Blog Post | Tom Weithman | OBSERVATIONS OF AN EARLY STAGE INVESTOR
Building an entrepreneurial ecosystem is a long process involving a complex array of factors. In "Business Attraction and Start-Up Investment: Flip Sides of the Economic Development Coin," I argue for accelerating ecosystem maturation through a unified approach to conventional economic development and start-up company support.
I sometimes hear risk capital or tech transfer held out as the panacea for jump-starting tech-driven entrepreneurial activity. The commentary goes something like this: “If only we had more venture capital, we could become the next Silicon Valley” or “If only we could spin technology out of our universities we would jump start an entrepreneurial economy.
Ecosystem Development – A Complex, Long-Tail Process The reality is that investment, like human capital and intellectual property, is an important but limited “production factors” in driving a successful innovation economy. High performing entrepreneurial ecosystems rely on a multiplicity of other determinants such as conducive business policy, a significant level of sector concentration, proximate supporting industries, accessible demand drivers, readily available and sufficiently developed support services and a strong entrepreneurial culture. All of these are “toggle-ables” in promoting ecosystem advancement.
With so many forces acting in concert to shape a region’s economic future, what single and simple recommendation might key stakeholders endorse to expedite ecosystem development? I believe that the single biggest boost to ecosystem advancement may result from a closer and cooperative engagement of traditional economic development programs and entrepreneurial support activities.
Traditional Economic Development – Big Targets, Big Benefits Traditional economic development programs offer incentives to attract companies from outside a given geography. These attraction efforts can deliver one or more corporate tech anchors whose contributions to the ecosystem may far surpass those of the most robust angel investor group or the most fecund institution of higher learning. Corporations contribute to the ecosystem not only by fostering intellectual property and educating human capital, but by: • Serving as customers or channel partners for new start-ups; • Developing business and technical personnel with transferable skills and domain expertise; • Birthing new company spin-outs that may become suppliers or competitors; • Offering a “safe haven” for start-up personnel whose entrepreneurial dreams don’t pan out; and • Providing sources of strategic investment and potential exit for early stage companies.
Corporate tech anchors not only enhance the chances for nascent in-region start-ups but can also act as a magnet to pull in start-ups from outside the region. Consider the contribution of Fairchild Semiconductor to the development of Silicon Valley. The rest is history.
Early Investment Programs – Growing the Ecosystem from the Ground Up Entrepreneurial support activities such as early stage investment, tech transfer and new company incubation take an approach orthogonal to business attraction. While accelerators may enable permanent relocation of a young start-up, early stage investment and tech transfer programs generally focus on fostering start-up development within a given a geography. These initiatives abet ecosystems development by: • Providing young start-ups with critical first-stage catalytic capital • Assisting in spin-out formation from companies and institutions of higher learning • Aggregating capital sourced both within and outside their region of operation • Providing start-ups with strategic guidance and mentorship • Sourcing start-up personnel and fostering ecosystem diversity • Encouraging channel partnerships, customer relationships and strategic investments between start-ups and larger industry participants
Traditional Economic Development and Investment – An Either-Or Solution? While both types of initiatives – new business attraction and entrepreneurial support – may make immense contributions to entrepreneurial ecosystem development, inconsistent operating objectives born largely of the disparate size of and developmental stage of program targets (start-ups v established business) often results in a failure to fully exploit program synergies. So how could these types of initiatives work in closer partnership?
Toward an Integrated Game Plan The key lies in the cooperative development of a strategic plan or “roadmap” for the geography or jurisdiction to be served by the initiatives. Rendering a “to-be” economic architecture for the geography, the roadmap should lay out the specific industrial sectors and subsectors that it wishes to cultivate over the next 5-10 years.
With implementation, this specification should: • Inform business attraction campaigns, designating sectors and critical operations desirable to locate to a given area based on patterns of pre-existing industrial formation and likely patterns of entrepreneurial activity • Apprise investment programs of potential sectors and subsectors in which to invest and align investment initiatives with corporate strategic investment interests • Aligns accelerators and their companies with sources investment, early adopters and strategic proximate sources of strategic guidance Further, the roadmap should lay out – on a granular level – the types of skills required to sustain the desired sectoral concentration. In this way, the roadmap might offer collateral guidance to workforce training and education initiatives offered by universities, community colleges and other programs. The roadmap need not be the sole determinant – but should be a significant determinant – in the implementation of these initiatives. The product of dispassionately analytical rigor, it must move beyond any pre-existing notions about economic equivalency of regions, the convergence of true entrepreneurial ecosystems with traditional political boundaries or what it takes to become “…the next Silicon Valley.” Rather, it must incorporate a candid inventory of the unique attributes of any geography assessed – what long-dead economists called “comparative advantage.” In summary, greater cooperation between business attraction and entrepreneurial support initiatives promises to yield increased IP and tech transfer, increased industry concentration, cooperation and competition, increased technical and business skills and yes – increased early stage capital – all critical production factors and determinants in the development of an entrepreneurial ecosystem.
CIT is the nonprofit operations arm of the Virginia Innovation Partnership Authority (VIPA)