10.01.17

Demystifying the Entrepreneurial Ecosystem

Karl R. LaPan, President and CEO of The NIIC

I thought this week I would look at additional entrepreneurial myths and folklore and debunk them. As you know, myths are the stories people tell to explain why something is the way it is. You saw some commonly held myths in last week’s post based partially on a HBR article from Dr. Isenberg.

I was able to spend some time this past week in the Grand Rapids ecosystem while attending and speaking at the Great Lakes International Innovation Summit.The Summit had a diverse group of participants from Illinois, Michigan, Indiana, Wisconsin and Canada. I want to express my appreciation for the time Mike Morin from Start Garden and Shorouq Almalla from the GVSU Center for Entrepreneurship & Innovation for spending time with me, Mike Fritsch and Ted Baker, CEO from the Muncie Innovation Connector. We had a wide-ranging and candid discussion. Here are a few of the insights we gleaned:

Myth #1: All entrepreneurial ecosystems build off the same strengths.

This is false. Regions need to look at the “native assets of their region and build on those”. As Isenberg pointed out in his HBR article, “the drivers entirely depend on and vary according to those parties invested in them”. In its first two years of existence, Start Garden deployed nearly $15 million of capital in 2.5 years. It’s major funder was a successful and serial entrepreneur and family. Mike made an important observation that “companies get started by funders and founders.” The rest of the actors and characters in the ecosystem are supportive.

We can’t pick and choose who we work with, we have to meet the entrepreneur, founder or business builder where we find them offering, and as Shorouq identified, the “hand holding, coaching and money required” to get them to the next rung on the ladder of entrepreneurial success. What was quite clear is there is no epicenter or commander in chief of the ecosystem. It is self-regulating and dynamic by definition.

Myth #2: Ecosystems success often depends on a vibrant Tier 1 (R1) research university and access to venture capital.

This is mostly true. As Mike states it, “You have to nurture the crap out of what you have.” Without money, you can’t do much and without a R1 university, you don’t always have the technologies, well-educated talent (faculty, researchers, students), culture of entrepreneurship and the spirit of innovation that can fuel growth in formation of new companies. Ecosystems are vibrant, self-regulating and enriching, but can be overwhelming to the entrepreneur and to those who work in them. While most communities are not blessed with R1 assets and large supplies of venture capital in their community, they can foster the right environment and orchestrate and connect the sources of capital – social, financial and intellectual (Start Garden’s model) in ways that differentiate themselves and work in the direction of investing in first time founders and fueling confidence and energy in the ecosystem by “doing stuff”. Also, the majority of companies are not venture-backed and that is ok. Mike’s experience has been women founder business do about 25% better than their male counterparts in venture-backed businesses. This is another reason to support and celebrate inclusive entrepreneurship efforts like NIICs WEOC program.

Myth #3: With proper selection and screening, I can pick the best of breed, high growth, high performance companies to invest in and develop and ignore the rest.

This is false. You can’t pick winners and losers and most “people’s first company is not Facebook”. In order to create a culture of entrepreneurship, you have to make entrepreneurship accessible to everyone in the community. If you focus on urban equity and access work and foster success, you will get some high tech, high growth companies. It will not work the other way around. As Mike opines, ” Only when neighborhoods transform is there wealth creation – this occurs through job mobility, asset ownership and business creation.” In a well balanced, asset allocated early stage investment portfolio, 1 to 2 investments carry the day for the return. Most investments in start-ups fail and go bankrupt despite strong underwriting, due diligence and active portfolio management. Remember, this simple fact: out of the nearly 29 million small business establishments, only 200,000 are high performance companies.

Myth#4: Entrepreneurship thrives on mythology.

This is true. Everyone in Silicon Valley knows someone who make it big, but most don’t make it big, they fail. As Mike makes the point, ” It used to be if you could start a business you did, and if you couldn’t you got a job. Now, if you can’t get a job, you start a business.” Today, millennials have the worse start-up formation rate of any age group and the highest failure rate of any age group. Additionally, have we dumbed down what it means to be an entrepreneur/business builder today? In order to get better and healthier ecosystems, communities need to cut down on the noise and narrative and be more honest about what it takes to succeed , how to measure success (decades and decades not weeks), and how well their efforts are doing at it. It is amazing that there are still people who believe you can create a scalable company in a thirteen week accelerator boot camp. You might create a minimum viable product but you are a long ways (like seven years away) from a credible, scalable enterprise.

Some solid kernels from our discussion worth repeating here:

  1. When taking someone else’s money, consider that the only company you have 100% control of is one in which there is no outside money invested in it. Founders need to perform a self-audit on their motivations and expectation before cashing the check!
  2. If you could only ask a potential entrepreneur seeking funding one question, the question to pose is “can you tell me about your first business?” Most of our communities lack a robust pipeline of serial entrepreneurs.
  3. What determines the funding component of your business model is your exit. Further, the founders worth backing are those who think big, but execute small. They are hard to find. The most ‘bankable’ founders are those that are coachable and self-aware. They are in short supply.
  4. Entrepreneurial ecosystems have to recruit talent and if they do, companies will find those communities. Grand Rapids has over 50 job openings in the startup ecosystem.

As they say, knowledge is power. Better understanding of these systems provides a solid framework within which stakeholders can ask the right questions, envision better approaches, and more effectively and honestly evaluate outcomes and impact.

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