What Makes for a Healthy Entrepreneurial Ecosystem?

One can find advice in many places. For example, the Kaufmann Foundation has a robust set of materials and even a yearly conference called the ESHIP Summit. The Kaufmann Foundation states the following:  The two biggest threats to entrepreneurial ecosystems are leader burnout and community stagnation. A more robust peer community of ecosystem builders can help address these. In this regard, they have a playbook to help those interested in fostering entrepreneurial ecosystems in their regions.

This work has a goal of increasing entrepreneurial starts. The website contains the following quote from Ewing Marion Kaufman: “Every individual that we can inspire, that we can guide, that we can help start a new company is vital to the future of our economic welfare.”

In distressed communities the challenge is daunting. The goal is not only business starts, but to find ways to translate these business starts into upward mobility.

If we were to divide the United States into geographic areas (about 2351) according to household income, we would find that of the approximately 470 low income areas, only 9.2 percent of workers in low-income areas were self-employed versus 10.9 percent in other areas. Only 6.7 percent of businesses with employees were located in low-income areas, and they tended to be smaller, with an average of 12 employees versus 15.1 employees in other areas. The average payrolls also tended to be lower in these areas. These data held regardless of the ethnic group and urban versus rural.

Another piece of data contributes to our understanding of the importance of entrepreneurship in low-income communities. Low wage occupations and higher wage occupations are trending upward, while mid-wage occupations have tended to decline. Three-fifths of all jobs lost during the recent recession paid middle-income wages, whereas about three-fifths of new jobs created during the recovery pay low wages.  To mitigate these trends, entrepreneurship seems to be one viable option.

So what to do? We should ask a few questions: what is the effect of entrepreneurship on the local economy? What are the barriers to entrepreneurship in low-income areas?  What programs are effective at encouraging entrepreneurship? I’ll address the last question.

Many have reported that entrepreneurship has been a proven ticket to financial empowerment and economic mobility for countless immigrants; can this outcome be extended to others?

Here are just a few suggestions.

Get our language right – this is particularly true when we use metaphors such as ecosystems.

Find ways to change the culture of low-income, native born communities by doing outreach and introducing individuals, especially young people, to entrepreneurial models and mentors.

Develop specific programs for low-income communities including incubators, seed funding, counting entrepreneurship as job placement for social services, and integrate self-employment outcomes into the workforce system.  For example, public policy should include reference to entrepreneurship so that entrepreneurs  are recognized within federal projects and public policy.

Mentors are critical.  The MIT Venturing Mentor Service is only one example of hundreds of successful models.  Spend lots of money and effort on mentors and mentoring.  Train the mentors.  Find lots of them especially those who have been entrepreneurs.  Yet, even if a person has been an entrepreneur, don’t assume they know how to mentor others.  Mentoring is a skill and mindset!  Train for effective mentorship.

We need to analyze the regional cultures in which entrepreneurs thrive.  For example, a few researchers developed a set of questions that help to identify country institutional profiles.  The country profile can help in tailoring entrepreneurial ecosystems.  If certain conditions do not exist that are important to a healthy profile, then the ecosystem developer can first work to develop this profile.

This instrument can work in cities and regions (following institutional theory).  I’ve adapted their work and added a few ideas for domestic contexts.  The survey starts by asking “Think of your city [region, state] and tell us to what extent do you agree with the following statements?” [the scale is 7 points from strongly disagree to strongly agree].

Regulatory: (1) government organizations in this city assist individuals with starting their own business; (2) the government sets aside contracts for new and small businesses; (3) governments have special support available for individuals who want to start a new business; (4) the government sponsors organizations that help new businesses develop; (5) even after failing in an earlier business, the government assists entrepreneurs in starting again.

Cognitive: (1) individuals know how to legally protect a new business; (2) those who start a new business know how to manage risks; (3) those who start businesses know where to find help; (4) most people know where to find information about markets for their products or services; (5) people in this city think of themselves as entrepreneurs.

Normative: (1) turning new ideas into businesses is an admired career path in this city; (2) innovative and creative thinking is viewed as the route to success; (3) entrepreneurs are admired in this city.

The idea here is to get the profile as you engage in other activities.

Mimic some of the natural occurring services in immigrant communities and successful clusters;  offer low-interest loans coupled with technical advice and education.

Get the curriculum right – certain communities have special needs and  the assistance offered to build acumen needs to be tailored.  Rising Tide Capital has done an excellent job of this work.

Expand educational offerings in more user-friendly ways – not just in college courses.  In fact, just-in-time delivery of this information is probably more effective than a course.  Build acumen when the need arises.

Help people turn “side-hustles” into formal businesses.  Low-income communities do not lack for entrepreneurial talent – the communities lack access and support.

Change the terms of ownership by giving low-income people the chance to become co-owners in a worker cooperative, where they not only come to own a business but gradually learn the skills necessary to manage it. Cooperative movements are interesting and effective.  Take a look a one documentary, an example in the USA, and an example in Spain.

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Thank you Nate Pritchard for his excellent insights into using entrepreneurship in difficult settings, Walt Frye for his information on ecosystems, Manuel Campbell for his insights into educating entrepreneurs, and Emma Rose for her research. All of them stimulated my thinking on this topic and showed me some fantastic ideas for helping our region.

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