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Brief Definition of an Entrepreneurial Ecosystem

Encouragement of entrepreneurship has emerged as a central tenet of economic growth strategies for communities and nations worldwide. The “entrepreneurship ecosystem” is the prevailing metaphor for promoting entrepreneurship as a strategy for economic development. However, it is to be expected that along with the proliferation of any ground-breaking innovation, myths and misunderstandings will inevitably emerge. Here is a short true-false quiz that may be used to verify your understanding of entrepreneurial ecosystems and the link between entrepreneurship and development. There’s a lot riding on getting this right, as the rise of entrepreneurship as a policy priority has coincided with—and is at least in part a response to—disappointment with top-down industrial policy, fruitless “cluster” strategies, and the failure of a narrow focus on a set of macroeconomic framework conditions (the so-called “Washington Consensus”). We need a firmer grasp on the meaning of the term “entrepreneurial ecosystems” if we are to prevent the waning interest in such ecosystems.

As the number of startups grows, you can be confident that the environment is conducive to business creation.

False. There is no proof that a rise in the number of startups or new business formation promotes economic growth. There is also some data that demonstrates the inverse relationship, that is, that economic expansion encourages the creation of new businesses and the launch of new ventures. The Kauffman Foundation has observed that when the US economy improves and excellent jobs increase, the number of startups decreases, lending credence to the theory that the number of small enterprises is inversely connected to national economic health. It’s possible that supporting new businesses is counterproductive.

Providing monetary incentives (such angel investment tax credits) for early stage, risky investments in entrepreneurs is a proven way to boost the environment supporting entrepreneurship.

False. Despite the widespread use of angel tax credits, there are surprisingly few reliable assessments of their effectiveness. The Entreprise Investment Scheme (EIS) in England was the first of its kind and has been studied extensively because it is thought to have encouraged inexperienced investors to make smaller investments (less than $10,000) than they otherwise would have. The majority of VC money is actually invested in the states of California, New York, Massachusetts, and Israel, where residents are subject to full taxation on any profits made.

Promoting an environment conducive to entrepreneurship is not primarily aimed at creating new jobs.

True. There can be no single goal that inspires all of the members in an entrepreneurship ecosystem as no one owns or represents the ecosystem. Whoever is doing the encouraging of entrepreneurship for any reason is the key actor or stakeholder. Financial stability and employment opportunities are two possible top priorities for government authorities. Possibly the most beneficial outcome for banks would be an increase in the size and profitability of their loan portfolio. The advantages for colleges could include more knowledge, improved standing in the community, and larger endowments thanks to charitable contributions. The value may lie in the possibility of wealth generation for business owners and financiers. The advantages for businesses could include new ideas, new products, new employees, and new ways of sourcing supplies. For an ecosystem supporting entrepreneurship to be sustainable, it must provide value to a wide range of participants.

Creating facilities like co-working areas and incubators is essential for boosting the startup culture in any given area.

False. There is little to no proof that shared office spaces actually help businesses expand. Incubator programs have been credited with the launch of numerous high-growth businesses across industries, although there are likely many more examples of highly successful businesses that did not utilize incubator programs. Some business owners feel that shared office environments inhibit their imagination or divert their attention. Still others like the network for the increased exposure to new perspectives and information it provides. Although they may be useful, purposefully designed support mechanisms for entrepreneurs account for only a tiny fraction of the whole entrepreneurship ecosystem and are by no means required for its success.

We need robust entrepreneurial education programs if we are to foster thriving startup communities.

False. Surprisingly, there is no evidence that formal education in entrepreneurship results in more or more successful entrepreneurship, and there is some evidence that it is irrelevant. The likes of Israel, Route 128, Silicon Valley, Austin, Iceland, and other now-famous destinations for business all had thriving startup scenes long before entrepreneurship education became mainstream. These developed naturally, driven in the main by the availability of clients and workers and secondarily by the availability of funding. In 1987, 15 years after Israel’s first tech IPO on NASDAQ, I taught the first masters course on technology entrepreneurship at the Technion. This coincided with the beginning of a revolutionary period for entrepreneurs in Israel. This does not mean that teaching people how to start businesses is useless, but rather that it is not a necessary step in building a thriving startup scene in a given area.

The entrepreneurial environment relies on the efforts of entrepreneurs.

False. This is an oft-heard statement, but there is a significant distinction between being one key ingredient out of many — which entrepreneurs definitely are — and being the driver. Because an ecosystem is a dynamic, self-regulating network of many various sorts of actors, there is no single factor that determines the health of the entrepreneurial ecosystem. In every entrepreneurship hotspot, there are essential connectors and influencers who may not be entrepreneurs themselves. In the 1970s and 1980s, a number of Boston’s bankers and academics played pivotal roles. Many of the earliest triumphs in Israel required as many as four investors. Non-governmental organizations (NGOs) like Endeavor and Wamda have been driving forces in the development of new marketplaces.

Big businesses kill off the entrepreneurial spirit because they exploit startups.

False. Of all, many huge firms do genuinely take defensive action against entrepreneurs who undermine their markets. But it is not possible to have a vibrant entrepreneurial environment without a broad spectrum of business “flora and fauna.” There are many reasons for this, two of which are that (1) corporations are not only competitors but also important customers and market channels for entrepreneurs, and (2) the movement of talented executives to and from larger corporations is a major contributor to the success of smaller businesses. Business vacuums do not exist, and neither do entrepreneurs.

According to entrepreneurs the top three obstacles everywhere are availability to talent, excessive bureaucracy, and scarce early stage finance.

True. They may have a point, but that doesn’t make them right. Raising capital, finding talent, and overcoming bureaucracy are three of the top challenges that entrepreneurs ascribe to their environments anywhere from Boston to Tel Aviv to Reykjavik to Milwaukee to St. Petersburg to Johannesburg to Buenos Aires to Rio to Bogota (all places where I have conducted workshops and conducted informal surveys on the question). Since this is so pervasive, I contend it is more indicative of a flaw in the overall process of entrepreneurship than a failure of the ecosystem. Feelings of difficulty and scarcity in raising risk capital are engendered by the very nature of entrepreneurship itself.

To the extent that banks do not provide startup financing, they have no role in the entrepreneurship ecosystem.

False. It is correct to say that banks do not and should not provide startup funding. Not related to their line of work at all. Nevertheless, banks aid in the development of financial markets and have an indirect effect on the entire investment value chain, even if they never directly engage or contact with entrepreneurs. Bankers have earned a lot of money investing in later-stage technological businesses, which has bolstered the faith of early-stage investors that their investments will be able to expand if they are successful.

To preserve their “franchise,” family firms stifle any attempts at innovation from within.

False. Well-known advocates of entrepreneurship have told me that family firms flourish through particular links and protections, allowing them to scale while staying family enterprises and make the greatest possible contribution to open markets. However, evidence from even the most developed economies (such as Denmark) reveals that businesses with a variety of ownership structures—from family to public to cooperative—are crucial to and highly facilitative of the entrepreneurship ecosystem.

How did you do overall? If you got more than half of them right, you’re among an elite group. The preceding reality check is merely an introduction. The only way for policymakers, civil society, corporate leaders, and entrepreneurs themselves to truly set the context for successful economic development is to separate myth from reality and shake free of the many misconceptions that exist. Entrepreneurship does indeed create many positive economic and social spillovers. Then, and only then, can we hasten the growth of entrepreneurial ecosystems. You can’t afford to leave their fate up in the air.