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2.2 Entrepreneurial Ecosystem

The entrepreneurial ecosystem (often called startup ecosystem) approach is a rather recent way to describe interrelations between startup communities and regional parameters. One of the first researchers in this field is Isenberg (2010), who stipulated that specific measures to foster the local startup economy must be aligned to regional characteristics in order to be successful. The approach focuses on high-growth ventures, meaning startups with potential for innovation, economic growth and job creation (Mason & Brown 2014, World Economic Forum 2013), therefore excluding any and all other kinds of entrepreneurship, such as self employment or regular small business formations.

The main concept behind this approach draws on entrepreneurial activities being linked to a community of different actors, strongly emphasising social contexts to hinder or foster entrepreneurship (Stam 2015, Ács et al. 2014). Although no evidence for improved success rates of each startup within a thriving entrepreneurial ecosystems can be found, a healthy ecosystem arguably produces larger numbers of startups and therefore larger numbers of successful high-growth ventures in that region (Compass 2015). As many other concepts - e.g. clusters or innovation systems - the entrepreneurial ecosystem approach focuses on the external business environment to describe the ecosystem and the relationships and dependencies within it. The main difference to other theories is the emphasis on the entrepreneur itself rather than the enterprise. Entrepreneurs are considered leading players in keeping the system alive and thriving (Stam 2015).

This fact leads to a different role for the government - compared to other policy concepts - as a “feeder” to the ecosystem, leaving the “leader” role to the private entrepreneur (Feld 2012).

Entrepreneurial Ecosystem Attributes

According to Feld (2012) there are nine core attributes that are relevant to the success of an entrepreneurial ecosystem. These attributes focus on (social) interactions between different stakeholders in the ecosystem and their access to relevant resources, such as funding, workforce and services as well as an enabling role of the government (see table 1).

There are other sources indicating distinct factors as relevant for an entrepreneurial ecosystem. The World Economic Forum (2013) lists 8 pillars for a thriving ecosystem which also require resources such as workforce, funding and services, formal (government) and informal institutions (culture) as well as access to local and international markets (see table 2).

All these principles emphasise local parameters and focus on a (social) bottom-up process. This is in line with Isenberg’s (2010) Harvard Business Review article “How to start an entrepreneurial revolution”, where he stipulates 9 principles to achieve “venture creation”, and the “creation of an ecosystem”:

1 “Stop Emulating Silicon Valley”: While undoubtedly being the “gold standard” entrepreneurial ecosystem, it is deemed not to be a valid guide for any other region in the world. Unique circumstances led to the emergence of today’s Silicon Valley which can not be replicated in the eyes of Isenberg.

2 “Shape the Ecosystem Around Local Conditions.”: Isenberg strongly recommends that governments should tailor towards their unique local economic dimensions, resources and culture.

3 “Engage the Private Sector from the Start.”: Only the private sector has the appropriate motivation to develop a profit-driven market in the eyes of Isenberg. Subsequently, structural barriers should be reduced in order to formulate entrepreneurship-friendly programs.

4 “Favor the High Potentials.”: In order to be effective, Isenberg calls for programs focussing on ambitious, high-growth oriented entrepreneurs with large potential markets instead of spreading resources among quantities of ventures.

5 “Get a Big Win on the Board.”: Isenbergs required thriving ventures to be highly visible in media and literature since visible success stories reduce entrance barriers and fear of risks for aspiring entrepreneurs.

6 “Tackle Cultural Change Head-On.”: Since changing ingrained culture is deemed very difficult, altering social norms about entrepreneurship, failure and risk taking is considered as very important and should be on everyone's agenda in the eyes of Isenberg.

7 “Stress the Roots.”: Isenberg recommends that governments should grant money carefully to ensure toughness and resourcefulness among the entrepreneurs and should not flood high potential entrepreneurs with easy money.

8 “Don’t Overengineer Clusters; Help Them Grow Organically.“: In Isenberg’s opinion, there is little evidence that governments can successfully breed industry clusters. Governments should therefore build on existing clusters and nurture those that form independently from government action.

9 “Reform Legal, Bureaucratic, and Regulatory Frameworks.”: Lastly Isenberg calls for administrative and legal barriers to new venture formation to be removed. Additionally bankruptcy should be decriminalised, shareholders should be shielded from creditors and it should be easy for entrepreneurs to start over in his view.

Unfortunately, scientific literature only provides long lists of relevant factors for thriving entrepreneurial ecosystems, without elaborating on their distinct effects on entrepreneurship and their independent influence on economic growth (Stam 2015), the key focus and reason behind the entrepreneurial ecosystem approach.

Entrepreneurial Ecosystem Illustrations

Still there are many ways to illustrate the complex interrelations and dependencies within an entrepreneurial ecosystem. These illustrations provide an ample way to better understand the overall configuration of an ecosystem and highlight the many different stakeholders with their distinct perspectives.

Figure 3: Domains of the Entrepreneurship Ecosystem

Isenberg developed an illustration of entrepreneurial ecosystems (see fig. 3) during the Babson Entrepreneurship Ecosystem Project (BEEP), introducing six specific domains - culture, policy and leadership, finance, human capital, markets and supports (Isenberg 2011a, 2011b).

The policy domain calls for public leadership support, regulatory incentives and policy statements towards entrepreneurship. The finance domain requires the availability of dept and equity financing as well as exit possibilities. The culture domain expects success stories to be visible and demands tolerance of risk and failure. The markets domain calls for entrepreneurial networks, sufficient early adopters and consumers as well as decent ways of distribution. The human capital domain not only requires experienced entrepreneurs but a supply of hireable talents as well as education and mentoring programs. Lastly, the supports domain aims at technological infrastructure, functioning legal and accounting systems and non-government institutions and activities (Isenberg 2010, 2011b).

The “Deutscher Startup Monitor” uses an illustration of the entrepreneurial ecosystem based on Isenberg’s findings in its 2014 edition (Ripsas & Tröger 2014). In addition to Isenberg’s external categories, the “Deutscher Startup Monitor” adds the categories of “enterprise perspective” and “employee perspective” (see fig. 4). The 2015 edition of the “Deutscher Startup Monitor” also uses this illustration throughout the entire document, highly emphasising it as the framework for monitoring the German entrepreneurial ecosystem (Ripsas & Tröger 2015).

Figure 4: Entrepreneurship Ecosystem used in “Deutscher Startup Monitor”

based on Isenberg (2011b)

Interestingly though, in the 2016 edition of the “Deutscher Startup Monitor” there is no mentioning of the framework anymore (Kollmann, et al. 2016). The document introduces a new academic framework, no longer solely focussing on the entrepreneurial ecosystem approach, but integrating elements of Kollmann’s “3K-Strategie (Köpfe, Kapital und Kooperation)” - heads, capital and cooperations - to foster innovative startups (Kollmann 2015).

Another more detailed approach is taken with the Ecosystem Canvas, developed by Dr. Thomas Funke, Head of the Entrepreneurship and Innovation department at the German Productivity and Innovation Centre (RKW), a think tank of the Federal Ministry for Economics. It describes an entrepreneurial ecosystem with 11 building blocks that illustrate its interrelationships and covers four main aspects of the ecosystem - ideas & talents, startup community, policy & finance and markets (see fig. 5). The canvas is meant to connect different stakeholders, show the “big picture” as well as interdependencies and to explore growth opportunities to accelerate the development of the ecosystem (Compass 2015). The Ecosystem Canvas is utilised in Compass’ Global Startup Ecosystem Report 2015, analysing the top 20 global startup ecosystems.

Figure 5: The Entrepreneurial Ecosystem Canvas

An additional illustration is provided by Stam (2015), adding causal depth with four ontological layers and corresponding causations and relations to the description of entrepreneurial ecosystems (see fig. 6). It addition to illustrating the different stakeholders and their impact on the ecosystem, this rather recent approach tries to demonstrate how the ecosystem actually works, not just how it is set up.

There are many other ways to illustrate the complexity of entrepreneurial ecosystems, most of them share many similarities as shown by the different approaches introduced so far.

Figure 6: Key elements, outputs and outcomes of the entrepreneurial ecosystem

Entrepreneurial Ecosystem Metrics

It might in fact be more interesting to measure and track changes within entrepreneurial ecosystems over time, since it would allow to draw conclusions on what actions have actual impact on the ecosystem’s development. There are a few proposals on how to measure the vibrancy of entrepreneurial ecosystems. For instance the City of Sydney introduced specific metrics to track the development of the regional startup community and the regional entrepreneurial ecosystem in its Tech Startup Action Plan (City of Sydney 2016), a very extensive document, outlining the city’s policy towards entrepreneurship.

The “community indicator framework” intends to use various data inputs from both official data sources and community reports to account for economic diversity, economic growth, a vibrant support system and global recognition (see tables 3.1 and 3.2).

Another approach to measure the vibrancy of an entrepreneurial ecosystem is proposed by Stangler & Bell-Masterson (2015). By using 4 indicators - density, fluidity, connectivity and diversity - it provides a way to assess the overall performance of an entrepreneurial ecosystem, again utilising both official data sources as well as community reports (see table 4).

Actionable metrics still remain to be produced, but these approaches seem promising in evaluating activities to foster entrepreneurship within regional entrepreneurial ecosystems.

Since the entrepreneurial ecosystem approach clearly draws on the interrelations between startup communities and external regional parameters, the “feeder” role of the local government is important to recognise. Although it might seem that public policy and its implementation only has a supporting role to play, it could also be understood as a backbone for a thriving entrepreneurial ecosystem.

All in all it is evident, that regional policy towards entrepreneurship should not be about optimising specific indicators of entrepreneurial activity but about fertilising a ecosystem in which entrepreneurs and their enterprises can prosper (Stam 2015).