All of the cities ID8 Nation has visited and written about have invested an enormous amount of time and thought to developing their entrepreneurial ecosystems, that nebulous foundation of talent, money, ideas and connections that yield high-growth companies.
But how is a city to know how well-developed its startup system is? A new report by the Kauffman Foundation offers some yardsticks.
The authors preface their recommendations by noting that there is no universally accepted standard for measuring entrepreneurial ecosystems. Some communities look at “more” – more entrepreneurs, more companies and jobs; others look at exits, such as acquisitions and IPOs. Still others track ingredients such as STEM degrees, university programs, incubators, patents etc. And some try to track everything.
The report proposes four areas in which ecosystems can be measured: density, fluidity, connectivity and diversity. In each of those four categories, it offers several measures.
The study suggests three measures to track:
1. Density of new and young firms (less than five or 10 years old)
2. Share of employment in startup firms
3. Sector density – where the new firms are concentrated
A strong startup scene is in constant flux, with companies being formed and disbanded, new connections made and alliances made. Again, three measures:
1. Population flux – number of people moving between cities and regions
2. Labor market reallocation – how easily people within a region move from job to job and from sector to sector
3. Number and density of high-growth firms – their growth is indicative of whether the necessary entrepreneurial resources are present
Connections among founders, mentors, employees, companies, investors and others are absolutely essential to a strong ecosystem. “To adopt culinary parlance, recipes matter more than the inventory of ingredients,” the report states. Three things to check:
1. Program connectivity – Are there enough resources for entrepreneurs, are they the right kind, do they offer what’s needed, do they complement each other?
2. Connectivity over time – Spinoffs from existing companies is a good way to test the strength of connections.
3. Dealmakers – These people might not be entrepreneurs, but they mediate relationships, make connections and facilitate new startups.
1. Economic diversification – It doesn’t mean an economy can’t be specialized; it means it needs a diversity of specializations.
2. Attraction and assimilation of immigrants
3. Diversification of opportunity – Does the ecosystem create opportunity and benefits for a wide range of the population?
The report does not include other possible criteria, such as housing affordability or land use, but concludes, “Nonetheless, once these baseline indicators are in place and the data are collected and tracked, they should give those involved in an entrepreneurial ecosystem a good idea of where they stand, and also point them in the direction of potential actions they can take to enhance vibrancy.”