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The ecosystem trap

What is the entrepreneurship ecosystem trap?

In international development, economists talk about the “middle-income trap.” This occurs when a country enjoys rapid industrialization and rising incomes, but hits an economic wall when it fails to fully “develop” and stops growing. Many middle-income countries from the 1960s, for example, remain so today. Read nearly any analysis of China’s current slowdown and you’ll likely encounter speculation as to whether the country is succumbing to the middle-income trap.

Among American cities, it appears as if a similar trap is taking hold: call it the ecosystem trap.

Over the past several years, cities and regions across the United States have been swept up in “startup fever.” Accelerators, incubators, pitch competitions, hackathons, training courses, investments – by any metric, cities and regions have poured significant energy and resources into attempts to create vibrant entrepreneurial ecosystems.

And many seemed to have gained traction: the Kauffman Index of Startup Activity recorded its largest increase ever in 2015. Metropolitan areas across the country enjoyed increases in new business entry and startup density, after several years of falling startup activity.

Moving past the initial successes

Some, however, fear they may be stuck there, trapped in a situation where this new burst of entrepreneurship does not translate into sustainable entrepreneurial vibrancy. If that happens, momentum will falter, enthusiasm will diminish, and we could see people turn away from entrepreneurship. The ecosystem trap manifests itself in different ways.

In some cases, promising startups decamp for Silicon Valley, pushed by investors or pulled because their home city does not host enough of the right kind of talent. In others, entrepreneurial firms get acquired but there is little “recycling” of capital and talent back into the ecosystem. Atlanta may find itself in this scenario. As one person in a different city said to me: “what do you do after the rah-rah entrepreneurship phase?”

Individuals involved in building entrepreneurial ecosystems have also raised other concerns. For many people, this has been a labor of love – they have devoted mostly unpaid time to promoting entrepreneurship. Now, some face the normal pressures of life – they want to go start a new company or need to take a job to make money. What will happen to the momentum they helped catalyze?

Others feel co-opted – the enthusiasm around entrepreneurship has attracted the attention of economic development professionals. Public money has been earmarked for helping entrepreneurs. New government programs aim to support entrepreneurship. This, however, is not what many of the ecosystem champions signed up for – they turned to entrepreneurship because the traditional methods of economic development didn’t have much to show for their city or region. The worry now is that entrepreneurship has gone mainstream, that once an economic development agency gets hold of it, the messiness of entrepreneurship becomes unwelcome, and thus vibrancy becomes unattainable. That may or may not be a valid concern, but the perception at least exists in some places.

In some areas, those involved in fostering entrepreneurial ecosystems have already shifted their thinking, or at least their rhetoric, recognizing that they could fall into the ecosystem trap. Well, we may have said we wanted to promote entrepreneurship, but what we were really after was greater equity, or more inclusion, and there are other ways to do that. Escapist logic is understandable, and it may actually point to a way out of the trap.

What does success look like?

Those involved in fostering entrepreneurial ecosystems need to better define what it is they want to achieve. Is it more new firms? More high-growth companies? Imitating Silicon Valley? Better paying jobs? Greater social mobility? Lower income inequality? Higher tax revenues? An overthrow of current economic development practice? Improved data and measurement would certainly help these efforts, and that’s something Kauffman and others are working on. Once you define your gauge of ecosystem success, you can better orient your ecosystem-building efforts in that direction.

But that’s only one step. Another is to refine the language you use: Dan Isenberg has pointed out that the word “ecosystem” means one thing, but the actions many places take belie that meaning. An actual ecosystem is a wild and messy place; many of the words we use and actions we take in “ecosystem-building” have more to do with something like farming: “build,” “manage,” “design,” “cultivate.” Are you trying to create a vibrant entrepreneurial ecosystem, or a vibrant entrepreneurial farm? Linguistic precision matters.

This task will vary from place to place, and will depend on who the “champions” are in your city. In some cases, a mayor is the leading proponent of economic renewal through entrepreneurship. Elsewhere, it’s driven mostly by nonprofit support organizations. When I say that “you” should define your gauge of success, that “you” will depend on what you and your organization want to achieve. Just like an actual ecological ecosystem, each entrepreneurial ecosystem is composed of different elements that compete and cooperate in various ways.

The middle-income trap is not a law of economics; nor is the ecosystem trap a law of economic development. If we develop better definitions, more precise language, and improved data, we can begin to outline a potential set of actions that can hopefully catalyze generative cycles of entrepreneurial activity in cities and regions across the world. My next post on this topic will examine why precision in objectives and language requires, ironically, generality in policymaking.