Development of Metropolitan Areas: Development of Their Entrepreneurial Communities

The development of metropolitan areas is likely to depend, among other things, on the development of their entrepreneurial communities. However, our understanding of entrepreneurial communities worldwide is limited. In the following chapter, we begin to fill this gap by providing data on the development of entrepreneurial communities around the globe. Moreover, we provide data on the diffusion of venture capital in the United States and Europe.We conclude the chapter with some recommendations for European policymakers. 2. Entrepreneurial Communities in the World The popular press is full of stories about startups and their founders who transformed small companies into international giants (i. e. , the so-called gazelles). Examples of these companies include: Google, Apple, Facebook and Twitter. What do many of these companies have in common? They were founded in Silicon Valley. Although Silicon Valley has become the preeminent leader of entrepreneurial communities across the world, metropolitan areas such as Boston, London, Tel Aviv and New York City are also considered hotspots.They are defined as such because their communities have produced the vast majority of funded and internationally recognized startups. Nevertheless, other communities have emerged as important hubs for startups. While we do not know all the reasons why the startup movement has happened, two notable trends which we discuss in this chapter are apparent: (1) there has been a global explosion of entrepreneurship and (2) metropolitan areas and countries are trying desperately to be leaders through their startup ecosystems.Despite our limited knowledge on the emergence of entrepreneurial communities, important factors, such as globalization, education, as well as economic and political interest have created the global desire to gain more information on this phenomenon. Last year, Startup Genome and Telefonica Digital collaborated to evaluate the state of entrepreneurial communities worldwide. The aim of this effort was to understand where, outside of the proven grounds of Silicon Valley, entrepreneurship takes hold. The results of this study can be found in the “Startup Ecosystem Report 2012”.Startup Ecosystem Report 2012 presents an index that is based on data from more than 50,000 startups. Startup Genome developed a tool called Startup Compass to collect the data. It is an automated analyst in the cloud that helps businesses make better decisions via benchmarks and actionable recommendations. The study is built on a convenience sample that is likely to be heavily skewed towards early stage startups. However, it also includes a number of later stage companies. The overall ranking, presented in Table 1, is based on 8 weighted component indexes.The eight weighted components are defined as follows: 1. Startup Output Index, which represents the total activity of entrepreneurship in the region, controlling for population size and the maturity of startups in the region; 2. Funding index, which measures how active and how comprehensive the risk capital is in a startup ecosystem; 3. Company performance Index, which measures the total performance and performance potential of startups in a given startup ecosystem, taking into account variables such as revenue, job growth, and potential growth of companies in the startup ecosystem; 4.Talent Index, which basically measures how talented the founders are in a given startup ecosystem, taking into account age, education, startup experience, industry domain expertise, ability to mitigate risk and previous startup success rate; 5. Support Index, which measures the quality of the startup ecosystem’s support network, including the prevalence of mentorship, service providers and types of funding sources; 6. Mindset Index, which measures how well the population of founders in a given ecosystem thinks like a great entrepreneur, where a great entrepreneur is visionary, resilient, has a high ppetite for risk, a strong work ethic and an ability to overcome the typical challenges startups face; 7. Trendsetter Index, which measures how quickly a startup ecosystem adopts new technologies, management processes, and business models, where startup ecosystems that stay on the cutting edge are expected to perform better over time; and 8. Differentiation Index, which measures how different a startup ecosystem is to Silicon Valley, taking into account the demographics and the types of companies that are started there.Overall, the Startup Ecosystem Index paints a glowingly positive picture of the state of entrepreneurship around the world. While Silicon Valley is by far the strongest ecosystem, most of the other ecosystems on this list barely existed five years ago. This analysis signals the reality of the global startup revolution. Moreover, the index contains several entrepreneurial communities formed in emerging economies, which demonstrate the far-reaching influence of the entrepreneurial revolution. In other words, it seems that no part of the world is excluded.Additionally, Table 2 provides key startup ecosystem indicators for the same 20 ecosystems presented in the ranking. These indicators show interesting similarities and differences between startup ecosystems. Indicators include: age, gender ratio, dropout versus graduate degree ratio, percentage of serial entrepreneurs, percentage of non-technical founding team entrepreneurs, working hours per day, percentage of entrepreneurs who have lived in Silicon Valley, and ratios for primary types of motivations, customers and markets. Table 1: The Global Startup Ecosystem Index Table 2: Global Startup Ecosystem Indicators . Entrepreneurial Communities in US and Venture Capital Investments Although the ideal of creating entrepreneurial communities everywhere is an appealing prospect for entrepreneurs, regional investors and policymakers, the reality is that regions across the United States are still struggling to lure venture capital dollars — a strong predictor of a vibrant, sustainable entrepreneurial community — away from Silicon Valley. Venture capital investment data from PricewaterhouseCoopers’ MoneyTree Report suggest that uninformed efforts to create entrepreneurial communities may be in vain.Venture capital investment is an important feature of a high-impact, sustainable entrepreneurial community. In Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do About It, Harvard Business School’s Josh Lerner discusses how venture-backed companies become publicly traded faster, have larger market value in industries such as computer software and hardware, and are more innovative, measured by patenting efficiency and quality, than non-venture-backed companies.Whether these benefits come from a venture firm’s ability to pick the best quality companies or through their contributions of funding, experience, and networking, startup communities have every reason to maximize the amount of venture dollars they can attract to the fold. The 2013 MoneyTree Report on venture investment paints a bleak picture for regions outside the West Coast. Figure 1: US Census Regions Map Data compiled from the MoneyTree Report’s “Historical Trend Data from the U. S. nd for Select Regions,” show that during the past 12 years, only one region (see Figure 1 for US Census regions) — the Pacific/West Coast region, driven mainly by California — has seen a sustainable increase in its share of total venture investment, increasing from 44 percent in 2001 to 57 percent in 2012. This growth is shown in Figure 2, along with the performance of three other regions. Figure 2: Share of United States Venture Capital Investment by Location (Region) of Portfolio Companies, 2001 – 2012 This trend could be for a number of reasons.Perhaps venture capital funds in California have grown larger and are invested in-state at higher rates than ever before, or that talented entrepreneurs continue to move to California, where failure is tolerated and costs associated with looking for new startups to work for are low due to the already established large ecosystem of startups, or maybe it is the favorable inherent startup culture. The other notable result from Figure 2 is that other regions in the United States are either experiencing no growth or saw a decline over the same period.While rising metropolitan areas, such as Boulder, Colorado, may be receiving more venture capital funding than two decades ago and are getting national recognition as core “startup communities,” the state of Colorado has seen a decrease in its share of the Mountain West region from 71 percent in 1995 to 48 percent in 2012 (see Figure 3) . Also, since 1995, the region has declined from a 6 to 4 percent share of total venture capital investment. Figure 3: Share of US – Mountain West Venture Capital Investment by Location (State) of Portfolio Companies, 1995 – 2012The decline across the state could suggest that while growth in an entrepreneurial community benefits its local area, it may be borrowing support from surrounding communities in the same state or region. Without the Boulder startup community, one might argue that these companies would have launched in Denver anyway. Conversely, Los Angeles/Orange County and San Diego, as well as the states of Oregon and Washington, seem to be generating a relatively constant share of total investment.Silicon Valley continues to grow, creating a net gain for California and the Pacific/West Coast region. The storyline is not all negative. While the Mountain West and Mid-Atlantic regions lost ground to the West Coast, two communities outside of Silicon Valley substantially increased their share of venture capital investment within their regions – Salt Lake City, Utah and New York City. The Silicon Slopes of Utah is an encouraging example of growth, increasing from a 5% share of venture investment in the Mountain West region in 1995 to an astounding 26% in 2012.Utah tech companies such as Omniture, Qualtrics, Xactware, AtTask and now, Fusion IO and Domo, have attracted investors from outside the region. With companies like Intel and Adobe, as well as the National Security Agency – or as Wired Magazine called it “the country’s biggest spy center” – all located along the I-15 corridor, Utah has the potential to turn the tables on technology startups. Coupled with a strong life science startup community in Salt Lake City and plenty of talent, there seem to be more than enough reasons why Utah should be flourishing. But the data seems clear.While there might be hope that entrepreneurial communities, such as Salt Lake City and New York City, can flourish outside of the Golden State, for the time being, California continues to increase its dominance as the startup community of communities. This means that policymakers should take great care in how they build and promote their ecosystems, lest they fall into the trap of overpromising and underperforming. 4. The Diffusion of Venture Capital Investments in Europe How has the venture capital industry evolved to impact different regions and communities in Europe?The European Venture Capital Association (EVCA) Yearbook most recently shows the development of the venture capital industry from 2007 to 2012. The data is reported on a country level and shows the amount of capital invested in firms in those countries. Even though this data does not precisely capture the development of metropolitan startup ecosystems, we can reasonably expect that the entrepreneurial communities located in countries with a high level of venture capital investments are likely to receive a higher level of venture capital.Nevertheless, this data is sufficient to provide a basic understanding of venture capital trends as they contribute to the development of regional ecosystems in Europe. Tables 3 and 4 show the development of the European venture capital industry between 2007 and 2012, based on EVCA Yearbook 2013. More specifically, Table 3 reports the amounts of capital attracted by startups located in each European country. Table 4 reports the number of venture capital deals in each country. EVCA data show that the development of the venture capital industry has not been homogeneous in European countries.More specifically, few countries have attracted the vast majority of venture capital: France, Germany, Netherlands, Sweden and United Kingdom (UK). Table 3: European Venture Capital Investment by Location (Country) of Portfolio Companies (Amounts in thousands of Euros), 2007 – 2012 Table 4: European Venture Capital Deals by Location (Country) of Portfolio Companies, 2007 – 2012 In addition, we evaluated the share of investment across countries and regions which show interesting trends. We use country boundaries as defined by the United Nations (see Figure 4).Figure 4: Regions of Europe as Defined by the United Nations Figure 5 shows the share of venture investment in European regions as a percentage of all venture capital invested in Europe from 2007 to 2012. It is not surprising that Western and Northern Europe see the majority of venture investment, as the UK, Germany and France pertain to these regions. However, we do observe that the two regions seem to be converging after separating in 2009. Western Europe has gained approximately 1% market share per year since 2007, whereas, Northern Europe has seen a 0. 5% decline, annually. Figure 5.Share of European Venture Capital Investment by Location (Region) of Portfolio Companies, 2007 – 2012 Figure 6 shows the top five countries by way of venture investment in Europe and their share of venture investment as a percentage of all venture capital investment in Europe. The UK has seen a decline in share, but still remains the leader. While France overtook the UK in 2009 but has since converged with Germany in its percentage of venture investment. Since 2007, the top three countries – the UK, France, and Germany – have accounted for over 58% of venture investment in Europe. Germany has seen the largest growth from 3. 6% share in 2007 to 17. 3% in 2012. Figure 6. Share of European Venture Capital Investment by Location (Country) of Portfolio Companies, 2007 – 2012 Figure 7. Share of European Venture Capital Deals by Location (Country) of Portfolio Companies, 2007 – 2012 Finally, Figure 7 shows the share of all venture capital deals in Europe by country. Interestingly, Germany is the strong leader. At its peak, Germany reached a maximum of 31. 8% of deals in 2010, almost 2. 5 times more than France’s share. Additionally, despite seeing a significant gap in investment share from the leaders, Sweden had a 12. % share of deals in 2012, with the UK following at 12. 1%. Although venture capital investment is just one measure that contributes to entrepreneurial ecosystems, the venture capital investment story in Europe seems to be consistent with the United States. Of course, with one major exception: there is no Silicon Valley in Europe. In fact, this analysis perhaps fortifies the position that there is indeed only one Silicon Valley in the world. Instead of having one leader, Europe has two regions that dominate venture capital investment and they seem to have converged over the last three years. 5.Entrepreneurial Communities and European Policy: Recommendations In this chapter, we have discussed trends associated with US and Europe venture capital investment, as it relates to communities, countries and regions together with their respective entrepreneurial ecosystems. We now suggest a few recommendations to policymakers regarding what could be done to improve the chances of launching successful entrepreneurial communities, specifically in Europe. First, policymakers should seek to standardize entrepreneurship metrics and data collection across the EU. These efforts could lead to a better nderstanding of why entrepreneurial communities behave the way they do and how best to structure them so as to drive economic growth and sustainability. Metrics might include the number of startup jobs filled by employees coming from within a metropolitan area, within a country, outside the country, across regions, as well as net job gain or loss within the metropolitan areas, countries and regions. Investment and performance data such as angel investment from inside and outside of communities, countries and regions and acquisition information could also be very helpful.Some of this information is already collected by the European Venture Capital Association. However, the effort is too intensive for one organization to handle. Policymakers need to work together to clearly define and coordinate metrics already being collected across their metropolitan areas and countries. Investors and startups must be willing to share more investment and performance data. Researchers would then be able to use this data to understand what works and what does not. It is a difficult solution, but one that can be leveraged to reap huge rewards and avoid tremendous losses.Second, policymakers should learn from the successes and challenges of London, Paris, and Berlin. As reported in London and Partners, London has seen a 700 percent increase of startups in the East End since three years ago. However, we know nothing about the source of this increase. Indeed, while bootstrapping or angel dollars could help explain this growth, the venture capital data may make us question the quality and validity of these startups. Alternatively, National Public Radio recently reported on the startup scenes in Berlin and Budapest.As is often the case, policymakers credit universities and talented individuals for the handful of startup successes. Of course, they may be right in surmising that these parties are major contributors to their communities, but are they the drivers of success? Rather than rely on anecdotal evidence, policymakers would be better served by collecting and leveraging entrepreneurship data to truly understand what is going on. Third, communities should seek to build stronger collaboration with neighboring communities that can enhance the metropolitan area, country and egion rather than shift resources away from them. Additionally, these communities can develop targeted strategies to increase venture capital funding or recruit entrepreneurial talent from outside their countries. Finally, Silicon Valley is the increasingly powerful headquarters of venture capital investment activity and for now, there is no stopping that trend. In his book referenced in Section 3 of this chapter, Josh Lerner showed that government supported programs restricted to domestic boundaries are bad strategies for developing startup ecosystems.Unfortunately, this policy still seems to be the go-to strategy across the world. Entrepreneurial communities may find greater success by interacting with, recruiting from, and investing in companies found in Silicon Valley. This path may provide better returns for current domestic funds and prove to be a launch pad for companies that could shift operations back to their home countries once they have gained sufficient support and traction in Silicon Valley. Communities should temper their expectations to match their capacity to innovate rather than expecting to achieve Silicon Valley results.This seems like sound advice for communities where they have rebranded the region as ‘the next Silicon Valley’, but have failed to generate more venture capital deals or investment to the city or country. About the Authors CARLOS KEMENY Carlos Kemeny is a Dual-Phd student at Carnegie Mellon University and Universidade Catolica Portuguesa, researching venture capital, economic development, and academic entrepreneurship/commercialization. He has a Bachelor’s Degree in Mechanical Engineering and a Master’s Degree in Business Administration, both from Purdue University.Carlos was the second employee at Digital Lumens, a successful venture-backed company in Boston, and he co-founded an LED chip company. He helped create and managed the operations for the first venture capital fund at Purdue University, targeting pre-seed university startups. FRANCESCO CASTELLANETA He has a PhD in Management and a MSc in Management of Public Administration, both from Bocconi University (Milan, Italy). Assistant Professor at CATOLICA-LISBON, he teaches “Entrepreneurship and Business Planning” in the Master of Science and Executive Courses. He teaches “Venture Capital” and “Private Equity” in Executives Courses.He coordinates a research project on the factors that have contributed to the development of the Private Equity Capital industry in US and Europe. He consults investors in Private Equity and Venture Capital funds, like banks, insurances and pension funds. FRANCISCO VELOSO Francisco Veloso is Dean of Catolica-Lisbon School of Business and Economics as well as Professor in the Department of Engineering and Public Policy at Carnegie Mellon University. His work focuses on how firms and regions develop and leverage scientific and technological capabilities for economic growth.He has won several awards for his contributions, including the Alfred P. Sloan Industry Studies Fellowship, the Stan Hardy award for the outstanding paper published in the field of Operations Management, as well as grants from the National Science Foundation, the Mexican Science Foundation and the Richard King Mellon Foundation. Francisco has published in journals such as Management Science, Proceedings of the National Academy of Sciences, Academy of Management Review, Journal of Operations Management and Research Policy, and worked with a variety of international firms and organizations, including Alcoa, McKinsey & Co. the Asian Development Bank, or the Portuguese Science Foundation. Francisco has a PhD in Technology, Management and Policy from the Massachusetts Institute of Technology, an M. S. in Technology Management from ISEG and a Diploma in Physics Engineering from IST, both part of the Technical University of Lisbon. ——————————————– [ 1 ]. The “Startup Ecosystem Report 2012” by Startup Genome and Telefonica Digital can be downloaded from the following link:

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