This is cross-posted/adapted from an Economist blog post entitled Intelligent Evolution.
As Russia's Yandex makes its NASDAQ splash, Microsoft scoops up Estonia’s Skype for a reported $8.5 billion, Finland’s Angry Birds pluck $42 million from happy venture capitalists, and China’s RenRen rakes in $742 million in its NYSE debut, Is there method to this entrepreneurial madness? Are these random events, or can we identify, or even cultivate, the conditions in which value-creating entrepreneurial ventures like these will thrive?
For years I have looked at how to foster entrepreneurship in such super-venture societies as Israel, Ireland, Taiwan, and Iceland, and worked with public and private sector leaders in over a dozen large municipalities and nations including in Spain, Chile, South Africa, Colombia, Puerto Rico, and Argentina, not to mention StartUp America. I have written in the Harvard Business Review about some of the principles and processes that drive the evolution of entrepreneurship ecosystems, but let’s go back to basics: What exactly is this entrepreneurship ecosystem that is generating so much buzz these days?
1. The entrepreneurship ecosystem consists of six domains (see diagram). Actually, the entrepreneurship ecosystem consists of hundreds of specific elements that, for convenience, we group into six general domains: a conducive culture, enabling policies and leadership, availability of appropriate finance, quality human capital, venture-friendly markets for products, and a range of institutional and infrastructural supports. Our entrepreneurship ecosystem diagram shows fifty of these specific components.
2. Each entrepreneurship ecosystem is unique. Although any society’s entrepreneurship ecosystem can be described using the same six domains, each ecosystem is the result of the hundreds of elements interacting in highly complex and idiosyncratic ways. Israel’s entrepreneurship ecosystem evolved in the 1970s with no natural resources, military necessity, and far from markets for its products. Ireland’s ecosystem evolved in the 1980s in the context of free education, native English, foreign multinationals, and proximity to the European market. Taiwan’s entrepreneurship ecosystem evolved in the 1990s in the context of a huge accrual of highly successful Taiwanese expatriates in the US. China’s entrepreneurship ecosystem is evolving now in the context of diverse regional policies and a somewhat (some would argue, very) totalitarian political system.
3. Specifying generic root causes of the entrepreneurship ecosystem has limited practical value. Whereas there is evidence that education, regulatory and legal frameworks, and well-functioning capital markets do indeed impact the level of entrepreneurship in a society, in general the impacts are over a long time frame, and also weak. The big step changes in entrepreneurship that we witness from time to time are the results of what statisticians call “high order interactions,” that is, many variables working together. In fact, a handful of individual people, sometimes one or two, can be the catalysts without which the step change would not have occurred. So whereas it is useful to assess each regional entrepreneurship ecosystem to specify causal paths at specific points in time, determining generic causal paths are less useful. Furthermore, what we often think of as outcomes can also be causes: in what I call the law of small numbers, you can often identify one or two more-or-less-random successes that are actually very causal in evolving the ecosystem. Skype impacted Estonia’s ecosystem, Scitex and Elscint stimulated Israel’s, Shockley, Fairchild, and HP helped create the Valley, Digital Equipment Corporation in Boston, and Baidu was influential in China. Success breeds success..
4. Entrepreneurship ecosystems become (relatively) self-sustaining. Because success does breed success by feeding back to enhance the six domains of the entrepreneurship ecosystem, there is a tipping point at which government involvement can and should be significantly reduced; not eliminated, but reduced. Once the six domains are strong enough, they are mutually reinforcing, and public leaders do not have to invest quite so much to sustain them. In fact, it is critical that entrepreneurship programs are designed to be self-liquidating in order to focus on building sustainability into the environment.
Nature or nurture? I am frequently asked if entrepreneurs are born or made. The same question can be applied to entrepreneurship ecosystems: Do they evolve naturally, or can we intelligently design them? I think a proper understanding of the nature of the entrepreneurship ecosystem gives us a clue: they are usually the result of intelligent evolution, a process that blends the invisible hand of markets and deliberate helping hand of public leadership that is enlightened enough to know when and how to lead as well as let go the grip in order to cultivate and ensure (relative) self-sustainability.
