One of our featured keynotes for the 31st International Conference on Business Incubation, Steven Koltai, spoke with InBIA CEO Kirstie Chadwick on his perspective of what it takes to build a successful entrepreneurship ecosystem. Watch the full video interview and take a look below for an excerpt from Steven’s book, Peace Through Entrepreneurship: Investing in a Startup Culture for Security and Development.
The Six + Six Model
If we want to influence the entrepreneurship ecosystem, we need a framework to organize our analysis and plan our attack. My approach to developing a strong entrepreneurship ecosystem is the Six + Six Entrepreneurship Ecosystem Model (see figure 7-1). Six + Six presumes that no single factor alone can move the needle on entrepreneurship: not funding, not regulatory reforms. Rather, entrepreneurs thrive when multiple sectors and actors consciously work together to develop a supportive environment. NGOs, foundations, academia, investors, governments, and corporations all need to play some role in identifying, training, connecting and sustaining, funding, enabling (through public policy), and celebrating entrepreneurs.
Let us look at the six pillars that capture what an entrepreneurship ecosystem is about. First, identify. Entrepreneurs need to get on an investor’s radar screen, whether that investor is a Sand Hill Road VC, a low- profile angel investor, or a captain of industry in a poor country. A robust ecosystem will do a good and efficient job of bringing investors to Hewlett and Packard’s garage. MEST actively runs an intensive recruitment and application process to identify promising entrepreneurs for its two-year program, and then invests (both money and mentorship) in a select few that develop a good idea and make a good pitch. Business plan competitions are a great way to cast a wide net. The next chapter discusses the best ways to run business plan competitions, but generally speaking, aggregating a large number of startup teams and enabling them to pitch their companies is a good way to shake the tree and find a community’s entrepreneurs.
But many potential entrepreneurs do not have the training and skills needed to operate a business, even those (sometimes especially those) who win business plan competitions. They may be good at the pitch but not so good at the execution. A successful entrepreneurship ecosystem, thus, requires educational resources that transfer knowledge and build real skills. This might come from world-class universities, but training comes in many forms and at different ages. Entrepreneurs in poor countries often don’t learn much in the way of accounting and bookkeeping from their under- resourced school systems, let alone master product piloting, types of financing vehicles, intellectual property protection, customer segmentation, or market research. Entrepreneurship hubs, aid programs, mentors, friends, foreign investors—these might all become sources of training. Some programs focus on early learning, teaching entrepreneurship concepts and how to think creatively to teen agers and even children age ten and younger. Entrepreneurship pedagogy is a major academic field. One of the discipline’s leaders, Babson College (and its affiliate Babson Global), runs programs worldwide, including training for community college faculty, on how to work with existing, local small businesses.
Entrepreneurs also need to be connected to other entrepreneurs and veteran business leaders to develop business acumen. This is very much the idea behind the mixing bowl of Start-Up Chile, MEST’s campus-based program, and the inclusive spirit of the Boulder Thesis that Brad Feld talks about in his book Startup Communities. Connecting a new entrepreneur to someone who has “been there and done that” is vital to the newbie’s success. In fact, I believe that mentoring—not funding—is the single most critical determinant of success or failure for a startup. In the long term, and often in more formal programs, connecting is about sustaining progress. Incubator programs and extended mentorship arrangements are key here. Be it 500 Startups, the Unreasonable Institute, MEST, or the Demeter Network’s mentor-matchmaking service, mechanisms that deliver experience and encouragement to startup founders are a key presence in a strong entrepreneurship ecosystem.
Funding is the lifeblood of any business, of course. It ensures entrepreneurs have the financial means to build upon ideas. No access to finance means (very likely) no startup. But financing means different things at different stages of growth. Only the strongest entrepreneurship ecosystem supplies options at each stage. For instance, in almost any economy, an entrepreneur’s own resources (and access to credit) are very likely to be the first source of funds. This is important. An entrepreneur’s first dollars are almost always their own; not the money of angel investors, venture capitalists, the bank, or even friends and family. (Friends and family, though, are very often the next source of funding: a rich uncle, the savings of university classmates, the contributions of a tight-knit church congregation.) This is true in the United States and Nicaragua and Niger . . . everywhere.
In developed economies (and in some poor economies) angel investors may well emerge to provide early-stage support. Further down the line comes venture capital, and then debt (for example, bank loans and mortgages), strategic partnerships with larger firms, and private equity. (By the way, despite the hype, less than 1 percent of American companies have ever received venture capital financing. And banks never loan to a true startup; the goal of banks is to lend money to people who do not need it and avoid lending to those who do, because the latter are almost always a poor credit risk.) The earlier in this progression a startup is, the more risk it presents for potential investors. Thus, whether you are in Ghana or Silicon Valley, the seed stage is usually the trickiest; the leap from friends and family money to VC or debt backing is often called the “financing gap.” Where can a startup get the $25,000 or $500,000 needed to prove a concept and run with an idea? The strongest ecosystems do not just dish out seed money for everyone, but they do have multiple mechanisms for funding the best ideas and a mature financial apparatus for companies further along.
Public policy must be conducive to entrepreneurship. Startups should be enabled rather than hindered by the regulatory environment. This is the catchall ecosystem parameter regarding red tape, tax incentives, rule of law, and all the political and institutional factors that can help or hurt a startup. One-stop-shop filing for new businesses, clear pathways for foreign investors to get money in and out of a country; these are among the myriad issues that determine whether an ecosystem is friendly toward entrepreneurship. A crucial, related factor here is corruption. It is difficult to measure the burden this places on startups, both in cost and time. Suffice to say that, in my experience, corruption is often one of the most decisive reasons why startups fail. An infant firm’s bottom line breaks under the extra weight of “facilitation” expenses; a young entrepreneur lacks access to the “big man” who de facto decides whether or not a business goes ahead on his turf.
Finally, entrepreneurship must be celebrated as a desirable, worthy, and viable career path. I believe that celebration rivals mentoring and funding in importance to a successful ecosystem. Silicon Valley is full of entrepreneurs. Everyone there thinks it is cool to be an entrepreneur, even (and especially) if you turned down a job with Goldman Sachs to pursue your own dream. In Ghana, if you have a university degree, you may well be considered an idiot, or at least irresponsible, if you do not take a job with a bank, an international NGO, or the government. Result: far fewer entrepreneurs.
A culture that belittles rather than extols entrepreneurs must change. In my view, one of the best ways to accomplish that change is precisely to celebrate those local entrepreneurs who do succeed. When you open the business section of a local newspaper, are you reading about a startup founded by college kids, or the latest sales figures for Coca- Cola? Do MEST’s latest graduates appear on the radio and TV talk shows, or is it just the CEOs of multi nationals and parastatals? Celebrating entrepreneurship is about rewarding successful entrepreneurs and introducing them to a community as role models.
These six parameters—identify, train, connect and sustain, fund, enable, and celebrate—are the key pillars to a strong ecosystem. If all of these activities are in evidence, then you will see more garages occupied by entrepreneurs and more of those entrepreneurs finding success.
The above is an excerpt from Peace Through Entrepreneurship: Investing in a Startup Culture for Security and Development by Steven R. Koltai with Matthew Muspratt. Come see Steven at ICBI31!