Entrepreneurial Ecosystem

The entrepreneurial ecosystem is comprised of a wide array of institutions and resources that contribute to the development of entrepreneurship on a local or municipal level. These components have led to the creation of clusters of entrepreneurial success and economic growth, such as Silicon Valley (Palo Alto, California) or Route 128 (Massachusetts).

Components of the Ecosystem

Accelerators and Incubators

Accelerators

An accelerator is a “fixed-term, cohort-based program including mentorship and educational components, that culminates in a public pitch event, often referred to as ‘demo-day’” (Cohen and Hochberg, 2014). The mission of an accelerator, often a non-profit entity, is to provide early stage start-ups with resources, mentorship, and networking needed to gain access to venture capital funding. On average, cohorts stay with an accelerator for 3 months cumulating with a pitch to several venture capital investors. (Fehder and Hochberg, 2014)

Incubators

Incubators “shelter vulnerable nascent businesses, allowing them to be stronger to become independent” (National Business Incubation Association). Incubators serve as a temporary space for start-ups to develop in their early stages. Unlike accelerators, there is no formal curriculum, cohorts, or duration of stay. Residents of incubators pay fees for both rent and services, and are not offered the breadth of resources found in an accelerator. (Fehder and Hochberg, 2014)

Top Seed Accelerators, 2014 (SARP)[1]

1. AngelPad (San Francisco, CA)
2. MuckerLab (Santa Monica, CA)
3. Techstars (Boulder, CO; Boston, MA; Chicago, IL; Seattle, WA; New York, NY; San Antonio, TX)
4. University of Chicago New Venture Challenge (Chicago, IL)
5. Alchemist (Silicon Valley)
6. StartX (Santa Clara, CA)
7. Amplify, LA (Los Angeles, CA)
8. 500 Startups (Mountain View, CA)
9. Capital Innovators (St. Louis, MO)
10. Dreamit (Philadelphia, PA; New York, NY)
11. Surge (Houston, TX)
12. MassChallenge (Boston, MA)
13. The Brandery (Cincinnati, OH)
14. Gener8tor (Milwaukee, WI; Madison, WI)
15. ZeroTo510 (Memphis, TN)
16. AlphaLab (Pittsburgh, PA)
17. Blue Startups (Honolulu, HI)
18. ERA (New York, NY)
19. Betaspring (Providence, RI)
20. The Iron Yard (Greenville, SC)

* Notable absences: Y Combinator and Rock Fund, both of which no longer identify as seed accelerators but as seed funds

Angel Investors

Angel investors are “high-net-worth-individuals that make private investments in start-up companies with their own money” (Kerr et al., 2014). Recently, angel investors have been pulling their resources together in what are classified as either angel groups or angel funds. In these groups, combined capital allows a combination of larger investments or a more diversified portfolio of investments.

Currently, the U.S. Securities and Exchange Commission [2] regulates the domestic definition for angel investor accreditation [3], establishing a level of wealth (income or net worth) in which investors need to prove before being accredited. The Angel Capital Association [4], a collective of accredited angel investors in the United States, claims over 13,000 member investors and more than 240 accredited angel groups.

According to the University of New Hampshire's Center for Venture Capital Research[5], 2014 saw Angel Investors contributing $24.1 billion, a slight decrease from 2013 investment.

Crowd Funding and Micro-finance

Crowd Funding

Crowdfunding is the practice of pooling external financing from a larger group of investors contributing small amounts of capital. In recent development, crowdfunding exists primarily in online communities, where crowdfunders receive some private benefit in lieu of an investment. (Belleflamme, Lambert, Schwienbacher, 2014)

Popular Crowdfunding Forums

• Kickstarter [6]
• Indiegogo [7]
• Rockethub [8]

Micro-Finance

Micro-finance institutions are banks that give small loans to individuals or groups with low interest rates. The clients of micro-finance institutions are often lower-income households and small business owners looking for micro-loans to expand or create a small business venture. Currently, micro lending in the developing world is significantly more prolific than in the United States or in other developed countries, due to a combination of policy and market obstacles. Though not exclusively, micro-finance institutions are often linked with non governmental organizations, social entrepreneurship, and nonprofit ventures in an attempt to stimulate economic activity and job creation in developing communities. (Sterner and Murdoch, 2001)

Regulatory Environment

Political institutions at the local, state, and federal level play a pivotal role in the entrepreneurial ecosystem. The regulatory environment in each of the three level of governments alter the ease of entry into the entrepreneurial space by way of a variety of mechanisms. These mechanisms include tax policies, incorporation costs, barriers to entry, etc.

in progress

Venture Capital

Venture capital firms provide “privately held 'entrepreneurial' firms with equity, debt, or hybrid forms of financing, often in conjunction with managerial expertise” (Amit et. al, 1998). The typical VC investment will occur during early or middle stages of the start-up process in exchange for a minority equity stake of the company, although most specialize in the investment of young entrepreneurial ventures. VC firms typically target start-ups in advanced technology sectors rather than service or low-tech businesses, and often specialize in a single vertical such as software or biotech.

A significant benefit of utilizing venture capital is access to large amounts of capital, although in exchange for a small portion of the ownership. Many start-ups need multiple waves of VC funding before developing enough to go public, or to be bought out by a larger company. The goal of a VC investment is to provide capital for a start-up to gain success in order to make a financial return, consequently VC firms place heavy scrutiny and analysis on potential investments.

in progress

Venture Capital Investment by Stage

Start-ups are classified by Venture Capital firms into 4 stages [9]: seed stage, early stage, expansion stage, and late stage. These stages of development help investors determine the potential return of an investment.

Moneytree, a collaboration between PriceWaterhouseCoopers[10] and the National Venture Capital Association [11] defines these stages as:

1. Seed Stage: "The initial stage. The company has a concept or product under development, but is probably not fully operational. Usually in existence less than 18 months."
2. Early Stage: "The company has a product or service in testing or pilot production. In some cases, the product may be commercially available. May or may not be generating revenues. Usually in business less than three years"
3. Expansion Stage: "Product or service is in production and commercially available. The company demonstrates significant revenue growth, but may or may not be showing a profit. Usually in business more than three years."
4. Late Stage: "Product or service is widely available. Company is generating on-going revenue; probably positive cash flow. More likely to be, but not necessarily, profitable. May include spin-offs of operating divisions of existing private companies and established private companies."

Historically, the majority of Venture Capital investment, in terms of both number deals and total dollar amount, occurs once a company reaches its early stage. Seed stage companies receive minimal investment simply because they are not often developed enough to be of legitimate promise to investors. Recent trends have shifted to the majority of deals being made during the early stages, though larger deals are found with firms in the expansion or late stages.

In Quarter 3 of 2015, Seed Stage ventures received 1% of total venture capital investment in dollars, early stage ventures brought in 33%, expansion stage firms 39%, and late stage received 27% of capital investment.

Top U.S. Venture Capital Firms (from Forbes[12], by most exists since January 2014)

1. Kleiner Perkins Caulfield & Byers
2. Bessemer Venture Partners
3. New Enterprise Associates
4. Sequoia Capital
5. Institutional Venture Partners

Other components

In addition to the larger institutional players, the ecosystem benefits from the presence of the following institutions and/or individuals in the community. The following components contribute to developing and cultivating a population of potential entrepreneurs and their innovations.

• Clubs, meet-ups, and other community organizations: local initiatives to foster the entrepreneurial community, provide forums for collaboration, and host entrepreneurial related events
• Entrepreneurship education: formal education on topics on or related to entrepreneurship, particularly in higher education such as MBA or undergraduate business programs
• Established incumbent firms: successful incumbent firms provide partnership, engage in open innovation, and act as a source for acquisition and spin-off in the entrepreneurial ecosystem
• Flex-space and other resource providers: businesses offering a variety of services specific to start-ups, primarily focusing on the supply of workspace to early stage ventures or entrepreneurs
• Skilled labor: members of the work force with advanced degrees, particularly in the areas of Science, Technology, Engineering, and Mathematics
• Small business lending: a subset of loans offered by financial institutions, specifically to small business that fall under the classifications established by the SBA [13]
• Research labs: labs that provide housing and resources for research conducted in a wide variety of disciplines, classified as either public or private depending on the primary source of funding
• Serial entrepreneurs and previous VC-backed firms: individual and firms that have found success in the entrepreneurial space, and are likely to engage in entrepreneurship in the future
• Universities: research institutions, that include not just the practice of innovation by members of the university, but also the university's interactions with entrepreneurs, spin-outs, technology transfer offices, and other mechanisms of interaction with the entrepreneurial space