Taking the Pulse of an Entrepreneurial Ecosystem

“If you can’t measure it, it doesn’t exist,” iconic entrepreneur Bill Gates has famously said.

But, when it comes to creating the conditions that allow entrepreneurs to thrive — that is, well-functioning entrepreneurial ecosystems — policymakers often wonder whether what they are seeking can be quantified.

While there is a growing consensus among policymakers, from heads of state to local mayors, about the need to support entrepreneurs, there remains a dearth of data and analysis around what works and what does not in creating vital and vibrant entrepreneurial environments. Beyond not achieving the desired results fast enough, this is important because public resources are, at the end of the day, finite, and misallocation is costly in terms of waste and opportunity cost.

When talking with policymakers in this field, they usually seek a framework for understanding the most critical areas on which to focus attention and resources and evidence-based systems for evaluating whether their efforts are having the impact they seek.

Many very serious and even scholarly attempts exist to identify the elements within a community that support firm formation and growth, how they are interconnected, and where bottlenecks threaten to extinguish individual creativity and initiative. However, entrepreneurship is still a messy field and there is not one agreed-upon standard.

Asking a policymaker to read through and synthesize such panoply is obviously a long stretch. Many end up taking one or two approaches to assessing their entrepreneurship ecosystems: focusing narrowly on a limited number of input metrics that fail to quantify outcomes, or taking a “kitchen sink” approach that, because it considers all aspects of the ecosystem equally important, tracks every result while failing to focus adequately on key components.

A new Kauffman Foundation report is intended to offer policymakers across the country, and perhaps the world, a solution. Authored by Dane Stangler and Jordan Bell-Masterson, the report recommends that policymakers look to four baseline indicators — density, fluidity, connectivity, and diversity — as a starting point for evaluating and measuring entrepreneurial vitality. It addresses measurement by providing state and local leaders with sources of data that can be used to track and evaluate over time whether new policies and programs are achieving their objectives.

For policymakers, looking at the density of new and young companies in a given location, be it a city or a region, will tell them how well the local economy is fostering entrepreneurial activity. To gain a deeper understanding, they can then look at the share of employment in new and young firms, and within the sectors that are most important to that local economy.

One of the key reasons entrepreneurship is so vital to human welfare is because of how it facilitates smart use of resources. The idea behind fluidity is to see whether or not regulations allow for or restrict the reallocation of resources so that they can be more efficiently deployed. This can be measured by looking at things like the number of high-growth firms and the level in which people move between cities or regions, providing a constant remixing of talent — which fosters idea generation.

The third indicator Stangler and Bell-Masterson present, connectivity, measures how entrepreneurs interact with each other, mentors, investors, and other ecosystem actors. To ascertain whether or not policies and programs foster such linkages, the authors suggest looking at spinoff rates, which indicate the extent to which successive waves of new companies are created.

It is for policymakers to avoid a startup monoculture mindset. In this context, similarly, to ensure that a city or region is not overly reliant on a particular industry, and to ensure a continual flow of new ideas, policymakers should foster economic and demographic diversity.

By measuring and tracking how well their city or state diversifies economic opportunity, such as through income mobility, and how well their city or region welcomes new immigrants, policymakers can better understand what adjustments are needed.

Tracked over time, “these four baseline gauges will provide a clear picture of an entrepreneurial ecosystem’s health and effectiveness,” replied Stangler when asked how the four indicators were selected. “They also serve to inform entrepreneurs and regional leaders about actions that will make the ecosystem stronger.”

Google’s CEO, Eric Schmidt recounted how in every meeting with city, state and national leaders he was asked for advice about how to propel entrepreneurial activity. “Well,” he said, “they all have human capital to do so, people everywhere are endlessly creative, what they need is to fix the environment. And, ultimately, this is a most urgent conversation because this is about growth, it’s about generating jobs. The way you create jobs is by creating new companies, new entrepreneurs, new ideas. The vital point is that every leader needs this because they all have to solve the problem with joblessness.”

Evangelists for entrepreneurship around the world have succeeded in getting the significant attention of a wide range of leaders to this mission Schmidt describes. The challenge ahead now shifts to giving them the most accurate and relevant information from which to act in pursuit of the cause. Stangler and Bell-Masterson’s work, along with parallel contributions it will undoubtedly prompt, is vital in this effort.

This new framework provides a terrific place for policymakers to begin making sense of what matters in their communities and markets.