Learning From the World’s Leading Startup Ecosystems

High-growth, innovation-based entrepreneurship creates the jobs, companies, and industries of tomorrow and is a vital component of spurring innovation and economic growth in developed and developing countries alike. But high-growth entrepreneurship flourishes best in the context of supportive ecosystems where networks of skilled talent, mentors, incubators, partners, knowledge, and capital thrive. Recognizing this, cities throughout the world have become much more sophisticated in creating supportive ecosystems in which start-up entrepreneurship can thrive. ITIF hosted an event to discuss strategies being implemented around the globe to achieve this.

Stephen Ezell, vice president for global innovation policy at ITIF, opened the panel by arguing that “innovation is not manna from heaven, it is the result of intentional human action.” Among the most effective of those actions, he argued, are those intended to create the ecosystems in which start-ups can thrive.

Because clusters of entrepreneurship can kick-start development, the World Bank is conducting groundbreaking research on the role of ecosystems in promoting start-ups. Victor Mulas, senior innovation officer for the World Bank Group, presented some findings on this phenomenon. He began by making several points about today’s global economy: First, the “value in the global economy is moving to digital businesses.” Data flows are increasing exponentially, and there is value in every data transaction. Second, the pace of disruption is accelerating because the barriers to innovation are decreasing. Mulas explained, “the cost of innovation has been reduced in the last 10 years by 95 to 99 percent.” Third, “at the core of this disruption are start-ups.” Companies like Airbnb, Uber, and Spotify have transformed the transportation, taxi, and radio industries. Fourth, these “start-ups are a global phenomenon.” The flags of start-ups’ home countries “look like the Olympics,” suggested Mulas.

The dynamics of these disruptions promote growth and development. Mulas noted that in New York City during the time of the World Bank’s study, start-ups created 60,000 jobs—and in response to this competition, established players created an additional 150,000 jobs. Roughly 44 percent of these jobs required less than a bachelor’s degree, highlighting the potential of start-up ecosystems to reduce poverty and make growth more inclusive.

Mulas and his colleagues sought to understand what makes entrepreneurship ecosystems like New York’s tick. He explained that some prerequisites are indispensable, including having access to people with talent, diversity, and creativity; strong infrastructure, especially transportation and broadband connections; economic assets and financing opportunities; and a stable “enabling environment.” But beyond these conditions, Mulas argued that a start-up ecosystem is powered by “collisions.” “You meet up randomly with a person … and that gives you another idea,” he said. Healthy ecosystems “multiply those collisions” through community-building events, skills teaching, collaboration spaces like co-working offices, and networks of mentors. In regression analyses, Mulas and his team found that start-ups that are more connected to these networks are more likely to be funded. Interestingly, geographical proximity to these networks “really doesn’t matter … what matters is the start-up’s connectivity.”

Mulas concluded with an overview of some of the studies his team is now conducting. Some of the most promising preliminary research is comparative, looking at the similarities and differences between ecosystems in different metro areas. For example, the World Bank’s analysis suggests Dar es Salaam has one inner “cluster” of connections that may be locking potential entrepreneurs out. In contrast, Medellin has a well-developed ecosystem with several “black holes” of connections “that bring in everybody.” Mulas and his colleagues are also examining how international connections between ecosystems can transplant different ideas, experiences, and practices.

Each of the panelists then discussed how many of these findings are borne out in their own cities or countries. Katie Stebbins, Massachusetts’s assistant secretary for technology, innovation and entrepreneurship, began by highlighting the Boston metro area’s ecosystem, which is the #1 ranked innovation and technology economy in the country. Stebbins pointed to the role of MIT and Harvard in propelling Boston’s tech sector. She noted, however, that just having good schools is not enough—Boston’s successes owe much to former Governor Deval Patrick’s decision to pour $1 billion into the life sciences. When Stebbins entered state government under the Charlie Baker administration, she explained, “everybody came to me and said ‘ok, we need another billion dollars,’ … [but] it’s not about giving out billion dollar incentives at this point, it’s about saying ‘we’ve created this momentum, and now we need to nurture the supercluster.’” By helping nurture the beginnings of a start-up ecosystem, Stebbins explained, government can help foster “an economy that leverages the bigger opportunities … the collisions between” entrepreneurs, firms, venture capitalists, and academics.

Echoing Mulas, Stebbins emphasized the importance of networks to start-up ecosystems. After getting her job, “the first thing I did … I went out into the ecosystem and I identified, ‘who are my people? Who are my navigators? ... I understand that network Victor had of all the pieces … I have one of those networks in my head, and I know the other 200 people in Boston who have one.” Stebbins was careful, however, to note that government should be a facilitating, rather than driving, force. “Government should not be going into the ecosystem and saying, ‘OK, ecosystem, this is how the robotics cluster is going to figure this out,’” but instead should let market forces take over.

Detroit faces stronger economic headwinds than perhaps any other major American city. Jill Ford, Detroit’s head of innovation and entrepreneurship, followed Stebbins by exploring how Mayor Mike Duggan’s administration is promoting entrepreneurship to revitalize the city. She stated, “if you ask what entrepreneurs need, the first thing a lot of people say is ‘funding.’ If you start to peel back, well, what is that funding for, that’s when you’ll actually hear a lot of the more basic needs of businesses. Businesses need customers, and to get those customers, you need talent. To house that talent, you need space.” To help start-ups find these spaces, Ford highlighted Motor City Match, a program that provides grants to entrepreneurs seeking to rent vacant commercial spaces throughout Detroit. She explained, the program helps solve “missed connections” between entrepreneurs looking for space and property owners looking to rent. Of businesses supported by Motor City Match, 76 percent are minority-owned, 68 percent are women-owned, and 62 percent are run by native residents of Detroit. Ford also pointed to the Detroit ID program, which provides residents with official IDs to access city services, and the Entrepreneurs of Color Fund, which helps to alleviate the gap in capital available to minority-owned start-ups.

As Mulas and Ezell noted, start-up ecosystems and entrepreneurship are not a solely American phenomenon. Uri Gabai, the Israel Innovation Authority’s chief strategy officer, knows that firsthand. He illustrated how the processes discussed by the other speakers have played out in the Tel Aviv metro area, one of the world’s most dynamic start-up ecosystems. Gabai noted, “Israel is doing quite well in the start-up scene, but it wasn’t always like that…. [T]here was quite a big leap in the ’90s, when entrepreneurship leaped quite dramatically.” In the 1970s, he explained, the Israeli economy was suffering from a shortage of knowledge of how to conduct R&D projects, so the government encouraged international corporations to open subsidiaries in Israel and mentor them in R&D. By the 1990s, the Israeli government had also jump-started the venture capital industry. But echoing Stebbins’s observations about the Massachusetts government’s role in the tech sector, Gabai explained that within five years of the initial funding, “basically the private VCs [venture capital firms] bought the [Israeli] government out.” The Israeli government’s focus then shifted to tech incubators, where Gabai argued “Israel was one of the pioneers in that scene.” A key function of these incubators is “getting knowledge from academic institutions into industry” by promoting applied research. As a result of these policies, Israel’s ratio of R&D approximately doubled to 4 percent of GDP.

The United States and Israel are both developed economies, and as Mulas argued, start-up ecosystems hold enormous promise for developing countries as well. Lucas Cornejo, chief of staff for Argentina’s national directorate of venture capital, spoke about his experience helping to promote entrepreneurship in Buenos Aires and then across Argentina. In 2013, Cornejo explained, he began helping the Argentinian capital develop its entrepreneurial sector. The first step was to convene the major public and private sector players involved in the city’s start-up scene to create a plan. Then, Cornejo and his colleagues sought to create “benchmarks” by studying the experiences of Brazil, Chile, Singapore, South Korea, and others. Third, Cornejo and his team traveled to the entrepreneurship offices of many of these countries to get feedback on their plans. Finally, the group convinced Buenos Aires’s then-mayor, Mauricio Macri, to create an office specifically for entrepreneurship. The program advanced by that office focused on three key areas: education, community-building, and access to capital. Mauricio Macri won Argentina’s presidential election in 2015, and Cornejo became part of a team tasked with building a national program based on Buenos Aires’s model.

As Ezell noted in his concluding remarks, “innovation has never been easier” than it is today, because technology and access to capital has been democratized. By the same token, competition has never been fiercer. To unleash the potential of the resulting disruptions, governments should focus on enabling, not directing, ecosystems in which start-ups can flourish. Mulas’s work and the experiences of the panelists demonstrate that the public sector can best help by building the connections between entrepreneurs, firms, venture capital funds, and academia to form the types of networks that underpin the most dynamic metropolitan economies.