Tuesday, May 16, 2006

Creating an Entrepreneurial Region

Several years ago, the National Commission on Entrepreneurship organized focus groups of entrepreneurs around the U.S. to discuss the factors which help entrepreneurs succeed, and to identify the obstacles in regions that impede the growth of new firms, lead to business failure, or discourage new business start-ups. Many of the participants were serial entrepreneurs, i.e., people who had started more than one business.

One of the focus groups was held in Pittsburgh (the others were in Anaheim, Atlanta, Austin, Birmingham, Boston, Boulder, Indianapolis, Kansas City, Los Angeles, New York City, Northern Virginia, Palo Alto, Phoenix, Research Triangle Park, Salt Lake City, San Diego, and Seattle).

The participants identified four key issues:

1. Talent -- finding quality people to fuel and sustain growth. The report noted that a successful technology company relies on more than technically skilled personnel; it also needs a qualified management team, both at the CEO and middle management levels. The report said:

...entrepreneurs in Salt Lake City and Pittsburgh can regularly hire entry-level technical talent thanks to the presence of strong science and engineering programs at the University of Utah and at the University of Pittsburgh and Carnegie Mellon University. But, recruiting management is a different matter. One major problem is the absence of a critical mass of new businesses in these communities. One entrepreneur from Utah noted, "I can convince managers to come to Utah for the quality of life and for the challenge of running a company. Yet they fear that they might not be able to find another job in the region should things fail to work out."

Talent problems occur at the other end of the spectrum, too. The focus groups almost unanimously lamented the competence and work attitudes of high school graduates. For both the technology and non-technology sectors, there is a labor shortage of workers who are "ready to work."

2. Access to Capital. The report said that even though at that time (2000) the overall environment for funding start-up businesses was better than at any time in history, entrepreneurs still faced a big problem obtaining seed capital investments in the range of $300,000 to $3 million. Robust entrepreneurial regions had professional seed or early stage capital funds to fill this gap, either privately funded or through public-private entities. The report specifically noted the efforts of Innovation Works in Pittsburgh to fill the seed capital gap.

The focus groups agreed that diverse sources of capital were needed to create and grow startup firms -- not just local venture capital firms, but organized networks of angel investors. The report said that "angels tend to emerge from the ranks of successful entrepreneurs, so regions with many successful entrepreneurs tend to have strong angel networks. Moreover, most angels invest close to home, so their presence has the effect of creating a virtuous cycle of wealth reinvestment in the community."

Diverse sources of capital also includes more traditional institutions, like banks. As the report notes, "Strong entrepreneurial regions often boast a banking sector that is more flexible and less risk-averse, thus making it easier for them to work with smaller firms."

3. Infrastructure and Institutional Support. This includes a range of issues like entrepreneur-friendly tech transfer policies at universities, presence of experienced service providers such as lawyers, accountants, and consultants who know how to work with entrepreneurs (which includes being flexible in their terms for payment and service), access to high-speed Internet service, and availability of affordable, appropriate office space. (The report points out that new economy companies need office space with flexible lease arrangements in wired buildings with 24-hour services, whereas many building owners want long-term leases and shut down building services in the evening.)

But this area also includes the harder-to-define notion of a culture that is supportive of entrepreneurs. For example, the report emphasized the benefits of having strong coverage of entrepreneurial companies by newspapers, and of celebration of entrepreneurs and risk-taking by political figures, business CEOs, and community leaders. The report said that "symbols matter," and that public officials can make an important contribution simply by recognizing the critical role played by entrepreneurial companies in the local economy. One focus group cited a mayor who visited startup businesses and pledged to make the community an entrepreneur-friendly environment.

The report emphasized the importance of networks to entrepreneurial success. As the report noted, "Entrepreneurs are classically depicted as rugged individualists who single-handedly build great companies. In reality, entrepreneurs are consummate networkers who thrive in communities. Networks are essential because they link entrepreneurs to potential sources of capital, new employees, strategic alliance partners, and service providers." Although formal networking programs can help, "Formal groups assume a less important role as regions become more entrepreneurial. In strongly entrepreneurial regions, informal networks tend to dominate."

4. Government Support. The focus groups indicated that entrepreneurs cared much less about federal policies and programs than about the support from state and local government. Entrepreneurs in Pittsburgh lauded Pennsylvania's efforts to foster technology development in the state, and saw value in a strong partnership between the government and private industry in investing in commercially viable technologies. Local government issues tended to focus on the ease of dealing with licensing and other regulations when creating and growing new firms. The report noted that "problems with licensing procedures were most pronounced in a region like Birmingham, where municipal, county and state governments share jurisdictions. This is in direct contrast to regions with regional governance structures, such as Indianapolis."

The key findings of this report represent a good agenda for the Pittsburgh Region in order to encourage more growth of entrepreneurial companies:

  • improving access to management talent and proficient entry-level workers;
  • improving access to seed capital;
  • facilitating networking to help entrepreneurs access information and needed services;
  • insuring availability of appropriate buildings and infrastructure; and
  • having supportive government leaders, policies, and programs.

The full report, "Building Companies, Building Communities: Entrepreneurs in the New Economy" is worth reading in its entirety.


Blogger fester said...

I'm pretty sure Pittsblog has been doing a good job of hammering away at the succession of companies needed to attract a critical mass of talented managers who want to have the option available of jumping down the street to another successful company instead of jumping states with those attendant costs.

5:11 PM  

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