Beyond Silicon Valley: Growing Entrepreneurship in Transitioning Economies

Beyond Silicon Valley:

Growing Entrepreneurship in Transitioning Economies

3 CONSISTENT COMPONENTS

1.     Perspective of an entrepreneur.

2.     Perspective of thought leaders.

3.     Provide international context.

Rockefeller, was the world's most famous entrepreneur in the 19th century. He started his business in Cleveland.

In the decade 1910-1920, Cleveland turn from the sixth largest to the fifth largest city in US, impelled by its population, its creativity and industry. That is called the Rockefeller effect. As the 20th century wore on, Cleveland's Rockefeller magic disappeared. In 2001, Entrepreneur Magazine ranked Cleveland 61 out of 61 places. In 2012, it was the 47th largest city in the country. The quiet crisis of 2000 is one aspect of what happened, but by the 1950's Cleveland was a lock on heavy industry.

Brad Whitehead, a key player on the McKinsey team tasked with making recommendations to Cleveland's community leaders on how to move the local economy forward: "It was the chicken and egg debate, is the problem that we don't have capital or is the problem that we don't have investable ideas? And, I think we thought, that is probably an interesting intellectual discussion. But probably the answer is, yes, we lack capital and we lack investable ideas, so let's get working on both at the same time".

Bruce Katz, Vice President and Director of the Metropolitan Policy Program, of the Brookings Institution in Washington, and the author of "The Metropolitan Revolution" (published on 2013), looks at how cities across the US try to grow their economy. He began a process of intervening in very smart and deliberate ways in what really makes metropolitan economies work in Cleveland: Innovation, entrepreneurship, manufacturing, and trade. He says that it is the one of the most successful network models around de US.

Role of government in supporting entrepreneurs

What kind of initiatives should government support?

How it justifies its investments?

Why should governments support entrepreneurs?

Why should governments get involved in supporting entrepreneurship at all?

The State of Ohio selected companies for investment that would be successful in the market doing two key things:

• First, it required companies to find other investors to match the government grants. Outside match requirement.
• Second, the government would require third party independent evaluators to make recommendations for allocation. Third party independent evaluation.

The Third Frontier program, created 11 years ago, due to the need for a significant program to support innovation in the Ohio economy, felt by the then Ohio's governor, Bob Taft, "came out of the desperation and the need to make change", said Lisa Delp, Former Executive Director of this program.

Rebecca Bagley, President and CEO at Nortech in Cleveland, thinks that Third Frontier program was critical because it is an extremely unique program across the country. She explains: "For one thing, it's at scale. So it's a very large program when in comparison to other states. There's only a handful of other states who have programs that large. It's also been sustained program. So we've been able to sustain that level of funding for almost the last ten years".

The measure of success of the Third Frontier program to support entrepreneurship, is considered by three key metrics: Job creation, tax revenue, and the amount of follow-on capital that has raised bye entrepreneurs after the state investment.

Morrys Wheeler, Founder at Drummond Road Capital, points out that "government can be an important, and in some cases necessary, catalyst for start-up activity. But it shouldn't attempt to be the kingmaker. And it shouldn't attempt to design the start-up activity. Instead, it should look at the entrepreneurs, it should look at the needs, and work as a catalyzer and as an enabler, not as a controller of entrepreneurial activity."

Some organizations involved in supporting entrepreneurship around the world, such as Endeavor, are less enthusiastic about working closely with governmental entities. Peter Kellner, co-founder of Endeavor Global, assure that his organization avoid working with government because "there are always strings attached, and you never know what's going to happen in government; people leave, people come in, the incentives are not aligned with your strategy, which is long term".

Government involvement in providing support for entrepreneurship is complicated. The ultimate return on investment can take years, if not decades, and political leaders tend to want results more quickly. So here are some key factors to consider:

·       How big is the program? Funding has to be large enough to make an impact.

·       How will the program be set up to avoid favoritism?

·       How diverse will the program be?

·       Would it fund different stages of entrepreneurship from imagining to sales?

·       Would it fund both research and entrepreneurship?

·       What metrics will be used to measure success?

The role of philanthropy and donors in supporting entrepreneurs

1.     Why donors get involved in supporting entrepreneurs?

2.     How donors have different expectations from government and private investors? (in terms of expectations of the organizations they support).

3.     Battling donor fatigue. The challenges of maintaining donor interest in entrepreneurship over the long haul.

US laws allows individuals or corporations to donate money without paying taxes on the money. Often time, these donations are channeled through foundations.

The Cleveland foundation was the first community foundation in the United States. It supported the Cleveland Orchestra and the Cleveland Museum of Art. They had not traditionally focused on economic development. However this changed in the 1980s when Cleveland's economy was suffering with the decline of its manufacturing base.

In 2002, the government of Ohio started to support entrepreneurship with the creation of the Third Frontier Program. At the same time, several leading foundations in northeast Ohio started to pool resources for economic development and entrepreneurship. The initiative was called the Fund for Our Economic Future, and it was a philanthropic collaboration program that was truly unique in the United States.

David Levine, the founder of Wireless Environment, is one such entrepreneur whose company benefited from philanthropic funding. In 2008, Jump Start, a local organization funded by donors, granted $400,000 investment to Wireless Environment.

Dorothy Baunach, the former CEO of Nortech, believes that it is a challenge to convince foundations to invest in entrepreneurs like David Levine. She thinks that the orchestra and the museum are wonderful, nevertheless, if there are not jobs for people, and investment in companies, they were not going to survive. She said that in the 1980s there were about 25 Fortune 500 companies, and now it descended to 10 or 12, so if they did not do anything, they were going to leave, too.

The Cleveland Foundation helped start the unique Fund for Our Economic Future. Brad Whitehead leads it, and explains that it is a philanthropic's communities response to the long term economic challenges, facing northeast Ohio. They have some 50 plus members, who pooled their financial resources to work with the economic vibrancy of their region through grant-making, convening, and sponsoring research.

Deborah Hoover serves at the CEO of the Foundation and as chair of the Fund for Our Economic Future. She explains that it has been a really aggressive match requirement on the part of the state of Ohio for their local economic development organizations to access those dollars, but it was finally a really good thing, because the money coming from the state invested in high-tech startups is significant.

Professor Michael Goldberg affirms that donors are more patient than the private sector and government in seeing their investments in entrepreneurship bear fruit.

Baiju Shah, former BioEntreprise CEO asserts that "government can never be the place where you look to for sustained investment in a strategy because of the short timeframes in which they operate, due to election cycles".

Keeping donors engaged and avoiding fatigue is a challenge, says Whitehead, "because it is tiring to stay with something for so long", and it takes decades.

Peter Kellner, cofounder of Endeavor, an international organization that supports high-growth entrepreneurship, argues that philanthropists around the world are not patients with entrepreneurship programs.

Philanthropy or donations come from sources other than foundations internationally. These philanthropic sources typically include:

·       foreign government through their development assistance programs,

·       non-governmental organizations, and

·       corporate donations.

As a recapitulation:

·       Government policy can play key role in catalyzing donor support.

·       Donors often work independently from governments.

·       One important point we learned about donors as investors is they are generally more patient than private-sector or government backers of startup companies. But even they can get tired and it is a challenge to keep them interested and engaged when the results of their funding are often best measured over decades.

Intermediary Organizations

In Cleveland, governments and donors committed significant resources to back entrepreneurs, but leaders quickly realized that an organization was needed to appropriately and wisely deploy this investment into private companies.

In 2004, JumpStart  was created as a venture development non-profit organization to support innovative startup companies by providing:

·       pre-seed funding,

·       developing networks of angel investors, and

·       making connections for follow-on funding for venture capital firms.

It also provides technical assistance and support to help entrepreneurs develop their business plans, connect to mentors and attract the necessary talent to manage and grow their companies.

JumpStart has received more than $75 million in funds to deliver in programs.

·       Why Cleveland created JumpStart?

·       How to measure success?

·       What are the challenges?

The first entrepreneur to receive an investment from JumpStart was Laura Bennet, the founder of Embrace Pet Insurance. They sell health insurance for cats and dogs in the US.

In ten years, JumpStart has invested nearly $30 million directly into its 76 startups companies through it investment fund. JumpStart provides funding at the seed capital stage when it is extremely critical for capital to be locally available. JumpStart fund is structured as what is known as an evergreen, which means any investment gains that it makes on its portfolio companies, gets put back into the fund to be invested in new companies. So, JumpStart see some initial returns on its investment when a company is sold or has an initial public offering.

Key metrics for success applied by JumpStart for the exit/return on investment are:

·       To raise follow-on capital

·       To generate revenue

·       To create jobs