Developing the Entrepreneurial System – Here and There

ecosystem

A professor from the University of Michigan’s Ross School of Business is writing from his home state’s perspective, but sharing insights regarding Midwest entrepreneurial ecosystems and how they might differ from international efforts. He notes four key elements, including the always popular capital and worker skill aspects:

  1. The most important step is connecting with your customer

While understanding the basic fundamentals of cash flow and knowing how to manage a staff is important, businesses everywhere must put finding the customer first if they want to be successful. For Midwestern businesses, that might be a challenge for marketing. For startups in some developing economies, the search can be less abstract: Infrastructure challenges can make connecting with customers more difficult. For example, in Vietnam, the single biggest platform for ecommerce is Facebook — but in rural Morocco, a lack of infrastructure makes ecommerce virtually impossible. Interpersonal connections and marketplaces remain indispensable.

  1. Success begets success

In the United States, the story of every successful startup cluster begins with capital — and one of the best sources of capital is another company’s exit. We’ve also seen that for every $1 a Michigan startup receives from a Michigan VC firm, it attracts $4.61 of investment from outside of Michigan. Cash is the fertilizer, and the more of it in the environment, then the more likely the economy will grow.

This logic doesn’t always hold in developing economies, one of the hallmarks of which is no middle class and a huge income disparity. When wealth is created in these environments, there are many places that the money can be reinvested in besides another startup: to fund education, for example, or to buy more land. That being said, more wealth generated by new venture activity has the potential to lift the income threshold and lead to a more stable, flourishing economy. 

  1. Give your talent the fulfillment they need

A major challenge for small communities is talent, no matter where they are located. But talent isn’t just about having smart people — it’s about having people with the skills needed to build a business, and a community that can support them. In the Midwest, that talent gap often takes the form of local workers who are educated, well-trained, and experienced in running a business, but who might not choose to stay and work in their communities if there aren’t opportunities that appeal to them.

Robust entrepreneurial ecosystems with more activity have the potential to attract top talent away from more metropolitan areas. It can become a self-sustaining cycle once it gets going, but may take a significant event or local unicorn to get it kicked into action. In developing countries, that more often looks like workers who have limited skills, who need the determination and resources to invest in themselves — and who need an ecosystem that can provide them with that base.

  1. Take local differences into account

What works in Silicon Valley doesn’t always work in Chicago — and what works in Kosovo might not work in Vietnam. When it comes to translating what has worked in one place to another, the details become local, and critical. Some business climates trust banks and credit lines; others operate solely in cash. In some places, the local language is widely spoken; in others, that local language could be six different dialects. Just as the National Venture Capital Association has local chapters to better understand and focus on the small ecosystems being built all over the United States, context is everything for entrepreneurs looking to get off the ground no matter where they are.

While languages, customs, and currency differ from country to country, one thing doesn’t: When entrepreneurs and innovation win, it can lift the outlook of an entire economy. With the right resources and support, the Midwest has stepped up to create the jobs and standing it needs to survive in the modern economy — and developing ecosystems around the world are doing the same.

A Look at Jobs Growth

USA Today recently posted Moody’s Economy’s projections of job growth state by state. Indiana’s projection is at .4%, although you might be more interested to look at the sector breakdown, which accompanies the story.

Economic consulting firm Moody’s Economy.com has forecasted U.S. job growth by geographic region and by industry. This interactive was updated August 12, 2010. We will update it each month.
This graphic shows actual job growth through second-quarter 2010 and Moody’s Economy.com’s forecasted job growth for third-quarter 2010 through second-quarter 2014. It covers every state, the District of Columbia and 384 metro areas, broken down by fourteen industry sectors. The data are seasonally adjusted.

National, state and metro data through second-quarter 2010 are averages of monthly data from the Bureau of Labor Statistics’ Current Employment Statistics (CES) survey.

The CES survey tracks the number of people employed full and part time by industry. It excludes proprietors, self-employed people, unpaid family or volunteer workers, farmworkers and domestic workers. Government employment covers only civilian workers. Employees are counted where they work, not where they live.

The data for third-quarter 2010 through second-quarter 2014 are forecasted by Moody’s Economy.com. Demographic trends such as population growth, migration patterns, the age composition of populations, cost of living and business costs, and the global orientation of regional economies are key factors in its forecasts.

The forecasting model reflects the industry makeup of regions and the growth outlook for those industries. For example, the industrial Midwest takes into account the problems in the auto industry, and the relative success of the technology industry is reflected in forecasts for California’s Bay Area and Boston.

Moody’s Economy.com’s model also takes into account policy decisions made by the Federal Reserve and the specifics of government stimulus and assistance programs.

Research: Distance Impacts Structure of VC Funding

What do we know about venture capital — other than there isn’t quite as much in play today as in recent years?

In a recently compiled list of the most active VC firms in 2008, 40 were located in the Silicon Valley and San Francisco. Another 18 of the firms doing the most business were in Massachusetts. That distribution is nothing new.

Whether that fact makes it more difficult for Indiana and other Midwest companies to obtain funding is an age-old question. Some say it is a distinct disadvantage for Hoosiers, while others contend good ideas will find the money no matter the location.

Research from Xuan Tian, an assistant professor of finance at IU’s Kelley School of Business, finds that if companies do receive funds, the overall level is not impacted by distance. The structure of the financing, however, is subject to variances based on proximity.

The State Science & Technology Institute summarizes it this way:

Companies located farther from their venture investors receive more frequent rounds of financing with lower cash amounts per round. According to the study, this difference is attributable to the higher cost of monitoring companies that are farther away.

Investee companies that are located near their investors are able to meet with them regularly, minimizing the risk to the investor and the cost of gathering information.

Tian argues that monitoring and the staging of funding rounds are substitutes for each other. With the low-cost monitoring that is possible with nearby firms, venture firms can afford the larger risks associated with large, infrequent cash infusions. The cost of monitoring more distant companies means that venture firms are less willing to take those risks. More frequent funding rounds give investors the option of dropping a company that is not meeting its goals, with fewer losses.

Magazine Ranks Indiana Top Business State in Midwest

In a recent ranking by Chief Executive magazine, Indiana was listed as the 11th best state in the U.S. for business, and the best in the Midwest. Texas topped the list, while New York was last.

And sadly, our neighbors, Ohio, Illinois, and Michigan placed 45th, 46th, and 49th, respectively. So perhaps the term "island of prosperity" might indeed apply to us after all. (Although Kentucky was 23rd.)

Hat tip to Inside Indiana Business.

Daniels v. Blagojevich: The People We Elect Really Do Matter

Part of the headline of this story is borrowed from the final words of an analysis written by Steve Stanek of The Heartland Institute.

He uses the Wabash River as the divide — the separation between the achievements of Indiana Gov. Mitch Daniels and the tribulations (capped by Tuesday’s arrest) of Illinois Gov. Rod Blagojevich.

Daniels’ story is well-known. His actions have been big and bold over the last four years. In his re-election campaign this year, he admitted that not everyone was likely to agree with all his actions. That has certainly been the case. But it is also undeniable that the state is in far better shape than its Midwest neighbors and most others around the country. We look forward to full steam ahead in the next four years.

To the west, the themes have been government ineptitude, out-of-control spending, corruption and now extortion. Blagojevich is not the first (there may need to be an Illinois governers’ wing opened in federal prison) to apparently take short cuts to increased political and personal power, but his alleged actions come after a series of questionable (if not illegal) moves during his time in office.

Just another reason that it’s good to live, work and play in Indiana. Don’t take it for granted.

Stanek summarizes it this way.

Great Lakes Region Not Trending So Great for GOP Houses

The 10 states in the Midwest/Great Lakes region have undergone significant shifts in party control in their State Houses. Following the 2004 election, eight of these 10 states had a Republican Speaker of the House. Today, nine of the 10 states have a Democratic Speaker of the House. The Midwest has been seen as a battleground the last several years for party control and for the Presidential races, but it has also shown dramatic power shifts.

During these last three elections, the Democratic Party has gained seats in ALL 10 states in both the 2006 election and the 2008 election. This has resulted in a net gain of 101 seats for the Democratic Party in this 10-state region since 2004. The most dramatic shift has been in Minnesota where the Democratic Party has gained 20 seats in the last two elections. Illinois and Indiana have changed the least with a shift of four seats each.

This sets up the Democratic Party nicely for the next decade if they are able to maintain their majorities in these nine states and control the reapportionment process in 2011. Control of the legislative agenda for the next decade has already been sealed by the Democratic Party in many of these states before the 2010 election is even over.

 

IEDC: National Media Lauding Indiana’s Business Climate

In a recent web article from the Indiana Economic Development Corporation (IEDC), it seems many national news media and sources are looking at Indiana as a model for how to take care of business, so to speak:

National news broadcaster CNBC listed the Hoosier state as the “Most Improved State for Business” in its 2008 survey of states. Indiana ranked the best in the Midwest and third in the nation for Business Friendliness in the survey, the best in history for the state and far better than the rest of the industrial Midwest.

Forbes magazine also provided Indiana acclaim by rating the state’s business tax climate as the best in the Midwest and sixth lowest cost of doing business nationally in 2008.

Indiana’s low cost of doing business and tax-friendly environment scored accolades from a Chief Executive magazine survey of the nation’s top CEOs. The magazine’s fourth annual “Best & Worst States” survey polled 605 top executives in early 2008 who listed Indiana as the best place in the Midwest for business, scoring an eighth place national finish and edging out neighboring states by more than 15 places on the survey.

To view all of the rankings, read the piece on IEDC’s web site (PDF).

Ring the Bellwether: Key Ohio Town Still Divided

CNN has an interesting article today on the bellwether Ohio town of Chillicothe. The town is still collectively on the fence regarding the McCain/Obama question, and may serve as a microcosm of many similar areas throughout the Midwest:

No Republican has ever won the White House without winning Ohio, a state that has received more visits from the candidates and their running mates this year than any other.

Inside the bellwether state is the bellwether town of Chillicothe, a town that often mirrors the state’s election results.

Voters there are divided.

With less than a month to go until the election, it’s concerns about the financial markets and the economy that dominate the airwaves at the town’s radio station.

"The only other people that’ve experienced something like what we’re experiencing now are our grandparents or our great-grandparents," host Dan Ramey said on his radio show on WBEX-AM.