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Definition of Entrepreneurial Ecosystem

The concept of an entrepreneurial ecosystem refers to the collective and systemic


nature of entrepreneurship. New firms emerge and grow not only because heroic,
talented and visionary individuals (entrepreneurs) created them and develop them.
New ventures emerge also because they are located in an environment or
"ecosystem" made of private and public players, which nurture and sustain them,
making the action of entrepreneurs easier. For example, the existence of prior
ventures, the availability of start-up financing mechanisms, a patent system and a
culture tolerating failure, all facilitate the creation of new firms. Conversely, the
ecosystem can hinder entrepreneurship as is the case in corrupt societies or if an
entrepreneur tries to introduce a radical innovation when no technical standard yet
exists.

According to D. Isenberg , an entrepreneurial ecosystem consists of elements that


can be grouped into six domains: a conducive culture (e.g. tolerance of risk and
mistakes, positive social status of entrepreneur); facilitating policies and leadership
(e.g. regulatory framework incentives, existence of public research institutes);
availability of dedicated finance (e.g. business angels, venture capital, micro loans);
relevant human capital (e.g. skilled and unskilled labour, serial entrepreneurs,
entrepreneurship training programmes); venture-friendly markets for products (e.g.
early adopters for prototypes, reference customers), and a wide set of institutional
and infrastructural supports (e.g. legal and accounting advisers,
telecommunications and transportation infrastructure, entrepreneurship promoting
associations). Based on this definition, governments can evaluate whether they
have a strong entrepreneurial ecosystem and what actions they should put in place,
knowing that each entrepreneurial ecosystem is unique and all elements of the
ecosystem are interdependent. Therefore, generic reasons for explaining or creating
a functioning entrepreneurial ecosystem or importing a single element from such an
ecosystem are of little practical value. Successful dynamics often result from the
identification of local assets, which may be in very limited numbers (like the firms
Shockley, Fairchild, and HP who helped create the Silicon Valley, or Digital
Equipment Corporation who contributed to Boston’s cluster). Focusing on
innovative ventures specifically, other scholars have developed measurement scales
that allow for international comparisons. For example, Jonathan Levie and his
colleagues have identified some weaknesses of the Scottish entrepreneurial
ecosystem, which can be transformed into priority issues, namely: a need for more
financing for growth (venture capital), increased effective networking, skills for
growth (especially sales skills), a more significant contribution from universities, a
growing number of role models and positive messages.

Entrepreneurial ecosystems have a positive effect on venture creation because of


their unique character, the co-existence of competition and cooperation (Romero and
Montoro 2008). There are three main explanations relating to the formation and
functioning of ecosystems. The first explanation, based in economic theory, is
agglomeration economies (Marshall, 1920). This line of analysis argues that
companies located in an area benefit from external economies of scale. Emerging
companies need some common inputs, and by sharing a common geography
companies can share the fixed costs of these resources external to the company. As
the pool of start-ups in the area share the cost of specialized inputs, the average
cost per start-up drops for the specialized inputs, this provides direct economic
benefit to companies located within the start-up community.

The second explanation is derived from sociology, and is based on horizontal


network effects. Horizontal network effects purport that a culture of openness and
information exchange among members in a system will enhance value for existing
network members (Saxenian, 1994). Such attributes allow members in a network
high flexibility to adapt quickly to change.

Finally, the third explanation for entrepreneurial ecosystems is based on the work
of Florida (2002) in the field of economic geography. According to Florida (2002), the
creative class (e.g., entrepreneurs, engineers, professors, and artists) creates
meaningful new forms.

The existence of a critical mass of creative class members in an area will create a
competitive geographic advantage over other geographies because creative class
members have a vested interest to create an environment that is pleasant,
culturally diverse, and tolerates novel and contrarian ideas.

The entrepreneurship ecosystem framework proposed by Isenberg (2010) consists of


six domains building off economics, sociology, and geography (see Figure 1). In
reality, the entrepreneurship ecosystem consists of hundreds of specific elements
that, for convenience, Isenberg (2013) groups into six general domains: (1) a
conducive culture, (2) enabling policies and leadership, (3) availability of
appropriate finance, (4) quality human capital, (5) venture-friendly markets for
products, and (6) a range of institutional and infrastructural supports. Figure 1
expands on several of the elements, initiatives, and attributes specific to each
domain within the entrepreneurial ecosystem identified by Isenberg (2010).
The goal of entrepreneurial ecosystems is to develop successful strategies for
accelerating existing processes that foster entrepreneurship. Regions interested in
developing an entrepreneurial ecosystem should focus on fostering mindsets among
stakeholders that center on creating a sustainable and organic environment of
entrepreneurship. Furthermore, entrepreneurial ecosystem development is a
process, just like the process of entrepreneurship itself, which should be aimed at
stakeholder collaboration in defining and achieving a common entrepreneurial
vision. In order to achieve the entrepreneurial vision, regions need identify
methodologies for integrating and leveraging local resources to do so. However,
policymakers need to be aware that entrepreneurial ecosystems can be fostered and
accelerate but you cannot just create one. The mindset of policymakers should be
focused on cultivation, and let entrepreneurs catalyze the effort. In order to
ascertain effectiveness of ecosystems, regions should also focus on a set of programs
and tools to measure potential outcomes of the entrepreneurial ecosystem (e.g., job
creation, new venture foundings, wealth, etc.) Specifically, one must be mindful that
practices and values vary considerably among cultures, and not all potential
policies, initiatives, or mindsets that promote entrepreneurship in one culture, will
fit in another.

Entrepreneurial ecosystems in real life

The absolute model of a successful entrepreneurial ecosystem is the well-known


Silicon Valley with its numerous and often leading high-tech companies and a very
well-developed venture capital base. Many countries and regions have tried to
emulate it, though often with limited success. Israel, Ireland and Taiwan also
represent very dynamic entrepreneurial ecosystems. Such ecosystems have been
developed for specific sectors: Germany did so in the life sciences domain with
"BioRegio", launched by the Federal Ministry of Education and Research in 1995,
which sustained vivid entrepreneurial dynamics in biotechnology and made this
programme famous Europe-wide. Developing dynamic entrepreneurial ecosystems
is currently one of the objectives pursued by the European Commission which, in its
"Entrepreneurship 2020 Action Plan", talks of "creating an environment where
entrepreneurs can flourish and grow" through better access to finance, better
support for new businesses in crucial phases of their lifecycle, easier business
transfers, or clearer and simpler regulations.[