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There are lots of point of view but determining your formula may just unlock your community
By now, just about every decent size city in the world has a group of passionate leaders trying to grow their startup community. Some leaders have a government or non-government position of influence. Some leaders come from an academic (teaching or research) position. Some leaders are current or former entrepreneurs. And some leaders are investors.
Regardless of your current day job, your community goal should be very well aligned among these players; to grow your startup community. With that goal in mind, I would posit that the best growth tool impacts the total number of entrepreneurs. But yet, much if not all of a community leaders focus seems to be about supporting existing founders and very little activity about finding, inspiring and creating new entrepreneurs.
The one most common underrepresentation in every community is the number of founders or entrepreneurs in the community.
There are a number of well-documented thought pieces that attempt to determine the optimal number of entrepreneurs in a specific geographic area. I have seen researchers suggest as many as 20% and as few as 2%. Like many complex systems, there are also definitional issues.
For the sake of this post, I am defining entrepreneur as a high-growth entrepreneur and not a main street entrepreneur. If you want to take an even tighter stance, we can choose to just include adults (though I would add that there are many budding entrepreneurs in middle & high school as well as college).
My non-scientific working hypothesis is this: every geography (city, metro, town) has 5-10% of their total adult population as potential future or current founders. For even the smallest of cities/towns (let’s say 150,000 people and 95,00 adults or 60+%) this would yield a total addressable market of 3,250 to 7,500 entrepreneurs. In the interest of taking an even more conservative view (maybe we filter by education or awareness), we can cut that in ½ again and target 1,620 to 3,500 total entrepreneurs in a city of 150,000.
I would imagine that not one city or community has optimized to that number. In most developing or even emerging communities that I work in, I typically see 50-200 engaged entrepreneurs.
Want a meta community goal to shoot for that everyone can get behind? Shoot for identifying and engaging 2% of your adult population to consider entrepreneurship. That is how many entrepreneurs should be in your community.
Last week, the Ewing Marion Kauffman Foundation released its annual Kauffman Index of Entrepreneurship, detailing “new venture creation” in the United States through 2016. The index reported that the rate of entrepreneurship in America held steady last year, up sharply from lows reached during the Great Recession.
Also included are measures across all 50 US states, the 40 largest metropolitan areas, and along various dimensions of entrepreneur characteristics (race, gender, nativity, education, and age). Colorado ranked sixth in terms of “startup density” (new firm formations per capita) and Denver was tenth among the largest metropolitan areas for the same measure.
But, these rankings mask important details—they doesn’t distinguish between growth-oriented entrepreneurship and small business formation (this distinction matters for public policy and for economic growth), and the geographic boundaries may be too broad. Fair enough, data limitations abound for this high-level view of activity, and Kauffman provides an informative, timely, service no less.
What remains clear is that density matters a great deal for growth-driven, innovative enterprise, and we can learn something from the places that continually produce these types of businesses.
In previous work for the Kauffman Foundation and Engine, I took a look at new firm formation rates specifically in the high-tech sector—where firms are substantially more likely to be growth-oriented and innovation-driven. I examined these trends nationally across the United States and its metropolitan areas. For “density” of entrepreneurship—in this case, the share of tech startups per capita—Colorado is a major outlier.
As the two tables below show, for firm formation rates on a per-capita basis for the information technology sector and the high-tech sector more broadly (IT plus biotech, medical tech, aerospace, and engineering services), Colorado cities saturate the top rankings—in fact four of them are in the top 10 for both tables, with Boulder leading the way nationally. These figures are slightly dated, but a subsequent analysis of data from my report showed that density numbers across metros evolve only slowly over time if at all.
Colorado also stands out in terms of “high-growth” firms. In 2012, researchers at the Kauffman Foundation produced a report that analyzed Inc. 500 data of the fastest growing companies in America.
Colorado ranked fifth for highest concentration of high-growth businesses (on a per-capita basis) during the 2000s. Meanwhile, Denver was ninth for large metropolitan areas, and two additional Colorado metros—Boulder and Colorado Springs—ranked in the top 12 for high-growth firm density among medium-sized cities.
Density is important for many sectors of the economy because it lowers transaction costs, and improves matching between firms, labor, suppliers, and customers. These factors are also beneficial for startups and tech companies, but more importantly, for these innovative, complex endeavors, density generates greater opportunities for knowledge-sharing and serendipitous creation.
Brad has written about the phenomenon of startup density on his blog (here and here) and about the importance startup of density to entrepreneurial performance in his Startup Communities book. In particular, he notes that when conducting business in well-known startup hubs—like San Francisco and New York—he tends to stay in a relatively confined area. This is especially true in Boulder, where much of the startup activity is concentrated in a very small space (~10 x 4 blocks).
So, measuring startup density at the level of cities or metropolitan areas may be too coarse. Academic research backs this up. Studies have established a high “decay rate” of knowledge sharing over distances. For example, one found that the benefits of knowledge sharing in the software industry are ten times greater when co-locating within one mile versus within two-to-five miles, while another found that the benefits of co-location among advertising agencies in Manhattan was fully depleted after just 750 meters!
Visionaries like Steve Jobs knew this, which is why he designed the Pixar office in a way that would maximize serendipitous interaction among colleagues in different departments. And, the importance of density is playing out before our very eyes. Cost of living increases in leading knowledge hubs are stratospheric—yet many entrepreneurs continue to start and scale businesses in these places. Why? Apparently because it’s still worth it.
Now, the sustainability of these trends are questionable, and we are starting to see at least some counter-balance taking shape as startups and capital proliferate into more geographic pockets. But the fact remains—whether you are in New York or New Haven, San Francisco or Santa Fe, a critical mass of innovators and entrepreneurs co-mingling in a relatively confined area is beneficial to their success.
Rob Kischuk has an excellent post up today titled startup communities are neighborhoods, not cities. Here’s an excerpt:
In a world where email, mobile phones, and video chat connect people instantly, it’s easy to underestimate the value of physical proximity. Boulder, Colorado has a thriving startup community, driven by startup density. In Atlanta, we would just call Boulder a suburb – it’s as close to downtown Denver as many of Atlanta’s outer suburbs are to downtown. I am certain that if an entrepreneur claimed that putting their office in Denver was just as good as setting up in Boulder, they would be roundly chastised, but in Atlanta, we pretend that all locations are equal, and that spreading startups across our metro area’s 8,000 square miles is competitive with Boulder concentrating its startups into 40 square blocks.
Any startup community that wants to replicate Silicon Valley, New York, Cambridge (Boston), or Boulder cannot ignore these facts. Proximity matters. Not linearly. Exponentially. Imagine that raising your seed round isn’t a matter of getting introductions to people you’ve never met. Imagine it’s having follow-up conversations with people you were first introduced to when you met a friend for lunch, then ran into them half a dozen times as you walked down the street to other meetings, then you talked to them about investing.
Rob lives in Atlanta and makes a powerful point that while “Atlanta” can be a startup community, the entrepreneurial leaders there should concentrate on “neighborhoods” first. Create some real entrepreneurial density by choosing a neighborhood and building all the entrepreneurial activity within in. A five by ten block area is more than enough. There’s no need for any formal decisions or declarations – just start doing it. In addition to locating there, all the entrepreneurs in the area should have events in the neighborhood, have dinners there, hang out there, and get to know and be part of the neighborhood. Over time the word with spread and you’ll wake up one day with a startup neighborhood.
These neighborhoods connect into one big community. Like most things associated with startups, this is a bottoms up, networked phenomenon. There isn’t a president of the startup neighborhood, nor do you have to be a member of it. And no one is the king of the community who gets to say where the neighborhoods are – they are just where the action is.
Go read Rob’s post – it’s a good one.