If growth criteria are met, subsequent rounds of funding might be attributed to the “later stage” and can involve large private equity firms or investment banks in addition to venture capital investors. The ultimate goal in terms of funding is an acquisition or an IPO, often referred to as an Exit, during which the shareholders can liquidate their equity shares at an ideally lucrative price (Graham 2005).
The “steady stage” as a stage of stagnation is not discussed in more detail since it does not entail firm growth and usually no substantial additional rounds of funding.
Startup Lifecycle
The lifecycle of a startup with high-growth potential can be described as a process of continuously changing shareholder structure (see fig. 2). This is necessary to facilitate the distinct kinds of investments at different levels of risk to achieve the exponential growth (scaling) characteristic for a high-growth startup (Recke 2015).
Figure 2: Startup funding at different stages of development
Taking all these aspects into consideration, startups - or more specifically high-growth ventures - are characterized as follows in regards to this thesis:
- newly established businesses with high-growth potential
- trying to establish an innovative, scalable business model
- having low initial capital, requiring high risk financing to scale
2.2 Entrepreneurial Ecosystem
The entrepreneurial ecosystem (often called startup ecosystem) approach is a rather recent way to describe interrelations between startup communities and regional parameters. One of the first researchers in this field is Isenberg (2010), who stipulated that specific measures to foster the local startup economy must be aligned to regional characteristics in order to be successful. The approach focuses on high-growth ventures, meaning startups with potential for innovation, economic growth and job creation (Mason & Brown 2014, World Economic Forum 2013), therefore excluding any and all other kinds of entrepreneurship, such as self employment or regular small business formations.
The main concept behind this approach draws on entrepreneurial activities being linked to a community of different actors, strongly emphasising social contexts to hinder or foster entrepreneurship (Stam 2015, Ács et al. 2014). Although no evidence for improved success rates of each startup within a thriving entrepreneurial ecosystems can be found, a healthy ecosystem arguably produces larger numbers of startups and therefore larger numbers of successful high-growth ventures in that region (Compass 2015). As many other concepts - e.g. clusters or innovation systems - the entrepreneurial ecosystem approach focuses on the external business environment to describe the ecosystem and the relationships and dependencies within it. The main difference to other theories is the emphasis on the entrepreneur itself rather than the enterprise. Entrepreneurs are considered leading players in keeping the system alive and thriving (Stam 2015).
This fact leads to a different role for the government - compared to other policy concepts - as a “feeder” to the ecosystem, leaving the “leader” role to the private entrepreneur (Feld 2012).
Entrepreneurial Ecosystem Attributes
According to Feld (2012) there are nine core attributes that are relevant to the success of an entrepreneurial ecosystem. These attributes focus on (social) interactions between different stakeholders in the ecosystem and their access to relevant resources, such as funding, workforce and services as well as an enabling role of the government (see table 1).
There are other sources indicating distinct factors as relevant for an entrepreneurial ecosystem. The World Economic Forum (2013) lists 8 pillars for a thriving ecosystem which also require resources such as workforce, funding and services, formal (government) and informal institutions (culture) as well as access to local and international markets (see table 2).
All these principles emphasise local parameters and focus on a (social) bottom-up process. This is in line with Isenberg’s (2010) Harvard Business Review article “How to start an entrepreneurial revolution”, where he stipulates 9 principles to achieve “venture creation”, and the “creation of an ecosystem”:
1 “Stop Emulating Silicon Valley”: While undoubtedly being the “gold standard” entrepreneurial ecosystem, it is deemed not to be a valid guide for any other region in the world. Unique circumstances led to the emergence of today’s Silicon Valley which can not be replicated in the eyes of Isenberg.
2 “Shape the Ecosystem Around Local Conditions.”: Isenberg strongly recommends that governments should tailor towards their unique local economic dimensions, resources and culture.
3 “Engage the Private Sector from the Start.”: Only the private sector has the appropriate motivation to develop a profit-driven market in the eyes of Isenberg. Subsequently, structural barriers should be reduced in order to formulate entrepreneurship-friendly programs.
4 “Favor the High Potentials.”: In order to be effective, Isenberg calls for programs focussing on ambitious, high-growth oriented entrepreneurs with large potential markets instead of spreading resources among quantities of ventures.
5 “Get a Big Win on the Board.”: Isenbergs required thriving ventures to be highly visible in media and literature since visible success stories reduce entrance barriers and fear of risks for aspiring entrepreneurs.
6 “Tackle Cultural Change Head-On.”: Since changing ingrained culture is deemed very difficult, altering social norms about entrepreneurship, failure and risk taking is considered as very important and should be on everyone's agenda in the eyes of Isenberg.
7 “Stress the Roots.”: Isenberg recommends that governments should grant money carefully to ensure toughness and resourcefulness among the entrepreneurs and should not flood high potential entrepreneurs with easy money.
8 “Don’t Overengineer Clusters; Help Them Grow Organically.“: In Isenberg’s opinion, there is little evidence that governments can successfully breed industry clusters. Governments should therefore build on existing clusters and nurture those that form independently from government action.
9 “Reform Legal, Bureaucratic, and Regulatory Frameworks.”: Lastly Isenberg calls for administrative and legal barriers to new venture formation to be removed. Additionally bankruptcy should be decriminalised, shareholders should be shielded from creditors and it should be easy for entrepreneurs to start over in his view.
Unfortunately, scientific literature only provides long lists of relevant factors for thriving entrepreneurial ecosystems, without elaborating on their distinct effects on entrepreneurship and their independent influence on economic growth (Stam 2015), the key focus and reason behind the entrepreneurial ecosystem approach.
Entrepreneurial Ecosystem Illustrations
Still there are many ways to illustrate the complex interrelations and dependencies within an entrepreneurial ecosystem. These illustrations provide an ample way to better understand the overall configuration of an ecosystem and highlight the many different stakeholders with their distinct perspectives.
Figure 3: Domains of the Entrepreneurship Ecosystem
Isenberg