Increasing New Zealand’s Entrepreneurial Density
Last Month, I launched a vision and action plan for a more innovative and entrepreneurial economy in New Zealand.
As part of that plan, I created a framework of 8 key ecosystem development goals, that I believe, if we could put more top-down and bottom-up- focus into, will create a more a vibrant entrepreneurial economy in New Zealand.
Over the course of the next few months, I’d like to dig in and share some more thoughts and context for why these goals are so important for Aotearoa, starting today with EDG #1: NZ’s startup ecosystems need to be geographically concentrated and nationally connected.
A Deeper Look at Entrepreneurial Density
There has been over a decade’s worth of research that has shown that most of the net job creation in a given economy comes from new young companies, especially those that scale. The birth and success of these companies is a direct result of the quality and stage of the ecosystem that it grows in.
Looking at the growth of startup communities in other parts of the world, a key determinant to the success of those communities is what some call ‘entrepreneurial density’, that is, the density of both entrepreneurs and supporting systems which allow people to come up with new ideas, and commercialise them at scale, with the right support systems around them to facilitate that.
The term was first coined by Boulder-based venture capitalist Brad Feld, using it to indicate the ratio of entrepreneurs and startup employees to the whole adult population of a particular city, being broadly a formula to measure:
One of the interesting things about entrepreneurial density is that as the number of startups in the community grows, the whole economic community related to that ecosystem — talent, universities, startup support organisations, etc. ultimately produces more value.
“Startup communities that are 3x larger, create about 5x more economic value” — Global Startup Ecosystem Report 2020
The upshot of greater entrepreneurial density, is that when founders are in close proximity to each other and frequently connect, they’re likely to create new and successful startup ventures, increase job creation and employment opportunities, refine local legislation in relation to startup policy, and ultimately lay the foundations for robust financial futures across their cities.
Entrepreneurial Density By The Numbers
Perhaps the most recent measurement of NZ’s entrepreneurial density, came through from Startup Genome’s 2018 report, which looked at how NZ’s founder connectedness ranked to other global startup ecosystems, as well as a few other interesting benchmarks:
These numbers confirm that we have the right mindset and theoretical know-how to create great ventures in New Zealand, but we fall short on the practical knowledge to put those ideas into practice (hence EDGs #4, #5, #6).
But if we zoom into the connectedness benchmarks, this is where our lack of entrepreneurial density really starts to show.
Compared to other startup ecosystems we’re significantly less connected, having a lower sense of community (founders helping founders), fewer tight relationships between founders, and almost half of the creative collisions than others, which could help us scale our ideas and impact.
Increasing Our Entrepreneurial Density
Brad Feld has continued to lead thought in helping us understand the factors that go into making effective startup communities. In his recent book, The Startup Community Way, co-authored with Ian Hathaway, they describe the attributes of a city or region that can either accelerate or constrain- the ability of entrepreneurs to succeed.
These seven factors, or Seven Capitals as the authors describe, are the most critical elements which impact entrepreneurship in a community.
The first three, intellectual, human, and financial- capital, are easy to understand and most commonly referenced as ideas, talent, and funding in the startup world.
The others are just as critical, but often don’t get as much airtime, particularly network capital.
Indeed, the main contention of Feld and Hathaway’s writing is that startup communities aren’t linear, so to make them grow and scale you can’t just do more of the same. Instead, they talk about startup communities being more akin to complex adaptive systems, and in these systems, a small number of actors and events drive overall value in the system.
In complex networks like startup communities, specialist nodes (central connectors and cross-connecting nodes), i.e. people with significant and diverse networks, and also a willingness to share them, create more connectivity and cohesion within the network as a whole, compared to adding more nodes (which is the essence of social network theory too).
Cultural capital, New Zealand has in spades: our two degrees of separation, the general lifestyle, the ease of starting a new business, and our willingness to try new things being just a few examples.
Institutional capital is relevant to this discussion as it talks to our system of laws, public sector, markets and stability, and again New Zealand scores well here. Whilst we can always create better policies to support more scalable impact in innovation and entrepreneurialism locally, broadly, Government has been supportive of helping new businesses getting off the ground and intervening with policy over the years, and our ability to access decision makers inside Government and at least talk to these very issues has been a huge plus compared to other countries.
Physical capital in this context relates to the how easy it is to exchange these resources through proximity and the general stability of infrastructure to carry out business.
When you step back and look at a startup community in this way, as a complex system of connections across this web of different capital components, you can start to see how hard it is to create scale and impact because it requires alignment and direction across many different drivers, again strengthening the case for a more coordinated national approach to entrepreneurship (EDG #2) that the Start NZ Up initiative is aiming to foster.
EDG 1 particularly talks about the need for a greater density of entrepreneurs enabled by tighter connections across all seven of these different factors.
The important thing to remember, as Feld and Hathaway point out, is that instead of focussing on the individual parts to scale impact in a startup community, which feels like the most obvious way to make progress as you increase the number of inputs (more university entrepreneurship programmes, more accelerators, more venture funds), the real primary source of value in this system is the connective fabric between them all — if it’s easier for those starting a venture, seeking funding, looking for talent, or needing education, to discover and connect into those resources through the network, the stronger the overall system, and by implication, the entrepreneurial outcomes will be.
Another closely-related facet of entrepreneurial density, is what Silicon Valley rather oxymoronically refers to as “Engineered Serendipity”, which Greg Lindsay talked about this in his 2014 blog post:
How do we bring the right people to the right place at the right time to discover something new, when we don’t know who or where or when that is, let alone what it is we’re looking for? This is the paradox of innovation: If so many discoveries — from penicillin to plastics — are the product of serendipity, why do we insist breakthroughs can somehow be planned? Why not embrace serendipity instead?
Lindsay talked to “serendipity not being magic. It isn’t happy accidents. It’s a state of mind and a property of social networks — which means it can be measured, analysed, and engineered.”
And this is exactly the property that we want to encourage in our startup communities — it’s helping those who have average ideas and teams, scale into great ideas and teams by intentionally bumping into a diverse set of thinking, experiences, and new ideas through connectedness, proximity, and entrepreneurial density.
Whilst engineered serendipity sounds like something magical, tech giants in more connected ecosystems have known this for years — rather than sit back and wait for serendipity to happen for example, Google designed it’s new GooglePlex campus expressly to maximise “casual collisions of the work force” with rooftop cafes, and employees in the campus being no more than two and a half minutes away from one another.
“We want to create opportunities for people to have ideas and be able to turn to others right there and say, ‘What do you think of this?’” — David Radcliffe, VP Real Estate Google
EDG #1’s High-Level Policy Recommendations
So, bringing all of that context together then, the two policy-level recommendations provided for in Ecosystem Development Goal #1 are:
These two sub-recommendations, aim to support both the explicit creation of critical mass and engineered serendipity in our cities, whether that’s through tech hubs/parks, focussed event series, or activating communities.
Additionally, and importantly, 01.2 looks at how we can stimulate the creation of better connections between the various actors, events, and support organisations to help entrepreneurs better connect to the resources they need to succeed.
This is particularly critical in less connected regions, and a key piece of feedback we heard when running virtual incubator programmes in New Zealand. Finding access to well-connected, growth-experienced, mentors and funding networks, was a consistent challenge for entrepreneurs who didn’t grow up in entrepreneurially dense centres.
EDG #1, therefore, talks to how we can create the critical mass required for ‘engineered serendipity’ at scale, and in particular, distributing that success, and cross-connecting it into the regions through highly visible and connected startup, capital, and mentor networks.
To summarise then, this article highlights a few of the considerations to factor into our thinking as we intentionally look at designing a more vibrant entrepreneurial economy in New Zealand, particularly as we look to greater geographic concentration in our startup communities, and better connected regional networks.
Whether that is increasing our entrepreneurial density; or lifting our connectedness; or considering cultural, physical, institutional, and, critically, network capital in our decision making; and ultimately understanding that as a complex and adaptive network, scale comes mostly from network cohesion and synergy rather than doing more of the same.
If you’re working towards the same vision of a more entrepreneurial and innovative economy in New Zealand and towards similar startup ecosystem development goals, show your commitment by partnering with one or more of the goals so we can speak with a collective voice of impact.
Thanks for reading.
This is article 1 in an 8 part series digging further into Start NZ Up’s 8 ecosystem development goals for New Zealand, read the others below:
- EDG#1 — Increasing New Zealand’s Entrepreneurial Density ← (this article)
- EDG#2 — Why New Zealand Needs a Coordinated National Entrepreneurship Plan