Endeavor Insight recently completed one of the largest studies ever conducted on entrepreneurship communities. This research was funded by the Bill & Melinda Gates Foundation in order to answer the following question: How can decision makers empower local entrepreneurship communities to become more productive? A full copy of the report can be downloaded here.
This project is one of the first studies to use network analyses to assess the collective impact of founders, investors, support organizations, and other entrepreneurship actors. These analyses revealed five key lessons that are listed below.
Five Lessons on Productivity in Entrepreneurship Communities
- Entrepreneurship communities are not predestined to follow a single development path. Entrepreneurship communities do not develop along the same linear path, and it is misleading to consider communities of different sizes and patterns as older or younger versions of each other. Instead, patterns of development are strongly shaped by the different approaches used by decision makers working to support local entrepreneurs.
- Entrepreneurship communities become productive by generating a relatively small number of companies that reach scale. Companies that reach significant scale generate a disproportionately large share of productivity in their communities. As a result, more productive entrepreneurship communities are those that generate more firms that reach scale.
The opposite is also true — the majority of entrepreneurial companies in any sector are low-productivity microbusinesses that have fewer than three employees and have raised no venture capital. The differences among companies that reach scale and low-productivity microbusinesses can be seen quite early. Even in their startup years, companies that will eventually reach scale tend to rapidly outpace the growth of their peers, while low-productivity firms exhibit minimal to no growth.
- Founders of the fastest-growing companies are much more likely to have received experience, support, and investment from leaders of companies that reached scale. The founders of the fastest-growing companies observed in this project were much more likely to have built connections with people who had led companies that reached significant scale, i.e., 100 or more employees. These high-value connections came in three forms: experience via previous employment, support through mentorship, or investment.
- Patterns of influence shape the development of entrepreneurship communities. A number of common principles of network systems can help explain how entrepreneurship communities develop. For example, the principle of like-attracts-like shows how specific types of members often attract others like themselves to each community as they become influential.
Another principle illustrates how the behavior of influential network members can transmit value signals to others and establish norms. Founders who wish to earn status and influence among their peers respond to these signals, which can promote a range of different behaviors.
- When people who have led firms that scaled are more influential, it empowers entrepreneurship communities to be more productive. Greater influence coming from leaders who have scaled is associated with better performance among individual companies and greater productivity within entrepreneurial communities. As a result, the level of connectivity in terms of experience, support, and investment coming from these leaders is a strong indicator of how some entrepreneurship communities become so much more productive than others.
Patterns of influence like these are especially critical since influence in network systems tends to be relative and persistent over time. When leaders elevate the influence of specific types of actors in a local entrepreneurship community, they reduce the comparative influence of others. This can have long-term benefits or consequences — analyses of many different networks have shown that once an entity becomes a major influencer, or hub, in a network, it will almost always remain very influential.
Taken together, these lessons show that elevating the influence of leaders at entrepreneurial that have reached scale promotes productivity and development within an entrepreneurship community. Local decision makers can empower these leaders to influence upcoming founders in a number of ways. These strategies, referred to as “Entrepreneur-Led Economic Development,” are discussed in depth in the report’s recommendations.
Contributed by Maha AbdelAzim.