This article originally appeared in Volume 7 Issue 4 of the EY Performance Journal. It was written by Sara Fang, David Fawley, Sanjay Konanahalli, and Brittany Hill with key contributions from Wendy Lea and Patrick Venturella.
Building start-up ecosystems requires specific economic actors to equally and mutually support each other. Start-ups, corporations, governments,educational institutions and investors represent the five main actors in a start-up ecosystem. Healthy ecosystems require that each of these five entities works in conjunction with, and mutually supports, each other because their needs are interdependent and success is co-created. Maximizing the role of these actors is essential to create and maintain a vibrant start-up ecosystem.
The concerted effort of these parties to spur regional economic development by attracting talent and capital to the region is what we call the “Power of 5.” While this article is based on how the US city of Cincinnati utilized the Power of 5, we also studied other regional start-up ecosystems. Through our study, we uncovered three roles instrumental to enabling and maximizing the collaborative power of the five actors: the ignitor, the connector and the lever.
These three enablers catalyze the changes necessary to reinvigorate a regional economy by developing and building a critical mass of start-ups to attract innovation, talent and capital.
Catalyzing a start-up ecosystem in Cincinnati
Founded in 1788, Cincinnati benefited from its place along the vital Ohio River and rapidly grew to become the sixth largest city in the US, by the early 19th century. Although the shift in transportation to railroads altered the region’s growth trajectory, successful entrepreneurs establishe
d the foundation for the city’s future as innovative businesses like Procter & Gamble were created and impressive structures such as the Cincinnati-Covington Bridge were erected.
Fast forward to present day; Cincinnati is in the midst of a start-up renaissance, attracting a plethora of venture capital interest. Since 2013, over 200 venture capital firms (VCs) have visited the city, including industry icons such as David Cohen (Techstars), Steve Case (Revolution Growth), and Mark Suster (Upfront Ventures). Since 2009, the region’s start-up ecosystem has also received US $663 million in third-party investments, product sales and federal grants while creating over 850 full-time positions.
This vibrant start-up movement in Cincinnati was accelerated, in 2012, when local organizations such as Procter & Gamble, Kroger, Children’s Hospital, Xavier University, The Brandery, CincyTech and Cincinnati Center City Development recognized the region needed reinvention and revitalization. These organizations, along with others, came together and developed a blueprint for building Cincinnati’s new tech-based economy focused on attracting capital and talent for start-ups. Collectively, they formed Cintrifuse, a not-for-profit entity and a Syndicate Fund.
Cintrifuse works closely with the five ecosystem partners (start-ups, corporations, governments, educational institutions and investors) to provide local start-ups with talent, mentors, customer connections, funding connections and working space.
The Syndicate Fund is designed as a “fund of funds,” investing primarily in venture funds outside the region. The outside investment approach is intended to attract investors to Cincinnati, a city that would otherwise not be on the radar of VCs from either coast. During their regular visits to Cincinnati, the VC funds meet with local start-ups, providing opportunities for entrepreneurs to network and connect with industry thought leaders, other experienced entrepreneurs and, of course, potential funders.
As a result of the collaboration and contribution from start-ups, corporations, governments, educational institutions and investors, the Greater Cincinnati ecosystem benefited from increased innovation, talent and funding.
While the process for building and sustaining a start-up ecosystem is unique to each region, commonalities exist. Our research found many similarities between the formation of Cincinnati’s start-up ecosystem and start-up ecosystems in other regions.
Lessons from Cincinnati: How do you build a start-up ecosystem?
As mentioned, there are five entities in every ecosystem that are instrumental for creating and sustaining a start-up ecosystem: start-ups, corporations, educational institutions, governments and investors. There are also three roles within the ecosystem that must be filled: the ignitor to spur ecosystem creation, the connector to maximize the connections between the five entities and the lever to differentiate it from other ecosystems. We call this model the Power of 5. Each entity has a specific function within the start-up ecosystem and provides a unique benefit:
1. Start-ups: spur job creation in the local community by transforming ideas into reality.
2. Corporations: provide entrepreneurs an outlet to solve industry and specific company problems and connections to new talent.
3. Governments: implement policies to attract start-ups via incentives, grants and funding.
4. Educational institutions: infuse young talent with current and relevant skillsets.
5. Investors (e.g., accelerators, incubators and VCs): fund early-stage start-ups and connect portfolio companies to potential customers and mentors in their network.
Although the needs of these entities vary, each requires access to the other and, consequently, ecosystem stakeholders are increasingly interdependent. For instance, customers for start-ups can be corporations, educational institutions or governments. Corporations can access innovation through direct interactions with start-ups, or through introductions via other corporations, investors, educational institutions and the government.
These complex, crisscrossed relationships demand each of the five to think and behave as a maximalist – contributing its share while joining forces so when success is achieved, each of the ecosystem partners wins.
Innovative economic development is dependent on the collaboration of the five entities and requires explicit trust, shared knowledge and access to investment. This enables constituents to optimize the value they extract for themselves and increases their value to the entire ecosystem. To maximize this collaboration, the three key enablers, previously mentioned are necessary: an ignitor, a connector and a lever.
The ignitor of change
The ignitor can be any one of the five constituents with enough power to leverage community resources to initiate change in the regional economy.
In Cincinnati, corporations were the ignitor. While considered a mid-sized city, Cincinnati ranks among the top 10 cities in the US with Fortune 500 companies, represented by Procter & Gamble, Kroger, and Macy’s. While all five constituents helped develop the ecosystem blueprint, global corporations led the effort.
When the Cincinnati Business Committee (CBC) noticed the region’s performance on key economic measures trailed peer cities, representatives of the CBC aligned other constituents in the community to drive change.
While Cincinnati’s transformation was corporation led, all ecosystem players can be the ignitor:
Start-up led: for Boulder, in the US, entrepreneurial success has attracted other entrepreneurs fostering a regional innovation powerhouse. New start-ups are hungry for mentorship from existing entrepreneurs and successful entrepreneurs are happy to provide help and support with no specific expectations. Even though it has a population of 300,000, Boulder ranks among the top 20 most productive metro areas in the US in terms of GDP.
Government led: in London, the UK government commissioned the creation of Tech City with dedicated programs for entrepreneurs such as the Digital Business Academy and the “future 50” accelerator to support the digital sector in London and the UK. Since its launch, the region has witnessed an unprecedented wave of growth in its digital business.
Investor-led: in 2011, in Las Vegas, US, investor Tony Hsieh personally committed US $350m to revitalize downtown Las Vegas into a thriving hub of high-tech creativity. Hsieh moved the Zappos headquarters to the area and bought 60 acres and 100 buildings in the surrounding area. The initiative intends to fund 50 small businesses and more than 100 tech start-ups that are willing to live in or regularly visit downtown Las Vegas. In addition to the 300 Zappos employees he brought to the area, his efforts have created 800 new jobs.
Institution led: in Silicon Valley, US, Stanford University helped faculty and students start businesses locally by creating an industrial park and leasing land to hi-tech companies. Entrepreneurs flocked to the area to access Stanford’s expertise and talent.
While the ignitor initiates change, the connector energizes the ecosystem constituents facilitating efficient access and forging long-term relationships among them.
Cincinnati, US: while Cintrifuse focuses on helping start-ups with talent and funding connections, one of its key strengths is customer connections. Because it was born out of a corporate-driven initiative, the organization has a strong network and deep ties with Cincinnati’s corporate community. These links allow Cintrifuse to pair start-ups with corporations, and corporations with start-ups. This relationship gives start-ups access to potential customers, and corporations access to innovation. A prime example of its role as the connector is Innovation Xchange. During the one-day event, innovation champions at local corporations were invited to participate in “speed dating” with start-ups to explore opportunities to work together. As a result of the 2015 Innovation Xchange, 13 letter of intents for collaboration were generated for start-up companies.
Chicago, US: 1871 is home to hundreds of tech start-ups with a 50,000 square foot facility in the heart of Chicago. More than just a working space, entrepreneurs come to 1871 to benefit from a myriad of support initiatives offered including educational classes, office hours by local professional firms and speaker events. It also serves as an umbrella organization for other entrepreneur-support providers. 1871 houses and gives entrepreneurs access to representatives from organization such as Techstars, Chicago Ventures and LEAP Innovations to name a few. The hub brings resources together under one roof to facilitate interaction and open dialogue among all ecosystem constituents.
Cleveland, US: JumpStart is a public and private partnership found in 2003 to address Northeast Ohio’s declining economy. In addition to providing seed capital for high-potential start-ups, it plays an important role in connecting entrepreneurial support organizations across the 21 counties of Northeast Ohio that are able to offer mentorship, talent and scaling support. From community loan funds and incubator spaces to accelerator programs and hubs for business assistance, the JumpStart entrepreneurial network and its associated partners have an array of resources available to assist young technology companies to start and grow.
The lever accelerates development of the ecosystem by differentiating it from other ecosystems. This is key for quickly attracting capital and talent.
Cincinnati, US – Known as one of the top branding, marketing and design hubs of the US, Cincinnati is home to consumer products and retail giants such as Procter Gamble, Kroger, Macy’s and 84.51° (formerly dunhumby USA). In fact, Cincinnati entrepreneurs likely began their career at one of these well-known companies and apply the core competencies they learned to their start-up. This industry presence has attracted consumer-oriented start-ups to the area. Not only does the city’s talent pool support the growth of these start-ups, the corporations often become their first customers.
Washington D.C. – The capital of the United States is a “melting pot” of technology innovation. With the highest concentration of PhDs per capita in the US, the DC metropolitan area has a vibrant technology community born from its proximity to the US Government. For example, cybersecurity and lobbying start-ups have migrated from other parts of the country to DC to be in close proximity to the US Federal Government, a key partner to building a customer base and expanding tech-driven solutions in both the private and public sectors.
Detroit, US – In 2014, Techstars in conjunction with The City of Detroit, Ford Motor Company, Magna International and Verizon Telematics launched Techstars Mobility to advance the field of mobility and transportation. Techstars selected Detroit due to it being a global epicenter for mobility and transportation innovation. The city leveraged its industry reputation to attract talent and capital. Detroit has another unique lever – its heritage. Homegrown investors and tech leaders with emotional ties to the city are also helping to fuel its renaissance. Quicken Loans founder and Cleveland Cavaliers owner Dan Gilbert, a graduate of Michigan State University and Detroit native, moved Quicken Loans downtown and has committed to invest over a billion dollars acquiring and revitalizing buildings within Detroit. He also found Detroit Venture Partners which invests in early stage digital technology start-ups in the area. This intangible connection with the region has attracted wealthy investors to come back and invest in the area and it has enticed locals to stay and launch their businesses there.
[pullquote]Yesterday’s Fortune 500 leaders are gone and entrepreneurial start-ups are replacing them as today’s most influential industry leaders.[/pullquote]
Creating innovation economies with the Power of 5
While there is no one correct approach to the formation of a strong innovation ecosystem, the various paths undertaken magnify the importance of the concerted contributions of the five ecosystem partners. Yet in order to attain a critical mass of start-ups within a region and develop an impactful start-up ecosystem, each of the enablers (ignitor, connector and lever) needs to exist. They are critical in catalyzing the formation and growth of the ecosystem. Without any one of them, the ecosystem will never reach its full potential. The ignitor has the convening power to initiate the change. The connector unifies the ecosystem partners and facilitates the connections between the five ecosystem partners. The lever differentiates the ecosystem and attracts start-ups to the community.
Never has it been more important than today for regions to evaluate their economic development models. Rapid technological breakthroughs are changing the marketplace dynamics and enhancing the opportunities for smaller regions to grow. Companies such as Uber and AirBnB will arise in the future and continue to unbundle and disrupt traditional companies. Yesterday’s Fortune 500 leaders are gone and entrepreneurial start-ups are replacing them as today’s most influential industry leaders.
Leveraging the Power of 5 to create and strengthen a start-up ecosystem helps regional economies innovate faster, attract outside investment and stay relevant as new technologies continue to disrupt the business landscape.