PowerPoint Presentation
Innovation-Driven Entrepreneurial Ecosystems:A New Agenda for
Measurement, Policy and ActionScott Stern, MIT, CBS and NBEROECD
Blue Sky III Forum
September, 2016
Lab for Innovation Policy and Science
Enabling Shared Understanding Through Meaningful Metrics
Leveraging Digitization and Big Data to Develop and Test New
Metrics
Assessing Innovation-Driven Entrepreneurial Ecosystems in
Real-Time and at an Arbitrary Level of Granularity
Field of Dreams3
#MITREAP
3
Some Thinkers such as Richard Florida imply that regions are
engaged in a war for talent and the creative class to be the NEXT
Silicon Valley4
#MITREAP
4
With many Silicon Xs strategies being implemented around the
world.5
#MITREAP
5
we dont want 50 Silicon Valleys; we want 50 different variations
of Silicon Valley, all unique from each other and all focusing on
different domains.Marc Andreesen, 20146
#MITREAP
6
How can we invest in innovation-driven entrepreneurial
comparative advantage?#MITREAP6
7
A global program designed to help regions accelerate economic
growth & social progress through innovation-driven
entrepreneurship (IDE) built upon a regions unique history,
capacity and comparative advantage. Partner regions form
stakeholder teams and commit to a two-year learning engagement
working with MIT faculty and the broader REAP community through a
series of action-learning activities to assess, build and implement
a custom regional strategy for enhancing IDE ecosystems. Mens et
Manus28@MIT_REAPThe MIT Regional Entrepreneurial Acceleration
Program (MIT REAP)?
8
MIT REAP Framework9@MIT_REAP
SystemStrategyStakeholders
Better graphic?
Slide structure for the 3 Ss: overview- key elements example
SystemIDE Framework (iCep & eCap +linkages etc accelerated
by catalysts )Inputs vs outputs whole> sum of partsEngagement of
all stakeholders! / shared measurement All needed for effective and
exclusive change
StakeholderPentacleBackbone organizationCollective impactShared
measurement
StrategyVersion of framework, highlighting catalystHow do you
choose strategy for implementation? What is a regional strategy?How
to make directed investment and action to leverage what you have
and identify how to push out the frontier in such a way that will
compliment effortsStrategy choice- choosing and winning must win
battle + catalyst !
Emphasize role of choice - Josh Lerner not Bolavard of Broken
Dreams but fixed dreams ?9
Cluster Based Comparative Advantage10@MIT_REAP
System
I-CapE-CapIDE EcosystemEconomic ImpactSocial
ProgressFoundational InstitutionsCluster Based Comparative
AdvantageMIT Framework
SystemIDE Framework (iCep & eCap +linkages + clusters +
accelerated by catalysts )Inputs vs outputs whole> sum of
partsEngagement of all stakeholders! / shared measurement All
needed for effective and exclusive change
10
MIT FrameworkStrategy
Determine regional comparative advantage & how itwill
accelerate IDE creation and growth in region
AcceleratorsPrizes &
CompetitionsEarly-stageCapitalApproachesDiasporaNetworks
&Immigration PolicySelect
YourREAPStrategicInterventions32@MIT_REAP
11
Engaging regions all over the world
12@MIT_REAP
Quick introductions (1 min/ region) name, organization &
role in REAP team12
Stakeholders are Key for Designing and Implementing Acceleration
Strategies.IDE Ecosystem-led growth is different from traditional
economic development approaches
Collaboration across key stakeholders is crucial for collective
impact and acceleration at the ecosystem level
EntrepreneurRisk
CapitalCorporateGovernmentUniversityInnovationEcosystemStakeholderModel
Shared Metrics and Evaluation Enable Stakeholder-Led
Accleration!
ActionIDE Ecosystem Acceleration
STAKEHOLDER-LED ACTION REQUIRES SHARED UNDERSTANDING.
SHAReD UNDERSTANDING IS ENABLED BY METRICS.
But HOW CAN WE DEVELOP REAL-TIME ACCURATE AND GRANULAR METRICS
THAT CAN (POSITIVELY) ENABLE THIS PROCESS?
consider the debate over the state of American
Entrepreneurship.
Americas great challenge is to bring about a substantial
increase in the numbers of highly successful new companies Nothing
less than the future welfare of America and its citizens is at
stake.
Litan, Robert E. Inventive Billion Dollar Firms: A Faster Way to
Grow. SSRN Working Paper #1721608 (2010).
Thanks to important and insightful work by John Haltiwanger, Ron
Jarmin, Javier Miranda and coauthors, we know that benefit of
startups for economic growth spring from a handful of fast-growing,
young companies.
For innovation and entrepreneurship to propel the economy, we
need more startups capable of meteoric growth.
17
The problem is that it is very difficult, if not impossible, to
know at the time of founding whether or not firms are likely to
survive and/or grow. This is true even with venture-capital backed
firms
Ian Hathaway and Robert Litan, 2014. Declining Business
Dynamism: Its for Real. Brookings Institution.
Cant tell from start which firms have the potential for meteoric
growth
18
While the quantity-based measures of entrepreneurship and
dynamism are on the decline, funding and salience of high-growth
businesses seems to be on the rise!
Quantity Based Measures
Decker, Haltiwanger, Jarmin, and Miranda (2013,2015)Haltiwanger,
Jarmin, Kulick, and Miranda (2015)Hathaway and Litan (2014a,
2014b)
Funding of Venture-Backed Firms
Quantity-based measures (BDS) document a 30 year decline in
entrepreneurship and business dynamism , with only a very modest
leveling off (and uptick in high-tech)
Outcome-based measures (PWC/NVCA MoneyTree Report) indicate
high-growth entrepreneurship is on the riseearly stage angel and VC
funding on a significant upswing (unit just recently)Growing number
of students joining startupsFear of bubble
The Business Dynamics Statistics (BDS) provides annual measures
of business dynamics (such as job creation and destruction,
establishment births and deaths, and firm startups and shutdowns)
for the economy and aggregated by establishment and firm
characteristics. The BDS is created from theLongitudinal Business
Database(LBD), a confidential database available to qualified
researchers through secureFederal Statistical Research Data
Centers. The use of the LBD as its source data permits tracking
establishments and firms over time.19
How can we measure high-potential entrepreneurship in a
systematic and timely way?
How can we utilize real-time granular measurement of
entrepreneurial quality to gain new insights and accelerate
innovation-deriven entrepreneurial ecosystems?
21
REAP and ENTREPRENEURIAL QUALITY MEAUREMENT TEAM
Three Steps to Measuring Entrepreneurial Quality(at or near the
time of founding)Business RegistrationsDigital Signatures of Growth
PotentialSuccess outcomes can be mapped to initial digital
signatures
Our ApproachA novel approach to the measurement of
entrepreneurial quality, combining three interrelated
insightsBusiness Registration as a Practical Requirement for
Growth. Some form of business registration (incorporation,
partnership, LLC, etc) is a practical and non-controversial
requirement for ventures seeking to achieve a meaningful growth
outcome. Public, comprehensive and comparable over time and
place.
Business registration is a practical and non-controversial
requirement for ventures seeking a meaningful growth outcome.
Public, comprehensive and comparable over time and location.
25
Examples of Business Registration
Our ApproachA novel approach to the measurement of
entrepreneurial quality, combining three interrelated
insightsBusiness Registration as a Practical Requirement for
Growth. Some form of business registration (incorporation,
partnership, LLC, etc) is a practical and non-controversial
requirement for ventures seeking to achieve a meaningful growth
outcome. Public, comprehensive and comparable over time and
place.Markers of Entrepreneurial Quality are Observable at or Near
the Time of Business Registration. Firms with the potential and
ambition for a meaningful growth outcome likely have different
start-up characteristics including measures directly observable
within business registration records, as well as publicly available
measures that can be matched in a systematic manner .
A Tale of Two Bookstores
Quick example: Tale of two bookstores
Around time of their founding, difficult to tell that Harvard
Bookstore and Amazon would have such different trajectories.
So, what data and methods can we develop to find the firms that
have the potential to be amazons in the sea of mom and pop
bookstores?
How can we identify and map growth potential from the start?
Quantity based measures treat them as equivalent
EQ measures ranks Amazon in top 1% of distribution at time of
founding28
Patenting and Firm Growth: Helicos Biosciences
CorporationDecember 5, 2003: Founded in Cambridge
May 24, 2004: First Patent Application
December, 2009: IPO as HLCS
Our ApproachA novel approach to the measurement of
entrepreneurial quality, combining three interrelated
insightsBusiness Registration as a Practical Requirement for
Growth. Some form of business registration (incorporation,
partnership, LLC, etc) is a practical and non-controversial
requirement for ventures seeking to achieve a meaningful growth
outcome. Public, comprehensive and comparable over time and
place.Markers of Entrepreneurial Quality are Observable at or Near
the Time of Business Registration. Firms with the potential and
ambition for a meaningful growth outcome likely have different
start-up characteristics including measures directly observable
within business registration records (firm name) as well as
publicly available measures that can be matched in a systematic
manner (e.g., have they applied for a trademark or
patent?).Meaningful growth outcomes can be observed with a lag,
creating the potential for a mapping between growth and start-up
characteristics. Rather than assume the relationship between
start-up characteristics and entrepreneurial quality, investigate
relative importance of different factors by developing a predictive
model of growth based on start-up characteristics
Growth and Start-Up Characteristics
Regress growth on start-up characteristics:
gi,r,t+k is a binary growth outcome (IPO or high value
acquisition, but could be others)Xi,r,t are start-up
characteristicss is lag allowed for growth to be achieved (6
yrs)Divide sample into training sample (70% of obs where growth is
observed), test sample (30% of obs where growth is observed, for
validation), and prediction sample (where growth has not yet been
observed but for which prediction is possible).
Our ApproachA novel approach to the measurement of
entrepreneurial quality, combining three interrelated
insightsBusiness Registration as a Practical Requirement for
Growth. Some form of business registration (incorporation,
partnership, LLC, etc) is a practical and non-controversial
requirement for ventures seeking to achieve a meaningful growth
outcome. Public, comprehensive and comparable over time and
place.Markers of Entrepreneurial Quality are Observable at or Near
the Time of Business Registration. Firms with the potential and
ambition for a meaningful growth outcome likely have different
start-up characteristics including measures directly observable
within business registration records (firm name) as well as
publicly available measures that can be matched in a systematic
manner (e.g., have they applied for a trademark or
patent?).Meaningful growth outcomes can be observed with a lag,
creating the potential for a mapping between growth and start-up
characteristics. Rather than assume the relationship between
start-up characteristics and entrepreneurial quality, investigate
relative importance of different factors by developing a predictive
model of growth based on start-up characteristics
Entrepreneurial quality is the estimated probability of growth
given startup characteristics.
How do the digital signatures of companies predict growth?(NB:
Prediction NOT causal)Change in the Probability of GrowthHas Short
Name248%Firm Named after Founder-70%Corporation (Not Partnership or
LLC)405%Trademark in First Year501%Patent and No Delaware
Registration3,534%No Patent and Delaware Registration4,470%Both
Patent and Delaware Reg.19,640%Sectoral ControlsIncluded State
ControlsIncluded
Guzman and Stern, 2016.
Reports core empirical relationship (based on logit
regression)Examines how presence or absence of startup
characteristic correlates with the probability of growth
(conditioning on the presence or absence of other
characteristics)Substantial changes in the predicted likelihood of
a growth outcome are associated with characteristics observable
from business registration filings (nowcasting) as well as
characteristics observable with a lagCorporations 400% more likely
to growFirms with short names 250%x more likely to growFirms named
after founding 70% less likely to grow.Firms that register in DE
and apply for a patent are 196x more likely to growCan use findings
to construct, for every registered firm, its underlying probability
of growth at time of foundingProbability of an average firm is low
(1/3500)For firms with multiple positive startup characteristics,
this probability jumps to 1/100Startup characteristics are digital
signatures not causal drivers of growthDigital signatures of growth
ambition and potentialRegistering in DE or filing for a patent will
not guarantee that the business that does them will growBut, the
firms that have historically engaged in these activities have been
associated with skewed outcomes .33
A New View of the Skew
Out of sample tests show method works
To test the predictive capability of the model and evaluate the
skewness of entrepreneurial growth potential, compare estimated
probabilities of growth outcomes to realized ones (in a ten-fold
cross validation in out of sample test
65-72% of realized growth events fall within top 5% of the
models estimated entrepreneurial quality distribution51% of
realized growth events fall within top 1% of the distribution of
EQ10-80% in top 10% of the distributionModel highly predictive. EQ
highly skewed.
Characteristics are highly predictive of a very rare outcomeShow
skewed nature of growth outcomeIndicate that distribution of
initial quality is itself skewed from the start(It is not that all
firms start out equal and some happen to grow) [[growth potential
is a key dimension of heterogeneity among newly founded
firms]]]
34
Entrepreneurial Quality Statistics
New Population-Level Entrepreneurship IndicesEntrepreneurship
Quality Index (EQI). Average estimated entrepreneurial quality
within a group of start-ups:
Regional Entrepreneurship Cohort Quality Index (RECPI). Expected
number of growth events within a regional start-up cohort:
Regional Ecosystem Acceleration Index (REAI). The ratio of
realized vs. expected growth events in a region:
Attributes:Panel or cross-sectionalArbitrary level of
granularityNot necessarily geographic in scope
EQI: The sum of the quality score for each individual
firm/number of firms in a given region for given yearTo create an
index of entrepreneurial quality for any group of firms (i.e.,
within a cohort or satisfying a particular condition), take the
average quality within the groupAggregate of quality at the
region-year basis by estimating average of Theta (I,r,t) within
that region{I r,t} all firms in region r and year t. Nr,t = number
of firms in that region year; Theta for firm I in region r at time
tExcludes any location specific measures (do not assume startups
from a given location are associated with a given level of
quality)Excludes time-based effects (e.g., changes in available
financing)Measure of the potential of a region given the intrinsic
quality of firms at birth, which can then be affected by the impact
of the ecosystem or shocks to the economy between formation and
growth outcome.RECPIAverage quality of new firms multiplied by the
number of new firms within a given cohort-region REAIThe ratio of
realized to expected growth events in a
region__________________________________________________36
Where is Silicon Valley? Science, 2015
Address-Level Visualization of Silicon Valley
The Quality of Entrepreneurship in Kendall Square
Nowcasting Entrepreneurial Quality in Kendall Square
Size of bubble = number of high-potential growth firmsColor of
bubble = level of entrepreneurial quality
CIC and Cambridge coworking center (biggest dot
Dark colored dots: wetlab accelerators and biotech lab
spacescorporate (IBM accelerator)40
The Quality of Entrepreneurship in Kendall Square
Nowcasting Entrepreneurial Quality in Kendall Square
Size of bubble = number of high-potential growth firmsColor of
bubble = level of entrepreneurial quality
CIC and Cambridge coworking center (biggest dot
Dark colored dots: wetlab accelerators and biotech lab
spacescorporate (IBM accelerator)41
The State of American Entrepreneurship
The State of American Entrepreneurship
Great variation across regions in Entrepreneurial Quality/growth
potential43
RECPI / GDP:The State of American Entrepreneurship Over
TimeRECPI / GDP shows a sharp raise in potential during the late
1990followed by a drop (but NOT a collapse) in 2001and more
moderate increase after the Great Recession.Nowcasted Index tracks
closely and documents boom since 2010Peak ofdot-com bubbleGreat
RecessionGuzman and Stern (2016)
44
Silicon Valley RECPI:@pmarca view of the world
The View from Silicon Valley with Marc Andreesens head to the
right45
The State of American EntrepreneurshipIn contrast to the secular
and steady decline observed in the BDS, RECPI has followed a
cyclical pattern that seems sensitive to the capital market
environment and overall economic conditions. US RECPI increase over
the 1990s, with a spike in 1999-2000, followed by a decline to a
higher level than had existed in the 1980s. After a decline at the
beginning of the Great Recession, strong growth in US RECPI since
2010. 2014 registers the third highest level of US RECPI (and
highest in absolute value).
Potential Versus Realized Growth OutcomesThe highest potential
cohort occurs in 2000
But the best performing cohort occurs in 1996
Guzman and Stern (2016)
48
Entrepreneurship and Economic GrowthPossible to examine the
relationship between regional entrepreneurship metrics and
subsequent economic growth
Without an exogenous shift in the supply of entrepreneurial
quantity and/or quality, no casual interpretation
But useful for evaluating growth impact of policies that set the
table for certain state of entrepreneurship
For each MSA in our sample, we estimate (in logs):
Levels of GDP, EQI, and Obs are averages of 2001-2003GDP Growth
is to average GDP of 2012-2014
Entrepreneurial Quantity Has a Weak Postiive Correlation with
10-year Economic GrowthElasticity: .04 (p sum of partsEngagement of
all stakeholders! / shared measurement All needed for effective and
exclusive change
StakeholderPentacleBackbone organizationCollective impactShared
measurement
StrategyVersion of framework, highlighting catalystHow do you
choose strategy for implementation? What is a regional strategy?How
to make directed investment and action to leverage what you have
and identify how to push out the frontier in such a way that will
compliment effortsStrategy choice- choosing and winning must win
battle + catalyst !
Emphasize role of choice - Josh Lerner not Bolavard of Broken
Dreams but fixed dreams ?60
Enabling Shared Understanding Through Meaningful Metrics
Leveraging Digitization and Big Data to Develop and Test New
Metrics
Assessing Innovation-Driven Entrepreneurial Ecosystems in
Real-Time and at an Arbitrary Level of Granularity
Thank [email protected]
Regression of GDP Growth at MSA Level. Dependent Variable:
LN(GDP,2012-2014/GDP,2001-2003)
Largest CitiesAll Cities
(1)(2)(3)(4)(5)(6)
Ln(Avg(Obs,2001-2003))0.0384*-0.01090.0170-0.00884
(0.0154)(0.0221)(0.0294)(0.0130)
Ln(Avg(EQI,2001-2003))0.0803***0.0641**0.0684**0.0494*
(0.0191)(0.0218)(0.0252)(0.0201)
Ln(Avg(GDP,2001-2003))0.0509**0.02380.01020.0145
(0.0173)(0.0120)(0.0285)(0.0182)
Constant-0.2180.809***-0.288*0.4260.4460.496
(0.141)(0.165)(0.138)(0.266)(0.285)(0.257)
N6363636363150
R-sq0.0930.2400.1580.2780.2830.062
Robust standard errors in parentheses * p
