Anatomy of an Innovation Ecosystem

February 21, 2022

By Ariel Gruswitz

A Case Study: Delaware

In many ways my personal journey over the last six years mirrors that of my home state’s economic development. Almost six years ago, Delaware was on the precipice of a major shift in its economy— a major employer with a significant (200+ year) history in the small state was about to announce one of the largest corporate mergers in history. As an employee of this corporation at the time, I and my colleagues anticipated a reorganization that, indeed, happened in quick succession of the announcement, eliminating my position among 1700 layoffs, an especially daunting number in a state with under a million people.

As I faced this reality personally and what it meant for my professional path and future options in the state, the business and state leaders reckoned with how to rebuild after such a significant high-quality job loss and the economic uncertainty left in its wake. Little did I know at the time, a couple of years later I would work with the public and private sector at the state’s new economic development organization in a role focused on building a stronger innovation economy that is better prepared to weather such setbacks.

Many states now recognize it is more sustainable and beneficial to diversify their portfolios and grow their own companies. States that create strong innovation economies, interconnected in “ecosystems,” with diverse players from across the public, private, and academic sectors, and throughout the business maturity spectrum, are better equipped to handle economic downturns or significant corporate reorganizations than those that do not. This approach also ensures a capable talent pool and a desirable community sought by existing and prospective businesses.

Time to Build the Foundation

Building a sound foundation for a sustainable innovation economy takes time, dedication, and resources. Most important, it takes clear leadership and articulation of the common goal to create a drum beat that everyone willingly (more or less) follows. As the Chinese proverb goes: the best time to plant a tree was 20 years ago; the second-best time is now.

If your state is just getting started on this journey, here are some things I have learned:

According to the State Science & Technology Institute, a successful innovation economy contains the following:

  • A research base that generates new knowledge;
  • Mechanisms for transferring knowledge to the marketplace;
  • An entrepreneurial culture;
  • Sources of risk capital; and,
  • A technically skilled workforce.

So, what does a state need to ensure that it has these elements in place? A great resource for understanding the role of the innovation ecosystem players is the book, Startup Communities by Brad Feld. It is a quick read documenting his personal experience on lessons learned observing the successes of Silicon Valley and Boston ecosystems and replicating it in Boulder, Colorado, where he has lived for the past few decades. Below is a basic summary of some of the key stakeholder groups and their roles as Feld sees them. From my experience in Delaware and in talking to tech-based economic development leaders across the country, it is accurate and helps to map out everyone’s roles to align expectations in the community.

Before delving into the individual roles, here are what Feld outlines as key axioms of healthy innovation economies:

  • People are always more important than institutions
  • Everyone in community needs to be invested in the long-term success and have a “give first” attitude
  • An ecosystem is a living organism that should have porous boundaries
  • Ecosystems should be thought of like an actual startup: experiment, embrace failure, adapt/pivot

Key ecosystem roles can basically be broken down into two main categories. This is not exactly how Feld describes it, but from a high level, it is basically the two categories of Leaders and Feeders. The Leaders are mainly entrepreneurs and the Feeders are everyone else, each with a distinctive role to play in supporting the Leaders.

1) Leaders

According to Feld, entrepreneurs must be the leaders of the innovation ecosystem. Depending on the size and dynamics of your ecosystem, fewer than a dozen who commit to the long-term growth of the ecosystem could be sufficient. Although this group comprises the “leaders,” the ecosystem is not hierarchical; it is an organic organism that is constantly evolving. Often the expectation is that government will lead these initiatives, but the true leaders and creators can’t be from government or the economic development organizations.

The entrepreneur leaders should ensure that the ecosystem adheres to several important tenets. First, it must be inclusive with porous boundaries; anyone who wants to be a part should be part, unless they are a bad actor and not “in it” for the community. Second it must be played as a positive-sum, not zero-sum, game that is played for the long-term with the notion of increasing returns. Next, failure is not shunned, and people can quickly be accepted into alternative efforts when something fails. Finally, the leaders should be mentorship-driven (Feld uses a metric of 20% of their time) with no expectation of personal gain. Mentoring should include other leaders, entrepreneurs, and their own peers.

2)  Feeders

Most if not all other players besides entrepreneurs fall generally into the “feeders” category. What this shows is just how much emphasis there should be on a strong serial entrepreneur population in your ecosystem; without “leaders” you won’t get very far even if all of the “feeder” categories are strong.

a) Government – According to Feld, one of the roles of government role is to distinguish between the needs of small business startups and high-growth/tech-enabled ones. The needs of each group are distinctive and the two should not be lumped together. The main role of government is to support, not create this activity; it should participate in the community with enthusiasm and use its platform to highlight activity. Government should ask entrepreneurs regularly what is needed, then, either commit to it through policies, programs, or other resources, or determine it cannot or will not do so. It should avoid making promises it does not intend to keep or “sitting” too long on these decisions.

b) Universities – Surprisingly, Feld does not believe universities are crucial to innovation ecosystems but concedes that they can be helpful. He highlights their contribution of human capital as the most significant, including students (esp. grad students), professors, research labs, entrepreneurship programs (separate from the business school), and tech transfer offices. The people in academia are a source of new thinking and the potential future leaders in community. Feld advises to look for the key convenors across the university and partner with the law school if possible (e.g., the Colorado University model). Finally, culture, which almost always must be modeled at the top of the administration to “stick”, is key. Everyone benefits when academia respects and support professors (and students) who engage with the startup community and are passionate about its success.

c) Investors – Investors need to be part of the community and committed to the long-term game. Although some might act it, they are not and should not be the owners nor the gatekeepers. They should recognize their role as support and let entrepreneurs lead. Feld points to Mark Suster at Upfront Ventures (Los Angeles) and Fred Wilson at Union Square Ventures (NY) as exemplary investors in their ecosystems who strike this balance well.

d) Mentors – Feld explains that mentors should be experienced entrepreneurs or investors who actively contribute time, energy, and wisdom. Mentors are distinct from Advisors, who have an economic relationship to the company. Mentors should have no pre-defined expectation of a return. Feld specifically highlights the Techstars Mentor Manifesto for best practices.

e) Service Providers – This category includes lawyers, accountants, recruiters, marketing consultants, contract CFOs. Although they will obviously be concerned about compensation for their services, the long-term view of donating time and expertise to early-stage companies not yet able to afford paying full price will pay off over time in a successful innovation ecosystem.

f) Large Companies – There are several things large companies contribute to successful innovation ecosystems and that do not take a lot of resources: 1) provide convening space and resources; 2) create programs to encourage building companies that enhance the company’s ecosystem; and 3) patronize local startups. Encouraging interaction with the outside community is good for employee relations, increasing job satisfaction and retention.

g) Instigators – These can be individuals who are either entrepreneurs or people who work for the Feeders. They use their passion and community network/influence to help catalyze the movement and change that is needed. Passionate instigators should be highlighted by the community and encouraged. Change is not easy, especially when there are local politics to navigate.

h) Cheerleaders – This category is self-explanatory; cheerleaders can be any individuals or organizations supporting and encouraging ecosystem development and using their platforms to tell positive stories, promote the community, and raise awareness of progress among key audiences.

Articulate the Vision

Once you understand everyone’s roles, it is helpful to undergo an exercise with your key ecosystem stakeholders to build alignment and articulate the vision, strategic goals, and the gaps/challenges in the way of achieving them. Next time, we will delve into some possible ways to approach this exercise to facilitate progress towards building a successful innovation ecosystem. One of the most important lessons for me so far has been managing the expectations of the return-on-investment timeline in the community, which is often longer than people desire or expect.