Innovation Insights: Five tough questions about scaleup ecosystems, with Daniel Isenberg

Last spring, we reported on Scale Up Atlantic Canada, a novel six-month program to teach CEOs and senior managers how to turn their ventures, of all ages and sectors, into scaleups. Designed by Daniel Isenberg, CEO of Entrepreneurship Policy Advisors and former Harvard Business School professor, the initiative seeks to address Canada’s need for more business owners who can grow mature enterprises and break the “invent and sell” culture that’s prevalent among startup founders and venture capitalists. We caught up with Isenberg again to unpack some knotty challenges faced by Canada’s emerging scaleup ecosystems.

RE$EARCH MONEY: Colleges and universities are an obvious fit for startup ecosystems, but with scaleups, the relationship is less intuitive. How can higher ed institutions work inside scale up ecosystems?  

Daniel Isenberg: Scaling up and universities are not incompatible but making them work together is tricky. On the one hand, universities should primarily treat entrepreneurship as an educational/research activity, because that is in their DNA. Education and research are success-agnostic, so to speak: you can learn from and research failures as much as you can successes. On the other hand, universities have a natural stake in the growth of their students’ and faculties’ companies because they provide internships, graduate jobs, royalties, research funding, donations and the like. For the former, startups are great; for the latter, you need firms that achieve significant scale.

We often get the causality backwards. Perhaps paradoxically, companies of scale stimulate high-quality startups, not just the other way around. Conversely, it is almost impossible to have high-quality startups without grown-up companies nearby. Scale Up Atlantic Canada is one attempt to stimulate the entire range of firms from young to old, by showing new growth is possible.

R$: Are large foreign multinationals good or bad for scaleup ecosystems? 

DI: A lot of it depends on how they arrive: Is it a natural process or does government subsidize their re-location? We see failure after failure of business attraction (Foxconn, General Electric, and Amazon HQ2) and some research shows that the social and economic returns to business attraction are not worth the public investment. These companies can act like an invasive species, unbalancing labor and real estate markets and upsetting local supply chains. But if they come because they are naturally attracted by the local assets like talent, they can be a tremendous boon to entrepreneurship.  Overall, homegrown entrepreneurship is much more advantageous. Governments often overlook the growth potential in existing local firms. The number one priority should be to enable local firms to grow big and strong.

But there are several important reasons why close-proximity multinationals are key. They spin off talent as much as they “consume” it. There is an understandable concern that they are like the god Kronos, who ate each of his offspring to prevent them from growing up and killing him. But the reality is that big corporations are just as scared of startups stealing their best people as they grow, as we are of them choking the labor markets.

Large companies also enrich the overall skill pool by creating experienced managers. They can serve as big levers for market access. They can invest in companies or in product development or joint R&D. And they serve as signals to global markets that there is something special about being where they are.

R$: How do startups find the right-sized niche in which to grow? If their market is too small, they can’t scale. If their market is too large, they can’t compete with the multinationals.

DI: Even within seemingly “big” markets, we see all the time that entrepreneurs discover untapped opportunities in the white space. All else being equal — which, of course, it never is — it’s much better to grow a company in proximity to large, established companies. Parenthetically, investors always dream that multinationals will acquire their companies, as this has become the most straightforward way for them to get liquidity.

R$: There’s a conversation right now about supporting the growth of innovation ecosystems in smaller cities. Some criticize this as “trying to spread the peanut butter around,” rather than doubling down on what’s working. Can you grow a scaleup ecosystem outside a big metropolis? 

DI: I want to clarify a misconception: entrepreneurship and innovation are two distinct phenomena that sometimes happen together, but frequently do not. For hardcore technical or scientific innovation, you do need critical mass. It is also true that cities tend to have higher concentrations of growth firms. But remote areas offer unique benefits: quality of life, low turnover, work ethic, a sense of community, not to mention lower costs.

R$: How does government get out of the way and let natural selection do its work of culling the poor players who suck up resources and outlive their viability?

DI: Exactly by getting out of the way and letting natural selection work. You have to let the failures happen. You’re not supposed to like them – failures are very painful on many levels – but without venture death, you don’t get venture life. To use an analogy, when proteins don’t get chopped up and their components re-used, you get sick. Stop measuring success in terms of survival, but in terms of scaling up. Are more and more firms growing more and more rapidly? Is our culture evolving to notice and encourage this growth? Are our institutions aligned around helping local firms enter new growth trajectories? Do the different stakeholders know how they can support growth in different ways? If yes, then you have a scaleup ecosystem in formation.