The State of Wisconsin ranks last of the 25 largest states in Startup Activity as measured by the Kaufmann Foundation for the second straight year. The alarm bells are being sounded, the criticism being directed, and other warning cries, for the second year in a row. Is this a worrisome situation or should the State of Wisconsin not be concerned?
First, before getting into criticism and potential solutions, let’s review the metrics as used by Kaufmann. The Foundation, out of Kansas City, was started by the late Ewing Kaufmann, founder of Marion Laboratories (It was ultimately sold to Merrill Dow in 1989) and owner of the Kansas City Royals, endowed the Kaufmann Foundation to research and participate in the field of entrepreneurship. The foundation is worth billions and is one of the largest and oldest foundations specifically focused on the study of entrepreneurship. It is a very serious organization.
The Foundation uses three key metrics in its measurement of Startup activity, 1) Rate of New Entrepreneurs, 2) Opportunity Share of New Entrepreneurs, and 3)Startup Density. Based on definitions provided by the Kaufmann website: Rate of New Entrepreneurs measures the # of Adults in an area that become entrepreneurs in a given time period; Opportunity of New Entrepreneurs measures the number of adult entrepreneurs who started a business NOT because of unemployment; and Startup Density is the # of firms less than one year old that have at least one employee. So, are these reliable measures of a region’s startup activity? Probably. However, the more important question is ‘should we care?’.
Whatever the study and measurement(s) used, it’s never good to be last two years in a row. So, yes, the state of Wisconsin should be concerned or at least be asking many questions. For instance, is it really that important about the # of firms started?
From a state perspective, do the number of startups relate to high-paying jobs or increasing wealth? If a company only has one or two companies like an Epic Healthcare software (generating upwards of 1,000 or more high paying jobs per year) and a several related consulting firms hiring hundreds of consultants, is this not a sign of economic success? Such developments wouldn’t show as a positive sign in the Kaufmann.
With that said, I’ll leave the discussion about the reliability and validity of the Kaufmann data to others. If we assume that being last two years in a row is not a good thing, what are potential causes and remedies for the situation? Successful ecosystems require an interrelationship of a variety of integrating variables to support the entrepreneurial environment.
Using the often-used Silicon Valley example, Professor Tom Byers, Professor in Management Science and Engineering and founder of the Stanford Technology Ventures Program, suggests that at five variables have been instrumental in Stanford’s successful ecosystem. They are: 1) A Market of Early Technology Adopters, 2) A talented, motivated and diverse labor pool, 3) A large services support structure (lawyers, accountants, etc. ) that allows outsourcing of many key services, 4) a Venture Capital industry that provides more than just financing, and 5) an entrepreneurial culture that exhibits openness, collaboration, and flat organization structures.
It may be valid to argue that using Silicon Valley as the model for a successful ecosystem may be problematic as there are so many significant differences between Wisconsin and the Bay Area. Yet, one can compare oneself to a benchmark to ascertain are their changes that can be made in the current Wisconsin environment to increase the number of startups. Tom Still, President, Wisconsin Technology Council and columnist for the Wisconsin State Journal suggested in a recent article (Wisconsin Startup Issues) that some of reasons for Wisconsin lagging in the national index were:
- We’re older than most states
- We have fewer immigrants than most states
- We’re more “inbred” than other states
- Most of us already have jobs
All are probably valid reasons. When comparing it to the variables mentioned by Byers of Stanford (above), the reasons cited by Still may not be going far enough. Do we have a technology oriented market in Wisconsin, both B-2-B or B-2-C? In other words, do they demand and seek the latest technology to adopt or do they take a ‘wait and see approach’?
Second, do we have the talent pool needed to develop a sizable tech ecosystem? When discussing talent pool, there are plenty of engineers, biologists, and other STEM related workers in Wisconsin generated by our University system but what about entrepreneurial managers? Business people with the experience of starting and scaling a company.
Finally, Wisconsin has a limited pool of venture capital in the State. There seems to be plenty of resources available at the One additional reason cited by many is the limited amount of risk capital available in the state, mainly in the form of venture capital from institutional investors and angels for seed and early stage financing. But, there is a limited number of venture firms located in Wisconsin providing growth financing for the tech firms (capital needed to expand, hire, etc as sales take off). One caveat that many investors will remind you of is that if there are good growth opportunities, the capital will find its way here. However, if they were more local based and possessed total capital in billions of dollars, it would be fun to see what impact could be.