The Right Way to Plan an Innovation Tour
This article by Daniel Isenberg first appeared in the Harvard Business Review July 7, 2015.
Innovation tourism: it’s a thing. The tourists are entrepreneurs looking for the right economic microclimate to start a business; corporate scouts looking to expand their company’s reach or improve their supply chain; policy makers trying to figure out the right balance of rules and infrastructure to create a thriving economy; investors searching for the next crop of opportunities. These well-intentioned professionals travel the world in pursuit of the secret sauce of innovation. Typically, tourism involves guided tours, pitch events, conferences with lots of panels, and well-planned visits to companies, universities, and government agencies tasked with increasing entrepreneurship and innovation.
The problem is, all of these good people are often guided to see a distorted reality. Not that more formalized presentations and assessments are necessarily Potemkin villages, but they often miss what’s really going on. It’s just that these actors naturally tend toward self-promotion. (If you ask the director of a government innovation agency how influential or effective they are, what answer do you expect, other than “extremely?” Have you ever encountered a university tech transfer office director who says, “Sorry, we are a drain on the university’s cash?”)
But an innovation tour can be valuable, as long as you know what to look for and think about. Entrepreneurship and innovation ecosystems aren’t simple, easily graspable objects; they are a construct we use to make sense of an exceedingly complex reality. And they are indeed important to be able to see and understand. To get at their essence, you need to think and act like the anthropologist doing field research by observing, questioning, and listening to many different parts of the land you are visiting. Here are some tips for a useful innovation tour:
Tip 1: Look for the “software,” not the “hardware.” Many people, including business experts, misconceive entrepreneurship and innovation ecosystems as consisting of the activities and structures which are easily visible – what I call the entrepreneurship ecosystem “hardware”: startup incubators, angel investor meetings, tech transfer offices, innovation centers, entrepreneurship courses, business plan competitions. Yet the most important drivers of entrepreneurship are often the more subtle “software”: the networks of trust going back to high school or military service, the belief systems or values at the root of people’s resilience in the face of setbacks, or the social norms which encourage thinking out of the box.
So try to find networking events, engage in conversations, or participate in the programs that shape that software. In 2009, I took 42 Harvard Business School students to Israel for a week of entrepreneurship exploration. I first had them meet with an Israeli army signal corps general (who was in the midst of overseeing a military operation); then we headed to a beach to engage in team building and camouflage exercises with young Israelis preparing for elite military combat units. Since military service is mandatory in Israel, this provided useful insights into the culture and mindsets of Israelis.
In addition, we also went to the discos to experience the culture’s youthful exuberance. And we spent time at Kibbutz Ein Shemer’s field house for ecological initiatives and experimentation. This helped underline the idea that cultural and social “software” is every bit as important as business and economic “hardware” in assessing a region’s business ecosystem.
Tip 2: Talk to all the actors, not just entrepreneurs. Don’t ignore the bankers, business families, corporate executives, private equity investors, researchers, service professionals, and educators. My ecosystem map is a good way to make sure you are touching all the bases.
I took an HBS student group to India in 2008 and met with CEOs of public companies, heads of family business groups, and visited Keggfarms, an innovative chicken breeder trying to make a dent in poverty. Thinking that entrepreneurs alone reflect the entrepreneurship and innovation ecosystem is a common mistake by even esteemed experts. It’s a bit like saying that a baseball game is exclusively about the pitcher. Without the lonely right fielder, baseball wouldn’t work either. Don’t just make a beeline to the entrepreneurs and venture capitalists; get a broad multi-disciplinary cross section.
Tip 3: Talk to people in mixed groups rather than in isolation. In over a dozen locations, including Istanbul, Edmonton, Copenhagen, and Puerto Rico, I have facilitated roundtable group conversations among researchers, investors, government officials, entrepreneurs, and non-profits. Not only does it become clear that they can have radically different views, but these group conversations will teach you important lessons about people’s naturally heterogeneous motivations for wanting more entrepreneurship. The university administrators want to attract students and donors with entrepreneurship activities. City officials want to create jobs. Non-profits want to accomplish a social mission while being self-sustaining financially. Entrepreneurs want to grow their ventures for wealth, challenge, and impact. These different objectives are natural and need to be understood in order to understand the entire ecosystem.
By listening to and observing these actors in groups, you can usually see if the different domains of the ecosystem are disconnected or aligned, polite or candid, collaborative or conflicting. Further, you can see parts of the entrepreneurship culture enacted in front of your eyes: Are people independent thinkers? Do they encourage different viewpoints, experimentation, and risk-taking? Have they even met before?
Tip 4: Pay more attention to scale-up and growth, than to startup. Seek out entrepreneurs who are trying to grow their companies from $1-$10 million rather than startup entrepreneurs (who are often first-timers) pitching ideas that aren’t yet on the market. This is harder than it seems: Around the city of Milwaukee there are 14,000 companies in this size range. In fact, Wisconsin is number two in the U.S. in the proportional size of its mid-market business sector. But most of them are hunkered down running their businesses and talking to customers, rather than going to hyped-up pitch fests or taking part in accelerators or conferences. It is surprisingly rare for entrepreneurship observers to put growth at the center of the dialogue. But you get a very different view of the ecosystem by looking at growth.
At Colombia’s Manizales Más, we conducted a study with the Chamber of Commerce of the local factors inhibiting or facilitating the growth of 100 companies. The responses put an emphasis on the challenge of attracting and retaining talent rather than on raising risk-capital. Again, the focus lands on scaling up and growing your business, not just getting it off the ground.
Focusing on scale-ups also matters when you talk to bankers. You will lose the bankers if your guidepoint is startups rather than growth; it is not banks’ business to invest in startups with few assets to secure as guarantees. But bankers are paying keen attention to those ventures who break away into rapid growth.
Tip 5: Study the financing food chain starting from the end, not the beginning. It goes without saying that finance is an essential element in entrepreneurial innovation, but don’t start with the angel investors or VCs. Start with the investment bankers whose livelihood it is to advise on acquisitions, talk to stock exchange officials, and meet with the late stage PE fund managers. Don’t ignore the companies who are leasing equipment to growth firms. In Colombia, as part of Manizales Más, we are developing financial instruments for rapidly growing businesses. By starting at the end of the financing food chain, it became clear that the exit possibilities in Colombia are so limited that VCs and angel investors will have great difficulty seeing a return for decades to come. As a result, we are developing hybrid financial instruments to give investors faster (if smaller) and more secure returns.
Tip 6. Look beyond what people tell you. When you talk to entrepreneurs (or any other actors for that matter) take what they say with a big grain of salt. Most people are not trained at observing or explaining their own behavior, let alone that of others, and entrepreneurs are no exception. I have talked to entrepreneurs in over 40 countries, and the story is always the same: “It is difficult to get access to early stage capital, hard to find talent, aggravating to fight with regulation and bureaucracy.” Sound familiar? Furthermore, innovation agency officials, or the national SBA, will gladly talk about how influential they are in all the successes. Talk to venture capitalists and they, too, will tell you how essential they are in leading the charge. Leaders of startup communities will passionately explain how startups are so important.
So you need to dig beneath the surface of what you hear. For example, one senior government official I know visited Israel and learned about Yozma, the gold standard of government efforts to stimulate venture capital, which was a $100 million fund of funds in the 1990s. Hearing about the positive impact of Yozma (a view more widely held by government officials than by Israel’s first generation of investors), his takeaway was to promote a similar VC fund in his country. Yet when I debriefed him, no one had told him that perhaps the critical element in Yozma’s success was the option the investors in each fund had to buy out the government’s interest at a pre-defined price. It’s essential to ask good questions and avoid taking success stories at face value.
Tip 7: Beware of macro-economic statistics applied to specific regions. Since innovative entrepreneurship is by definition rare and entrepreneurship ecosystems are by definition hyper-local, even metro area statistics often mask the realities of entrepreneurship in a region. Recently Scale Up Milwaukee hosted a visitor from a prominent entrepreneurship institute who came with well-prepared data showing Milwaukee’s population was in decline, researchers per capita were low, and the startup rate was abysmal. But after three days of seeing pockets of vibrant growth, the community engagement of the many large local corporations, and talking with investors who are actually investing, he changed his view of Milwaukee as a “challenged city” on par with Detroit (and Detroit may be rapidly changing as well) to one of strong potential.
Tip 8: Try to identify and meet the hidden heroes. Two years ago I had lunch with MIT entrepreneurship Professor Ed Roberts who had been one of my early entrepreneurship mentors in the 1980s. Since the 1960s, Roberts has been at the nexus of the Boston entrepreneurship ecosystem. Decades before the Cambridge Innovation Center was established, Roberts had researched Boston entrepreneurs, created the first seed capital fund (Zero Stage Capital), co-founded Meditech, and sat on boards of many technology companies. We were interrupted five times by entrepreneurs stopping in the MIT Sloan School cafeteria to thank Ed for investing, or for making a key introduction, or for giving good advice. Clearly Roberts was a key feature of the ecosystem of entrepreneurship in Cambridge. Finding these hidden heroes should be part of your research gathering.
In sum, innovation tourism is not really tourism. At root, it’s an important endeavor in attempting to understand how a complex economic and cultural reality actually works. To do this successfully, you need to become an anthropological investigator, ask tough questions, and get beyond appearances.
Daniel Isenberg is Professor of Entrepreneurship Practice, Babson Executive Education, and founding executive director of the Babson Entrepreneurship Ecosystem Project. He is also the author of the book, Worthless, Impossible, and Stupid: How Contrarian Entrepreneurs Create and Capture Extraordinary Value (July 2013).