It’s a fact — startups are tough. One in three new firms will shut down within two years of launch. Only one in two will survive for more than five years. Companies can close shop for many reasons, but one issue that interests policymakers and entrepreneurs alike is geographic location
. Does launching a firm in one city versus another influence its chances of survival? New research supported by UVA Darden’s Batten Institute for Entrepreneurship and Innovation has found evidence that it does.
In a peer-reviewed article published in July 2019, Batten Fellow Siddharth Vedula
and his collaborator Phillip Kim, professors at Babson College, presented rare quantitative evidence that a firm’s survival does indeed depend, among other factors, on the quality of its regional entrepreneurial ecosystem.
Vedula said, “This is one of the first empirical studies exploring a venture’s dependence on the regional entrepreneurial ecosystem. Almost all of the work to-date on regional entrepreneurial ecosystems has been theoretical or conceptual in nature. Here we offer scholars and practitioners a framework as well as data to understand region-specific causes of a venture’s failure.”
In high-quality entrepreneurial ecosystems, the researchers concluded, fledgling firms can boost their odds of survival thanks to easier access to human, financial and social capital. Weaker ecosystems, by definition, are deficient in all these assets, and are less capable of supporting and nurturing young businesses to the same extent, leading to many of those businesses to close.MATCHING VENTURES TO THEIR ECOSYSTEMS
These findings rest on a series of analyses combining two distinct levels of data: one about the characteristics of individual ventures and the other about the quality of those ventures’ respective entrepreneurial ecosystems.
ENTREPRENEURIAL ECOSYSTEM QUALITY INDEX: A TOOL FOR FOUNDERS, INVESTORS AND POLICYMAKERS
- Longitudinal Firm-Level Data: Vedula and Kim examined detailed data of a cohort of 2,600 ventures, spread across 301 U.S. metropolitan areas. All these ventures had been launched in 2004 and tracked, as part of the Kauffman Firm Survey, for eight subsequent years. This longitudinal data was instrumental, providing information not only about which firms survived and which didn’t, but also about all these firms’ founders, employees, products, industries and assets.
- Ecosystem Quality Index: To measure the quality of entrepreneurial ecosystems — of the 301 regions where the ventures resided — Vedula and Kim developed a regional entrepreneurial ecosystem quality index. The index combined five characteristics of an ecosystem that are most likely to influence a venture’s survival: supportive entrepreneurial culture, access to finance, human capital, innovation capacity and formal support organizations. By merging venture data to this index in their analysis, they were able to isolate the ecosystem’s effects on a venture’s survival, while controlling for venture characteristics.
Vedula and Kim believe their index — a set of quantitative indicators to measure and compare ecosystem quality across U.S. regions — can be useful beyond this study in multiple ways.
Entrepreneurs evaluating location choices to launch a new venture can use the index to measure a location’s attractiveness. The index can also help entrepreneurs and investors notice those regions that are not well-known for entrepreneurship but appear to have, based on the data, healthy entrepreneurial ecosystems. For regional leaders and policymakers, the tool offers a way to identify, and invest in, the elements most in need of improvement in their region.RELOCATING IS NOT ALWAYS OPTIMAL
From the findings of this research, one might conclude that entrepreneurs can enhance their chances of success by merely moving from a weaker ecosystem to a stronger one. It is not always so simple. Vedula and Kim noted, “Getting to know a new market, establishing a reputation, building a new social network, and mobilizing resources in an unfamiliar setting takes time, which raises barriers against easily moving from one location to another.”
Vedula and Kim suggested in their paper that founders deeply embedded in a less supportive ecosystem should look to build compensating assets. Their analysis identified founding experience as one such asset. Vedula explained, “We found serial entrepreneurs rely a lot less on their ecosystem for their venture’s survival.” But, he added, experience cannot compensate for all deficits of an ecosystem. “A strong, supportive entrepreneurial culture, for instance, is equally vital to new and experienced founders.”
The evidence found in this study confirms the critical role of location in a venture’s survival. Entrepreneurs and policymakers now also have a tool — the regional entrepreneurial ecosystem quality index — to assess in what ways a specific location plays that role in the life of the ventures it accommodates.Siddharth Vedula is a fellow at Darden’s Batten Institute for Entrepreneurship and Innovation.
[This article has been reproduced with permission from University Of Virginia's Darden School Of Business. This piece originally appeared on Darden Ideas to Action.]