Section 6: The Growth of Entrepreneurial Ecosystems: Lessons from Buenos Aires, Amman and Istanbul
Entrepreneurs can play multiple important roles in an ecosystem. Endeavor, a non-profit organization, has much experience in promoting these roles in many parts of the world. Starting in New York in 1997, Endeavor then opened its first regional offices in Argentina and Chile (1998), followed by Brazil and Uruguay (2000). Subsequently, it expanded into South Africa (2003), Colombia and Turkey (2006), Egypt, Jordan and India (2008), Lebanon and Dubai (2011), and Indonesia, Saudi Arabia and Greece (2012). “High-impact entrepreneurs” have five important roles that Endeavor Insight, the organization’s internal research team, has tracked and helped facilitate for entrepreneurs starting and scaling an early-stage company. Illustrated in case studies of ecosystems from Buenos Aires, Argentina; Amman, Jordan; and Istanbul, Turkey, these roles are:
- Inspiration – inspiring other individuals to become entrepreneurs
- Founder crucible – attracting and developing employees who subsequently found other companies
- Employee crucible – attracting and developing employees who subsequently become employees of early-stage companies
- Investment source – using acquired wealth to invest in subsequent new entrepreneurial ventures
- Mentor – providing key support such as advice, encouragement and access to a network
6.1 Longitudinal Endeavor Methodology Applied to Buenos Aires
Most policy-makers believe that entrepreneurship is an effective way to create employment and economic growth, and have included building entrepreneurial ecosystems as one of their most important agenda items. The most successful ecosystem is Silicon Valley, but despite being the benchmark to which so many aspire, its vibrancy defies easy explanation. The Valley’s thriving ecosystem has evolved over fifty years. Although it shares much with several other top entrepreneurial ecosystems, such as Boston’s Route 128 (US) of top universities, research-oriented firms and a culture of disruptive innovation, the Valley and other regions are unique due to their attributes and the key events that have marked their rising global prominence.
To better understand how entrepreneurial ecosystems grow, Endeavor Insight has developed a methodology combining longitudinal data on the firms it supports, supplemented by surveys of other key firms in the countries where it operates. This approach allows it to analyse the unique features of each ecosystem and the broad trends that they share. After opening its office in Buenos Aires, Endeavor began collecting data on the city’s entrepreneurial firms. In 2011, Endeavor Insight decided to leverage this data and study the extent to which networks of people, firms and support organizations underpin the development of entrepreneurial ecosystems. Focusing on the Buenos Aires technology sector, Endeavor combined the data from its firms with a survey of other technology entrepreneurs involved in local entrepreneurial organizations, incubators and accelerators, or who received venture-capital investments. The resulting data set contained more than 200 interviews and covered 21 years (1990–2011). Endeavor asked each entrepreneur five questions: (1) Who inspired you to become an entrepreneur?, (2) Where were you employed before becoming an entrepreneur?, (3) Who invested in your company?, (4) Who mentored you as you built your company?, and (5) Have you founded any additional companies?
6.1.1 Buenos Aires: A challenging place to succeed as an entrepreneur
One-quarter of Argentina’s population lives in the capital Buenos Aires and its metropolitan area. In recent decades, the country has experienced large economic swings, with periods of exuberant growth followed by deep economic crises. Since its return to democracy in the late 1980s, Argentina has gone through hyperinflation in the early 1990s, a period of rapid growth in the mid-1990s, a sovereign-debt default in 2001 and commodity-fuelled growth in the early 2000s. The five presidents who tried to rule the country during the 2001 default exemplify the frenetic trajectory of Argentina’s politics. The country’s economy continues to experience problems, including high inflation, infrastructure deficits, government intervention in business and a weak legal system.
Despite this challenging environment, an entrepreneurial ecosystem is thriving. Hundreds of high-tech firms have launched in recent years, with several achieving exits of over US$ 100 million (such as a trade sale to a large corporation or an initial public offering [IPO]). Office openings by Google and Yahoo! capped two decades of strong growth in the technology sector. Government intervention does not seem to explain this dynamic environment. If anything, the government has been focused on Argentina’s broader macroeconomic problems. The Buenos Aires ecosystem, having produced world-class technology firms and developed the talent to sustain them, is a product of connections among entrepreneurs, mentors and sources of finance.
6.1.2 The evolution of the Buenos Aires network
Using the entrepreneurial community’s responses to its surveys, Endeavor Insight mapped the evolution of the Buenos Aires entrepreneurial ecosystem as a function of those connections. The state of the ecosystem is shown for 1996, when the Internet started to become an important source of entrepreneurial activity. Figure 1 depicts the “first-generation” network of companies founded in 1990-1996. Each circle in the network represents a specific company, with the circle’s size reflecting the number of interactions coming into and moving out from the entrepreneurs at that company. Figure 36 also relates to the five research questions by identifying five types of relationships: inspiration, founder, former employee, investment and mentorship.
The ecosystem was originally sparse, comprising 11 technology companies, most of which were isolated. Only three – Amtec, Technisys and SIA Interactive – had relationships with other companies.
Figure 2 shows the network in 1999, including the 15 companies founded in the second generation (1997–1999) that moved the entrepreneurial ecosystem from a nascent to an emerging stage. While still defined by companies working predominantly in isolation, the ecosystem began to exhibit an increasing number and variety of relationships among local firms. More importantly, this period included the founding of several companies that played significant roles in the ecosystem’s development over the next decade. Two of these companies, MercadoLibre and DeRemate, brought e-commerce to Latin America. MercadoLibre’s founder attended Stanford Graduate School of Business and came to the nascent ecosystem with a blueprint drawn from companies such as Silicon Valley’s eBay. The founder of DeRemate came from Harvard University with a similar profile. Another company that emerged in the late-1990s was Patagon, an Internet banking firm founded by an entrepreneur seeking to disrupt Argentina’s banking industry by using a model similar to that of E*TRADE Financial Corporation. A fourth company, Officenet, sought to transform the office-supply business. Founded in 1997 with the support of four local angels, it brought Staples’ distribution model to Argentina and was so successful that Staples ultimately acquired it in 2004. While not a pure Internet company, Officenet leveraged angel investment to receive venture funding, built an Internet-centric distribution channel and exited successfully within a decade – a model of entrepreneurship more commonly seen in the US than in South America.
Figure 3 depicts the Buenos Aires ecosystem as of 2006, including companies founded in 2000–2006. It matured over these seven years, with a dense set of connections linking the 35 companies. Officenet and Patagon became important nodes in the ecosystem’s network, supporting an increasing number of start-ups through inspiration, mentorship, investment and human capital development (both founder crucible and employee crucible). Other companies complemented these nodes, creating connections noted for their depth and breadth. Compared to 1999, start-ups in 2006 were no longer isolated, and many had at least one connection to an existing ecosystem participant.
As the ecosystem moved into this third generation, its participants began to benefit from spillovers and network effects, initiating a “virtuous cycle” effect on entrepreneurs in Buenos Aires. When the Spanish-based Banco Santander bought 75% of Patagon for US$ 750 million in 2000, it was one of the first major liquidity events for Argentina’s technology sector. Reinforcing the impact of the Patagon acquisition, Officenet was acquired by US-based Staples in 2004. Taken together, these two events represented a seminal moment in the development of the Buenos Aires ecosystem. After eBay acquired a 19% stake in MercadoLibre in 2001, the latter quickly expanded; it gained market share on DeRemate and ultimately acquired it in 2005, setting the stage for an IPO in the latter half of the decade. The Buenos Aires ecosystem now had hundreds of millions of dollars of additional smart capital and a new set of norms defining success for entrepreneurs. Patagon, Officenet and MercadoLibre became central players in the ecosystem from 2000 to 2006. Interestingly, they are not from the first-generation “founders”, but have inherited the initial impetus from the early entrepreneurs.
Figure 4 plots the network through the fourth generation from 2007 up to July 2011. The ecosystem was well established with nearly 100 companies founded in the 2007–2011 period. In 2007, MercadoLibre’s IPO on the NASDAQ stock exchange was valued at US$ 1.6 billion. In 2007, and adding to the growing list of acquisitions and other liquidity events, Fox Entertainment purchased Digital Ventures, an online advertising company founded in 2003.
The entrepreneurs from Patagon (sold to Banco Santander), MercadoLibre (sold to eBay) and Digital Ventures (sold to Fox Entertainment) had become the biggest players in the ecosystem. Other successful companies such as Officenet and DeRemate played a significant role in the ecosystem, and Globant, a third-generation company like Digital Ventures, was a relevant player and successful entrepreneurial story.
By 2011 the network had a high density, a hallmark of a dynamic ecosystem. In 15 years, the Buenos Aires technology entrepreneurial ecosystem had managed to succeed as a network generating successful companies, doing so in the midst of a challenging socio-economic environment. Company founders from the 1990–1996 period did not manage to have large exits, but they started to create the social dynamics that would help start important companies and, more relevantly, important entrepreneurs to feed the network. The second and third generations produced enough winners, and their leaders committed themselves to the region. The fourth generation, larger in number of companies and connections, will likely continue to create corporate winners and new jobs.
Figure 5 illustrates the important role of a few entrepreneurs in creating the dynamics of the Buenos Aires ecosystem. Their three companies – Patagon, Digital Ventures and MercadoLibre – are in orange and their networks in lighter shades of the same colour. These successful, high-impact entrepreneurs reach over 80% of the ecosystem via their networks and are willing to influence other entrepreneurs through their investments, mentoring and advice. Rich connections among them create a solid foundation for the ecosystem to thrive. Some of their “heirs” from the third and fourth generation have become influential in their own right, as their connections create a promising framework for future growth. A handful of network players are critical to the success of the ecosystem; they are not only successful in business, but also in building bridges between people and companies throughout the ecosystem, devoting time to the network and inspiring new entrepreneurs as a result.
Figure 6 plots the growth in number of start-ups by year in the Buenos Aires technology entrepreneurial ecosystem. The trend is clear: their growth in number is exponential, punctuated and accelerated by successful exits that in turn lead to growing awareness about entrepreneurship. Two years after Patagon’s acquisition, the first support organizations emerged, the density of connections increased and the ecosystem expanded. As it enters into its self-sustaining stage, the ecosystem forges ahead in the face of Argentina’s broader economic problems.
6.2 The Amman and Istanbul Entrepreneurial Ecosystems
To further document the importance of high-impact entrepreneurs, Endeavor Insight collected similar data in two other cities in emerging markets, studying the technology-sector entrepreneurial ecosystems of Amman, Jordan and Istanbul, Turkey. According to Bloomberg, a global business and financial information company, while Jordan is a small country with little oil and, much like Buenos Aires, with an unfortunate tradition of top-talent brain drain to other places, it is ranked among the top ten cities for launching a technology start-up. Maktoob, an Internet services company and the most important exit from the Middle East and North Africa (MENA) region, came from this ecosystem, and 50% of all start-ups in Amman are in the technology sector. Istanbul also has an important entrepreneurial ecosystem, attracting the attention of top venture capital firms such as Kleiner Perkins Caufield & Byers and General Atlantic. With incubators and accelerators, and with multiple companies selling for US$ 100 million or more, Istanbul has demonstrated its potential as a serious destination for entrepreneurship.
Figure 7 compares the three entrepreneurial ecosystems. The structure of the Buenos Aires ecosystem is not unique; the pattern of those in Amman and Istanbul is similar, with a small number of high-impact entrepreneurs creating the majority of the network that underpins the ecosystems.
6.3 Lessons for Creating an Entrepreneurial Network
The Buenos Aires experience, in concert with those in Amman and Istanbul, provides several key points for better understanding the growth of ecosystems:
- Entrepreneurial ecosystems are not created overnight. The Buenos Aires technology entrepreneurial ecosystem took its first steps in the mid-1990s, and it was only 15 years later that a rich network emerged. This observation is consistent with other regions; for example, Silicon Valley evolved over a number of decades.
- A few people play a central role. Networks require a few nodes that activate and connect to the rest of its players. In the case of the Buenos Aires network, entrepreneurs from three companies account for a significant share of the network activity. Often, these people build successful companies themselves and are then willing to provide resources and time to support other entrepreneurs. Their importance speaks both to the need for creating pathways to activate the network, and to their roles as crucial intermediaries. Such high-impact entrepreneurs advise, inspire, support and even fund the next generation of entrepreneurs.
- Infrastructure initiatives such as incubators, accelerators, large companies, investment funds and service suppliers are complementary. They will not create a network on their own but will provide the mechanisms for high-impact entrepreneurs to realize their importance, activate the ecosystem and multiply their impact. These entrepreneurs should be encouraged to become investors, mentors and board members to leverage the human capital accumulated through their experience and networks.
- Governments should design policies that facilitate the growth of entrepreneurial ecosystems by empowering private- rather than public-sector actors. Government-run incubators and venture funds have a mixed track record, and typically do no better than those from the private sector in picking winners and losers. Governments can support opportunities for international studies, rational investment, bankruptcy regulations and fundamental scientific research (along with the pathways to commercialization). These policies, more than direct intervention, make it more likely that the most important nodes will realize their entrepreneurial visions, find business success and stay engaged in the ecosystem as mentors, advisers and investors.