Entrepreneurial Ecosystems: Which Comes First, Entrepreneurs or Capital? Classic Chicken and Egg Dilemma

Yesterday at Excelerate Labs Demo Day, Brad Feld gave the keynote. He talked about start up entrepreneurial ecosystems and brought up some fantastic points. He has a new book out that talks about building a start up community.

Brad speaks from experience, because he was one of the foundational builders for the start up culture in Boulder, Colorado. It wasn’t happenstance. It was a purpose driven effort.

Can Chicago do it too? Sure, we can. But it’s not easy. It also isn’t random. It has to be a purpose driven effort that comes from individuals acting in their own self interests.

The first thing you need is networks. Networks are absolutely critical when it comes to entrepreneurship. All kinds of them. Capital, customer, mentorship. They all should be built to support the entrepreneur. Successful entrepreneurs are the key to sustaining ecosystems. When Brad talks about networks, it reminds me of a trading pit.

Trading pits on the floors of exchanges were big entrepreneurial networks. Everyone was welcome. Information flow was pretty democratic. Everyone had a chance to access the market. Not everyone was successful. Ironically, the stats on traders and the stats on start up companies are about the same. For every Facebook, how many start ups fail miserably? For every “Facebook” type trader, how many traders failed? That mentality can be easily transferred to a public entrepreneurial forum. At Hyde Park Angels, our membership process and the way we interact is similar to the local commodity exchanges.

Viscerally, I understand exactly what Brad is talking about. However, I have a slight difference of opinion on who leads the ecosystem.

Brad makes the point that entrepreneurs lead. Entrepreneurs are the creative genius behind the ideas and companies that get started. I would agree, once an ecosystem starts, entrepreneurs lead and the rest of us follow. However, in the initial phase, capital leads.

In addition to that, there is a tremendous learning curve. Becoming a cog in the ecosystem is an educational process. Don’t underestimate that very high hurdle. Because of the tremendous risks of investment, many people don’t want to attempt to get down that curve. On the other hand, many people are secure in their jobs-and don’t want to risk failure as an entrepreneur. But taking risk and learning from failure are two of integral characteristics of a successful ecosystem.

Back when the internet was being built, companies were being formed here but couldn’t find any capital to sustain themselves. There weren’t any networks of mentors or customers either-but the money wasn’t here. The midwestern psyche didn’t accept failure, and refused to take the kind of risks that these internet trailblazers wanted us to assume. They left. They went to the coasts.

If you expect start up companies to start up, you have to establish local capital networks for them to tap into so they can get going. Without that pool of water to drink and refresh themselves at, there is no ecosystem. The capital has to be accessible, and as easy to get at as a river in the forest.

However, Brad makes a very deep point that many ecosystems want to build walls around themselves. There is a strong human tendency to want to do that. Even trading pits used to do that. Traders wouldn’t tell anyone that they were making money. They didn’t want more traders coming into the pit and competing. Capital providers for start ups can be like that. If there is good deal flow, they don’t talk about it for fear of competing. If there is less capital around, they can have a stronger influence on price, and direction.

Once the kindling on the campfire starts to spark, it’s important to make that fire as big as you possibly can. This is where you need connectors that freely make associations that are meaningful happen. These people become the nervous system of the network. That’s why walls will smother the fire.

If we contemplate the Chicago entrepreneurial ecosystem, we have had various points where a fire has been kindled. In the nineties, it was government lead. It failed. In the early 2000’s, it was sort of a public-private partnership. That failed. It wasn’t until 2007 that we had an organized network that was free to use and tap into that the system started to spark.

But in Chicago, we have a historical bias to building walls. We need to fight that bias. When I go to events, I see the same people again and again. It’s great that people are engaging and staying engaged. How do we make sure the door is open to everyone? How do we attract everyone?

It’s up to those in the ecosystem to broadcast that the door is wide open-but more importantly it’s very important for those that are considered leaders in that ecosystem to not just pay lip service to open doors but to actively be accessible to everyone. Whether it’s in person, email, Twitter, Facebook it doesn’t matter. Just as long as people know where to find you and they know they will get a response if they reach out and touch you.

The other thing Chicago needs to do is get the corporate community engaged. Via organizations like the Economic Club, the social clubs, the Executives Club, they need to start spreading the news. Entrepreneurs need to figure out an easy “API” like connector for corporate types to plug into. The start up culture and corporate culture are not two peas in a pod. Flip flops and wing tips don’t naturally go together. But, because corporations can be awesome customers, connectors, and add a lot to entrepreneurial networks, it’s up to entrepreneurs to figure out how to engage them.

For years, we have said it, Chicago could be one of the outstanding start up cultures in the entire world. It has a great location. It has great universities. It has great research in all kinds of areas. It has great people. It has one 800 pound gorilla in Groupon ($GRPN). There is plenty of stuff to do when an entrepreneur needs downtime. There is momentum. Companies get built in Chicago.

But Chicago is second tier. It’s Silicon Valley, Boston, then the rest. Chicago needs to keep the momentum so that it places itself solidly in third place behind the other two areas. Then, see if it can expand using it’s resources to grow larger.

Great ecosystems start with a pool of capital. Once entrepreneurs drink from that pool, and become successful, they can lead.