MS Thesis, Christian Jantzen

7/26/2019 MS Thesis, Christian Jantzen

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Abstract

Aarhus has many of the resources needed to become a thriving entrepreneurial hub: large marketleading companies, strong entrepreneurial spirit, highly skilled labour, and young creative minds.

However, the entrepreneurial ecosystem of Aarhus lacks the collaboration needed among its players tofacilitate an efficient use of these resources. In recent years, the field of entrepreneurial ecosystems has

received increasing attention from academics due to a surge in public interest. Most studies usequantitative methods to examine ecosystems attributes such as access to capital and new firm creation.

This study proposes a qualitative approach to explore the relationship between these and otherelements of entrepreneurial ecosystems. The research is based on 11 interviews with entrepreneurs,

venture capitalists and policy makers, accompanied by four months of participant observation in thefield. The study finds that the entrepreneurial ecosystem of Aarhus is fragmented. This, in turn, leads to

barriers to collaboration and the city employing valuable resources inefficiently. Among the main

causes of this fragmentation are factors such as a weak internal culture, zero-sum games, and lack ofentrepreneurial engagement. The study is unique because it condenses the current research knowledge

into seven propositions and uses the theory to analyse the entrepreneurial ecosystem of Aarhus.Moreover, the study compares existing findings to the ones made directly in the field. Based on the

analysis, the paper proposes an inside-out approach to building successful entrepreneurial ecosystems.The paper concludes by discussing its implications for both policy makers and scholars.

Acknowledgements

The willingness of 11 interviewees and dozens of other conversations carries a significant stake in thispaper. Two distinct people made this project possible. My supervisor Claus Thrane; without hisguidance and ideas, the study may well have evolved in an entirely different manner, and Lasse Chor;

his network and knowledge of the ecosystem are what made this thesis possible in the first place.

Keywords

Entrepreneurship, Economic Geography, Entrepreneurial Ecosystems, Economic Systems, RegionalEconomics, Networks, Startups, Clusters, Growth-Entrepreneurship


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Table of Contents

1. INTRODUCTION 41.1BACKGROUND 4

1.2CONTEXT 41.3PROBLEM STATEMENT 5

1.4MOTIVATION 5

2. LITERATURE REVIEW 6

2.1DEFINING THE ENTREPRENEUR 6

2.2.1ANOTE ON ENTREPRENEURSHIP "2.2THE EMERGENCE OF THE ENTREPRENEURIAL ECOSYSTEM 8

2.3UNWRAPPING THE ECOSYSTEM 10

2.3.1ENTREPRENEURS 112.3.2FINANCE 12#$%$%&'()'*+ ,#

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3. METHODOLOGY 17

3.1RESEARCH DESIGN 17

3.1.1A QUALITATIVE STUDY 173.2LITERATURE SEARCH 17

3.3DATA COLLECTION 183.3.1INTERVIEWS 183.3.2FIELDWORK 193.3.3DATA ANALYSIS 19

4. FINDINGS 20

4.1THE FRAGMENTED ECOSYSTEM 20

4.1.1LACK OF COMMUNITY VALUE 204.1.2SUB-CLUSTERS DOMINATE 214.2THE CAPITAL-ENTREPRENEURSHIP DEADLOCK 21

4.2.1LACK OF INVESTOR KNOWLEDGE 22

4.2.2LOW QUALITY OF STARTUPS 224.3THE POSITIVE ATTITUDE TOWARDS ENTREPRENEURS 234.3.1LARGE INFLOW OF NEW ENTREPRENEURS 234.3.2FEAR OF FAILURE 244.4THE ZERO-SUM GAMES 24

4.4.1AN ECOSYSTEM LED BY ITS SUPPORTERS 244.4.2ZERO-SUM GAMES BETWEEN COMMUNITY LEADERS 254.4.3LACK OF LATER STAGE SUPPORT 254.5THE STRONG ACCESS TO SKILLED LABOUR 26

4.5.1PRESENCE OF EARLY EMPLOYEES 264.5.2UTILISING SPECIALISED KNOWLEDGE 274.6THE SMALL HOME MARKET 27

4.6.1LACK OF GLOBAL OPPORTUNITIES 284.6.2EARLY ADAPTORS AND INCUMBENTS 28


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4.7THE HAND-OFF POLITICAL APPROACH 294.7.1A BOTTOM-UP ECOSYSTEM 294.7.2PUBLIC RESOURCES 29

5. ANALYSIS 31

5.1PROPOSITION 1(ENTREPRENEURS) 31

5.2PROPOSITION 2(FINANCE) 315.3PROPOSITION 3(CULTURE) 32

5.4PROPOSITION 4(SUPPORTS) 325.5PROPOSITION 5(HUMAN CAPITAL) 33

5.6PROPOSITION 6(MARKETS) 33

5.7PROPOSITION 7(POLICY) 34

6. DISCUSSION AND IMPLICATIONS 35

6.1BOOTSTRAPPING AN ECOSYSTEM 35

6.2THE BIG IDEA:AN INSIDE-OUT APPROACH 366.2.1PHASE 1:CONNECTING THE ENTREPRENEURS 366.2.2PHASE 2:THE EVOLVING NATURE OF CULTURE 376.2.3PHASE 3:THE INTER FIRM-BASED CLUSTER 376.2.4PHASE 4:THE EXTERNAL CLUSTER 376.2.5THE CYCLICAL NATURE 376.3IMPLICATIONS:AARHUS AND BEYOND 38

6.3.1FOR POLICY MAKERS 386.3.2FOR SCHOLARS 38

7. CONCLUSION 39

7.1LIMITATIONS 40

8. BIBLIOGRAPHY 41


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1. Introduction

1.1 Background

At the heart of the central region in Denmark lies the city of Aarhus, the subject of this study. Inpopular media, Aarhus is often hailed for its vibrancy and entrepreneurial spirit, an image whichcontinues to spur high growth for the citys popularity among the Danish population. With apopulation of roughly 300,000 people, Aarhus is the second largest city in the country. The universitypopulation of 50,000 has made the city the youngest in Denmark. Multinational companies such as

Arla, LEGO, Vestas, and Bestseller are all headquartered in the area, making the business ecosystemrich with opportunities. The questions being raised are: how is this fertile soil being used by the citysentrepreneurs? What does the entrepreneurial ecosystem around entrepreneurs look like in Aarhus?

These types of questions are what this study sets out to investigate to provide answers that will informthose developing the entrepreneurial ecosystem of Aarhus.

1.2 Context

With the recent growth in entrepreneurial activity around the world (Compass, 2015) the notion ofentrepreneurial ecosystems is increasingly becoming an area of interest for scholars. The amount ofresearch being published in this field is rapidly expanding. Moreover, the acknowledgement thatentrepreneurial ecosystems play by a different ruleset than traditional economic clusters is becomingprevalent among scholars (Saxenian, 1994; Storper, 1995; Storper, 1997). This body of research hasprovided us with initial insights about how ecosystems form and what matters in building andconstructing them. Work has emerged around areas like academia (Feldman, Francis, Bercovitz, 2005;

cs, Autio & Szerb, 2014), policy (Isenberg, 2010) and practical business (Feld, 2012; Hwang &

Horowitt, 2012) and viewpoints from various schools of thought have emerged (Spiegel, 2015). Thishas provided us with an initial setting for investigating ecosystems. With the continuous rise inpopularity among scholars, the field of research will likely sustain its advancements.

Despite the advances in knowledge on entrepreneurial ecosystems, there are still some caveats to benoted in current research. From an evolutionary perspective, we still know little about how ecosystemshave emerged (Feldman & Braunerhjelm, 2004). The lack of evolutionary knowledge makes thedevelopment of upcoming ecosystems a challenge. Replicating initiatives from the more developedecosystem (such as Silicon Valley) rarely provides a high return on investment (Lerner, 2009; Isenberg,

2010). Observing the evolution of young ecosystems is thus key to understanding the time dimensionin ecosystemic development, and inform the development of future ecosystems. Another challenge incurrent research is the understanding of connections and relationships inside ecosystems (Motoyama &

Watkins, 2014). Although it has been discovered that the anatomy of an ecosystem matters greatly(Feldman & Zoller, 2011) scholars have often defaulted to measuring ecosystems by their attributes.Examining the relationships between components of an entrepreneurial ecosystem can thus lead to agreater understanding of the underlying connections it contains. Through closing important gaps likethese, we could unlock the secrets of regions like Silicon Valley and Route 128.


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1.3 Problem Statement

Scholars do not yet have a great understanding of how entrepreneurial ecosystems are connected andevolve over time. This paper has been designed around a dynamic approach in which connectivity,relationships, and evolution are studied. Research has historically focused on top-tier regions likeSilicon Valley, meaning that second-tier regions like Aarhus are poorly understood by scholars (Mayer,2012). Analysing these second-tier regions is thus important to comprehend less developed regions.

The following research questions guide the study:

o How is the entrepreneurial ecosystem connected in Aarhus?o What governs the dynamics of the entrepreneurial ecosystem in Aarhus?

Through answering these questions, we would come closer to an explanation on how to develop theentrepreneurial ecosystems in second-tier regions like Aarhus. The paper should be able to provide an

in-depth understanding of the inner workings of the entrepreneurial ecosystem of Aarhus to facilitatemore informed decisions about developing it. The research will be limited to focus on theentrepreneurial ecosystem, rather than the entire business cluster. The reason for this is twofold; 1)focusing on the whole region is too time-consuming for the constraints of a thesis, and 2)entrepreneurial ecosystem are characterised by a significantly different ruleset (see 2.3).

1.4 Motivation

Aarhus is an interesting case due to its status as a less developed second-tier entrepreneurial region,thus resembling most cities. However, at first glance, the Aarhus case may seem uninteresting for most.

The city has no great history of entrepreneurship nor does it have a thriving entrepreneurial ecosystem.

However, this is how most regions look. The similarity to other areas is what makes Aarhus particularlyinteresting, especially since the findings could help guide decision makers in similar ecosystems. Aarhuscan be classified as a second-tier ecosystem given its lack of track record regarding entrepreneurialsuccess. Solely studying pioneering top-tier ecosystems will do little to inform researchers on theirevolution, as their current status is inherently dependent on their past. Conversely, in second-tierregions, we can observe the development over time and thus more easily understand why they developin certain ways. Moreover, Aarhus has an appropriate size for conducting a study like the one outlinedin this paper. With its relatively small size, Aarhus provides the perfect testing ground for research. It issimple to map, and the data needed to perform analytical work are readily obtained.

To answer both research questions adequately, this study sets out to examine the connections andrelationships between the attributes of the citys entrepreneurial ecosystem. The upcoming sectionreviews the current literature in the field and outlines a framework for understanding ecosystems. Thisknowledge base will then be condensed into seven unique propositions that provide insights on what

we currently know about entrepreneurial ecosystems. Following the literature review, a methodologysection will discuss the methods used and the qualitative nature of this study. The paper then presentsempirical evidence from the Aarhus ecosystem that will be analysed with regards to the previouslymentioned seven propositions. Based on this analysis, a reformulation of Isenbergs (2010) model willbe proposed, accompanied by a discussion of the models implications for policy makers and scholars.

The study concludes by answering the two research questions outlined in this introduction.


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2. Literature Review

In the literature on entrepreneurship there has been a considerable amount of definitions introduced byboth scholars and practitioners. Some of these definitions appear contradictory and may confuse theirreaders. This lack of consensus on the subject and need for common ground is widely acknowledged inthe field (Sexton & Smilor, 1986; Venkataraman, 1997; Shane & Venkataraman, 2000 and more). Thereason for this definition problem could be rooted in the heterogeneity associated withentrepreneurships nature. Entrepreneurship happens at every corner of the planet, from all walks oflife, and across every industry. Creating a definition that captures both Larry Page of Google and third-

world textile manufacturers is rather challenging. Similar problems arise when it comes toconceptualising the ecosystem in which entrepreneurs operate. The attempts of theorising areas of highentrepreneurial activity have been many, due to the job-creation effects and economic growthentrepreneurial ecosystems offer. However, over-engineering local ecosystems to resemble top-tier

ecosystems is highly inadvisable (Isenberg, 2010). Instead, one should understand the local ecosystemand embrace the unique conditions it holds within.

2.1. Defining the Entrepreneur

Numerous scholars have tasked themselves with defining entrepreneurship and the entrepreneur.Several schools of thought have emerged with varying definitions. In his 2010 paper, Gedeon arguesthat researchers have applied and created various sub-domains to address the complexity of definition.

These include Corporate Entrepreneurship, Social Entrepreneurship, Necessity Entrepreneurshipand Opportunity Entrepreneurship. Moreover, he notes that the schools of thought historically can be

divided into four major areas, namely: The Risk Theory of Profit, The Dynamic Theory of Profit, TheBehaviour School and The Traits School (For the full list of definitions sees Gedeons review, Table 1).

The origins of definitions stem from the mid-1700s and arguably entrepreneurship has changed sincethen. This change also becomes prevalent when examining the evolution of the definitions in academia.

The earliest definitions focus on the entrepreneur as the bearer of risk in the transition period betweeninputs and outputs. In bringing the production and price in line with the demand, she earns herentrepreneurial profits (Cantillon, 1755). Building on top of this first theory is numerous definitions allassuming risk to be at the centre of every act of entrepreneurship. Hawley (1907) for instance argues

that undertaking the proprietary risk is the essential variable for every entrepreneur, and this is whatsets her apart from managers implementing innovation into their firms. It is thus implied thatentrepreneurs inherently take risks to accomplish a potentially greater profit than could be gainedthrough employment. More modern definitions also put the profit-risk equation at the heart of whatentrepreneurship is (Hull & Bosley, 1980; Draheim, 1972). The main point of critique to the risk-centric view of entrepreneurship is that it fails to encapsulate the many branches of entrepreneurshipthat do not carry an equal amount of risk as opportunity-based entrepreneurship (i.e. non-profitentrepreneurship, intrapreneurship). Furthermore, it assumes that there is a static pool of opportunities.It matters less who exercise these opportunities, but rather which individual is willing to carry the risk.

With its roots in the neoclassical economic theories, the Schumpeterian view offers a much more

dynamic approach to entrepreneurship. In his opinion, entrepreneurs are the ones responsible for


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carrying out new combinations and form these into new enterprises. In doing so entrepreneurs causecreative destruction in markets (Schumpeter, 1934; 1942). The underlying assumption in the moredynamic views of entrepreneurship is the missing link in the market, a disequilibrium, andentrepreneurs are there to exploit the opportunities this generates. Similar patterns of thought can beseen in more recent definitions such as the one by Bygrave & Hofer (1991) arguing that entrepreneursbuild organisations to pursue their perception of opportunities. Whereas more dynamic approachoffers a broader and more complete view of the act of entrepreneurship, they fail to tell us much about

who the entrepreneur is and how she acts in the pursuit of opportunities.

In recent periods of research, psychology minded researchers have flocked to the field in the attempt todiscover a common set of characteristics governing whether an individual is entrepreneurial (e.g.McClelland, 1987; Shaver & Scott, 1991; Lee & Tsang, 2001). Although some studies have found aconnection between parental role models and a preference towards self-employment (Brockhaus &

Horwitz, 1986), these fail to predict the future entrepreneurial performance of an individual (Kolvereid& Isaksen, 2012). The underlying assumption that all entrepreneurs share common characteristics isvague and Gedeon (2010) notes studies seem to show that entrepreneurs are as different from oneanother as they are from non-entrepreneurs (p. 21). However, he does argue that there seems to beconsensus around the finding that entrepreneurs characteristics, goals, values, and culture can affectthe performance of new ventures.

In modern periods, the most quoted paper on entrepreneurial definitions is the 2000 article Thepromise of entrepreneurship as a field of research by Shane & Venkataraman. Their view onentrepreneurship is based on opportunities. It is argued that the nature of opportunity recognition

varies heavily depending on the eyes seeing it. An accountant will not see similar opportunities in spacediscovery as an aeronautical engineer and vice-versa. Furthermore, they argue that opportunityrecognition is not sufficient for defining an entrepreneur. The actual formation of a new venture iscritical to exploit the opportunities. Due to this inherent focus on opportunities, the above definition ofentrepreneurship is the one this study will be guided by going. The definition in itself is not a make-or-break point for the research in this paper. However, it is important to understanding which sort ofentrepreneurship (namely opportunity-based entrepreneurship) will be the focal point of the study.

2.1.1 A Note on Entrepreneurship

The research carried out in this paper will focus on growth-entrepreneurship. It is important tounderstand the distinction between the creation of growth ventures and self-employment/soleproprietorship. The two generate significantly different types of value and takes varying degrees of risk(Chatterji, Glaeser & Kerr, 2013). As Steve Blank argues 75% of small businesses are a success. On thecontrary to growth startups, where 75% fail (Blank, 2013). Isenberg (2011) states that sole-proprietorsare non-entrepreneurs. The reason for the distinction lies in value creation. Whereas sole-proprietorstransfer value they would have generated working for other firms, high-growth startups create large

value for societies. This creation happens through employment, taxation, reinvestment in communities,and role modelling. Furthermore, regarding entrepreneurial ecosystems, the ladder are the ones whobenefits from a thriving ecosystem.


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2.2 The Emergence of the Entrepreneurial Ecosystem

Prior to reviewing the entrepreneurial ecosystem, it is relevant to examine how the concept emergedand how similar theories have shaped todays understanding. Many related concepts have been devisedover the years, to explain why regional clusters develop and benefit firms. The earliest concept in thefield is the concept of agglomeration economics devised by economist Alfred Marshal. A theoryarguing that grouping together companies creates economies of scale and network effects, leading to acomparative advantage over competing regional economies (Marshal, 1890). In recent periods, theconcept of economic clusters has been popularised by economists Michael E. Porter and PaulKrugman. Cluster theory argues that grouping similar firms in tight geographical areas will lead to anincrease in competition, more rapid innovation, and the creation of new companies in the field.Economic regions thus create competitive advantages over other areas and continuously expand thatposition into the global economy (Porter, 1990; 1998; Krugman, 1991).

The notion of a business ecosystem is a new idea in the eyes of scientific research. Until the 1993,ecosystems have mainly been explained through geographical economics, agglomeration economics,and industrial clusters as described above (Mason & Brown, 2013). The scientific term is originallycrafted by James Moore in an article published in Harvard Business Review in 1993. Moore argued thatyoung firms do not evolve in a vacuum and that the relational structure of suppliers, customers, andpartners matters greatly for entrepreneurs. Businesses created under these conditions, have a higherchance of growing (Moore, 1993). In 1994 AnnaLee Saxenian published her highly influential book onregional advantages, comparing Bostons Route 128 and Silicon Valley. What Saxenian found was thatthe open and non-hierarchical culture of Silicon Valley had significantly affected the areas economic

boom in the technology sector. On the contrary, the much more firm-centric and closed Boston lackedbehind. Her conclusions were that a focus on regional innovation and local culture can spurconsiderable economic growth (Saxenian, 1994). Her work revitalised the interest in entrepreneurialecosystems. It expanded on the neo-classical economic notions of agglomeration economics throughthe integration of culture, structure, and sociology to the field. Moreover, it deepened the idea thateconomics alone is far from perfect when it comes to explaining the success of ecosystems.

Similar to the views proposed by Saxenian, Michael Storper devised his theories of territorialdevelopment in the global world. He argued that the view of traditional economic systems, where we

measure systems as their input and output, do not suffice. Instead, we should consider regional areas asnetworks governing human interactions through informal rules of the system. His theory highlights theimportance of local blocks in the globally networked world (Storper, 1995; 1997). Both Saxenian andStorper thus focused their research on uncovering these regions to understand better how theygenerated economic value through more than the sole presence of specific elements. The concept oflearning economies and knowledge regions similarly emerged during the same period. This approachhighlights the importance of establishing communities in which firms learn from each other.Furthermore, through engaging in the regional area surrounding them, they develop knowledge as aregional intangible asset that cannot be duplicated (Lundval & Johnson, 1994; Asheim, 1996; Morgan1997). Similar to the concept of learning economies, the theory of regional innovation systems (RIS)

was popularised during the same period of research. The RIS research takes a dynamic view of systems,


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through describing how knowledge flows via actors in a local cluster. The network is thus governed byinstitutions like universities, enterprises, and governments. These systems hold both innovation assetsand a culture of knowledge sharing between its actors. Accordingly, the theory also accounts for howlocal systems interact with both global networks of knowledge and markets (Cooke, 1992; Asheim &Ikasen, 2002). When comparing the research of RIS with modern research in entrepreneurialecosystems, we can draw significant parallels between the theories. Both fields rely on explaining theinteractions between the agents in a system and uses intangible assets such as culture, collaboration, andknowledge sharing as central themes of their theory. It could be argued that research in the are ofentrepreneurial ecosystems is an accurate approach concerning a subset of the RIS that deals withentrepreneurs. These similarities should become increasingly evident as we continue to uncover theentrepreneurial ecosystem.

In recent periods, the attention has shifted towards the softer aspects of the business ecosystems.

Storper and Venables (2002) introduced the concept of buzz in urban economies. They argue that theconnections created by face-to-face contact are vital in explaining the evolution of economic clusters.This interaction increases the strength of human relationships in the area and limits the possibleharmful effects of moral hazard. Related to buzz, Gertler (2003) argues that individuals gain deeperinsights into emerging technologies, cultural habits, and local knowledge flows from being there with aphysical presence in an area. How the buzz is transferred depends on the structure of the social ties inthe area. More tense structures can limit the information flow in a region and diminish the benefits ofpresence. On a different note, economist Richard Florida explains the emergence of innovationsystems through his idea of the creative class. He argues that 30% of the population belong to a classof creatives. Accumulating this sort of class in dense geographical areas will cause innovative clusters to

form. He highlights regions like Silicon Valley and Route 128 as having a dense population belongingto the creative class. Moreover, the theory argues that specific sectors (technology, design, R&D,among others) attract more creatives to an area than other industries (Florida, 2002).

The evolution of the field has seen a shift from general economic thinking towards a more anatomicalunderstanding of regions. Scholars have increasingly adopted an acknowledgement of the intangibleassets in an area. Research suggests that systems are more than the sum of its parts and the underlyingculture, relationships, and interconnectedness must be recognised. The perspective of theentrepreneurial ecosystem relies on research from previous fields, yet offers a view tailored towards

entrepreneurs, specifically those creating high-growth ventures. Isenberg (2011) devised a modeloutlining the factors present in an entrepreneurial ecosystem, consisting of six specific domainssurrounding entrepreneurs. Brad Feld developed four cornerstones of the ecosystem in his bookStartup Communities in which he outlined the story and key ingredients of the thriving ecosystem inBoulder, Colorado (Feld, 2012). Similarly, a significant amount of research has recently been conductedby the Kaufman Foundation to explain how ecosystems develop and what triggers success with localentrepreneurship. All of these and many others will be discussed in the upcoming section as theentrepreneurial ecosystem is reviewed in depth.


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2.3 Unwrapping the Entrepreneurial Ecosystem

Entrepreneurial ecosystems are distinct with unique components governing their behaviour. To fullygrasp the entrepreneurial ecosystem, an understanding of what it consists of must be established. Thisexplanation provides both a complete picture of what is referred to when discussing an entrepreneurialecosystem and a base of consensus for further analysis. Component-based models (see figure 1) aregreat at explaining features and mapping out players. Such models are ideal for building anunderstanding of the ecosystem, yet fall short when it comes to examining connections andrelationships between the players. Therefore, it is important to realise that a component-based modelcannot be used in a vacuum. Related theories can effectively be used in harmony with them to analysethe dynamics of an ecosystem.

Several attempts at devising an ecosystemic model have been conducted, and many have a clear set of

similarities. Spiegel (2015) has created a model in which he explains the relationship between threeprimary attributes of an ecosystem: material, social and cultural. The model has been applied to the casestudy of entrepreneurial ecosystems in Calgary and Waterloo, Canada. Similarly, Thomas Funke has

created an ecosystem-canvas formapping out the local players inan ecosystem. His model attemptsat building a shared understandingof the problems and opportunitiesin an entrepreneurial ecosystem.The work of Funke has since

been used to help inform thegrowth of the ecosystem in theGerman capital Berlin (Compass,2015). An array of lesser knowmodels has been developed toexplain ecosystems. However,these will not be taken intoconsideration by this paper.

The framework used for thepurpose of understanding entrepreneurial ecosystem in this study is highlighted above (figure 1).Originally developed by Daniel Isenberg (2010), the model is chosen due to its intuitive nature andencapsulation of all known domains in an ecosystem. As with all models, Isenbergs framework haspitfalls. It fails to deliver an explanation for why players need a presence, how they interact, and whichare more important. In spite of these pitfalls, the model is more than sufficient for creating a sharedreality of an entrepreneurial ecosystem and its attributes. Based on this understanding, one can theninvestigate dynamic factors such as networks, relationships, and connections to explore the interactionsbetween the different domains.

Figure 1: Daniel Isenbergs (2011) model of the Entrepreneurial Ecosystem


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In the upcoming section, the seven sub-sections representing the current state of research in Isenbergsdomains will be examined. It is crucial to understand each area in depth to conduct research that buildson the current understanding. From this examination, a series of propositions will be crafted. Eachproposition will serve as best practices knowledge within a particular domain of the entrepreneurialecosystem. The unique propositions can later be used to analyse how a particular local ecosystemperforms compared to the current state of research.

2.3.1 Entrepreneurs

At the heart of every ecosystem are its entrepreneurs and their startups. That is an undeniable fact as,without entrepreneurs no ecosystem would exist. What is being discussed, however, is whetherentrepreneurs also need to be at the centre of leading the ecosystem. Brad Feld argues that successfulecosystems must be led by its entrepreneurs as they work in networks, rather than hierarchies.Furthermore, he claims that leaders of an ecosystem need a long-term perspective (+20 years). Giving

shorter sighted players such as capitalists, politicians, and supporters the control can damage theecosystem, something Feld labels as feeder-control (Feld, 2012). Feldman et al. (2005) similarly arguethat entrepreneurs are the ones building the ecosystems around them. Entrepreneurs do not rely ongovernments and other supporters to create their ecosystem. They argue that the focus of governmentsinstead should revolve around creating new opportunities for entrepreneurs. Contrary to both thesearguments Isenberg (2014) states that entrepreneurs are not necessarily the drivers in an ecosystem.Isenberg stresses the importance of having a range of influencers and connectors which can drive theecosystem. He uses cases like Boston and Israel to exemplify ecosystems not led by its entrepreneurs.Isenberg does, however, agree entrepreneurs themselves will sniff out opportunities rather than beingforced towards them, and that ecosystems must evolve organically without being over-engineered

from the top-down.

A notion often believed by many is that the ultimate goal of an entrepreneurial ecosystem is to createmore entrepreneurs. That is in fact not the case. Shane (2008) notes Policy makers believe a dangerousmyth. They think that startup companies are a magic bullet that will transform depressed economicregions, generate innovation, create jobs, and conduct all sorts of other economic wizardry (p. 4). Heargues that the focus should be on expanding the successful businesses and help these create moregrowth opportunities. That is ultimately where the ecosystem supports entrepreneurs and startupcompanies. Entrepreneurs do not have large organisations to rely on for guidance, growth, and

learning. Instead, successful entrepreneurs can rely on each others expertise, networks, and knowledgefor growing their companies, thus creating similar benefits to those of large established enterprises(Aurswald, 2015). The end goal of an entrepreneurial community should thus be to ensure that thesuccessful entrepreneurs thrive there. Fostering a culture in which more people build mediocrecompanies eventually seizing to exist, is an inefficient strategy for policy makers wishing to createeconomic growth.

Proposition 1: Creating more startups has a diminishing effect and should not be the goal. Insteadconnecting the current entrepreneurs creates growth opportunities through learning.


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2.3.2 Finance

The role of risk capital plays a vital role in developing both successful businesses and the localentrepreneurial ecosystem. However, the area of venture capital (VC) also seems to be surrounded bycertain myths. A lack of risk capital is often cited as one of the most common needs in a startupecosystem by its entrepreneurs (Isenberg, 2014). However, in reality very few startups rely on riskcapital to succeed. In fact, only half of the world's VC activity is located outside of California (Hwang& Horowitt, 2012). Similarly, Feld (2012) argues that instead of the focus on creating VC activity in alocal community, it is much more efficient to concentrate on the community and building strongerstartups. Once this is achieved, investors will be attracted to the ecosystem. That is however not to saythat capital is not impactful in a local area. It has been observed that doubling a citys VC activity willlead to a 1% increase in employment (Samila & Sorensen 2011). What is important to note is that itshould not necessarily be the focus of community builders. VCs rely on a steady deal flow to keep theirbusinesses attractive and if communities fail at creating this flow, investing consistently in the

ecosystem will never be profitable. Lerner (2009) instead argues that local communities should focus onbuilding well-connected startups and lower the outside barriers for international capital to flow to theecosystem. Capital is often treated as a silver bullet by the players in an ecosystem, however, whatresearch reveals is that there is a range of factors needed for VC to be effective.

Proposition 2:Venture capital has a significant impact in an ecosystem. A pure focus on attractingcapital is inefficient, rather ecosystems should build more attractive firms for capitalists.

2.3.3 Culture

Culture seems to have played a vital role in the development of some of the worlds most important

entrepreneurial ecosystems (Saxenian, 1994). Also in modern literature is local entrepreneurship culturehighlighted as an outstanding explainer for a value generating ecosystem. In the sense ofentrepreneurial culture, two paths have been investigated: the general beliefs towards entrepreneurship(external) and the culture between players of an ecosystem (internal). An example of the ladder is

Aoyama (2009) arguing that local entrepreneurial culture shapes the norms and beliefs in an ecosystem,in turn influencing how local businesses are perceived. Similarly, Hwang & Horowitt (2012) argues thatactors engaging in an entrepreneurial ecosystem must be driven by extra-rational motivators. Ratherthan expecting a monetary compensation for their efforts, they should seek a return-on-involvementfrom the ecosystem. Having a strong culture between entrepreneurs and other players in an ecosystemseems to matter greatly. Feld (2012) mentions the give-before-you-get mentality in the Boulderecosystem and that the inclusiveness of the ecosystem has caused it to become an ever-expandingentity. Moreover, enhancing collaboration and eliminating the zero-sum games between entrepreneursis an important aspect, according to Feld. Another key finding is the importance of entrepreneurial-recycling. The term describes successful entrepreneurs who have exited their businesses giving back tothe ecosystem through reinvesting their wealth, knowledge, and experience to create newentrepreneurial activities (Mason and Harrison, 2006). Highlighting the local stories of these successfulentrepreneurs can also have a powerful effect in inspiring the upcoming entrepreneurs in an ecosystem(Feldman et al., 2005; Isenberg, 2010).


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In a broader sense, we find the general public opinion towards startup companies and entrepreneurshipas a career path. Kibler, Kautonen and Fink (2014) argue that a strong culture towards entrepreneurs inthe general public can be part of creating a normalised outlook towards entrepreneurship. This can, inturn, support entrepreneurial firms in their development. Several attempts to measure thisentrepreneurial-spirit have been conducted. Most notably by Achs, Autio and Szerb (2014) creatingthe Global Entrepreneurship and Development Index (GEDI). Their index is published once a year tomeasures a countrys entrepreneurial attributes and culture towards entrepreneurship. Similarly,

Armway (2015) has created an index comparing the entrepreneurial spirit across countries based on thedata from close to 50,000 respondents. Whereas measures like these are useful for assessing theexternal cultural norms and attracting new talent to an ecosystem, they are not tackling the internalsocial rules of an ecosystem, which create most value (Isenberg, 2010).

Proposition 3:External entrepreneurship-friendly culture is valuable, yet only to a certain extent.

An internal culture of collaboration is what generates the most value for ecosystems.

2.3.4 Supports

The support functions in an entrepreneurial ecosystem play a significant role in acting as connectors forother players. Besides the notion that modern infrastructure plays a critical role in entrepreneurialcommunities, researchers have found some of the highly significant support functions to be mentors,events, and support professions (legal, accounting, etc.). Mentors, especially, seem to play a crucial rolefor entrepreneurs and growth ventures. A startup being mentored by experienced entrepreneurs onaverage grows 3,5 times faster than those without mentors (Compass, 2015). The importance ofmentors is also featured in the case study of the St. Louis ecosystem conducted by Motoyama &

Watkins (2014). In this study, they argue that mentoring is the most critical ability of all supportorganisations. Their case study also highlights the importance of entrepreneurial events in whichentrepreneurs connect through entrepreneurial activities. Several practitioners have similarly stressedthe importance of events with 'entrepreneurial content' as a vital part of growing entrepreneurialcommunities. Engaging the local stack of entrepreneurs is, however, often an overlooked factor byscholars (Feld, 2012; Hwang & Horowitt, 2012). Lastly, it is important to note that the presence ofsupport professions in itself is not necessarily sufficient for an entrepreneurial ecosystem. These firmsneed to understand the nature of entrepreneurial ventures and pay their services forward for the chanceof a later gain. As Mason & Brown (2014) notes: Such firms are often willing to offer their support tostartups at no charge with the expectation that long-term business relationships will emerge in duecourse (p. 12).

Proposition 4: Support functions play a vital role in gluing together the community, mainly throughrelevant events, mentoring, and support.

2.3.5 Human Capital

The presence of cheap skilled labour is an essential part of a thriving ecosystem, as startups rely on thisresource to sustain their development. Great examples of this, is the impact Stanford University andMIT have had in Silicon Valley and Boston respectively. However, it also seems that an over-emphasis

on the importance of having proximity to a top university does not appear to be justified. There are


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countless examples of thriving ecosystems that do not possess this (Mason & Brown, 2013), and thehighest performing entrepreneurial workers are often around 40 years old (Chatterji, et. al.). Universitiesseem to play two major roles in a startup community. One role is that of creating new entrepreneurialopportunities through the commercialisation of research, for instance through technology transferprograms (TTP) (Shane, 2004). The second role is that of a talent-feeder to the ecosystem. Byproviding highly-skilled graduates that can be hired by the local business environment, these transferthe knowledge acquired at universities into the entrepreneurial ecosystem (Wolfe, 2005). Both roles arenecessary for an ecosystems talent-pool and continued growth. Lerner (2009) argued thatentrepreneurship is a global phenomenon and allowing startups to hire skilled labour outside ofnational boundaries is an effective way to attract human capital. Lerner does, however, not diminish theimportance of strong local education.

An often debated issue is the effectiveness of entrepreneurial education. It seems that this sort of

education has little to no significant effect on a startup ecosystem (Isenberg, 2014). Conversely, Feld(2012) argues that the main issue with this type of education is not necessarily its effectiveness. Hestates that the problem with this kind of teaching is that it is often located within business schools,rather than with actual inventors in computer science or engineering. Y-Combinator president, Sam

Altman, has equivalently presented the belief that roughly 33% of entrepreneurship can be taughtthrough education (Altman, 2014). In an increasingly technical world, there is no doubt that the needfor high-skilled labour is a critical component of any entrepreneurial ecosystem. The means forcultivating this type of resource is, however, not necessarily an internal ecosystemic process.

Proposition 5:The presence of cheap high-skilled labour is crucial to ecosystems. The flow of labour

can come from both internal and external sources.

2.3.6 Markets

Large established corporations are crucial for the entrepreneurial ecosystem to thrive (Feldman et al.,2005; Isenberg, 2013a; Ebdrup, 2013). Their ability to attract talent to a local area is unprecedented(Feldman dubbed them talent-magnets), and a startup ecosystem cannot exist without incumbentfirms. They cultivate an ecosystem through investments in new ventures, as customers, early adaptors,and potential partners. Furthermore, when big companies in a local area fails they give birth to a new

wave of young startup firms. These are competing over the lost market shares, a dynamic that has beendubbed whale-fall. Examples of these falls are Nokia, IBM, Blackberry and several other high-techfirms, giving way to new blood in an ecosystem (Isenberg, 2013). Despite this impact, its been arguedthat local policy makers should in turn favour the incumbent firms less and create opportunities forentrepreneurs (Aurswald, 2015). A complete neglect of incumbents, however, is by no meansfavourable for neither of the parties.

Another popular term that has risen in recent years is that of the dealmaker, and their importance hasbeen discovered in several ecosystems. The original notion was introduced by Feldman and Zoller(2011). They find strong evidence that having a high degree of dealmakers connecting the players in anecosystem is an efficient predictor of the growth of an ecosystem. Accordingly, Napier and Hansen

(2011) argue that having dealmakers act as the missing link between players, though creating


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connections across the ecosystem and towards new markets, is crucial for success. Both research paperspoint to the fact that the anatomy of a local ecosystem matters greatly and assuming that the presenceof all other actors is not sufficient. Without dealmakers, the crucial connections do not flow across thelocal ecosystem. Moreover, the impact of dealmakers proves why solely measuring the components ofan ecosystem does not suffice. Researchers must dig deeper to examine the connections between theplayers of an ecosystem to gain valuable insights into local conditions.

Proposition 6: Ecosystems need incumbent firms to thrive and cultivate new ventures. Dealmakers areessential to connect startups with opportunities across the ecosystem.

2.3.7 Policy

Several ideas have been formulated around the role of policy in entrepreneurial ecosystems, enough sothat policy makers should be able to make informed decisions about their efforts to enable ecosystems.

In his 2009 book The Boulevard of Broken Dreams, Harvard scholar Josh Lerner addresses a range ofreasons why government initiatives to boost startup activity fail. He argues that a top-down approachto ecosystems and lack of understanding of what entrepreneurship is, are the most common pitfalls forpolicy makers. Both observations are very much in line with the findings made by several otherresearchers (Isenberg, 2010; Feldman et al., 2005; Chatterji et al., 2013). He instead argues that localpolicy makers should be very patient in their efforts to promote entrepreneurship and consistentlymeasure what has an actual impact on the ecosystem. At the same time, they should remain flexibleenough to change the initiatives that are implemented (Lerner, 2009). Researchers thus seem to agreethat governments must acknowledge the complexity of entrepreneurial ecosystems and stop the pursuitof quick fixes economic growth. As Isenberg (2010) notes: Ironically, even Silicon Valley could not

become itself today even if it tried (p. 3).

When it comes to the role of national government, there seems to be somewhat more ambiguity amongresearchers. Often the argument is that governments should focus on creating framework conditionsfor entrepreneurship to thrive. However, research from both Denmark and The Netherlands suggeststhat despite creating some of the world's best conditions for new companies, this does not seem toaffect the amount of high-growth ventures established in the countries (Napier et al., 2013; Stam,2013). Policy makers must, therefore, define their role between the hands-off approach and the top-down approach. Mason and Brown (2014) have proposed four elements of the ecosystem which policymakers can target; entrepreneurial agents, entrepreneurial resources, connectors, and theentrepreneurial orientation. They conclude that the ultimate goal of policy makers should be to supportan ecosystem in which high-potential entrepreneurs are favoured, and not over-value their role in theecosystem. Furthermore, Motoyama & Wiens (2015) suggest that the main problems with currentpublic entrepreneurship policies are that policy makers will often try to fill out the gaps in the localmarketplace. Gap filling efforts often happen through the creation of public venture funds andincubators. However, research suggests that these initiatives are very ineffective. Instead, governmentsshould help foster learning and connections through initiatives like catalytic events. There is a clearconsensus in the current state of the research that governments should accept their supporting role inthe ecosystem. Rather than trying to lead it, they should seek to engage and grow organically with the

entrepreneurial ecosystem.


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Proposition 7:The bottom-up approach is essential for successful ecosystems. Policy makers shouldassume a role of supporters and connectors to private initiatives.

As noted at the beginning of the section component models have a range of limitations. However, itshould provide us with a common understanding of what an ecosystem is. An important aspect to noteis that ecosystems do not follow a standardised trend. Rather, each ecosystem develops under a set ofunique local conditions. It should thus not necessarily be the goal for community builders to acquire allof the above features, but to identify local strengths and specialise around these. As Feldman andBraunerhjelm (2004) argue, we still know little about how ecosystems historically have emerged and thetime dimension is often neglected. Trying to learn from an ecosystem that has developed over 50 yearsand applying that knowledge to younger systems is not efficient. This means that practical ecosystemicevolution is more a process of trial-and-error learning than it is finding the magical Silicon Valley silverbullets. As research progresses, a greater emphasis is thus needed towards examining relationships and

the evolution of an ecosystem.


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3. Methodology

Aarhus as a region is particularly interesting to study as it resembles most other ecosystems in theworld. Designing a study of complex phenomena like an entrepreneurial ecosystem is a challengingtask. This section will outline the research design, literature search, and the data collection process. Thestudy has been designed with the previous research in mind, to accommodate for some of the criticisedpitfalls. That should, in turn, contribute to closing some of the knowledge gaps that currently exists inthe field of research.

3.1 Research Design

This paper is set as a single case study of the entrepreneurial ecosystem in Aarhus, with research beingconducted over a four-month period from February to June, 2016. The study seeks to build an in-depth

picture of Aarhus and the dynamics existing inside its entrepreneurial ecosystem. The base design ofthe study is exploratory given little prior knowledge of the social phenomenon in the local context(Stebbins, 2001). The primary goal of the research is understanding the relationships between players ofthe ecosystem, rather than a descriptive approach towards components. Inductive reasoning will be themeans of reaching this goal. The inductive method is effective in this type of study, given that littleresearch has previously been published on the subject matter. Due to the time constraints, a cross-sectional study will be performed, with data collected in one-shot within four months. Ideally, thisstudy would have had a longitudinal component such that the entrepreneurial ecosystem could beobserved as an evolutionary process.

3.1.1 A Qualitative StudyThe study is put in a qualitative research frame due to its focus on connections and relationships. It canbe discussed whether quantitative methods would have been appropriate to make observations moremeasurable. However, given the narrow local context of this study, the qualitative methodology is thepreferred mode of research (Ragin, 2014). The qualitative approach should provide rich insights aboutthe entrepreneurial ecosystem of Aarhus, since the data are obtained from local entrepreneurs,capitalists, and policy makers. The data will be collected in a non-contrived setting, through interactions

with the natural environment (see section 3.3). In part, the study seeks to create grounded theory. Thestudy began solely with two research questions without preconceived notions of the ecosystem.

Through gathering and coding data to discover patterns, theory emerges. However, it can be discussedwhether the methodology of the study is in fact grounded theory. Due to its reliance on previousresearch from the field in analysing the Aarhus case, the method is not grounded theory in its purestform. Nonetheless, the study contains significant traits from grounded theory, enough justify the use ofthe methodology throughout the paper.

3.2 Literature Search

The sources for obtaining the literature needed for this study have been threefold. The starting pointfor the search was through reviewing the books Startup Communities (Feld, 2012) and The Rainforest

(Hwang & Horowitt, 2012). Moreover, literature was found through using two main academic


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databases; EBSCO and Google Scholar. The keywords used to gather literature were entrepreneurshipecosystem, startup ecosystem, entrepreneurial ecosystems and entrepreneurship. Given the smallsize of the field most literature references to similar papers, meaning that exploration through articlesand journals have been possible. The cornerstone papers for identifying the most relevant research inthe field have been: Entrepreneurial Ecosystems and Growth Oriented Leadership (Mason and Brown,2013), The Relational Organization of Entrepreneurial Ecosystems (Spiegel, 2015) and TheEntrepreneurship Ecosystem Strategy as a New Paradigm for Economic Policy (Isenberg, 2011). Lastly,

The Kaufmann Foundations online directory has been a significant source of literature, as thefoundation is the most active researchers of entrepreneurial ecosystems.

3.3 Data Collection

The foundation of this thesis is based on rich data from both qualitative interviews and participant

observation. A total of 11 interviews and a fieldwork log with 15 entries acts as the foundation foranalysis. Furthermore, the study relies on secondary data such as OECD and GEDI. This sectionoutlines how data has been collected, the design of the collection process, and the mode of analysis.

3.3.1 Interviews

Out of 16 interview requests, 11 requests were successful and resulted in interviews. The sample setrepresents a broad range of entrepreneurs differing in age, years of experience, and company size. Mostinterviewees have founded businesses in the technology sector and the interviews have been conducted

with an unstructured approach. The mix of participants is seven entrepreneurs, two capitalists, and twostakeholders. The unstructured method has been chosen to support the emergence of grounded theory.

Moreover, due to the exploratory nature of the study, the unstructured approach has been deemed themost appropriate with regards to the research questions. The table seen below contains an overview ofthe participants in the study:

Name Sort ID Organisation Firm Size Date

Thomas Laursen Entrepreneur I1 UNSILO 15-29 03/03/16

Morten Larsen Entrepreneur I2 Hungry.dk 15-29 08/03/16

Simon Staack Entrepreneur I3 Emplate 1-5 10/03/16

Alexander Christiansen Entrepreneur I4 KidUp 1-5 15/03/16Lars Stigel Investor I5 Capnova n.a 15/03/16

Rune Mai Entrepreneur I6 Spiir 6-14 16/03/16

Jan Beyer Srensen Official I7 Local Gov. n.a 16/03/16

Camilla H. Lastein Entrepreneur I8 Lix Technologies 6-14 16/03/16

Finn Sty Investor I9 Finn Sty n.a 17/03/16

Astrid H. Tyrsted Incubator I10 StartupLab n.a 21/03/16

Claus M. Christensen Entrepreneur I11 Clearhaus 15-29 21/03/16


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3.3.2 Fieldwork

The second core element of the data collection process is from of participant observation throughinvolvement with the organisation #AARSOME. The fieldwork log (Appendix 2) contains a series ofobservations gathered at events, meetings, and conversations. It consists of a thorough description ofthe observation and reflections on the takeaways. The time and date for these observations range fromthe 12th of January until the 23rd of May. None of the participants have been explicitly informed thatthe conversations would be used for research purposes, ensuring a natural setting.

3.3.3 Data Analysis

Upon ending the data collection process, the data have been organised and made ready for analysis.The method of analysis has followed Yins (2011) process of 1) compiling data, 2) disassembling data,3) reassembling data, 4) interpreting, and 5) concluding. The initial step of the process meant compilingthe data into different IDs and organising them in a spreadsheet (Appendix 4). The second phase

involved re-listening to interviews and re-reading the fieldwork log. From there, a series of statementshas been extracted, and patterns have been detected. A list of 220 quotes has been created to supporteach of the statements from the interviews. It could be discussed whether full transcription would havebeen appropriate. However, given the time constraint a larger sample size was prioritised. From therough dissemblance process, the data points and quotes have been ordered into six categories, usingIsenbergs (2011) framework.

The goal of the process has been to ensure the objectivity of the studys findings. Participantobservation is inherently subject to researcher bias, giving the high degree of personal involvement.Furthermore, the evaluation of the data presents another limitation, given that the assessment becomes

subject to the researchers worldview (Spradley, 1980). Member checking could have been used tovalidate the evaluation with the participants. However, this was deemed impossible due to the nature ofthe data collected (see Findings).


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4. Findings

The fourth section of the study will outline the findings made in the field over the four-month periodthis project has run. The results have been sorted into seven distinct domains, each concerned with aparticular area of the entrepreneurial ecosystem (as defined by Isenberg). This structure will ensure thatthe complete story of the entrepreneurial ecosystem in Aarhus is told. Given the earlier criticism ofmodels that are too component based, the approach of these findings has been different to most otherresearch. Rather than a static view where domains are measured with quantitative data, a dynamicapproach has been taken to discover connections between components of the ecosystem. A lot ofdirect quotes will be used in the findings, to ensure the objectivity of the research.

4.1 The Fragmented Ecosystem

An essential part of any ecosystem is the interplay and connectivity between its entrepreneurs. Asalready noted startups do not exist in a vacuum, as they depend on each other for sparring, network,learning, and growth. In Aarhus, however, it seems that startups do in fact live in a vacuum. Oneentrepreneur explained: There is not really a special Aarhus-spirit in the city (I11). The lack of anAarhus-spirit may have several root causes that can be explained through a variety of factors.Interestingly, the entrepreneurs who are actively engaging in smaller networks with their peers, takehigh value from their connections as noted by several: I like to meet with the other founders in ourCEO network, they understand my challenges and problems (I1) was observed by one. Anotherargued: Our founders club has been extremely valuable for both me as a person and my company(I6). If the local entrepreneurs are aware of the value arising from interacting with each other, the

question of why they are not engaging with the community is natural to ask. Another key point that canbe drawn from this observation is that entrepreneurs are not directly reluctant to engage with eachother and share knowledge.

4.1.1 Lack of Community Value

A story that repeated itself in the interviews is the lack of value the best entrepreneurs feel they aregaining from actively engaging with their community. One noted: I would like to engage and supportthe ecosystem, but we need more professionalism in our approach and initiatives (I2). The lack ofprofessionalism is evident in the form of the events initiated in the ecosystem. Most events are targeted

towards either inspiring more people to become an entrepreneur or towards helping new entrepreneurswith the basics of their business (F8). Only rarely do events which favour the high-potentials appear.That, in turn, makes it less attractive for the best entrepreneurs in the city to engage with thecommunity. For instance, one argued: Simply put, I just dont have the time to stand down at the localpub and drink beers with entrepreneurs that are completely new in the game (I1). The fragmentednature of the ecosystem is in fact quite surprising. Close to all interviewees pointed towards therelatively small size of Aarhus as a strength, meaning it is easier to get an overview of other relevantplayers in the ecosystem. The making of new connections would thus, logically, not be problematic.

The fact that most talented entrepreneurs have decided to abandon the ecosystem has a self-enforcing

effect on their willingness to participate. The less interaction there is from the best entrepreneurs in the


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ecosystem the less quality and professionalism new initiatives will have. A negative feedback loop hasbeen set in motion. A feedback loop that if continued, may threaten to harm the community spirit astime goes on. The lack of a community feeling may not necessarily directly impact the talentedentrepreneurs immediately. What it does for the community, however, is limit the ability of new,potentially gifted, entrepreneurs to gain access to peer learning through relationships with andmentorship from the best entrepreneurs. That dynamic, in turn, slows down the stream of new high-potential startups (F10). Uniting the ecosystem will be a point for discussion in the later sections.However, the early indicators of a thriving community are starting to emerge: The community woulddefinitely be more attractive if the initiatives were more ambitious. But its bubbling currently and thepossibilities of getting help are ever increasing (I8) was the comment of one entrepreneur. The idea ofan increasing inflow of new entrepreneurial activities was echoed in several interviews, in particular bythose closest to the community. With a growing ecosystem comes a vast amount of opportunities tocreate a more vibrant ecosystem, but the potential pitfall may be a further fragmentation between top-

tier entrepreneurs and the rest of the community.

4.1.2 Sub-Clusters Dominate

The entrepreneurial ecosystem of Aarhus holds a series of sub-clusters with individual cultures, norms,and efforts to connect their entrepreneurs. Most of these exist in the form of incubators ormembership organisations, such as Startup Lab, Culture Workspace, and Accelerace. In organisationslike these, young firms have the possibility to connect with peers and grow their businesses. Initiativeslike the ones mentioned above are all recent (within five years), thus supporting the hypothesis of agrowing community around Aarhus-based entrepreneurs. Despite the growth, a narrative often told

was the vacuum created by these organisations, with little interconnectivity between the initiatives (F6).

Having communities that are driven by incubators and accelerators brings a series of structuralproblems. Once the successful startups grow, they will eventually move to larger office spaces and thelearning opportunities for the next generation of startups become limited. That is particularly the case,as long as the growing startups are reluctant to recycle their knowledge back into the ecosystem. Asdescribed in detail earlier, this does not seem to be the case in Aarhus, thus limiting the interactions tobe purely between newer entrepreneurs.

4.2 The Capital-Entrepreneurship Deadlock

Every entrepreneur commented that the lack of capital was a problem for local entrepreneurs. Earlier itwas stated that almost all entrepreneurs will argue that their ecosystem lacks risk capital (Isenberg,2014), and the entrepreneurs of Aarhus do not differ. One entrepreneur noted Honestly; I think mostpeople wouldnt even know where to start looking for capital in Aarhus (I6). Several others echoedthis opinion with statements such as: There is virtually no access to capital on the local scene (I1) andVenture capital is not very accessible here (I4). One would have to be precocious about using thesestatements as facts, however, in the case of Aarhus, there is a strong case. Denmark as a country rankssixth out of the 34 OECD countries in terms of GDP per capita. Despite this, based on the amount of

venture capital invested in high-growth startups the county ranks 18th, below countries like Hungaryand Portugal. Compared to the neighbouring country Sweden, investors only put up one-third of the

capital for new ventures in the Danish ecosystem (OECD, 2015). Furthermore, a large degree of the


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existing venture capital flows through the more developed startup ecosystem in Copenhagen, givingAarhus based entrepreneurs a significant challenge in raising capital.

4.2.1 Lack of Investor Knowledge

Some of the strongest opinions were exercised when it came to the topic of the venture capital scene inAarhus. The venture capital environment is mainly dominated by public funds Capnova and Borean, aswell as a number of angel investors, more or less organised in syndicates. Most of the privateinvestment scene is, as mentioned previously, situated in the capital city Copenhagen. Six out of sevenentrepreneurs interviewed have closed investment rounds, only one of which was from the publicfunds. Despite this, most of the entrepreneurs seemed to have an opinion on especially the publicfunds, their terms, methods, and deal structure (F7). The prevailing narrative from entrepreneurs wasthat the funds take far too much equity, contribute with insufficient knowledge, and lack reasonableterms for entrepreneurs. For instance, one strongly noted:

I think most public funds have completely ridicules terms and they do not at all look at the biggerpicture or the future perspectives. They instead obsess about gaining control and return on investment,and I have heard several horror-stories from fellow entrepreneurs taking money from public funds. I

would never take money from a Danish VC. Honestly, I think they are kind of laughable (I8).

The stories about the local venture funds were central in most of the interviews with entrepreneurs.Another entrepreneur stated that: A lot of the public funds still have a hard time knowing anythingabout new business models. They are stuck in an industrialised way of thinking (I6) with reference tothe funds inability to understand the next generation of technology startups. The one entrepreneur

who took an investment from a public fund was satisfied with the relationship to his investors, yet stillnoted that The short runways from our investors made us take wrong decisions in the early stages(I1). The lack of knowledge concerned with venture financing contributes with further challenges tothe startup ecosystem of Aarhus. Given that investors in Aarhus lack investment knowledge, this willonly add to the depletion of resources for entrepreneurs in the city, resulting in more startups leavingthe city to find the needed resources elsewhere. Exactly that was the case with significant startups

JustEat (London) and Trustpilot (Copenhagen). The structural problem with the local public funds istheir objective in the market. Most are created with the classical economic incentive of making up formarket imperfections. This results in funds that cannot compete with private investors and are solelyallowed to invest in companies that are unable to raise money elsewhere in (I5). This dynamic skewsthe performance of the funds towards more negative results, as they are unable to invest in the best

ventures created in the ecosystem.

4.2.2 Low Quality of Startups

Investors argued that great investment cases are tough to stumble upon in Aarhus and thatentrepreneurs are the reason for the low amount of investments. One investor stated that I think thereis enough capital in the city. All entrepreneurs will tell you that there is no capital, in reality, there arenot enough good investment cases (I9). Several indicators in the ecosystem support the claim thatthere is a lack of high-potential startups (F13). A phrase often heard was that there seems to exist a

BMW-syndrome among Aarhus-based entrepreneurs, in which they stop growing their businesses


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once they are able to afford a BMW car. The notion of such a syndrome is, however, not shared by theentire ecosystem and one argued: I think that our low degree of growth companies has to do with asmall home-market, rather than the famous BMW-syndrome (I7). The lack of ambitious and high-quality startups where not only noticed by investors. It was noted numerously by fellow players withstatements like The mindset is not really to think big and people are often really short-sighted in theirthinking (I10) and People are not thinking big enough here. There is a tendency to sell companiesearly on, rather than taking the risk of going global yourself (I8). Often times the scenario above isportrayed as a chicken and egg problem in which a deadlock exists between the two parties relying oneach other (investors and entrepreneurs). Breaking this deadlock between investors and entrepreneurs

will be a point for discussion in the coming sections of the study.

4.3 The Positive Attitude towards Entrepreneurs

With the shifts that technology is creating in the world, an increasing number of new entrepreneurs areemerging to seek out opportunities (Compass, 2015). These shifts in the world of business are creatinga transition in the culture surrounding entrepreneurs, which is growing increasingly positive. Accordingto Armway (2015), Denmark rated as the world's most entrepreneurship-friendly country on the planet,based on a sample of 49,775 respondents in 44 countries. One entrepreneur stated that: The culturehas definitely changed. Being an entrepreneur is much more rock star like today. I never meet anyonethinking: what a fool (I1). Both observations contribute to the notion that the culture surrounding

Aarhus-based entrepreneurs is positive.

4.3.1 Large Inflow of New Entrepreneurs

With an increasingly positive culture towards entrepreneurship comes a significant inflow of newentrepreneurs seeking opportunities. Its becoming popular to be an entrepreneur in Aarhus, so theterm is a bit vague currently was the claim of one interviewee (I10). The great inflow of newentrepreneurs is largely visible throughout the city. New incubation spaces are opening at a rapid pace,and there are daily stories in the local media about recent innovations (F6). Aarhus is seeing atremendous amount of buzz around becoming an entrepreneur currently, a trend that may continue topick up momentum in coming years. One stated: Entrepreneurship, in general, has a tailwindcurrently. A great indicator of the culture is actually how the press talks about them. Compared to 10years ago you see way more stories today (I7). One could suspect that the impact this inflow has onthe ecosystem is one of dilution, as one entrepreneur noted: Entrepreneurs in Aarhus are put on apedestal, and its become a shortcut to becoming an expert (I3). Despite this, the concern of dilutionis not generally shared by the entrepreneurs in the community. Conversely, another argued that: Itsbecoming a modern thing to be an entrepreneur. Its a great thing to see so many new entrepreneurs.However, a lot of them will normally quit their companies once they meet challenges (I4).

Shane (2009) stated that creating more entrepreneurs are not necessarily a positive thing for societies.In the case of Aarhus and Denmark, the statement holds true. Although an increasing amount of

ventures are being formed by entrepreneurs, their ability to create high-growth firms is lacking behindsimilar economies. 26 out of the 5000 fastest growing companies in Europe are based in Denmark

(Inc., 2016). The small home market was previously argued to be the primary cause of this


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as incubators, consultants, and media, all players with a direct interest in the ecosystem. The dominanceby supporters directly impacts the ecosystem in a specific way. Most of the initiatives are created tomaximise the utility of a given support player, rather than benefit the entire community (F3). Theimpact of this dynamic can be observed in the type of events created in the city. Often, these arefocused on getting more people to start companies, hence more resources for consultants andincubators. As previously discussed, this dynamic is limiting the involvement from top-tierentrepreneurs. There is simply no value for them to gain in through engagement. Understanding thisdynamic in the ecosystem is critical, as throughout the section a series of toxic behaviours will beexplained. One can only understand how these are affecting the ecosystem, through realising that theentities displaying them are the community leaders rather than their rightful position as supporters tothe local entrepreneurs.

4.4.2 Zero-sum Games Between Community Leaders

The zero-sum behaviour became evident in multiple ways over the time this fieldwork took place.Examples were seen in cases where new initiatives threatened existing ones managed by the communityleaders (F2). Rather than welcoming an expansion of community initiatives to strengthen thedevelopment of the ecosystem, the players would seek to maintain their position as a local leader. Thisbehaviour has translated into a community where some new initiatives are being sabotaged behind thescenes, by the leaders pledging to move the ecosystem forward (F4). The ecosystem thus holds a fewtoxic entities that, perhaps unknowingly, are trying to control the ecosystem. The dynamic was notedseveral times during the interviews. One story was how incubation spaces would try to poach startupsand convince them to relocate between spaces (F6). Another noted: Particular people are yelling tooloudly in the community. There is often a personal agenda behind everything they do and a lot of the

most dominant people in the ecosystem rarely bring any real value (I10).

Despite the previously described Machiavellian behaviour, in recent years, a series of significant supportinitiatives have begun to emerge. Altruistic initiatives like Startup City (incubation), Culture Workspace(incubation) and #AARSOME (support organisation), were recent efforts all portrayed as providing

value to the community by entrepreneurs. Perhaps less surprisingly, these efforts have all been led byyounger newcomers to the community. One of these noted that: Support organisations give the city amore entrepreneurial mindset. We do, however, lack more people taking initiatives that stretch beyondjust helping people to get started with their new businesses (I4). Increasing the amount of initiatives

similar to these, where relationships and connections are optimised, will strengthen the ecosystem ofAarhus and move the community towards collaboration.

4.4.3 Lack of Later Stage Support

The city has a tendency to favour early stage initiatives that rarely helps startups build and scale theirbusinesses. As noted earlier, this results in successful startups ceasing to engage with the community,causing little or no interaction between experienced and upcoming entrepreneurs (F10). Anotherdimension to the type of initiatives created is that most of the support functions have no experience

with later-stage activities. A recurring theme, for instance, is how the city is lacking an acceleratorprogramme for young startups. However, those proposing the idea have little entrepreneurial

experience and would thus create little value in such a setting. There are a lot of good intentions from


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several community leaders. However, the resources that are needed to lead the ecosystem towards scaleand growth are not activated currently. As long as this resource-base goes unutilised, strengthening thestartup initiatives in the city will continue to be a challenge. Finding ways to employ more experiencedresources is thus critical to creating a stronger connection between the entrepreneurs of the ecosystem.

It could be argued that the ecosystem has excellent infrastructure for starting companies. There areseveral offerings to get support from business professionals such as lawyers, accountants andconsultants. Many incubation spaces will have these either as a permanent part of their network oroffer workshops and sparring opportunities. Access to this kind of resources provides tremendous

value for early stage startups. However, their value diminishes over time, as companies grow. As oneentrepreneur argued: There are plenty of people who are willing to help. However, it is important tocut to the bone. I dont need a consultant to tell me what a business model canvas is; I would ratherhave access to state-of-the-art research from the University (I3). Additionally, one entrepreneur stated

that I think today a lot of people know how to start their company, but they need a market, finance,and human capital (I6). Another issue raised by more seasoned entrepreneurs was the lack ofinfrastructure, specifically that the city needs an international airport. In essence, there exists a great

variety of initiatives for starting new businesses in Aarhus. However, when it comes to helpingentrepreneurs scale and grow their startups, the selection is more limited.

4.5 The Strong Access to Skilled Labour

An essential part of the firm formation process is the access to cheap skilled labour. In an increasinglytechnological world, the sort of work required is becoming more specialised. The access to these kinds

of skills can drive the growth of a startup, yet solely having access to the labour is not sufficient. Ifstartups cannot attract skilled employees and compete with larger companies, the access to labourmatters less. At the heart of Aarhus lay the local university with approximately 50,000 students, makingup a significant part of the citys total population. The university provides the business ecosystem ingeneral with a large inflow of both talented students and cutting-edge research, thus making it aninvaluable asset for the city. The question is then, how the entrepreneurial ecosystem benefits from thistalent mass and whether this resource is employed to its fullest by the ecosystem.

4.5.1 Presence of Early Employees

Getting the first employees to join a startup is often challenging, given the insecurity associated withyoung firms. The great stream of talents that annually pour into the ecosystem makes convincing theearliest employees to join startups less challenging in Aarhus. Often the earliest hires will be newlygraduated students willing to run the risk of joining early-stage companies, and the young employeesplay a vital role for entrepreneurs. Our biggest strength in Aarhus is the young people of the city.

There is plenty of talent in town, and there is gold on every street corner (I7) was noted by one.Another argued that I believe that if you are attractive as a company, you can get good people. Ivenever had trouble hiring good people in Aarhus (I2). Continuous investments in education andattracting talented students is thus an integral part of supporting the startup ecosystem. However, asargued by Chatterji, Glaeser and Kerr (2013), the best entrepreneurial workers are typically around 40

years old. What this means is that lots of students will not suffice when accelerating the growth of an


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early-stage firm. Aarhus based startups thus need to be attractive for more experienced entrepreneurialworkers as well.

In getting these more experienced workers to join the citys startups, the challenges start to emerge.Aarhus is not known for its startup culture, and a large part of the highly educated workforce isaccessed in competition with multinational powerhouses such as Arla, Bestseller, Lego, and Vestas.

That gives the entrepreneurs particular challenges when it comes to hiring more experiencedemployees. Several entrepreneurs addressed the problem: University graduates are easy to find,however, more senior people have a hard time taking the plunge into a startup. Its going in the rightdirection, but its still hard (I1) was the statement of one. Another argued: Its easy enough to findnewly graduated employees. Finding more senior hires are much more difficult (I4). As observedearlier, the culture around startups in Aarhus is somewhat risk-averse, and the fear of failing outweighsthe upside of joining a startup (F13). One entrepreneur furthermore noted that the competition from

the more cultivated startup ecosystem in Copenhagen made hiring in Aarhus a difficult task: It hasbeen harder the last couple of years since everyone believes Copenhagen is the place for startups (I6).The challenges in Aarhus make an interesting observation. Individually, entrepreneurial firms havetrouble competing with established organisations. However, thriving entrepreneurial communitiesbecome assets that startups can leverage in their search for more experienced employees.

4.5.2 Utilising Specialised Knowledge

A point continuously mentioned was the interplay between startups and research institutions in the city.The issue that was brought up is the gap that exists between entrepreneurs and the cutting-edgeresearch at Aarhus University that could be used to build stronger businesses. One argued that It

would be perfect for the local startups if we could use the harder and less accessible knowledge in thecommunity (I6) referring to the research being conducted at the university. Employing the resourcesof the university is crucial in a city like Aarhus, where a large part of the citys activities is built aroundits research institution. The university may have the potential to help develop startups through utilisingthe research for commercial purposes to grow their businesses. The act of pairing the presence of theuniversitys activities with the local startup scene has a series of intriguing prospects. Ecosystemsshould be built around local conditions and the human capital in Aarhus is one of the most valuableresources that the city contains. Finding ways to utilise this resource fully will be essential. Hiring high-performing employees is an issue for most companies and something we know that most entrepreneurs

will mention as a limitation. However, in a city which is so heavily dominated by a large university,Aarhus-based startups have a better ground for attracting skilled labour than almost anywhere else inthe world. If the citys entrepreneurial community can find ways of recombining the human capital, thiscould spur significant advances in growth for its startups.

4.6 The Small Home Market

With a population of approximately six million people, the home-market upon which Aarhus basedstartups operate is small in size. The small market forces companies with a desire to grow rapidly toeither make activities global from the offset or relocate their business abroad for scaling. This challenge

is one that every country with a small home market needs to address. The amount of Danish growth


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companies underperforms the Scandinavian neighbouring countries with similar home markets when itcomes to scaling companies internationally. The question is whether we can explain this dynamicthrough examining the entrepreneurial ecosystem of Aarhus. Moreover, we must investigate how localmarkets are enabling growth and whether larger corporations play an active role in the entrepreneurialecosystem of Aarhus.

4.6.1 Lack of Global Opportunities

Markets are always complicated to explain; as different markets may have varying dynamics. There aregeneral trends that can be observed in the markets surrounding Aarhus. One significant challenge

Aarhus based entrepreneurs are facing is global scaling. As one noted: Its extremely limited what youcan do in the local market, and I would love to know more about how to enter international markets.Investors are saying: 'First you take the U.K and then the U.S,' but how do you do that? (I8). Thequote encapsulates some of the pains local entrepreneurs are challenged with, especially those who are

successful. The phrase Denmark is just a test market before going global is often heard in theecosystem, yet the local knowledge on global scaling is limited from both entrepreneurs, advisors,investors, and supporters (F13). There are plenty of entrepreneurs in the community who have createdinternational businesses. However, common for most of them is a reliance on their internal network toscale their startups. For instance, one successful entrepreneur argued: The largest challenge is to findthe first few great people abroad. I didnt need to be connected when starting in other countries; I hadan internal network helping me out (I2). Despite the most successful entrepreneurs being able to scaletheir businesses through experience and networks, most founders in the city do not have this option.

The lack of internal networks combined with a disconnected ecosystem makes the creation of theseinternational connections more challenging for most entrepreneurs.

4.6.2 Early Adaptors and Incumbents

Another crucial aspect of market attractiveness is the access to early adopting customers and largemultinational companies. Attracting early consumers in the Danish market was mentioned as achallenge by some entrepreneurs. For instance, one noted: The Danish market sounds great on papergiven that everyone has a tonne of devices. However, Danes are somewhat late followers making ithard to scale and test new products (I4). These market realities may be hindering the growth ofstartups, only strengthening the argument of a need for faster internationalisation. However, assessingthe adoption rate of new products, of course, comes down to more than just interviews, as this is

influenced by a number of factors, such as market-fit, product quality, etc.

The incumbent companies in the city have long been disconnected from the startup ecosystem.However, in recent years, it seems that they are starting to embrace the new wave of local startups.

Accelerator programmes, incubation environments, and collaboration with startups are becomingincreasingly typical for large organisations and one entrepreneur explained: Large companies wereopen to trying out our products and giving us an early proof of concept (I1). Despite early signs ofengagement from incumbent firms, their overall connection to the ecosystem is still limited. One noted:Large companies in Aarhus are rather incumbent and not very entrepreneurial in their mindset (I1).Many of the companies are willing to engage and collaborate with startups, mainly to a point where it

does not require larger investments. Their efforts are usually depended on specific employees driving


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their engagement (F11). However, initiatives like Danish Food Cluster and Stibo Accelerator showearly signs of interest in entrepreneurs from incumbent firms in Aarhus. Getting large corporations toengage more with the startups comp is a vital resource for the ecosystem and one of the areas holdingthe most significant potential for the city and its future entrepreneurs.

4.7 The Hands-off Political Approach

In the Aarhus case, the local government has chosen a hands-off approach to entrepreneurship. Muchof the public activity in the area is driven by the Danish state. As already noted, state driven investmentfunds, public grants, and an extended range of sparring opportunities are available for entrepreneurs inthe ecosystem. Most of these initiatives are run with little involvement from the private sector. Themunicipalities director of business development noted that: Luckily, we are getting to a point wherethe startup ecosystem is starting to drive itself. Our reason for existing is purely based on market

imperf

MS Thesis, Christian Jantzen

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