Entrepreneurship is back to cities, the evidence is clear, the action is no longer in tech clusters, but in the middle of cities such as New York, San Francisco, Boston, Austin, London or Berlin.
The ones that are not fully convinced of this transformation may take a look at the data. Martin Prosperity Institute – whose director is Richard Florida – released last year a study called “Startup City” that shows this trend of venture capital shifting from clusters in the outskirts of cities to metro areas.
Even further, together with seemingly traditional startups that Florida describes in his study we can find new forms and spaces of work such as co-working spaces, new ways of learning like Developer Bootcamps and MOOCs and new forms of incubation such as accelerators. All these three elements configure not only a changing landscape for the startup process and the policies that support it but also challenge our understanding of the concept of work.
Industry clusters were introduced in the 90’s by Michael Porter in his book The Competitive Advantage of Nations. Since then, the idea of cluster has dominated policy. Do these new developments mean that the concept of clusters and its resulting policies are now outdated? And if so, what are the implications?
In order to answer these questions we need to understand, at least partially, the roots and the whys of the changes that we are witnessing.
Some light in this understanding can come from a pretty old paper – 1937 – of Ronald Coase: The Nature of the Firm. Yes, I know the title doesn’t say much but there Coase asks an intriguing question: if markets are so efficient in assigning tasks and distributing work, why do we have firms anyway? Firms, in contrast to markets, are hierarchical, centralised structures, just on the opposite end of this invisible hand that efficiently manages to assign work and resources. Why do firms exist?
For answering this question Coase introduced the notion of transaction costs. If the cost of the agreement and the interaction – the transaction – is higher than the value added by the work to be done, then firms will be chosen instead of markets. It is a simple, but powerful idea. A hierarchical structure such as firms has very low transaction costs, allowing to organize production more efficiently than markets when the added value of each transaction is low.
What happened with Internet is that these transaction costs plummeted and suddenly you can commission and organise work in a extremely distributed way with a very low cost. This process is at the root of the dismantling of firms. Now, in many activities there is no need to have an internal capacity anymore because you can easily contract these activities in the market at the cost of a mail, a whatsapp or even less.
These dissolving of the boundaries of the firm has multiple implications for work. Chances are that if you are for the sake of the example, a designer or a software developer, you won’t work inside a firm but as an independent professional and you will work in a co-working space or from your home office. These are some of the new forms of work and entrepreneurship that are appearing. New forms that sharply contrast with our understanding and our expectations of work.
So, are clusters over? Completely outdated?
First we have to point out that not all industries are the same and not all go at the same pace. Traditional industries, traditional startups do exist and there old policies apply fully. However, the action neither the future are probably there.
The first thing that changed dramatically is the objective of the policies that we are discussing, the organization. Before the objective was a startup that through different rounds of financing will become a full fledge company. Now we can find a variety of forms that range from single professionals to virtual organisations or small partnerships. Companies with otherwise a huge impact such as whatsapp have been functioning with no more than 16 people for years. Therefore the objective should no longer be make companies grow in terms of headcount and competencies. Not even in terms of marketshare, small organisations of professionals will remain small or evolve to virtual organisations but most of them won’t evolve to large companies.
These novel types of structures arising demand new support actions such as access to co-working spaces, meetups and places of encounter both physical and virtual where communities can endow themselves of an structure.
Three main characteristics of clusters changed dramatically in this new world: capacity building, connectivity and specialisation.
In clusters, capacity building that could nurture companies in terms of talent, was a key element. Universities where the ones who provide this capacity with direct ties to companies. Now, many of these companies and participants in the ecosystem are going to seek these capacities outside and not inside. Capacity building is therefore still important but its nature changed and together with it university placement moved from targeting almost exclusively companies to a mix that includes entrepreneurial ventures.
Connectivity materialized in roads and infrastructures able to support the transit of goods. Now this connectivity is still important but has to support the flow of information inside and outside the ecosystem, enabling and powering virtual organisations.
Finally, clusters focused on specialisation, gained mass through the accumulation of similar industries sharing partners, facilities and ideas. All this has become more transversal. Specialisation is no longer needed to benefit from the sharing process inside ecosystems. And on the other hand, the dissolving boundaries of firms together with the increasing need of new and diverse ideas in order to compete on innovation also benefits from the interaction of a diversity of partners.
In general interaction is on the rise while capacity building is still there but changed their forms and objectives while the need of capital is orders of magnitude lower because of cloud computing and digital technologies now widely available.
I like to call these new entrepreneurs citypreneurs because this name identifies and resonates with many of the characteristics that make them different. Firstly, its about cities, city centres and all that this implies in terms of connection and networking. Secondly it’s about individual entrepreneurs and not startups that want to become large companies,but many times virtual companies or at least organisations that take full advantage of opportunities wherever they are.
Entrepreneurship came back to cities, but it is not the same that we had in clusters. Needs are different and different are the ways that we can support and make it grow. If the old mantra was defined by the access to capital the new one revolves about attracting and maintaining talent and being connected to be able to materialise it.