The "transitional" in "transitional economies" refers to:
A community, or group of communities whose collective economic livelihoods are intimately connected, facing difficult economic challenges as a result of pre-existing variables inhibiting the rapid evolution from matured (out-dated) modes of industry to higher-value product and service creation.
Transitional economies are wrought with symptoms such as underfunded budgets, mounting debt, brain drain of young people, deteriorating educational infrastructure and support, and local scandal. Pre-existing variables can include "old boy" networks with a vested interest in maintaining the status quo, poorly structured local policies and regulations (both spoken and unspoken), disillusioned younger populations, and the lack of visionary leaders with the wherewithal to mobilize and activate change across diverse segments of community stakeholders.
Northeast Pennsylvania (Greater Scranton, Wilkes-Barre, Hazelton, and the Poconos area) provides an ideal Tier 2 transitional community case study. I was curious to further explore these issues, so I attended The Conference--a gathering for small businesses, non-profits, executives, and civic leaders—this past April in Wilkes-Barre, PA. In a panel session with the head of a local business incubator, I posed the question: Why lean so heavily on the prospects of venture capital as a solution to economic development in NEPA? Shouldn’t the focus be centered on graduating existing companies from incubators as opposed to starting and investing in VC funds? (It was a loaded, but honest question. The panelist's response was ambiguous and centered on "innovation." It left me and several audience members seriously questioning the merits of using a VC-driven approach in a community like NEPA.)
Why all this talk about VC in NEPA when funding isn't the key driver of early-stage innovation in a regional economy in search of a new economic identity? Innovation should support a future of prosperity. Operating under a pre-bubble approach to innovation—“If there is funding, innovation will come,”—is toxic. The venture capital model only works for certain business models—those capable of generating double- and triple-digit returns in 2-5 years for investors. Is NEPA trying to spur high-tech web and biotech startups? Historically, this is not the region’s strength. Can you farm innovation by offering tax incentives and subsidies to attract these types of companies to the area? Courting is too expensive for small regional economies and retardant to re-igniting NEPA’s economic vitality. Let's stop trying to attract companies to the area; the future economic livelihood must be developed from within.
Seasoned venture capital investors are deal-makers, not silver bullets to local innovation. Legitimate VCs pour through hundreds of business plans and meet with tens of entrepreneurs a month only to toss, ignore, or back-burner 99%. If a firm funds one or two deals a year, it's considered a success. And the colloquial statistic, 9 out of 10 VC portfolio companies fail to produce needle-moving returns, certainly doesn’t seem to deliver the scale of impact our local economic development organizations should be hunting.
Given the very real systemic, operational, and managerial risks assumed by VCs, many firms breed exit-seeking opportunists thriving on cash-starving companies (allows for optimal deal terms), proven leadership (decreases oversight risks), fortified competitive advantages (minimizes competitive risks), rapidly scalable model (addresses market risk), and potential triple-digit returns. Venture capital certainly has a role in spurring innovation, but rarely, if ever, should it be viewed as a community-building strategy.
Let's use British business-thinker Max McKeown’s simple definition of “innovation” – new stuff that is made useful.
A litmus test of innovation is the culture of failure, success, and active mentorship that embraces Founders. Founders are the resourceful geeks, innovators, artists, entrepreneurs, techies, hipsters, engineers, and performers with a vision and the wherewithal to pursue meaningful, mission-driven work. Local Founders have been neglected for too long in NEPA and they need a hug.
Potential Founders exist within NEPA’s creative economy. However, the level of apathy, disillusionment, and dissatisfaction within the local startup scene is prohibitive. Without amplification, screams from the local creatives fade into distant echoes. The current entrepreneurial ecosystem scatters NEPA’s future Founders. Relocation from NEPA to NYC/Philly/DC is the modus operandi of high-potential 20-something Founders. There must be a mainstream-to-grassroots lifeline of support to Founders (sure funding, but more importantly outreach and dedicated mentorship from fellow local Founders) that connects the well-suited office buildings to the hipster counter-culture of the cafes, spanning from the artists to the high-tech entrepreneurs. There must be a culture that fosters collaboration and exploration. NEPA and transitional Tier 2 & 3 communities in general must become a springboard, not a barrier, for young people pursuing their ideas.
It takes surprisingly little capital to make this a reality.
So, why all this talk about VC in NEPA when funding is only a part of the equation for a regional economy in search of a new economic identity?
Transitional Tier 2 & 3 economies may have a precedence of collusion, lack of transparency, back-door dealings, piping scandals, mistrust, and corrupt politics that rival some emerging markets. Here is a telling metric: Divide the number of public officials that are either incarcerated or on trial by the number of funded innovative companies. This is discouraging to all parties up- and downstream. We have created a “cover-my-own-ass” local economy. Conclusion: It's the culture that's lacking, not the funding!
But if you listened to regional figureheads at The Conference, you probably left thinking just the opposite. Having worked on (and invested in) early-stage companies, I can tell you first-hand the current approach being promulgated in NEPA is dangerous. I don't believe malicious intentions are at fault, more likely individuals’ vested interests. Whoever "owns" the fund, "owns" that particular flavor of innovation. In a transitional economy such as NEPA, this approach debilitates other forms of potential innovation. Current leadership will maintain a pervasive illusion of a monopoly on regional innovation efforts, thus discouraging potential Founders. Incestual politics could ensure this veneer of power stays within the hungry mouths of the few. This death spiral precedent must be crushed immediately.
But first, why is it that people think more capital = more/better innovation?
To sprinkle money to sprout innovation when the soil needs tilling and plowing is poor farming and an inefficient allocation of resources. Take time to strategically invest small amounts capital to cultivate the existing grassroots network of innovation and yield a harvest above and beyond the short-sighted returns and incalculable negative externalities from dangling carrots to drive large companies to the area.
Look within, young Jedi economy; the force is in us. The big companies transitional Tier 2 & 3 economies woo, by design, are profit-maximizing whores (not always a bad thing in a capitalistic economy), which is precisely the reason they consider relocating in the first place. This is not a sustainable strategy. It undermines the tried-and-true kinematics of innovation. It is too costly to spend your time hoarding capital. (Sidenote: Business plan competitions are not the solution either.) Focus internally. Let homegrown innovation be the gravity that attracts capital into the area. Self-driven innovation is sustainable. We need to invest our time, energy, and scarce funding to reverse the lack of a vibrant, welcoming, and supportive local startup culture.
For NEPA, VC is not The Way to economic enlightenment, at least not yet. The infrastructure is not here to support it, yet. In investment banking, you learn that well-managed, innovative, cash-generating, scalable companies and organizations (anywhere) can always find funding.
In most startup scenarios, you do not need large infusions of private equity or
venture capital. There is an even smaller chance that you actually secure investment fro
But all critique with no way forward is boring and too easy. One way we at Young Impact are addressing the transitional Tier 2 & 3 conundrum is the StartUp Scramble. The StartUp Scramble NEPA Challenge, a weekend-long startup retreat for anyone (geeks, artists, entrepreneurs, activists, innovators, techies, and creatives) starting anything (new venture, performance, company, organization, initiative, project, association, platform, art, operation, or group), takes place July 30th-August 1st at the Kania School of Management at the University of Scranton. More details can be found on Facebook In a future post, we’ll explore other ways we can begin building and mobilizing a stronger startup movement in transitional economies. For now, I’ve posted articles below to add color to the dialogue:
Investing for Competitive Regions: New
Competing With Others, Rather Than Ourselves
Startups: Poverty is Underrated. Be Glad That You’re Not Rich
Looking For Jobs, Innovation And Culture? Try These 10 Cities
Boulder, Colo., a Magnet for High-Tech Start-Ups
Kicking Venture Capital When It's Down
McKinsey Global Institute: How to Compete and Grow: A Sector Guide to Policy
