This manuscript was submitted as a master thesis on December 5, 2016 to obtain the degree of Master of Arts in Next Media (M.A.) at the Faculty of Engineering and Computer Science at Hamburg University of Applied Sciences in Hamburg, Germany.

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Preface

The thesis was created in late 2016 and builds on research done at the Business School of University of New South Wales (UNSW) in Sydney, Australia, in early 2016 during an academic research exchange program. Over a period of several months the regional entrepreneurial ecosystem and the public policy agenda towards entrepreneurship in Sydney were analyzed. This case study led to a subsequent publication as a peer-reviewed article at the ACERE conference in Melbourne in February 2017{1} and was later issued as an updated version in 2018 as part of the SEAANZ Research Book Series{2}. The thesis manuscript takes the research to Hamburg, Germany, to evaluate regional entrepreneurship policy in greater detail.

I want to thank both Dr. Susanne Draheim and Prof. Dr. Kai von Luck who supervised the thesis and field research.

Autor: Moritz Philip Recke

Topic: Hamburg’s Entrepreneurial Ecosystem And The Next Media Initiative - Public Policy Towards Entrepreneurship

Keywords: accelerator, angel, angel investor, business angel, company builder, economic policy, economy, ecosystem, entrepreneur, entrepreneurship, entrepreneurial ecosystem, employment, entrepreneurship, financing, founder, Germany, growth, high-growth, high-growth venture, Hamburg, incubator, innovation, innovation policy, investment, investor, job creation, location development, media, metrics, next media, policy, public policy, regional development, startup, startup economy, startup ecosystem, venture capital, vc

Abstract:

Entrepreneurship, more specifically the formation of tech startups, is often attributed with economic growth and job creation due to their high-growth potential by many policy makers around the world. This link is widely debated in scientific literature, which does not necessarily seem to inform public policy. The City of Hamburg established a Next Media Initiative, focusing on media and IT industry related innovation to nurture the future development of this industry cluster with the help of high-growth ventures. This master thesis explores the composition of Hamburg's entrepreneurial ecosystem, local government efforts to facilitate its development and the (dis)connect between municipal innovation policy and academic literature.

Autor: Moritz Philip Recke

Thema: Hamburg’s Startup-Ökosystem und die Next Media Initiative - Politik für Unternehmertum

Stichworte: Accelerator, Angel, Angel Investor, Arbeitsplätze, Beschäftigung, Business Angel, Deutschland, Entrepreneure, Entrepreneurship, Finanzierung, Gründer, Hamburg, Inkubator, Innovation, Innovationspolitik, Investition, Investor, Kapital, Medien, Metrik, Next Media, Ökosystem, Politik, Regionale Entwicklung, Risiko, Risikokapital, Skalierung, Standortpolitik, Startup, Startup-Ökosysteme, Unternehmer, Unternehmertum, Wachstum, Wirtschaft, Wirtschaftspolitik

Kurzzusammenfassung:

Unternehmertum (Entrepreneurship), insbesondere die Gründung von Tech Startups, wird aufgrund des enormen Wachstumspotentials solcher Unternehmen von vielen Politikern weltweit oft mit Wirtschaftswachstum und der Schaffung von Arbeitsplätzen verbunden. Diese Verknüpfung wird in der wissenschaftlichen Literatur umfassend diskutiert, wissenschaftliche Erkenntnisse fließen aber nicht zwingend in die Entwicklung politischer Strategien zur Wirtschaftsförderung ein. Die Freie und Hansestadt Hamburg hat eine Next Media Initiative gegründet, welche mit einem starken Fokus auf die Medien- und IT-Branche die Entwicklung dieses Wirtschafts-Clusters fördert, insbesondere mit Hilfe von Startups mit hohem Wachstumspotential (high-growth ventures). Diese Masterarbeit untersucht die Zusammensetzung des Startup-Ökosystems (entrepreneurial ecosystem) in Hamburg, die Bemühungen der lokalen Verwaltung dessen Entwicklung zu fördern und Deckung der regionalen Innovationspolitik mit wissenschaftlicher Literatur.

1 Abstract

Introduction:

The City of Hamburg established a Next Media Initiative - nextMedia.Hamburg - in 2014, focusing on media/IT industry related innovation to nurture the future development of this industry cluster with the help of high growth ventures.

This master thesis explores the composition of Hamburg's entrepreneurial ecosystem, local government efforts to facilitate its development and the (dis)connect between municipal innovation policy and academic literature.

Method:

With its nextMedia.Hamburg initiative within the media/IT industry cluster, the City of Hamburg aims to support the entrepreneurial ecosystem as well as the media and creative industry in general. In various official documents and on a dedicated nextMedia.Hamburg website the efforts to nurture innovation, to create more ventures and maintain Hamburg as a media industry capital are published.

This thesis will introduce the local entrepreneurial ecosystem along with its most relevant stakeholders and review the regional innovation strategy and nextMedia.Hamburg initiative in 3 parts.

Taking into consideration the current setup of Hamburg’s entrepreneurial ecosystem and its various entities, the first part will summarise salient points of the innovation strategy outlined by the City of Hamburg as well as key elements of the nextMedia.Hamburg initiative’s activities by which the regional government aims to attain its goals.

The second part takes relevant aspects of the outlined strategy and activities and reviews them from an academic perspective, considering arguments presented by Shane (2009), Audio et al. (2007), Morris et al. (2015), and Brown & Mawson (2015).

The third part draws on research findings to classify the outlined policy agenda and its measures to support the entrepreneurial ecosystem in Hamburg and discusses them in regards to Regional Innovation Systems (RIS) analysed by Moutinho et al. (2015) and the Triple Helix Approach (Ranga and Etzkowitz 2016) to asses their possible impact on the entrepreneurial ecosystem in Hamburg.

Results:

This thesis makes 4 contributions. Foremost, several disconnects between local entrepreneurship policy in Hamburg and academic literature on entrepreneurship policy are explored by analysing both the regional innovation strategy and nextMedia.Hamburg initiative's documents and activities. Additionally it is shown how relevant scientific findings have not been taken into consideration despite collaboration with research facilities at local universities. Third, it is illustrated how the activities to nurture entrepreneurial activity by the nextMedia.Hamburg initiative lack a connection to actionable metrics to successfully measure results and adapt for change. As a fourth contribution, this thesis draws on common challenges in developing regional entrepreneurship policy and proposes closer collaboration between the research community, industry and policy makers.

2 Introduction & Definitions

This thesis explores complex interrelations between startups, the entrepreneurial ecosystem in which they exist and regional public policy towards entrepreneurship in Hamburg, Germany. Although certain aspects discussed throughout the document about startups and entrepreneurial ecosystems might be generic and could be applied to any other region in the world, the analysis of Hamburg’s regional public policy towards entrepreneurship is location specific, regardless of similarities to other regions.

For the purpose of the research in this thesis it is prudent to introduce and define specific terms in regards to their usage throughout the document. Especially in the context of entrepreneurship and innovative potentials of high-growth ventures, many different definitions for terms such as startups or ecosystems are used and in fact often misused as buzzwords in various types of publications, ranging from scientific journals, newspaper articles and publicly available government documents to tv documentations and internet publications of any kind.

Since some of the terms are relatively new in terms of academic research, the attempted definitions are meant to be up-to-date at the time of the thesis’ composition and in accordance with current academic literature.

2.1 Startup

The term “startup” is used generically as a synonym for entrepreneurial activities across many forms of businesses and especially to describe young, new businesses ever since the dot-com-bubble in 2000 (Recke 2015). In recent years, startups have been attributed with being a driving force behind economic growth and job creation by many policy makers and industry advocates around the world (Reynolds et al. 2000, Shane 2009, Kane 2010). Therefore a differentiated approach to classify entrepreneurial activities is necessary.

To distinguish between regular entrepreneurial activities and those that might in fact entail a potential for the creation of economic wealth, a startup can be defined as an innovative company, trying to develop a scalable business model that can be replicated repeatedly (Blank 2012). In addition these startups can be characterised by being young businesses (Brettel et al. 2008), having low initial capital funds and taking high risks to establish their innovative business ideas (Graham 2005).

Most importantly, these businesses are growth oriented (Warmer & Weber 2014) and are often called high-growth ventures (Shane 2009, Morris et al. 2015, Mason & Brown 2013). High-growth ventures are very different from any other kind of newly founded firm, since their chance of failing is about 75% even if its business idea, team and product are good enough to secure venture capital financing (Blank 2013).

Therefore a scalable business model is the most relevant aspect for growth oriented startups and needs to be verified in regards to its potential for success at the lowest financial expense (Kollmann 2011). This is a challenging process during which the startup, its structure and financial needs change dramatically and repeatedly. During its lifetime a startup requires very different types of funding, ranging from initial seed capital funding to high volume venture capital financing (Ripsas 1997).

Startup Stages

Startups may evolve very dynamically and can be categorised in 5 distinct stages of development according to “Deutscher Startup Monitor”, initiated by the Bundesverband Deutsche Startups (e.V.). These stages are “seed stage”, “startup stage”, “growth stage”, “later stage” and “steady stage” (Ripsas & Tröger 2014).

The “seed stage” is a conceptional stage in which the startup is experimenting with its product and business model to reach a market fit. Within the “startup stage” the company has a working product and generates first revenues or signs up users. In the “growth stage” the company is characterised by a matured product and high growth (also known as scaling). During the “later stage” the business might plan to sell or aim for a stock exchange IPO whereas the “steady stage” is a phase of stagnation (Kohlmann 2011, Ripsas 1997). Additionally there are an “idea stage” and a “co-founder stage” (see fig. 1) described by Vital (2013), which are important to note in order to understand concepts behind startup funding (Recke 2015).

Figure 1: How Startup Funding Works

Startup Funding

During its distinct stages of development, a startup requires different types of funding, which can ruffly be divided in “seed round”, “angel round” and “series A round” (Graham 2005). There are other terms used for these stages, e.g. by Vital (2013) and there might be additional rounds of funding, still they all fit into one of the above categories.

Smallest rounds of funding before an actual “seed sound” might be called “pre-seed investment” or something similar. Although they might have impact on equity shares within the business and are of relevance for startup formation, they are not that different from a “seed round” in regards to requirements in terms of scope, size and volume of the investment. Therefore, Graham (2005) does not distinguish between different types of “seed round” funding and considers them structurally comparable.

A “seed round“ can be attributed to the “seed stage” of a startup and might come from the entrepreneurs’ private funds or investors such as family & friends, public subsidies or as part of an accelerator program. The investment usually ranges between a 5-digit and small 6-digit sum and involves giving small equity shares to the investors (Recke 2015). Accelerator programs are the most professional forms of investments at this stage. They provide initial funding during a timed program of usually 3-6 months to prepare the startup for the next round of financing in exchange for 3-10% in equity. In addition they provide access to office space, coaching, industry insights and workshops for the founding team. Lastly they expect the startup to leave the accelerator after finishing the program, hopefully with prospects of additional funding (Altman 2014, Springer 2015, NMA 2016).

An other alternative is receiving subsidies or investments from public funds. These can be divided in grants, aids, investments and non-cash benefits and are available on regional, national and international levels (FÜR-GRÜNDER.DE 2015). These types of funding will be discussed in greater detail later on.

If a startup manages to obtain a “seed round”, it leaves the “idea stage” and “co-founder stage” mentioned by Vital (2013) and evolves into the “seed stage” in terms of the “Deutsche Startup Monitor” (Ripsas & Tröger 2014).

An “angel round” is typically linked to the “startup stage” and is usually done with business angels (also called angel investors), who invest their own money, or seed funding companies, often called incubators or company builders. It involves higher investment sums in the 6-digit to low 7-digit range and larger equity shares for the investors (Recke 2015). Incubators can be compared with accelerators but in addition to higher investments and larger equity shares, they also provide more operational support in building up the company, e.g. with dedicated development or marketing teams. Startups remain within an incubator for longer periods of time, ranging from 1 to 5 years (Cohen 2013).

Additional means of financing during this stage might be crowd-funding and crowd-investing through various national or international platforms which became quite popular over the past years (Recke 2015).

If a startup manages to obtain an “angel round”, it evolves to the “startup stage” in terms of the “Deutsche Startup Monitor” (Ripsas & Tröger 2014).

A “series A round” or any subsequent investment round after that (called “series B round”, “series C round” etc.) is meant for the “growth stage” during which the startup scales towards an potential acquisition or an IPO. It is typically done by specialised venture capital investors, investing large amounts of money through their managed funds and acquiring equity shares of usually more than 33% to accelerate the growth of the business (Recke 2015).

If growth criteria are met, subsequent rounds of funding might be attributed to the “later stage” and can involve large private equity firms or investment banks in addition to venture capital investors. The ultimate goal in terms of funding is an acquisition or an IPO, often referred to as an Exit, during which the shareholders can liquidate their equity shares at an ideally lucrative price (Graham 2005).

The “steady stage” as a stage of stagnation is not discussed in more detail since it does not entail firm growth and usually no substantial additional rounds of funding.

Startup Lifecycle

The lifecycle of a startup with high-growth potential can be described as a process of continuously changing shareholder structure (see fig. 2). This is necessary to facilitate the distinct kinds of investments at different levels of risk to achieve the exponential growth (scaling) characteristic for a high-growth startup (Recke 2015).

Figure 2: Startup funding at different stages of development

Taking all these aspects into consideration, startups - or more specifically high-growth ventures - are characterized as follows in regards to this thesis:

- newly established businesses with high-growth potential

- trying to establish an innovative, scalable business model

- having low initial capital, requiring high risk financing to scale

2.2 Entrepreneurial Ecosystem

The entrepreneurial ecosystem (often called startup ecosystem) approach is a rather recent way to describe interrelations between startup communities and regional parameters. One of the first researchers in this field is Isenberg (2010), who stipulated that specific measures to foster the local startup economy must be aligned to regional characteristics in order to be successful. The approach focuses on high-growth ventures, meaning startups with potential for innovation, economic growth and job creation (Mason & Brown 2014, World Economic Forum 2013), therefore excluding any and all other kinds of entrepreneurship, such as self employment or regular small business formations.

The main concept behind this approach draws on entrepreneurial activities being linked to a community of different actors, strongly emphasising social contexts to hinder or foster entrepreneurship (Stam 2015, Ács et al. 2014). Although no evidence for improved success rates of each startup within a thriving entrepreneurial ecosystems can be found, a healthy ecosystem arguably produces larger numbers of startups and therefore larger numbers of successful high-growth ventures in that region (Compass 2015). As many other concepts - e.g. clusters or innovation systems - the entrepreneurial ecosystem approach focuses on the external business environment to describe the ecosystem and the relationships and dependencies within it. The main difference to other theories is the emphasis on the entrepreneur itself rather than the enterprise. Entrepreneurs are considered leading players in keeping the system alive and thriving (Stam 2015).

This fact leads to a different role for the government - compared to other policy concepts - as a “feeder” to the ecosystem, leaving the “leader” role to the private entrepreneur (Feld 2012).

Entrepreneurial Ecosystem Attributes

According to Feld (2012) there are nine core attributes that are relevant to the success of an entrepreneurial ecosystem. These attributes focus on (social) interactions between different stakeholders in the ecosystem and their access to relevant resources, such as funding, workforce and services as well as an enabling role of the government (see table 1).

There are other sources indicating distinct factors as relevant for an entrepreneurial ecosystem. The World Economic Forum (2013) lists 8 pillars for a thriving ecosystem which also require resources such as workforce, funding and services, formal (government) and informal institutions (culture) as well as access to local and international markets (see table 2).

All these principles emphasise local parameters and focus on a (social) bottom-up process. This is in line with Isenberg’s (2010) Harvard Business Review article “How to start an entrepreneurial revolution”, where he stipulates 9 principles to achieve “venture creation”, and the “creation of an ecosystem”:

1 “Stop Emulating Silicon Valley”: While undoubtedly being the “gold standard” entrepreneurial ecosystem, it is deemed not to be a valid guide for any other region in the world. Unique circumstances led to the emergence of today’s Silicon Valley which can not be replicated in the eyes of Isenberg.

2 “Shape the Ecosystem Around Local Conditions.”: Isenberg strongly recommends that governments should tailor towards their unique local economic dimensions, resources and culture.
3 “Engage the Private Sector from the Start.”: Only the private sector has the appropriate motivation to develop a profit-driven market in the eyes of Isenberg. Subsequently, structural barriers should be reduced in order to formulate entrepreneurship-friendly programs.
4 “Favor the High Potentials.”: In order to be effective, Isenberg calls for programs focussing on ambitious, high-growth oriented entrepreneurs with large potential markets instead of spreading resources among quantities of ventures.
5 “Get a Big Win on the Board.”: Isenbergs required thriving ventures to be highly visible in media and literature since visible success stories reduce entrance barriers and fear of risks for aspiring entrepreneurs.
6 “Tackle Cultural Change Head-On.”: Since changing ingrained culture is deemed very difficult, altering social norms about entrepreneurship, failure and risk taking is considered as very important and should be on everyone's agenda in the eyes of Isenberg.
7 “Stress the Roots.”: Isenberg recommends that governments should grant money carefully to ensure toughness and resourcefulness among the entrepreneurs and should not flood high potential entrepreneurs with easy money.
8 “Don’t Overengineer Clusters; Help Them Grow Organically.“: In Isenberg’s opinion, there is little evidence that governments can successfully breed industry clusters. Governments should therefore build on existing clusters and nurture those that form independently from government action.
9 “Reform Legal, Bureaucratic, and Regulatory Frameworks.”: Lastly Isenberg calls for administrative and legal barriers to new venture formation to be removed. Additionally bankruptcy should be decriminalised, shareholders should be shielded from creditors and it should be easy for entrepreneurs to start over in his view.

Unfortunately, scientific literature only provides long lists of relevant factors for thriving entrepreneurial ecosystems, without elaborating on their distinct effects on entrepreneurship and their independent influence on economic growth (Stam 2015), the key focus and reason behind the entrepreneurial ecosystem approach.

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Hamburg's Entrepreneurial Ecosystem And The Next Media Initiative