The case for local government involvement in innovation hubs

New innovation hubs are popping up across Australia, and local governments are getting involved. In some cases they support existing hubs in their regions. In other cases local governments fund the hubs outright, with examples in Queensland, Australia being Ipswich City Council’s Fire Station 101, Noosa Shire Council’s Peregian Hub, Brisbane City Council’s The Capital, Rockhampton Regional Council’s Smart Hub, and the upcoming Logan City Council’s Kingston Butter Factory.

Innovation hubs provide functions in an innovation ecosystem, including: access to networks, mentoring, skills development, technical infrastructure, community, and in many cases physical work space. Beyond the real estate play of co-working desk hire, an innovation hub provides programs, events, and mentoring to help entrepreneurs build, grow, and scale their business. These functions require multiple investment channels or revenue streams to be sustainable.

So out of everyone who might invest in a hub, why would a local government be involved?

The illusion and reality of local entrepreneurial impact

In his 2008 book The Illusions of Entrepreneurship, author and professor Scott A. Shane provided a critical view of popular beliefs underpinning entrepreneurial activity. He acknowledged the popular sentiment that to many people entrepreneurship means growth. Shane highlights statements that attributes nearly 70 percent economic growth to entrepreneurial activity and positive correlations between new firm formation and GDP growth. But Shane also counters these positions with challenging research highlighting a low sustainability of jobs, lower number of jobs, and low quality of jobs produced by startups.

So which is it? Is support for entrepreneurs and startups a detriment to a local community? Or is entrepreneur development the only option to ensure long-term economic sustainability? As with most black and white arguments, the true path is a little of both and extremes of neither.

Local governments considering whether to invest in an innovation hub often lead with a desire for jobs. Stating that jobs from local entrepreneurship, startups, and indeed the innovation ecosystem overall is an illusion pours cold water on innovation investment. More risk-averse local governments may take a “wait-and-see” attitude, committing scarce resources towards more traditional economic development activities that have a proven track record, even though recent history may be showing diminishing returns from those investments.

The response to a critical view would be common sense to those taking a long-term view of their region. In their 2015 response to Shane’s book, researchers Morris, Neumeyer, and Kuratko counter with seven arguments that outline how the economic benefits from entrepreneurial activity can be realised from a portfolio approach. They highlight how specific promises from an innovation hub include:

Reduced cost to start and close a new business from the support and skills building provided
Increased productivity from shared resources and networks
Increased job creation from supply chain effects from new enterprises
Testing job creation in diverse industry sectors to diversify a region’s sector portfolio
Building capability in the overall ecosystem of investors, service providers, policy makers, education providers, researchers, and other entrepreneurs
Unintentional opportunities that emerge from positive failures
Other human capital benefits building resilience in individuals beyond the economic outcome of a specific startup venture

The authors propose that a portfolio approach is necessary to realise these benefits from investment into innovation ecosystems. Four types of startups to be included in this portfolio approach include:

Survival: Provide basic subsistence for the entrepreneur and his/her family;
Lifestyle ventures: Provide a relatively stable income stream for owners based on a workable business model and a maintenance approach to management;
Managed growth ventures: Have a workable business model and seek stable growth over time, as reflected in occasional new product launches, periodic entry into new markets, steady expansion of facilities, locations, and staff, and development of a strong local and regional brand.
Aggressive / high growth ventures: Referred to as gazelles, these are often technology-based ventures with strong innovation capabilities that seek exponential growth and are funded by equity capital.

The emphasis on innovation hubs is often on high growth firms and rightly so, but not at the expense of others. This portfolio approach creates a pathway, building initial skills and providing pathways out of unemployment with survival companies, through to expansion and scale at later growth ventures.

While an innovation hub does not exclusively focus on high growth firms, an innovation hub must be designed to accommodate high growth firms. Otherwise it will not differentiate from any other traditional business or community centre. Innovation hubs provide opportunities to build capability and awareness to understand what it means to develop high growth firms. An innovation hub is often the only context where this capability can be built, attracting external investment and skills to develop internal capability.

It takes time, but it is worth it

When considering local government investment into an innovation hub, it is also important to understand that it is a long game. An analysis of 127 European cities between 1994 and 2009 found the displacement effect of entrepreneurship, or the ability for new knowledge-based technologies to displace local incumbents and create or transition into new jobs, can take up to three years for large cities and over seven years for small to medium size cities. An increase in entrepreneurship by 10% can have a 3.7% direct effect increase in economic development (GPC per capita) and 7.2% increase in economic development from later stage indirect effects.

These outcomes are enhanced with a functioning innovation ecosystem which can include an innovation hub. In their 2015 analysis, Huggins and Thompson highlight the value of entrepreneur networks in getting greater outcomes from regional entrepreneurial activity. Innovation hubs help these networks to be realised.

Other sentiments often shared by local governments include:

Why local government?

A healthy innovation ecosystem has multiple innovation hubs, depending on population size and entrepreneurial density. Local governments often create the first innovation hub, which can then help attract others.

Care should be taken to avoid perception of subsidised competition with other hubs. A good way to do this is to ensure a large focus of a local government funded innovation hub to focus on addressing local community challenges that other hubs are not incentivised to solve. These can range from environmental conservation and barking dogs, to graffiti and youth engagement. If a portion of the hub is focused on addressing civic challenges which makes council operational activities more efficient and increases attraction to the region, then the case for continued local government involvement is clear.

If not us, then who?

A question to ask when looking at innovation ecosystems is “Who is incentivised to look out for the people outside the door?” Out of all the models previously shared, only local government has the mandate for local economic development. A criticism of any level of government is that it can be slow and overly controlling. Yet without intentional action, the task of developing entrepreneurs is often left to a passionate individual without the resources to be effective.

When will we be break even?

Innovation hubs are notoriously not sustainable based on member fees. Ongoing investment is often required to keep them going. Rather than looking for a cost neutral exercise, councils can consider how to otherwise measure their ROI in attraction of new jobs, residents, and community profile.

That said, an innovation hub is not as some have described a cash cow. Where an investment is made in the first year should not be the same as year three or five. What you should expect is that the amount of investment will continue or even increase, but for more mature and targeted outcomes beyond day to day operational activities.

When will we see our unicorn?

A unicorn in startup speak is a company valued at over a billion dollars. Statistically most regions will not achieve this due to density challenges and access to markets and talent. It is also not something that can be constructed, otherwise someone would have published the step-by-step playbook.

Rather, the focus of local government is to facilitate the environment in which entrepreneurial activity can grow. Horowitt and Hwang refer to innovation ecosystems as a Rainforest. Using the metaphor, local government can be seen as creating a fertile soil for the rainforest to occur, facilitating an entrepreneurial ecosystem that supports entrepreneurs returning as mentors and investors.

What is the business model, business plan, and how do you measure?

This post focused on the business case for local government involvement. LaunchVic has a great resource prepared by KPMG targeted at educating local government on definitions and options. Once a decision is made to support innovation activity, a next decision is on the model and plan for that investment. This can include partnering with existing local stakeholders, building internally, outsourcing, and a combination of each. Other considerations include how to measure the impact ongoing. These will be topics for future posts, and are decisions often supported by bringing in short-term specialised skill sets.

A conversation with local governments

Local governments are a key contributor in innovation ecosystems, particularly in regional areas. I am keen to have a conversation with local government representatives when I commence my tour of Australian innovation ecosystems.

My particular focus is on the economic development managers and those who are involved in or considering engagement with local innovation hubs.

If this is you, please connect with me here. I am keen to share and understand.