Uddevalla Symposium, Kansas City, USA, June 2013

Entrepreneurship in Second Tier Regions: The Case of Kansas City

Heike Mayer

Professor of Economic Geography

Institute of Geography &

Center for Regional Economic Development

University of Bern, Switzerland

The Silicon Valley recipe

• Silicon Valley success led to a “simple recipe”

• Network of SMEs that cooperate and compete

• Large amounts of venture capital

• World-class research university

(Saxenian 1994, others)

• Reality is more complex

• Region’s long-standing industrial history (Sturgeon 2000)

• Silicon Valley’s firms began to expand outside in the 1950s (Packard, 1995; Lecuyer 2005; Zhang 2003)

• Industry is heterogeneous (Gray et al 1999, McCann et al 2006)

• University as support institution not engine (Florida 1999)

• Firms (large) as incubators for spinoffs (Cooper 1971, Lecuyer 2000)

3 models of high-tech growth

1. High tech because of university

Silicon Valley, Boston’s Route 128, Cambrige, UK

2. University but no high tech

Baltimore, Cleveland

3. High tech without university

Second-tier regions: Portland, Boise, Kansas City

University is neither necessary nor sufficient

Firms as “surrogate universities” (Mayer 2005, 2011)

Regions emerge through spinoff processes (Klepper 2001, 2007)

Emerging second tier high-tech regions

Portland, OR

Boise, ID

Kansas City, KS & MO

Kansas City as a second tier region

> Study conducted in 2005/2006 (Mayer, 2006)

> Firm building

— Legacy of Marion Laboratories (1950)

— Limited impact by other firms such as Sprint Nextel, Cerner

> Strong efforts to build research capacity

— The Stowers Institute (2000)

— Various life sciences initiatives

> Emerging regional innovation system

— Weaknesses: capital formation, entrepreneurial support, networking

6 Source: Mayer (2006)

Limitations of second tier regions

1. Role of large firms

> Dependence on large firms as «surrogate universities» (Mayer 2011)

2. Entrepreneurial recycling

> Low levels of entrepreneurial recycling (Mason & Harrison 2006)

3. Regional innovation system & entrepreneurial support

> Organizational thinness & fragmentation (Tödtling & Trippl 2005)

4. Funding

> Difficulty accessing venture financing

> Lack of dealmakers (Zoller & Feldman 2012)

7

Update of 2006 study in 2012

Research funded by the Kauffman Foundation

> What role do large hub firms play today in facilitating entrepreneurial dynamics?

> In what ways are entrepreneurs networked with others in the region?

> In what ways has the region facilitated entrepreneurial dynamics?

> How has the entrepreneurial culture and support infrastructure changed over the past years?

Research methods

> 20 interviews with entrepreneurs (VC-backed companies), venture capitalists and entrepreneurial support organizations

> Online firm survey in late 2012/early 2013

> Unique visualization of entrepreneurial dynamics

8 Source: Mayer (2012)

9 Genealogical Networks of Entrepreneurs in the Kansas City region in 2012 Design: Stuart Armstrong

N=582 ©Heike Mayer

1. Role of large firms (I)

10

> Limited role of hub firms as incubators of spinoffs

“I do think the single largest, the single most powerful entrepreneurial legacy in the city is Marion, but I would say the second largest and probably soon-to-be more important one is the Pipeline network.” [Life Sciences Entrepreneur 3]

“What is missing and what is really a shame is that Marion Labs created, I call it the Microsoft event. If you look around the parking lot at Microsoft in Seattle, all these really nice cars because half of the people in the company are millionaires. Marion Labs had that. Unfortunately it was almost too early. We weren`t ready for it. Right? Ewing Kauffman did too good of a job in making that happen. So it is amazing, you still find Marion people, but they are scattered all over the country. So when they came out and let`s say somebody had an idea and wanted to make something happen, [they] struggled for years to get enough funding…” [Venture Capitalist 2]

Source: Kansas City Interviews 2012

11

1. Role of large firms (II): Benefits

> Labor market pooling “I think there is talent here. And I think that having companies like Cerner and Sprint and Adknowledge and H&R Block, they are cranking out good people. And they do a good job training people. First of all, they hire smart people and then they do the job training so that’s really kind of the training ground for many people that can come here. So I think, then you get them and one of the good things is that they don't leave, they don’t job hunt that much.” [Technology Entrepreneur 8]

> Doing business with large firms can be beneficial, but relationships with hub firms seem to be rare “So I think that Sprint relationship is really important for us and just generally in a smaller market, in a secondary market, the fact that Sprint is here. There is a little bit a double-edged sword because at times we've gone in to Sprint and say hey this is the best thing for you and they say, how can that be, you are from Kansas City! You know, we want to work with the Silicon Valley, or whatever. So it’s a little bit, well that’s too convenient, you know, you better look around a little bit more.” [Technology Entrepreneur 8] 12 Source: Kansas City Interviews 2012

2. Entrepeneurial recycling

> Entrepreneurial exits are starting to spur regional development through reinvestment in new ventures

> Entrepreneurs who exit become engaged

“Certainly, there have been some exits in Kansas City. So, there is some money that is recirculating.” [Entrepreneurial Support Organization Manager 5]

“There are a lot of exits that occur under the radar from the national scene, guys who made a lot of money, right now. We don’t have the Facebooks, but we had a dozen guys selling 100 million dollar businesses.” [Technology Entrepreneur 5]

“It`s completely immature here in Kansas City and I know that what […] there are some great Kansas City success stories, but what you don`t see is them going back to the community or them working with the entrepreneurial community. Some of them will have large exits and then try to be angel investors, but they are not effective angel investors because their nature is to micro manage their investments, just like they micro-managed their companies before.” [Technology Entrepreneur 4]

13 Source: Kansas City Interviews 2012

2. Entrepreneurial recycling: Example

14

3. Regional innovation system

> Firms do not collaborate much with other local firms; fragmentation of networks and relationships characterize the Kansas City entrepreneurial economy

Interviewer: To what extent do you collaborate with other local companies here in Kansas City?

“Not, I mean, in terms of the technology and product not a whole lot because nobody is really doing exactly what we are doing.” [Technology Entrepreneur 5]

Interviewer: When you think about important partners, who are the most important partners locally?

“Hmm. [Long pause]. That's tough. We don't really have a lot of partners, so to speak.” [Technology Entrepreneur 1]

15 Source: Kansas City Interviews 2012

Sources of new ideas

16

Within Kansas City

Within the states of

KS and MO

Within the United States

Overseas Location is not relevant/ applicable

Commercial labs or priv. R&D institutes 8% (13) 3.3% (7) 10.7% (23) 1.9% (4) 16.4% (35)

Consultants 31.5% (51) 19.8% (32) 33.3% (54) 9.3% (15) 9.3% (15)

Customers and users 43.8% (71) 34% (55) 56.8% (92) 17.9% (29) 9.3% (15)

Informal networks with other friends 42% (68) 35.2% (57) 46.3% (75) 9.3% (15) 8% (13)

Internal R&D units 33.3% (54) 11.1% (18) 12.3% (20) 3.1% (5) 16.7% (27)

Manufacturers 8.6% (14) 6.8% (11) 21% (34) 7.4% (12) 19.1% (31)

Mentors who give advice 52.5% (85) 34.6% (56) 40.7% (66) 4.3% (7) 9.9% (16)

Other firms in your industry 25.9% (42) 23.5% (38) 58% (94) 12.3% (20) 11.1% (18)

Suppliers (materials, services, equipm.) 17.9% (29) 14.2% (23) 31.5% (51) 9.9% (16) 16.7% (27)

Universities or other HEIs 21.6% (35) 25.9% (42) 20.4% (33) 6.2% (10) 11.7% (19)

Valid N 75.7% (162) N 100% (214) Question on survey: New ideas often come from a variety of sources. Below is a list of potential sources for new ideas and innovations that help your company. Please

consider the last three years (2010 to 2012) and indicate the primary location of sources of new ideas and innovations. Please check all that apply. Sources can

include joint ventures, contracting relationships, but also other types of formal and informal arrangements.

Entrepreneurial culture & support

> Development of culture that is supportive of entrepreneurial attitudes such as risk taking & tolerance of failure

> Definitely greater energy around entrepreneurship

> Some describe entrepreneurial support efforts as “segregated”, “disconnected” or “siloed”, but support environment starts to coalesce

“The networks are tigthening” [Entrepreneurial Support Org. Manager 1]

“The network is getting better” [Technology Entrepreneur 2]

> Supported by initiatives such as Startup Weekend, 1MC, Pipeline, Big 5 Ideas, Google Fiber bring people together

“One of the things I like about the Pipeline network is that it increases the region`s stickiness…” [Life Sciences Entrepreneur 3]

17 Source: Kansas City Interviews 2012

Region-specific advantages & entrepreneurial support

18

Advantages Valid N Mean rating Percent

indicating

somewhat

and

extremely

important

Percent

indicating

extremely

important

Informal local access to innovative people, ideas, technologies 150 4.12 84.0% 34.7%

Supportive local entrepreneurship organizations and initiatives 151 4.03 76.8% 42.4%

Attractive local quality of life for staff and management 149 3.94 77.8% 27.5%

Local availability of managerial/professional staff 147 3.65 61.9% 23.8%

Access to local business services 148 3.63 62.1% 18.9%

Access to Midwestern markets 148 3.44 52.7% 21.6%

Proximity to local customers 150 3.34 37.4% 22.0%

Access to local sources of capital, finance 147 3.23 48.3% 24.5%

Supportive local training organizations 148 3.11 37.8% 14.2%

Local shareholders 144 2.93 34.7% 14.6%

Proximity to local suppliers, subcontractors 148 2.91 33.1% 10.8%

Research links with other firms or organizations in the region 142 2.82 33.8% 4.9%

Quality of local research staff 146 2.75 18.5% 11.0%

Research links with a university 144 2.66 13.9% 8.3%

4. Capital availability

“[…] some of the hindrances are that there is not as much venture capital or investment funds in Kansas City than there are maybe in other big markets. It's not to say that there is not, there's money out there, but it's obviously less than in Silicon Valley or in other places.” [Technology Entrepreneur 1]

“We don`t have as much early stage capital or the culture of early stage capital of some regions in the country. I wouldn`t say we are the worst in the country, but I don`t think we are the best.” [Entrepreneurial Support Organization Manager 5]

19 Source: Kansas City Interviews 2012

KC-based investors, 2012

Name Type Year established

in KC

HQ location

Kansas Venture Capital Venture Capital 1977 Leawood, KS

Invest America Venture Capital Venture Capital 1985 Cedar Rapids, IA

Advantage Capital Partners Venture Capital 1992 St. Louis, MO

Mid-America Capital Group Investment bank 1996 Kansas City, MO

Open Prairie Ventures Venture Capital 1999 Chicago, IL

October Capital Venture Capital 1999 Kansas City, MO

BioMed Valley Discoveries Venture Capital 2001 Kansas City, Mo

Midwest Venture Alliance Venture Capital 2005 Wichita, KS

Mid-America Angels Angel Network 2006 Lenexa, KS

Centennial Angel Network Angel Network 2006 Columbia, MO

Mariner Private Equity Venture Capital 2006 Kansas City, MO

Five Elms Capital Venture Capital 2006 Kansas City, MO

Angel Capital Group Angel Network 2007 Nashville, TN

K-State Angels Angel Network 2008 Manhattan, KS

Women`s Capital Connection Angel Network 2008 Kansas City, MO

Show Me Angels Angel Network 2008 Lee’s Summit, MO

Open Air Equity Partners Venture Capital 2008 Kansas City, MO

CC Capital Advisors Venture Capital 2009 Kansas City, MO

Great Range Capital Venture Capital 2010 Kansas City, MO

MPM Capital Venture Capital 2010 San Francisco, CA

Indie Ventures Venture Capital 2011 San Francisco, CA

Archer Foundation Venture Capital 2012 Overland Park, KS

Source: Various data sources, including company websites, etc.

20

KC-based investors, 2012

Name Type Year established

in KC

HQ location

Kansas Venture Capital Venture Capital 1977 Leawood, KS

Invest America Venture Capital Venture Capital 1985 Cedar Rapids, IA

Advantage Capital Partners Venture Capital 1992 St. Louis, MO

Mid-America Capital Group Investment bank 1996 Kansas City, MO

Open Prairie Ventures Venture Capital 1999 Chicago, IL

October Capital Venture Capital 1999 Kansas City, MO

BioMed Valley Discoveries Venture Capital 2001 Kansas City, Mo

Midwest Venture Alliance Venture Capital 2005 Wichita, KS

Mid-America Angels Angel Network 2006 Lenexa, KS

Centennial Angel Network Angel Network 2006 Columbia, MO

Mariner Private Equity Venture Capital 2006 Kansas City, MO

Five Elms Capital Venture Capital 2006 Kansas City, MO

Angel Capital Group Angel Network 2007 Nashville, TN

K-State Angels Angel Network 2008 Manhattan, KS

Women`s Capital Connection Angel Network 2008 Kansas City, MO

Show Me Angels Angel Network 2008 Lee’s Summit, MO

Open Air Equity Partners Venture Capital 2008 Kansas City, MO

CC Capital Advisors Venture Capital 2009 Kansas City, MO

Great Range Capital Venture Capital 2010 Kansas City, MO

MPM Capital Venture Capital 2010 San Francisco, CA

Indie Ventures Venture Capital 2011 San Francisco, CA

Archer Foundation Venture Capital 2012 Overland Park, KS

Source: Various data sources, including company websites, etc.

21

Conclusion

22

What role do large hub firms play today in facilitating entrepreneurial dynamics?

Limited role regarding e`ship, they shape labor market

In what ways are entrepreneurs networked with others in the region?

No strong local interactions, hub firms have long arms

In what ways has the region facilitated entrepreneurial dynamics?

Starting to see entrepreneurial recycling & more dynamics

How has the entrepreneurial culture and support infrastructure changed over the past years?

More energy around entrepreneurship, support system is coalescing

… to a more

collaborative

entrepreneurial

economy

From fragmented…

Map based on a data from a survey of high-tech firms in Boise, Idaho (2008)

Design: Stuart Armstrong; © Heike Mayer

23

Map based on data from a survey of high-tech firms in the Portland, Oregon, region (2008)

Design: Stuart Armstrong; © Heike Mayer

24

Poster here

Genealogical Networks of Entrepreneurs in the Puget Sound Region in 2009 Design: Stuart Armstrong

N=711 ©Heike Mayer

26 Genealogical Networks of Entrepreneurs in the Kansas City region in 2012 Source: Heike Mayer, 2012

N=582 ©Heike Mayer

Thank You!

Heike Mayer Email: mayer@giub.unibe.ch

Mayer, Heike (2011). Entrepreneurship

And Innovation in Second Tier Regions.

Cheltenham, UK: Edward Elgar.

27

Application of ideas to other industries

> Athletic and outdoor gear industry in Portland, Oregon

> Anchor firms:

— Nike

— Adidas

— Columbia Sportswear

> Similar processes; yet not as prolific and many firm entries from other sectors