Foundation-Dominated Entrepreneurship Ecosystems

Supporting entrepreneurship as an economic development strategy is trending in the world of philanthropy. Funding pitch competitions, launching incubator programs, and supporting organizations that provide technical assistance to entrepreneurs are all popular ways for foundations to spend their resources.

For example, in Detroit, foundations large and small support various efforts to spur entrepreneurship, and foundations in SE Michigan have even come together to fund an umbrella organization that oversees the grant-making for much of the work done in the region to promote entrepreneurship. What does a foundation-dominated ecosystem mean for entrepreneurs and economic development?

The opportunity

Of the various institutions involved in an entrepreneurship ecosystem, foundations are uniquely positioned to define their objectives and think long-term. In terms of economic development, leaders of local governments focus on things like creating jobs and attracting employers. Banks and venture capital funds would like to see opportunities for more investment. By contrast, foundations have the freedom to define their own objectives – these could be improving neighborhoods, accelerating small business growth, or increasing the number of entrepreneurs launching new ventures.

The consequences

From the perspective of implementing organizations (non-profit groups doing work on the ground with entrepreneurs), the biggest concern is continuation of foundation funding and the sustainability of their programming.

For these organizations operating in an ecosystem dominated by foundation funding, the funding cycle creates an incentive to compete rather than collaborate with other organizations. Foundation funding is a limited resource and organizations want to keep their piece of the funding pie. In turn, foundations have learned to encourage and promote organizations that collaborate with others. However, the pressures to compete rather than collaborate remain high – leading to what amounts to collaboration in name only.

In addition, foundations tend to be highly numbers focused as their default position for evaluating grantee performance over the lifecycle of a grant. The consequence is that grantees gravitate toward technical assistance activities involving a high number of entrepreneurs. In other words, entrepreneurship support organizations that are highly dependent on foundations will overvalue activities that create a high number of “touch points” with entrepreneurs. In many grant-making activities, this focus on quantity makes sense. For example, if foundations give to a malaria prevention organization, it will be helpful to know how many bed nets the organization is able to provide to families. If a foundation is supporting a conference on sustainability, it will want to know the total number to attendees.

It is much less clear that a focus on numbers is valuable for supporting entrepreneurship – in fact, this focus might be leading to a misallocation of resources. While it is nice to have 100 entrepreneurs in a room learning the basics of starting a business, it might be better in terms of impact to use those resources in assisting a handful of promising entrepreneurs with strategic consulting and legal assistance. The idea that quantity should be prioritized over quality – as opposed to focusing efforts on a smaller total number of entrepreneurs but providing more assistance – is an untested, built-in assumption of foundation funding and the standard process for evaluation.

The concern

Even though foundations have the ability to plan around a long-term entrepreneurship development strategy, it doesn’t mean they will. Changes in foundation leadership and trends in philanthropy could then lead to a drop off in support for entrepreneurship.

From a societal perspective, it is interesting that something that has come to been seen as vital to an economic development strategy – supporting entrepreneurship – is largely funded by organizations outside any type of democratic accountability. In many places, foundations are even able to shape the priorities of the entrepreneurship ecosystem because of their outsize influence – determining, for instance, the neighborhoods that will be a focus, or whether supporting start-ups or small businesses is a better idea.

There is a great opportunity to learn more what works and what doesn’t in creating fertile ground for new businesses – developing a mentorship network is one area receiving increased attention. Despite all the work entrepreneurship-supporting organizations do to encourage innovation, they themselves are often slow to innovate and test out new ideas.

The balance of funding for entrepreneurship between foundations, governments, universities, and corporations will become a concern for those thinking about the future of entrepreneurship and sustaining networks of support. Ultimately, which sectors of society become the dominant funders of a given ecosystem will influence the outcomes of the ecosystem in terms of its sustainability, priorities, and overall direction.


Image courtesy of Flickr. Originally published by S&S on August 22, 2019.


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