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The First International Entrepreneurship Research Exemplar Conference co-sponsored

by the Department of Economics and Business of the University of Catania, and the
Academy of Management’s (AoM) Entrepreneurship Division

UNDERSTANDING AND UNCOVERING STARTUP

ECOSYSTEM STRUCTURES

SAKARI SIPOLA*
TUIJA MAINELA
VESA PUHAKKA
University of Oulu Business School

*Corresponding author: Sakari Sipola, University of Oulu Business School, Department of

Management and International Business, P.O. Box 4600, FIN-90014 University of Oulu,
Finland, tel. +358 40 5535 922, email: sakari.sipola@oulu.fi
The purpose of this paper is to contribute into the emerging startup ecosystem discussion that
has potential to make a significant impact on future research and understanding of
entrepreneurship and firm growth. We begin by discussing the economic actors that are
generally seen as the structural components of a startup ecosystem, and by application of the
competence bloc theory extend the structure by introducing new economic actors to be
included. Secondly, based on the cultural-historical activity theory we develop the theoretical
basis for startups as a shared object of work for the startup ecosystem and account for the
prior economic culture-history and its role in understanding present economic activity.
Thirdly, as the academic discussion on the topic is increasing, we propose critical realism as a
philosophy of science suitable for understanding causality in this new contextual setting. As a
result integrative framework for startup ecosystem research is proposed.

Entrepreneurship research took a significant step forward when Gartner (1989) suggested
focus on firm creation instead of characteristics of the entrepreneur. Firm growth research has
for long followed this path and focused on explaining growth of firms by looking at the firm
and its growth as a “change in amount” (see Iacobucci & Rosa 2010, McKelvie & Wiklund
2010). This line of research has recently led to a situation where the quest for a
comprehensive firm growth theory is “tilting at the windmills” and new theoretical
approaches and disciplines are called for to advance the field (cf. Leitch, Hill & Neergaard
2010). This is paradoxical because at the same time need for insights behind the emergence of
growing firms, especially high-growth startups, has increased at the policy maker and
practitioner level due to, among other reasons, the challenging economic landscape, high
unemployment rates and globalization triggered industrial change that is taking place in
several countries.
The nascent startup ecosystem discussion is one field of research to answer the call for
new approaches to firm growth. The interest towards startup ecosystems has risen not only
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because of the need for high-growth firms and the fact that they contribute a significant
portion of new job creation (Mitchell 1980, Storey 1980, Birch et al. 1993, Sohl 1999, Shane
2009) but also by the overall increased interest towards startups and “glocalization” of
entrepreneurship. This is mainly based on technological development, easy access to
information and global networks, Internet-enabled opportunities and, most importantly,
dramatically lowered startup establishment and product building costs in certain categories,
like software. Lots of new economic activity is therefore taking place around the world and
many claim that it is associated with the entrepreneurial or startup ecosystems rather than the
more traditional national or regional innovation systems. Fostering of startup ecosystems is
therefore seen as a potential economic policy for increasing regional prosperity and economic
renewal.
The transition towards the startup ecosystem based economic growth is a fundamental
systemic change that is recognized and seems well performed only in a few places, such as
Silicon Valley and Israel (e.g. Kenney & von Burg 1999, Avnimelech & Teubal 2004a).
Currently our knowledge about the systemic structures and the basis for systemic change
towards high-growth startup ecosystems in other regions is rather limited. For understanding
ecosystem structures, we need to know how different stakeholders understand the startup
ecosystem with respect to, for example, its structure, reasons for existence and expected
outcomes. In a transition situation misguided notions and conceptions of the new economy are
possible (cf. Wetzel 1995). In principle even the discussion of entrepreneurial versus startup
ecosystem has in this respect significant differences in framing the observable activity and
academic discussion. For instance, are startups understood as new ventures aiming for high-
growth often with funding from venture capitalists or are they seen more as traditional small
businesses that are not investment opportunities sought by the venture capitalist (see Sohl
1999). The definition, its operationalization and implications for sampling are important for
comparability of the results from different ecosystems (cf. Shepherd and Wiklund 2009) and
for transfer of knowledge between the academia and practitioners (Achtenhagen, Naldi &
Melin 2010).
In this paper we firstly examine the structural components of a startup ecosystem that is
mostly seen to consist of entrepreneurial startups, different policy agencies,
incubators/accelerators, and actors providing risk capital. By applying the competence bloc
theory (Eliasson 1995, Eliasson & Eliasson 1996) into this context, we show what other
economic actors could also be seen forming the startup ecosystem structure. It is rare to have
a complete startup ecosystem that has all the needed economic actors locally present (cf.
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Eliasson 2003). Thus, we further discuss how in the startup ecosystem research emphasis
should also be in understanding the level of completeness and how the local economic actors
and institutions are organized to complement or address the possibly missing structural
elements.
Secondly, the focus on ecosystems, instead of only startups, changes the research object
from single firms to regional systems. Based on cultural-historical activity theory (e.g.
Engeström 2001) we therefore define a startup as a shared object in the collective processual
creation of potential high-growth businesses. We see that in the research of startup
ecosystems, knowledge of the other actors sharing the interest in creating desired outcomes is
a crucial factor for explaining the performance of the whole ecosystem. When the collective
human activity is seen as object-oriented and motive-driven as well as culturally-historically
mediated (cf. Engeström & Miettinen 1999), institutions that give incentives to involved
actors are important (Eliasson & Eliasson 1996, Johansson 2010) for understanding how
startups are perceived.
Thirdly, we highlight the need to define a startup ecosystem not as a ‘thing’ (cf. Van de
Ven & Poole 2005) and a structure but rather as means for ‘processual’ building of successful
startups. Only the emergence of successful startups as a processual outcome is at the end a
measure of ecosystem’s competence and enables the associated positive effects regarding the
job creation and economic prosperity. The focus on outcomes is important because as Lerner
(2009) remind if the goals of the different entrepreneurial programs and interventions are not
clearly defined and success properly evaluated publicly there can be a tendency to keep
allocating money without justification from prior policies and outcomes. Hence seeing the
startup ecosystem as process with historical roots that need to be taken in account is
important. The processual definition of the ecosystem further has implications for how we
understand causality. We elaborate critical realist reasoning (e.g. Bhaskar 1975, 1978, Sayer
2000) where the causality is based on understanding the systemic structure and mechanisms
that processually create both the occurrence and non-occurrence of desired events i.e.
potential high-growth businesses. This way we can also take into account failed startups, the
non-occurrence, that are normal in high-growth ambition startup ecosystems.
The results contribute to the research on startup ecosystems by (1) providing a basic
structure of involved economic actors and agencies, (2) defining the startup as a shared object
of work among the startup ecosystem and highlighting the importance to study institutions
and incentives, and the economic culture-history behind them, and (3) critical realist
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argumentation of causality. These are combined to an integrative framework for startup

ecosystem research.

COMPETENCE BLOCK THEORY

In the recent discussion among academics and practitioners the structural components of
startup ecosystems are mainly seen to consist of entrepreneurial startups, different regional
and national policy agencies, incubators/accelerators, and business angels and venture
capitalists (VC). There is especially interest towards the incubator/accelerator model as these
programs are being created at an increasing pace around the world with the Silicon Valley
located Y Combinator leading the pack since 2005. For instance, Dee et al. (2011) provide a
recent review of incubation and its impact in fostering high-growth potential ventures in the
UK.
From the perspective of a startup, however, these are not the only economic actors
present that are crucial for the process of building the business towards a success story. We
therefore discuss the applicability of the competence bloc theory (e.g. Eliasson 1995, Eliasson
& Eliasson 1996) in examination of the functioning of a startup ecosystem. Competence bloc
theory is relatively extensive and relates closely to the theory of the experimentally organized
economy (EOE) (Eliasson 1987, 1991, 1996). It has macro-economic and industrial origin
and it emphasizes efficient selection of investment projects (see Johansson & Karlson 2002,
Johansson 2010). We intentionally limit the use of the wide theory base mainly to its
economic actors as structural components for a startup ecosystem.
The competence bloc theory was developed to explain the organization of competitive
selection of innovations and firms under the view of EOE. The seminal article laying out the
theory (Eliasson & Eliasson 1996) defines a competence bloc as “the total infrastructure
needed to create (innovation), select (entrepreneurship), recognize (venture capital
provision), diffuse (spillovers) and commercially exploit (receiver competence) new ideas in
clusters of firms”. Significant importance in the theory is given to human embodied (tacit)
competence capital that is gained in active participation in viable market competition against
internationally best competitors with the market as the school and closeness to market as
necessary for the successful acquisition of such competence (Eliasson 1996). The role given
to competence is critical for the organization of institutions and hierarchies of the market and
the economic activity of the competence bloc.
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The structure of a competence bloc is defined originally by six economic actors and
agencies (Eliasson & Eliasson 1996) namely customers, innovators, entrepreneurs, venture
capital, exit markets, and industrialists. We discuss them in the startup ecosystem context. At
the top of the list is the competent and active customer who defines the maximum degree of
sophistication of the product for which the most advanced customers are willing to pay for
(Eliasson 2003). No matter how advanced the technology, the products do never get better
than what customers are capable of appreciating them. Therefore, competent customers
participating in competition in large markets are crucial in setting the long-term technical and
market change. According to Johansson (2010) this is not an ordinary customer who solely
buys the product, but also a strategic partner who takes an active part in the development and
commercialization of products by serving as a channel of information and informing the firm
about the market and specific customer demands. They act as a catalyst for innovation and
have a decisive influence on the development and final design of new products. The more
advanced and radically new the product technologies the more important customer quality
becomes (Eliasson 2003).
For startup ecosystem research the presence of competent customers is an essential
element to study. As it is now well known and recently endorsed by the lean startup
(Eisenmann, Ries & Dillar 2012), customer development (Blank 2005), and business model
innovation (Osterwalder & Pigneur 2010) movements, exposure to customers is one of the
key things for startups very early on. In terms of research this means mapping out the
different ecosystems under observation to find what type of competent customers are present
and what type of reference value their feedback and role can have for the startups. For
instance, the acknowledged startup ecosystem of Israel had 240 foreign R&D centres located
there in 2011 (Ministry of Trade & Labor 2011). Many of these are strategic and work closely
with startups providing valuable large and competitive market perspective as an input for their
business development.
The second competence bloc element is innovators. They are defined as actors to
combine new and old technologies into new composite technologies, to be selected or
recognized by the entrepreneurs based on the assumed economic potential and profitability
criteria (Eliasson 2003). Innovators as individuals or organizations are one of the first to
introduce into reality something cheaper, faster or better and thus potentially valuable than
before. The innovator agency functions as an integrator of different technologies and new
ways to create value that are needed for building products or services (Eliasson & Eliasson
1996, Johansson 2010). The competence bloc theory defines the innovator mainly through
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technology and gives it substantial absolute value per se. While the technology innovation is
important, from the perspective of the startup ecosystem this however is not enough, as
technology and its development has become increasingly global, quickly copied, and in some
cases an easily accessible commodity. Hence, innovations and business value creation can
happen more outside the technology per se. This is manifested by the advancements and an
increasingly important role of design thinking (Brown 2009), business design (Martin 2009)
and by the open innovation paradigm (Chesbrough 2003). In the startup ecosystem structure
we therefore see an innovator as an agency that is not constricted to technology in value
creation.
Entrepreneurs as the third actor create commercially viable innovations or select ones
they perceive to have market potential on the desired scale. For an entrepreneur who is
looking for to build a small business the opportunity or viable innovation and the related
execution is viewed differently than by an entrepreneur aiming to raise venture capital and
building a big business. The main function of the entrepreneur is to move the innovation to
connection with markets and economy (Eliasson & Eliasson 1996). The entrepreneur has the
most critical economic function since she/he understands, selects and initiates the
commercialization of the innovations (Johansson 2010), although in some cases venture
capitalist are known to initiate the commercialization (Bussgang 2010). The new
entrepreneurial startup is suggested to be seen as a competent team (cf. Eliasson 1990,
Johansson 2010) that is not ready or complete day one, but needs to be completed as a
business experiment moving forward in connection to markets.
Significant factor behind successful project filtering, one of the central mechanisms of the
competence bloc, is the tacit industrial and business building competence residing in the
venture capital industry (Eliasson & Eliasson 1996, 2005, Eliasson 2003) that is the fourth
actor of the competence bloc theory. Competent venture capitalists are critical in enabling to
take advantage of the technological and team based investment opportunities making the final
commercialization of the startup project possible while leaving the innovator and entrepreneur
with significant part of the gain (Eliasson & Eliasson 1996). Without value adding
competence, venture capitalists will only function as risk diversifiers (Eliasson 2003) for the
entrepreneurs.
In the context of startup ecosystems we want to further underline the other sources of risk
capital namely business angels and in less extent corporate venture capitalists (CVC) to be
included in the structure. Business angels are high net worth individuals who invest smaller
amounts at an earlier stage either alone or with other angels whereas venture capital firms
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traditionally want to see more proof and invest larger amounts at later stage (Freear & Wetzel
1990, Harrison & Mason 2000, Mason & Harrison 2004). Especially important is the impact
of super-angels or micro-VCs running smaller funds, and hence settling for smaller exits, that
has increased significantly during the last years (see Peters 2009). The philosophy for making
the CVC investments is the idea that entrepreneurial ventures are likely to be the source of
highly valuable and innovative ideas (Tushman & Anderson 1986, Kortum & Lerner 2000) to
be exploited by the corporation to compensate for the weak internal innovation (Eliasson
2003).
Fifth, large and deep exit markets are critical for supporting the rapid industrialization
and scaling of winning businesses (Eliasson & Eliasson 1996), and for spurring venture
capital investments, but are often a neglected part of the entrepreneurial environment (Lerner
2010). Exits though an IPO or M&A mechanisms are highly valuable and essential for the
expansive development of the involved actors as innovators, entrepreneurs, and early
employees besides investors, gain experience-based competence and make money that they
often invest back to new startups, funds, or become serial entrepreneurs. Eliasson and
Eliasson (2005) later discussed exits as a market for strategic acquisitions that is relevant
because the exit market has recently evolved around an increased number of so-called early-
exits, smaller acquisitions around $12 to $30 million that represent the majority of exits (see
Peters 2009). The weak IPO market influences this in the US (NVCA 2013). Hence the
market for strategic acquisition is active at an earlier stage of startup development, not only at
the intersection of venture capital, but also with angel capital, and in some cases without any
risk capital at all when the founders sell the company without raising external capital. We
emphasize exit markets understood at this scope as a part of startup ecosystem structure.
One of the key roles of the sixth actor the industrialist is to take the winning products and
innovations to large-scale production and distribution (Eliasson & Eliasson 1996, 2005).
Johansson (2010) discusses the industrialist from the perspective of innovation diffusion
through imitation of innovations by industrialists in reference to Schumpeter (1934). The
point of view to growth is different as the industrialists are seen as a source of economic
growth, which of course they are, but for the startup ecosystem perspective, the industrialists
represent the scale and platforms that startups need for growing the business. They are, for
instance in high-tech, companies that have grown to industrial scale and can provide the
needed scale by partnering with startups through the global platforms they have and are
hence, in a way, modern industrialists without the traditional connotation. Therefore, in the
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startup ecosystem context we emphasize the industrialist role understood also as an economic
agency and a platform for scale to startups.
These actors and agencies are not necessarily separate but can overlap within the real
actors. For instance Cisco Systems, as an example, can be seen as a competent customer,
industrialist, corporate venture capitalist and an exit channel all in one entity. In addition, the
competence bloc theory assumes that the economic actors are private with incentives and their
existence based on competence and performance at markets. Therefore, a clear distinction
between the centralized public and politically led systems and decentralized market based
actors is made (cf. Eliasson 2003). This is especially important to note in longitudinal
research of aspiring startup ecosystems where the market failures are addressed by public
initiatives.

CULTURAL-HISTORICAL ACTIVITY THEORY

The focus on ecosystems, instead of only startups, changes the research object from
single firms to regional embedded systems. Based on cultural-historical activity theory (e.g.
Engeström 2001) we define a startup as a shared object in the collective processual creation of
high-growth businesses. We see that in research of startup ecosystems, knowledge of all
actors sharing the interest in creating desired outcomes is a crucial for explaining the
performance of the whole ecosystem.
Instead of individual startups the whole collective, artifact-mediated and object-orientated
activity system (Figure 1), its activity and network relations to other activity systems is a
prime unit of analysis (cf. Engeström 2001). Adoption of the collective system as the unit of
analysis retains the importance of subjectivity, e.g. the importance of startup in the analysis,
but at the same time integrates it with cultural means and constraints that inescapably
characterize human practices (Sannino, Daniels & Gutierrez 2009). This inclusion of the role
of cultural artifacts in human actions overcame the split between individuals and the
untouchable societal structure (Engeström 2001). Hence, we can understand startups as a part
of the startup ecosystem that is embedded into the regional economic cultural-history.
When activity is seen as object-orientated and motive-driven (cf. Engeström & Miettinen
1999) the startups become the object of collective activity. In order to understand how the
different startup ecosystems actually perceive startups as a shared object we need to include
three activity theory elements; rules, community and division of labor. The rules are
understood as the social rules of activity (Vygotsky 1978, Cole & Engeström 1993,
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Engeström 1987) that are in the startup ecosystem carried at institutional level. Institutions as
the rules of the game in a society and as the humanly devised constrains that shape human
interaction (see North 1991) strongly influence how the startup as an object of work is
perceived.

FIGURE 1
Startup Ecosystem as an Activity System (Modified from Engeström 1987, 2001)

Mediating artifacts

Startups as
an object of
activity
Subjective
importance Sense Activity of
of the generating Processual
Meaning winning startups outcomes
startup

Rules: Community: Division of

Institutions Competence labor:
bloc actors/ Incentives
agencies Completeness

The community includes the other economic actors besides the startup present in this case
based on the competence bloc actor structure. Division of labor is approached from the
incentives and completeness perspective (Eliasson 2003). The structure creates different
positions for the actors and its completeness affects what resources and competence the
startup can access within the startup ecosystem, and incentives enable to study how the other
actors are aligned in relation to the startup and entrepreneurs whose incentives are based on
their ability to turn the early-stage startup into a high-growth business.
The above factors are important determinants of the collective perception of startups
within the startup ecosystem. There is not necessarily one coherent view of startups because
activity systems take shape and transform over long periods of time (Engeström 2001). Prior
generations of economic actors and their accomplishments are cumulated in the present
outcomes and contextual situation, in this sense, history is strongly present and can include
embedded institutionalized patterns and perceptions mediating the economic activity (cf. Cole
& Engeström 1993). Therefore it is important to account for the historicity, multi-voicedness
 10

and different perspectives of the object of activity that are shaping how the startup ecosystem
works. There are multiple layers and strands of history embedded to the rules and conventions
that each participant and the whole startup ecosystem carry. These are at the same time also
the potential drivers for change and keep the object of startups both moving onwards and
expanding because the created contradictions are keys in shaping the activity systems.
By analyzing these elements we can examine how the startup ecosystem makes sense and
gives meaning to the activities that take place. The perception of startups is mediating the
collective activity and relates to generating the object perception mediated winning startups
and the type of processual outcomes it is systemically aligned, incentivised and organized to
generate. Indeed, the activity theory view of humans as culturally-historically mediated
becomes critical (Engeström & Miettinen 1999). The context is reflected in human activity
also in the deep-seated rules and patterns that people learn as a member of the startup
ecosystem (cf. Bateson 1972, Engeström 2001). Therefore, the role of prior economic
cultural-history and activities in economic development, its organization and policies are
important to take in account because startup ecosystems are not started from scratch but carry
this type of history within. In this regard the activity theory complements the competence bloc
theory.

RESEARCH PHILOSOPHICAL CONSIDERATIONS

The definition of the startup ecosystem as a collective economic actor that is

embedded in economic culture-history creates a need to consider how we understand
causality in research based on these premises. Sannino et al. (2009) note that the
methodological innovation of the whole activity system as a prime unit of analysis
represents a challenge to traditional thinking in human and social sciences, which rely
on deep-seated individualism and on views of society as an anonymous structure. This
line of reasoning has been dominant also in firm growth research where answers to
growth have been sought from the firm often with the SME and its owner-manager at the
focal point.
Among the aspects of startup ecosystems understood as described above that set the
basic requirements for philosophy of science are firstly, the occurrence of failure as
natural because from the created startup (understood as high-risk and high-reward
cases) only a fraction will actually scale and grow into big businesses and reach an exit.
The startups are business experiments (cf. Eliasson & Eliasson 1996) as a part of an
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open-ended winner generation process within the startup ecosystem. As Hayek (1937,
1978) put it already decades ago, goods are not well defined and consumers and
producers never have complete information about preferences, technology and so forth,
therefore actors must discover what works. Due to this uncertainty the outcome of the
collective process is therefore open-ended (see Alvarez & Barney 2010).
Hence, the followed philosophy of science and causality needs to firstly include both
the successful and unsuccessful outcomes of startup business experiments and the
ecosystem activity. In other words, in this setting the traditional natural law-like
causality is not sufficient, as it cannot account for the occurrence and non-occurrence at
the same time. Significant part of firm growth research in the past has missed this other
side of the coin by focusing on natural law-like causality on the quest of comprehensive
theory of firm growth (cf. Leitch et al. 2010).
Secondly, this traditional law-based and firm focused point of view to growth seems
to assume that growth is transferable, i.e. the factors that explain the growth of the firms
in data sets could be taken out and “injected” into other SMEs and would produce the
same outcome in the future. However, in practice we know that this is not the case.
Regarding startup ecosystems, there have been for instance numerous attempts since
the 1960s to copy Silicon Valley by different planning bodies and government agencies
from all over the world (cf. Miller & Coteé 1985), typically without success (Leslie &
Kargon 1996). This suggests understanding startup ecosystems and reasons behind the
emergence of high-growth firms as embedded to open systems and its human embodied
competence that cannot be easily copied. In fact, as startups are competing on markets
against other new and existing companies the competence pools both get and need to
get updated all the time making the object of work a moving target. These aspects are
difficult to extract into certain transferrable factors as not only the structure but also the
cultural-historically evolved embedded drivers of the collective activity emphasized by
the inclusion of the activity theory and institutions are mediating the collective process.
We therefore discuss critical realism (e.g. Bhaskar 1975, 1978, Sayer 2000, Easton
2010) as a suitable philosophy of science in this connection. Critical realists have rejected
“naturalism” by recognizing that the social world cannot be understood in the same way
at its natural counterpart (Blundel 2007). Bhaskar (1998: 42) describes how social
structures do not exist independently (1) of the activities they govern, and (2) of the
agents’ conceptions of what they are doing in their activity, and (3) they may be only
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relatively enduring (they are situated in a particular space and time), and (4) are
reproduced and transformed through social agents which are, in turn, dependent upon
the relationship between structure and praxis. Meaning of things has to be understood;
it cannot be measured or counted (Sayer 2000).
Where as the causal powers of natural objects like weather systems work without
human mind and any (self-conscious) sense of meaning, interpretation and intent, those
of social objects, such as entrepreneurial activism display these characteristics in
abundance (Blundel 2007). Hence, critical realism criticises the study of social domain as
a ”closed” system and opposes the idea that reality can simply be reduced to our
interpretation of it (Castellacci 2006).
The logic of critical realist reasoning enables (1) to move the focus from studying the
success of individual firms aggregated in data sets towards the whole startup ecosystem, its
historically evolved structure and embedded causal-powers, and (2) understand their role in
explaining both the generation and non-generation of scaling and successful startups. Indeed,,
as its view of causality is based on generative mechanisms it enables to account for the non-
emergence of the collectively desired outcome, i.e. failure of startups as the other side of the
coin. This emphasizes the view that phenomena in the social world are seen to take place in
spatiotemporal open systems (and open-ended processes) in which events do not follow a
law-like determined and recurrent pattern (see Tsoukas 1989).
Tsoukas (1989: 553) sees that causal explanation is from a realist viewpoint not about the
deterministic or stochastic associations of patterns of events, nor about experiences, but the
ascription of causal powers to structures. This further complements the competence bloc and
activity theories, as the context of events and object structures is seen crucial and every
critical realist study must be contextualized, because the way the structures’ causal powers
will develop, or not, will depend on the contextual conditions (Leca & Naccache 2006). The
processual outcomes, either the occurrence or non-occurrence of growth businesses , are
not possible to understand without studying the underlying realm of structures, mechanisms
and their causal powers or liabilities (Smith 1998). That is also were the main focus in critical
realist research is, not per se in the events like a set of successful firms, but the causal
explanation (1) identifies entities, (2) mechanisms/generative processes that connects them,
and (3) combine to cause events/effects to occur (Tsoukas 1989, Easton 2010). Especially the
non-event, non-occurrence of an event when one is expected, requires explanation and may
provide useful insights as events occur as a result of embedded mechanisms.
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INTEGRATIVE FRAMEWORK FOR STARTUP ECOSYSTEM RESEARCH

The discussed two theories and the critical realists philosophy of science are in this
section integrated to suggest a theoretical framework (Figure 2) for startup ecosystem and
firm growth research. The structural elements are based on the competence bloc actors and
agencies but can include also incubators, accelerators or other professional service providers
such as law firms depending on the characteristics of the startup ecosystem at issue. The
application of the cultural-historical activity theory makes it possible to move deeper to the
structure in terms of understanding the evolution of the context specific economic cultural-
history that mediates the activity within the ecosystems. Critical realist causality as for
enables to include both the occurrence and non-occurrence of desired outcomes in the
processual activity of generating high-growth startups. We are not aware of studies that would
build firm growth and startup ecosystem research on similar grounds.

FIGURE 2
Startup Ecosystem Structure, Mechanisms and Critical Realist Causality
Occurrence of
Generative mechanisms desired outcomes
Structure
Causal powers
Non-occurrence of
desired outcomes

Mediating artifacts

Startups as
an object of
activity
Subjective
importance Sense Activity of
generating high- Processual
of the
Meaning growth startups outcomes
startup

Rules: Community: Division of

Institutions Competence labor:
bloc actors/ Incentives
agencies Completeness

Startups as an object of activity relate closely to the embedded view of entrepreneurship

as either a numbers or quality game (Shane 2009). Like Shane found, policy makers often
wrongly believe that creation of more new ventures will transform depressed economic
regions, generate innovation and foster job creation when the key, in fact, is to encourage the
formation of high-quality, high-growth companies. Therefore we emphasize not only to study
 14

the entrepreneurs and startups but also the other relevant actors present in the startup
ecosystem in terms of their view, sense and meaning of startups. By taking the three elements
at the bottom of the triangle in account it is possible to understand how startups are
collectively perceived, and how this affects to the type of new ventures that are being
generated within different ecosystems.
On the other hand, this also highlights why the important role is given to the tacit,
human-embodied competence (Eliasson & Eliasson 1996). High-growth potential startups are
its own competence area that is not unequal to other types of entrepreneurship, but different in
terms of needed competence requirements. Indeed, these competence requirements concern
the startup ecosystem as a whole, not only the entrepreneurs. As this competence is gained in
active participation in viable market competition against internationally best competitors with
the market (Eliasson 1996), the framework enables to study the economic cultural-history in
this sense: is there are pool of startup competent actors present ensuring that the nascent
startup entrepreneurs can have (1) competent evaluation of their early-stage business
experiment, and (2) most importantly, find the right partners for that particular case, (3) with
incentives that are aligned with the outcome of the business building process similar to the
entrepreneurs. The competence pool outlook from this perspective, its horizontal variety and
vertical depth (cf. Eliasson & Eliasson 1996, Eliasson 2003) are of essence in improving the
likelihood of success for the startups and can be studied with the framework.
If high-growth startups are a new object of work for the particular regional system then it
is possible in the light of the above that the competence pool constituted by the economic
actors is not necessarily competent enough and incentivised properly to ensure that nascent
entrepreneurs have a good opportunity to find the right money and value-add for supporting
the startup building process. This is critical to understand in research as Johansson (2010)
notes “incompetent money” can have a negative effect on firms since the financial capital
then confers power and authority to actors who do not understand the business.
Indeed, as the startup ecosystem discussion and number of studies is likely to increase we
express the importance of mapping the economic culture-history and path to the present
structure in this regard. As in many regions and countries economic growth is sought through
entrepreneurship and more so of high-growth startups, accounting for the competence pool
and its incentives are of essence to understand both from academic and nascent entrepreneurs
perspective. The research of startup ecosystems has an opportunity to bring knowledge of
how different regional economic systems deal with the transition towards startup driven
 15

economic growth when having the historically accumulated institutionalized patterns of

activity present mediating the activity.
For instance, Israel and its successful Yozma program in the early-1990s set motion the
creation of the domestic venture capital industry from a starting point where it was almost
non-existent (see Avnimelech & Teubal 2004b). Critical behind the success of the particular
program was the view that Israel at the time lacked system-wide competence and experience
in building startups, in fact even the aspiring Israel VCs needed to be mentored in the art of
business mentoring (Senor & Singer 2009: 165-166). They solved the competence gap by
bringing competence from the U.S. VC industry as a part of the VC firms managing the
Yozma funds (ibid).
The development of entrepreneurship and venture capital towards global enterprises
(Lerner 2010) and the notion that complete startup ecosystems are rare suggest to place
interest in researching the organization to use networks to access the needed resources to
complement the missing elements at the local structure. The research by Saxenian (2006)
illustrating how entrepreneurs outside the advanced core of the world economy build
successful ventures using external or global search networks is a good example of such an
activity. How the non-complete and aspiring startup ecosystems organize to solve the possible
competence problems is therefore essential to study. In this understanding the structural
completeness, balance between public and private actors, and their incentives from historical
evolutionary perspective as illustrated is essential.
The type of research enabled by the framework does not aim for uncovering the one right
startup activity system organization or structure that would be the solution of non-performing
or aspiring regions in their economic development through the startup mechanism. In other
words, the research is not about the quest for one comprehensive theory of firm growth like
has been for long attempted (Leitch et al. 2010). Based on the discussion above, it is a well
educated guess at this early stage of startup ecosystem research that there are several ways to
organize the activities for generating successful startups. However, by looking at the most
successful startup ecosystems like Silicon Valley or Israel, there are lessons to be learned on
institutional, incentive, competence and division of labor levels with regards to the embedded
generative mechanisms and causal powers that affect and have evolved during long time
periods to present form. Indeed by understanding the startup ecosystem not as a thing but
rather an outcome orientated processual open system, and firm growth as a verb (Van de Ven
& Poole 2005, Tsoukas 1989), we can better assess the startup ecosystem’s role as a means to
achieving the outcomes different regions around the world are striving for.
 16

DISCUSSION
The purpose of this paper is to contribute to the startup ecosystem and firm growth
research by developing an integrative framework for understanding and uncovering startup
ecosystem structures in different geographies. We defined the startup ecosystem structure
based on the economic actors outlined in the competence bloc theory (Eliasson 1995, Eliasson
& Eliasson 1996) with some modifications in order to make it better suitable for startup
ecosystem research. This way we addressed the knowledge gap regarding the systemic
structures of different geographical economic systems that is rather limited because firm
growth research has for long relied on studying the firm entity while viewing the society as a
rather anonymous structure (cf. Sannino et al. 2009).
By leaning on cultural-historical activity theory (e.g. Engeström 2001) we described the
startup ecosystem as an activity system that is embedded to economic culture-history and
further discussed how, by understanding the startup as a shared object of its activity, the
mediating role of other economic actors, institutions, incentives, and the completeness of the
structure (Eliasson & Eliasson 1996) can be taken in account in research. Startups are then
seen as collective business experiments where the outcome is uncertain beforehand, it is
impossible to know weather the startup will be a great success or not (Eliasson 2003).
We therefore analysed why the positivistic view of causality that is based on the quest of
natural law-like factors for opening the “black-box” of firm growth is not sufficient as it
cannot account for the occurrence and non-occurrence at the same time. This is
contradictory because startup ecosystems processually generate also the non-
occurrence of high-growth startups despite the opposite intention. We suggested how
critical realism (e.g. Bhaskar 1975, 1978, Sayer 2000, Easton 2010) as a philosophy of
science and its view of causality that is founded on understanding the structure, its embedded
generative mechanisms and causal powers, make it possible to include both the occurrence
and non-occurrence of desired outcomes as normal in the collective process. The search for
this type of mechanisms means that we are not satisfied with merely establishing systematic
covariation between variables and events; a satisfactory explanation requires that we are also
able to specify the social “cogs and wheels” (Elster 1998, Hedström & Swedberg 1998).
Understanding firm growth is then not necessarily a measurement or variable problem.
These theoretical and philosophy of science grounded views were lastly integrated to the
suggested theoretical framework. We are not aware of prior research that would enable to
study startup ecosystems and firm growth this way. The framework proposes the kinds of
theoretical viewpoints that can be valuable in addressing the long-standing challenges
 17

highlighted by prior firm growth research (Leitch et al. 2010). Startup ecosystem research
understood from the critical realism based philosophy of science has significant potential in
addressing the shortcomings of firm growth research.
The view of growth in the suggested framework is fundamentally different than in firm
growth research in general. A significant portion of firm growth studies approach the growth
phenomenon by placing the firm and its owner-manager to the focal point as an unit of
analysis, and uses positivistic natural law-like reasoning based causality in reasoning. We
discussed how this is in contradiction with the view that startup ecosystem as a collective
economic actor produces at the same time both successful and unsuccessful startup as
processual outcomes. Structure, competence and mechanisms needed to build successful
outcomes is therefore not something identifiable as a law that could be further copied and
applied in new contexts with same results. We noted how Silicon Valley for instance has been
tried to replicate during the history without significant success.
As many startup ecosystems are just emerging and taking first steps without a track
record of creating successful startups, we emphasize the temporal dimension of the startup
ecosystem evolution as decades long. Silicon Valley or the Israeli startup ecosystems did not
happen over night (e.g. Avnimelech, Kenney & Teubal 2004) and the systemic impact to
economic development takes time, but needs the right institutional level understanding and
market based drivers to get results. Access to global networks and resources (Saxenian 2006)
is one potential social mechanism for overcoming and addressing the local startup ecosystem
weaknesses by entrepreneurs.

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