While investment promotion in the US is often associated with hefty tax incentives for big investors, more and more economic development organisations (EDOs) are turning their attention towards small start-ups.  

As EDOs expand into the start-up space, accelerators and venture capital firms are expanding into the economic development space, leveraging their expertise and networks to help EDOs build start-up ecosystems.

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Among them is 500 Startups, a global venture capital firm that also partners with companies and government agencies to build start-up ecosystems. fDi spoke to Rodrigo Mahs (RM), the firm’s head of North America innovation and partnerships, and Derek Pham (DP), an innovation and partnerships manager, to learn more about their work with EDOs.

Why did 500 Startups start partnering with EDOs?

RM: The reason why we started partnering with EDOs was due to this incredible shared alignment that we have in vision and mission, in terms of developing regional and global ecosystems, diversifying the economy, advancing technology and creating new jobs through entrepreneurship.

We can take the EDO’s vision, and we can take their deep knowledge and know-how around the local economy, and the specific needs of that group of their constituents, and help them to either activate or create what is needed in order to build a thriving and sustainable ecosystem.

What benefits can start-up ecosystems bring to city and regional economies that more traditional investments cannot provide?

RM: Start-up ecosystems provide great opportunities for economic diversification. They also bring the opportunity of knowledge augmentation and transfer through the attraction and development of new talent, which wouldn't necessarily be coming to more traditional organisations, especially in industries that are being disrupted today. A lot of the requests that we’re getting are from cities and countries that have solid industries that are being disrupted, and they need to find new ways to diversify.

But we don't believe that start-up ecosystems and traditional industries are exclusive to one another. Actually, they should be integrated in a symbiotic relationship where the large companies in the traditional industries can benefit from the start-up ecosystems, through tech partnerships, acquisitions and investments, while at the same time the start-up ecosystem could benefit from these large companies, as they offer opportunities for growth.

Can you elaborate on how start-up ecosystems and traditional industries can form a symbiotic relationship?

RM: What we've been experiencing so far is looking at building an ecosystem from scratch in a region that has an existing industry or an area of focus. You have regions that have strong auto manufacturing. How do you then leverage that expertise to ask how do we become the hub for mobility or the hub for autonomous driving?  

I think the question is, has that industry been disrupted or not? Is it part of the future or is it part of the past that needs to be transformed? The question that needs to be asked is, is the industry base here to stay and do we want to continue to complement it through start-ups? Or do start-ups need to start to transform that ecosystem?

Do EDOs recognise these benefits, or are they reluctant to support small, early-stage companies?

RM: We recently interviewed key development leaders from over 33 cities and 21 states across the US to really try to uncover the key opportunities for growth and development. And the number one opportunity that we heard was to build and grow strong early-stage start-up programs. It is definitely top of mind for at least the cities and states that we included in our research.

Covid-19 has led to fewer big investment projects while remote working has distributed tech talent. Have these trends led EDOs to focus more on start-ups?

RM: When you land an Amazon HQ or a distribution center, you're immediately going to have jobs created. But if anything disrupts that, you've automatically lost all those jobs, and you're not building the general talent and the capabilities to sustain through time.

DP: We spoke to smaller cities that are looking to find ways to still remain relevant and competitive in this new environment where they see this untethering of the tech workforce from these big centers. They are trying to figure out how they can kind of grab a piece of that.

This article first appeared in the October/November print edition of fDi Intelligence. View a digital edition of the magazine here.