Recently I was asked to provide some thoughts and recommendations on how entrepreneurs in small cities can be successful.
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What are the pros and cons of starting a business in a small city? Would some types of small businesses -- e.g., a retail store, restaurant, or tech startup -- do better than others in a smaller city?
Pro -- in a smaller city, there may be more tightly connected social networks (i.e., everybody knows everybody) that entrepreneurs can leverage when they get stuck in creating their new venture. Social networks and social capital are two powerful drivers of entrepreneurial success in a number of ways; e.g., the right social connections can help an entrepreneur receive seed funding easier, help them validate product ideas faster, and may also help provide access to potential strategic partners.
Con -- in entrepreneurship, having the right social network with access to the right resources is important too (i.e., resource fit). Smaller cities may have less diverse resources than larger cities, less access to angel investors and venture capital. In addition to funding, smaller cities may lack diversity in their overall social networks and in potential customers. Without such diversity, it is difficult to validate new product ideas across different customer segments. Furthermore, smaller cities have fewer people by definition, which indicates a smaller market size to test and sell one’s products. Getting traction and validation for new products is difficult and perhaps, in some cases, much more difficult in smaller cities due to the aforementioned reasons.
Solution -- engage in customer discovery and validation online (e.g., online focus groups, customer interviews, and surveys). This brings up a very important issue, which is how digitization will change startups. This may seem like an outdated or already solved problem, but many large companies see the issue of developing a digital business strategy as a core priority to survive in the near future (e.g., see McKinsey report on "Why digital strategies fail"). Some business models transition very easily to digitally enhanced business models (e.g., software as a service), but new ventures that require brick-and-mortar stores to sell products may find a digital transition of their business model more difficult and more necessary over time.
What tips do you have for an entrepreneur starting a business in a small city?
The main limitation in smaller cities is fewer resources in general, as well as fewer potential customers. To remedy this situation, I’d recommend entrepreneurs in small towns create their own digital strategy, or some way to convert their revenue model into one that can sustain itself online. Online offers access to both resources and new customers, which significantly helps a nascent entrepreneur get feedback on their product ideas and scale their business. A common method is to change the pricing model of one’s product or services to a subscription-based service or having multiple “packages” of products to more easily accommodate the needs of multiple customers segments.
Second, as online does not always work perfectly, I would recommend that entrepreneurs in smaller cities find the community or adjacent city that has someone else (i.e., another entrepreneur) working on a similar business model. More often than not, other entrepreneurs are also looking for help, so if you can find a complementary skill set in another entrepreneur who has the same passion for solving the same problem, then a number of potential benefits emerge. For example, with the new social connection in a new city you have access to more diverse ideas, can learn from their failures, understand a potentially new customer segment (i.e., new customer needs), and also gain access to a completely new social network. Great places to reach out for help are:
What can local authorities do to encourage entrepreneurial activity in their small city?
A very popular and growing model for developing an entrepreneurial ecosystem in a city or region is being referred to as a Clinical Model of Entrepreneurship (E-Clinic). A good example of this model is the E-Clinic run out of NC State University, which won best emerging program in entrepreneurship in 2017 from the United States Association of Small Business and Entrepreneurship (USASBE). Essentially, this model connects multiple stakeholders in the ecosystem in a way that benefits all parties involved. For example, professors connect their students to work on real projects with actual entrepreneurs, and in turn collect data to better understand how to solve the problems that emerge during the new venture creation process.
Mentors and High Quality Ventures - - Similarly, local entrepreneurs get access to expert advice and students to help them validate new products and grow their business. Unlike traditional entrepreneurship programs, the E-clinic model goes one step further and connects multiple actors in the entrepreneurship space in addition to researchers, students, and practicing entrepreneurs. For example, each student is required to develop their own ideas and refine them through multiple courses, in addition to learning practical skills and necessary real-work experience by working with real entrepreneurs. As each student starts to validate their own ideas, they are connected directly with mentors (i.e., local business owners, serial entrepreneurs, lawyers, accountants, etc.), schedule weekly meetings with these mentors, and also begin to develop relationships with local investors, all with the purpose to create real companies that last. This is an important point, as the focus on the E-clinic model is to create quality companies rather than a high number of new ventures that have not been properly vetted.
The E-clinic model was formed based upon the hospital teaching model, where students learning different medical skills are embedded within a hospital and supervised by doctors while developing their skillset. This new program simply replaces the doctors with entrepreneurs, professors, mentors, investors, local government, and multiple other community stakeholders in order to help emerging ventures create real value in their communities.