The Digital Entrepreneurial Ecosystem

Over the last few decades, a new breed of businesses equipped with digital technologies has disrupted industries, including finance, communication, advertising, operating system as well as various internet-based industries ranging from real estate to transportation. Some are startups that have become new market leaders. Consider the likes of Uber and Airbnb or Facebook, Amazon, Apple, Netflix and Google (FAANG). Many of them are Matchmaker businesses whose core competency is the ability to match one group of users with another by reducing the transaction cost. The advancements in information communication technologies (ICT) opened a pathway for these businesses. More specifically, platforms are enabled by technological openness (architectural interface specification) and organizational openness (governance) both of which are mediated by the platform owner. This rise of digital multi-sided platforms as avenues for value creation, appropriation, and innovation is commonly known as platformization.

Digital platforms are an emergent organizational form characterized by (1) technology: a modular core, standardized interfaces, and complementary extensions, and (2) social processes: a set of governance mechanisms managing the ecosystem of independent complementors. The ICT has elevated role of users and agents, and also the creation of platform ecosystems that facilitate their social and economic activities. In 2011, Stephen Elop, the Chief Executive Officer at Nokia, stated in a company memo, “Our competitors aren’t taking our market share with devices; they are taking our market share with an entire ecosystem.” Apple and Google opened up their platforms providing application programming interfaces (APIs), software development kits (SDKs) and other boundary resources that enabled complementors to access, customize, and exploit market opportunities within their digital platforms.

These platforms offer important benefits to agents – such as, access to established market, reliability in transactions, reputation of platforms, and guaranteed operability. In effect, platforms have dramatically lowered the costs of development and distribution of mobile applications and other complementary products connecting to platforms that now worldwide app developers and other agents can exploit using heterogeneity of knowledge resources. Entrepreneurial innovation closes the gap between supply opportunity and demand need within platforms. The effective use of technology and mobilizing factors of production by third-party complementors increases platform efficiency.

The “Digital Entrepreneurial Ecosystem” (DEE) integrates two separate but related literatures on ecosystems, namely, digital ecosystem and entrepreneurial ecosystem. The framework consists of four components (See Figure 1): (1) Digital User Citizenship (DUC) concept includes users on the demand-side and the supply-side; (2) Digital Technology Entrepreneurship (DTE) includes app developers and various agents that contribute to entrepreneurial innovation, experimentation and value creation on platforms; (3) Demand-side driven intermediaries enabled by digital technologies that orchestrate social and economic activities between users and agents; (4) Digital Infrastructure Governance (DIG) pertains to all government policies and regulations that govern social and economic activities of users, agents, and platforms at the local, national, and international levels in the digital age. This new framework situates digital entrepreneurship in the broader context of users, platforms, and institutions, such that two biotic entities (users and agents) actuate individual agency, and two abiotic components (digital infrastructure and digital platforms) form the external environment.

Figure 1 The Digital Entrepreneurial Ecosystem

A sustainable biological ecosystem is one which can thrive and support itself without external assistance or interference. A number of conditions need to be satisfied for an ecosystem to be self-sustaining. A sustainable “Digital Entrepreneurial Ecosystem” is one in which (1) user privacy is protected; (2) platform efficiency enhanced by third-party agents; (3) market competition is not stifled by platforms; (4) security of digital infrastructure ensured. Creating and maintaining these conditions present its own unique set of challenges.

First, protection of user privacy is critical for a healthy and active Digital User Citizenship. If the public trust becomes eroded, the sustainability of the DEE suffers. Erosion of trust in platforms can lead to a decline in user activities or membership. For example, Facebook’s scandal involving Cambridge Analytica exposed millions of users and served as a watershed moment that prompted more government regulation of the internet to protect consumer privacy. Since then, Facebook has experienced a steady decline of daily active users in Europe.

Second, Digital Technology Entrepreneurship brings forth entrepreneurial innovation and thereby increases platform efficiency. The larger the user base, the larger the market segments and niches. A good platform sponsor provides boundary resources ease the entrepreneurial innovation process and offers a fair profit-share plan. Over the years, some critics have complained that Apple’s high developer commissions and fierce control over its App store can limit experimentation, entrepreneurial innovation, and value creation.

Third, monopolistic behavior of Digital Multi-sided Platform will stifle competition, innovation, and entrepreneurial activities, which results in a welfare loss for consumers and the society as a whole. For example, European regulators have penalized Google for antitrust violations three times: for unfairly pushing its apps on smartphone users and blocking rivals; for using its search engine to steer consumers to its own shopping platforms; for blocking its rivals from placing advertisements on third party websites.

Fourth, Digital Infrastructure Governance is responsible for keeping the digital economy open and secure. Huawei has been accused of being controlled by the Chinese government, and its equipment spying on companies and countries. These allegations on the issues of control, ownership, and fraud have raised questions whether the Chinese smartphone and telecommunication giant should be allowed to build the world’s 5G mobile infrastructure. While Huawei has defended itself as an open, transparent and trustworthy company, it remains to be seen how global users and governments will respond.

In addition to the aforementioned conditions, one cannot leave out the role of digital finance to building a sustainable DEE. Secure and reliable digital infrastructure is necessary preconditions for the flourishing of the online financial transactions. A migration to a cashless society is a necessary first step, which users will be inclined to take only if there are tangible benefits. One such benefit is the reduction of transaction costs – the seamless payment experience between users and agents. In the digital age, digital finance has transformed capital markets too. One rather remarkable trend is the emergence of crowdfunding, an alternative method to raising capital. Similar to the way knowledge commons is a concerted effort of sourcing knowledge online, crowdfunding is a concerted effort of sourcing funding online. Another important trend is the rise of digital platforms many of which are unicorns. Startups are reaching $1 billion or even $10 valuation (e.g. decacorns) at faster pace. The average time for a US technology company to go public has gone down from four years in 1999 to eleven years in 2011. The formation of mega funds, such as the Softbank’s $100 billion Vision Fund, and the availability of venture capital funds increasingly leave little incentive for platform startups to go public. Part of this decision-making is that demand-side driven businesses tend to take long to develop a sustainable revenue model and going public would subject it to scrutiny and pressure that tends to drive down the value. In short, finding a sustained long-term growth remains elusive.

Table 1: Keys to Building a Sustainable Digital Entrepreneurial Ecosystem

Digital User CitizenshipDigital Multi-sided Platform
For a sustainable DEE, terms to user privacy should be clearly laid out and upheld by a social contract since public trust is a prerequisite to user participation in the digital economy. Key word: “Privacy”Example: FacebookFor a sustainable DEE, digital platforms should be kept in check from partaking in monopolistic behavior that stifles market competition, innovation, and entrepreneurial activities. Key word: “Competition”Example: Google
Digital Infrastructure GovernanceDigital Technology Entrepreneurship
For a sustainable DEE, governments are responsible for enacting and enforcing rules and regulations that discourage destructive activities that undermine data security and encourage productive activities.   Key word: “Security”Example: HuaweiFor a sustainable DEE, third-party agents engage in entrepreneurial innovation and knowledge exchange that close the gap between supply opportunity and demand need within platforms that increase platform efficiency. Key word: “Efficiency”Example: Apple