The Measurement Trap

Mariana Mazzucato is one of my favorite thinkers. She’s an academic who rejects market orthodoxy and presents her arguments, persuasively, to the masses—a gift that many in the field of economics don’t possess. Mazzucato’s overarching argument is that (a) the state’s role in driving innovation, and therefore economic growth, is much larger than is reflected by market reward mechanisms, and (b) a primary driver behind this lopsided arrangement is the flawed way we value a range of inputs to production.

On this latter point, Mazzucato argues in a recent New York Times Op-Ed:

Essentially, only something with a price is valuable. This approach overvalues goods and services with a price tag — which in turn make up a country’s gross domestic product, the driver of public policy. This has perverse effects. A coal mine that spews carbon into the atmosphere increases G.D.P., and so is valued. (The pollution it causes is not taken into account.) But the care given to children by their parents at home doesn’t carry a price, and so is not valued.

Since I have the topic of entrepreneurial ecosystems at top of mind, I immediately went there after reading this quote. It reminds me that what gets valued in entrepreneurial ecosystems tends to be the tangible factors that can easily be counted, like the amount of investment capital or the number of startups, instead of the intangible factors that more fundamentally drive system value, such as social capital or tacit knowledge.

In my upcoming book, The Startup Community Way, which will be on shelves July 28, my co-author Brad Feld and I dedicate an entire chapter to this phenomenon—we call it The Measurement Trap. Here’s a partial snippet from our description of the fundamental measurement problem:

Effective measurement of startup communities and entrepreneurial ecosystems is still in its infancy, but demand for metrics is growing, as the scope of participants widens and the amount of committed resources expands. However, the measurement of complex systems is inherently difficult. Consequently, the void gets filled with quick fixes and substandard approaches that emphasize many of the least important factors. This leads to confusion about what matters most and results in misguided strategies that ultimately fail. Using data to dictate which strategies get implemented, the proverbial tail is wagging the dog.

This problem occurs because people, especially in feeders, need to demonstrate the direct impact of programs or activities to justify their continued investment and support. Since the easiest things to measure are tangible, quantity based, or input oriented, this motivates the design of programs around those types of factors. Unfortunately, these are often the wrong factors to be applying pressure to because they have the least amount of impact on the long-term performance of a startup community.

This gets compounded by the fact that many of the metrics being emphasized take a long time to materialize and are simultaneously affected by many other factors. And yet, the impact of a course of action is expected to occur quickly and be directly attributed. These expectations are misguided.

In complex systems, the interactions matter more than the magnitude of people or resources, and the value of these interactions takes time to materialize. The intervention points with highest leverage are those dealing with the system structure, such as behaviors or relationships, and the underlying attitudes and values of the people involved. But the qualitative, localized, and personal nature of these factors makes measuring them challenging to capture, requiring a lot of bespoke on-the-ground work that imposes significant time and cost burden. Furthermore, data collection is best done at the individual level, continuously, and over a long period of time. The longitudinal data is much more important than cross-sectional data at one moment in time.

If you want to read more about The Measurement Trap, and a whole lot of other subjects about startup communities and entrepreneurial ecosystems, make your pre-order for The Startup Community Way today.

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