Last month, we discussed whether the Interstate 20 corridor could become the next Austin, Texas, a region that enables the creation of an entrepreneurial ecosystem to support torrents of new business venture creation.

I posed a caveat to all of the good things that have happened in our region around entrepreneurship to date: For new ventures the key resource needed is money. Investment will flow to its highest expected returns adjusted for risk. Why would we expect our homegrown entrepreneurs to be better than entrepreneurs in other parts of the United States and world who might offer higher expected returns adjusted for risk for investors?

This is a huge question for us and an answer needs to be persuasive but realistic. We cannot fool ourselves. This will only delay an inevitable situation where we talk a good game without delivering and all of the energy just dissipates away.

First, let’s discuss the importance and difference between a region’s comparative advantage and given firms’ competitive advantage. Comparative advantage is gained when a geographic region can provide key resources supporting all individual firms in an industry in a rich mosaic of healthy business relationships. A firm’s competitive advantage is either based on low costs and thereby low prices, or differentiation, with higher costs, but allowing charging premium prices.

Thus, ideally we need for the I-20 corridor to build and sustain comparative advantage first, helping our population of existing and new venture startups create and sustain their own unique competitive advantages.

The corridor building comparative advantage is not a must, but a huge plus. Dr. Michael Porter of Harvard chronicled in the 1980s the reality of industrial clusters which are groups of complimentary suppliers, intellectual resources (like universities, consultants, accountants, lawyers, etc.), and funding sources that focus on one industry and enjoy rich, healthy business relationships.

The California wine cluster, the New Orleans tourism and leisure cluster, the Dutch flower cluster, the Italian shoe cluster, Silicon Valley and Highway 128 in Boston are some examples. The argument goes, unless our region can develop an advantaged cluster(s), it will be more difficult for individual firms to develop and sustain their unique competitive advantages. Recall this is a plus and not a must.

“Good” industry clusters are groups of complimentary resources and incumbent firms that are “protected” in a legal, not monopolistic, sense. A good cluster makes it difficult for just any new entrant to join by erecting entry barriers that protect the incumbents. Excellent new entrants with great business models and great management teams will figure out how to gain entrance and after perhaps a squabbling period, will be accepted because they help increase the size of the overall pie. Marginal firms will have a tough time.

Cyber innovation, bio-med, supply chain/logistics and digital animation could be valuable clusters. What are your thoughts?

The second building block is the funding of individual homegrown ventures because investors see advantages in investing in them over other ventures anywhere in the world. The advantages have to do with a venture team who forges compelling business models for real customer needs, is a great management team and one that investors can get to know and trust. A huge part of this is monitoring costs that investors must bear once they make investments. It is simply easier and cheaper for investors to monitor progress, or lack thereof, in ventures that are geographically close and ideally in a good cluster. Think of the expense and angst of monitoring the performance of a group of Chinese entrepreneurs from our region. Other things held equal, homegrown talent wins.

Investors typically need at least 12 firms in their portfolios to diversify their risk. Austin Ventures, a key venture capital firm in Austin has invested in at least 75 firms, and most are not headquartered in Austin. Why the nicety that our ventures be homegrown and headquartered here in the I-20 Corridor? The quick answer is this will further strengthen the clusters but also provide employment for people here or who would move here with the right skills.

Now for the third and last building block: the inherent brain power and business acumen of the homegrown venture teams themselves and if there is enough of this talent to diversify the portfolios of current and future investors with deals big enough to interest them.

Honestly, I cannot answer this third block and question now, but I can offer this observation. I have come to know entrepreneurs, young and old, who have created and built successful major ventures here. This is prima facia evidence that there is very little preventing the further rise of an excellent entrepreneurial ecosystem here.

As I ended last month’s article, the pieces are here for the I-20 corridor to become the next Austin, Texas. What do we want to do about it?