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Which came first, the chicken or the egg? Great football players make great coaches or great coaches make great football players. I call these circular arguments but they are actually causality dilemma’s and they drive people crazy.
In startup communities I believe the same argument or dilemma exists but with another anchor to the circle. Great companies.
My circular argument goes like this: Great leaders build great companies which build great Communities which build great leaders which build great companies.
For some of you this makes a lot of sense. You are probably the more vision & abstract type of thinker. For those of you who skew to a more precise and factual point-of-view, your head probably just blew up.
“You want answers! I want the truth! You can’t handle the truth.” (Insert Tom Cruise and Jack Nicholson in A Few Good Men or Rudy Giuliani, “truth is not truth”).
Well I have a little surprise for you. While laying out this framework I have tricked you by getting you to eliminate the things that are not necessarily catalysts for a great startup community (space, capital, government programs or even Startup Weekends – all of which can help tremendously).
The one catalyst for a startup community are the entrepreneurs themselves.
I have a pet phrase I use every day, “no entrepreneurs – no entrepreneur community”. They are the center pivot for everything. Without them the rest is just noise. Without them the rest of us are useless. I think it’s funny and sad when I hear community leaders working hard to help spawn, grow and accelerate their startup community and never once spent more than 15 minutes with a local entrepreneur.
Let me repeat – everything starts with the entrepreneur. Serve them. Build your community around them. And when you are conflicted with multiple choices of what to do next, ask yourself this one question – “what action of mine would help the entrepreneur the best”.
Last week, Endeavor Insight (the research arm of Endeavor Global) teamed up with the Bill & Melinda Gates Foundation to publish a new report on fostering productive startup communities. The report was authored by Rhett Morris and Lili Török of Endeavor, and I think it is one of the best pieces of empirical work I’ve ever seen on startup communities.
Why such a strong endorsement? Because it helps fill a pretty big information gap for two of the most important principles for building startup communities—networks over hierarchies and entrepreneurs as leaders. At present, the evidence-base is thin, due to the fact that there are no shortcuts to doing this type of work well (building network maps with vital information about the nodes and relationships among them)—it requires painstaking, on-the-ground data collection, which is expensive to do and requires a lot of time (it took Endeavor 18 months to complete the study). Thankfully, Endeavor has done the work in two cities so that we can all learn from it, and more importantly, use to help persuasively state the case for bottom-up community-building.
The research takes a case study approach, studying in extensive detail the startup community networks in Nairobi and Bangalore. To do this, the authors collected information on the individuals and organizations involved in the startup communities in each of these two cities, and mapped the relationships among them. The main result: Bangalore’s startup community is more productive (more high-growth firms and companies at scale) because the network is denser and because the biggest influencers are themselves entrepreneurs; the opposite is true in Nairobi.
The report begins by setting context on the importance of entrepreneurship, by demonstrating that a relatively small number of high-growth companies create most economic value in jobs. This is true in most countries and cities, and as we can see here from the report, is more the case in Bangalore versus Nairobi.
In other words, most businesses don’t produce much in the way of jobs or output, but a small number create a lot of those things, and they drive economic growth. Displayed differently, the report shows that Bangalore’s high-growth business sector is much more productive than is Nairobi’s.
In other words, Bangalore has been better at producing businesses that achieve very high rates of growth and reach a large scale.
That of course leads to the question of why in one city but not the other? There are a number of factors that could affect this, but central to this study—and two in which I mentioned before are often neglected due to measurement challenges—are networks (relationships) and leadership.
More specifically, Nairobi not only lacks the network density of Bangalore, but it critically lacks the right type of influencers. As the network graphs below make clear, the most influential people in the Bangalore startup community are successful entrepreneurs—those that have guided companies to scale—and non-entrepreneurs are not very influential. In Nairobi, the opposite is true.
Pretty impressive right? I encourage you all to read the report itself—it’s not too long and it’s written very well (succinct yet weighty). The report summarizes the following five findings, followed by a graph explaining the differences between on bottom-up, network-based approaches to startup community building (recommended) versus top-down ones (not recommended).
Finally, the report concludes with some recommendations, which I’ll spell out here.
- Avoid the myths of quantity (ie, quality over quantity any day—something I call the More of Everything Problem)
- Follow local founders who have reached scale
- Listen to leaders of the fastest-growing firms to identify the most critical constraints in the local entrepreneurship community
- Expand existing mechanisms that leaders of companies at scale use to influence upcoming founders
- Invite leaders of companies at scale to positions of influence at existing support organizations
Couldn’t agree with that more. Well done, Rhett, Lili, and your team.
Careful which game you chose to play as you tell stories about your community.
When selling anything, the first tool you utilize is the tool that showcases the benefits of your offering. Seems like a no-brainer, right? Resumes attempt to do this for you. Brochures or sell sheets emphasize the benefits of your product or service. As you begin to tell your community story, the first task at hand is to identify your unique community strengths. Playing to your strengths is a vital and obvious tool to use for many community building goals.
But, I see community leaders get this wrong all of the time. I find this exacerbated in smaller communities. Let’s call this the community asset theorem.
The basis of the theorem is that the biggest company in your small community is by default your biggest asset and as such one believes that this is a unique asset of your community as compared to other communities. (We will discuss the compare community theorem at another time.)
The first trait of the theorem I find myopic. Myopic in that you assume your asset is unique as compared to everywhere else because it is so vital to your community. The local healthcare system is a perfect example. Decent size cities (1M population) have a dominant healthcare facility with some decent research component attached. They are typically the largest employer in town. And they are staffed with super smart people. Community leaders then develop an asset list based on the fact that they have a sizable and leading healthcare ecosystem in their community and as such this should be the basis for a unique startup community.
As compared to who?
Do you know that every city with a population of 500,000 has one of these if not more? Do you know that there are 34 cities in the US with this population or larger? What is unique about that? I think it is a fundamental flaw to think your healthcare system could be the basis for a robust startup community.
The implication in this line of thinking is that you can build your community by recruiting entrepreneurs, capital and generate general attention to your area because of this unique asset.
When I hear community leaders highlight their local dominant company and then leap to assumption that they can build a unique startup community around this a number of red flares go up.
Instead of taking this naïve and myopic view, why don’t you go find your local coworking space or the expensive but hipster coffee shop and talk to a bunch of entrepreneurs. Find out what they are all working on and build your unique community value proposition around them.
On October 1st, New Jersey Governor Philip Murphy announced a $500 million plan to increase venture capital investment in the state. The move is motivated by New Jersey’s decline (relative to other states) in venture capital investment the last decade, and his belief that an expansion of publicly-subsidized venture capital pools will help turn things around.
The plan calls for the establishment of an evergreen fund (with no fixed time horizon), whereby the state will co-invest with venture firms that put money into New Jersey startups. Half of the $500 million will come from corporations through an auction of tax credits (sold at a discount and subsidized by public funds), and the rest would come from the co-investments made by venture capital firms. The state’s portion of net returns would be reinvested into the fund for future use.
Information on the plan is still sparse and there are a lot of details that need filling in. But that’s precisely why we’re speaking up now. The details really matter here—history is littered with failed government venture capital programs that didn’t get the specifics right. So, Governor Murphy, if you’re listening, we’d like to share some ideas with you as your plan begins to take shape.
Understand the problem first
For starters, it’s worth prodding deeper on what exactly is ailing New Jersey’s innovation economy. Is it truly a lack of venture capital supply, or has there also been a change in demand for venture capital (i.e., investment-worthy companies)? It is critical to consider both sides of the equation. “More venture capital” is sometimes the right answer, but in our experience, capital tends to follow good companies—not the other way around. Other factors may also be at play. As one example, New Jersey is heavily weighted in the same technological sectors that have seen their share of venture capital activity overall decline (healthcare and energy) and under-weighted in sectors that have grown the most (business and consumer software and services).
Recognize that entrepreneurship is multi-dimensional
Venture capital is just one of many resources for high-tech startups (we wouldn’t put it at the top, by the way). We recommend the governor take a comprehensive approach, from building “hard assets” like the talent base in the state to developing “soft assets” like seeding the environment for the right cultural conditions to take shape from the bottom up. This latter set of factors often go ignored, but they are critical for startup communities to be successful. The goal should be to make New Jersey the best place for startups to succeed, not to be the easiest place to raise a round of venture capital. These are not the same thing.
Get clear signals from the market
To his credit, Governor Murphy seems keenly aware of one of the biggest pitfalls of government venture capital programs—the lack of private-market participation—by making matching funds by professional venture investors a central pillar of the program. We’d encourage him to go further and require that the state’s participation in a funding round be no more than 40 percent, with the remainder of capital coming from investors or their syndicates. This will better align incentives and reduce moral hazard from investors hoarding the best deals.
Know the risks and rewards of the model you choose
Two of the most popular structures for government-sponsored venture capital programs are fund-of-funds (where the government invests into venture funds) and co-investing (where the government invests into companies). The first is a form of indirect investing where the latter is direct investing. Historically, state governments have been a poor direct allocator of capital into private companies, so the most effective approaches have generally been the fund-of-funds approach. The New Jersey plan appears to be a direct investment program, and for it to be effective, it will need to run by experienced investors with the right incentives and be structured in a way that limits its exposure to political pressure.
Agency and incentives matter—a lot
We have alluded to this in the previous two points, but it’s worth repeating because it’s the second major pitfall that typically sinks government-backed venture capital programs. Because the state will co-invest with venture capitalists, the investors will have agency, making it vital that the objectives of the investors are aligned with those of New Jersey. The successful fund-of-funds approaches have historically encouraged but not demanded the dollars be allocated 100% in the state they are raised from. Adverse selection can quickly come into play here, as the government becomes a source of additional capital, independent of the quality of the investment. Remember that venture capital investing, especially early stage, is extremely high risk / high reward (with a lot of failed companies and investments that go to zero). Avoiding the adverse selection problem is paramount for any co-investment program.
Organization and process will matter a lot too
The public officials charged with administering the program should have deep expertise as startup investors. They should also be compensated appropriately based on the performance of the investments—again, aligning incentives so that capital is put to its best use in the state. It’s also imperative that the individuals have existing relationships in the venture capital and startup community in the area, and that they can make decisions independently from any political influence, favoritism, or corruption. To build public trust, decisions and fund performance should be made in a transparent way. Hire the right people and make sure they are able to do their jobs without interference.
Concentrate activity—don’t spread it around
Though there will be pressure to spread public funds equitably around the state, a more effective strategy would be to bolster regions where startup activity is already occurring. The parts of northeastern New Jersey inside of the New York City metropolitan area account for about 80% of venture deals in the state. However, they are spread out across a wide geographic area, lacking a true center of gravity. This is problematic because modern, innovation-driven entrepreneurship thrives in dense, urban areas. Policies that work to improve density, particularly in areas across the Hudson River from Manhattan such as Hoboken, Jersey City, and even Newark, should be a major priority.
Respect the entrepreneurial process
For venture-backed startups, things move fast, they break, and chaos reigns. Most companies fail. In a typical well-performing venture fund, 50% of the companies will fail, 40% will break even or return very little, and 10% will carry the entire portfolio. Investment decisions must be made quickly and under a high degree of uncertainty (where, ultimately, failure is the norm). Finally, it can take a decade or more for a startup to generate a return on an investment. These conditions, and the decade-long timeframe, are unthinkable for government officials, which is why they need to appreciate this dynamic and protect the program accordingly.
Measure, learn, and adapt
Remember, this is an experiment, so you don’t have to do everything at once. Start small. Learn from what you’re doing, review, and adapt as needed. Repeat. For this to be possible, you need to take measurement seriously. This means building a robust measurement scheme into your roll-out plan and evaluating your activities along the way. As you get a better sense of what’s working, begin to expand your program if it makes sense. It’s also critical to understand that much of what you want to see in the data will take years to unfold and some of it won’t be able to be tracked directly.
Take a very long-term view
We know this is one of the biggest challenges for government engagement with startup communities because it grates against the political cycle, which is much shorter. But, for vibrant startup communities to take shape, it takes decades—at least twenty years—for things to really take hold. While progress can be tracked over a shorter time frame, you must make a long-term commitment to seeing it through. Reach across the aisle and build a bipartisan coalition that will better ensure that happens. The story of Silicon Valley is not an overnight success story; it’s now over 100 years in the making.
Build on your strengths and don’t over-engineer
Don’t try to create a technological or startup cluster from scratch—New Jersey has plenty of them. There is already a well-established tradition of healthcare around Princeton and parts of the northeastern suburbs of New York City, as well as some recent internet platform successes in Newark (Audible) and Hoboken (Jet.com). Something is happening there already. Instead of trying to build something from nothing, search for how you can support the existing infrastructure and fill gaps where key ingredients might be missing. If you don’t know what those are, ask the entrepreneurs. Ask them even if you do.
Make New Jersey a great place to live
One of the most important things of all is to make New Jersey a place where well-educated founders, management, technical teams, and their employees will want to live, work, and raise their families. The value of these indirect policies as a mechanism for entrepreneurship policy is often overlooked in the rush to use direct, blunt force objects that are more familiar to government officials. Young- and mid-career professionals value quality of place tremendously, and with the option to live in New York City and Philadelphia, it is critical that any talent attraction strategy be centered around quality of life.
These are just a few ideas that we might consider if we were tasked with structuring a state venture capital program—or more broadly, to improve the environment for startups in a state. We applaud Governor Murphy for his wise recognition that innovation-driven startups are a key to economic vitality and for his willingness to take action to expand opportunities in New Jersey. However, we also want to make clear that errors in conceptual and implementation strategies and tactics could doom a program to failure before it even gets going. Let’s hope Governor Murphy gets things right.
A few years ago, Brad Feld outlined in a blog post the notion of density as a primary factor in the maturity of a startup community. His observation was that when visiting Boston, he ended up never leaving Cambridge and that in turn meant that Cambridge was a great place to do everything startup. Though a specific ratio was never outlined, the idea is that there is a flywheel effect that comes from having a robust amount of the startup tribe (as compared with the general professional population) in a specific geographic area (building or neighborhood).
Think of this as the watercooler effect for a city.
A few weeks after that post, I was meeting with Adam Klein (one of my Raleigh/Durham community leader friends) and I brought up Brad’s post and the implications for our work in trying to build our startup community. From that meeting, Adam and I set a goal of 200+ net new entrepreneurs in our downtown location.
Underlying Brad’s notion of density is the idea of what I call the Aspirational Founder Stack. I believe that every founder at whatever part of the journey they are on, derives comfort and knowledge from the founder/company that is operating at the next higher level.
So, if you are just starting something and you are a one-man band, you look at the group with 3-5 people and aspirationally long for a future when you are that big. When you are the 3-5 person company, you imagine a day that you have raised more than $1M and have 10-15 employees. You get the idea.
Great community density comes when all of the actors in the stack are easily visible and accessible to the others actors in the stack.
We all agree that this is more of a team game than a solo sport and to that end, we gain a level of psychological comfort and even inspiration from seeing someone just like you achieve what you are trying to achieve.
As community leaders, it is really important to create/facilitate as much founder density as possible. Yes, bring in as many first-time or seed-stage founders, but also recruit as many of the more mature companies to the same building or neighborhood.
That aspirational founder stack around the same daily watercooler will create an energy that will in time organically recruit others founders, investors, and community supporters.
Today I have a major new study out for the Center for American Entrepreneurship, called Rise of the Global Startup City: The New Map of Entrepreneurship and Venture Capital. The report is the culmination of months of work that my co-author, Richard Florida, and I have been toiling away at, and we are really happy to be sharing it today.
What’s new here? We aggregated venture deals and capital invested across more than 300 metropolitan areas that span 60 countries, tabulating levels of activity and changes over time, beginning with the period before the financial crisis (2005-07), the period just after (2010-12), and ending with the most recent period (2015-17). We also break down activity by stages: Pre-VC (angel + seed), Early-Stage VC, Later-Stage VC, and something we call Mega Deals (those above $500M).
To our knowledge, our work on the distribution and dynamics of global venture capital activity at the level of metropolitan areas on such a scale is the first of its kind.
There are a number of key insights from the report, which I’ll summarize in a moment, and there is A LOT of data. We have organized this information in three key ways so that you can easily access our findings:
- We have produced a comprehensive, written report that lays out our findings and provides a lot of data charts and tables (with a nice foreword from Brad Feld);
- We have also produced a website, which tells the story of our findings and allows users to interact with the rich data set we constructed (both the print report and the site were beautifully designed by our friends at LGND).
- Richard and I have an OpEd in The Wall Street Journal, which is online today and will be in the print edition tomorrow (The Saturday Essay). It goes a bit further in describing the implications of our findings, and takes a particular tack on declining American competitiveness.
(I suppose there’s also a fourth. If you want a really short cut on the main findings and implications—particularly for the United States—I have summarized my thoughts in this Twitter thread.)
Overall, we document a significant expansion (massive growth), urbanization (driven by cities), globalization (driven by cities outside the United States), and concentration (driven by a relatively small number of global cities) of venture capital and startup activity in recent years. America’s long-held singular dominance of startup and venture capital activity is being challenged by the rapid ascent of cities in Asia, Europe, and elsewhere. While the United States remains the clear global leader, the rest of the world is gaining ground at an accelerating rate.
I encourage all of you to spend time with the assets we produced, as there is a wealth of information and lots of nuance around global venture capital and startup activity patterns. Plus, as I mentioned, we have a lot of cool data tools for your to play around with. However, here, I’ll provide a brief visual guide of our work.
Building and maintaining your network is important but is that everything?
A community is made up of all of the actors in the region and us community geeks call this a network. The first step in community building is to make sure you get all of the nodes (people not organizations) mapped out. The second step is to try and see who is already connected and to connect those not yet connected to each other. This can take months if not years.
To do this effectively you need a number of leaders/influencers to actually work at this daily. Some may call this a form of networking and for now let’s refer to this as community networking.
As you begin to build out your community network, it is essential that you don’t stop at mapping and connecting the recognizable actors. Which means you have to work at finding and connecting with Net New players.
If your idea of managing your network is simply reaching out to old professional friends to get an update on what they are doing over a coffee or beer, then I would argue that you are operating at a “B” level. Congrats on actually reaching out to connect – it is still critical and obviously better than not reaching out at all.
There is another gear for optimizing your networking time. I would argue that you need to add NET NEW people to your network for you to be operating at a level “A”. Of course, this is more difficult and does not necessarily feel as good as connecting with old friends.
NET NEW contacts expand your network power in so many ways.
First, you get to tell your story to a person who does not know your story. They are now enabled with you, your story and your mojo. If they are local, you get to reinforce your position in the community. If they are not local you just created a new seed in a weaker networked area. The real value is then reached when they then tell your story within their network. (This is why you always ask what you can do for them and then do it.)
The second benefit is that you have just added a resource to later utilize for you and/or your community. Every NET NEW person expands an industry niche, a functional skill, or a seasoned experience that you can lean on later.
Found some time to network this week? Think about how you can meet 5 NET NEW people to connect with and share stories. Your network thanks you in advance.
Just about every city has one, what options do you have?
It turns out that startup communities are no different than any other community; there are good actors and bad actors. One of the bad actors I label as the community bully. In this day of #metoo it should not surprise anyone that startup communities have the same type of bad actor.
There is no room for the community bully in the same way there is no room for the gender, racial, sexual preference bully.
The one definition of a bully that I prefer is a person who, “uses superior strength or influence to intimidate (someone), typically to force him or her to do what one wants.” In startup communities, it is the influence that bully’s use to intimidate.
Some examples of startup community bullies include:
- Investors who use their monetary power to extract outrageous terms and unproductive behaviors from founders,
- Entrepreneurial leaders (and their organizations) who force entrepreneurs to secure real estate (office space) to get access to their organization,
- Advisors or mentors who only share their experience and network through a “pay to play” arrangement,
- The grizzled business or government leader who hoards information, convenes secret meetings and generally exhibits “old-boys club” behaviors,
- Corporate executives who bring their old-school corporate aggressiveness (compete, shouting, take-no-prisoners) to their interactions with new founders.
Community building is more art than science. It is more support than burn bridges. Great communities recycle people every day. Bully new founders and they will find a new place to start their company. The best entrepreneurs quickly recognize bully behavior and vote with their feet. No entrepreneurs – – no entrepreneurial community.
So, what to do with your community bully?
Cut off their access to the community. Investors need deal flow, stop making introductions. Create alternative co-working arrangements with companies that have some extra space. Stop inviting them to meetings. Don’t put them on a panel or invite them to speak to your program. Establish a code of conduct amongst the good actors and share that across the community through social media.
Good actor leaders also hold responsibility to privately address the bully one-on-one. Though this feels confrontational, the spirit of the conversation should be more like, “we need you as an integral part of our community but not the way you are doing it today”.
Giving is sometimes easier than asking.
#givefirst is the aspect of community building where you as an individual help someone else without any expectation of getting something in return. No quid pro quo transaction approach here.
For many of you, you provide elements of #givefirst every day. You take a coffee meeting with a friend of a friend. You make an introduction on someone’s behalf. Or you simply listen to someone pitch their idea and give them some much needed feedback.
For others, the notion of hoarding all of your gold (time, energy, experience) just for your own benefit makes total sense. (I would like a chance to convince you that a little #givefirst will pay major dividends in ways you cannot even imagine – email me and let’s talk.)
But this post is not about #givefirst. It is about asking for help. I sometimes refer to this as the other (darker?) side of #givefirst, and in many communities, people are simply afraid to ask for help.
Asking for help has its roots in self-awareness and radical self-inquiry. The best entrepreneurs give time to understand what factors and emotions are driving the hundreds of decisions required in a startup. A significant outcome is the ability to ask for help.
Immature communities may frown upon a more public presentation of needing help with the belief that is shows weakness. Startup founders are supposed to know everything, be in command of their ship and can weather any issue that confronts them. Hogwash.
I see this as a signal of community maturity and firmly believe that leaders have to show 1st timers that asking for help is as much part of the success journey as fundraising, hiring or developing a great product.
Leaders lead by showing others that certain behaviors or mindsets are acceptable. Every panel discussion, every blog post, every tweet are opportunities to nudge your community’s beliefs.
Looking for a way to help your startup community? Network, baby!
It is imperative of you as a business leader that you fully understand the difference between a contact database and your network. Get this wrong and it’s like running with only one shoe – you can do it but it makes things a lot harder.
Seeding, nurturing, and harvesting a network will provide you and your business with a lot more horsepower then simply building a database of your contacts.
Full disclosure, I am a Malcolm Gladwell “connector” and have been for about eight years. Truth is, I had always been good at keeping a contact database up to date as I moved through my life and changed jobs. But I did not fully realize the power of a network until that point eight years ago.
Your contact database is just that – a structured collection of information that you can query for a variety of reasons. Most of us use the contact database to call people, or email them, maybe send a text message. Some of you may have this database tied to an email service so that we can send out large bulk messages. Regardless of what tools you use, the concept here is a one-way communication from me to one or many.
A network is something much different. The core concept of a network is the idea of interconnectedness. I think a lot of people miss the full idea of the network where nodes are connected to other nodes not just one node (the me as the center of my database view). We fundamentally understand this more today with the advent of social networks like Facebook and LinkedIn. But you don’t have to view your network solely through the eyes of these tools.
There is power and potential in how you help bridge connections between nodes in your network.
A few years ago, I considered getting involved with a new opportunity, which would drive this existing business into the future. Their current operational thinking has roots that date back over 30 years. When considering this opportunity, I many times saw examples of their activities as contact database building versus activities that encouraged, facilitated or supported interconnectedness. They have a database not a network.
As you consider improving your position or your company’s position, take a few moments and assess whether you are building a database or facilitating a network. Morph your thinking to full network and you will reap the benefits for years to come.
Want to up your network activities? Try these two simple tasks:
- Every day introduce 2 people in your database to each other with the simple sentence, “I thought you two should get to know each other.” Do this for 3-4 pairs.
- Convene a lunch or a late-in-the-day beer social where you invite 8-10 people who don’t already know each other. Hold no agenda other than getting the group to share who they are and what they do. (One simple trick is to have everyone share something silly like, “share one unique fact about yourself”.)
Each of these two tasks can be started tomorrow. You don’t have to buy lunch or the beers, everyone is on their own. We all enjoy these get togethers (for the most part) and are always waiting for someone to be the organizer. Be that person and you will yield the benefits for years to come.