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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.
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.
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.
Writing a book is a very hard thing. It’s one of the hardest things I’ve done professionally. It is the nonlinearity of the process that makes it so difficult and the sheer perseverance that’s required. It’s remarkable to see how different the content is today compared with where it was on day one.
Part of the process means writing a lot of words that no one will ever see. I have written literally tens of thousands of words—several complete chapters even—that will never see the light of day. I was going through one of those today and decided I will publish it here. It is a brief summary of Brad‘s book Startup Communities: Building an Entrepreneurial Ecosystem in Your City, meant to be a refresher for those familiar with the material and to quickly get newcomers up to speed. I also added layers of my own context, data points, and interpretation.
And with that, at the risk of depriving Brad of some royalties and pissing off his publisher, here is my condensed version of Startup Communities.
We know that you read Startup Communities (“SC1”) on more than one occasion and handed it out at your office summer party. But, in case you are forgetful or your mother-in-law wants to better understand what you do for a living without having to miss out on her tennis match later, in this chapter we revisit the main themes of SC1 and provide a concise guide for newcomers to get up to speed.
This chapter is not a substitute for actually reading SC1 (which you should do), though we think you can grasp many of the high-level concepts here quickly. If you have already mastered the content in SC1, feel free to skim through this chapter to refresh your memory or go a bit deeper in certain areas, even referring back to the first book as you go along—perhaps you’ll see something in a different way this time.
Boulder made for an exemplar case study in SC1 for three reasons. First, it is a vibrant and sustainable startup community. Second, it is unlike other leading startup hubs, such as Silicon Valley, San Francisco, Boston, and New York. Finally, Brad has lived in Boulder since 1995 and has been actively engaged with its development—giving him an intimate view of the internal dynamics of the startup community there.
Boulder has some defining characteristics.
Boulder is a small city. With a resident population of approximately 108,000 and a broader metropolitan area of more than 322,000 people, Boulder is just the 155th largest metro area in the United States and the 4th largest in the State of Colorado. In terms of population density (inhabitants per square mile), Boulder ranks 64th nationwide, and is one of the most densely populated mid-size metropolitan areas in America.
Boulder is a smart city. The University of Colorado Boulder is a major research institution of more than 37,000 students, faculty, and staff situated near the center of town. Boulder hosts three national labs, including the National Oceanic and Atmospheric Administration (NOAA), National Center for Atmospheric Research (NCAR), and National Institute of Standards and Technology (NIST), and has the highest concentration of adults with advanced degrees among large- and mid-size U.S. metropolitan areas.
Boulder is an innovative city. According to a 2013 Brookings Institution study, Boulder ranked 33rd among US metro areas in terms of patenting activity between 2007-2011, but ranked sixth when scaling for the size of the workforce. Similarly, venture capital investment in the Boulder metro area ranked 16th nationally in 2016-17, but when adjusted by the size of the community, it ranks third—behind only San Francisco and San Jose (Silicon Valley). Google will soon open a new 330,000 square foot campus near downtown Boulder that will employ 1,500 people.
Boulder is an entrepreneurial city. A Brookings Institution study of the fastest growing firms in the United States ranked Boulder first on a per-capita basis, while a joint report by Kauffman and Engine found that Boulder leads the nation in high-tech “startup density,” and by a long shot too—at more than six times the national average. The overall rate of new business formation places Boulder among the top ten percent of major metros nationally. Livability, a website that ranks quality of life factors in small and medium sized cities, recently rated Boulder as the best city in America for entrepreneurs.
Boulder is an attractive city. With nearly 250 predominantly sunny days per year (no, it’s not 300 as popular legend states), Boulder is among the sunniest cities in America. Its access to the Rocky mountains attracts adventure-seekers, and a plethora of high-end restaurants, shopping, and entertainment, gives the young and active plenty to do. Richard Florida, an urbanist, ranks the Boulder metro fifth for concentration of workers in the “creative economy”—meaning that Boulder is home to not just techies, scientists, and other highly skilled professionals, but also plenty of artists, musicians, and other creative types that help feed an innovative, dynamic, and vibrant economic system.
Having these factors is a major advantage for Boulder’s startup community—brains, capital, a knack for innovation, an entrepreneurial spirit, and an exciting, thriving place to live are critical factors for creating and sustaining a vibrant startup ecosystem. But, they alone are not enough. Many cities have smart people, innovative activity, a density of startups, and an array of amenities, but lack the entrepreneurial vigor of Boulder. The difference lies in the way these ingredients are mixed together, primarily by means of human relationship. The difference is culture and social norms. That’s what startup communities is fundamentally about.
THE BOULDER THESIS
The main intellectual novelty of SC1 is the Boulder Thesis—a framework that explains why a small city of just over 105,000 residents is able to consistently produce a steady drumbeat of high-impact startups. More specifically, when looking at the leading startup hubs in the United States and globally, Boulder doesn’t look like the others—even among well-educated cities with universities, flagship companies, and attractive amenities. Something about Boulder is different. Woven into the fabric of the Boulder startup community is a way of combining these inputs that has given fledgling companies there a better chance of success. That has been distilled into the Boulder Thesis. It has four key components:
Entrepreneurs must lead the startup community. Although a range of participants are critical to a startup community—including government, universities, investors, mentors, and service providers—the entrepreneurs must lead organizing efforts. Entrepreneurs here are defined as those who have founded or co-founded a growth-oriented startup.
The leaders must have a long-term commitment. Entrepreneurs must be committed to building and maintaining a startup community over the long-term. Leaders should take at least a twenty-year view—a view that refreshes every year (the horizon is always twenty years out). For a startup community to be lasting, it must be bigger than the latest fad or as a response to an economic downturn.
The startup community must be inclusive. Startup communities should embrace a philosophy of extreme inclusion. Anyone who wants to get involved should be able to, whether they are new to town or new to startups, or whether they are company founders, employees, or simply want to help out. A startup community that embraces diversity and openness is a more flexible, adaptable, and resilient startup community.
The startup community must have continual activities. It’s important that the span of participants in a startup community are constantly engaging—not through passive events like cocktail parties or award ceremonies, but through “catalytic” events like hackathons, meetups, open coffee clubs, startup weekends, or mentor-driven accelerators, which are venues for tangible, focused, engagement among members of the startup community.
THE IMPORTANCE OF GEOGRAPHY
A dense co-location of businesses is valuable for many sectors of the economy, because it lowers transaction costs and improves matching between firms, labor, suppliers, and customers. These “agglomeration effects” or “external economies” (economies of scale that exist outside the firm, often at the local or regional level) are particularly important in industries where specialized inputs and highly-skilled workers are important to production (a “bigger pool” of resources to draw from).
Beyond lowering transaction costs and improved matching, a third benefit to density is vital to innovation and entrepreneurship—a concept economists refer to as “knowledge spillovers,” or the exchange of ideas. In complex activities like starting and scaling innovative businesses, idea exchange and learning from others is critical. Because complex concepts are difficult to transfer verbally or in writing, learning of this nature is best done at an arm’s length (“learning by doing” or “learning by seeing”).
Brad has written on his Feld Thoughts blog (www.feld.com) about the phenomenon of startup density and the importance of density to entrepreneurial performance. As one example, he describes that when doing business in well-known startup hubs like San Francisco or New York, he tends to stay in a relatively confined area. This is particularly true in Boulder, where most of the startup activity is concentrated in a relatively confined space of about 40 square blocks.
Academic research confirms that measuring startup density at the level of cities or metropolitan areas is probably not fine enough, having established a high “decay rate” of knowledge sharing over distances. One study found that the benefits of knowledge sharing in the software industry, for example, are ten times greater when co-locating within one mile of similar companies versus within two-to-five miles. Another study found that the benefits of co-location among advertising agencies in Manhattan were fully depleted after just 750 meters.
To quote Maryann Feldman, an expert on the geography of innovation:
“…geography provides a platform to organize resources toward a specific purpose. While firms are one well-known way to organize resources, location provides a viable alternative—a platform to organize economic activity and human creativity… More than facilitating face-to-face interaction and the exchange of tacit knowledge, geography enhances the probability for serendipity—the chance for something unexpected to have a profound and transformative impact.”
Visionaries like Steve Jobs understood this, which is why he designed the Pixar office in a way that would force “spontaneous collisions” among colleagues from different disciplines. Google, Facebook, and other highly innovative companies have followed suit. They don’t provide free food and table tennis for nothing, and it’s not just to give overworked engineers a fun way to destress—it’s to get people who might not otherwise engage with one another to open up, share ideas, and find new ways to collaborate.
NETWORKS OVER HIERARCHIES
Advanced and emerging economies alike have been undergoing a massive transformation in recent decades, from centralized, command-and-control structures of the industrial era, to decentralized, network-centric organizational forms of the information age.
Hierarchies are best suited for conditions that require tight control of production or information, such as manufacturing facilities or in large bureaucracies (universities, government). Hierarchies require formal rules and standard operating procedures. Networks, on the other hand, require flexibility and horizontal flows of information. Startup communities rely upon unencumbered information flows and therefore thrive in network structures such as these. Conversely, they die under hierarchical control.
This thinking, and Brad’s writing about it in SC1, is heavily influenced by the Berkeley economic geographer AnnaLee “Anno” Saxenian, in her seminal work Regional Advantage: Culture and Competition in Silicon Valley and Route 128. This book is probably the most important book ever written on how to think about what makes some regions consistently more innovative and entrepreneurial compared with others.
In her work, Saxenian compared two technology hubs—California’s Silicon Valley and the Route 128 Corridor near Boston—that looked similar as late as the mid-1980s in terms of their ability to produce a high rate of information technology businesses. From there, however, the Route 128 region spiraled into a state of deep decline while Silicon Valley pulled further ahead in the global technology race. What changed? A period of intense, rapid technological disruption and increased global competition left the more rigid hierarchical structure of Boston flat-footed and unable to quickly adapt, whereas the network-based structure shaped by Silicon Valley’s open culture of “collaborative competition” made it better-positioned to capitalize on these changes.
As Brad summarized in the first book:
“Saxenian persuasively argues that a culture of openness and information exchange fueled Silicon Valley’s ascent over Route 128. This argument is tied to network effects, which are better leveraged by a community with a culture of information sharing across companies and industries. Saxenian observed that the porous boundaries between Silicon Valley companies, such as Sun Microsystems and HP, stood in stark contrast to the closed-loop and autarkic companies of Route 128, such as DEC and Apollo. More broadly, Silicon Valley culture embraced a horizontal exchange of information across and between companies. Rapid technological disruption played perfectly to Silicon Valley’s culture of open information exchange and labor mobility. As technology quickly changed, the Silicon Valley companies were better positioned to share information, adopt new trends, leverage innovation, and nimbly respond to new conditions. Meanwhile, vertical integration and closed systems disadvantaged many Route 128 companies during periods of technological upheaval.”
We’ll go deeper on networks throughout the rest of the book, but the important point here is that startup communities thrive in environments where information, talent, and capital flow freely and horizontally through relational networks.
ATTRIBUTES OF LEADERSHIP IN A STARTUP COMMUNITY
SC1 listed four key attributes of leadership in a startup community. In the vernacular of the Ten Commandments, these can be thought of as the “dos” of the startup community.
Be inclusive. Leaders of the startup community should embrace anyone who wants to engage, regardless of experience, background, education, gender, ethnicity, perspective, and so on. Startup community leaders serve as gatekeepers, and have a duty to ensure the door is open to anyone. As a common point of first contact, leaders should introduce newcomers or visitors to high-impact, easy-to-access events and a handful or two of key individuals. Finally, leaders should nurture and make room for the next generation of leaders—eventually handing off existing activities, and taking on new responsibilities.
Play a non-zero-sum game. Many approach human and business relationships as a zero-sum game—there are winners and there are losers. This thinking has no business in a startup community. Participants must fully embrace the notion of increasing returns—everyone gains more by contributing positively to the collective.
Be mentorship driven. Give to others. A good mentor has no expectations of what he or she will get out of it—instead, they approach it with a “give before you get” dynamic, with a willingness to let the relationship evolve naturally. Leaders, in particular, must embrace the mentorship role, and build time for it into their regular activities. This should occur on three levels—mentoring future leaders, mentoring other entrepreneurs, and mentoring each other. Finally, lead by example.
Have porous boundaries. The best startup communities know that it’s beneficial to be open—leaders should talk with one another other, sharing strategies, relationships, ideas, and resources. Individuals who come and go should be embraced and welcomed back when they return.
CLASSICAL PROBLEMS IN A STARTUP COMMUNITY
Continuing with the Ten Commandments theme, SC1 listed ten common problems that occur in a startup community—these are the “don’ts”.
Patriarch problem. Also known as the rich old guy problem, this occurs when people try to control the startup community, restricting rather than enabling the next generation of leaders. In these controlled environments, it matters who you know, not what you know. If we haven’t said it enough before, we’ll say it again—startup communities thrive in networks, not hierarchies. To get around patriarchs, entrepreneurs should play the long game (wait for them to die off) or simply ignore them.
Complaining about funding. There will always be an imbalance between the supply of capital and the demand for it. Some local initiatives can improve things on the margin, but the underlying problem persists. At the very least, complaining about it won’t help. Instead, entrepreneurs should concentrate on something they can control—building a great business around a problem they are obsessed about solving.
Being too reliant on government. Relying on government to either lead or provide key resources for building a startup community is a misguided view over the long term. In spite of some successful efforts and the best of intentions, governments generally lack the resources, expertise, mindset, and sense of urgency to effectively mobilize resources that entrepreneurs need most.
Making short term commitments. It takes a long period of hard work to get a healthy startup community up and running in a sustainable way—at least a generation of effort (twenty-year view). Strategies rooted in the current economic cycle, political calendar, or latest trend aren’t sufficient to achieve this. And while we’re at it, this generational clock resets every year—leaders should always have a twenty-year view.
Having bias against newbies. Vibrant startup communities, like Boulder, welcome newcomers and visitors with open arms. Shunning “outsiders” or demanding that newbies “earn their way” into the startup community is a dumb, outmoded way of thinking. It is the thinking of hierarchies. Startup communities are not hierarchies.
Attempt by a feeder to control the community. In some cases, non-entrepreneurs (“feeders”) masquerade as leaders or try to control the startup community—this stifles both short- and long-term growth. Venture capitalists, governments, and universities are some of the worst offenders of this principle. It is no coincidence that many of these also operate in a hierarchy, where top-down control is a natural force.
Creating artificial geographic boundaries. Within cities, multiple startup communities can exist. For example, in the Boston metro area there are several: in Boston, there is the Financial District, Innovation District, and South End, and in Cambridge there is Kendall, Central, and Harvard Squares. Ideas do not flow in a linear fashion, and efforts to confine them to arbitrary administrative boundaries impede them.
Playing a zero-sum game. See earlier—playing a zero-sum game isn’t helpful for startup communities, including when competing against neighboring communities for the sake of promoting your own. Instead, take a network-based approach and connect your startup community with neighboring ones. Learn from each other. Share ideas.
Having a culture of risk aversion. Persistent risk aversion is another obstacle to startup community development. It typically manifests in two forms: (1) a concern about investing time in something that doesn’t end up having an impact, and (2) the fear of rejection by other people in the startup community. Take more chances, though with a view towards adjusting when feedback dictates a change in strategy. As for the fear of rejection, let it go.
Avoiding people because of past failure. A great deal of learning occurs in failed ventures. And outside of doing something seriously wrong or illegal, failed entrepreneurs shouldn’t be ostracized from the startup community. Rather, embracing them will encourage others to take risks, eventually changing the culture over time.
THE POWER OF THE COMMUNITY
Throughout the Boulder startup community, there exists a widely held set of beliefs about how to behave and interact with each other that evolved organically over time. Collectively, they are the glue that sustains the startup community in Boulder.
Give before you get. One of the secrets to success in life is to give before you get. This is particularly important in the context of a community. By investing time and energy into the startup community upfront without having an expectation of what’s in it for you personally, you will end up receiving more out of it than you put into it.
Everyone is a mentor. One of the best ways to help your startup community is to find someone to mentor. Focus on your specific skill or expertise, and let it be known that you are available to mentor someone in that area. Creating a culture of sharing knowledge is vital to a startup community, and over time, mentors may end up learning more from the mentees.
Embrace weirdness. About his theory of “creative capital,” urbanist Richard Florida once stated: “You cannot get a technologically innovative place unless it’s open to weirdness, eccentricity and difference.” Plus one to that. In Boulder, you don’t have to look, dress, or act a certain way to be accepted—you can just be yourself. And yes, you can even be weird.
Be open to any idea. The best way to learn something is to try something. In a startup, that might mean experimentation and modification, as in the Lean Startup methodology that has been popularized by Eric Ries. In a hierarchy, when something new is proposed, people try to figure out all of the ways it won’t work. In a startup community, they do the opposite. Learn how to fail fast—try something, learn from it, and make the needed adjustments, including winding it down. The bottom line though: you won’t know if you don’t try first.
Be honest. Be intellectually honest with others—do not bullshit each other. Always express yourself honestly—acknowledging that you could in fact be wrong—but do so with respect and kindness. Do this even in situations that are heated or emotional. Do this especially in those situations. Also understand your surroundings, and people give and receive feedback differently.
Go for a walk. Whenever you have something serious to talk about with someone, do so while going for a walk. Or do so riding a bike. The point is: get out from behind your desk to have some of your biggest discussions, get some fresh air, and hopefully, sunshine.
The importance of the after party. Often after major startup events, there is an after-party. Try to attend these as much as possible, engaging with individuals more deeply. The point here isn’t the after party itself, it’s that community is what the startup community is all about.
MYTHS ABOUT STARTUP COMMUNITIES
In SC1, Brad drew upon the help of Paul Kedrosky to dispel and expand upon some persistent myths about startup communities. Here are three of them:
We need to be more like Silicon Valley. No you don’t. You aren’t Silicon Valley and you never will be. Nor should you want to be. Even Silicon Valley couldn’t recreate itself if it tried. The allure of “being like Silicon Valley” is that it has many of the measurables that any startup community would want—lots of smart and creative people, an abundance of venture capital, leading research universities, great climate and amenities, an army of hot young technology startups, and a number of very large, successful companies. But what makes Silicon Valley unique lies under the surface, such as the porous boundaries of firms and institutions, the constant cycle of talent into and out of companies, and an attitude that embraces the challenges of growing and scaling young businesses. Instead, learn the important lessons from Silicon Valley and determine how they apply to your community.
We need more local venture capital. As discussed before, demand for venture capital will always exceed supply. This is a structural feature of startup communities. However, the mistake occurs with people equate the two—startup communities are bigger than venture capital. In Paul’s words:
“Venture capital is a service function, not materially different from accounting, law, or insurance. It is a type of organization that services existing businesses, not one that causes such companies to exist in the first place. While businesses need capital, it is not the capital that creates the business. Pretending otherwise is reversing the causality in a dangerous way.”
Additionally, venture capital firms needn’t exist in your community for the funds to flow in. VCs screen thousands of companies per year, and if yours is one of the good ones, they will come to you. Finally, it’s important to remember that fewer than 0.5 percent of American businesses receive venture capital funding. Many startups, even those that achieve high growth or high impact, rely on more traditional forms of financing—friends, family, savings, or the very best way, their own customers. Venture capital is a huge bonus to a startup community, but it is neither a necessary nor sufficient condition for one to exist.
Angel investors must be organized. While there are many examples of some effective angel investor groups, there are many more of them that are a giant waste of everyone’s time. Many of these groups are slow, and too cautious to actually write checks to entrepreneurs—even after multiple meetings and endless due diligence. A key goal for an angel group should be to build a network of trusted co-investors. Regardless, a more direct path for angels likely occurs through interpersonal relationships based on trust, building out the broader startup community network, and ultimately, making investments in promising startups.
A quick look through the breadth of themes covered in SC1 points to some high-level areas of priority—namely, a focus on the nature of human relationships, of altruism and decent behavior to one another, of fairness, and of the way in which all of the various people and institutions in a startup community come together as being key differentiators for its vibrancy, rather than for the existence of the factors themselves. This is something we will revisit over and over again in the pages that follow, as we build on these and other themes contained in SC1—and add to them. This chapter sets the tone for our thinking about what matters most in startup communities.
Some additional topics covered in SC1 were not explicitly mentioned above—namely, the role of startup accelerators, universities, and governments. We dedicate entire chapters to each of these three topics later in the book.
We’ve heard it in startup communities everywhere—while it’s become increasingly likely for high-potential companies to get started most anywhere, the best ones often leave for Silicon Valley. One of the most commonly-cited reasons is that Valley investors require companies to move. That may be true, but perhaps it’s for a much bigger reason—because doing so is beneficial for these companies. But, what do the data say?
Jorge Guzman of Columbia University attempted to answer this question in a research paper published in May: Go West Young Firm: The Value of Entrepreneurial Migration for Startups and Their Founders. He analyzed migration patterns of high-potential companies across the United States and honed-in on those moving to the Bay Area in particular. To make the process more manageable, he looked only at companies incorporated in Delaware—though representing about 4 percent of all firms, they account for half of all publicly listed businesses, over 60 percent of all venture capital financing, and are 50 times more likely to achieve an IPO or be acquired than are non-Delaware firms. Seems like a good batch to look at.
Guzman’s dataset spans companies born between 1988 and 2014, which amounts to nearly half a million firms. He did lots of rigorous statistical work to ensure that he was isolating the impact of migration on a company’s performance, rather than some additional factors, and he cut the data in a number of interesting ways (for example, finding that older founders are less likely to migrate—which makes sense as they are more embedded in existing communities).
So, what did his analysis find?
To begin with, he finds a sizable positive impact from moving on a number of key performance metrics, including equity growth (IPO or acquisition), intellectual property, and raising venture financings—and that these effects are the strongest for companies that move to Silicon Valley.
Collectively, we see that although fewer than 0.25 percent of the 500,000 companies studied moved to Silicon Valley, those that did were more than 13 times more likely to achieve a successful exit, 11 times more likely to raise venture capital, and 8 times for likely to secure intellectual property rights, compared with companies that did not move. We also see positive effects for the more than 4 percent of companies overall the move, but the impact is much lower.
Furthermore, Guzman finds that not only are companies that move higher-performers to begin with, but controlling for pre-move firm-quality, he finds a significant impact from the move itself—in other words, Silicon Valley may in fact be siphoning some of the best entrepreneurial talent from other places and it’s because doing so helps these companies succeed. In fact, Guzman finds no measurable benefits to moving for companies with lower pre-move quality.
Now, before you startup community leaders in other places feel too defeated, there’s a potential silver lining here—there is suggestive though not definitive evidence in Guzman’s work that the advantage of moving to Silicon Valley is reducing over time. As Guzman notes, and as can be seen in the figures below, while the quality of migrants to Silicon Valley has remained constant over time, the impact of moving there has not:
“The patterns before and after the dot-com bust are striking… While there was a large benefit of moving to Silicon Valley during the boom years, this benefit becomes negligible in the bust years.”
The one drawback here is that in order to conduct this analysis, Guzman looked at a shorter-time period: he only included moves between 1996 and 2006. That means we don’t know if migrations to Silicon Valley in recent years have also been reduced, or if this was isolated to just the half-decade or so following the Dotcom boom-bust (a unique period in time). That’s a major limitation to the study and one that has me uncertain about what to take away from this, especially given that startup and venture capital activity have been concentrating in the Bay Area considerably in recent years.
For me, the major takeaway as it relates to startup communities is this: a robust entrepreneurial environment provides significant value to high-impact startups, which is something every city should want—there are significant economic spillover benefits to such activity in a city. The example of Silicon Valley can be thought of as an upper bound for the value improvements that could occur for startups in a city with a vibrant external environment for founders. As the data demonstrated, startups benefit from moves broadly, and while the study didn’t go into detail about where those places are, the clear signal is that migrating founders believe that being in some places is more beneficial than others—the evidence here supports that belief.
A year ago, Brad wrote a post titled Effective Networking, where he discussed how producing good work can be a useful mechanism for building meaningful connections. While power-networking can also be an effective strategy, it is not the only path to developing great relationships. Brad’s post was heavily influenced by two essays by Adam Grant, the professor and writer: Networking Is Overrated and To Build a Great Network, You Don’t Have to be a Great Networker.
I savored that post earlier this year when suffering from a bout of conference fatigue, and decided to write about it in a post titled Introverts and Networking. I have found that the most meaningful professional relationships in my life have typically sprung out of a common appreciation about something that I or the other person did—not from hitting it off in a conference lobby or at the post-event reception. That has happened of course, but it’s not the dominant theme, at least for me.
Because of this, I was excited to discover this recent TEDxPortland talk: An introvert’s guide to building community, given by Rick Turoczy—a leader in the Portland startup community. The talk is not about how introverts per se can build community, but rather, how he as an introvert used some counter-intuitive advantages that introverts possess to do this type of work—namely, a desire to make connections one-to-one, or what he calls collecting dots.
But for Turoczy, this is only the beginning. The real magic of building community occurs not through the collecting of dots but through the connecting of them. By collecting many dots, and through the power of introspection and patience, community-builders will begin to see patterns emerge—uncovering dots that need connecting but haven’t been yet. These connections will eventually seem obvious, but aren’t at first—otherwise they would have already been made. It is the process of collecting and reflecting—along with your own unique perspective—that the connecting naturally unfolds.
For me, the real beauty of this talk is what it reveals about Turoczy himself—he views the process of networking not as a means for helping himself, but as a means for helping others. And that’s the whole point of building community. It’s almost certainly a key reason for why he is so good at it too.
Last week I published a report with the Center for American Entrepreneurship that analyzed the geography of venture capital first financings across U.S. metropolitan areas during the last eight years. You should definitely check out the full study on the CAE website because it includes a lot of interesting data and graphics. You should also check out this Twitter thread I posted on the day the study was released.
Thread on the geography of first rounds of venture capital in the U.S. below. TL;DR a nuanced story, but one I choose to view (mostly) optimistically. Full analysis here: https://t.co/ymnkj4WPVv >> pic.twitter.com/43sprXFgOY
— Ian Hathaway (@IanHathaway) July 31, 2018
Here, I provide a brief overview of the main takeaways from the study. I also include an interactive map that allows users to play with some of the data. The report finds:
- After a stellar five-year period of expansion between 2009 and 2014, a sharp contraction in the number of startups raising a first round of venture capital has occurred the last three years
- This contraction has been geographically widespread—fewer metro areas had a startup that raised a first round of venture funding and those that did had a smaller number of them.
- First financings are still highly concentrated among a small number of cities—in 2016-17, five metros captured 54 percent of all U.S. first financings and ten metro areas accounted for 68 percent.
- But, a number of startup communities continue to expand—including Boulder, Columbus, Indianapolis, Charlotte, Denver, and Durham-Chapel Hill, while others exhibited relative rises (including Madison, San Diego, Pittsburgh, Raleigh, Houston, Baltimore, Seattle, Ann Arbor, Honolulu, Philadelphia, and Santa Barbara).
- The longer arc tells a more positive story—the number of startups receiving a first round of venture capital in 2017 was still 84 percent higher than in 2009, and 38 percent of metros saw an increase in deals over this period.
Some may point to conflicting evidence about the emergence of new startup hubs in the U.S., but I believe this is still a mostly positive story—more startups in more cities are accessing venture capital compared with a decade ago, a brief period of over-exuberance is moderating, and the early-stage funding market seems to be moving toward a more stable yet geographically inclusive path forward.
But that statement is not boundless—there is critical nuance. The data are a stark reminder that startup communities take time to develop, that progress will be non-linear, and that the scope could be narrower than many would hope for. History suggests that the establishment of startup hubs must be thought of in terms of decades, not years, and there are limits to the number of cities that will ultimately emerge. It is still being determined which those will be, but the overall trend points to there being more of them.
Startup communities are examples of complex adaptive systems. This means many things for understanding and influencing their behavior, but today I want to focus on two concepts: non-linearity (the sum is greater than the parts) and synergistic integration (interaction between the parts matters a lot). To make my point, I’ll draw on an example from my favorite sport.
The New York Yankees won four World Series titles in five seasons between 1996 and 2000, following a drought of 18 years. With this newfound success came a big television deal, a higher revenue stream, and much more money on the field. After winning four championships with the team they had, the Yankees tried to buy additional titles through a collection of All-Stars.
The result? No World Series titles and a steadily declining regular season winning percentage during the next eight seasons. What happened?
The demise of the 2000’s Yankees can be attributed to a failure by management to recognize the complexity of a team sport like baseball. The Yankees applied linear systems thinking to what is an inherently complex system. They believed that simply adding more of “the best” inputs (players) would predictably and reliably produce the desired result (wins, championships).
Linear thinking works in individual sports like tennis or golf, but not in team sports like baseball, where the integration of the pieces (the players) can be more deterministic of the outcome than the sum of the parts (the combined talents of the individual players).
By all accounts, the Yankees clubhouse was toxic and in a sport like baseball where the team is together everyday for most of the year, poor interactions among the players can be fatal. And for the Yankees, it was. Having the nine best players on the field won’t guarantee a winning team. The Yankees learned that the hard way.
Startup communities are also a team sport. They might even be the ultimate team sport. Having the “best players” alone won’t work, just as it didn’t for the New York Yankees. The interactions between the parts (people) make all the difference in the world. Healthy attitudes, behaviors, and ideas are the key to vibrant startup communities.
I recently wrote about The More of Everything Problem, whereby too many startup communities believe that large-scale, top-down interventions are the key to success. Many mistakenly take a linear systems approach that prioritizes resource accumulation over resource integration. But for complex systems like startup communities, integration really matters—human relationships are the whole ballgame.
I see a simple yet powerful lesson for startup communities participants here: focus less on the pieces and more the interactions. Evolve from asking “how many” to “how well.”
The New York Yankees forgot this lesson and paid dearly over the course of a decade. They are back to their winning ways again, and their success is being built from the bottom-up—by a group of young, relatively unknown players, matched with a few elder veterans, who are hungry for success, and are playing like a team.
This article originally posted at ianhathaway.org.
Great ideas come from unexpected places.
I recently had the opportunity to meet a fascinating group of young pastors who are applying a complex systems approach to a new congregation they founded. Dissatisfied with the top-down, command-and-control structure of the churches they had previously been a part of, these young innovators created something better—a system based on a decentralized network, on communal governance, and on trust, reciprocity, and fulfilling commitments.
This should sound familiar to you members of the church of startup communities, which in my view, can be best understood through the prism of the complex systems framework. In such systems, we focus on cultivating the right environment, on improving the interactions between the individual elements (ie, people) rather than focusing on the elements themselves, a governance structure that adheres to non-control, and a set of virtuous informal norms and rules.
As we were discussing various approaches and challenges to organizing a modern religious community and a startup community through this belief system—which have a lot in common, by the way—I brought up the notion of social capital, and how that in order for “transactions” to take place in a startup community, one must agree to a broad-based informal “contract” that everyone adheres to. Critically, this takes place between each individual and the community as a whole.
That’s when one of my new friends turned to me and said: “I think about that as the difference between contracts and covenants.” This is a powerful distinction that is important for participants in startup communities to embrace.
Contracts, in their purest form, are specified agreements for two parties to fulfill a particular set of promises. If one party breaks that agreement, the contract is broken—freeing the other party of their obligations. Contracts establish a give-and-take relationship that is institutionalized and conditional.
Covenants, on the other hand, appeal to a cause that is greater than any mutual exchange. In a covenant, if one party breaks his or her obligations, it does not permit the other to do the same. Why? Because an oath is not really about the other person anyway—it is an appeal to our higher nature and a commitment to serving the greater good.
Contracts are transactional. Covenants are committal.
As I was kicking around this idea in my head, I stumbled upon an interesting blog post that was discussing the concept of covenants and contracts, and drew the link between the notion of covenants and a sacred document in the founding of the United States—the Declaration of Independence. Rather than summarize that analogy, I’ll just copy and paste some of that text here.
The Declaration of Independence was signed by 56 men who all understood they were committing high treason against the British government when they signed the document. Benjamin Franklin famously highlighted that reality at the time, “We must all hang together, or assuredly we shall all hang separately.”
The concluding sentence of the Declaration states “And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.”
To the signers it didn’t matter if any one of their confederates broke or switched sides. They were still committed to their course of action regardless, even if it cost them their lives.
I am not a religious person, nor a scholar of laws nor American history, so I am probably way out over my skis here. But the point I want to make is an important one for startup community participants to embrace—make covenants, not contracts. Don’t be conditional in your actions of service. Do what is right because it is right. Make a commitment to your community regardless of what it gives you in return. In the end, you will gain more anyway.
I want to socialize an idea that my friend Chris Heivly and I have been tossing around the last few months. It’s a concept called #FoundersFirst, and it’s something that we hope will be embraced in startup communities everywhere. Let me explain.
Startup communities cannot be controlled. But, like other complex systems, they can be guided. The physical world must work within a set of rules (physical laws), but the potential outcomes (physical states) are seemingly infinite. The interaction of the many, varied ecosystem elements, the constant learning and adaptation, and the chaotic, non-linear responsiveness to change also mean that outcomes for complex systems—like startup communities—cannot be predicted (at least not very well). Instead, they can be shaped and influenced—through experimentation, learning, and behavioral adjustments.
The one constant in complex systems is the need to operate within a set of rules. In the case of the physical world, that means the laws of nature. But healthy startup communities must also abide a set of (informal) rules. In Startup Communities, Brad spells out a few: inclusivity, playing non-zero-sum games, being mentorship driven, having porous boundaries, being honest, and above all, giving before you get.
I’d like to add one more: #FoundersFirst.
What do I mean by #FoundersFirst? Put simply, it’s putting the needs of founders above all others in the startup community—even your own. Participants in a startup community—be they governments, corporations, universities, service providers, or any number of ecosystem actors—should precede every action with one simple question: “does this help entrepreneurs?” If you don’t know, ask the entrepreneurs.
If you think this is an issue that doesn’t need addressing, then congratulations—you live in one of a handful of startup communities worldwide that embraces this philosophy wholeheartedly (and even they need to practice #FoundersFirst every day).
I have spoken to countless people in startup communities worldwide this year. Two problems exist in almost all of them—number one, the rich people in town don’t invest in startups, and number two, the range of startup supports and other actors sometimes dictate to the entrepreneurs rather than listening to them. And that’s just the tip of the iceberg—there is an endless supply of extreme behavior that will shock you.
To illustrate this point, here’s a startling quote in an academic paper written by two researchers that I happen to respect: “In contrast to some practitioner viewpoints (Feld, 2012), a myth we wish to refute is that ecosystems are predominantly about start-ups.”
Huh? This is completely wrong-headed. Without startups, you have no startup ecosystem.
Whether you are a lawyer, an investor, a government bureaucrat, a university administrator, an employee of a large corporation, or in any number of roles that engage with local startups, I challenge you to embrace a #FoundersFirst mindset. You will end up getting more this way over time, and will support your community in a meaningful way in the process. Here are a few tips for how to go about it.
Listen and engage. My friend Monisha Merchant—a former advisor to Senator Michael Bennet of Colorado and a brilliant mind for civic engagement—once said it to me best when I asked her what non-entrepreneurs can do to engage meaningfully in a startup community: “I want to stress how important it is to listen, and be engaged.” Her message is so simple and yet so powerful. I share it constantly. If you want to help entrepreneurs, spend time with them. Engage with them in a meaningful way to get an understanding of what their challenges are. Be open—you have a lot to learn. We all do.
#GiveFirst. A related point—give to your community by finding ways to help startup founders. Think about what you are good at and figure out how that overlaps with what startups need. Don’t know what they need? See above. Don’t stop there, be creative too. Anticipate problems that founders may not be aware of—see if they resonate with them, and make adjustments as needed. Determine what works and what doesn’t. Keep learning, adapting, and experimenting. Treat founders as your customer—put them front and center. Don’t ask what’s in it for you. If you #GiveFirst, you’ll get more than you give over the long run anyway.
Be honest (with yourself). Ask yourself if you truly want to be involved in a startup community by placing a #FoundersFirst mindset above your own personal agenda. If you are not, at best you may be wasting your time, and at worst you might even be harmful. I think the vast majority of startup community participants are well intentioned and just need better direction. Some will still want to play by their own rules, and a few will intentionally do harm by taking advantage of entrepreneurs. Both can be damaging to the entire startup community—undermining the trust and openness that are critical to the functioning of a healthy ecosystem.
I encourage startup community participants everywhere to follow the path of #FoundersFirst—a firm belief that the needs of entrepreneurs are the central focus of a healthy startup community. #FoundersFirst acknowledges that individual agendas in a startup community will persist, but challenges those agendas to be oriented around company founders. If you don’t know what startup founders in your community need, just ask. Engage with a #GiveFirst mentality and be clear with yourself about what you’re in if for.