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In 1957, a group of eight Silicon Valley executives lead by Robert Noyce resigned from famed Shockley Semiconductor to start a rival in Fairchild Semiconductor. This sort of thing happens all the time in Silicon Valley today, but at the time, it was a watershed moment that sent reverberations throughout the industry. The Traitorous Eight, as they became known, changed the course of innovation forever by injecting the region with an entrepreneurial ethos that continues to this day, and has made Silicon Valley the envy of the world.
Around the same time, nearly 6,000 miles (~10,000 kilometers) away, a very different type of revolution was taking place in Communist China. In 1958, Communist Party Chairman Mao Zedong launched the Great Leap Forward—a wide-sweeping series of economic and political reforms aimed at transitioning China from an agricultural economy to an industrialized one, and at consolidating power behind the socialist regime.
One of the first initiatives was the Four Pests Campaign, an effort to eradicate insect, rodent, and avian populations that were thought to be threatening the health and well-being of the Chinese people. Birds, in particular the tree sparrow, were the most aggressively targeted because they fed on human grain and fruit supplies. The sparrow, it was feared, would cause starvation of the Chinese people.
And, the campaign was successful—pushing the tree sparrow nearly to extinction in less than two years. The result? The disruption of a delicate ecological system that contributed to the Great Chinese Famine of 1959-1961, killing an estimated 15 to 30 million people. What went wrong?
By eradicating the tree sparrow, the government exacerbated the very problem they were trying to solve.
It turns out that not only did tree sparrows eat grains targeted for human consumption, they also fed on insects that were an even bigger drain on grain supplies. With a key predator out of the way, the insect population swelled and grain supplies collapsed, which is how the eradication of the tree sparrow contributed to widespread famine. The policy was terminated in 1960 when it became clear what a disaster it was.
So, why on earth am I linking the Great Chinese Famine with the essence of Silicon Valley’s entrepreneurial spirit and with startup communities today? Because these are important lessons in the law of unintended consequences, which are common in complex adaptive systems like startup communities.
The Chinese government took a heavy-handed, top-down approach to preserve food supplies and created a much bigger problem by not thinking systemically—unleashing a destructive feedback loop. At the same time, the Traitorous Eight took the seemingly isolated and relatively inconsequential decision of escaping a misguided (and reportedly tyrannical) William Shockley with the aim of creating something better for themselves. And yet, what it helped spark was a new way of doing business in an new technological era. It’s hard to believe their immediate plan was to transform the regional business culture—one that is now emulated globally to promote innovation-driven entrepreneurship. But that’s what happened anyway.
The lesson for startup communities is that you might not know if a proposed course of action will produce famine or feast—this can only be determined through trial and error, an informed intuition, some humility, and a desire to learn from mistakes. This is also why big ticket initiatives or programs should be considered carefully. Take a more measured approach first and see what works and what doesn’t, learn, adapt, and change course as needed. The biggest successes are often not the result of efforts at the level of “species eradication”, but rather, at the level of “let’s try doing something we’re already doing, but better.”
A major tip of the hat to Nicolas Colin, who during a conversation on complex systems and startup communities, alerted me to the Four Pests Campaign, which I had previously been unaware of.
In The Startup Community Way, my upcoming book with Brad Feld, we explain that startup communities must be viewed through the lens of complex adaptive systems. Such systems are characterized as having many elements (people and things), interdependencies (connections between them), feedback loops (actions lead to reactions), and as being in a constant state of evolution (never at rest).
We make the effort to explain the complex systems framework and tie it to startup communities because the nature of these systems requires a very different type of engagement than we are used to in most of our professional and civic lives. Complex systems require different skills (diversity v. expertise), mental processes (synthesis v. analysis), tactical approaches (experimentation v. planning), and goals (right conditions v. right outcome), among other factors we discuss in the book.
One prominent condition in complex adaptive systems that I want to talk about today is Basins of Attraction. In neoclassical economics, it is assumed that the economy (also a complex adaptive system) is moving towards a point of stability—an equilibrium. This is done for reasons of simplifying mathematics, but it also has the impact of making many economic predictions unreliable.
Instead of a single point of stability, Basins of Attraction takes the view that there are many such potential “resting places” and that a complex evolutionary process will determine which of these wins out. Basins of Attraction in complex systems—like startup communities—can be thought of as a sort of center of gravity where things can get stuck. Critically, they can get stuck in “good” or “bad” outcomes.
A critical job of startup communities, then, is to apply maximum pressure over a sustained period of time to “push” the system out of a bad outcome—freeing it from the powerful gravitational forces holding it back and allowing it to move to a better state of being. This means that in order to move a startup community forward, you need to introduce a lot of instability—to “shock” the system out of its slumber.
To visualize this, I’ve produced what I’m calling The J-Curve of Startup Community Transition. I adopted it from the political scientist Ian Bremmer, whose 2007 book The J Curve: A New Way to Understand Why Nations Rise and Fall, plots a similar J-curve relationship between stability and openness for nation-states. Here, I show a relationship between stability and vibrancy or sustainability of startup communities.
The J-Curve of Startup Community Transition demonstrates that communities can become locked-in to a state of low vibrancy, which is hard to break free. This state is unsustainable, and if it persists, the startup community will die off. In order to get to a more vibrant and lasting condition, low performing startup communities will have to go through a transition period where things become less stable—this can be a painful experience, but a necessary one.
What I think of as introducing instability is trying big bold ideas—initiatives that may result in repeated or even spectacular failures, that mix things up, and that push the boundaries of people, forcing them to improve. This transition will be uncomfortable for many, because it directly challenges powerful incumbents, entrenched interests, controlling powerbrokers, and stale yet comfortable ways of thinking and behaving.
Nobody knows which ideas will ultimately be the right ones, but it has to be done. That is why we focus on taking an empathetic, open mind into a process of trial and error—trying many things until you figure out what works and what doesn’t. That is also why we promote a radical embrace of inclusion, because the best ideas often come from unexpected places. Many approaches will fail, but it only takes one or two good ones to fundamentally alter a startup community’s trajectory forever. Find those. Be bold. Mix things up. Get unstuck.
Recently, Brad Feld and I have been working hard on The Startup Community Way, a book on how to harness the complexity in the entrepreneurial age. It’s a follow-up to Brad’s, 2012 classic: Startup Communities. We completed a chapter that documents the growth of startup activity globally over the last decade—from startup deals to investors to startup programs—but recently decided to scrap it from the book. But, we wanted to put those data points to use, so I’ll publish some of them here.
(Note: if you want a comprehensive look at trends of venture deals, see Rise of the Global Startup City: The New Map of Entrepreneurship and Venture Capital, a report I published last September with my friend and colleague Richard Florida. It covers a decade of venture capital deals across more than 300 global metropolitan areas that span 60 countries.)
Here, I’ll document the rise of three types of investor groups: venture capital firms (from Seed through later-stage VC), corporate venture capital groups, and a third group for accelerators and incubators. These groups have been pre-populated by PitchBook, my source in this analysis.
I tabulated the active universe of these three investor groups annually between 2002 and 2018, and broke them down as being headquartered in either the United States or the Rest of the World. Active investors are categorized either as “new” (founded that year) or “existing” (founded prior to that year and made at least one investment in the three years prior).
The first three charts here show the active number of firms by year by investor type, activity status (exiting or new), and the new firm share of total.
For all three groups, we see a remarkable rise in the number of active firms, with the sharpest rises coming from corporate venture capital and the broad accelerator and incubator group. Venture capital firms increased in a straight linear fashion, and they are about 2.5 the number of active firms today as in 2002. Corporate venture firms have seen a rise of a similar magnitude, and accelerators and incubators are now at about a factor of 8 compared with the beginning of the period.
The new firm share of global venture capital firms raised from around 6 or 7 percent in the mid-2000s to 10 or 11 percent in the first part of this decade before collapsing after 2015. Accelerators and incubators increased from around 8 percent to as high as 24 percent before tailing off the last few years, and CVCs meanwhile expanded the most—increasing their new firm share from 3 to 4 percent to as high as 15 percent. The stock of existing firms is so much larger for venture capital that it masks the sizable growth in activity over the period, compared with the others.
The sheer collapse of new firms across all three groups is stunning. I have no doubt that there has been a major pullback in the number of these firms being launched in recent years, however I suspect the numbers will increase some with time—venture founding events frequently come with time lags in venture capital databases. But, it won’t change that much—the substantial and continued rise of new venture capital firms, accelerators and incubators, and CVCs is over, or it is at least on hold.
What’s also interesting to me is the resiliency of firms in the sector once launched. Even in spite of the massive growth of new firms, we see that they still make up a small share overall—and even when the growth of new activity slowed, the overall level of active firms (the “stock”) stays more or less the same. This of course varies across the groups (VC firms are the most resilient, accelerators and incubators are the least), and of course, the overall levels will come down some with time.
Next, let’s look at the distribution of new investor formation by geography—comparing firms headquartered in the U.S. versus those in other countries. The charts below show the number of new firms by firm type, broken down by either geographic group, and the share of new firms that are HQ’d in the US.
The charts tell two stories. First, we see that the Rest of the World launched new venture capital firms and corporate venture groups at a similar and at times faster pace than the United States did for much of the period, that changed dramatically after 2012 (VCs) and 2015 (CVCs) when the U.S. headquartered share spikes. This is interesting because, as documented in Rise of the Global Startup City, most of the growth in venture capital deals came from outside of the U.S. the last half decade.
Second, we see that the opposite occurred for accelerators and incubators, which grew more outside of the U.S. than inside of it since about 2008. Unfortunately for this group, we can’t break it down between accelerators and incubators (these are vastly different things, as I wrote about here and here), but this is an interesting and useful data trend no less.
To close, although not shown here, the rise of new firm activity among venture capital firms and corporate venture arms—though significantly elevated in recent years compared with a decade ago—is nowhere near what it was at the height of the dotcom boom. The new firm share of VC firms was 18 percent in 2000 and 28 percent for CVCs in the same year! Accelerators and incubators are really a thing of the recent past, so the results are different. So, in the context of that broader history, we’re at much more subdued levels of new firm entrants.
I’ve often heard people say “building startup communities (or startup ecosystems) is not about the ingredients, it’s about the recipe.” What they mean is that a focus on the individual people, institutions, and resources will provide only limited insight or success, and that what matters most is how these things all come together. Integration is the right concept, but a recipe is the wrong analogy.
Recipes, like chicken noodle soup or chocolate chip cookies, are simple systems. These recipes require some understanding of techniques and tools, but once learned, they are replicable with a high degree of certainty. The process of creating these “systems” can easily be broken down into constituent parts, such as chopping vegetables or sifting flour, and their integration (mixing) requires little precision.
Recipes become complicated when they involve a twenty-course tasting menu at a restaurant with three Michelin stars. Producing and serving these meals is surely a challenging problem, requiring highly specialized expertise, coordination of many factors, and consistency at scale. But these systems are also ultimately solvable, and when mastered and carried out with care, they can be replicated with relative precision. Restaurants do this repeatedly every night in cities around the world.
Startup communities and startup ecosystems are nothing like this. They are complex systems, meaning they have many “agents” (people and things), interdependencies, and are in a constant state of evolution, which makes fully wrapping your arms around them a challenging task. Most importantly, no one is in control. Such systems cannot be fully understood, predicted, controlled, or replicated; they can at best be guided and influenced. And yet, many strategies used in startup community building today still attempt to impose a complicated systems worldview onto what is an inherently complex system. This is the central problem facing startup community building in practice today and why so many well-intentioned efforts fail.
A better approach for building startup communities is not one steeped in a fixed set of ingredients, a rigid prescription of rules, and where engineered, linear processes are carefully calibrated through tight control. Instead, dealing with complex systems is best done with an informed intuition, trial and error, humility, and a desire to learn. It is more about getting the conditions right than aiming for a specific outcome. This is why you can learn more about startup community building from raising a child than you can by flawlessly executing even a complicated recipe (or system).
To drive this point home, I’m going to pull a passage from Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up, by the economist David Colander and physicist Roland Kupers, which I think captures this idea perfectly. (this quote has been slightly modified to improve readability where text was streamlined):
One approach to parenting is to set out a set of explicit rules for the child—”this is what you are to do; this is what is best for you, and these are the consequences of your not following the rules.” That is the idealized “control approach” to parenting.
There are two problems with this—the first is that most parents are not sure which rules are the correct ones. If they pick the wrong ones, then the child’s welfare won’t be maximized. The second problem is that the child may not follow the rules—do you then give in or not?
The true alternative to top-down control parenting is the parenting equivalent of the complexity approach we are advocating; a laissez-faire activist approach. In a laissez-faire activist approach you have as few direct rigorously specified rules as possible. Instead, you have general guidelines, and you consciously attempt to influence the child’s development so he or she becomes the best human being possible.
Instead of focusing on the rules, the focus of complexity parenting is more on creating voluntary guidelines, and providing a positive role model. (emphasis added).
This is why, in my upcoming book with Brad Feld, The Startup Community Way, we’ll be talking a lot about the behaviors, attitudes, and leadership qualities that promote healthy startup communities, and not about ingredients or recipes. We understand that startup communities require a different set of guidance, tools, and techniques than most of us are used to applying in our professional lives (which occurs because most workplaces are structured in a top-down, hierarchical way).
But the reality is, we all deal with complex systems everyday—from cities to our bodies to any situation that involves interacting with other people. Complexity is all around us. Our hope is that we’ll do our part to help you uncover how to apply what you already know to a different type of problem: that of building a vibrant startup communities in the city where you live. We can’t wait to share our ideas with you.
There are many aspects of life where more is better and as such there are many times we employ strategies to maximize the more. A few examples that many of us live by are:
- Priceless Art
- Time with loved ones
- Goals in ice hockey (ok maybe just me).
In terms of startup community building, there are a plethora of activities that local leaders utilize to create lift. (For clarity, I am using the word “activities” in a very broad sense.) These may include:
- Coffee meetups ~ 1 Million Cups
- Grant Programs
- Pitch Competitions
- Learn to Code Academies
- Networking Socials
- Startup Weekends
- Recruitment Events
- Venture Funds
- Community Blogs
The list literally goes on and on. Developing communities are first challenged to convene the various actors across the ecosystem. This has an immediate positive impact as the tribe begins to organize. Participate in this over a few months and some momentum begins to build.
As a community matures, activities naturally increase as newly motivated leaders step up and attempt to fill various voids. In many mature communities, there may be as many as 2-3 events every week.
I find the number, the diversity and the cadence of these activities to be one of the critical signals as to the maturity of a community.
But beware. There is a trap that evolves in some minds that if the first handful of activities start to build some very visible momentum, then more activities would have an even larger effect. Unfortunately there I a ceiling to the # of activities and the subsequent impact.
In terms of startup community building, the more is better strategy has a very visible limit to its effectiveness. Once a critical mass of organizing activities are achieved (different trigger points for different communities), then the strategy should shift to building more meaningful activities.
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.