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Today I have a major new study out for the Center for American Entrepreneurship, called Rise of the Global Startup City: The New Map of Entrepreneurship and Venture Capital. The report is the culmination of months of work that my co-author, Richard Florida, and I have been toiling away at, and we are really happy to be sharing it today.
What’s new here? We aggregated venture deals and capital invested across more than 300 metropolitan areas that span 60 countries, tabulating levels of activity and changes over time, beginning with the period before the financial crisis (2005-07), the period just after (2010-12), and ending with the most recent period (2015-17). We also break down activity by stages: Pre-VC (angel + seed), Early-Stage VC, Later-Stage VC, and something we call Mega Deals (those above $500M).
To our knowledge, our work on the distribution and dynamics of global venture capital activity at the level of metropolitan areas on such a scale is the first of its kind.
There are a number of key insights from the report, which I’ll summarize in a moment, and there is A LOT of data. We have organized this information in three key ways so that you can easily access our findings:
- We have produced a comprehensive, written report that lays out our findings and provides a lot of data charts and tables (with a nice foreword from Brad Feld);
- We have also produced a website, which tells the story of our findings and allows users to interact with the rich data set we constructed (both the print report and the site were beautifully designed by our friends at LGND).
- Richard and I have an OpEd in The Wall Street Journal, which is online today and will be in the print edition tomorrow (The Saturday Essay). It goes a bit further in describing the implications of our findings, and takes a particular tack on declining American competitiveness.
(I suppose there’s also a fourth. If you want a really short cut on the main findings and implications—particularly for the United States—I have summarized my thoughts in this Twitter thread.)
Overall, we document a significant expansion (massive growth), urbanization (driven by cities), globalization (driven by cities outside the United States), and concentration (driven by a relatively small number of global cities) of venture capital and startup activity in recent years. America’s long-held singular dominance of startup and venture capital activity is being challenged by the rapid ascent of cities in Asia, Europe, and elsewhere. While the United States remains the clear global leader, the rest of the world is gaining ground at an accelerating rate.
I encourage all of you to spend time with the assets we produced, as there is a wealth of information and lots of nuance around global venture capital and startup activity patterns. Plus, as I mentioned, we have a lot of cool data tools for your to play around with. However, here, I’ll provide a brief visual guide of our work.
Building and maintaining your network is important but is that everything?
A community is made up of all of the actors in the region and us community geeks call this a network. The first step in community building is to make sure you get all of the nodes (people not organizations) mapped out. The second step is to try and see who is already connected and to connect those not yet connected to each other. This can take months if not years.
To do this effectively you need a number of leaders/influencers to actually work at this daily. Some may call this a form of networking and for now let’s refer to this as community networking.
As you begin to build out your community network, it is essential that you don’t stop at mapping and connecting the recognizable actors. Which means you have to work at finding and connecting with Net New players.
If your idea of managing your network is simply reaching out to old professional friends to get an update on what they are doing over a coffee or beer, then I would argue that you are operating at a “B” level. Congrats on actually reaching out to connect – it is still critical and obviously better than not reaching out at all.
There is another gear for optimizing your networking time. I would argue that you need to add NET NEW people to your network for you to be operating at a level “A”. Of course, this is more difficult and does not necessarily feel as good as connecting with old friends.
NET NEW contacts expand your network power in so many ways.
First, you get to tell your story to a person who does not know your story. They are now enabled with you, your story and your mojo. If they are local, you get to reinforce your position in the community. If they are not local you just created a new seed in a weaker networked area. The real value is then reached when they then tell your story within their network. (This is why you always ask what you can do for them and then do it.)
The second benefit is that you have just added a resource to later utilize for you and/or your community. Every NET NEW person expands an industry niche, a functional skill, or a seasoned experience that you can lean on later.
Found some time to network this week? Think about how you can meet 5 NET NEW people to connect with and share stories. Your network thanks you in advance.
Just about every city has one, what options do you have?
It turns out that startup communities are no different than any other community; there are good actors and bad actors. One of the bad actors I label as the community bully. In this day of #metoo it should not surprise anyone that startup communities have the same type of bad actor.
There is no room for the community bully in the same way there is no room for the gender, racial, sexual preference bully.
The one definition of a bully that I prefer is a person who, “uses superior strength or influence to intimidate (someone), typically to force him or her to do what one wants.” In startup communities, it is the influence that bully’s use to intimidate.
Some examples of startup community bullies include:
- Investors who use their monetary power to extract outrageous terms and unproductive behaviors from founders,
- Entrepreneurial leaders (and their organizations) who force entrepreneurs to secure real estate (office space) to get access to their organization,
- Advisors or mentors who only share their experience and network through a “pay to play” arrangement,
- The grizzled business or government leader who hoards information, convenes secret meetings and generally exhibits “old-boys club” behaviors,
- Corporate executives who bring their old-school corporate aggressiveness (compete, shouting, take-no-prisoners) to their interactions with new founders.
Community building is more art than science. It is more support than burn bridges. Great communities recycle people every day. Bully new founders and they will find a new place to start their company. The best entrepreneurs quickly recognize bully behavior and vote with their feet. No entrepreneurs – – no entrepreneurial community.
So, what to do with your community bully?
Cut off their access to the community. Investors need deal flow, stop making introductions. Create alternative co-working arrangements with companies that have some extra space. Stop inviting them to meetings. Don’t put them on a panel or invite them to speak to your program. Establish a code of conduct amongst the good actors and share that across the community through social media.
Good actor leaders also hold responsibility to privately address the bully one-on-one. Though this feels confrontational, the spirit of the conversation should be more like, “we need you as an integral part of our community but not the way you are doing it today”.
Giving is sometimes easier than asking.
#givefirst is the aspect of community building where you as an individual help someone else without any expectation of getting something in return. No quid pro quo transaction approach here.
For many of you, you provide elements of #givefirst every day. You take a coffee meeting with a friend of a friend. You make an introduction on someone’s behalf. Or you simply listen to someone pitch their idea and give them some much needed feedback.
For others, the notion of hoarding all of your gold (time, energy, experience) just for your own benefit makes total sense. (I would like a chance to convince you that a little #givefirst will pay major dividends in ways you cannot even imagine – email me and let’s talk.)
But this post is not about #givefirst. It is about asking for help. I sometimes refer to this as the other (darker?) side of #givefirst, and in many communities, people are simply afraid to ask for help.
Asking for help has its roots in self-awareness and radical self-inquiry. The best entrepreneurs give time to understand what factors and emotions are driving the hundreds of decisions required in a startup. A significant outcome is the ability to ask for help.
Immature communities may frown upon a more public presentation of needing help with the belief that is shows weakness. Startup founders are supposed to know everything, be in command of their ship and can weather any issue that confronts them. Hogwash.
I see this as a signal of community maturity and firmly believe that leaders have to show 1st timers that asking for help is as much part of the success journey as fundraising, hiring or developing a great product.
Leaders lead by showing others that certain behaviors or mindsets are acceptable. Every panel discussion, every blog post, every tweet are opportunities to nudge your community’s beliefs.
Looking for a way to help your startup community? Network, baby!
It is imperative of you as a business leader that you fully understand the difference between a contact database and your network. Get this wrong and it’s like running with only one shoe – you can do it but it makes things a lot harder.
Seeding, nurturing, and harvesting a network will provide you and your business with a lot more horsepower then simply building a database of your contacts.
Full disclosure, I am a Malcolm Gladwell “connector” and have been for about eight years. Truth is, I had always been good at keeping a contact database up to date as I moved through my life and changed jobs. But I did not fully realize the power of a network until that point eight years ago.
Your contact database is just that – a structured collection of information that you can query for a variety of reasons. Most of us use the contact database to call people, or email them, maybe send a text message. Some of you may have this database tied to an email service so that we can send out large bulk messages. Regardless of what tools you use, the concept here is a one-way communication from me to one or many.
A network is something much different. The core concept of a network is the idea of interconnectedness. I think a lot of people miss the full idea of the network where nodes are connected to other nodes not just one node (the me as the center of my database view). We fundamentally understand this more today with the advent of social networks like Facebook and LinkedIn. But you don’t have to view your network solely through the eyes of these tools.
There is power and potential in how you help bridge connections between nodes in your network.
A few years ago, I considered getting involved with a new opportunity, which would drive this existing business into the future. Their current operational thinking has roots that date back over 30 years. When considering this opportunity, I many times saw examples of their activities as contact database building versus activities that encouraged, facilitated or supported interconnectedness. They have a database not a network.
As you consider improving your position or your company’s position, take a few moments and assess whether you are building a database or facilitating a network. Morph your thinking to full network and you will reap the benefits for years to come.
Want to up your network activities? Try these two simple tasks:
- Every day introduce 2 people in your database to each other with the simple sentence, “I thought you two should get to know each other.” Do this for 3-4 pairs.
- Convene a lunch or a late-in-the-day beer social where you invite 8-10 people who don’t already know each other. Hold no agenda other than getting the group to share who they are and what they do. (One simple trick is to have everyone share something silly like, “share one unique fact about yourself”.)
Each of these two tasks can be started tomorrow. You don’t have to buy lunch or the beers, everyone is on their own. We all enjoy these get togethers (for the most part) and are always waiting for someone to be the organizer. Be that person and you will yield the benefits for years to come.
Creating meaningful connections can be difficult at any age.
You remember how you felt in 7th grade at the dance with the girls clustered in groups on one side and the boys clustered in groups on the other side of the gym? Even the most confident still had a strong sense of fear of what was going to transpire next. They just hid it better.
The basis of that fear – a fundamental fear of the unknown. What do we say? (I don’t want to look stupid.) What is the first move? (Should I ask her to dance or just talk to her.) Who should I approach? (The girl that I like or the girl that keeps looking at me.)
The sheer memory of that night (my memories might have lasted until college, by-the-way) remains close to the surface as adult events many times evoke the same awkward set of questions and unknown answers.
Nascent startup communities are often like those middle school dances where there is awkwardness around what to say and who to talk to.
Entrepreneurs feel awkward talking to government officials. (Do we have anything in common?) Corporate executives feel awkward revealing departmental vision to entrepreneurs. (Fear that the startup might steal something.) Investors are always walking a tight rope. (Let’s not disclose what deals we are doing or about to do.)
The result of this awkwardness are communication silo’s that prohibit healthy connections to flourish. It is clear that many communities exhibit clusters of like-minded people that are not connected to others in their community. This is a big problem. Why?
The secret sauce of the mother-of-all communities (Silicon Valley) is the ability to quickly and effortlessly connect with the resources needed to start and grow a company. The valley is the quintessential flat network. This was mapped excellently in the work that Zoller & Feldman did around dealmakers in their research of 12 US cities in 2012.
One of our community-development principles here at Techstars is that emerging or nascent startup communities can advance quicker when they work to connect their clusters. Sometimes local dealmakers can make this happen. Sometimes an outsider has to facilitate these connections.
Bottom line – startup communities can’t advance at the dance unless everyone starts dancing together.
Everyone has some level of motivation, what is yours?
I have argued that there is room for everyone at the proverbial startup community leader table. Though we believe that you need 8-10 entrepreneur leaders on the team, most communities have a cadre of non-entrepreneurs stirring the pot. The issue is that non-entrepreneur leaders sometimes fade away after some initial participation.
To that end, what are you going to do once your initial involvement fades away?
Most non-entrepreneur community leaders are motivated first by their job. Examples include a:
- city staff who are driven by the notion of job growth in their city,
- angel investors who yearn for better deal flow,
- corporate executive who realize that a thriving startup community helps their company,
- real estate leader who sets up a coworking space,
- lawyer who holds group meetings and gives away free advice to first time founders,
- economic development executives who now have an entrepreneur charter,
- elected officials (at any level) who see a growing role for more entrepreneurship.
Let me be the first to thank you for joining us entrepreneurs to create a better future for our community. We need you in order to create a more inclusive discussion. And we need the resources you bring to grow smarter, better and faster.
I recognize that your initial motivation is your job, I also recognize that you bring a level of passion to this community-building effort and even give much of yourself during non-working hours. Again, thank you for your #givefirst attitude.
But now that you have a new job, or got really busy, or achieved your near-term job goals, what are you going to do now?
My partner Brad Feld reminds us that community-building is a 20-year effort that restarts every day. He also reminds us that community leaders need to be involved for 10+ of those years.
When you as an important leader in the startup community make your mark at any given stage of the journey and then fade away, we miss your leadership. You leave a void. And the community just slips back a little (or a lot).
My ask, don’t fade like a light switch; fade a little over time (like years). Show up at a few meetings, personally and publicly support others in their projects (which help foster the next generation of leaders), and maybe even join just one more project (instead of the 3 you were involved in previously.)
The overly-simplistic measurement tool provides bad signals to good people.
Investments made or capital deployed are the typical measure of success for a community. There are many reasons why capital is used and I will delve into that in another post. Today, I argue that using capital as the primary measure of a community’s success is the wrong view to base your entire community building strategy around.
But Chris, isn’t capital the most telling characteristic of a community’s health?
No, community measures like total capital invested provide no underlying insight into what is actually happening in your community.
Let us take a look at two different communities.
- Population of 800,000+
- Diverse general population but not entrepreneurs and working silo’s
- 100-150 active, full-time growth companies
- Long tradition of business building (not necessarily entrepreneurship)
- Raised $20M this last quarter ($15M from one breakout company (led by a regional VC) and $3M from another).
- Population of 250,000
- Not a diverse population but a diverse set of entrepreneurs who work together
- 50+ active, full-time growth companies
- No record of sustainable business building of any kind
- Raised $10M this last quarter (over 15 companies and only 1 at $1M).
When we take a high-level flyover and compare these two communities in a ranking of all cities, we would naturally force ourselves to think that community #1 is 2x more active than community #2. Even more so, we would look at the $10M raised from the breakout company as an indication that this community can scale companies. Next quarter or next year we should see this again with the company that raised $3M right behind them.
I am going to take a contrarian view and argue that community #2 is in a much better position to build a great startup community over the long run. They are building a base for the future. Community #2 has found 15 companies this quarter and I might see that there are multiple investors with different interests putting money into different companies.
On the surface community #1 has raised 2x the amount of money.
But community #2 has invested in 2-3x the number of companies.
Which community is doing better?
Our simple media approach to create and digest Top 10 lists and look at overly-generalized statistics to quickly tell a story does not truly reveal the startup activity or health of a community.
At best capital is a lagging indicator and a signal of the power of a handful of actors. At worst, measuring only capital creates a signal from which actors make poor community building decisions that ultimately derail the best efforts of well-intentioned actors.
What other measures can you use to benchmark your progress?
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.