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Last week, Endeavor Insight (the research arm of Endeavor Global) teamed up with the Bill & Melinda Gates Foundation to publish a new report on fostering productive startup communities. The report was authored by Rhett Morris and Lili Török of Endeavor, and I think it is one of the best pieces of empirical work I’ve ever seen on startup communities.
Why such a strong endorsement? Because it helps fill a pretty big information gap for two of the most important principles for building startup communities—networks over hierarchies and entrepreneurs as leaders. At present, the evidence-base is thin, due to the fact that there are no shortcuts to doing this type of work well (building network maps with vital information about the nodes and relationships among them)—it requires painstaking, on-the-ground data collection, which is expensive to do and requires a lot of time (it took Endeavor 18 months to complete the study). Thankfully, Endeavor has done the work in two cities so that we can all learn from it, and more importantly, use to help persuasively state the case for bottom-up community-building.
The research takes a case study approach, studying in extensive detail the startup community networks in Nairobi and Bangalore. To do this, the authors collected information on the individuals and organizations involved in the startup communities in each of these two cities, and mapped the relationships among them. The main result: Bangalore’s startup community is more productive (more high-growth firms and companies at scale) because the network is denser and because the biggest influencers are themselves entrepreneurs; the opposite is true in Nairobi.
The report begins by setting context on the importance of entrepreneurship, by demonstrating that a relatively small number of high-growth companies create most economic value in jobs. This is true in most countries and cities, and as we can see here from the report, is more the case in Bangalore versus Nairobi.
In other words, most businesses don’t produce much in the way of jobs or output, but a small number create a lot of those things, and they drive economic growth. Displayed differently, the report shows that Bangalore’s high-growth business sector is much more productive than is Nairobi’s.
In other words, Bangalore has been better at producing businesses that achieve very high rates of growth and reach a large scale.
That of course leads to the question of why in one city but not the other? There are a number of factors that could affect this, but central to this study—and two in which I mentioned before are often neglected due to measurement challenges—are networks (relationships) and leadership.
More specifically, Nairobi not only lacks the network density of Bangalore, but it critically lacks the right type of influencers. As the network graphs below make clear, the most influential people in the Bangalore startup community are successful entrepreneurs—those that have guided companies to scale—and non-entrepreneurs are not very influential. In Nairobi, the opposite is true.
Pretty impressive right? I encourage you all to read the report itself—it’s not too long and it’s written very well (succinct yet weighty). The report summarizes the following five findings, followed by a graph explaining the differences between on bottom-up, network-based approaches to startup community building (recommended) versus top-down ones (not recommended).
Finally, the report concludes with some recommendations, which I’ll spell out here.
- Avoid the myths of quantity (ie, quality over quantity any day—something I call the More of Everything Problem)
- Follow local founders who have reached scale
- Listen to leaders of the fastest-growing firms to identify the most critical constraints in the local entrepreneurship community
- Expand existing mechanisms that leaders of companies at scale use to influence upcoming founders
- Invite leaders of companies at scale to positions of influence at existing support organizations
Couldn’t agree with that more. Well done, Rhett, Lili, and your team.
Great ideas come from unexpected places.
I recently had the opportunity to meet a fascinating group of young pastors who are applying a complex systems approach to a new congregation they founded. Dissatisfied with the top-down, command-and-control structure of the churches they had previously been a part of, these young innovators created something better—a system based on a decentralized network, on communal governance, and on trust, reciprocity, and fulfilling commitments.
This should sound familiar to you members of the church of startup communities, which in my view, can be best understood through the prism of the complex systems framework. In such systems, we focus on cultivating the right environment, on improving the interactions between the individual elements (ie, people) rather than focusing on the elements themselves, a governance structure that adheres to non-control, and a set of virtuous informal norms and rules.
As we were discussing various approaches and challenges to organizing a modern religious community and a startup community through this belief system—which have a lot in common, by the way—I brought up the notion of social capital, and how that in order for “transactions” to take place in a startup community, one must agree to a broad-based informal “contract” that everyone adheres to. Critically, this takes place between each individual and the community as a whole.
That’s when one of my new friends turned to me and said: “I think about that as the difference between contracts and covenants.” This is a powerful distinction that is important for participants in startup communities to embrace.
Contracts, in their purest form, are specified agreements for two parties to fulfill a particular set of promises. If one party breaks that agreement, the contract is broken—freeing the other party of their obligations. Contracts establish a give-and-take relationship that is institutionalized and conditional.
Covenants, on the other hand, appeal to a cause that is greater than any mutual exchange. In a covenant, if one party breaks his or her obligations, it does not permit the other to do the same. Why? Because an oath is not really about the other person anyway—it is an appeal to our higher nature and a commitment to serving the greater good.
Contracts are transactional. Covenants are committal.
As I was kicking around this idea in my head, I stumbled upon an interesting blog post that was discussing the concept of covenants and contracts, and drew the link between the notion of covenants and a sacred document in the founding of the United States—the Declaration of Independence. Rather than summarize that analogy, I’ll just copy and paste some of that text here.
The Declaration of Independence was signed by 56 men who all understood they were committing high treason against the British government when they signed the document. Benjamin Franklin famously highlighted that reality at the time, “We must all hang together, or assuredly we shall all hang separately.”
The concluding sentence of the Declaration states “And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.”
To the signers it didn’t matter if any one of their confederates broke or switched sides. They were still committed to their course of action regardless, even if it cost them their lives.
I am not a religious person, nor a scholar of laws nor American history, so I am probably way out over my skis here. But the point I want to make is an important one for startup community participants to embrace—make covenants, not contracts. Don’t be conditional in your actions of service. Do what is right because it is right. Make a commitment to your community regardless of what it gives you in return. In the end, you will gain more anyway.
You hear it in startup communities everywhere: “we don’t have enough capital; if only we had more capital we could achieve X; we can’t grow our company here because there is no risk capital,” and so on. All variations on a common theme. As Brad wrote in Startup Communities:
I’ve lived and invested in [countless places in the U.S.]… Over and over I hear one thing from entrepreneurs: “There is not enough capital here.” My message is the same for entrepreneurs—let it go. There will always be an imbalance between supply of capital and demand for capital. The whole idea of “enough capital” is nonsensical, and complaining about it doesn’t actually impact it.
There is no denying that early-stage funding can help startups profoundly. But, let me point to another type of capital that is just as important for a startup community over the long-run. It is also something that local leaders have greater control over.
Networks of trust
Social capital refers to the set of informal norms and values shared by a group of individuals (a network), which allows them to cooperate and engage collaboratively with greater ease. The network (relationships) directs vital information and resources (ideas, talent, funding) to company founders, but social capital—the nature of those linkages—determines how well information and resources flow through the network. This is particularly true for highly valued indirect connections.
In the context of building high-growth startups, social capital and informal norms are essential—acting as a lubricant for “transactions” (idea sharing, collaboration, connecting people) to occur. All businesses engage with external individuals and organizations—they have suppliers, customers, and talent to acquire. But in complex, fast-paced environments, it is not always feasible to engage in a “market” context (imagine signing an NDA every time you wanted to socialize an idea, or determining a price for offering feedback). Instead, participants in a healthy startup community make informal contracts—between each other and with the community as a whole—underwritten by trust, reciprocity, honoring commitments, and stewardship.
In other words, social capital represents the value improvements to a startup community caused by virtuous, high-trust, social networks. For a given set of resources and entrepreneurial heft in a region, startup communities with more social capital will achieve greater outcomes than those with less of it.
Berkeley scholar Anno Saxenian describes how a culture of collaboration and openness was decisive for Silicon Valley becoming the beacon of innovation and entrepreneurship that it is. Startup Communities makes a similar case for Boulder. Having spent nearly half a year here, it is evident that something is different about community culture in Boulder—which helps explain the remarkable innovative and entrepreneurial output such a small city produces.
A storied history
The concept of social capital is not new. The first known use of the term “social capital” was in 1916 by a school reformer in West Virginia named L.J. Hanifan, who urged a community-based approach to improving local education—an approach grounded in “goodwill, fellowship, mutual sympathy and social intercourse.” This may sound familiar to readers of Startup Communities.
Antecedents of social capital can be traced to the mid-19th century French philosopher Alexis de Tocqueville‘s Democracy in America, who called the “art of association” the “mother science” for understanding how American society functioned so well at that time. Classical thinkers from Aristotle to Thomas Aquinas and Edmund Burke espoused virtues like trust, caring for one another, and living by a society’s norms as essential ingredients for effective “community governance.” In 1905, the German philosopher Max Weber wrote that the foundation of Western Capitalism was rooted in Puritan virtues of truth-telling, reciprocity, and honoring commitments—not what it has evolved into, broadly, today.
More recently, social capital was injected into the mainstream by Harvard professor Robert Putnam in his 2000 book, Bowling Alone: The Collapse and Revival of American Community. Putnam describes two forms of social capital—bonding, which connects people in the same group, reinforcing exclusivity and homogeneity (religion, country clubs), and bridging, which connects people across groups, expanding identity, diversity, and reciprocity.
Startup communities need both. The latter is more difficult to achieve, yet ultimately more decisive for innovation.
The social capital imperative
I want to argue that social capital in startup communities is more important than ever—an importance that will accelerate.
First, as we progress further into an information and knowledge-intensive economy, the network as a form of organization over traditional hierarchies will become more pervasive. Information—particularly complex information—is better circulated in a network structure. As political scientist Francis Fukuyama claimed, the fall of the Soviet Union was a failed attempt at imposing a hierarchy on an increasingly information-based system (a modernizing economy). The rapid pace of technological advance today necessitates strong external relationships. These collaborations, often taking place informally (not in a “market” setting), work best when grounded in trust and shared values.
Second, technological advance and complexity require diversity, but this is not easy to achieve. Innovation networks are not based on just any type of relationship, but human ones. As they describe in their excellent book, The Rainforest: The Secret to Building the Next Silicon Valley, Victor Hwang and Greg Horowitt state that it is the ability to consistently overcome our primitive nature to distrust people who are different that separates vibrant innovation ecosystems from the others.
Finally, social capital exhibits increasing returns—which makes it important for economic growth. In an era of persistently low income and employment growth around much of the world, we need as much of this as we can get. In his 1995 book, Trust: The Social Virtues and the Creation of Prosperity, the aforementioned Mr. Fukuyama ties economic prosperity to societies that operate informally on the basis of trust, flexibility, and informal relations.
What you can do
Simply put, relationships and cultural norms in a startup community are economically valuable. As an asset, people extract value from social capital. Also as an asset, it requires maintenance, care, and replenishment. As a communal asset, social capital depends upon a shared commitment and responsibility. But like any public good, social capital is subject to underinvestment—it is too easy to take without giving, which undermines the entire undertaking.
How to get around that? First and foremost, it requires motivated leadership. The leaders set the tone in a city. If the leaders in a startup community take a #GiveFirst approach, demonstrate the virtues of trustworthiness, reciprocity, and fulfilling one’s commitments, and do so visibly, the rest of the startup community will follow suit.
In Startup Communities, Brad lists several key attributes of leadership and culture: be inclusive; play a non-zero-sum game; be mentorship driven; have porous boundaries; experiment and fail fast; have constant engagement; embrace weirdness; be open to ideas; be honest; and celebrate success—as well as failure! He also talks about the need to take a long-term view—at least twenty years. Changing the culture and mindset in a place can take awhile. It might be the next generation of startups that benefits from your hard work—be ok with that.
In The Rainforest, Hwang and Horowitt distill the Silicon Valley ecosystem to one that relies on human relationships—one that requires learning-by-doing; superconnector leaders they term “keystones” to build bridges and promote diversity; celebrating of role models and peer mentors; building “tribes of trust” so that people can engage freely under a common set of standards; and the creation and adherence to social feedback loops (both positive and negative).
So, before you resign your startup or your community as doomed to failure because of a lack of investors and risk capital, instead think about how you can develop a capital base of your own—one founded on shared informal norms and values that promotes relationships of trust, idea-sharing, collaboration, and a love of place (topophilia). Social capital won’t solve every problem, but over time, it will make a fundamental difference in the ability of young high-growth companies in any city to start, scale, and yes, secure financial capital.
Lately, I’ve been talking with entrepreneurs and other civic leaders in cities throughout the US and globally for the new startup communities book. Many find themselves struggling to attract and retain talent—particularly in smaller cities and college towns. One common sentiment is along these lines: “We have a lot of bright young people graduating from University X, but because there are fewer opportunities here for after graduation, they go off to City Y or City Z and start their careers or businesses there. We just don’t have the jobs to support them.”
Talent flight is a real problem. Not just for college towns, but for major cities and regions outside of coastal innovation and knowledge hubs like Silicon Valley and New York. The US Midwest, for example, is notorious for producing high rates of engineering and science graduates from top-flight schools, only to see them flee for the coasts (though, this trend may be changing somewhat).
Over the long-term, city leaders need to think hard about how to make sure that would-be local entrepreneurs and other talented individuals have the resources they need to stay at home. But, let me suggest another course of action that can be taken right away: build a diaspora.
Though most commonly used in a specific context to reference Jews living outside of Israel, the term diaspora generally refers to the movement or dispersion of a group of people from their ancestral homeland. In this context, I’ll use the term “ancestral homeland” loosely to mean a place that has a deep emotional connection to a person (e.g., where they were born, grew up, or went to school).
People leave these places for any number of reasons—self-discovery, employment opportunities, following or finding a partner, and so on—but choose to remain connected, in some way, to their roots. Perhaps they even maintain the hope of returning one day when the time is right. What is overlooked among these short-term “losses,” is the potential for what is learned “out there” to have significant value for the community back home, if properly cultivated.
In the context of building startup ecosystems, this is doubly true, where the process of starting and scaling high-growth businesses is niche, and best learned at an arm’s length (learning by doing/seeing). This is why places like Silicon Valley continue to attract talent, even as the practicalities of living there seem to be untenable—the resources, the culture, the tacit knowledge, all make the congestion and exorbitant cost of living worth it.
And yet, with the right mindset, what’s learned there can be transferred elsewhere.
In her 2006 book, The New Argonauts: Regional Advantage in a Global Economy, AnnaLee Saxenian of UC Berkeley chronicles how foreign-born engineers and managers working in Silicon Valley were able to transfer localized knowledge—on how to build and invest in scalable technology ventures—back to their home countries. She specifically points to a critical mass of motivated Taiwanese and Israelis in the 1980s, and Chinese and Indians in the 1990s, as essential to the burgeoning innovation ecosystems we see in those places today.
Some of these migrants stayed as expats, others returned home, while others still migrated to California to replace those leaving. What was common among them was their connection to home and a desire to bring what was learned abroad back there. Instead of Silicon Valley as a central source of “brain drain,” a group of motivated, patriotic, opportunistic individuals became a pipeline of “brain circulation”—where invaluable knowledge obtained at the frontier of technology and entrepreneurship was transferred back home, planting the seeds of the next generation of booming global innovation that followed.
So, what can be done today to build a vibrant startup community in smaller, more isolated cities?
First, of course, make your city as attractive as possible to talented individuals that do not want to leave. Provide the sort of infrastructure, cultural amenities, and mindset that knowledge workers in the creative economy desire. Make sure they have access to the necessary skills to innovate and start great companies, and get them connected with experienced local entrepreneurs. Play the role of convener and do what you can to increase the frequency of interaction among new and seasoned entrepreneurs alike. Organize “catalytic events” like Startup Weekend and 1 Million Cups. Celebrate entrepreneurship, champion local founders, and encourage them to serve as mentors to the next generation.
Second, make sure that the young people who do want to leave have the right skills to be employed at the best companies in leading innovation hubs. If the secret sauce to technological innovation is best learned at the likes of Google, Amazon, Sand Hill Road, and Kendall Square, ensure that departing members of your tribe have a fighting chance to gain access to that knowledge, experience, and network.
Finally, and perhaps most critically—don’t ignore those who have left, or resort to a sense of frustration at the inability to “keep talent at home.” Instead, view it as an opportunity. Build stronger ties with your diaspora, learn from them, engage with them, keep them emotionally tied to the region and interested in its success. Some may return to live there—be prepared for them (see #1 above). Others may choose not to return. But make sure they, too, have constructive ways of engaging with the startup community there—as mentors, investors, or advisors.
Think it’s impossible? Look no further than the story of Microsoft, when Seattle’s native sons Bill Gates and Paul Allen relocated the company there simply because they wanted to go home. As UC Berkeley’s Enrico Moretti described in his book, The New Geography of Jobs:
This was not a business decision. Gates and Allen were both from Seattle, and they wanted to go back to the place where they had grown up… Seattle was not an obvious choice for a software company. In fact, it seemed like a terrible place. Far from being the high-flying hub it is today, it was a struggling town.
I don’t mean to infer that the Microsoft story is likely, or even probable. Bill and Paul are remarkable, few-in-a-generation talents, whose mold is unlikely to be recast. But the point remains: today’s outbound traffic may be tomorrow’s inbound local heroes. Don’t miss a golden opportunity to keep tabs, keep ties, keep engaged, and keep the brain circulation moving ahead at maximum speed.