If you're the only startup in
town, it's going to be tougher than if you're launching in a healthy startup
ecosystem.
Contributed By:
George Deeb
Source: Entrepreneur
Chicago’s startup ecosystem is exploding. But so
are others all across the country and around the world, with varying levels of
success. I wanted to talk about the mix of ingredients that are needed to
make a startup ecosystem thrive over time, so leaders in your local
communities can have a blueprint to follow to propel your local startup
ecosystem, and hopefully, your own success in the process.
The most important ingredients.
Access
to Great Ideas. Great
ideas turn into great businesses. Think building “platforms” over
“features,” or “wisdom” over “widgets,” or “painkillers” over
“vitamins.” Startups are hard in all cases, might as well be working on
really big ideas.
Access
to Talent. Great
entrepreneurs, preferably serial entrepreneurs that have learned from prior
mistakes, are ultimately going to dictate the success of their businesses, and
in turn, the success of the ecosystem.
Access
to Capital. The
best ideas and the best talent are useless without the capital to fund their
vision. If that capital is local, great; investors like to invest close to
home. If that capital is located in another city, that is also great,
provided investors in those towns are willing to deal with travel (which they
often don’t).
It is
critical that the capital be available to support each stage of
development, from seed to early to growth stages of your business. Having
seed stage, but not Series A or Series B stage, is a recipe for a likely
“flame-out” of that startup, when they hit the wall in that level of their
growth.
Access
to Customers. To
me, this is the most important piece. Customers drive
revenues. Revenues impress investors. Investors fund growth. Growth
leads to big exits. Big exits leads to a robust ecosystem. This often
means tight partnerships between early stage ideas with later stage companies
to buy those services (ones who are supportive to the local startup
community).
The key players.
Entrepreneurs. Duh, you need experienced teams
running the startup businesses. With an equal balance of needed skill sets
-- from strategy, to marketing, to technology, etc.
Mentors. First time entrepreneurs need to
be able to ask questions of experienced leaders, to help get up the learning
curve without making the same mistakes of their predecessors.
Investors. Whether these are individual
angels, organized angel networks, venture capital firms, private equity firms,
family offices, corporations or other funding sources doesn’t matter. What
matters is the money is flowing from whoever can cut the checks for that stage
of a business’s growth.
Incubators. This category picks up everything
from shared office spaces for startups, all the way up to formal startup
accelerator programs with formal educational curriculums. The point is,
entrepreneurs can learn from each other when they are in close proximity
to each other.
Universities. A lot of the biggest business
ideas are born from the research inside universities. Having a
healthy technology transfer process for these ideas to be monetized by business
leaders is key. And, university professors need to know: It is perfectly
acceptable to try and monetize their ideas, at the same time they are trying to
win a Nobel prize.
Corporations. The big companies in town help in
many ways. They invest through corporate venture capital funds. They
become potential customers of new local startups. They have pain points of
their own that a local startup can solve for them. They are often the
exit for startups that have gotten large in size.You need a really healthy
interaction between the startups and corporations working towards a common
goal.
Associations/Events. There are many groups in town
that help organize and propel the ecosystem. This could be industry trade
associations, venture capital associations, entrepreneur networking groups,
chambers of commerce, economic development groups, etc. Leverage these
groups of like-minded people at their big annual events or leverage their tools
(e.g., job boards on their websites).
Government. Whether it is at the city, county
or state level, your local government can play a very important role. That
could include providing tax incentives for startups to launch in their city,
tax-free profits on any capital gains in a startup (to help stimulate
investment), passing ecosystem friendly laws (like free access to the
internet), or establishing venture capital funds with a portion of their
treasury.
Service
Providers. The
lawyers, accountants, bankers, recruiters, agencies, advisors and
consultants in your community all play a role. The more experienced they
are with startups, the better advice they will bring to the ecosystem.
Optimal ownership and economics.
Spread
Equity Deep. Most
entrepreneurs concentrate equity into only a couple people at the top of the
organization. It is better to spread equity deep into other employees, as
well. Why? Because if employees have a vested interest in the
business, they will work harder towards hitting the goal. And, when the
company sells for $1 billion, it creates hundreds of
multi-millionaires that have new-found funds to start their next startup,
powering the ecosystem to the next level.
Serial
Exits. Selling
companies for big returns impresses investors. But, often times a first
time entrepreneur will see a $50 million sale as “big money,” and
sell too early to put some cash in the bank for a rainy day. But, a second
or third time entrepreneur has already banked cash from their first exit, and
now they are in a position to “roll the dice,” walking away from a $50
million sale in hopes of a $500 million sale down the road.
Reinvest
Returns. Money
that simply goes into the bank account, or into safe real estate investments,
does not help the ecosystem. The money needs to round-trip back into the
community. So, if you sell for $100 million, hopefully a good chunk of
that is funding other startups in the ecosystem.
Shoot
for the Moon. Many
investors are simply too conservative for a startup ecosystem to be successful. Silicon
Valley prides itself on “failure as a badge of honor,” as the lessons
learned in one bad startup will apply to the next good startup. If
you are too conservative, trying to cross potential “strikeouts” off your list,
you are most likely crossing off potential “home runs” at the same time.
Key assets and initiatives.
It
Takes Leadership. It
takes a couple cheerleaders at the top that are going to “plant the flag”
to have everyone rally around those goals for the
community. Preferably, somebody that can put their money where their mouth
is, and can lean on their deep rolodex of key relationships in your region
(e.g., the governor, the mayor, the local billionaires).
Leverage
Local Strengths. Figure
out what your region does better than others, and focus your efforts around
those industries or skills. For example, New York would be a great place
for financial startups and Los Angeles would be a great place for entertainment
related startups, given the high concentration of experts in each.
It
Requires Startup Density. It
will be really hard to build a robust community in very small towns. There
simply isn’t enough activity, breadth of industries or depth of expertise in
any one industry to be effective. So, either live in a town big enough to support
an ecosystem, or prepare for a lot of travel between a bunch of smaller regions
that have been aggregated into one community.
Collaborate
Across Regions. Don’t
think a startup ecosystem is isolated to your city. The best startup
ecosystems feed off each other. Think about the collaboration happening
between New York and Boston startups, given their close proximity to
each. Or, between Detroit and Germany, because they both serve the auto
industry, as examples.
Publicity
Helps. The rest of
the country needs to know what you are up to. It should be less about your
desire to build an ecosystem and more about the venture capital flowing
into your region, or big exits being realized at big valuations. So,
celebrate your successes, and put those success stories locally “on
display,” or nationally “on the road.” That will
attract investors and talent wanting to check it out.
Progress
Must Be Measured.
As with any business endeavor, you must have good measurement with which
to manage it. Quantify key metrics like the amount of capital raised,
investor value created, companies formed, jobs created and material exits in
your market. Shoot to have those metrics improve year over year.
It
Can’t Be Forced. The
community needs to share a common goal. The goal of building a robust
community can’t simply be embraced by a few, to be forced upon others; it has
to be embraced by everybody participating in the community for it to be
successful.
It
Takes Time. Don’t
expect miracles overnight. Ecosystems are not built in years, they are
built over decades. That is why Silicon Valley’s startup ecosystem is as
big as it is; they have literally been working on it since the 1970’s, to
become a fine-tuned machine after 40 years of optimization.
Hopefully, you now have a
better understanding of what it takes to build a robust startup
ecosystem. You can’t do it by yourself; you must collaborate as a
symbiotic community with a shared set of common goals between people that are
equally happy helping others, as they are at helping themselves. Layout
the blue print for your city, let it percolate for a couple decades and hopefully
good things will come.