Colorado is for Founders

Virginia may be for lovers, but Colorado is for doers, creators, and founders. I was reminded of that again today on Twitter by this photograph of Jared Polis and Phil Weiser—respectively, the Governor-Elect and Attorney General-Elect of the state.

If you don’t know them already, Jared and Phil are giants in the Colorado startup community.

Jared produced not one but two nine-figure exits as a startup founder in the late-1990s and early-2000s, before going on to co-found Techstars and engage in public life—as a philanthropist, state official, and most recently, as a Congressman in the United States House of Representatives.

Phil was most recently the dean and a professor at the University of Colorado Law School, where for years he lead efforts that made CU an entrepreneurship center of excellence for higher education nationwide. Phil was also instrumental in launching Startup America, Startup Colorado, bringing the Blackstone Entrepreneurs Network to Colorado, and many other things (including service in the Obama Administration).

If I’ve learned anything in the last two years, it’s that public leadership really matters. Leaders don’t just advance policies or promote a specific agenda, they represent the ideals and values of a society. They are an embodiment of how a country, a state, or a community wants to present itself internally and to the rest of the world. Moreover, leaders have the unique ability to embolden our highest—or lowest—impulses.

Think about the message it sends about a place that chooses people like this to lead and represent them publicly.

By many measures, Colorado is the most entrepreneurial state in the country, a fact that I discovered in 2013 when studying high-technology business formation around the United States. I was struck by just how many places across the state had a high proportion of startup activity occurring—a finding that has been extended to looking across other types of high-growth entrepreneurship as well. Something special is happening there, and it has been for many years.

John Hickenlooper, the outgoing Governor of Colorado (himself an entrepreneur!), attributes the state’s ability to consistently produce a high rate of fast-growing, high-value companies to a love of place—a pervasive sense of community that makes helping others a central part of the social fabric there. I was lucky enough to spend most of last year in Colorado observing this firsthand. And while I have no hard data to prove it, I know he’s right.

So, if you’re a startup founder, a tech sector worker tired of fighting crowds, expense, and inconvenience on the coasts, or a policy or research professional interested in tech and startups, look to Colorado—a place that with each passing day looks more and more like the place to be for all things entrepreneurship.

What is honored in a country is cultivated there
— Plato

How the Geography of Startups and Innovation Is Changing

This article originally appeared in the Harvard Business Review

(with Richard Florida)

We’re used to thinking of high-tech innovation and startups as generated and clustered predominantly in fertile U.S. ecosystems, such as Silicon Valley, Seattle, and New York. But as with so many aspects of American economic ingenuity, high-tech startups have now truly gone global. The past decade or so has seen the dramatic growth of startup ecosystems around the world, from Shanghai and Beijing, to Mumbai and Bangalore, to London, Berlin, Stockholm, Toronto and Tel Aviv. A number of U.S. cities continue to dominate the global landscape, including the San Francisco Bay Area, New York, Boston, and Los Angeles, but the rest of the world is gaining ground rapidly.

That was the main takeaway from our recent report, Rise of the Global Startup City, which documents the global state of startups and venture capital. When we analyzed more than 100,000 venture deals across 300-plus global metro areas spanning 60 countries and covering the years 2005 to 2017, we discovered four transformative shifts in startups and venture capital: a Great Expansion (a large increase in the volume of venture deals and capital invested), Globalization (growth in startups and venture capital across the world, especially outside the U.S.), Urbanization (the concentration of startups and venture capital investment in cities — predominantly large, globally connected ones), and a Winner-Take-All Pattern (with the leading cities pulling away from the rest).

These major transformations pose significant implications for entrepreneurs, venture capitalists, workers, and managers, as well as policymakers for nations and cities across the globe. 

1.png

The Great Expansion

The first shift is the Great Expansion, as the past decade has witnessed a massive increase in venture capital deployed globally.

The annual number of venture capital deals expanded from 8,500 in 2010 to 14,800 in 2017, for an increase of 73% in just seven years. The amount of capital invested in those deals surged from $52 billion in 2010 to $171 billion in 2017 — a gain of 231%. These figures represent historical records aside from the peak of the dotcom boom in 2000 (and may even exceed it). By all accounts, 2018 will be even bigger.

Globalization

The second shift is the accelerating Globalization of venture deals. For decades, the United States held a near monopoly on venture capital, where as late as the mid-1990s, the U.S. captured more than 95% of all venture capital investments globally.

That share has declined since then — gradually for the first two decades (falling to about three-quarters of the global total by 2012), and rapidly in the last five years (dropping to a little more than half by 2017).

Urbanization

The third shift is the Great Urbanization of startup activity and venture capital activity in the largest global cities in the world. For decades, startups and venture capital activity was located in the quaint suburban office parks and low-rise office buildings of “nerdistans” like Silicon Valley, the Route 128 Beltway outside Boston, and the suburbs of Seattle, Austin, or the North Carolina Research Triangle. But our research shows that the startup activity and venture capital investment are now concentrated in some of the world’s largest mega-cities.

3.png

The table below shows the 10 leading cities for venture capital investment in the world. These 10 cities accounted for more than $100 billion in venture capital investment on average each year between 2015 and 2017, or more than 60% of the total. Three of the 10 leading global metros have populations in excess of 20 million people and three more have populations of between 10 and 15 million. Three more cities have between 4 and 10 million people, while one has less than 2 million (San Jose, the heart of Silicon Valley).

separate study by one of us and a colleague that looked at the factors associated with venture capital investment across U.S. metros found population size and density to be key. The only other factor that was slightly more important was high-tech industry concentration, which is what entrepreneurs and venture capitalists are aiming to create over the long run.

4.png

Winner-Take-All Geography

Startups and venture capital increasingly take on a winner-take-all pattern geographically. Venture capital investments are highly concentrated geographically. Just the top five cities account for nearly half of the global total, and the top 25 for more than three quarters of global venture capital investment. And, previous research one of us has done for the United States and globally, shows that even within cities, venture capital activity tends to be highly concentrated among just a few postal codes.

The geographic concentration of venture capital has also increased over the last decade. This is particularly the case at the very top, where the top 10 cities account for 61% of venture activity worldwide in the latest three-year period, but just 56% a decade ago. Given the large amount of underlying activity going on each year, even small percentage point changes represent meaningful shifts in concentration.

Forces Behind the Shifts

We can point to three major factors driving these trends, though there are others. The first is technological, as the confluence of high-speed internet, mobile devices, and cloud computing has made it possible to start and scale digitally-enabled businesses at a fraction of the cost. As these technologies have fallen in cost, they are within reach in more markets, meaning that it’s easier to create and grow these high-growth, high-tech businesses in more cities.

The second factor is economic. The world has just gone through the largest global reduction in poverty and concomitant expansion of the global middle class in history, and multi-national corporate giants are emanating from more countries, particularly in emerging markets. This has increased demand for many digital goods and services in more places, giving technologically-enabled entrepreneurs in more places a robust market to sell into.

The third factor is political. Many nations around the world are doing more than ever to compete on a global stage by improving their education systems and universities, investing more in research and development, and bending over backwards to welcome high-skilled foreigners and company founders. The United States, on the other hand, is sliding backwards on all of these fronts — and in our view, has become complacent with its long-held dominance as a monopoly for high-tech entrepreneurship.

What It Means for Leaders

These trends have important implications for entrepreneurs, investors, managers, and workers, as well as national and local policymakers across the world. For entrepreneurs, it’s fairly straightforward. The San Francisco Bay Area remains by far the leading location for venture activity and the most robust ecosystem for growing a high-tech startup by a long shot. However, many of the key resources found in The Valley are increasingly available in other places. Whether non-American founders can’t obtain a U.S. visa or choose to stay at home for other reasons, it will only get easier for them to do so while building their companies.

For investors and corporations, the big takeaway is this: You can no longer look only in your own backyard for startups, innovation, and the talent that power them. Venture capitalists, used to looking close to home, need to broaden their horizons and think, look, and act globally.  Corporate managers, especially those in the United States, are used to strong local sources of innovation, but they too must increase their awareness of global innovation and startups as they look to as address competitive threats and capture new sources of innovation. Large established corporates may see opportunities in building globally disturbed teams. Techies and entrepreneurs around the world can count on greater opportunities in their home markets.

For global policymakers, the lesson is that globalization of high-tech entrepreneurship and venture capital mean greater competition across the board. For U.S. policymakers, they can no longer take its long-established lead in innovation and startups for granted. China is nipping at its heels and other nations are also gaining ground quickly. Sure, the US remains the dominant place by far, but it is time to stop doing counterproductive things like imposing immigration restrictions on highly-skilled individuals and founders with validated business ideas. Such actions chill the climate for global talent. For countries that are emerging on the global stage, it means continuing and even expanding on recent improvements in education, innovation, and immigration. For the world as a whole, having entrepreneurs and techies build companies where they are may eventually help to address the growing spatial inequality and winner-take-all dynamics that currently define the global geography high-tech startups.

Of course, innovation and entrepreneurship are local, not national, games. That means mayors and city leaders must take the lead. And it means nations should consider devolving responsibility for innovation and economic policy functions to the local level, especially as most countries will only have one or a few cities that can compete on a global stage. But it does not mean throwing government money at venture capital, which too many national and local governments tend to do. Instead it means investing in local universities and innovation, creating greater local density, and generating the kind of quality of local talent. And it also means working with the private sector not just to improve the preconditions required for innovation and startups, but to address the growing economic inequality and housing unaffordability that is causing a growing backlash against big tech in cities across the globe.

The Gift of Global Talent

Talent is to a knowledge-based economy what oil and steel were to an industrial-based one—it’s most important asset. And while agglomeration was important in the past too, it pales in comparison to the type of economic concentration we see playing out right now in major cities across the globe—talent wants to be around other talent. In fact it needs to be.

For decades, the United States has been the world’s biggest beneficiary of global talent flows by a long shot. But the United States risks squandering its long-held gift of global talent, due to changing economic conditions abroad and series of missteps at home. That’s the main message of an excellent new book from Bill Kerr of the Harvard Business School: The Gift of Global Talent: How Migration Shapes Business, Economy & Society.

The King of Queens

Well, it’s official. The Amazon HQ2 sweepstakes is finally over and the winner(s) are New York City, Washington, DC, and Amazon itself of course (in reverse order). I offer my congratulations to both cities—this is a BIG win for both. Kudos to Amazon too—it couldn’t have chosen two better locations. And finally, I suppose some tip of the cap is in order to Jeff Bezos—the new King of Queens.

Hedge

I recently had the pleasure of meeting Nicolas Colin. I’ve been an admirer of his writing in the past, and we had a delightful conversation at one of my favorite breakfast spots in London. For those of you who don’t know, Nicolas is a co-founder of The Family, an early-stage investment firm started in Paris and now operating in London and Berlin.

He is also the author a new book Hedge: A Greater Safety Net for the Entrepreneurial Age, which I’m happy to have completed just this week. Hedge hits three important notes for me: it is meticulously researched (527 references! 😍), very well-written, and has a point of view that stands out from the others.

New Evidence on Fostering Productive Startup Communities

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.

Solving Canada’s startup dilemma

Canada, we increasingly hear, is becoming a global leader in high-tech innovation and entrepreneurship. Report after report has ranked Toronto, Waterloo and Vancouver among the world’s most up-and-coming tech hubs. Toronto placed fourth in a ranking of North American tech talent this past summer, behind only the San Francisco Bay Area, Seattle and Washington, and in 2017 its metro area added more tech jobs than those other three city-regions combined.

All of that is true, but the broader trends provide little reason for complacency. Indeed, our detailed analysis of more than 100,000 startup investments around the world paints a more sobering picture. Canada and its leading cities have seen a substantial rise in their venture capital investments. But both the country and its urban centres have lost ground to global competitors, even as the United States’ position in global start-ups has faltered.

Thoughts on the New Jersey Innovation Evergreen Fund

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.

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.

Early-Stage Valuation Multiples Are Coming Way Down. What Does it Mean?

Earlier this year, I wrote about the declining number of early-stage venture deals and in the number of startups entering the venture-backed pipeline in the United States. As I think about the overall health of American entrepreneurship, this development raises some questions. Is the early-stage decline driven by factors on the supply-side (investors) or the demand-side (startups)? Or is it both? Does it reflect an overheated market simply returning to normal, or are other factors at play? As one example, is this evidence of winner-take-all markets, whereby fewer startups get funded, but those that do raise ever more capital? Is it something else? Is it all of these things? And, should this concern us?

Platform Giants and Venture-Backed Startups

A friend recently pointed me to a July study by Oliver Wyman titled Assessing the Impact of Big Tech on Venture Investment. I was immediately intrigued because this is a question I’m asked all the time and one for which I don’t have a good answer. On the one hand, I see how platform giants could expand startup activity because they seed an ecosystem, improve labor quality, and provide capital (as customers, investors, and acquirers). On the other hand, I see how their sheer dominance—and the ability to leverage their power into adjacent markets by favoring their own content or wares—makes it difficult  to compete in their space. In fact, reporters have told me that most VCs won’t touch startups operating anywhere near these companies’ orbits, a phenomenon that is apparently so common it’s been given a nickname: “kill-zones”. I took a close look at the numbers to try and figure out what’s going on.

Startup Communities Revisited

Startup Communities Revisited

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.

Startups Move to The Bay Area for Good Reason, but That Advantage May Be Waning

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: Go West Young Firm: The Value of Entrepreneurial Migration for Startups and Their Founders. Here’s what he found.

The Follow-On Funnel

Two weeks ago, I published a study for the Center for American Entrepreneurship titled America's Rising Startup Communities. The study looked at the growth and geography of venture capital first financings across U.S. metropolitan areas between 2009 and 2017. One of the biggest questions that's come out of that work is: "what's happening beyond first financings?" This post is the first of at least two that will begin to address that question. Here I will look at national trends, and in a later post, I will examine geography of follow-on investments.

The New York Yankees and Startup Communities

Startup communities are examples of complex adaptive systems. This means many things for understanding and influencing their behavior, but today I want to focus on two concepts: non-linearity (the sum is greater than the parts) and synergistic integration (interaction between the parts matters a lot). To make my point, I’ll draw on an example from my favorite sport.

The North Star

In the last couple of weeks, the subject of Canada as a rising startup and tech hub has been seemingly everywhere in my news feed. Much of discussion about Canada has focused on Toronto and Vancouver, and to a lesser extent Montreal (where Techstars is opening a new accelerator, one year after launching in Toronto). And that’s for good measure—these are far and away the leading hubs of startup activity in Canada.

But, I’d like to talk about another northern star that shouldn’t be left out from the discussion: Kitchener-Waterloo.

Introverts and Networking

I'm an introvert. I didn't know that for a very long time, but it turns out to be true. It surprises most people I know well when I say that because they find me to be engaging and social. But, introverts are not necessarily anti-social. Rather, introverts are energized by solitude and drained by crowds. Extroverts are the opposite. I'm at my best in small groups—anything above six to ten or so brings out the introvert in me. This is less true in social settings; more so in professional ones.

Last week I was at a conference—the type of environment my introverted self really likes to come out. It was an excellent conference and the people I met are amazing. But, big conferences can wear me down, and the productivity guilt and self-doubt associated with not wanting to be a power networker starts to creep in.

I'm not a power networker and I'm ready to own that. I am committed to doing more of it, but I can only push that so far. I also know there is another path.

The More of Everything Problem

The More of Everything Problem

Last week, the European Investment Fund—the small business investment arm of the European Union—announced a new $2.6 billion fund-of-funds to support venture capital deployment in the continent. The EIF is already the most active LP in European venture funds by a long shot. 

That got me to thinking: is this the best way to stimulate startup activity in the EU? Is a lack of venture capital the biggest constraint facing European startups right now? If so, is this the right way to go about it? How else could that money have been used? What is the opportunity cost?

To me, it is another reminder of something that I’m seeing in startup communities everywhere: what I’m calling The More of Everything Problem.

Where the really big venture deals are

I'm currently doing some research that will detail global venture capital flows. My co-author and I are observing some very large deals in the last few years that skew the overall numbers. These deals are emanating from two places—China and the United States. Interestingly, a relatively small number of companies seem to be driving overall venture capital investment in China, whereas the same is not true of the US.