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.
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.
I’m currently working with Brad Feld on a sequel to his 2012 paradigm shifting book Startup Communities: Building an Entrepreneurial Ecosystem in Your City. Last week, I wrote about behavior and mindset in a startup community, and think one of the points we’re making—about cooperation and playing positive sum games—is worth sharing here. Not only do cooperative strategies in startup communities make intuitive sense, but there is also a fair amount of supporting evidence. In fact, even a Nobel Prize was awarded for ideas that support the central thesis behind startup communities.
A New York Times article published yesterday declares that “Silicon Valley is Over.” This follows a recent Wired article declaring that “Everyone Hates Silicon Valley.” While this does make for great journalism, I worry that it sets a unrealistic expectations in other parts of the country. Silicon Valley is not over—not even close. And when you suggest that it is, it implies a Silicon Valley’s downfall will be a big win for everyone else. That’s zero-sum thinking and I don’t agree with it.
On Monday, Revolution — the Washington-based venture capital firm lead by Steve Case — announced a new $150 million seed fund dedicated to helping entrepreneurs living outside the well-established startup hubs get their business off the ground. I’ll use this opportunity to share three things stand out in my mind.
I want to socialize an idea that my friend Chris Heivly and I have been tossing around the last few months. It’s a concept called #FoundersFirst, and it’s something that we hope will be embraced in startup communities everywhere. Let me explain.
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. 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. 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. If it is the network (relationships) that directs vital information and resources (ideas, talent, funding) to company founders, it is social capital—the nature of those linkages—that determines how well information and resources flow through the network.
Last week my friend Chris Schroeder published a highly engaging article on the state of technology entrepreneurship in the Middle East. If this topic interests you, I encourage you to check him out. Chris is a successful American internet and media entrepreneur turned global startup investor. He’s easily one of the most knowledgable people on the planet about startups and venture capital in the Middle East specifically, and emerging markets more generally.
The article, “A Different Story from the Middle East: Entrepreneurs Building an Arab Tech Economy“, appears in the MIT Technology Review. It highlights some recent successes in the region—including Amazon’s $600 million acquisition of e-commerce platform Souq.com in March, and the $1 billion valuation placed on ridesharing app Careem a few months earlier—and the psychological impact these breakout companies have had on entrepreneurs there.
Last month, economist William Baumol passed away at the age of 95. His death was universally mourned by the economics community, many of whom shared the view that he had passed before receiving a much-deserved Nobel Prize. One of us had the great privilege of working with him, befriending him, and being able to regularly witness his economic wisdom, even in his later years.
Among his many contributions to economics, Baumol is most famously known for his “Cost Disease”, which explains why high-productivity industries raise costs and therefore prices in low-productivity industries. This insight is particularly relevant now, as economic activity has shifted into low-productivity services like healthcare and education, where price increases are devouring public and household budgets, and whose continued low productivity has weighed down U.S. productivity growth overall.
However, a lesser-known work of Baumol’s is equally relevant today, and may also help explain America’s productivity slump. Baumol’s writing raises the possibility that U.S. productivity is low because would-be entrepreneurs are focused on the wrong kind of work.
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.
Last week, the Ewing Marion Kauffman Foundation released its annual Kauffman Index of Entrepreneurship, detailing “new venture creation” in the United States through 2016. The index reported that the rate of entrepreneurship in America held steady last year, up sharply from lows reached during the Great Recession.
Also included are measures across all 50 US states, the40 largest metropolitan areas, and along various dimensions of entrepreneur characteristics (race, gender, nativity, education, and age). Colorado ranked sixth in terms of “startup density” (new firm formations per capita) and Denver was tenth among the largest metropolitan areas for the same measure.
But, these rankings mask important details—they doesn’t distinguish between growth-oriented entrepreneurship and small business formation (this distinction matters for public policy and for economic growth), and the geographic boundaries may be too broad. Fair enough, data limitations abound for this high-level view of activity, and Kauffman provides an informative, timely, service no less.
What remains clear is that density matters a great deal for growth-driven, innovative enterprise, and we can learn something from the places that continually produce these types of businesses.
Engine, the non-profit organization that supports technology startups through economic research, policy analysis, and advocacy, has been producing profiles of startup communities throughout the United States on its blog.
I'm going to Chicago tomorrow to attend the wedding of an old friend over the weekend. Chicago has always been a special place for me—I lived there for a few years after college and received a first-rate education on the city's south side. Chicago is awesome.
A lot has changed in the city since then, including the development of a booming tech and startup scene. Some of this I've learned about through conversations with active participants in the startup community there, and some has been through a series of research that has been published in the last few months.
As such, I'll use this opportunity to share some of these items with readers who might be interested. The collection of readings—which span academic working papers, analytical blog posts, and business case studies—are all great. They are informative, well-written, and resourceful. And please, if you know of others, add them to this thread in the comments section. Enjoy.
If you haven’t done so already, I highly recommend reading The Third Wave: An Entrepreneur’s Vision of the Future, a New York Times Bestseller by Steve Case that published one year ago. Steve is back in the news, with an expanded version (in paperback) out this week that adds a chapter on startup-friendly policies in the post-election environment.
Yesterday, I made my first contribution to the Startup Revolution blog. In it, I discussed my move to Boulder to work on a sequel to Startup Communities with my co-author Brad Feld, and my early impressions of the community here (hint: they are good!). Last night, I got to attend Demo Day for the 2017 Techstars Boulder class—it was fantastic! A lot of great companies to watch out for.
But, as this has mostly been a blog populated by Brad’s writings—and more recently, by Chris Heivly who I’ll also be collaborating with on startup communities—it’s probably a good idea to take a step back and provide a personal introduction.
A recent article in 5280 Magazine caught my attention. It profiled the economic vitality of the Boulder-Denver region, dubbing it “The Most Exciting and Innovative Tech Hub in the Country.” While I expect every local publication to champion its own hometown, this one happens to be on stronger footing than most others. You see, at least in terms of innovation and startup activity, Boulder is unique among its peers.
The article—which is excellent by the way—couldn’t have come at a better time for me personally. A few days ago, I moved myself and my family to Boulder to work on a book about startup communities. Not only did I come here to work closely with my friend and co-author Brad Feld, I also wanted to experience first-hand what makes this place so special. I came here to learn… and to contribute.
Last month, I published an analysis in the Harvard Business Review on the gig economy and employment in San Francisco. Yesterday, the folks at HBR were kind enough to post an interactive piece of the analysis.
I recently interviewed Brad Feld, a co-founder of TechStars--arguably one of the very best seed accelerator programs out there. Brad was kind enough to give me his thoughts on the accelerator phenomena, best practices, and things to avoid.
This was originally posted on Fortune
(with Robert Litan)
With President Obama expected to make a statement about immigration tonight, Washington is gearing-up for a fight over the President’s seeming willingness to exercise his executive authority to prevent the deportation of primarily low-skilled immigrants. While that’s worth watching, the more important economic picture risks getting lost: the impact that immigrants can bring to the American economy in the long-term. It’s the immigration discussion we ought to be having, and if the rumors are correct as of this writing, it’s the one the President will at least partially extend in the executive action that he will outline.
High-skilled immigrants are good for America, and we should encourage more of them to come here given recent trends in entrepreneurship, where more firms are dying than being created every year. But high-skilled immigrants could help turn that trend around -- they are twice as likely to start businesses as native-born Americans. This is especially true in high-tech sectors, where immigrants are not only more likely to start firms, but also to patent new technological discoveries. Giving green cards to foreign students completing STEM degrees at U.S. universities, and to many more immigrant entrepreneurs, would increase income and employment opportunities for American workers across the board.
We have recently published new evidence at the Brookings Institution that supports the link between immigration reform and economic growth. Our research brings a new perspective -- the importance of entrepreneurs -- to an older idea: the link between greater population growth and economic expansion.
This connection was at the heart of concerns expressed by Harvard economist Alvin Hansen in his address, “Economic Progress and Declining Population Growth," before the American Economic Association in 1938. Hansen worried that what he saw as falling rates of population growth and technological advance portended a slump in investment, which would lead to persistently low employment and income growth. Hansen’s forecast never came true, thanks to post-war booms in innovation and fertility rates.
Three-quarters of a century later, another Harvard economist, Larry Summers, has updated Hansen’s concept of “secular stagnation” to describe post-recession slow growth across much of North America and Europe. In the year since Summers first made his remarks, economists have been debating whether and to what extent his thesis will hold in the future.
Much less publicized is another debate that concerns the current and future state of U.S. economic growth—that of a pervasive decline in the rate of firm formation and economic dynamism. We and others have documented this decline in a broad range of sectors and regions throughout the United States during the last few decades—a decline that even reached the high-tech sector and so-called high-growth firms, the small group of (often young) businesses that are responsible for creating the bulk of U.S. jobs.
And the U.S. wasn’t alone—this decline was observed in other advanced economies of the OECD—suggesting that large global factors are at play.
This evidence runs counter to the narrative that an entrepreneurial renaissance is sweeping the globe, and the seeming endless technological change disrupting the economy. We also see plenty of those signs around us, but their impacts haven’t yet been reflected in the data. Even if they were, their effects would be following more than three decades of persistent decline.
Our most recent Brookings research suggests that slowing population growth hurts entrepreneurship. This was particularly true beginning in the 1980s in America’s West, Southwest, and Southeast regions of the United States—once places with the highest rates of new firm formation as population surged in the 1970s. During the three decades that followed, however, the formation of new businesses fell partly because population growth slowed.
In other words, population growth matters.
George Mason University Economist Tyler Cowen recently warned that the “relatively neglected field” of population economics could hold answers to the period of slow growth facing much of the developed world. For Cowen, one solution is obvious: absorb more immigrants. We couldn’t agree more.
Given the declining rate of growth of native-born Americans in the decades ahead predicted by official federal forecasters, the only other sure way to boost our work force is through more legal immigrants. Welcoming more foreign-born workers makes both economic and political sense, and in an ideal world, Congress and the President would agree on a comprehensive reform package. Since that’s not likely in the cards for now, let’s at least begin with high-skilled immigrants, who can help reverse our nation’s falling startup rate and provide a boost to our innovative capacity.