Commentary

A Second Nobel Prize in Startup Communities

Last year, I wrote about Elinor Ostrom, an American political economist, who was awarded the 2009 Nobel Prize in Economic Sciences for her work on cooperation and collective action. Ostrom studied how rural communities self-organized to sustainably share scarce natural resources in the absence of formalized governance structures. In her Nobel acceptance speech, she described her work in the following way:

“Carefully designed experimental studies in the lab have enabled us to test precise combinations of structural variables to find that isolated, anonymous individuals overharvest from common-pool resources. Simply allowing communication, or “cheap talk,” enables participants to reduce overharvesting and increase joint payoffs, contrary to game-theoretical predictions.”

In other words: we tend to cooperate with people we know, trust, and frequently engage with, while we find it easier to defect or play zero sum games with people we don’t. This thinking is central to building healthy startup communities (or ecosystems), where the flow of ideas, talent, and capital are made possible by informal norms and relationships built on trust, reciprocity, and stewardship. For that reason, I awarded her the Nobel Prize in Startup Communities (credit goes to Victor Hwang for originally connecting Ostrom’s work to startup communities/ecosystems).

Platforms versus Pipes

One of the biggest challenges facing startup communities (or ecosystems if you prefer) is the inability of “feeder” organizations—such as governments, economic development authorities, corporations, and universities—to engage with an entrepreneurial mindset. The reason is simple: startups and startup communities are organized through networks. Feeders are structured around hierarchies.

Hierarchical organizations exist in a “complicated systems” paradigm, where input-output relationships are linear, outcomes are relatively stable and predictable, and the path to success is illuminated by rigorous planning, tight control, and flawless execution.

Feeders like control. They like plans. They like programs. They like clear lines between cause and effect, and a return on investment that is reducible to one number. Moreover, feeders often want to be the vehicle for change rather than an enabler of the change agents. But these are not the makings of vibrant startups or startup communities.

Startups and startup communities are “complex systems”, which means they are best approached through adaptive learning, an informed intuition, a heavy dose of humility, and a focus on shaping the environment so that the right solutions may emerge from the bottom-up. Change cannot be forced from the top down.

And so, startup communities get stuck in the Systems Trap. Feeders—armed with critical resources for startups and startup communities—apply the wrong framework, tackling complex problems through a complicated worldview. Opportunities are squandered, and progress is stifled in spite of best intentions. The cycle repeats in city after city.

What can be done? For starters, there is a need for a larger body of knowledge around these ideas—establishing key concepts and common language. I hope that my upcoming book, The Startup Community Way, will add substantively in that regard. The continual sharing of ideas between global startup community members will also produce new ways for thinking about, discussing, and ultimately, overcoming the inherent frictions between leaders and feeders in local startup communities.

A recent email exchange with my friend Joe Maruschak—an entrepreneur and startup community leader in Eugene, Oregon—produced an excellent way of framing the issue succinctly. Joe writes (lightly edited for clarity):

Ecosystem development is a 'pipe vs platform' problem. With an ecosystem, one is creating a platform for engagement. However, too many involved with ecosystem development are engaged with ‘pipe’ thinking— their focus is on how to we 'deliver' programming, and offer the services.

He credits the “pipe versus platform” framing to Sangeet Paul Choudary’s book Platform Scale, but the crossover to startup communities is Joe’s brilliant insight.

The role of feeder organizations in a startup community is not to “deliver” the community through endless programs and activities. Instead, their job is to enable and support the startup community as a platform.

Bill Janeway, a venture capitalist and economist, describes the entire digital economy in similar terms in his book Doing Capitalism in the Innovation Economy. About the sizable U.S. federal government role in enabling the development of many of today’s core digital technologies through wartime spending, he writes: “the federal government funded construction of a platform on which entrepreneurs and venture capitalists could dance.”

That’s another helpful way for thinking about how governments or other feeders can engage with startup communities in a healthy way. It’s ok to participate in the creation and ongoing maintenance of the startup community dance floor. In fact, it’s necessary. Entrepreneurs need help. But at the end of the day, you have to let the dancers dance.

Joe Maruschak, Bill Janeway

Joe Maruschak, Bill Janeway

If You Want to Better Understand Startup Communities, Read These Three Women

I’m working hard on The Startup Community Way this week with my co-author Brad Feld. As we’re polishing up the meaty part of the book—which draws on a wide range of theory, empirics, frameworks, and just some really brilliant thinking on the part of the many impressive shoulders this work stands upon—a few names keep coming up in the references we’ve assembled.

Three of these names I want to talk about today are intellectual giants in the areas of entrepreneurship, geography, and cooperative social systems. Their work collectively intersects in a way that explains a lot about why startup communities exist. If you want to understand startup communities, you should know their work. Two of them I consider friends, so not only do I get to benefit from their insightful work, I also know there’s a kindness and generosity behind their ideas. The third is not someone I knew, and sadly she’s already passed. But, I think a lot of her work and I’ve written about it already.

All three are women.

Why Content-Driven Strategy is Smart Business

My friend Nicolas Colin has an excellent new article out titled “Content-Driven Strategy,” in which he makes a convincing case for thoughtful content as a means of demonstrating and shaping the strategic direction of businesses. Nicolas would know: a robust content-driven strategy has been foundational to the success of The Family—the early-stage investment firm he co-founded with Oussama Ammar and Alice Zagury in 2013. What started out in Paris, The Family is expanding rapidly throughout Europe, with offices in London, Berlin, Brussels, and more surely to follow.

I am a strong believer in content as a means of more fully developing thoughts, stimulating discussion, and attracting potential collaborators. Some American entrepreneurs and investors do take content seriously, but many more don’t. That’s a big missed opportunity. The Family has something to teach us Americans on this front, and Nicolas’s article lays out the many reasons why producing content adds value. I encourage you to read the whole article yourself (as well as The Family’s Scaling Strategy series), but here is a summary.

How to Build a Successful Startup Ecosystem in your City

Techstars recently launched a Startup Ecosystem Development offering, which is designed to work alongside of communities around the world to help them build a more vibrant environment for entrepreneurship. The program has been in an R&D/beta-launch phase the last couple years, but the first official program will take place in Buffalo, New York over the next three years.

Yesterday, to introduce the program and answer questions about what they’re up to, Chris Heivly (who leads Ecosystem Development at Techstars), Brad Feld (author of Startup Communities and a Techstars co-Founder), and Eric Reich (chairman of 43 North, the startup support organization in Buffalo that is partnering with Techstars to lead the effort) participated in an hour-long segment on Crowdcast.

I embed the event below and encourage anyone interested in the topic to give it a listen—it’s definitely worth your hour and is full of wisdom and insights from these three.

New Study on Women Founders

Last week, I published a new report for the Center for American Entrepreneurship, titled The Ascent of Women-Founded Venture-Backed Startups in the United States. The study is the culmination of months of research and collaboration with some amazing friends at the National Center for Women & Information Technology and beyond.

Student Loan Debt is Killing American Entrepreneurship

Ethan Mollick, a professor at the Wharton business school, Tweets about a paper that causally links student loan debt with declining entrepreneurship in America (including in high-growth, high-tech activities). By exploiting two “exogenous shocks” to the student loan system (public policy changes that are unrelated to entrepreneurship), the authors demonstrate that student loan debt not only causes individuals to start fewer businesses (especially in the high-tech, high-growth segments), but when they do, they are (a) less likely to be successful, and (b) experience greater hardship from the (already more likely) business failures. These are not exactly the type of conditions that encourage people to start new ventures, particularly when competing in a harsh competitive environment of increasing market power, raising incumbency advantage, and expanding wage opportunities at larger companies.

Robert Noyce, Mao Zedong and Lessons for Startup Communities

In 1957, a group of eight Silicon Valley executives lead by Robert Noyce resigned from famed Shockley Semiconductor to start a rival in Fairchild Semiconductor. This sort of thing happens all the time in Silicon Valley today, but at the time, it was a watershed moment that sent reverberations throughout the industry. The Traitorous Eight, as they became known, changed the course of innovation forever by injecting the region with an entrepreneurial ethos that continues to this day and has made Silicon Valley the envy of the world.

Around the same time, nearly 6,000 miles (~10,000 kilometers) away, a very different type of revolution was taking place in Communist China. In 1958, Communist Party Chairman Mao Zedong launched the Great Leap Forward—a wide-sweeping series of economic and political reforms aimed at transitioning China from an agricultural economy to an industrialized one, and at consolidating power around the socialist regime.

So, why on earth am I linking the Great Chinese Famine with the essence of Silicon Valley’s entrepreneurial spirit and with startup communities today?

The J-Curve of Startup Community Transition

In The Startup Community Way, my upcoming book with Brad Feld, we explain that startup communities must be viewed through the lens of complex adaptive systems. Such systems are characterized as having many elements (people and things), interdependencies (connections between them), feedback loops (actions lead to reactions), and as being in a constant state of evolution (never at rest).

We make the effort to explain the complex systems framework and tie it to startup communities because the nature of these systems requires a very different type of engagement than we are used to in most of our professional and civic lives. Complex systems require different skills (diversity v. expertise), mental processes (synthesis v. analysis), tactical approaches (experimentation v. planning), and goals (right conditions v. right outcome), among other factors we discuss in the book.

One of these prominent conditions in complex adaptive systems that I want to talk about today is Basins of Attraction. In neoclassical economics, it is assumed that the the economy (also a complex adaptive system) is moving towards a point of stability—an equilibrium. This is done for reasons of simplifying mathematics, but it also has the impact of making many economic predictions unreliable.

Instead of a single point of stability, Basins of Attraction takes the view that there are many such potential “resting places” and that a complex evolutionary process will determine which of these wins out. Basins of Attraction in complex systems—like startup communities—can be thought of as a sort of center of gravity where things can get stuck. Critically, they can get stuck in “good” or “bad” outcomes.

Startup Communities Are Not Like Recipes, They are Like Raising Children

I’ve often heard people say “building startup communities (or startup ecosystems) is not about the ingredients, it’s about the recipe.” What they mean is that a focus on the individual people, institutions, and resources will provide only limited insight or success, and that what matters most is how these things all come together. While integration versus elements is the right concept, a recipe is the wrong analogy.

Back and Ahead

I started out 2019 on the blog by looking back at last year: my posting activity, traffic patterns, and which posts were the most popular. I posted 29 entries last year, which is around 2.4 per month or about one post every other week. The maximum was 6 posts (in November) and in three months I wrote nothing (in June, July, and September). The median was 3 posts.

I’d like to be much better about posting this year—not just frequency but consistency. I write on a number of other platforms and am working on a few major projects right now—including crashing towards a deadline for a book manuscript. I also tend to write lengthy and analytical (data-driven) pieces, which means it simply takes longer to produce content (did I mention already that I’m pretty busy doing other things?).

How the Geography of Startups and Innovation Is Changing

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.

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.

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.

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.