6 Triggers When Building a Startup Ecosystem
In my years of studying economic history, the evolution of technology, business, and start-ups, I’ve come to believe that there are six key drivers that cultivate innovation based economic ecosystems. As we move farther into the age of hyper-innovation, and farther away from resource focused economies, policy makers and leaders need to focus on these six areas. These six drivers are education, access to capital, fostering competitive yet collaborative cultures, access to information, ensuring access to market verticals, and ensure the ability for companies to move up market verticals as they grow. In this post, I’ll run through each factor giving context to each in relation to fostering innovation.
Of the six triggers education is the most well-known, and best executed. Here in Nova Scotia a recent push to teach coding and focus more on STEM subjects in junior high are great examples of education focused on innovation. Strong higher education is another key component, as is importing skilled people through robust, targeted immigration policies.
The challenge for innovation-focused growth these days is ensuring the relevance of lessons taught. Driven by technical innovation, business best practices are evolving at a very fast pace. Marketing is a prime example. Marketing has gone from a focused, qualitative, creative driven field, to a highly analytical, qualitative, multidisciplinary collaborative exercise. Driving growth and acquiring customers effectively once product-market fit is achieved requires a combination of analytics, design and communication skills commonly known as growth hacking.
Centres of innovation excellence such as Silicone Valley have long recognized that it isn’t just the high concentration of engineering talent that makes the area so successful. What makes Silicone Valley so successful is the tacit knowledge around how to drive growth and do business development. In areas with limited tacit knowledge gained from direct experience in technology start-ups, well intentioned advice around these subjects by unqualified people often does more harm than good.
In Canada, we’re renown for our ability to create valuable technology, but equally known for our inability to leverage it into long-term economic value. Until our institutions are teaching the newest best practices in sales, negotiations, relationship building and growth hacking, we’ll continue to struggle in maximizing the economic potential of our great innovations. This rate of change makes being a skilled business educator a daunting task.
Access to capital is another well known driver of new businesses and innovation, although one that tends to be executed poorly in immature technology ecosystems. Ensuring that a business has access to capital in the right amount(s) for the type of business, at the right times, while ensuring that there is a real business case in play, is hard to do.
An innovation focused new business starts with a thesis. The base thesis is often tested with the entrepreneurs own resources, or a research project funded by higher education or existing businesses. This testing can be as complex as a multi-million dollar research project, or as simple as an A/B test done with landing pages before the core technology is built, as long as the technology itself is not too complicated. In our case, we built a hardware prototype with off the shelf parts, used it to collect data out in the field, and then analyzing the data to ensure that we could see what we were looking for. At the same time, we interviewed dozens of potential users to ensure we were addressing a need in the marketplace.
Once this initial work is completed, further angel or seed funding is often needed to bring the product to market. This is a high-risk time for the entrepreneur, and the investor. The key is to have enough money to test the business thesis over the course of 12–18 months. This money usually needs to be deployed quickly to leverage market timing. There also needs to be enough cash on hand to pivot if the market requires. Most successful innovation focused new businesses pivot a number of times until they find product-market fit.
Mature economic ecosystems where multiple large technology company exits have taken place tend to do this better because individuals have the capital to deploy, combined with the technological expertise to be comfortable deploying the capital in technology-focused businesses. Without this depth and breadth of tacit and technical knowledge found in mature ecosystems, combined with capital in the ecosystem, the deployment of capital is often left to governments, which, more often than not, is encumbered by expertise and political issues.
Entrepreneurism is the exploitation of, or creation of, value to meet a market need. In today’s world, information itself is often the opportunity because it can be leveraged in so many ways. Census information allows entrepreneurs to know the where and who to sell to. Environmental, social, market and economic data uncovers the what and why to sell. The communication of how customers can access that value, the goods and services offered by business, is equally important.
Just as modern businesses are obsessed with analytics and data, governments and leaders focused on leading growth through innovation should be obsessed with the availability of data to facilitate a healthy entrepreneurial ecosystem. Josh Nessbaum recently proposed Efficient Start-up Hypothesis explaining the intensity of modern information exchanging, opportunities inherent in it, and issues it leads to in a world focused on innovation.
A Competitive, Collaborative Culture
Creating a business, and institutional, culture that is both collaborative and competitive is the hardest of the 6 drivers to execute. Atlantic Canada, like many other smaller regions, is defined by scarcity. Our institutions and businesses have a tendency to create closed, exclusive cultures that rarely look beyond their organization’s boarders, or our regional borders.
In the modern, complex economy where even the most rudimentary products and services require multiple levels of expertise to execute, a culture of open, collaborative competition is required to execute world-class products and services. Creating an environment where failure is not punished through financial ruin and ostracization allows room for the development a competitive, entrepreneurial culture. Incubators, and creating platforms for start-up entrepreneurs to share knowledge and network are important to ensure knowledge transfers and foster collaboration.
Entrance into a Market Vertical
A market’s vertical is determined by the nature of the product(s) or service(s) delivered. The goal of firms within a vertical is often to enter into the vertical at the lowest cost point of entry, and move up the vertical while attempting to close off opportunities for new firms to enter into the vertical behind them. The two most common means to do this are re-ordering the vertical’s mechanisms so the cost to new entrants is high enough to dissuade new entrants (commonly explained as finding efficiencies), or through influencing public policy to the same outcome.
In a healthy, competitive economic system designed to provide maximum innovation and thus maximum employment and subsequent taxation, policy makers must play an active, informed role in managing market verticals. Specifically, it is key to ensure that new entrants can enter into the market vertical at the lowest cost entry point possible. Our food system is an example of a market value chain with a low cost of entry. Businesses can enter the value chain at farmers markets or food stalls with minimal capital expenditure, education, or government oversight.
Opportunity to Move Up a Market’s Vertical
A market’s vertical has tiers as a business scales up. Generally, each tier has barriers to entry such as capital expenditures, marketing costs, regulatory adherence, competition, logistics and economic structure. To continue using the food system as an example, in Canada a new prepared food business establishes itself in a farmers market. The main barriers to entry into the next tier are structural, regulatory, and competitive because large grocery chains like Loblaws and Sobeys dominate retailing of prepared foods. The business must first produce at a volume large enough to meet the supply demands of one of the big two. Next, they have the production facility federally inspected because in order to supply Loblaws or Sobeys and fit their distribution structure the product must be able to cross provincial boarders. Lastly, they must fight for prime shelf space with multinational food companies who pay a premium for prime placements.
Understanding the barriers to entry into each tier in a value chain is important because a company’s ability to scale up allows smaller, more innovative companies to overthrow existing businesses by providing customers with new or increased value. Business churn is not an externality in an entrepreneurial, innovative economy, it is a requirement. Government policies that protect existing legacy industries, specifically the idea that a company is “too big to fail” protect investment and some jobs in the short term, but ultimately hurt these industries in the long term.
As the marginal cost of energy continues to drop, manufacturing becomes more automated and more dispersed with 3D printing, and as the walls around traditional industries such as finance and transportation are broken down, new value creation through innovation is becoming more important as the key driver of economic growth. Innovation centres such as Silicon Valley and Boston have momentum behind them making it very hard for immature innovation centres to catch up. Israel is the shining example of a nation that used aggressive policies to build an innovation focused ecosystem. It is possible.
Ensuring a robustly educated workforce, and ensuring the transfer of tacit knowledge, is the base to a leading innovation focused ecosystem. Access to capital in the right amounts, at the right times, allows innovation to be properly leveraged. The free flow of information allows that capital to be used at the right time, focused on the right customers, in the right ways. A competitive yet collaborative culture allows firms to share resources, share knowledge and encourages risk taking. Access to market verticals, and the ability for small innovative firms to move up these verticals, allows the local economic ecosystem to set the best practices and lead value creation for global industries, instead of being laggards who have these new best practices imposed on them, and have value flow into other geographic areas.