Startup Ecosystems: What are the Goldilocks conditions?

Here’s to Growth Capitalism, Free Economy & ‘The Crazy Ones’

Startups in context

Startups are found in contemporary societies where private ownership, market liberalization and constitutional labor rights have been sufficiently entrenched and are preserved by law. Another vital feature of these societies are its financial systems which facilitate the instruments and protocols of inter-mediation between money lenders and borrowers. A central or reserve bank is mandated to regulate monetary policy by adjusting inflation rates and distributing a sovereign fiat currency which is backed by government and acts as the depository of value and medium of exchange in the domestic economy.

The Goldilocks Conditions:

What comes with a liberal legal framework, the preservation of private ownership and the maintenance of a money market economy in contemporary global societies are certain key institutions. Those which are conducive to the emergence of startups commonly include:

1. World-class universities and a robust corporate and industrial environment which supplies highly-skilled and managerially-endowed labour to the economy;
2. Proximity to a globalized metropolitan area which offers a vibrant standard of living and desirable leisure opportunities;
3. A business-friendly regulatory climate which attracts international financial capital investment;
4. The ubiquity of infrastructure for internet-enabled, microelectronic-based communication technologies which are accessible for the general population.

Have I missed anything? — Write in the responses below what you think is an important Goldilocks condition

These societies of course have their own unique social history but they share in the social, political and economic structural relationships of advanced capitalist development or better-named: growth capitalism. The factors of production under these circumstances are organized towards a growth imperative where the incentive of improved returns through abridgements in efficiency is what guides productive activity in the formally developed sectors of the economy, at least in principle.

Big on Growth, but why?

Growth is structurally instituted as an imperative norm because of the very basis upon which value in money rests, namely the virtual debt or interest attached to it which is expected to be paid back in theory. And because all money is leveraged debt all existing units are expected to be used productively so that it grows and from that surplus the debt can be resolved.

But when lending increases and the ability of borrowers to pay back falls by the wayside these societies face an economic collapse or recession which negatively impacts the strength of their currency, puts its domestic industries in a volatile situation and international investor confidence is withdrawn; hence the result of stagnant growth is business foreclosure, job losses, increased unemployment and in extreme cases political unrest.

Growth is therefore not purely an economic concern. It permeates the culture of these societies and guides the habitual mode of thought and action of persons if not voluntarily then at least as a spiritual prerogative of others that shapes the conditions of constraints around those who may not be involved in the formal economy. This inescapable situation was theorized by Weber in his famous study, The Protestant Ethic and the Spirit of Capitalism.

The Spirit of Capitalism 2.0

Here Weber explained how the active promotion of capitalism was inadvertently infused throughout western society by the beliefs of Protestants, namely the calling in Lutheranism and Calvinist predestination. Lutherans perceived their economic actions as tied to a calling to exude God’s grace in the world through good works and Calvinists acted persistently to appear materially prosperous as a sign of their predestined election into Heaven. These convictions guided their actions along the lines of an ascetic restraint from indulgent expenditure and instituted a self-willingness to work hard.

The meaning-directed action from these religious beliefs laid the foundations for an ethic of rationalized profit-making and saving that would take hold and permeate society. Such actions and convictions would later break away from their attachment to religion all together and become a self-sufficing organic impulse which Weber analogized as an iron cage. And today this ethereal containment is expressed by the imperative of growth.

The Iron Cage of Growth Capitalism

A general consensus in the contemporary global economy is that entrepreneurship is the driver of economic growth (Schumpeter, 1934) which if left unabated leads to the gradual expanding of the market (Smith, 1776), increases the opportunity for competition (Kirzner, 1973), and product offerings will tend to be regularly optimized to the benefit of consumer demand (Von Mises, 1978). But there is more that differentiates the present mode of growth capitalism from preceding forms under these established economic facts.

The difference lies in the propensity for rapid exponential growth; an observation which economist William Baumol (2010) attributes to innovative entrepreneurship. This entails coming up with new ideas and putting them into practice, a process which leverages the power of digital technology and relies on the constant revision of tried-and-tested intelligence of consumer behaviour to produce and deliver new goods or services in an optimal and scalable way. The operation whose mandate it is to start this discovery process for validating unknown assumptions and labour towards getting a new business model up and running is what we call a startup.

Startups are organic expressions of the growth imperative in the free economy. They occupy the space of expansive potential in the economy because they lie in a privileged position at the margins between the unknown and already established markets. Because their propensity for scaling rapidly is an economic moral good startups are ennobled as an aspirational and socially responsible occupation which must be encouraged and promoted by societal institutions.

The Free Economy?

We call this situation the free economy in the sense that despite our judgement of the case, these relations endow people with the freedom of choice to devote or withdraw from economic activity in ways they see fit. But there is a tension which pervades this situation. And it is caused by the consequential disconnect between peoples’ image of themselves, their wilful or obligatory commitments to the market and how receptive society is to their convictions and actions. Durkheim spoke of social facts as forces external to the individual which act as a set of constraints; and when people go against the grain of these facts the normative functions of society become disrupted. If this is the case then startups do something quite significant.

What actually happens when they build a new model is to encourage people to follow a different set of conventions from what they are currently used to. By exploring the territory between what is established and new possibilities startups try institute a new set of expectations that challenge the existing habits. This is why they are controversial because if they prove successful people become ingrained with the new convention and the situation will change as these conventions permeate society in a network effect. This is why startups are innovative; because by striving to make themselves relevant to people they add new value by subverting and driving out established conventions into obscurity. They do this by working the distance between norm and anomie in order to change the facts. This attitude is encapsulated in Apple’s 1997 Think Different ad campaign, quoted below in full:

“Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They’re not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can’t do is ignore them. Because they change things. They push the human race forward. And while some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.” — Apple, Think Different (1997)

Steve Jobs and Steve Wozniak of Apple, alongside Bill Gates of Microsoft, are the posterchilds of the personal computer and digital revolution in the 1970s. If the above quote exemplifies the character traits of these men then it exemplifies the usual traits of startup entrepreneurs today since those in the present emulate the kind of stature which these men pioneered in the tech industry. Startup entrepreneurs are the crazy ones because of their conviction to change the world. They are misfits because their vocation is outside of the norm, if the norm is a stereotypical corporate occupation; and they are rebels or troublemakers because they set out to disrupt established conventions. These sentiments originate in the hippy culture of the 1960s which was at the heart of the cultural revolutions around sexuality, gender, race, environmentalism and anti-war protests in America.

Jobs himself was a hippy outright who refused to wear shoes and sustained himself on a strict fruitarian diet of apples and carrot for weeks at a time (Isaacson, 2011). Another sentiment which these traits embody is the harmony between art and technology. If technology is doing things in better ways and art is the expression of human creativity then the combination of these aspects meant technology could be devised so as to enable people to express themselves in new and powerful ways that were previous impossible. This is why entrepreneurs change things and push the human race forward because they are able to force into being new possibilities by fusing the idea of how something could work better with the technological prowess of actually making it happen.

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The above post is an excerpt from my paper: Startups: A Sociological Study of Tech Entrepreneurship in South Africa, feel free to check out the full text to find out more about the theory of entrepreneurship and the history of tech startup ecosystems.