Elements of A Startup Ecosystem

The other night I had dinner with T.A. McCann in downtown Seattle. It was the first time I experienced Bay Area traffic in Seattle, and I will say, that is something I certainly don’t miss.

For those that don’t know T.A., he is chiseled out of Founder Rock. Not only does he look the part, but his entire life is built around a belief we both share:

Entrepreneurship will change the world.

As you can imagine, much of our conversation was about the Seattle ecosystem. What I loved was we weren’t comparing Silicon Valley with Seattle, but focused on ways to grow the Seattle ecosystem.

I shared with him my post Silicon Valley is Dead as the reasoning behind my move up to Seattle. He challenged me to explore ways that Seattle’s ecosystem could continue to grow and thrive.

So, with apologies to Brad Feld, and his wonderful Startup Communities book, here is my take on Seattle.

Investors

About 10 years ago, I spend a year traveling the United States visiting startup ecosystems big and small. Every single one said the same thing “there is no capital here.” Most of the time, I agreed. A friend once told me that there are more than 400 seed funds currently writing checks. Would guess 300 of them are in Silicon Valley.

Which means the answer to the question is not there is no investment dollars, but that a culture around investing hasn’t matured like Silicon Valley, where the investment flywheel (investments >> founding >> exits >> more investing & investment dollars >> more founding >> more exits).

In Seattle, that is very true. There are a very small number of active seed/Series A funds, with Founder’s Co-op, Flying Fish and Madrona being the most well-known. Smaller funds, like Curious, are led by younger operators who understand the value of community, and startup “studios” like Pioneer Square Labs, Madrona Venture Labs and AI2 fill a much needed place in the ecosystem and attract a different type of founder than traditional venture.

What about the angel community? It’s pretty anemic in relation to the number of large companies in Seattle (more on that in a minute), truth be told.

What is amazing, though, is the potential. According to Angel List there are 682 angels in Seattle, but 6148 interested in investing in Seattle (11.1%). How does that compare to say New York? Amazingly well. In New York you have 5,066 angel investors, and 6,851 interested in New York (73.9%). Seattle’s profile is closer to Los Angeles, which has 2,005 angel investors and 9,145 interested in LA (21.9%), but interest in investing in Seattle is still 2x that growing ecosystem.

There are angel groups, like the Alliance of Angels and Seattle Angel Fund, who are doing a great job of educating folks on angel investing, but it’s clearly a growth area for Seattle.

Which brings us to the next enormous asset Seattle has:

Big Companies

Amazon, Microsoft, Expedia, Zillow, Valve, Boeing, Nordstrom, Alaska Airlines (who owns Virgin America), Starbucks, Costco and Redfin are just some of the companies HQ’d in Seattle. Expand to Portland, and you can add Nike, Columbia Sportswear, and FLIR Systems.

Facebook, Google and so many other large “Silicon Valley” companies that have offices here. (For a long time, the vast majority of Facebook’s Messenger team was here.)

Not to mention that the two richest men in the world live in Seattle.

In a state of 7.3 million. (New York City alone has 8.5 million people).

This is both a boon and a bane for the startup community. Folks that might have been founders in other ecosystems opt for the safety and challenge of big company life.

  • There is a real opportunity in the Pacific Northwest to extract executives from large companies into the startup ecosystem either as founders.
  • But maybe more importantly, big companies executives, who have made money in stock options, need a direct path to become investors. As T.A. just emailed me (I am paraphrasing):
Angel investing is about continued personal learning, about helping create the world you want to exist (via new startups), investing in a local ecosystem that likely helped you be successful, co-investing with others and improving your acumen, and then, of course, returns so you can do more of it at an increasing rate.

I can’t agree more. Angel investment needs to be a flywheel that creates not only more opportunities, but more investors (and venture funds) over time.

T.A. also reminded me of Rich Barton, who I recently met at Expedia. Was at Microsoft, started Expedia, started investing, joined Benchmark, invested more and got more involved as a prototype of this type of angel. Yes!

This is not an easy problem, but it’s never an issue of safety vs. risk. It is always due to a lack of opportunity and support.

  • Very few large companies have embraced the concept of innovation departments or intrapreneurship.

But, it is a rising trend among the biggest and best companies, and in my work at Amazon with corporate innovation teams, it is clear that there is a huge opportunity to tie the startup ecosystem into corporate innovation, and more importantly, big companies are motivated to make it happen.

Each of these elements of integrating big companies into the startup ecosystem are important individually, but together put an ecosystem into a positive overdrive.

Redirecting Founders

Seattle has nothing but resources available for startup founders. While I have often said, and still believe, that if you want to be an actor you should take a shot in Hollywood, and if you want to be a founder, you should take a shot in Silicon Valley, the key is timing.

The cost of living and running a company in Silicon Valley has gotten punitive. The average price of an apartment in San Francisco is currently $3,670. This drives salaries, office rents, commute times, etc. which in turns increases the reliance on venture capital, tightens the labor market and makes running a company, frankly, miserable.

In Seattle, the average price is $2,085, and there is no state income tax. Yes, just moving to Washington gives you a ~40% raise. More money; less money problems. More talent (see all the big companies? Ripe for recruitment). More time, the one thing that a startup needs more than anything else. Time.

How can redirecting founders help an ecosystem that has only 10% of the investors that it should? Ten years ago when Foundry Group (a large seed fund out of Boulder, CO) made an investment in Seattle in Gist (T.A.’s company) and started to travel here for board meetings, they started to meet more founders and make more investments in the ecosystem. Imagine doing that with dozens of top ecosystems in the country, Chicago, NY, LA, and yes, SF. Over a 5–10 year period, Seattle become a destination not only for the best founders, but top investors, as success and familiarity breeds success and repetition.

Homegrown Founders

There are many and they are (generally) awesome. Unlike an ecosystem like Silicon Valley where money has become king, many of the founders in Seattle are looking to solve real problems. Some are corporate pain points (lots of B2B SaaS here), but there are some great consumer companies, deep tech, biotech (which I know nothing about), and/or hard problems. As more companies are built in Seattle, recycling those founders back into the ecosystem either as investors (angel or future seed funds) or as serial entrepreneurs will be paramount to the long-term growth of the region.

And yes, this doesn’t take into account all the other feeders necessary for a great startup community like the government and universities that already exist here, but as Brad likes to say the leaders have to be the entrepreneurs.

This is something I am learning about Seattle, there is an interesting rub between exclusion and inclusion, and how important telling your story can be. My frustration often with AWS is that we believe in humility and letting our customers tell our story. I was born in the fires of Silicon Valley, where story often trumps substance.

The growth of companies like Amazon have drastically changed the landscape of the city, and many people are not that excited for inevitable growth that entrepreneurship can bring. I saw it in Boulder, and it took decades for the city to embrace their role within the startup ecosystem.

The founders of Seattle have to be more than founders. They have to be civicly minded. It is not enough to create jobs, but we have to also create opportunities, we have to be the boats that rise all tides.

Luckily, for many founders, this is part of what attracts us to a state like Washington that has passed automatic voter registration and net neutrality protections in just the last few days.

Outlook

I have often thought of Seattle as somewhere on the continuum between Boulder and the Bay Area. Over the next five to ten years, I see us becoming a real mecca of innovation, and I have committed myself to be part of helping realize that in the right way.

If anyone in the Pacific Northwest (or are interested in the Pacific Northwest) is doing interesting things I could be involved in or people I should talk to, please let me know at micahb@gmail.com.

And, as always, I am listening and learning…