Building World-Class Startup Ecosystems by Focusing on Needs

As the managing partner at Beta Boom, a high-touch seed fund that focuses on emerging tech hubs, I have had the great fortune to speak to scores of entrepreneurs, tech workers, investors, and civic leaders in over a dozen emerging startup ecosystems in the United States as well as in regions such as Indonesia, Uruguay, and Nigeria. Through these conversations and numerous visits, I noticed that some ecosystems that seem replete with resources fail to meet the needs of local startups while others with smaller communities and fewer programs have thriving, successful tech scenes.

After giving this phenomenon considerable thought, I realized that resources don’t directly translate to meeting startups’ needs much in the same way that cramming features into a product doesn’t necessarily make it more useful. Instead of engaging in a race to create more resources, I believe that more effective startup ecosystems can be built by focusing instead on the needs that startups have. Only after truly understanding startups’ needs, should we consider what resources can best meet those needs. We can think of this as need-centered ecosystem design.

Many folks point to local startup conventions as a bellwether of an ecosystem’s vitality. However, that missed the point, and those regions with the most impressive events do not always have the strongest startup industries. What is singularly important, instead, is how well such event help founders learn best practices, access capital, recruit talent, and connect to customers. Moreover, those resources are also available through other means, so a startup ecosystem that lacks a huge, glamorous conference might still provide superior conditions for a prolific tech industry as startups’ needs are met through other resources.

Tech entrepreneurs and the businesses they create have six basic needs. First, new entrepreneurs need inspiration to help them develop their ideas as well as to give them the courage to build their companies. Second, founders need know-how about everything from incorporating their business to securing funding for their company and beyond. Third, startups need access to capital at all stages of their development. Fourth, founders also need to build exceptional teams by recruiting top talent across various roles. Fifth, early-stage tech companies need connections to customers. Finally, most tech companies aim to “exit” via an acquisition by a larger company or by becoming publicly traded on a major stock exchange. The most effective startup ecosystems provide the right resources to effectively meet these six needs. Below, I’ll explore in detail how each need can be met through various and sometimes unconventional capabilities.

Inspiration

Tech entrepreneurs need different kinds of inspiration. First, they need to see that an entrepreneurial path is possible and have faith that they can be successful embarking on this journey. Second, they need creative inspiration to conceive new solutions or business models. Any startup ecosystem that is not able to effectively inspire its native entrepreneurs might as well forget about everything else since their efforts will be wasted without a healthy pipeline of newly minted founders.

Before an entrepreneur starts a business, she needs to be inspired to conceive an idea, believe that it can be turned into a product or service and that the solution can spawn a thriving business. As aspiring founders are exposed to local success stories involving individuals from their community, their self-belief and drive grow until they overshadow doubt and other inertia.

Moreover, in ecosystems where innovators frequently interact with their peers, there seems to be a greater volume of ideas and solutions. In fact, it seems that this dynamic is self-reinforcing as increasing creativity leads to greater inspiration. Both of these factors lead to a greater probability that new solutions will be conceived and developed by those innovators that have ample opportunity to interact with and be inspired by others in their community. This inspiration is pivotal in seeding new innovations and businesses.

In any given startup ecosystem there are a number of channels through which inspiration can be transferred. Probably the most obvious are events where successful founders recount their stories. However, there are many other ways in which components of an ecosystem enable the flow of inspiration to new entrepreneurs. For example, the mere existence of large, successful tech companies can be inspiring. Media can also play a role in fostering inspiration by promoting stories about successful entrepreneurs and companies. At the same time, events that bring together founders can foster the exchange of ideas and solutions, which can be invaluable to participants.

Access to Inspiration

• Speeches by successful tech entrepreneurs
• Media coverage of successful founder or companies
• Meetups that bring together founders
• Academic symposia
• Co-working spaces fostering interactions between founders

Knowledge

Startup founders constantly come across challenges that require them to learn new best practices, methods, and skills. In the earliest stages when a founder has only an idea, she might have questions about how to get started. Should she write a business plan, develop the solution, or talk to potential customers? Even if she knows where to start, the founder might not know exactly how to carry out certain tasks such as validating the market opportunity. “What’s the best way to do that?” the founder might ask. Should she ask people to take a survey, call them, or try to meet them in person? What questions should she ask? There is a seemingly never-ending stream of questions that the founder might have, and this holds true throughout the entire entrepreneurial journey.

To answer these questions, the founder can turn to a variety of sources for information including books, articles, online communities, training, symposia, meetups, boot camps, advisors, mentors, and so on. Access to many of these resources are not constrained by geography, but others such as training, meetups, boot camps, entrepreneurship centers, and mentors are easier to access when they are available in one’s community. Therefore, such resources are key components of regional startup ecosystems, since their absence means less efficient information transfer to founders whose success depends greatly on knowledge.

Access to Information

• Trainings
• Meetups
• Symposia and Summits
• Bootcamps
• Entrepreneurship Centers
• Mentors
• Professional Experts

Capital

Without a doubt, the most important ingredient in helping local tech startups succeed is money, which is needed from idea to exit. As entrepreneurs come up with an idea to solve a problem, they will often need some amount of capital to develop it even if they themselves are going to be doing the building. In some cases, creating the solution might require a more substantial amount of capital particularly if the solution is a leading-edge platform technology. The sources of this initial capital typically include friends and family, grants, entrepreneurship competitions, and angel investors.

Grants and competitions are critical in unlocking opportunities for those investors that do not come from more affluent circumstances and cannot count on a “rich uncle” to finance their endeavor. Moreover, many developing tech ecosystems lack sufficient angel capital since those individuals that can supply it often garnered their wealth through more traditional means and lack both a strong understanding and interest in tech-centered investments. Bank loans are rarely a source of capital for tech startups because they lack tangible assets and predictable cash flow, often making them too risky for banks to finance. Therefore, access to capital is often an acute issue in developing tech ecosystems.

In many developing tech hubs, there is also a relative dearth of venture capital. It’s not uncommon for startups to pitch more than a dozen venture capital firms when raising money, yet even more developed ecosystems rarely have a dozen venture capital firms investing in early-stage startups. Complicating matters further, local venture capital firms offering seed-level investment tend to be more risk-averse than firms “on the coasts” and consequently require much higher milestones before they will even meet with startups.

Perhaps even more deleterious is the lack of pre-seed funding (typically considered to be in the $100–250K range) in up-and-coming regions. On one hand, there are relatively fewer angels investing in technology startups in these regions. On the other hand, local seed-stage venture capital firms (if there are any) require greater traction before participating in rounds, which typically exceed $1M. What this means is that there is a huge chasm in the middle that native startups have to cross with sparse capital resources in the $100K to $1M range.

If a startup company takes on venture capital investment it often takes a few more rounds of financing until it exits (is bought by another company or IPOs). With each round, the amount of capital that is needed grows significantly, and emerging tech ecosystems have an even more acute issue providing access to later-stage venture investment.

The more nascent the ecosystem, the less capital is available across the board. However, providing access to financial resources does not have to hinge on developing regional capacity but can just as effectively be met by providing connection to investors in more well-developed regions such as Silicon Valley, NYC, and Boston. Such connections can be made through a number of resources such as entrepreneurship and investment conferences and services provided by civic organizations.

Access to Capital

• Grants
• Competitions
• Angel investors
• Venture capital firms
• Private equity firms
• Family offices

Talent

While the common refrain is that developed startup ecosystems such as Silicon Valley have an unparalleled concentration of talent, this does not directly translate to access. A company’s ability to recruit top talent is obviously a function of supply and demand. While it is true that Silicon Valley has scores of talented engineers, many startup founders gripe that is essentially impossible to hire engineering talent in “the Valley” due to the insane competition for those workers. Tech giants such as Facebook, Uber, AirBnB, and Google are swiping up the best engineers with pay packages topping $300K (not to mention other incentives). How likely is it that a startup with even a $1M in funding can land one of those prized engineers in that face of that kind of competition? One pivotal advantage that developing startup hubs have over bigger, more mature ones is that they might be better able to supply skilled workers to early-stage tech companies given that there is less competition for talent in those regions as compared to places like Silicon Valley and New York.

Supplying a strong workforce for tech startups is driven by a series of factors. An obvious one is the capacity and quality of local institutions of higher learning. Regions such as the Northeast have many excellent colleges and universities that produce a well-trained workforce. However, that is not the only way that regions can provide greater access to talent for early tech enterprises. Luring workers from bigger tech hubs can also be a very effective way to fill the pipeline, and civic agencies can help by promoting their region, providing incentives as well as supporting recruiting efforts. Given the rising living costs in Seattle and the San Francisco Bay Area, the conditions are ripe for luring talent to emerging tech hubs where workers can often enjoy a much better quality of life.

Finally, it must be pointed out that mature tech companies are perhaps the most important contributor to the local talent pool given that they inculcate their employees with successful best practices and skills that can make or break early-stage tech enterprises. Various stakeholders can do their part in ensuring that larger companies hire locally and that developed talent stays in the region.

Access to Talent

• Universities
• Mature tech companies
• Meetups and networking events
• Conferences
• Local job boards
• Publicity
• Other community members

Customers

It goes without saying that startups need customers to build profitable and sustainable businesses. What might be less apparent is how a well-functioning startup ecosystem can help companies attract customers. Events such as conferences and meetups not only provide an opportunity for tech companies to meet individual customers, they also can create an opportunity for startups to promote their business within more public forum through demonstrations, panel discussions, and displays.

A related way that actors within an ecosystem can provide connections to customers is through personal connections and affinity groups. For example, the local chamber of commerce can make introductions between a new B2B startup to potential business customers. Likewise, fellow entrepreneurs can recommend a new startup to their friends or professional contacts. The key to facilitating customer acquisition through direct connections is providing ample opportunities for individuals to interact and encouraging local organizations to serve as a catalyst for promotion.

The third way that ecosystems can help drive customer acquisition for startups is through press and marketing efforts. Journalists are often deeply embedded in the startup community allowing them to play a key role in helping burgeoning startups to grow. Similarly, trade groups and civic organizations can encourage coverage of noteworthy startups and milestones. Beyond helping those businesses get much-needed leads, such publicity is generally great for the region by highlighting local tech activity and creating a narrative that the region is blossoming.

Access to Customers

• Meetups and networking events
• Conferences
• Competitions
• Local press coverage
• Trade organizations and chambers
• Other community members

Exit Opportunities

The principal payout for many tech startups occurs when the company exits — is bought by a larger company or is listed on a stock exchange in an initial public offering (IPO). While many founders aspire to build a company large enough to one day be traded publicly, most startups exit through an acquisition. In smaller markets, there are fewer large tech companies that are likely to acquire startups, so bridging opportunities to other markets is critical. Consequently, one of the most important functions that a local ecosystem can offer is providing startups with connections to exit opportunities.

Multiple types of actors in the community can meet this need. Venture capital and angel investors not only have strong networks with local companies but also to more established markets where there is a much higher probability that a strategic acquisition can be identified. Likewise, successful entrepreneurs and executives enjoy networks that span across the country or even the globe and can aid the matchmaking process. Local chambers of commerce or trade organizations also can serve as a hub for connections with potential acquirers.

Exits, particularly large ones, bestow manifold benefits on the regional ecosystem when they occur. First, notable acquisitions or IPOs are often picked up by national or global media drawing attention to the region in terms of investment, talent, and strategic interests. Second, large exits often create significant wealth in the local market, which then frees up additional capital for the tech sector as founders and early employees become sophisticated angel investors. Finally, successful stories inspire new entrepreneurs, which are necessary to keep the momentum going and create a sustainable startup ecosystem.

Access to Exit Opportunities

• Venture capital firms
• Angel investors
• Trade organizations
• Local chambers of commerce
• Successful entrepreneurs
• Executives
• Journalists

Coordination

While not directly a capability meeting startups’ needs, coordination is the ether that enables a blossoming startup ecosystem to function efficiently and effectively. This responsibility falls on various actors in the community such as trade organizations, interest groups, and individual leaders. Strong coordination is a conduit that allows capabilities to reach startups in a timely manner and in a format that is most helpful. The most effective ecosystems are able to meet all six of the above needs through an efficient use of resources and outstanding coordination to optimally deliver the full scope of the region’s capabilities.

Building Stronger Startup Ecosystems

Regions don’t need to be awash with money or resources to spur vibrant technology industries that can compete at a global level. The most effective tech hubs effectively meet the needs of native startups through a well-orchestrated array of resources and programs. By shifting focus to meeting needs rather than blindly building capabilities, regions can deploy their resources most efficiently by ensuring that all needs are met without over-indexing in any one capability. As the global race to build tech hubs heats up, the winners will be decided by their speed and efficiency rather than the depth of their coffers.

Thanks for reading! If you’d like a worksheet to help you evaluate how well your local ecosystem is meeting the needs of startups, email me at sergio [at] betaboom.com.