The building blocks of a Tech Ecosystem

At the PreMoney Miami conference, Dave Mcclure and the 500 gang asked me to share my insights on the various ecosystems we look at across North America and Western Europe to provide insights to entrepreneurs and investors in Miami and Latin America.

I decided to focus on what I consider to be the required building blocks for an ecosystem to thrive. The slides are available on SlideShare and the YouTube video is now attached below.

Mariano Amartino , who leads Telefonica’s Wayra program, asked me to write out the presentation in a blog… so here it goes.

As I think about the necessary components for a tech ecosystem to thrive, I see it as a set of interlinked and interdependent building blocks. The basic and required base is a healthy supply and access to technical talent. If “software is eating the world” you need founders and team members who can build said software.

If you look at the countries that are generating the greatest amount of technical talent a few immediately jump out. The size of the bubble represents volume of students and the axis outline % of total graduates in Science and Engineering. Singapore has a high % of engineers but a small absolute number. The US has a high percentage of graduates in Science but a lower % than one would have expected in Engineering.

There are a number of new initiatives like Cornell Tech in New York and 42 in Paris that are helping to accelerate the amount of talent. Cornell Tech, once up and running, will be graduating 2,000 students per year changing the supply in the NY ecosystem. In Paris (the absolutely awesome) Xavier Niell has created a school for hackers where, in a very un-traditional french style, anyone with any academic background can apply and the top X students each year will receive need-blind admission. Classes will also be taught in english (sacre bleu!). At scale it will be graduating 1,000 new coders each year.

“École 42 might be one of the most ambitious experiments in engineering education.” Venturebeat

So, assuming the supply of talent exists, the next building block is a visible and broad set of role models. Successful entrepreneurs that others can look up to aspirationally and whom young entrepreneurs will want to emulate.

I call this the “Mom Test”: Does the Mom in China want you to be the next Jack Ma? Yes! Does the Mom in the US want their son to be the next Zuck? Probably. Does the Mom in Madrid or Rome want their son to be an entrepreneur? Probably not, given cultural stigma on failure. The Mom probably wants the child to be a bank teller or government bureaucrat…much safer jobs.

<rant> As an aside, when I was building this slide, it was quite easy to find magazine covers with successful male entrepreneurs but much, much harder to find covers with female entrepreneurs. It is clear that unless we actively highlight female role models as successful entrepreneurs we will not be inspiring half of the population which will simply exacerbate the existing gender gap in tech. </rant>

So assuming there are technically capable men and women, and role models that make entrepreneurship a desirable career choice… how do they go from wantrepeneur to building? I do believe there is a role for launch platforms in ecosystems, be they incubators and accelerators like 500 Startups, Seedcamp, Techstars or company builders like Rocket Internet, Betaworks or Science.

The next building block is access to risk capital to take a concept from idea to product. This includes a vibrant Angel community but also early stage venture capital funds to allow companies to launch and find product-market fit.

This piece of the ecosystem can be influenced by government policy, whether that is EIS tax-credits in the UK for Angel investments (if company does extremely well, capital gains will be tax-free. If it fails, the investment can be taken as a tax write off) or Tekes in Finland (where government grants match investors Euro for Euro).

As I had pointed out in a previous post there is a marked difference between access to early stage funding in Europe and the US where there is a marked (and visible) Series A funding crunch which leads to half the number of companies making it from Seed to Series A.

So lets assume all of these pieces are in place and an entrepreneur has launched a product and is getting traction. To scale (and compete globally) he or she now needs Growth funding. A lot of the discussion at the conference focused on the morphing state of late stage investments with everything from South African cable companies to Hedge Funds to Asset Managers and family offices now leading very large investment rounds. This is clearly the case in the US with the un-IPO rounds of Uber and Pinterest. This trend is not yet as visible in the European market but certainly a signal of a new set of funders for Growth stage.

And the final (and one could argue most critical piece) of healthy ecosystems is a vibrant and active path to exits. Exits matter for investors (especially VC who need to return money to their LPs). Exits matter for employees who can then take on the risk of becoming founders of their own venture or angel investors in the ecosystem. Exits matter for the growth of the VC community where new entrants can access capital from LPs wishing to bet on the growth of the ecosystem.

Atomico, the UK based global investor, did a recent analysis on >$1B companies. The more interesting points from the analysis were 1) the greater amount and faster acceleration of unicorns outside of the Valley and 2) the difference in the blend of paths to >$1B across regions were Private Markets are leading in the US but IPOs lead in Europe.

So if all the building blocks above come together they lead to that scarce but needed component of a vibrant ecosystem: Mafias! Successful founders and team members of companies with significant exits who will become founders, co-investors, mentors of new companies across subsequent generations. San Francisco traces its roots back to the Traiterous Eight and subsequently it had the famous PayPal Mafia. Berlin traces a lot of the current set of angels and founders to the Jamba/Jamster employees (including the Samwers). The New York scene has a number of DoubleClick alumni (including Kevin Ryan who is emblematic of the rise of New York).

So, as was the case at the conference, when people ask what is needed to make Miami or Buenos Aires or Monterrey into a Tech Hub, the answer has to be more nuanced than simply “more VCs” or “better entrepreneurs” as a stable, self-sustaining and thriving ecosystem requires all of these building blocks to come together… and that takes time.

PS. The Youtube video of the talk is now up. Posted below: