Defining Startup Ecosystems: Key Players and Their Roles

Democratising early stage tech investments is part of our mission at the Emerging Markets Angel Network (EMAN) and we believe that ensuring the availability of clear, concise and high quality information to potential investors is key. The industry is inundated with industry-specific terms and jargon which can be intimidating for someone who is new to it. As a result, we will be covering, in a series of articles, the key information that any potential investor should know before making their first investment.

We start by looking at start up ecosystems (sometimes referred to as technology ecosystems, tech hubs or scale up ecosystems). The term start up ecosystem refers to the complex system of entrepreneurs, start ups, capital providers, Governments and other players who are all interacting with one another to help start ups within the ecosystem reach their potential. Different players fulfil different roles and tend to focus on specific parts of the ecosystem.

The Role of Entrepreneurs

At the heart of any start up ecosystem we have entrepreneurs— we consider that it is the founders who drive the other ecosystem players to rally and provide capital, infrastructure and other support required to succeed.

As Brad Feld explains in Ecosystem Arabia, entrepreneurs are the leaders of ecosystems whereas all other organisations are ‘feeders’ into the start up ecosystem. Feeders are unable to play a leadership role in a start up ecosystem (although their employees may) and instead their role is to support the entrepreneurs.

The Role of Basic Infrastructure

Before considering the role of the feeders, we must also acknowledge the importance of the availability of basic infrastructure. By ‘basic infrastructure’ we mean effective transportation systems, telecommunications and widespread availability of high quality internet. Without these the development of any ecosystem will be severely stunted and will likely fail in the long term.

The Roles of Feeders

Start up ecosystem feeders include government organisations, capital providers, large companies, advisors and customers.

Governments drive the level of regulation applicable to new ventures. To date, we have two clear models when it comes to the level of regulation applicable to new ventures. The US Government has a very low level of regulation approach whereas China has a contrasting model whereby the Government has tight control of the market, IP and any data collected and generated by its start ups. The Chinese Government implemented significant protectionist policies allowing companies like Alibaba and Tencent grow while companies like Ebay and Google exited the Chinese market. There is no clear consensus over which model allows for a better start up environment and these models, as they currently stand, may not necessarily work in other parts of the world. Governments overseeing the growth of prominent start up ecosystems will have the difficult task of deciding how they want to support and oversee the ecosystem and which parts of each model may work for them.

Capital providers range from micro-loans, friends and family and angel investors to venture capital, private equity and public markets. Different capital providers will be appropriate at different stages of the business i.e. while early on a venture may be financed by friends and family or angel investors, as the growth accelerates and funding requirements increase, we expect that venture capitalists or private equity firms step in.

Another key component of a healthy start up ecosystem is access to high quality human resources. The most successful start up locations are clustered around top tier universities (Silicon Valley, London, Boulder) thus allowing new ventures access to top talent. Additionally, as the world becomes more digital, especially due to the ongoing Covid pandemic, quality online education providers are increasing the pool of highly skilled individuals in geographically varied locations allowing new ventures to be selective over whether they run centralised or geographically dispersed operations.

Advisors (also sometimes referred to as support professions) such as lawyers, accountants and investment bankers are experts in their fields and play a crucial role in guiding entrepreneurs through necessary yet often confusing topics like funding rounds, legal or reporting requirements. Entrepreneurs’ focus on the growth of the business, while laudable, can sometimes lead to ineffective corporate governance and other processes. Advisors keep the entrepreneurs on track and help with ensuring that any legal, corporate governance etc issues are addressed before they become stumbling blocks for the entrepreneurs and their ventures.

Finally, large corporates have a significant two-fold role to play in start up ecosystems. Firstly, they are starting to act as capital providers — we are seeing more large companies setting aside money into Corporate Venture Capital funds and investing in early stage start ups. Additionally, these large companies also feed the growth of start ups. For example, the Boulder start up community has benefited from the presence of IBM in Boulder. Initially, IBM attracted talent to the community and, after a few rounds of layoffs, also provided the next generation of start up founders.

Cultural and Societal Norms

The importance of cultural and societal norms can frequently be overlooked when people discuss the key components for comprehensive start up ecosystems. While their role is intangible, it is also essential. Cultures around the world reward success, however, the reality is that majority of new ventures will fail. It is instead how the society perceives and tolerates failure that will determine how willing aspiring entrepreneurs will be to start risky new ventures. Start up ecosystems will thrive in cultures which recognise and value the contribution the entrepreneurs make. As a result, start up ecosystems are boosted by success stories of local founders and proof of how start ups can generate wealth.

A successful ecosystem will support start ups within it and provide the optimum conditions for entrepreneurs to succeed. While an ecosystem may survive without one or two feeders, it will struggle to reach its potential and support optimally the entrepreneurs within it. We founded EMAN to ensure that start up ecosystems in LATAM and MENAT have the best chance of success and are able to support the local entrepreneurs in their quest to become global leaders.

*Some of the information contained in this article was sourced from Ecosystem Arabia by Amir Hegazi.