Elements of a successful startup ecosystem
A good startup ecosystem is an unfair advantage. Studies show that if you belong to a vibrant ecosystem you increase your odds of survival. Indeed, the chart below shows the survival rate between each financing round in the USA. The USA average is in red, and the blue line is average excluding the top 6 hubs (SF Bay Area, NY, Boston, Los Angeles, Seattle and Chicago).
You are two times less likely to succeed in a financing round if you are not in a top tier hub (up to series C, it’s even worse after that).
Creating a successful startup is already hard so why would you double the difficulty?
So, what does provide a better ecosystem? It’s about more money, more collective knowledge and more talents. It is, therefore, easier to succeed. The term unfair advantages is not too weak.
As Nicolas Colin discussed in an article, the growth of some startups hubs implies the weakening of others. Less successful startups mean fewer jobs. Fewer jobs mean less attractiveness and more brain drain. That leads to fewer startups and in the end a self-reinforcing loop towards oblivion.
As bad as it seems we shouldn’t be afraid, it is up to us to make things happen. In the words of Brad Feld:
I strongly believe that startup communities can be built in any city and the future economic progress of cities, regions, countries, and society at large is dependent on creating, building, and sustaining startup communities over a long period of time.
Your territorial prosperity is at stake here. Don’t wait too long.
The good news is that many books and articles are written on the subject (I curate a list here) with many insights to help you along the way. We will first explore how three ecosystems have emerged (Boulder, New York and finally Chicago). In a second part, we will discuss the key ingredients for a successful ecosystem creation. Let’s start with Boulder.
Boulder
The book from Brad Feld is the bible for creating startups communities and comes from an unexpected city, Boulder, CO. It’s a small city of 100 000 people of which 30% are linked to the University of Colorado Boulder.
The community started small but grew up to the top. Indeed, in the first meeting of the Young Entrepreneurs Organization created by Brad Feld in 1996, only 12 people showed up. Ten years later, he joined David Cohen to launch the famous accelerator TechStars. Finally, ten more years later, Boulder was awarded as the best place for starting a business by Forbes.
Suddenly I was part of a group of a dozen entrepreneurs who were meeting monthly. — Brad Feld
In the book, Brad Feld describes in length the Boulder Thesis that can be summarized as:
- Entrepreneurs must lead the startup community.
- The leaders must have a long-term commitment.
- The startup community must be inclusive of anyone who wants to participate in it.
- The startup community must have continual activities that engage the entire entrepreneurial stack.
From the book, I can find those other important remarks:
- Google that provides free space for startups (an event space for 250 that the community can use for local gathering).
- The concept of “external economies of scale”. With the concentration of startups in the same place, the startup infrastructure costs are less expensive and probably more relevant.
- The administration led programs trap (“they often have a long list of objectives to accomplish without any real thought to the weighting or impact of the specific initiatives”).
Let’s move to the East Coast for the birth of another startup hub, New York.
New York
While being the Big Apple, New York was quite late in the ecosystem building game. The DotCom bubble was strong in New York and some startup where way too wild (as depicted in the documentary We live in Public). The hangover froze the NY ecosystem until 2004, a period described as the nuclear winter by Fred Wilson. The NY Tech Meetup, the local gathering of the tech scene, was founded in 2004 by Scott Heiferman and started modestly. It is now a big show that attracts around a thousand people every month (more than 60 000 members).
I decided to form the NY Tech Meetup and convene the first meeting. One person showed up, Dawn Barber; the second month we were four; the third we were 14 — Scott Heiferman
Another key member of the NY scene was no less than the mayor Michael Bloomberg. In 2009, he started a program to re-launch NY as a new “Tech City”. His “Center for Economic Transformation” team acted as a bridge between Government and private entrepreneurs in the high-tech scene. One example is the creation of twelve incubators across NY. While the administration helped them to start, even putting money, they were designed to live a life of their own and remain privately managed. The public sector only helped the private sector to kick-start initiatives.
New York’s way of executing on this should be a lesson for others as well: it was not done by throwing loads of tax-payer money at initiatives controlled and managed by the city, but by seed-funding specific projects with little money or underutilized assets, and allowing private entities to do the rest while government got out of the way. — Alessandro Piol
Another example of Mayor Bloomberg implication is the Cornell NYC Tech campus where the city gave away the land and $100M in seed money (the complete project budget being $2 000M).
The campus was helped as well by a $350M contribution from Chuck Feeney (founder of Duty Free Shoppers). A prototype is hosted for free at the NY Google campus (yes Google again like in Boulder) and has already produced 30 startups that have raised $20M in pre-seed and employ 105 people.
If Google is now strong in NY it is thanks to DoubleClick, one survivor of the DotCom bubble that was founded in 1996. In 2007, it was sold to Google for $3.1 billion. This gave a huge inflow of money in the ecosystem and build a strong presence for Google.
Former employees were getting a lot of money from their equity. They were able to apply their knowledge in building new startups. They were also able to finance other startups. The virtuous cycle was in action.
Moreover, the Google presence was good to teach the startup culture as well. Dennis Crowley, the founder of Dodgeball and Foursquare, recall that his second venture was a lot easier because the tech community was stronger thanks to Google (a third of his employees were ex-Googlers). It’s interesting to notice that his first venture, Dodgeball, was sold to Google.
New York is now a major hub. For the last story, we will focus on a third tier ecosystem according to Fred Wilson, Chicago.
Chicago
It seems that the geographical position of Chicago, between New York and Silicon Valley, doesn’t help. In 2016, Peter Thiel told to Chicago students:
If you are a very talented person, you have a choice: You either go to New York or you go to Silicon Valley
While Chicago is not the brightest spot in the world, it deserves probably better than that. In fact, it has a long story of B2B companies, especially in the financial markets (Morningstar was created there in 1984). Sadly, no iconic startup from the DotCom bubble survived and in 2004 it seems like starting from scratch.
Still, this 2004 vintage did quite well with major output like Grubhub, FeedBurner (sold in 2007 to, guess who, Google for $100M). The Illinois Technology Association was founded in 2005 to gather this emerging startup scene. The first incubator, TechNexus, arrived in 2007.
With this strong first layer in place, the tipping point for the Chicago startup scene was in 2010 when Lightbank was founded. This venture capital fund was created by two founders of the success story in Chicago, Groupon. The chart below emphases the before and after this point in time as the investing activity increased by a factor of 3–4.
This start was consolidated with the creation of a set of incubators and accelerators. In particular, the huge 1871 was launched in 2012. It has 140,000 square feet space and 2000 people from 500 startups are working there daily. It’s the innovation hub of Chicago with a myriad of accelerators and incubators.
The creation of this behemoth was helped with public funding ($2.3M then $2.5M for an extension) as well as private money, notably a $1M pledge from J.B. Pritzker. Currently, 1871 is no longer using public subsidies and find most of its resources from donors and renting space.
These innovation hubs, or third places, are seen as a major asset as they facilitate the connection between startups, investors, corporate sponsors and civic boosters. Put more simply:
“When you have a bunch of molecules squeezed together, you get a reaction.” — Steve Collens
As Chicago was the last stop on our journey, it is now time to conclude.
Elements of a successful startup ecosystem
What can we learn from those stories? There is three elements I would like to highlight.
Entrepreneur-led with public support
In every case, there were entrepreneurs that took on their time and put efforts to foster a vibrant startup community. This sense of membership laid the foundation on which the ecosystem infrastructure like incubators and accelerators were build. This second stage needed help from the public sector or wealthy people (founders with an exit or donors like in Chicago).
Strong connectivity
According to a Kauffman Foundation report, connectivity is key. That’s why those successful communities like Boulder and New York created a myriad of events to connect. Density cause collaboration and creates culture. That’s why in most cities (especially in Chicago with 1871), there is innovation hub where people are co-located, can meet and connect and therefore build the future of the community.
This activity is happening both between entrepreneurs and between organizations that provide support, such as mentoring and funding, to entrepreneurs. As these connections deepen, the strength of the entrepreneurial ecosystem grows. — Mayor Francis G. Slay,
City of St. Louis
Success
The last factor is something outside control but critical nonetheless. We saw how Groupon success ignites the Chicago hub, DoubleClick in New York. Gate5 and Rocket Internet helped the Berlin ecosystem.
Before the first wave of success, it is way more difficult to achieve anything. Nevertheless, that doesn’t mean we shouldn’t try. I will let Michael Bloomberg conclude:
The fact is, every city creates its own future. If you believe you’re at the mercy of larger forces beyond your control, you’ve already lost. Those larger forces affect every city, but successful cities learn how to adapt. — Michael Bloomberg
Other resources:
- Building a startup ecosystem: 6 books you should read and other resources
- What makes an entrepreneurial ecosystem
- Startup Genome Global Startup Ecosystem Report 2017
- Kauffman Foundation resources on startup communities
- Startup Nation: The Story of Israel’s Economic Miracle
- La transition numérique au coeur des territoires
- Berlin startup hub: The rise to europe’s startup capital
