How The Midwest Can Compete With Coastal Unicorns
A guide to developing thriving entrepreneur ecosystems anywhere
What makes for fertile soil to grow a unicorn? By unicorn soil, I don’t necessarily mean ground that grows billion-dollar public companies. I mean a region that spawns thriving entrepreneur excellence. Many people (especially Zebras Unite) are starting to re-imagine startups as things that emerge organically from communities which they in turn nurture.
I recently finished a course in urban agriculture. As a city girl who previously only grew things in pots, the scariest part of larger scale growing is the soil. When you pick a plot of land, the soil you have determines what you can grow. If it’s too much clay or too much sand, you will have an uphill battle. If the soil has no structure (few clumps of organic matter) you will need to spend a lot of money to alter the balance. And if you mess up your soil by overworking it, it can take years to correct it.
If the metaphor holds, the soil that you have in a region ultimately determines which businesses can grow and which can’t grow.
If you kept track of the Amazon HQ contest, it’s clear that many regions want to grow wildly successful companies, especially “Rust Belt” towns that are grappling with how to compete with the coasts in the new economy. I have something to say about this.
For 20 years, I lived in startup boomtowns like Los Angeles and Austin. Last year, I returned to Cleveland, Ohio my hometown, a town perpetually eager to create something outstanding. Comparisons are difficult. Boomtowns like Austin, L.A. or the Bay are some of the most robust economies in the country. Cleveland is often ranked among the top 10 poorest cities in the U.S.
Can a struggling region in the center of the country, like Cleveland, actually compete with the three coastal states who currently receive 80% of venture capital? Can they offer better soil for the next big thing to grow? That depends on what kind of soil nutrients you believe are necessary to nurture startups.
I believe three regional conditions are required to grow start ups: 1) Openness 2) The Appetite for Risk and 3) Support.
Creativity Requires Openness. What Regions Will Let You “Think Different?”
A Silicon Valley consultant described Cleveland’s startup scene as “nascent, meaning in his mind it barely exists. This could be an advantage when it comes to openness.
Why? Because when you live in the shadow of behemoths who have already demonstrated a certain model of success, it can be difficult to imagine a different path to success.
As an analogy, think of great disruptions in nature. The dinosaurs ruled the earth for almost 200 million years. Mammals did exist during the age of dinosaurs. They were small, shrew like creatures that scurried about in crevices to avoid being crushed under foot. However, once the dinosaurs disappeared mammals could come out into the open and create a new world for themselves, which is the world we experience today.
Perhaps the upside of having no looming Apple or Google campuses is that there is room to imagine something totally different.
I think that many entrepreneurs would want the open environment found in off the beaten track places if they really considered it. Entrepreneurs are often highly creative people. They don’t want to be restricted to what came before. They don’t care for industry dogma. They want to stretch their creative muscles. This very desire creates the David and Goliath heroism that we most admire in entrepreneurs. It’s why a single startup founder might be able to solve problems that elude a whole corporation.
Who Is Open to Diverse Types of Innovators?
The bottom line is that entrepreneurs need to be taken seriously if they are going to succeed. Yet in “Boomvilles” it’s difficult for many types of people to be taken seriously. Are marginalized entrepreneurs more likely to be taken seriously elsewhere? Quite possibly.
When I was in Boomvilles, I heard again and again that investors invest in the “team” not the idea. For laymen, this means they want to invest in the most talented team because lots of people have good ideas, a lot fewer can bring them to fruition.
Makes sense in theory. Yet how it’s practiced ushers in massive amounts of bias. I’ve hired and managed teams. I know that you have little idea who people are until you’ve worked with them for at least several months. There is a reason why institutions implement six month probation periods on new hires. It takes that long to get a true sense of someone’s competence.
So I was baffled at how the strengths of “teams” were being evaluated over the course of a 5-minute pitch. Finally, I realized team “strength” was often synonymous with Ivy League education, past experience working with a major tech or Fortune 100 company, hacker prodigy, or previous tech exit. This leaves out 99% of the entrepreneurial population.
An advantage to “nascent” ecosystems is that they could allow a different type of entrepreneurial species to flourish. Bluntly, there are more women, older people, people of color and lower income entrepreneurs taking center stage here. I suspect it’s because they are getting fewer messages, explicitly or implicitly, that they can’t do it, so they are more likely to believe that they can. And when resources are limited, they are less likely to be entirely pushed out by other species of entrepreneurs, like the kinds that dominate elsewhere.
I hate talking about diversity for diversity sake because it’s too easy to undermine that argument. Diversity is important for a country and for a region because it creates more genuine innovation. If you select only hacker prodigies and Ivy Leaguers this may select for solutions to problems experienced by hackers and Ivy leaguers and that leaves out most of the world. If you solve for different problems that affect different people you get more varied innovation. Period.
Diversity also widens the aperture for finding real talent. What the funders say about the importance of team is true. I’ve met a lot of entrepreneurs and I’ve rarely heard a bad idea. I’ve more often heard good ideas from people who don’t have the grit to execute them.
How you find people with grit? First you have to know what it looks like. It doesn’t necessarily have to do with Ivy League education or any other marker of prestige. It’s very simple. Look for people who love to take action and can learn quickly from the results. One of the slogans you hear repeatedly in Boomvilles is that fundable people need to be “coachable,” which can imply that they need to take advice from certain people in power who want to give it.
The ability to learn has little to do with being coachable by “experts.” The ability to learn is the ability to be in dialogue with your specific business environment. For example, if you have a restaurant and you receive negative feedback from customers, you should be able to quickly respond by improving your operations. If you have a technical invention you should be able to quickly come up with an adjustment if your test results aren’t what you desired.
People of all races, genders, and economic classes can be delusional and insulated. But if I had to bet on people, it would be on people who can’t crawl back into a bubble. Diversity opens the gates to find more of those people.
Who Is Open to New Models of Innovation?
Several locations I’ve lived in have tried to model themselves after Silicon Valley down to taking a version of their moniker: Silicon Prairie, Silicon Beach, Silicon Hills. If you have the soil that allows you to easily replicate Silicon Valley, why not do it?
But what if you don’t have the soil to easily grow something similar. It’s difficult to imagine a region with a 36% poverty rate spawning … Silicon Great Lake. However, that forces you to create something else and this may be a good thing. After all, how innovative can you be when you are franchising a concept created by another region?
What else could possibly grow besides Silicon X? When I moved to Cleveland, I was delighted to find that this region’s startup culture seems to be led by people who believe social responsibility is simply the way you do business.
At a recent civic forum on Cleveland’s blockchain initiative, an audience member asked a question about how the block chain effort was going to help Cleveland’s most vulnerable communities. I can’t imagine this question being asked in Silicon Valley or Austin.
Why is social entrepreneurship more dominant in this region? Perhaps it’s because entrepreneurs solve for the problems they see on a daily basis AND for which they feel responsible. My experience on the west coast is that social problems like homelessness are invisible to the business world. It’s viewed as the problem of professional politicians, social workers or the police. This detachment can be one of the features of living in a large metropolis.
However, as a contrast, in the Midwest region, when you look around and see poverty, job displacement, opioid addiction and other social ills, it’s much clearer that it’s happening to your community and to people that you know. And there is a more direct linkage between the health of the surrounding community and your business prospects so social concerns become part of your business thinking.
Think of it like a math equation. When you change a variable you get different results. Likewise, when you change entrepreneurial constraints you often get new solutions. For example, a company that decided that local homelessness must be addressed in the business model, would look much different than a company that didn’t. The common wisdom says it would be preposterous to consider local homelessness in a business model but if it became a precondition that must happen, then you would be free to unleash your mind on HOW it will happen. Such a constraint could create a proliferation of innovative business models that combine services, products, public elements, private elements, capitalist strategies and socialist strategies.
Appetite for Risk: Is Innovation A Necessity or A Nice to Have?
Let’s be honest there is no way to get around the fact that investing in new businesses is risky. Why would you risk on new business models or new types of entrepreneurs? Mostly likely because you need these new business to survive. Part of the appetite for risk means risk is the only thing that’s really going to nourish you. There aren’t other things to eat.
Boomvilles are currently doing well enough that risking on different people or strategies is a “nice to have” but not a “need to have.” This could give the rest of the country an edge in the second criteria: appetite for risk.
For diverse entrepreneurs pursuing diverse entrepreneurial strategies you might want to head to the center of the country. You could be more likely to be taken seriously because they need you to succeed more than the coasts need you.
Whose Favorite Meal is Risk?
Unfortunately, it’s difficult to find places, in any spot on the map, that incentivize risking on early stage companies. According to industry insiders, even Silicon Valley has dis-incentivized risk.
It wasn’t supposed to turn out this way. Just a few years ago, in 2014, the Economist foresaw a massive boom in entrepreneurial creativity. They envisioned a “Cambrian explosion of tech startups trying every conceivable idea in every conceivable variation.”
Sadly, the opposite occurred. Major tech companies created a “kill zone” where they bought or killed any potential burgeoning competition.
Roger McNamee of Elevation Partners, a private-equity firm, who was an early investor in Facebook, says:
“The dominance of the big platforms has had a meaningful effect on the entrepreneurial culture of Silicon Valley. It’s shifted the incentives from trying to create a large platform to creating a small morsel that’s tasty to be acquired by one of the giants.”
Basically, there is little reason for Silicon Valley entities to risk funding something highly ambitious or innovative. They aren’t trying to grow the next Facebook because they believe it’s impossible in that environment. They believe it will require massive amounts of capital to outrun being crushed or having their innovative features be “borrowed” and assimilated (Borg like) by the big tech companies. So instead they make their money back by investing in companies that produce incremental innovations (a better algorithm) that large tech companies will be likely to acquire.
This is probably why seed investments have dropped by half since 2014. Funders don’t want to risk on early stage companies who will face overwhelming odds. Instead they are concentrating investment in less risky later stage companies.
This would seem like a long-term sustainability problem for the industry because by starving young companies, there will be less viable investment in the pipeline in the future. However, few seem to see that as their problem. Yet.
Skin in the Game
This highlights another challenge with entrepreneurial ecosystems in hot markets— they are rife with asymmetry of risk. This means that in this business arrangement the vulnerable entrepreneur takes all the risk, and the people they are seeking support from take none.
What does this look like in actuality? High profile Silicon Valley Venture Capitalist (VC), Chamath Palihapitiya reveals that many venture capital firm partners put almost none of their personal money on the line. As individuals they will not bear any consequence if they invest in a business model that harms society or ultimately leaves the entrepreneur with nothing or is just plain vapid and dumb. This is because all they have to do to get a promotion is to pump a company up enough to generate hype so that other investors will follow suit and then they make their money back in the next round of funding.
People who work in business know that asymmetric relationships never work out well for the one with less power. You ideally want to work with suppliers or customers that depend on you as much as you depend on them. That way you can’t screw each too much because you will both go down with the ship.
Is there more appetite for risk in the center of the country?
Personally, I see this as an opportunity for other regions to step into the void, if they can stomach the risk.
Theoretically, center of the country cities could resonate with entrepreneurs in a way that Silicon Valley perhaps no longer can. Startup entrepreneurs know that a small group of dedicated team members has to “think better” than a huge corporate competitor who has tons more resources but has gone soft.
Since center of the country regional funders aren’t in the eye of Sauron-like kill zone of the Bay Area, they aren’t getting the same messages that dissuade genuine risk taking
Beyond industry indoctrination, non-coastal funders may be more likely to have the same risk/reward ratio as their entrepreneurs, which makes it a more symmetric relationship.
For example, a regional funder in Iowa probably can’t directly compete with Andreessen Horowitz(AH) and they may never be invited to syndicate with coastal investors on big deals. They may not be able to generate enough hype to get a gazillion follow on investors. So they may have to compete by finding overlooked deals of businesses who will actually be profitable without a ton of investor money.
Entrepreneurs ideally want to find investors/regions whose fate is directly tied to their fate. A symmetric relationship may be more likely in the center of country because the investor, the regional infrastructure and the entrepreneur may be closer in their worldviews.
Theoretically, struggling Midwest communities, who may be on the precipice of falling into a death spiral, may directly understand the need to innovate or die. They are the ones staring into the abyss. They may directly experience the worldview that the person or community to be really afraid of is the hungry one with nothing to lose and everything to gain.
This is not the worldview you tend to hold when the world feels like your buffet table. When I lived in Boomville it was easy to feel like the big break, was just around corner, at the next meeting, even though that next meeting usually ended up being equally illusory. I thought, if I just hung in there and waited it out, my ship would come in!
Many in those ecosystems tend to share the same illusion. It could be for no other reason then when you live in that bustling a place the possibilities appear endless. When the reality is even if they are, they are not for you, because you are unlikely to find them.
In my years in those towns I saw very few entrepreneurs’ ships come in but the entrepreneurs weren’t connected enough to each other (because hot markets are so noisy) to compare notes and understand that what was happening to them was a system wide failure. So it takes a lot longer to develop a sense of urgency and to realize you are going to starve if you don’t do something different, so to speak.
Moreover, in Boomville I met a number of very talented people, including; Stanford graduates with computer science degrees or people who worked in high paying jobs in finance, Wall Street, tech or Hollywood. When startup life got hard, they could likely get a high paying job elsewhere. And indeed, they often took that route.
However, for entrepreneurs with fewer options, there may be no other choice. You either succeed or there is nothing else to go back to. This is a way they might relate to struggling regions in the center of the country.
There can be a strong competitive drive among people and regions that cannot afford to rest on their laurels.
If most regional systems put no skin in the game, then there is opportunity to do something different. If everyone else is playing it safe, it actually heightens your chances of succeeding if you go out on a limb.
Theoretically, there are a lot of reasons risk could be valued in the places in the center of the country. In practice, however, there can be analogous types of disincentives to risk. For example, government money continues to flow despite that fact while healthy metros have an early stage company growth rate of 2.5%, Cleveland’s is .01% …If you don’t feel the pain, you are less likely to take a risk to do something different.
What does good entrepreneurial support look like?
If the region is open to you and willing to take a risk on you, then you need appropriate support to climb the ladder to success. What does good support look like?
As an analogy, let’s look at the learning pyramid, which describes what best supports people to learn something new. Basically, the more active a learner is the more of the lesson they will retain. Most people retain almost nothing from lectures or reading, as those are passive forms of learning. They retain the most from having to teach the subject to another person because it requires the most active mental effort.
Likewise, the more active the support is, the more value it will have for the entrepreneur.
Yet, 90% of what is offered in most ecosystems is generalized training which only returns 10% and is the most flaccid support available to entrepreneurs. It’s the opposite of the Pareto Principle.
Training is useful to learn a specific skill to advance in a specific way. But standard training isn’t suitable for many tasks of entrepreneurism, which is often about blazing new paths. Sometimes the training offered isn’t easily implementable. For example, management training is only useful when you have the resources to hire staff. Standard classroom training is also fundamentally misaligned with entrepreneurial temperament. Most people learn more when they do more. Entrepreneurs, action oriented to the max, are the poster children for that philosophy.
So why is the trainer model the way nearly everyone does it? It’s the least risky thing to offer and still get a paycheck.
Yet this strategy creates a vicious cycle. Entrepreneurs are viewed as too untrustworthy to receive substantive support (funding, sales leads); so, they are “re-educated” in entrepreneur boot camps. But that type of support doesn’t move the business forward, so they are more likely to fail, and then be seen as risky bets who need to be more educated. It’s a set up for failure for both the entrepreneur and the support ecosystem.
Here are ways to provide support better suited to growing entrepreneurial excellence.
One: Develop a vetting process you can have trust in so you can better trust the entrepreneurs you want to help.
If you don’t trust your entrepreneurs you will be afraid to support to them. So develop a vetting process that you trust to find people you can put your trust in.
For example, Tulsa, Oklahoma recently offered $10k to talented people who wanted to move to Tulsa and work remotely. They received 10,000 applicants for 100 slots, allowing them to pick the best and brightest. High ranking applicants had an existing profitable business (demonstrating talent and success).
Tulsa also understood their regional brand and what could they offer. They understood their target market wasn’t just coastalites looking for cheaper housing but coastalites who wanted to be community leaders. They sought to lure people (or lure them back) with the opportunity to have influence in ways they would never have in big coastal cities.
This can be a model for cities who want to reverse brain-drain, which has been a major problem for large swaths of the Great Lakes, Midwest, Plains and Sun Belt.
Two: Minimize Unnecessary Middleman and Bureaucracy
I have personal experience working in the government to seed new initiatives. I raised millions of dollars and started five different grant-making programs at the University of California Los Angeles.
With very little formal training from us, 80%+ of our grantees met or exceeded their goals. This is a far better success rate than standard VC’s or current entrepreneur services.
Instead of meddling with grantees day to day activities, we focused on the parts of the process only we could bring excellence to:
- Developing a rigorous vetting process to ensure we funded professionals/institutions who had already demonstrated basic competence
- Facilitating a peer to peer learning process, where grantees learned from each other, as they experienced things in the field.
- Setting up data collection systems and running rigorous evaluation, in order to identify best practices that could be disseminated to others and scaled.
Why did we select the strategies we did? It was partly necessitated by our funders who forced us to prioritize outcomes over outputs.
Think about this way, if you, as a funder, said the only criteria we are measuring, in order to continue to fund your accelerator/entrepreneur services organization is growth in entrepreneurs’ businesses, then that organization should be mighty motivated to get their entrepreneurs to grow.
Since the accelerator has no direct control over the entrepreneurs’ businesses, they are more likely to pass the funding on to entrepreneurs to hire staff to make it more likely their business grows. In that scenario, the goals of the regional ecosystem, the entrepreneur and the entrepreneur services organization are better aligned. Isn’t business growth what the end goal of entrepreneur services should be anyway? If so, the incentive structure should match that goal.
Three: Make Vetting Decisions More Fair and Effective
If you are dealing with public monies, I know you want (and may be legally required) to be impartial. Yet despite scads of equity training and making founders mark racial and gender checkboxes, the rates of funding for companies headed by diverse people are still dismal. One reason is because the standard pitch/application model is highly subjective and therefore inherently biased.
Here are some ways to eliminate subjectivity: First when judging the competitiveness of an idea, potential customers are the only experts who need to weigh in. New ideas aren’t the same as McDonald’s franchises. There isn’t a standard evaluation. If you’re creating something new, there are no experts nor any peers. Therefore their opinions should have little weight. What should have weight? How a business’s intended customers react to it. Will it help them? Do they want it?
There might be another step if there are questions about feasibility, specifically around cutting edge or speculative technology. In that case, letters of support from relevant academics and technical experts (engineers, architects, doctors) may help to assess if the technology has a good possibility of succeeding. But you still need to connect with the technologies intended end customers to assess its competitiveness.
If it’s validated that potential customers want it, the second step is to assess if the team can execute. It doesn’t matter if it’s a one person or ten-person team. The first part of execution means you want to weed out the people who do from those who merely talk. Importantly, “doing” means they can do entrepreneurship — not just any job, not even a related one in an established company. The tasks of entrepreneurship often do not correspond with the job tasks of many established businesses.
I suggest using vetting processes that mimic how entrepreneurs have to function in real life. Why not make your competition six months in length? This better resembles the marathon of actual entrepreneurism. Get a group of early stage companies together and give them (or let them set) benchmarks over the next few months (think of these like hurdles on a running track) and see who clears the benchmarks. In genuine early stage companies, who are lacking resources, you want to measure their perseverance, resourcefulness, and ability to iterate quickly and creatively.
I also suggest creating benchmarks that mimic the hurdles that these businesses actually face. Currently nearly every competitive strategy I’ve seen used to vet entrepreneurs requires either a written mini business plan or standing in front of an audience giving a several minute formal pitch covering everything from the idea to the financials. For most businesses, these tasks have nothing to do with how revenue will actually be made.
I’ve heard the argument that business is sales and if you can’t sell you won’t succeed. That has some merit, but not enough. For example, what if a technical genius who sits in a lab all day, gets tongue tied talking to civilian audiences. It may not matter if that nervous nelly’s intended audience is other technical people who don’t expect slick presentations and in fact relish deep dives into arcane details.
Yes, you want people who understand their business enough to explain it concisely. But keep in mind the standard types of competition tend to reward good talkers, not necessarily good doers. You need the latter skill even more than the former. Even for a sales person, I can’t think of a single instance where a business would woo a big customer after a five-minute elevator pitch.
Benchmarks that reflect action could be: getting 50 potential verifiable clients to give video testimonials about their willingness to use the potential product, hard data from customer surveys, the number of new formal partnerships developed with potential supply chain or customer pipeline partners, the ability to get a certain part of the technology built or tested (with verifiable results) even if they don’t have the funds to build the whole thing etc.,
The benchmarks should be hard but doable. Believe me these benchmarks listed above are difficult. As a comparison, the founder of Uber, Travis Kalanick, assessed whether his business would take off by cold calling limo drivers in San Francisco. A third hung up on him, a third listened for 90 seconds and then hung up and a third said they would be interested in ride sharing. On a 1/3 potential customer acceptance rate, Kalanick got funding and a unicorn was born.
The point is to set challenges that reward ($$) people with real entrepreneurial competitive spirt. A good pitch deck can be bought. These other kinds of things are harder to fake.
As a side benefit, this structure actually helps all the participating entrepreneurs by giving them incentive to focus on growing their actual businesses. This relieves them of trotting around to pitch competitions or doing other ancillary activities that don’t support their core business functions which they feel forced to do simply because they are in a desperate search for seed capital to get to the next level.
This strategy has precedent. The U.S Department of Energy recently launched a competition for solar energy innovation that awards funding at multiple stages of competition and rewards a larger prize to those who progress farthest during the time period.
The multi-phase competition model was also employed by the state of Ohio to find technology that curbed opioid addiction.
Implementing these strategies takes significant commitment. It’s not too difficult to sit on a panel for an hour judging a pitch competition. It’s a lot more work to watch 50 video testimonials and determine whether these are actual potential clients or someone’s friends, or to decipher five technical letters of supports from academic researchers. Basically, you need to put the time in to understand what the entrepreneur understands (or doesn’t).
However, with the labor comes the rewards.
Four: Compete as a Region By Focusing On Under-Supported Areas of Innovation
Currently, entrepreneurs are more likely to succeed if they get accepted to a premier accelerator, like Y Combinator. Why? Because they will easily be moved through the pipeline to the bottom of the entrepreneur support pyramid and get personal introductions to funders and other important business growth opportunities. However, 99.9% of entrepreneurs won’t get into an elite accelerator.
And those that don’t get in can be rejected for nothing more than their type of invention. For example, of the top 100 companies in Y Combinator’s portfolio there is only one agricultural company (it’s still software). Is this because there are no potential high growth agricultural products? I doubt it. I suspect it’s because Y Combinator is primed to recognize excellence in business models in which it has regional understanding and agricultural equipment might not be one of those areas.
This means there are opportunities for regions to create (or lure) elite accelerators to focus on content areas that are not currently being covered. In fact, this may be the best road to regional success. Why would you want to compete for the next Google with Silicon Valley who specializes in that type of business? Find another type of business to specialize in.
As a note: Elite accelerators aren’t just training (forgive me for repeating myself). They have a robust pipeline for sales, funding and talent leads, all of the substantive forms of entrepreneur support.
What happens, you ask, in the void where a functional support pyramid doesn’t exist? In my experience, a parasitic layer of “support” tends to form as it usually does around people who have dreams. This extractive layer is one of the biggest dangers to entrepreneurs.
Five: Offer Support That Is The Opposite of Extraction
What does the aforementioned extractive layer look like? As a comparison, I lived in Los Angeles for a long time and had several friends seeking to make it as actors, musicians, writers etc. They encountered an interminable layer of acting and writing “coaches” who expected payment for skill development but who also explicitly or implicitly communicated that they had connections to industry insiders that they would share. That day rarely came.
Similarly, I’ve seen entrepreneur accelerators that claimed a high percentage of their companies raised funds. However, when you peak beneath the hood, it’s because they only accepted companies who already raised significant funds which padded the accelerators stats.
These accelerators claim to prepare you for the premier accelerators like Y Combinator, but unlike Y Combinator you need to pay them. They also often promise access to investors but less often produce those connections and may string you along with the promise as long as you continue to pay for their support.
This is another example of asymmetry of risk. The “support services” are not held accountable for their failures, while the entrepreneur bears the full weight of them.
The extractive layer destroys entrepreneurs most valuable and scarce resource — their time. Entrepreneurism is a trial and error process. It’s a race between the time you have and how quickly you can find the right path. Extractive entities waste that precious time by setting entrepreneurs down a path of fake opportunities. Nobody built a business on fake opportunities. Pursuing fake opportunities zaps precious time from pursuing real ones.
Being pointed to real opportunities is one of the most important types of support an entrepreneur can get.
Six: Get entrepreneurs into a functional support pyramid
What’s the difference between an entrepreneur that gets into a functional support pyramid and one that doesn’t? 8 years. Entrepreneurs that I met that got into a fast lane were either up and running in 2–3 years or they had seen enough to know to close their door within that same time frame.
On the other hand, the gritty buggers I met who kept going despite having little support took 8–10 years to reach that curve. Why should regions care about the extractive layer that prevents or delays entrepreneurial success?
Because not only is entrepreneurism the American dream and the American way… but during those 8 years those starved entrepreneurs are typically draining their regional economy when they could be feeding it. They aren’t creating much in the way of new jobs. They are often sucking their friends and family dry.
Moreover, to add insult to injury, the entrepreneurs who don’t get supported often face skepticism from funders inquiring as to why they haven’t progressed as fast. That adds one more barrier to growth.
This is why successful entrepreneurs who have been funded will often admit to “adjusting their origin story.” This means they tell people they launched 2 years ago, around the time they got their angel investment, instead of 5 years ago because they spent 3 years producing little in the way of tangible outcomes. They “adjust” to fit Boomvilles idea of start-up success; that a successful company should spring up instantaneously like the Greek goddess Athena sprang from her father Zeus’s head. Why? I guess because startups should be unattainably mythical.
This is one of the advantages to doing startup life in the Great Lakes area. There is a more blue-collar culture understanding that work is a process. It’s supposed to be hard, that’s why it’s called work. The work pathway vs. the magical genius pathway is more respected in this region. I believe it should also be supported.
Seven: Reduce Toxic Hype
Can we assess how well regions do at supporting hard work and getting entrepreneurs to people who can really help? It’s challenging because it’s made opaque by hype.
Hype is by definition an exaggeration of the benefits being offered. It is about talking more than doing, which again, offers the least return on investment in the entrepreneur support pyramid.
Hype is one of the features of hot markets. People come in busloads with new ideas and personalities. The speed of transactions is high. It’s like atoms bumping up against each other quicker and quicker in a tea kettle, so what may come out is loud noise followed by vapor.
The opposite of hype is whispered quietly such as when a mentor of mine in Austin, a well ensconced angel investor, confessed that even he couldn’t get other potential investors to come listen to pitches of potentially talented entrepreneurs.
This reality becomes more evident when you dig into the data, which shows that in Austin there is a preponderance of young companies, some stalwart late stage companies and fewer medium stage companies. Boiled down it means many come, few succeed because the investment is highly concentrated in just a handful of companies.
My hope was that moving to a slower ecosystem like Cleveland, I could get to know people on a more personal level, so something more solid and grounded could form. In some ways that is occurring. However, in other ways, I was surprised to find that hype still exists even in smaller regions. Early on I found myself in exciting meeting after exciting meeting, with people eager to change the fates of the region, but as the meeting progressed, they would lean in to whisper something unprompted to the effect of “there’s a lot of talk here.”
I have started to get to the layer of people who can help. It mostly came from kamikaze cold calling and emailing. That’s on me, not the support system. Other successful entrepreneurs I’ve met have privately confessed the same.
Eight: Assess Whether Your Local Networks Are Closed or Open, Strong or Weak
Hype is the fools’ gold version of something you actually need as an entrepreneur: brand notoriety. Brand awareness can be bought with a lot of money. But most entrepreneurs will not have access to a lot of money; so, they need to consider which regional cultures are better for organically generating brand awareness.
I’m not talking about the shallow retweet virality. I’m talking: what is considered social validation in different areas, so that people will give you a chance and potentially talk you up? Ideally you want to be in a place where people don’t need insane amounts of social validation before they will take a meeting. And, if that meeting goes well, you want a regional network strong enough that the word spreads quickly and carries credibility.
For example, from what I’ve heard, Silicon Valley is a closed but strong network. Social validation may require Ivy League credentials, a former job at a prestigious tech company, or acceptance into an elite accelerator. If you don’t have that the doors to people who hold substantial power many be closed. However, if you can get doors to open, then word supposedly spreads quick amongst local funders and is widely credible amid the whole region.
Los Angeles, on the other hand, is a closed and weak network in my experience. Despite going through two accelerator programs, despite getting top rated marks on fundability from local VC’s judging pitch competitions (who we were still too early for because they were all series A and above), despite literally paying one accelerator to facilitate introductions — — it was difficult to get meetings with decision makers. Social validation in Los Angeles tends more to be about how many twitter followers or prestigious clients you have (or some other metric of social influence). It’s difficult to get a half million followers unless you take your clothes off or have capital to spend.
And worse, L.A. is a weak network. It’s a huge and fragmented place; word doesn’t spread easily. So, the only way for enough people to develop trust in you, so that you gain momentum, is through ambient brand presence. However, to create an ambient brand presence in a place the size of Los Angeles takes a lot of money. You’re facing the chicken and egg dilemma.
Personally, I’ve found Cleveland (and I suspect the Great Lakes region as a whole) a good balance. People are open to giving you a shot or hearing you out. Social validation is helpful, but it’s not as hard to get it. You don’t need to be BFF’s with Kim Kardashian or Elon Musk to get doors opened. Going to local networking meetings is all you need to get going.
And the network is reasonably strong. It’s a smaller environment, where people love to talk. It’s easier for word to spread amongst enough people that you raise your profile. For instance, I wrote one blog piece for a local civic organization and had multiple people reach out to me telling me that they heard about me. That never happened in L.A. or Austin.
Raising your profile can be the difference between success and obscurity. As an illustration, I recently met a company in Cleveland pioneering an identical concept to one that my friend was trying to launch in Los Angeles. Except my L.A. friend was unable to find funding to get past the initial hump. The Cleveland group, on the other hand, found regional investors and are on their way to scale.
Bottom line: Cultivating a regional network that is both open to letting people in, strong in spreading the word, high in accessible opportunities, and low in hype, is a calling card for attracting savvy entrepreneurs.
Nine: Lower Costs of Living and Doing Business
I would be remiss if I didn’t mention that lower costs of living and doing business can be a regional entrepreneurship feature. That is one of the biggest downsides of hot ecosystems. As an anecdote, I have an entrepreneur friend, a wily entrepreneur, that I met in Austin. He went to try his luck in Silicon Valley. He took meeting after meeting that seemed to be leading to a big break. All the while his savings were dwindling. In order to have a bed to lay his head at night, he almost considered living in a basement with open sewage flowing, because that is all he could afford in the expensive region.
Although he has a degree in engineering, he eventually took a retail job at Home Depot to survive financially. He did get his angel investment, but not in the conventional way. While working at Home Depot he carried a customer’s ladder to his car and started talking to the customer. The customer worked in a local tech company and was interested in the type of hardware my friend was developing. He wrote a check the following week. My friend still had to leave the valley because the amount of angel investment didn’t make Silicon Valley rent that much more bearable.
Does my friend’s story represent a regional failure or success? Hard to say. I do know that, as mentioned above, entrepreneurial success often comes after a period of trial and error, and you need to be able to survive long enough to break through.
Even after you break through, there are still challenges to scaling. For example, I have a west coast client with a consumer brand that sells great online. They have been considering opening a storefront for a long time but the costs to open a storefront in their region are out of reach for any small business. Quite simply, it’s difficult to survive in regions where the costs of living and doing business are astronomical.
Tangible Tactics for Strengthening Regional Entrepreneurship Ecosystems
Theoretically a region that genuinely wanted to be attractive to entrepreneurs could make the process of getting to important resources (sales prospects, partnerships, funders, talent) more efficient than it typically is.
Tactics to Create Efficiency could be:
1. Create free opportunities for entrepreneurs to showcase at trade events.
2. Allow entrepreneurs to pitch to government procurement offices
3. Reduce regulations
4. Have regional entrepreneur organizations buy services or products that can be collectively used by local entrepreneurs, and thus help entrepreneurs bring down their costs. This especially includes attorney and accountant time, not just one hour of consultation, but tangible help filing paperwork and drafting contracts.
5. Require government suppliers to source or subcontract with a high percentage of local companies or include incentives for contracts that include second or third tier suppliers that are local and early stage and thus allow them a scaffold to build more capacity.
6. Offer tax breaks for local angels who invest in local companies. Individuals who agree to be listed in a public database of angel investors, accessible to entrepreneurs, receive an additional tax break.
7. Create a government filtration system to de-risk early stage companies. This could include a young company public rating sheet done with government style rubrics. This might be crazy talk but what if those rubrics captured the level of actual work the entrepreneurs had put in, (e.g. their patents, their leg work, their test results, their market validation interviews) instead of trying to rate the value of the idea, which is highly subjective by all but the best experts and the potential customers.
8. Require state funded or entrepreneur services orgs/accelerators to connect entrepreneurs with a minimum of 5 sales/funding leads based on the request of the entrepreneur, or else be subject to reduction in funding.
9. Give tax breaks to regional corporate headquarters willing to incubate/fund startup initiatives, including joint ventures.
10. Since VC’s have significantly shrunk pre-seed and seed funding for early stage startups, offer incentives for funding early stage and diverse companies from the region.
11. Allow/encourage/incentivize existing philanthropies to invest in early stage for profit social entrepreneurship or entrepreneurship in distressed communities, as an extension of mission. For example, the Cleveland Foundation supported the pioneering Evergreen workers cooperative during its lean years. Now Evergreen is a successful set of interconnected businesses.
12. If funding entrepreneur support services organization, assess how much of the awarded funding is going to the organization’s operations and overhead (staff salaries) and how much is going directly into entrepreneurs’ businesses. There should be at least a 50/50 ratio. It’s not that funding entrepreneur services is inherently bad. But think of those services as large mature plants. Entrepreneurs are the tiny young seedlings growing in their shadow. Public monies are a watering can. If you want all to thrive, you have to take special efforts to make sure those tiny seedlings get water before it’s entirely sucked up by the roots of the established organizations.
13. For regional/state advisory boards/committees related to entrepreneurism and innovation growth or for regional entrepreneur services, current local entrepreneurs should have board seats and have the ability to advocate for their interests at open listening sessions.
14. Focus on entrepreneurs with types of products that are getting short shrift from other regions, whether that’s agricultural, medical, educational or something else. Ideally, your region should have some history of expertise in this area or has the will to put in the labor to attract expertise.
15. The Cleveland “Two Tomorrows” report referenced above emphasizes that what gets measured gets done. Measure your progress and hold the organizations you fund accountable for providing measurement.
16. In the same vein, what gets funded grows. You can’t water the side of the garden where you planted petunias and expect to grow sunflowers. Likewise, if you fund training and pitch competitions, you get more training and pitch competitions. If you fund enterprises (smartly), you will get more smart enterprises. The term “reap what you sow” is in effect here.
17. As alluded to above, there is a difference between outputs and outcomes. Outputs related to entrepreneur supports might be number of trainings attended. Low level outcomes might be increases in knowledge as a result of training. I’ve worked in government initiatives that measured these sorts of things. My personal belief is that you could throw them all out the window and not be worse for wear. The measure of entrepreneurial success is company growth. That is the outcome you need to measure.
18. Use multi stakeholder coordination to distribute the risk and consequences more evenly. This ensures the risk doesn’t fall solely on the shoulders of a single foundation, government employee, entrepreneur, or angel investor. It also increases the risk of people who work in entrepreneur ecosystems, so they share the pain of irresponsible investment, training etc. These strategies may make risk more palatable for multiple people within the system but it also forces more parts of the system to face consequences for failure and so it may force many people to learn…not just entrepreneurs.
19. Along those lines, the region or state could match every investor dollar given to early stage enterprises (series A and before) to increase investors (and entrepreneurs) chances of success.
20. Develop ecosystems around promising businesses. For example, a Kentucky based company called App Harvest received venture capital investment to erect hydroponic greenhouses with the hope of creating a major regional food hub. If that looks like a good bet, seed ancillary businesses in the region that will feed into the same supply chain (e.g. local hydroponic equipment producers).
21. Subsidize or incentivize high functioning accelerators/incubators to launch or relocate to your region. By high functioning, I mean they are putting skin in the game by investing into a portfolio or have a verified list of investors or sales prospects ready to share.
22. Lure funders to your region (or to set up regional offices) that specialize in specific sectors that you specialize in. Don’t know what your specialization is yet? I’ve read that struggling regions have been focusing on “eds and meds” — the anchor medical and educational institutions that were left when other industry departed. Develop those nascent pipelines so they have real teeth (getting deeper into the entrepreneur support pyramid).
23. This also might involve making angel investors and VC’s your customers. Is any kind of funder having a problem with quality deal flow? Experiencing problems with a particular stage of deal flow? Or particular sectors? You might work backwards to see where you can meet a need for investors and then make special efforts to support startups that meet those criteria.
24. Or find VC’s that share your values. Mara Zepeda and Jenn Brandel have begun to flesh out a model on this topic. For example, certain funders are the “don’t approach us without a warm intro” type. And certain funders like Kapor Capital have a more open- door inclusive policy.
Along with entrepreneur mythology, there is also an accelerator mythology, that it requires 99 percent magical genius charisma to be a successful (as an individual organization or as a region) accelerator. I don’t see it that way.
While in one of those big ecosystems, I approached the coordinator of one of the most prominent funder associations (in fact they only funder association) that provided fundraising training for entrepreneurs. I asked the coordinator if any interested investors actually showed up at these events. He said, (I’m paraphrasing) “no, the ones that did were retired and doing it as a favor to the organization.”
This means that one of the most prominent funder organizations in one of the most major start up cities was training entrepreneurs to pitch to nonexistent funders — whether by design or neglect. Could your region do better?
Drumming up investors and creating a high functioning pipeline might just be a matter of doing the work to find them. It’s just that most regional accelerators don’t see actively cultivating investors as their core business, when in reality it’s the primary role of a successful accelerator.
Okay, so if you’re in Indianapolis you might not be flush in newly minted tech billionaires but you have something to work with. As I shared, the hot ecosystems have real opportunity but also lots of smoke and mirrors. If you’re smoke and mirror free and are willing to put in the labor then you can grow something valuable.
And believe it or not, the government, often seen as stodgy, has played a vital and successful role de-risking early stage innovations, especially ones that required high levels of capital outlay like defense technology or healthcare. The role can be extended to other types of innovations.
If governments see themselves as investors, then they should seek the balance of protecting their own interests as a typical investor would and doing the philanthropic role that only government can. On the one hand, government actors should be cognizant of risking political capital. On the other hand, those risks may pave the way for advancement. Remember FDR ascended to the presidency largely because he was one of the few Governor’s to succeed at beating back the Great Depression in his own state. He was elected to a higher office to spread the success he created at the state level.
The Goldilocks Zone
Is there a region where the right things are converging to produce the next yet to be seen version of startup paradise? Where the soil and weather and garden tenders are just right?
Why should we care?
I personally care because I am an entrepreneur who works with other entrepreneurs. I love entrepreneurs. They embody the American dream. They represent every person who came here to carve out their own destiny carrying little but their own resourcefulness.
If you value that dream, then you must see that we have a problem in this country. As mythical unicorns ascended, the fates of the average entrepreneur grew bleaker. Notice again the pattern that we saw in Austin. Capital is concentrating amongst a few very and not trickling out, down, or sideways. This is not a matter of subjective sour grapes among frustrated entrepreneurs. The truth is right there in the data. U.S. entrepreneurship has been severely declining for 40 years. The company birthrate has nearly been cut in half over the last few decades.
This basically means as a society we are not doing a good job creating new businesses, who in turn create new jobs. This is about survival. As an analogy if, as a population, you aren’t birthing any babies you are in the process of going EXTINCT. What do we think is happening to the country when our company birthrate is in negative numbers?
The ability to start your own business has been the prime route to social and economic mobility. Yet with the decline of entrepreneurship, is it surprising that America’s social and economic mobility has taken a nosedive? Despite the massive concentration of startup capital in certain regions, it has done little to support or revive entrepreneurship or social mobility. Something else must be done.
I’m speaking to midwestern communities, along with all the other reasons I’ve mentioned, because I’m acting on a hypothesis about who is most likely to take responsibility for turning around entrepreneurship decline. The people who act tend to be those who are experiencing the pain of a problem. The Midwest has seen what happens firsthand, when you depend on a single industry or corporation that leaves and because business creation is so sluggish, there is nothing to fill the void. Midwest communities touch this void first hand. They may intuit that what should be in the emptiness is new business creation. However, it doesn’t have to be the Midwest which steps into the void, it could be any region with a vision and the ability to mobilize around it.
Steve Case (founder of AOL) created a fund to invest in non-coastal startups. He lays out seven elements he thinks are needed to create a regional startup hub. Almost every mid-size city has at least 4 out of the 7 elements Case describes.
However, I’ve been in cities that contained all seven elements but were still unable to coordinate them efficiently to achieve results.
Why can’t regions with all the raw materials coordinate efficiently — to beat back the decline of entrepreneurship?
One element may be the goldilocks phenomenon. If you are too small you don’t have enough resources. If you are too big it’s difficult to get your fingers around all the necessary pieces and get them to agree on a joint vision. Medium sized regions might have the right balance. There are some resources and there is the potential ability to touch all the spokes and mobilize them.
The missing elements from the Seven Spoke graphic are desire and a sense of responsibility, which flow through the spaces between the spokes, like water would flow in irrigation canals. Which ecosystem wants it more? Which will take on the responsibility of cultivation? Desire and effort are the best fertilizers for our entrepreneur farm.
