Mar 9, 2018 | Techcelerate Ventures |
The Global Startup Ecosystem Ranking 2015 *excluding China, South Korea and Japan * Foreword by Steve Blank The Startup Ecosystem Report Series Compass.co (formerly Startup Genome) with the support of Crunchbase August 2015 Version 1.2 with from by 2 Contents 3 Foreword Mene, mene, tekel, upharsin - The Writing is On the Wall 5 Startup Revolution Series 6 The Great Transition: Industrial to Information Revolution 8 The Decline of the Blue Chip 12 The Rise of the Startup 16 The Critical Role of the Startup Ecosystem 19 Introduction 22 The Global Startup Ecosystem Ranking 28 Top 20 Deep Dives 32 Silicon Valley 37 New York lected Findings 42 Los Angeles Se #lected Findings 47 Boston elected Findings 52 Tel Aviv Selected Findings 57 LondonK ey findings 62 Chicagoy fi ndings 67 Seattleey fi ndings 72 Berlinfindin gs 77 Singaporefin dings 82 Parisdings 87 Sao Paulondin gs 92 Moscowdings 97 Austinings 102 Bangalorending s 107 Sydney Share this report Copyright 2015 Startup Compass Inc. (compass.co), all rights reserved. You agree not to reproduce nor distribute the report, either by email, website download, or any other electronic or physical means without the prior written authorization of Compass. This material has been prepared for general informational purposes only and is not intended to be relied upon as professional advice. Please refer to your advisors for specific advice. 112 Torontoindings 117 Vancouverndings 122 Amsterdamngs 127 Montreal gs 132 Feature: Hong Kong 134 Feature: Kuala Lumpur 139 Feature: Ecosystem Canvas cted Findings 142 Methodology 143 Overview 143 1. Stakeholder Objectives 143 2. Data Sources 143 3. Definitions Used 143 4. Ranking Methodology 144 5. Changes from 2012 144 6. Index Details 145 7. Growth Index 146 Sources 147 Literature 148 Primary Data Sources 148 Secondary Data Sources 150 Acknowledgment And Partners 151 Authors 151 Project Team 151 Academic Contributors 151 Survey Participants and Interviewees 154 Startup Package Partners 155 Survey Promotion Collaborators About Compass Compass.co (formerly Startup Genome) We came together for one reason: To radically improve the success rate of businesses. With 34,000 signups, Compass is the leading solution for automated management reports and benchmarks for small and medium-sized online businesses. Compass is made for executives who seek visibility on how to improve their ROI without having to rely on analysts or consultants. Compass automatically prepares best- practice reports and benchmarks for your weekly and monthly business meetings. You get your first interactive report in less than 2 minutes after signing up. Simply connect the tools you use to manage your business and Compass will create your tailored report. Why we built Compass: In our research as part of the Startup Genome Project on the success and failure of young firms, we found that most businesses fail not because of competition, but rather due to self destruction. Or in other words, they fail because they execute on the wrong things. In our search for scalable solutions to this problem we learned that peer benchmarks and industry data were one of the most effective ways to help businesses focus on executing what matters most. 3 Mene, mene, tekel, upharsin - The Writing is On the Wall 50 years ago Alfred DuPont Chandler, a business historian at Harvard, wrote Strategy and Structure: Chapters in the History of the American Industrial Enterprise. The book chronicled the transformation of four American companies, DuPont, Standard Oil, General Motors, and Sears in the first decades of the 20th century. It charted how they grappled with a series of strategic changes; expanded markets, vast geographic distances, multiple customer segments, diversified product lines, and so on. These four companies were the first to realize that their existing centralized functional organizations organized into sales, marketing, engineering and manufacturing departments were inadequate to deal with these strategic shifts. 4 In response to the changing strategic needs, CEOs and their boards began to experiment with new corporate organizational structures. Eventually they shifted from functional organizations into organizations comprising vertically integrated divisions. The corporate central office provided planning and coordination, while each division contained all the necessary resources and functions and is individually responsible for profit and loss. Forty years later, the multi-division firm was the standard form of organization and management for complex industrial firms. Companies in the 21st century are dealing with strategic issues as large as those in the beginning of the 20th. The old rules for corporate growth and profit no longer apply. We see the symptoms of this everywhere, particularly in declining firm performance and declining Return On Assets (ROA). In fact, the average life of a company on the S&P 500 has declined to about 15 years from 65 since the 1920s. The problems companies were trying to solve in the early 20th century were how to manage an enterprise across vast geographic distances, how to build and manage multiple customer segments, and how to build brands to engage the newly emerging U.S. middle class. In the 21st century the problems are now inverted. The world is not only flat but it's instantaneous. Consumers are connected. Entrepreneurs are connected. The cost of entry for most new ventures has plummeted. The speed to reach new users is growing in record and accelerating time. Competition comes not only from companies in local, regional or national markets, innovation now comes from everywhere on earth. The Internet accessible to a wired planet means most markets are being re-imagined as part of a connected world. This relentless wave of disruptive innovation is marching through not only technology industries such as computers and communications, but is destroying industries thought of as forever stable and predictable: newspapers, entertainment, energy, healthcare, education, construction, transportation, retail commerce, finance, and even governments themselves. Most of the innovation and disruption are coming from new entrants young, fearless, and not afraid to take on the status quo. So now what? Existing corporate strategy and structures have proven unequal to adapt to this changing economy. Every existing company will have to deal with this common economic problem: how do you build an effective organization in a time of continuous disruption one where the old rules and structures no longer work. Companies will need to adapt a new strategy that embraces disruption, sustaining innovation, and execution. Crucially, they need to build new organizational structures that embrace those changes. The democratization of entrepreneurship from Silicon Valley and from startup ecosystems all over the world is creating new strategies and structures for that disruption and innovation. It is the strategy lessons from startups that will light the way for the massive restructuring of all corporate structures by the middle of this century. Only then will we look back and realize that we were just beginning the economic revolution of the wired world. Steve Blank Only then will we look back and realize that we were just beginning the economic revolution of the wired world STARTUP REVOLUTION SERIES Part 1 The Great Transition: Industrial to Information Revolution Part 2 The Decline of the Blue Chip Part 3 The Rise of the Startup Part 4 The Critical Role of the Startup Ecosystem 6 The Startup Revolution Series |1 The Great Transition: Industrial to Information Revolution Have we reached a critical tipping point in the transition between the Industrial Era and the Information Era? It is difficult to define a precise moment when major economic epochs swap places of relative dominance, but there is an increasing amount of evidence that points to a significant decline in businesses founded in the Industrial Era or which operate under Industrial Era principles. At the same time, one can hardly fail to notice the explosive rise of the Information Era. If we look at the performance of the types of companies that have been the lifeblood of the economy for several centuries, we see worrisome trends. The Shift Index1, by the Deloitte Center for the Edge, notes a 75% decline in Return on Asset (ROA) performance for U.S. companies over the past 45 years, despite increasing labor productivity over the same time frame. Meanwhile, the success of market leaders appears to be increasingly short lived, with the length of time a company remains on S&P 500 declining by almost 80%. Over the last 15 years, a significant portion of job and economic growth in the U.S. has come from high-growth technology companies such as Apple, Amazon, Google, Salesforce, VMware, Facebook, Twitter, Groupon, and Zynga. And while Apple was officially incorporated in 1977, it was only when Steve Jobs returned to helm in 1997 that the company reinvented itself using the process of what one might call disruptive technology intrapreneurship, which later led to the development of the iPhone, iPad, and their corresponding suite of app ecosystems. These new product innovations transformed Apple from a struggling organization to the company with the largest public market cap on the planetquadrupling its value in just the past five years alone. 1 Hagel, J., Brown, J.S. & Davidson, L. (2009) Consider this: The entire U.S. GDP is $15 trillion. Collectively, these nine big-hitters of the tech world that barely existed a decade and a half ago have created almost a trillion dollars in new wealth. Will the trend of multi-billion dollar tech startups that have a disproportionate effect on the needle of the global economy continue? As we will discuss in the following set of essays, many signs point to a definitive yes. The virtual explosion of startups below the radar is so substantial, The Economist recently likened it to the Cambrian moment of species evolution2. Humanity doesn't see transitions between major economic eras very often, but when they come, every aspect of society gets reinvented: government, business, finance, education, medicine, energy, technology, art, and science all get upgraded. In fact, most historians would argue there have only been three such transitions before in human history: 1. Foraging to horticulture 2. Horticulture to agriculture 3. Agriculture to industrialization. The Industrial Revolution was the last great full spectrum societal transformation, and the Scientific Enlightenment that ensued gave rise to modernity. With two billion broadband Internet users and billions of smartphones now entering circulation, the necessary tools and infrastructure are in place for the Information Age to burst into full bloom, moving beyond the confines of just the technology world to transform all aspects of society. Therefore, the role of technology entrepreneurship in our global economy is now more important than ever. Increasingly, it is becoming clear that technology entrepreneurship will be the primary growth engine of this new economic era. Having gone through a fairly severe dot com boom and bust cycle only fifteen years ago, it is understandable that many people imagine a similar fate for the current tech boom. Yet while it is human nature to expect the future to look like a 2 Siegele, L. (2014) 7 linear progression of the past, that thinking does not produce good predictions when the pace of change is accelerating, and is especially inaccurate in the midst of epochal transitions. So rather than seeing the recent boom as a sign of a coming bust, we see it as a harbinger of long-term exponential wealth creation over the comings decades. Yet making the case that exponential wealth creation is on the horizon should not produce unbridled optimism. The development from one era to the next requires dangerous periods of transition, where a society can either slide into turmoil or rise to the occasion, using foresight to summon fortitude and grace. We will have to be thoughtful but bold about how we shed our industrial skinand the institutions, business, jobs, culture, and traditions that have come with it. Undeniably, this kind of change is not an easy thing. Adaption requires the release of much of what was previously familiar, comfortable, and secure. But if we can adopt new skills, beliefs, and values appropriate for the new Information Era, we can reap the prosperous potential the Information Era would like to sow. The Industrial Revolution brought wealth and prosperity unseen before in the likes of human history. In 1750, the total wealth of the world sat at an estimated $126 billion dollars. Today the world's wealth is calculated at over $70 trillion. But the hard truth is that the Industrial Era strategies, mindsets, and behaviors that got us here will no longer take us much further. To successfully make the transition to the Information Era, much of the socioeconomic fabric of society needs to be reinvented. If we do not adapt and release much of our now expiring industrial era mindsets and practices, then the dark days of the 2008 economic recession may return. To avoid this fate, we must let go of the past and engage with the future to ensure that the greatest era in human history is closely in front of us. This Startup Ecosystem Report will explore why we believe technology startups are the primary growth engine of the Information Era and how nurturing startup ecosystems can keep the world on a path to greater prosperity. Together we can lay the groundwork for a successful transition into the new socioeconomic era of the Information Age. Let's dig in. 8 The Startup Revolution Series |2 The Decline of the Blue Chip Humanity may be approachingor have already passedthe tipping point between the Industrial Era and the Information Era. Now we will dive deeper into why much of the old business and economic wisdom no longer seems to apply with blue chip companies becoming far from the reliable investments they used to be. Let's start with the good news. Since 1965, labor productivity has more than doubled. Economists define the inputs to this calculation as number of hours worked and the outputs as industry growth. In some industries, such as technology and telecommunications, labor productivity has grown by more than 800%. Productivity is usually considered a key performance indicator for economic growth, so with all the productivity gains companies should be growing faster than ever, right?1 Exhibit: Labor Productivity (1965-2010) Source: Compustat, Deloitte analysis 1 Hagel, J., Brown, J.S. & Davidson, L. (2009) Not so fast. During the same time period, companies experienced a 75% decline in Return on Assets (ROA) and a decline of almost 80% in the length of time an S&P 500 company could expect to remain on that list. Better productivity, worse results. What is going on behind the scenes to lead to such diverging indicators? For answers, we turn to the monumental Shift Index, released in 2009, by John Hagel, John Seely Brown, and Lang Davidson of the Deloitte Center for the Edge, which documents the long-term decline of business profitability. While the report focused solely on American companies due to the availability of data, it would be a mistake to assume their conclusions are purely U.S.-based. Rather, we believe their findings are generalizable to Industrial Era industries all around the world.2 They found two clear trends that cannot be ignored: declining company performance and an increasing topple rate from positions of market dominance. First let's look at "the what," then we'll explore "the why". Declining company performance While there are a number of ways to measure growth metrics (such as return on invested capital), the Shift Index authors focused on Return on Assets, or ROA, as it measures how much a company is able to do with what is hasin other words, how much profit it can make by turning its inputs into outputs. 2 Hagel, J., Brown, J.S. & Davidson, L. (2009) 9 When they reviewed data for the past 45 years, the authors and the community at large were equally surprised to find a drop of 75%. And while recessions in 2001 and 2008 clearly added to poor performance, the graphed results show a long-term trend that is as challenging to explain away as the result of anomalies.3 At the same time, anyone who has spent much time with statistics knows that averages can provide useful high-level perspective, but can also skew conclusions if a small number of data points vary widely from the rest. So to gain a sharper perspective, the authors separated the companies into performance quartiles. The results from The Shift Index, showed that "the ROA Performance Gap between winners and losers has increased over time, with the winners barely maintaining previous performance levels, and losers experiencing rapid deterioration in performance."4 In other words, not only were poor performers dropping rapidly, even the best companies were only stagnating. 3 Hagel, J., Brown, J.S. & Davidson, L. (2009) 4 ibidem The authors surmised, "after questioning and re-questioning our data and our assumptions, we came back to the same conclusions. The downward trend in company performance is accurate, the assumptions are reasonable, and further analysis confirms these persistent trends." Increasing Topple Rate In addition to the declining performance of the blue chip category, it also appears the success of market leaders is increasingly short-lived. In the following graph, topple rate is defined as the propensity of market leaders on the S&P 500 list to "topple" from their leading rank, and thus fall off the list. The authors describe the meaning of this dynamic as such: "Back in the 1930's, a company coming on the S&P 500 list could expect to remain there for 65 years. In recent years, the average life-time of a company on the S&P 500 has declined to about 15 years, a decline of almost 80%."5 So those at the top aren't staying there long. What about those at the bottom of the market? "The churn for the lowest decile (0-10th percentile) has been declining, implying that fewer firms are performing poorly enough to sink to the bottom, but those that do are experiencing long, drawn-out declines."6 Another way of interpreting this information might be that now that the ground Industrial Era economic conditions have shifted, businesses that were adapted to those conditions do not know how to adapt to the new conditions of the Information Era, and thus await a languishing future to be followed soon by death. 5 ibidem 6 Hagel, J., Brown, J.S. & Davidson, L. (2009) Exhibit: Economy-wide Asset Profitability (1965-2008) Source: Compustat, Deloitte analysis Exhibit: Economy-wide Asset Profitability quartile (1965-2008) Source: Compustat, Deloitte analysis Exhibit: Economy-wide Firm Topple Rate (1965-2008) Source: Thomas C.Powell and Reinhart, "Rank friction: an ordinal approach to persistent profitability." Compustat, Deloitte analysis 10 Why Is Performance Declining? Now that we understand more about the decline that is taking place, the most important question to answer is why. It would seem paradoxicalincreasing productivity coinciding with declining results, but there is an answer. In a word, it's pressure. During the Industrial Era, companies were somewhat insulated by low levels of competition, information obscurity, and growing consumption. But the Information Age has made those barriers more obsolete than castle walls after the introduction of gunpowder. Let's look at these three new competitive pressures they must face in more detail. Factor 1: Greater competition Competitive intensity has more than doubled during the last 40 yearsas measured by market concentrationdue to falling barriers to entry and economic liberalization. Falling barriers to entry: It used to be far more difficult to start a company. Product production was very capital intensive and slow, customers were hard to find and also expensive to reach. Today's technology means a business can be started inexpensively and quickly with cloud-based services, freelance talent, and plug and play technologies. This equates to more entrants, and consequently, a dramatic increase in competitive intensity. Economic liberalization: We live in an increasingly globalized world, where global communication and shipping is exponentially easier than it at any other time in human history. In many instances, once a business is up and running, global markets can be reached overnight. Companies no longer compete solely in their domestic geography, but against firms from all over the world. Factor 2: Information transparency The world has changed so completely it can be hard to recall the "quaint" days when most of what we knew about a product was from a TV commercial or what the local salesman had to tell us. These were the glory days of branding, when a company could define its own image, irrespective of critical review, and then communicate that identity with clever marketing as long as they had the money to spend on ads. But this advantage of large companies has disappeared in the wake of information transparency. Consumers can find the best price for a flight on Kayak and the most inexpensive product on Google. Increasingly, pricing information is available real-time at the point of purchase, lowering prices and squeezing profit margins. They can also find the highest rated service providers on Yelp and best rated products on Amazon based on the crowdsourced intelligence of hundreds or thousands of fellow consumers. This same transparency applies to B2B offerings as well, with price and quality comparison tools available for almost every industry. If there is a niche left where transparency doesn't exist, you can be sure someone is working on a solution to fill the gap. Branding is far from useless today, but it is no longer the golden goose it once was. The Shift Index found 47% of people strongly agree there isn't much cost associated with switching brands. A simple way of summing up the effect of information transparency might be, that in the Industrial Era, sales & marketing were arguably the most important functions of a successful organization. Yet in the Information Era, design & engineering reign supreme as the superior product is now far more likely to win. Factor 3: Declining consumption After a long period of post-war consumption increase, people are buying fewer new goods than ever before. Not only did the 2008 economic downturn thin the pocketbooks of the middle class, consumers are now more fully embracing engaging experiences and lasting relationships as reliable sources of fulfillment, decreasing the demand of shiny new goods that promised happiness but consistently failed to deliver. Consumers are also increasingly selling or renting their fixed assets when they aren't being used. Craigslist and eBay created a thriving used-goods marketplace, ZipCar showed the world that owning a car wasn't always necessary, and AirBnB built an entire industry out of previously unused guest bedrooms. These trends are supported not just by frugality, but an increasingly environmentally conscious population that wants to minimize their impact by reusing what has already been produced. Exhibit: Churn Rate in 90th-100th Decile (1967-2006) Source: Compustat, Deloitte analysis 11 More dollars in the sharing or renting economy means fewer dollars in the traditional producer-consumer marketplace, and many of the companies thriving today are facilitators of existing physical assets rather than producers of new ones. How can blue chips respond? There are generally two main levers to increasing profitability either increase revenue or decrease costs. Many business schools have trained executives in the science of cost cutting efficiency. Think just-in-time manufacturing, workforce reduction, and economies of scale. This worked very well as a profitability lever for decades, until the point where efficiency reached a critical point of diminishing returns, competition still continued to increase. Essentially, you can't cost-cut your way to profitability ad infinitum, at some point your cost cutting efforts begin degrading the essential qualities of the organization itself. What about the other lever of profitability, increased revenue? The traditional Industrial Era approach is more and better marketing. Focus on marketing can create a spike in revenue if this area is unoptimized or when new Information Era tools like segmentation and analytics suites are developed that allow further optimization. Marketing is powerful, but it isn't the silver bullet either. Marketing approaches can quickly reach a point of diminishing returns, just like the strategy of pursuing cost cutting efficiencies. If the traditional Industrial Era approach to decreasing costs and the traditional approach to increasing revenue have both reached a point of diminishing returns, what then is the solution? The answer is disruptive innovation; achieved through the creation of new Information Era products and services. Yet, while this solution provides plenty of hope for the global economy, it provides plenty of gloom for Blue Chip Industrial Era incumbents. Information Era disruptive innovation requires completely new ways of working, new culture, new tools, new economics, new everything. Who is figuring out how to adapt and succeed in this brave new world better than anyone else? Technology startups. 12 The Startup Revolution Series |3 The Rise of the Startup This is the third essay in the "Startup Revolution Series." In the first part, we suggested humanity may be approachingor have already passedthe tipping point between the Industrial and Information Eras. In the second, we provided data that demonstrates fairly conclusively that over the last 50 years, Industrial Era focused blue chip companies have lost significant value and much of their potential for renewed growth. So what is rising in their place? This post will focus on the Information Era businesses that are best adapted to this new Darwinian business environment: Startups. The Startup Explosion So many startups have burst on the global scene that The Economist likened the entrepreneurial explosion to the Cambrian Explosion in earth's biological history. High-growth technology companies have penetrated nearly every area of society, and for every declining or transforming Industrial Era company, one can usually find an emergent Information Era replacementor a suite of them. As Marc Andreessen famously put it: "Software is eating the world."1 The following is a list of some very successful Information Era companies that have succeeded by upgrading Industrial Era products and processes for the Information Era. Kodak Instagram (Photography) Borders Books Amazon (Books) Tower Records Apple, Spotify (Music) Hotel Chains Airbnb (Travel) 1 Andreessen, M. (2011) Taxis Uber/Lyft (Transportation) Resumes & Recruiters LinkedIn (Human Resources) Newspapers Social media (Information Consumption) Retail stores eCommerce (Shopping) How big is this trend? Quantifying change while it is occurring can be a fool's errand, but varied indicators suggest that a hockey stick best describes startup category growth. The graph below demonstrates the growth of Innovation Industries in comparison to traditional industries in Silicon Valley. Exhibit: Innovation Industries and Overall Economy Silicon Valley (2003-2013) Source: Moody's Analytics Analysis: Collaborative Economics 13 Why startups are exploding To what extent is talk of a revolution too much inflated hype? Will this bubble burst like the last one? While no one can fully predict the future, we can confidently echo The Economist in saying that "Today's entrepreneurial boom is based on more solid foundations than the 1990s Internet bubble, which makes it more likely to continue for the foreseeable future." What is happening behind the scenes to foster this kind of "sudden" explosion? The answer is many factors have been building to this moment for some time. Steve Blank, an entrepreneur, thought leader, and faculty member at Stanford and Berkeley proposed four key reasons for the startup explosion. 1. Startups can now be built for thousands, rather than millions of dollars The cost of product development has fallen by a factor of 10 over the past decade. Code is available in free snippets, integrations are easy thanks to application programming interfaces (APIs), development comes cheap with temporary freelancers wielding plug & play tools, and once costly servers have given way to pay- as-you-go services. 2. A higher resolution venture finance industry When a VC is required to spend millions of dollars on an investment, they must make a small number of big bets. But the decrease in capital needed to start a software company has opened up the VC space to new types of investors: angels, accelerators, and micro-VCs. The checks they write are smaller, generally in the $10,000 to $500,000 range, which means they can make a whole lot of small bets and give birth to a larger number of startups. Since many can be started on such a shoestring, they don't even look for outside funding until later stages of developmentan idea that was all but impossible a decade ago. 3. Entrepreneurship developing its own management science In 1602, the Dutch East India Trading company formed the world's first multinational corporation. Around three hundred years later Frederick Taylor, Henry Ford, and Alfred Sloan invented the foundations of modern Management Science and disseminated this knowledge in Business schools and MBA programs throughout the world. The first wave of Information Era venture backed software companies began in the 1970's. For the first few decades many entrepreneurs and investors in the startup community misapplied the formalized lessons they had learned in business school to the startups they were running. Over time, many entrepreneurs began to recognize they were playing a different game where the old rules did not apply in this new context. Forty years after the inception of the modern startup era, Steve Blank with The Four Steps to the Epiphany and Eric Ries The Lean Startup laid the foundation for a Management Science for Entrepreneurship which has come to be known as the Lean Startup Movement. The Lean Startup philosophy formally recognized that startups were not shrunken down versions of large corporations (what Eric Ries' has called the Startup Dollhouse fallacy), where Industrial Era management fundamentalsfrom hierarchical organizational structures to rigid long-range planssimply did not work well for the rapidly evolving and uncertain markets and landscapes of the Information Era. As the practices and principles of the Lean Startup have continued to evolve and spread into mainstream consciousness entrepreneurs have become significantly better at creating startups. Entrepreneurs who have internalized the Lean Startup understand that incorrect assumptions are no longer disasters, they are opportunities to pivot. Unfinished products aren't hidden behind closed doors, they're called public betas. Development doesn't proceed from a binder full of requirements, but from a flexible list of incremental improvements that are re-prioritized every two weeks based on customer feedback. Compass has been laboring in this same vein, analyzing data to help determine what structures, processes, and people are most conducive to a startup's success. The Startup Genome Report provided the first hard data behind the factors that increased the likelihood of startup successfrom the critical role of mentors to the make-up of a founding team. Why Startups Fail and Premature Scaling looked at the other side, demonstrating that attempts to scale a business before product/market fit is Exhibit: Progression of Early Stage Investment Silicone Valley Based Startups - For companies that Lauched 2006, 2009 and 2012 Source: CB Insights Analysis: Collaborative Economics 14 conclusively achieved is the strongest predictor of failure. And the 2012 Startup Ecosystem Report was the world's first map of the global expansion of high-growth technology businesses, viewed by an estimated 10 million people and referenced by the Obama administration, Chancellor Merkel, and countless other global leaders. 4. Speed of consumer adoption of new technology As The Economist feature noted, "The Internet is now fast, universal, and wireless." Not unlike what Gutenberg's printing press gave nascent publishers, this technology provides a mechanism for startups, to inexpensively distribute new products and services around the world almost instantaneously. From day one, a startup can now be what Steve Blank refers to as a "micro-multinational." Large companies used to adopt technology from startups very slowly. The old business adage, "no one got fired for choosing IBM or McKinsey" governed their decision making process. In just the last 5-10 years and increasingly so with each passing year, corporate decision makers are more willing than ever to try out new cheaper, faster, more elegant solutions from emerging startups. The ease of global access to users and customers all around world and the increasing speed of technological adoption by consumers and businesses has enabled startups to grow at a significantly faster rate. What Startups Mean To Economic and Job Growth While the most successful tech startups in the last two decades like Google, Facebook and Amazon now loom large in the global economy, it is highly likely that the powerhouses that will drive the global economy in 2025 are companies you've never heard of today. Many don't even exist yet. They will be launched from Silicon Valley, certainly, but increasingly from unexpected places like Bangalore, So Paulo, Singapore, and the many startup ecosystems around the globe that are increasingly in frenzied competition for the magic combination of investment dollars, founders, talent, and culture that leads to a thriving startup ecosystem. With trillions of dollars of GDP at stake, it's no wonder governments are paying rapt attention. But beyond wealth, startups also bring jobs. Lots of jobs. In fact, they're the only ones who bring new net job growth. The highly influential Kauffman study demonstrated that over the past 28 years, startups were responsible for all net new job creation in the U.S. On average over that period, Industrial Era companies shed more jobs than they created, while startups added to the total. Moreover, this stunning finding held up even when looking at individual years. In 21 out of 28 years (75%), startups were the only net job creators.2 Together, these circumstances make for a very simple equation: In the coming decades, the ecosystems with the most thriving startups will enjoy the most thriving economies. What Startups Mean To Power Structures In the first post we mentioned that while humanity doesn't see transitions between eras very often, when they come, every aspect of society gets reinvented: government, business, finance, education, health, energy, technology, art, and science. As the Information Era bursts into full bloom, we are seeing its dramatic impact quite notably in new values related to politics and power. 2 Kane, T. (2010) A recent Harvard Business Review article studied the cultural shifts taking place in real-time. Where "old power" is held by a few and jealously guarded, "new power" is participatory and held by many.3 Increasingly, new power structures and values are pressuring, replacing, or transforming older power structures that were reliant merely on consumption. New power structures cater to the new ideals of an Information Era society: People expect to share, shape, fund, produce, and co-own companies, products, ideas, governments, and even art. They feel an inalienable right to participate and value informal decision-making, collaboration, do-it-yourself ideals, transparency, and informal affiliation over long-term allegiance. While the authors of The Harvard Business Review article argue that some old power structures are necessary for forward momentum (as evidenced by the failure of both Occupy Wall Street and the Tea Party to effect lasting change), there is little doubt that the Information Era values are thoroughly transforming 3 Heimans, J., & Timms, H. (2014) Exhibit: The Participation Scale Source: Jeremy Heimans and Henry Timms www.hbr.org 15 expectations of Industrial Era power structures. To be successful moving forward, both structures must learn from each other. What Startups Mean To Society Innovation is never clean. It is never linear. Our way forward in the Information Era will invariably have many fits and starts. It will take false turns. We're still waiting for the personal jet packs promised by earlier visionaries. But nor can we hold back the tides of change. We must reinvent ourselves with care but also with courage. We must objectively study the data, rationally evaluate its implications and boldly incorporate its implicit recommendations in order to ensure and maximize our society's future prosperity. We must be prepared to continuously evolve, to push through boom and bust cycles with an eye towards the longer horizon and understand that what drives growth today will be different from what drives growth tomorrow. The innovation history of Silicon Valley is a valuable model to consider. From the perspective of today, tomorrow may appear murky, but there is one thing we can see with the clarity of a crystal ball. Our future will be constructed from the building blocks of the Information Era. As we speak, entrepreneurs are crafting our path forward on laptops around the world. Welcome to the rise of the startup. Exhibit: A World of Difference Source: Jeremy Heimans and Henry Timms www.hbr.org Exhibit: Evolution of Silicon Valley Source: Employment Development Department, Labor Market Information Division Analytics: Collaborative Economics 16 The Startup Revolution|4 The Critical Role of the Startup Ecosystem So if our entire global economic future rests on our ability to support the growth of startups, how do we help them thrive? By supporting the evolution and development of the ecosystems in which they are born. Wait... what? Aren't Internet businesses inherently global? Haven't tools like Skype and Slack made location meaningless? If successful traditional businesses get started every day around the world, why do startups need the special support of a local ecosystem? If you're an experienced entrepreneur, the challenges described below may seem all too familiar. For the rest of the world who is still trying to understand the complex and unique drivers that either support or suppress startup growth, we hope this provides some additional perspective on the importance of startup ecosystems. The Difference Between Startups and Small Businesses High growth technology startups are very different from other businesses. If you begin a traditional small business, your odds of succeeding for the first two years are pretty goodaround 75%. On the other hand, if you found a startup, even if your idea, team, product, and plan are good enough to gain VC backing, you have a 75% chance of failing.1 That said, you'll never find a local auto-body shop that reaches a Fortune 500 market cap or hires 10,000 employees, but there are hundreds of startups quickly pushing into those upper echelons of growth. This is such a critical point that it bears repeating 1 Blank, S. (2013) startups rarely succeed, but when they do, they can succeed brilliantly. Different Financing Needs Banks make loans to traditional small businesses. If you want to start a dry cleaners, you can make a good business case to a bank for why their loan to you is a solid investment. The bank can compare your projections to millions of other dry cleaners and plug it all into the time-worn risk/reward ratio for making loans. For a well-run bank, this is like being the house at a casino. You may win some and you may lose some, but at the end of the day, the odds are clear and in your favor, so you will win a lot more than you lose. Venture Capital firms invest in late-stage, proven startups. If your startup has achieved profitability and can show a hockey-stick growth chart, you'll have to hire a team of bouncers to keep away VC firms from all over the planet looking to fund the next stage of growth in exchange for a piece of your company. VC firms are, by and large, structured to make multi-million dollar investments in a small number of late-stage startups that they can shepherd from strong to stratospheric results. If you want to start a startup company from ground zero, you may fail before you can even agree on a catchy name. Plus, from the point of view of any standard bank your business model is so new there's almost nothing to compare it to, which makes you a completely unacceptable risk. From the perspective of a VC firm, you're also too new to be worth the time of day. So who fills the gap for early-stage startups? 17 The A team: Angels and Accelerators. The angel investor spreads their investment over a large number of early-stage startups and takes a larger percentage of equity in return. The vast majority of their investments fail, just as one might lose many hands of poker. But the hope is that eventually that royal flush will come up and they'll find themselves owning a huge chunk of the next ZenDesk or Salesforce. The business model of accelerator programs centers around "hacking" the early stage funding environment by preparing companies for their first investment, usually within three months of the end of their program. They invest at market terms, provide access to mentors and training on a broad set of startup-related subjects. In exchange they take 5-10% equity in the company. How do angels and accelerators decide how to invest their resources when a startup entrepreneur has neither a traditional business plan nor multiple years of strong start-up results to show? Is it that killer idea that grabs their imagination? The "great idea" is perhaps one of the most mythical and misunderstood elements to the entire startup process. Ask anyone in Silicon Valley these days and they will tell you there are no more new ideas. The secretive culture of the late '90s that operated on 10-page non-disclosure agreements and NSA-like hierarchies of classified knowledge, has given way to a culture that understands execution trumps ideas. Today, walk into any coffee shop south of Market Street in San Francisco, you will hear a dozen fully transparent pitches, challenges, value propositions, target customers and funding needs. It's not that ideas don't matter, it's that Silicon Valley has learned that the hard work that differentiates winners from losers comes not in dreaming things up but in getting them done. If the A Team doesn't invest primarily in plans, results or ideas, what does that leave for companies that don't yet have traction? People. For all the modern tools the Information Era has produced, early- stage startup capital investment still relies on an old fashioned network of trust. Video-conferencing may allow people to communicate from afar, but the "growth hack" for building human trust has still yet to be discovered. The vast majority of early stage investment dollars are found through the networks of trusted human relationships. Where can founders and early-stage investors find each other? In a thriving local startup ecosystem. Different Talent Needs of Startups & Large Corporations Rare Personalities Working for a large company requires having the appropriate experience to match a job description. Day in and day out there are written goals, established processes, and predictable routines to help facilitate output. This type of work is analogous to traveling in a first world country where the trains run on time and the hotel can be booked in advance with your credit card. Working for an early-stage startup requires figuring out what your job should be every day, how to accomplish things that have never been done before and when you should throw out everything that's already been done and start over. This type of work is analogous to traveling in a third world country where the ferry is suddenly delayed at least two weeks and you don't even know if the next town will have a hotel. Myers-Briggs typology? Keirsey temperament sorter? Pick your personality classification system and it will tell you that it is a rare sort of person indeed who has just the right combination of vision and execution, risk- taking profile, and fear of failure motivation, leadership qualities, and listening skills to be successful on a small startup team. Rare Talent Many people can read, write, and solve math problems. Very few people can design a user experience to make a completely new process feel intuitive, or decide the right way to parse and visualize data to generate useful insights, or write a string of C# code that solves an unprecedented problem in a scalable way. To gain a sense of just how rare some of these necessary talents are, consider the Silicon Valley Competitiveness and Innovation Project 2015 report that demonstrated a stunning 70% of Silicon Valley software developers are foreign born. This finding is even more astounding considering an immigration environment that requires considerable work and investment by companies to get and keep visas for non-U.S. employees. Single Geography In-person conversations lead to innovation, especially for early- stage startups where the strategy is likely to change three times between 9am and 5pm, and the best work is often done by a core team after midnight over late-night pizza delivery. Success requires moving fast and pivoting even faster, in a race to find product/market fit before the money runs out. Often there is precious little time to send thoughtful updates to far-flung employees or account for multiple time zones. Look at the office layout of early-stage startups and often you won't even find desks separated. Instead, the whole team sits around one large table so they can all hear every conversation and informally stay on the samefast movingpage. 18 Where can an entrepreneur find the doubly rare combination of personality and talent necessary to build a successful start-up team? In a thriving local startup ecosystem. Different Inputs If you start a pool cleaning service, odds are you don't need several months worth of research to tell you what customers need. But for startups, the strategy changes and pivots happen when entrepreneurs get surprising feedback from customers that invalidate some of their core assumptions. This means founders need ready access to potential customers to shape their product as much as they need access to the talent to build it. They need to sit down with these customers, ask questions, watch their processes, uncover their needs. They need structured usability sessions as well as tons of informal conversations about a particular space or pain point. Whether the target is a teenager for a mobile game or a CFO for an ERP system, easy access to a wide variety of potential customers is a requirement. The same holds true for inputs from mentors. In a fast-paced world, no small early-stage startup team can be expected to know everything about growth strategies, financing, taxes, hiring laws, new technologies, marketing, and how to set appropriate expectations internally and externally. Enter the mentor to provide crucial perspective, advice, context, contacts, and inspiration to the founding team. This role is so critical, a Compass.co study, The Startup Genome Report, found that entrepreneurs with mentors had three and a half times more growth and raised seven times more money than those without. Again, for all the technology being glamorized behind startup success, the truth is that human relationships are the lead actors of this movie and new technology is merely playing a supporting role. Where can an entrepreneur find the right concentration of many different types of customers and engaged mentorswhere the culture runs so deep that even the local gym offers free services in exchange for equity in your startup? In a thriving local startup ecosystem. (And yes, this is a Silicon Valley reality.) Ecosystem Winners and Losers All of these factors have led certain geographic locations to have dramatically higher concentrations of startups for decades. While it hasn't yet been proven if a thriving ecosystem improves the success rates of each startup individually, it does act as a giant factory, produc
Foreword by Steve Blank The Startup Ecosystem Report Series Compass.co (formerly Startup Genome) with the support of Crunchbase
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