Startup Cities

1. The Startup Common: A Vital Ecosystem for Entrepreneurial Success

Think of these locations as Startup Commons. To understand this notion, go back to old England where farmers brought their animals to graze in a field at the center of their village.

The Startup Common concept draws a parallel between ancient village commons and modern startup ecosystems. Just as farmers shared resources and contributed to the common good, today's startup ecosystems thrive on shared knowledge, resources, and networks.

Key elements of a Startup Common include:

• Pillar companies
• Universities
• Human capital
• Investment capital
• Mentor networks
• Startup-friendly values

A successful Startup Common creates a virtuous cycle where success breeds more success, attracting talent and capital while fostering innovation. This ecosystem approach emphasizes the interconnectedness of various stakeholders and the importance of collaboration in building a thriving startup scene.

2. Location Matters: Why Some Cities Dominate the Global Startup Scene

Location matters to startups because the people who provide them with the resources they need to grow—revenues, talent, capital, advice—are more than producers of code or PowerPoint decks.

Geographic concentration of resources plays a crucial role in startup success. Certain cities, like Silicon Valley, have become dominant startup hubs due to their unique combination of factors:

• Access to top talent from world-class universities
• Presence of successful pillar companies
• Availability of venture capital and angel investors
• Strong mentor networks and support systems
• A culture that embraces risk-taking and innovation

The proximity of these resources creates a network effect, making it easier for startups to access the talent, capital, and expertise they need to grow. This clustering effect also fosters serendipitous encounters and knowledge spillovers, further enhancing the ecosystem's productivity.

3. Pillar Companies: The Backbone of Thriving Startup Ecosystems

Pillar companies are local, publicly-traded firms that provide startups with talent and capital by using their products and sometimes by acquiring the startups once they've grown to their full potential as independent firms.

Pillar companies serve as anchors for startup ecosystems, providing multiple benefits:

• Talent pool: They attract and develop skilled professionals who may later join or found startups
• Capital: Successful exits create wealth that can be reinvested in new ventures
• Mentorship: Experienced executives offer guidance to new entrepreneurs
• Customers: They can become early adopters of startup products and services
• Acquisitions: They may acquire promising startups, providing lucrative exits

The Pillar Company Staircase framework illustrates the progression of startup ecosystems:

1. No Pillars, No Gazelles
2. No Pillars, Some Gazelles
3. No Pillars, Acquired Gazelles
4. Some Pillars in Niche Markets
5. Many Pillars in Huge Markets

As regions move up this staircase, their startup ecosystems become more robust and self-sustaining.

4. Universities as Catalysts for Innovation and Entrepreneurship

Universities do the following: Attract professors and researchers: University professors and researchers develop ideas and technologies with the potential to solve significant societal and economic problems.

Universities play a multifaceted role in startup ecosystems:

• Talent development: Educating future entrepreneurs and skilled workers
• Research and innovation: Generating new ideas and technologies
• Technology transfer: Licensing intellectual property to startups and established companies
• Incubation: Providing resources and support for student-led ventures
• Cultural influence: Shaping attitudes towards entrepreneurship

Key factors that determine a university's impact on the startup scene include:

• Strength of research programs in high-potential fields
• Effectiveness of technology transfer offices
• Entrepreneurship education and support programs
• Partnerships with industry and investors
• Cultural attitudes towards commercialization of research

Universities like Stanford and MIT have been particularly successful in fostering entrepreneurship, creating billions of dollars in economic value through their alumni-founded companies.

5. Human Capital: The Lifeblood of Startup Success

Different startups need different skills as they grow.

Talent is the most critical resource for startup success. The availability and quality of human capital in a region can make or break its startup ecosystem. Key aspects include:

• Skill diversity: Startups need a range of skills, from technical expertise to business acumen
• Entrepreneurial experience: Serial entrepreneurs bring valuable know-how to new ventures
• Scaling ability: The capacity to grow a company from idea to large enterprise is rare and valuable
• Cultural fit: Startups seek people who align with their values and work culture

Regions must consider:

• Attracting and retaining top talent
• Developing local talent through education and training
• Creating an environment that fosters skill development and knowledge sharing
• Balancing the needs of startups with those of established companies

The most successful startup hubs have a deep pool of talent with diverse skills and experiences, creating a self-reinforcing cycle of innovation and growth.

6. Investment Capital: Fueling Growth and Innovation

Startups need different kinds of capital at different stages of their development.

Access to appropriate funding is crucial for startup growth and success. The investment landscape includes:

• Bootstrapping and founder financing
• Friends and family investments
• Angel investors
• Venture capital
• Growth equity
• Public markets

Regions at different stages of the Pillar Company Staircase have varying access to capital:

• Level 0-1: Limited local capital, reliance on government grants or outside investors
• Level 2-3: Growing local investor base, some venture capital presence
• Level 4: Abundant capital across all stages, strong local and international investor networks

Successful startup ecosystems develop a robust capital stack that can support companies from inception to maturity. They also foster a culture of reinvestment, where successful entrepreneurs become investors in the next generation of startups.

7. Mentor Networks: Guiding the Next Generation of Entrepreneurs

Mentors can help founders to make better strategic choices.

Experienced mentors provide invaluable guidance to startup founders, helping them navigate challenges and avoid common pitfalls. Effective mentor networks offer:

• Strategic advice on business models and growth strategies
• Operational expertise in areas like sales, marketing, and product development
• Access to industry connections and potential customers
• Emotional support and encouragement during difficult times

Key elements of successful mentor networks:

• Diversity of expertise and backgrounds
• Formal and informal mentoring opportunities
• Culture of giving back among successful entrepreneurs
• Strong connections between mentors and local startup support organizations

Regions with robust mentor networks can accelerate the growth of their startup ecosystems by efficiently transferring knowledge and experience to new entrepreneurs.

8. Startup-Friendly Values: Shaping Cultural Attitudes Towards Entrepreneurship

Different cities have different attitudes towards startups. These differing attitudes steer the conduct of the region's stakeholders.

Cultural values significantly influence a region's startup ecosystem. Key factors include:

• Risk tolerance: Acceptance of failure and willingness to take entrepreneurial risks
• Time horizon: Patience for long-term value creation vs. short-term gains
• Collaboration vs. competition: Willingness to share knowledge and resources
• Social status of entrepreneurs: How entrepreneurship is viewed as a career choice

The most successful startup hubs, like Silicon Valley, tend to have cultures that:

• Embrace risk-taking and view failure as a learning opportunity
• Value long-term vision and transformative ideas
• Foster collaboration and open sharing of knowledge
• Celebrate entrepreneurial success and inspire the next generation

Changing a region's startup values is challenging and typically occurs slowly over time, often catalyzed by visible local success stories.

9. The Pillar Company Staircase: A Framework for Startup Ecosystem Development

The Pillar Company Staircase (Figure 2-1). Level 0: No Pillars, No Gazelles . Cities like Worcester, Mass. have no pillar companies and no gazelles.

The Pillar Company Staircase model provides a framework for understanding and developing startup ecosystems:

1. No Pillars, No Gazelles: Limited startup activity, few resources
2. No Pillars, Some Gazelles: Emerging startup scene, some success stories
3. No Pillars, Acquired Gazelles: Growing ecosystem, successful exits
4. Some Pillars in Niche Markets: Established ecosystem with some large companies
5. Many Pillars in Huge Markets: Mature ecosystem with global impact

Key considerations for advancing up the staircase:

• Developing and attracting entrepreneurial talent
• Building supportive infrastructure and policies
• Fostering connections between startups, investors, and mentors
• Creating a culture that celebrates and reinforces entrepreneurship

Cities can use this framework to assess their current position and develop strategies for moving to the next level, recognizing that progress often takes years or decades.

10. Government's Role in Fostering Startup Ecosystems

Government can help boost a city's startup scene in meaningful ways but only when it partners with exceptional entrepreneurial talent.

Effective government support can catalyze startup ecosystem development, but must be carefully implemented:

Successful approaches:

• Investing in infrastructure (e.g., Chattanooga's high-speed internet)
• Facilitating connections between startups and established industries
• Streamlining regulations and bureaucracy for new businesses
• Co-investing with private venture capital (e.g., Israel's Yozma program)

Potential pitfalls:

• Over-reliance on government funding without private sector involvement
• Attempting to artificially create demand for startups
• Ignoring the importance of organic ecosystem development

Governments should focus on creating an environment conducive to entrepreneurship rather than trying to directly pick winners or create startups themselves.

11. Building Your Startup Common: A Roadmap for Cities

Based on their ideas and my own thinking, here is a six-step methodology, illustrated in Figure 8-2, for boosting a city's startup scene:

Cities can take proactive steps to develop their startup ecosystems:

1. Form a Startup Common team: Assemble key stakeholders
2. Study successful and unsuccessful Startup Commons
3. Assess the city's world-beating skills objectively
4. Agree on a vision for the city's Startup Common
5. Attract talented leaders who can turn skills into fast-growing companies
6. Build necessary infrastructure and cultural elements

Key considerations:

• Leverage existing strengths and unique local assets
• Foster collaboration between universities, businesses, and government
• Create programs that attract and retain entrepreneurial talent
• Develop mentor networks and support systems for startups
• Cultivate a culture that embraces risk-taking and innovation

While government-led efforts can help jumpstart ecosystem development, long-term success ultimately depends on the actions of entrepreneurs and private sector stakeholders.

Last updated: July 29, 2024