This post is for anyone taking part with entrepreneurship, innovation or startup ecosystem development at any level.
As part of iteratively improving our Startup Ecosystem development framework, Startup Commons has created a new approach to describe key actor segments in startup ecosystems. Our website is now also divided between these four segments: business creators, support providers, ecosystem developers, digital teams - to help you find the most relevant content for each segment.
Although there are overlaps between the various roles that people play, we have learned that it is valuable for ecosystem actors to identify the roles that they play at any given time to enhance the effectiveness of their interactions within the broader ecosystem.
A simple example is our Growth Academy's startup entrepreneurship education curriculum that has at least two relevant segments and perspectives;
From Ecosystem Developers' perspectives, they should be aware of and evaluate the availability of such or similar curriculum in their ecosystem and how it is performing ie. how is it made available, offline and/or digital format? how often is it run? What is the number of participants? What is the feedback for quality/value of the curriculum for participants? What is the impact for ecosystem top level KPI’s (like number of new businesses created, improved success rate, faster growth, etc.)?
Step by step, we will be adding these segments into all of our materials and applying them to all of our communications going forward. This should not only help you find the most relevant content on our website but also help you to understand the perspective from which any items can be perceived.
Key Ecosystem Roles in more detail
Please take some time to understand these roles since they will help you make sense of the jobs that people do within your ecosystem and identify which roles need to be filled.
A. Business Creators
Business Creators are people who as their primary role develop new companies. They include founders, entrepreneurs, key team members, investors and board members. Ie. founders & other equity holders. In this segment, there are naturally category specific subroles at the strategy and operative levels, as well as for specific skills or company operations specific roles. From finance to management, to designers, developers, sales etc.
Business Creators perspective, role, and focus is in one company (or depending on their more specific role to only few companies) at a time for longer period of time in logical and balanced manner over longer period of time; especially in case of being a founder, early team member, or angel investor.
It is also quite common that people who are founders, later on become "serial entrepreneurs" and Business Creators in more flexible or more systematic ways. Ie. more flexible would be becoming an advisor board member, mentor etc. and more systematic would be to become an angel investor, VC, create own accelerator etc.
Many Business Creators also work together with support providers as mentors, advisors board members etc. to a) share their expertise for support organizations needs and/or b) to build relationships to get "deal flow" of new entrepreneurs and early startups with which to work. As they become more involved, they will acquire more channels for "deal flow" and reputation building. At the same time, involvement in the ecosystem is a lot about just "giving back" as well.
B. Support providers
Support providers are all the public and private support function providers catering support services directly for venture building, mainly free or for nominal fees (subsidized by government or other bigger organizations). The support providers are available in the ecosystem, and providing the support function is their primary role. At the same time, some of them also have overlapping roles in venture building (investors, board members, accelerators etc.) or in ecosystem development (universities, incubators, banks etc.). Additionally, in this category, there are naturally category specific subroles at the strategy and operative levels, as well as for specific skills or organization operations specific roles. From finance to management, to designers, developers, sales etc. depending on the support function.
Support providers' jobs are to cater for specific need of Business Creators at a specific stage of the ventures development and provide support to that need effectively. As such their support for venture may be very effective, deep and valuable, but it’s meant to serve a high volume of ventures and only for relatively short time (to remove the need and help venture move forward).
Most support service organization primary operative people do not typically possess an entrepreneurial background, or they may have some experience from long ago, without big success (there are naturally expectations as well). They learn from their partner mentors but also from startups they help, as well as many many trainings, events etc. that they organize, listen, and learn.
While support providers may not have first hand experience, they have a lot of "holistic" understanding and can be very helpful to new entrepreneurs. They also gain unique perspectives on startups because they see a lot of them, gaining exposure to many ideas and types of people. They develop a strong and interesting skillset, especially if they cater to various different support functions at different development stages over time. These roles also help to create necessary talent for ecosystems, and some support providers eventually join startup teams or become founders or other Business Creators themselves.
The key difference in perspective between Business Creators and Support function providers is that Business Creators focus on one, or a maximum of a few, ventures at a time for longer periods of time, and they possess direct stakes (equity positions) in their companies' success, gradually developing them through various development phases. On the other hand, support function providers mainly focus on specific needs of business creation, typically at a specific stage of the venture's life, without having direct stake in the outcome. This gives them neutral and non-biased positions. It also means that support function providers cater to higher volumes of ventures in shorter periods of time, focusing on solving specific needs at hand.
In earlier stages of development, the volume of ventures is higher, and the hands-on interaction period is shorter. Additionally, in the earlier stages, support providers help to partially fill in for certain types of roles and provide external perspectives in the short term before the team have other “more built-in” external/strategy perspective business creators committed (ie. board members, advisors, investors).
C. Ecosystem Developers
Ecosystem Developers are focused on startup ecosystem orchestration and are made of policy makers and ecosystem developer individuals whose primarily interest and role is to develop the ecosystem as a whole. The key focus of ecosystem developers is not directly in either venture building or providing a specific support function but rather to focus on developing and growing the ecosystem from these components in indirect ways. Ecosystem developers directly support operative support providers and indirectly support business creators (policy, funding instruments, funding for support functions etc.).
To be able to develop the ecosystem, ecosystem developers need to create and maintaining holistic pictures of the majority of businesses being created and the related “collective support providers funnel” composed from individual support functions available for the Business Creators needs - and to manage the balance between these two main segments at various development stages, verticals and levels (availability balance between need & supply at any given time). They also manage the effective quality and efficiency of these services. Where there are gaps, bottlenecks, unmet needs, imbalance, inefficiency or obstacles, - new ecosystem development initiatives should be created. However, before creating new initiatives, a holistic view of existing initiatives and their statuses should be collected.
While there may be multiple organizations running development projects independently or collectively, ecosystem developers' roles are to coordinate and maintain lists of these ecosystem development initiatives and projects in logical manners and manage up-to-date information about their priorities and statuses.
D. Digital teams & Applications
Each of the other segments have some different connections with the digital side or even have their own digital team members, ie applications to support operative processes like CRM, newsletters etc., websites for publishing information, online services & tools like communities, or funding applications etc. and people making selections for these tools and providing supporting for users. This fourth segment is divided to two parts: (1)those who select the applications to be used and provide user support for those within their organization (digital teams) and (2)tools being used (applications) & developers who actually create new ones or develop them.
Digital skills are in high demand and short supply - Digital teams are responsible for developing, testing, and implementing a set strategy to reach, engage and serve target audiences through digital channels and applications like web, mobile, and social. While other groups may create the strategy, draft the messaging, etc. a digital team works hand-in-hand with communication and service team leaders to create the digital strategy, most often reporting through the CEO or COO. Digital teams are also often responsible for providing guidelines and tracking for KPI's and implementing cross-channel analytics, as well as surfacing relevant emerging trends and audience behavior. Digital teams collaborate heavily with application people, who are responsible for critical technology infrastructure and associated applications.
Naturally within these segments, there are also related categories like designers, frontend and backend developers, project managers, support people etc. The main reason to separate digital teams and applications into its own segment is that while they are part of any of the other segments they can be considered to focus only on a) what applications are needed, b) what will be used (including in some cases to self develop suitable application) and c) how to use the selected applications to support the main functions.
To help make digital transformation in economic development for more data-driven policy making, learn how a ecosystem level digital team setup would look like.
If you found this post valuable in your ecosystem development activities, please consider sharing it with your network.
Download related presentation: Ecosystem Key Actor Segments
About Ecosystem Development
We know startup ecosystem development and understand it is a multilayered, complex and challenging long term endeavor. However, this is where economic development is competing now globally, and the only way to be competitive is to attack the challenge head on and keep going.
This is a small summary snapshot of our more complete Startup Ecosystem development framework and materials. Get in touch to start scheduling a workshop or consulting project to take your ecosystem to next level.
What would you do for data? Would you pay money, provide services, or barter with tools? How do different organizations exchange data in startup ecosystems?
In the modern era, data is becoming an exceedingly precious commodity. A digital transformation in economic development is taking place as data-driven policy development begins to shape the world. Startup ecosystem analytics will play a vital role in this digital transformation, fueling data-driven policy development in the startup space.
Startup Commons is working to help startup ecosystem developers adapt to this digital transformation by offering GovTech for economic development, specifically startup ecosystems. Our Digital Ecosystem Applications are designed to help ecosystem developers, support organizations, and startups exchange data in startup ecosystems. Since our tools are designed to facilitate data exchange, we would like to share with you how the transactions work.
As illustrated in the graphics, information flows between organizations and the digital infrastructure, which is centrally operated by the startup ecosystem development team. In order to make the data flow, larger entities typically provide money, support, and tools to smaller entities. As organizations share real data about their performance and developments, they can receive more money, support, and tools. This creates a positive feedback loop of information flow.
Once organizations begin sharing data between others, they can start comparing results on regional, national, and global levels. Our KPI Data Dashboard, a form of GovTech for economic development, enables government agencies policy makers and NGO’s to share and compare startup ecosystem statistical data with other regions to benchmark economic growth. Service providers can also use various Digital Ecosystem Applications to compare outcomes in the context of startup ecosystem analytics.
Business creators and startup teams can also compare their data, as well as business performance, with other startups in similar development phases and industries. The above graphic explains the various startup development phases. Startup teams can get started with visualizing and benchmarking their progress with tools like Business Plan Tool and others, provided in their ecosystem.
With broader understanding how to exchange data in startup ecosystems, we encourage you to reach out to us, to learn more about our Digital Ecosystem Applications. We help you connect, visualize, and benchmark your startup ecosystem, Contact us today.
Entrepreneurship education differs from other disciplines. When you train students to become entrepreneurs, you are teaching people to create their own jobs, serve unmet needs, and change the way society functions. Essentially, you are teaching them how to navigate uncharted waters. Traditional business schools, as well as other vocational programs, use clear metrics to define student success. These metrics include how many students get jobs and how much they earn. Benchmarking entrepreneurship education is a much more difficult task. How can universities and entrepreneurship education programs measure student outcomes in uncharted waters?
The LEO-I Model
According to “Entrepreneurship Education Comes of Age on Campus,” a 2013 Kauffman report, Arizona State University has developed an innovative model to measure entrepreneurship education outcomes. The LEO-I model consists of four dimensions: Landscape, Engagements, Output, Impact.
Landscape: What courses, clubs, services, etc. does the university offer to train students in entrepreneurship?
Engagements: How many students, faculty, and staff are participating in the university’s entrepreneurship offerings? How many are starting? How many are finishing?
Output: How many ventures are students starting? How much funding have these ventures received? How many patents are being created? (Output covers quantifiable outcomes.)
Impact: How are the university’s entrepreneurship education programs changing the world, as well as students’ lives? Are student ventures sustainable? (Impact is much harder to measure than output.)
Problems with the LEO-I Model
The LEO-I model provides a strong starting point for benchmarking entrepreneurship education, but it lacks in several areas.
Solutions to LEO-I Model Problems
Here is the overview of solutions to the problems that occur within the LEO-I model:
Now, let us explore each solution in greater detail.
Benchmarking Entrepreneurship Education at the Ecosystem Level
Universities are clearly not the only institutions educating entrepreneurs. Formal training programs, such as accelerators and workshops, help entrepreneurs build key skills, grow their startups, and raise investment capital. Additionally, mentors, advisors, and collaborators provide informal training and support for entrepreneurs.
In a sense, startup ecosystems are like giant universities, offering a wide selection of entrepreneurship services. However, it is much easier for universities to keep track of their entrepreneurship offerings than startup ecosystems since universities are more centralized than startup ecosystems. In order for data-driven economic development to occur within startup ecosystems, policy makers and ecosystem developers need mechanisms to apply the LEO-I model to their startup ecosystems.
This is where Startup Commons can help. Our Ecosystem Mapping Application and Startup Ecosystem Portal enable ecosystem developers to understand the landscapes of their entire ecosystems. By applying our Ecosystem Development Framework, which is based on our Startup Development Phases, ecosystem developers can easily measure engagements and outcomes for their entire ecosystem, as well as specific entrepreneurship education programs.
Applying KPI’s to Measure Impact
Using KPI's to measure impact is nothing new. Impact investment firms, such as Village Capital, already maintain impact metrics on their portfolio companies. Village Capital’s KPI's include amount of carbon emissions offset, number of low-income students served, acres of farmland sustainably managed, kilowatts of solar power installed, etc. Social entrepreneurship accelerators, such as Halcyon Incubator, also track impact metrics. Halcyon uses broad KPI's, including number of lives impacted globally and number of jobs created, because the companies that they serve span a wide range of sectors.
Although impact investment firms and social entrepreneurship accelerators maintain impact KPI's, the companies that they serve are ultimately responsible for reporting the data. Essentially, the investment firms and accelerators ask for the data that they want, and the companies give it to them. This brings us to standardization of KPI's.
In the cases of Village Capital and Halcyon, a central authority acts to standardize KPI's by asking companies for certain data. Using the Startup Commons KPI Data Dashboard, ecosystem developers can standardize KPI's throughout their ecosystem. This puts startups, support providers, and entrepreneurship education providers on the same page. The KPI Data Dashboard also makes it simple for policy makers to understand what is working in their economic development efforts.
Additionally, ecosystem developers can use the KPI Data Dashboard’s API’s to share data with other parties. For example, ecosystem developers in multiple cities could share data between their startup ecosystems to compare economic development policies. They could also share the data with foreign investors to attract them to their regions. Of course, sharing data only makes sense if KPI’s are coordinated across startup ecosystems. This is why collaboration is key to global startup ecosystem development.
Now, you hopefully understand how to overcome the problems with LEO-I and can successfully apply the model to your startup ecosystem development efforts. Whether you work for an investment firm or entrepreneurship education provider, you need to be sure to standardize your KPI’s across organizations. By placing an ecosystem development team in charge of your ecosystem data, you can create a centralized authority to standardize KPI’s and apply the LEO-I method to benchmark your ecosystem’s entrepreneurship education efforts.
“Current trends toward entrepreneurship and resisting hierarchy, as well as the desire to create egalitarian work spaces, are nothing new,” according to Fred Turner, a communications professor at Stanford University. “It is a rhetoric that comes right out of the 1940s.” Turner found that the 1960’s American counterculture, as well as the modern entrepreneurship movement, “owes many of its ideals, and particularly its understanding of how media shapes people, to a generation… that really came to life during World War II.”
Both the 1960’s American counterculture and modern entrepreneurship movement developed predominantly in the greater San Francisco area, although they were also connected to New York City. What implications does the formation of the 1960’s American counterculture have for people working to develop startup ecosystems in other parts of the world?
Promote Openness, Collaboration, and Independent Thinking
The Committee for National Morale convened in New York during the 1940’s to promote an open, flexible, collaborative, and democratic personality among the American people. Commissioned by the Museum of Modern Art, Bauhaus artists then created propaganda exhibitions, which people were supposed to interpret as free democratic individuals, to further the Committee’s goals. Turner links the Committee for National Morale and the Bauhaus aesthetics to the multimedia environments that would become cornerstones of the 1960’s countercultural movement.
If you want to develop a startup culture in your region, you should harness the powers of art, music, architecture, and other mediums to promote entrepreneurial values.
Since startup ecosystems resist hierarchy, startup ecosystem management can be a difficult undertaking. How do you act as a manager if the system, by nature, lacks leadership positions?
You act as a prominent network node. This can be as simple as making introductions, and it can be as complex as organizing events or speaking at ecosystem gatherings. During the 1960’s countercultural movement, which also resisted hierarchy, leaders were well-connected and vocal people, such as authors and musicians. They organized and keynoted events to make statements and build relationships. Examples include Ken Kesey, Bob Dylan, and Timothy Leary. While these people lacked formal positions of power, they spread ideas, expanded perspectives, and formed networks.
In the 1960’s counterculture, leaders introduced new forms of art, ideas, and mind expansion. Similar to rocks dropping into a pond, these intellectual stimulants created ripple effects that combined to create a counterculture.
If you want to lead a startup revolution, you should introduce innovative tools to your regional ecosystem. By introducing tools, you generate ripple effects and create credibility for yourself as a progressive originator of growth. Startup Commons’ Business Plan Tool and Ecosystem Mapping Application are two tools that are designed to solve confusing problems for entrepreneurs and service providers. Would you like to be known as the people’s savior?
Open Communication Lines
As you can tell, multimedia, art, and communications played significant roles in cultivating the 1960’s countercultural movement. In fact, communications may well be the backbone of all revolutions. Technology has given birth to new forms of communication that, when applied to startup ecosystems, will lead to an economic development digital transformation.
Startup ecosystems are decentralized and dynamic, so they require different policy approaches than traditional economic development. Although governments do not typically promote countercultural revolutions, enabling startup revolutions are often in smart governments’ best interests because they can lead to digitized economic development and data-driven innovation. How can governments help promote entrepreneurship and startup culture?
One small step that smart governments and their partners can take is opening communication lines for ecosystem actors. By providing proper digital infrastructure, governments and their partners have the ability to rapidly accelerate cultural change. This can be accomplished by introducing Startup Commons’ Startup Ecosystem Portal to your ecosystem.
Now, apply what you have learned, engineer a countercultural movement, and lead your region's startup revolution!
On March 31, 1968, Martin Luther King Jr. delivered a speech at the National Cathedral, titled “Remaining Awake Through a Great Revolution.” He discussed a triple revolution that was taking place, consisting of three factors: technology, weaponry, and human rights. Does that sound familiar to our present situation?
Martin Luther King Jr.’s wisdom has valuable implications for today’s entrepreneurs and policy makers. Here are four key takeaways for entrepreneurship ecosystem developers from “Remaining Awake Through a Great Revolution.”
Ethics need to keep pace with technological changes.
“Through our scientific and technological genius, we have made of this world a neighborhood and yet we have not had the ethical commitment to make of it a brotherhood.” This statement from King’s speech resonates deeper in the modern era than it did in 1968. Internet, smart phones, and social media now link people around the world with constant communication. Furthermore, smart cities and govtech solutions are rapidly bringing regulators into the digital future. However, our ethics still need to keep pace with our increasing digital connectedness.
With so much digital information available, entrepreneurs and policy makers must make decisions about who controls and maintains responsibility for data. The European Union’s General Data Protection Regulation (GDPR) is an effort to give citizens control of their personal data. The Startup Commons team is happy to advise on GDPR compliance, and our Digital Ecosystem Applications are designed to give users control of their data, no matter where they are in the world.
Another challenge presented by technological change is intellectual property ownership. As startups increasingly drive innovation, traditional technology transfer models are becoming cumbersome and outdated. Startup Commons offers Open IPR consulting for universities and research institutions so that they can more effectively contribute to innovation.
Leaders create consensus.
"Sir, I’m sorry you don’t know me. I’m not a consensus leader,” King once told a newsman. He claimed in his speech that “ultimately a genuine leader is not a searcher for consensus, but a molder of consensus.” If you are leading an entrepreneurship ecosystem, you will need to balance several competing viewpoints and opinions. Sometimes you will feel the need to take unpopular positions, such as Martin Luther King Jr.’s stance against the war in Vietnam.
What do you do if you are a politician and the majority of your constituents fear losing their jobs to immigrants? Do you push for stricter immigration policy? What if your constituents do not understand that high-skilled immigrants actually create, rather than remove, jobs in your region’s economy? When you take a position on an important issue, it is sometimes best to create, rather than respond to, consensus.
Gain insight from interconnectedness.
During his speech, King made the point that “we are tied together in the single garment of destiny, caught in an inescapable network of mutuality. And whatever affects one directly affects all indirectly.” Similar to our broader society, entrepreneurship ecosystems are inescapable networks of mutuality. They rely on the contributions of multiple players, ranging from startup employees to political leaders.
How do ecosystem developers make sense of these interconnected relationships? Startup Commons’ Digital Ecosystem Applications illustrate the interconnectedness of entrepreneurship ecosystems, enabling ecosystem developers to visualize and benchmark ecosystem activity. For example, our Ecosystem Mapping Application enables entrepreneurs and policy makers to see how support providers serve a startup’s needs at various phases of the startup’s development. By mapping out support-provider roles, we help entrepreneurs and grant makers navigate an otherwise complex, interconnected network.
The time to act is now.
Since “time is neutral,” King made the point that things do not automatically improve with time. He called on his audience to “realize that the time is always ripe to do right.” King’s wisdom holds true for economic development.
If you want to build an entrepreneurship ecosystem, then you should start now. Reach out to Startup Commons!
Thomas J. Donohue, CEO of the U.S. Chamber of Commerce, delivered the “2018 State of American Business Address” on January 10th. After making the case for economic growth, Donohue outlined eight priorities for the 2018 and beyond. How can Startup Commons answer Donohue’s calls, assist American business, and drive economic growth in 2018?
Building the Workforce of the Future
As Donohue stated in the Address, “Growth doesn’t happen without people,” and we completely agree. Our Growth Academy provides a curriculum for training entrepreneurs and startup employees, as well as the educators and personnel who support them. If America desires high-growth companies, we will build the workforce that fuels them. Startup Commons also offers numerous services for higher education, including Open IPR and startup ecosystem consulting.
Embracing Technology in our Economy
Our mission is to help you develop high-tech startup ecosystems. Whether your region seeks govtech solutions or consulting, Startup Commons is your one-stop-shop for embracing technology.
Modernizing and Expanding Infrastructure
Does your state or city want to cultivate a thriving entrepreneurship ecosystem? If so, then you will need digital infrastructure to manage your ecosystem development efforts. Startup Commons’ Digital Ecosystem Applications can supply the digital infrastructure to build your region’s startup ecosystem. America has long been a global leader in telecommunications infrastructure, originating telephone lines and internet cables. Will you stay ahead of the curve with digital infrastructure and smart cities? Startup Commons is here to assist.
Reasserting American Leadership in the World
Does American want to be the leader in global innovation? Unfortunately, it will take more than Silicon Valley, Boston, and New York City. Luckily, Startup Commons can help America strengthen its startup ecosystems in other parts of the country. Regardless of your ecosystem’s maturity, we can help guide you to the next level with our training and software.
Fueling Business Growth
We are eager to help you build the strongest startup ecosystems in the world. All you need to do is ask.
Restoring Fiscal Health
According to Where the Jobs Are, startups create all net new jobs in the United States. If America wants to combat its rising debt and protect the middle class, then startups provide a key piece to the puzzle, supplying tax dollars and job opportunities.
Electing Pro-Growth Leaders
Our Digital Ecosystem Applications add transparency to economic development. We force leaders to ‘walk their talk,’ by holding them accountable to their communities. To further increase accountability, Startup Commons will help you structure public-private partnerships for startup ecosystem development and data handling.
Protecting Free Speech and Civil Discourse
Since our software facilitates transparency and trust, we create space for civil discourse. Additionally, we promote open knowledge and best-practice sharing. Similar to Thomas J. Donohue, Startup Commons champions freedom as a means for economic growth.
Will You Work with Us?
What are you waiting for, Americans? It is time to reassert your leadership in the world. Startup Commons is here to help.
According to Investopedia, “The principal-agent problem develops when a principal creates an environment in which an agent's incentives don't align with its own.” This specific example of moral hazard results from differing interests and information asymmetries.
Why do economic development efforts often fail fantastically?
You guessed it. The principal-agent problem. Here are five ways that the principal-agent problem kills economic development efforts:
1. Voters and Elected Officials
Once elected officials enter office, they do not need to fulfill their campaign promises. Even if they are up for re-election, it may be in their best interest to appease major campaign donors, rather than individual voters. Since legislation is often too long and complex for voters to bother reading, public perceptions of elected officials are often crafted by the media. This information asymmetry often results in economic development initiatives that are merely for show. The situation gets even worse if bribes and backroom deals occur.
2. Elected Officials and Regulators
Regulators know the industries that they regulate much more intimately than elected officials do. Almost all regulators desire to keep their government jobs or jump to a more lucrative careers in the private sector. Either way, regulators possess incentives to take credit for successes and conceal their mistakes, using information asymmetries to keep elected officials and supervisors content. When regulators want to use the revolving door to enter the private sector, they can use information asymmetries to their advantage to appease private-sector interests at the expense of politicians.
3. Regulators and Businesses
Although regulators understand industries, businesses know their operations better than outsiders. Attempting to maximize shareholder value, businesses may bend or break regulations. Depending on the reasons for pursuing economic development, regulators and entrepreneurs can end up at odds. For example, generating taxable revenue and increasing employment may not serve shareholder interests. Offshore holdings and automation may benefit entrepreneurs and investors, but they may not help regulators, as well as politicians, achieve their objectives.
4. Regulators and Support Organizations
The relationship between regulators and support organizations is similar to the relationship between regulators and businesses. Support organizations understand their own operations much better than regulators. This is especially dangerous when support organizations are competing with each other for government grants. Incentivized to stay in operation and maintain their salaries, support organization personnel may exploit information asymmetries to exaggerate their economic development contributions.
5. Support Organizations and Businesses
Support organizations and businesses can ideally align their interests through contracts and equity deals. However, deals can become so complex that one side manipulates the other and, as they say on Wall Street, “rips their face off.” More commonly, one side just fails to deliver on their promises, and the situation becomes even more complex when they attempt to save face for regulators.
How Can You Solve Principal-Agent Problems?
Startup Commons offers a suite of tools that are designed to eliminate principal-agent problems in startup ecosystems. Our digital ecosystem applications increase transparency for all parties, reducing information asymmetries at all levels of economic development. What can you accomplish with trust and transparency?
Are you investing exclusively in U.S. companies? If you think this is a wise strategy, sorry sweetheart, but you are stuck in the 90s. Now that it is 2018, intelligent angel investors and venture capitalists are putting their money into foreign companies. Do you not believe this? Here are four reasons why you should invest outside the U.S. if you want meaningful returns:
Decimalization and SOX
According to Investopedia, “The U.S. Securities and Exchange Commission (SEC) ordered all stock markets within the U.S. to convert to decimalization by April 9, 2001, and all price quotes since appear in the decimal trading format.” Previously U.S. stocks had traded at 1/16 dollar increments, but they traded at penny increments after the decimalization conversion. This has caused tighter spreads, resulting from smaller price increments and movements. While tighter spreads are wonderful for the trading desks at investment banks and high-frequency traders, they are awful for small-cap stocks.
According to AICPA, “The Sarbanes-Oxley Act requires that the management of public companies assess the effectiveness of the internal control of issuers for financial reporting. Section 404(b) requires a publicly-held company’s auditor to attest to, and report on, management’s assessment of its internal controls.” Even with the JOBS Act providing an “on-ramp” for high-growth startups, compliance can cost companies millions of dollars when they go public. AOL went public at $10 million in 1992. No company in their right mind would do that today.
Decimalization and Sarbanes Oxley, deter venture-backed companies from IPOs. This is why we have begun to see so many unicorns, private companies valued over $1 billion, in U.S. markets. When startups cannot effectively go public, they must resort to exits through acquisition. In recent years, startups have been forced to choose between acquisition by Facebook, Amazon, Apple, Netflix, or Google (FAANG). While these exits create lower returns for investors, they also tend to destroy company cultures that startup executives and board members work hard to cultivate. Furthermore, acquisitions are often a way for established players to quash would-be competition, which increases tech-sector consolidation.
There were only 39 venture-backed U.S. issuer IPOs in 2016 - the lowest number since 2009. Compare this with 270 venture-backed U.S. issuer IPOs in 1999. With venture-backed IPOs at historically low levels in the U.S., it may be time for investors to look toward countries that are more IPO-friendly.
In Chapter 6 of Where the Jobs Are, John Dearie and Courtney Geduldig explain that there are too many venture capital funds, and they are investing too much money in U.S. ventures. “As funds swelled in number and size, industry critics say, general partners became less focused, less disciplined, and ultimately, less effective.” Fred Wilson claimed in 2009 that “the venture capital asset class does not scale,” and he advocated a “back to the future” approach of smaller funds, partnerships, deals, and exits.
Since these critics of venture capital are focused on the U.S., they fail to see that expanding the scope of venture capital could solve problems plaguing the industry. Even with larger funds, venture capitalists could add discriminatory nature to their investments by sourcing deals globally. Instead of throwing money at increasingly risky ventures within 15-mile radii of their offices, intelligent venture capitalists invest in the most promising startups, no matter where they are located.
By investing globally, venture capitalists can significantly de-risk their asset class and continue attracting institutional investments, even during U.S. economic downturns.
In Tim Draper’s book, How to be The Startup Hero, he discusses how he bought a Willie Mays rookie card in Boston for $600. However, the baseball card would have cost him over $2,000 if he had bought it in San Francisco. After learning the lesson of geographic arbitrage, Draper went on to create a venture fund, called DFJ ePlanet, that invests in startups around the world.
Investors often obtain larger equity stakes in exchange for smaller amounts of capital when they invest in foreign startups. In other words, they get better deals on startups that are outside the U.S. Similar to Willie Mays cards, valuations tend to be higher in Silicon Valley than anywhere else in the world. If comparable technologies are being developed in Silicon Valley and Southeast Asia, it may be a better move to invest in Southeast Asian startups.
In How to be The Startup Hero, Draper explains that “when the government piled on Sarbanes Oxley Act regulations to public companies, our best form of financial exit was sabotaged. Our international investments through DFJ ePlanet were our saving grace.” In addition to utilizing geographic arbitrage, you can see that Draper’s strategy circumvented SOX issues and de-risked his portfolio. Investing abroad can be a powerful move.
Innovators Live Abroad
Where do the top innovators and technology entrepreneurs live? If you guessed the U.S., then you better reconsider.
Dearie and Geduldig claim that Finland “is the only country where students leave high school ‘innovation-ready’.” At least, U.S. students excel in technical disciplines, right? The PISA 2015 tests, which measure students in 71 countries, ranked the U.S. 38th in math and 24th in science.
Luckily for the U.S., the country’s world-leading universities attract some of the best and brightest students from around the globe. Unfortunately, U.S. immigration policies deter students from staying in the country to work for or launch startups after graduation. Chile, Canada, Australia, New Zealand, the United Kingdom all offer visa programs that are designed to attract entrepreneurs. Intelligent investors should follow the talent and focus on entrepreneur-oriented countries.
How Can U.S. Regulators Reverse These Trends?
As intelligent investors open their eyes to opportunities abroad, the U.S. government may want to wake up and reverse the exodus of early-stage capital. As our society becomes increasingly globalized, geographic arbitrage and de-risking strategies will remain appealing to investors. However, regulators can pursue a number of actions to drive innovation and strengthen the pull of U.S. markets.
Federal regulators should consider tiered price levels in U.S. stock exchanges, similar to Japan and Hong Kong, as well as entrepreneur-friendly immigration policies. Although it is a massive undertaking, education reform may be necessary if the U.S. hopes to stimulate entrepreneurial competitiveness among its citizens. At the state and local levels, tax credits for angel investors can provide useful incentives.
Most importantly, the U.S. needs to build robust startup ecosystems outside of New York City, Boston, and Silicon Valley to create at-home options for investors. This is exactly where Startup Commons can help.
According to Brad Feld’s Startup Communities, universities should be feeders, rather than leaders, in their local startup ecosystems. This means that universities should supply talent and provide support for local startups, instead of positioning themselves at the center of entrepreneurial activity. Although it may be difficult for universities to view themselves as feeders, this approach has merit and can ultimately lead to more cohesive startup ecosystems, as well as improved relations between universities and local communities. Additionally, acting as feeders can help universities become more competitive, secure increased funding, and create employment opportunities for students.
With broader community interests and self-serving goals in mind, universities should play three roles in startup ecosystems: suppliers, connectors, and accelerators.
What do startup ecosystems need most?
This comes in the form of founders, employees, and service providers. Universities are well-positioned to cultivate entrepreneurial traits and interests among their students, shaping them into key contributors for their local startup ecosystems. Since the modern workplace requires entrepreneurial skills and students are demanding them, it is in the best interest of universities to facilitate entrepreneurial learning.
One of the simplest ways to cultivate entrepreneurial students is by offering an entrepreneurship curriculum. However, entrepreneurship blurs the barriers between traditional university departments, so it is best to create a cross-disciplinary initiative, rather than merely setting up an entrepreneurship center in the business school. The courses within the entrepreneurship curriculum should be taught by practitioners. Students should also have opportunities to gain field experience through research, prototyping, and testing.
Another basic way to stimulate entrepreneurship is through student clubs and organizations that focus on startups. These may take the form of entrepreneurship clubs, consulting organizations, or investment groups. Such organizations will often evolve into research labs or fall under the umbrellas of larger entrepreneurship initiatives. They provide excellent starting points for universities that have little formalized entrepreneurship programming.
In addition to supplying entrepreneurship organizations and curriculums, universities can foster entrepreneurship by encouraging students and faculty to engage with local startup ecosystems, which we will cover in the following sections.
While talent is the bread and butter of startup ecosystems, technology also plays an integral role. Universities often contain technology transfer offices (TTOs) that license and patent internally developed technologies to existing companies. As startups increasingly drive innovation, the traditional models to release and transfer research findings from universities to feed innovation are often outdated and broken, causing a large portion of research findings to be underutilized. Universities may want to transition from traditional technology transfer models to Open IPR, a process with which Startup Commons can assist.
By acting as benevolent connectors, universities can start to see significant payouts from assuming the position of startup-ecosystem feeders. These payouts will include increased competitiveness, due to higher visibility, and improved community relations, stemming from collaborative interactions. Most significantly, alumni, faculty, and friends will donate more money to universities that act as connectors within their local startup ecosystems.
With rewards to be reaped, what actions can universities pursue to convene and connect startup enthusiasts?
When universities act as connectors within startup ecosystems, win-win situations result for everyone involved.
Serving as suppliers and connectors are the most important roles of universities in startup ecosystems. However, ambitious universities can deepen their impact by establishing accelerator programs.
Accelerators are designed to help entrepreneurs find product-market fit, acquire outside capital, and scale their companies. They can be publicly or privately funded, and under most circumstances, anyone can apply. These programs always provide education, along with mentorship, and they often make seed-stage investments in exchange for equity stakes in cohort companies.
While university incubators are fairly commonplace, university accelerators are a more novel concept. Since universities can provide housing, food, and workspace, they are good candidates for accelerators. That being said, universities must have strong relationships with entrepreneurial mentors, investors, and service providers within their local startup ecosystems before accelerators can be considered.
Also, accelerator initiatives should be piloted with student-run companies before universities open the floodgates to everyone.
Empower the Entrepreneurs
On a final note, academics and administrators should let entrepreneurial students and faculty lead these types of initiatives. Entrepreneurs gravitate toward one another, so allow university entrepreneurs and startup-community members to design how they engage with each other.
In the midst of the holiday season, you will hopefully take some time away from business to relax with your children and younger family members. If you are lucky, this relaxation time will involve playing with legos. What can entrepreneurs learn from their family shenanigans with these timeless toys?
Be a Builder.
If legos came in pre-made sets, they would not be any fun. Children view them as superior to other toys precisely because assembly is required. Once we become adults, we often hesitate to do things for ourselves and get easily frustrated when we have to assemble things (e.g. IKEA furniture).
The holidays provide the perfect time to reconnect with your inner child and reinvigorate your builder spirit. Creating something out of nothing can be an immensely rewarding experience. Just watch your children as they focus intently for hours on crafting their lego masterpieces. Whether you are developing software or a startup ecosystem, you should imagine yourself putting lego pieces together, patiently watching as your project takes shape before your eyes.
Create Your Own Adventures.
Legos are not meant to be admired on the shelf. They are designed for play, breakage, and reassembly. What do children do once they have assembled their lego sets? They imagine entirely new worlds, acting out stories with the pieces. Children possess true vision. They know how to blur the lines between fiction and reality. Unfortunately, adults often prioritize reality over their right-brain-driven imaginations, but they need not always view life in such a way.
If you want to be a successful entrepreneur, you should learn a lesson from the children in your life and get lost in your imagination from time to time. Construct a model of the society you would like to see, and work backward to figure out how to make the changes that you envision emerge in reality. What do people in your ideal world do? How do they interact with each other? What technologies dictate their behavior? Practice stretching your imagination, and create your own adventures.
Will You Follow the Directions?
In the modern era, legos come in sets with directions. However, you may want to try gifting your children boxes of miscellaneous pieces, free from guidance or instruction. Without specified directions, children will amaze you with the designs that emerge from their unconstricted minds. The mark of a true builder is being able to create without instructions.
As an entrepreneur or ecosystem developer, you will encounter many mentors and advisors who have previously been in your shoes. They will offer you advice and guidance on what to do, but whether or not you follow their instructions is up to you. Remember that every case possesses unique characteristics. Sometimes it is best to experiment with entirely new ways of conducting business or developing ecosystems. After all, that is how we ultimately make progress as a society. Do not be afraid to pave your own path and refrain from following the directions.
Happy Holidays from the Startup Commons team!
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