Key Components of Building and Scaling Thriving Startup Ecosystems: A Practical Guide

Preamble:

This is not an academic paper. It is a collection of practical observations collected from witnessing both successful and unsuccessful startup support initiatives in more than a half dozen different ecosystems across the past decade.

The team at AstroLabs has:

  • Founded and operated startups, supported and invested in entrepreneurs, and designed and operated acceleration and incubation programs in various geographies around the globe
  • Advised policy makers and private initiatives aiming to build and scale nascent ecosystems
  • Participated in, supported, and operated university-lead entrepreneurship initiatives
  • Performed both primary and some secondary research on the topic through partner organizations

For more in depth case studies and recommendations we suggest reading a few books including:

1- Boulevard of Broken Dreams: Why public efforts to boost entrepreneurship and venture capital have failed and what to do about it (Josh Lerner)
For thorough analyses of initiatives around the globe and patterns of failure.

2- Startup Communities: Building an entrepreneurial ecosystem in your city (Brad Feld)
For practical tips for building a true thriving startup community that lays the ground for a healthy ecosystem based on Brad’s experiences in Boulder, Colorado and other work.

Time and reflection:

You need a long breath and the ability to reflect

Few things worth building are actually built overnight; any initiative that expects overnight results is doomed from the start.
Building a successful ecosystem is a multi-decade exercise. However, just like a natural ecosystem (from where the analogy emanates) it is possible to see some early progress before the full “forest” is grown and healthy.

For this to come to fruition a few elements are important:

  1. Thinking about the ecosystem culture you want to have: the culture of the ecosystem will emulate the behavior of the early pioneers and the ecosystem support organizations, so it is critical to set the right examples of values and behavior such as inclusivity, humility, support, fairness and  tenacity.
  2. The organizations leading the initiatives need to be structured for longevity and populated by people who are committed to the mission. Consultants could be used for short tactical projects, but you need people committed for at least 5 to 10 year missions to be the stewards of important initiatives.
  3. The governance structure has to be setup such that the board and committees overseeing the initiative have a long term view and aligned around a long term vision.
  4. While government-lead initiatives usually start with a large endowment, the objective of many ecosystem support projects should be to transition to self sustaining models or phase out altogether to give room to grassroot initiatives that will replace them in the future.
  5. And most importantly, the entrepreneurs need to be thinking long term. This is both a cultural mindset fostered by seeing local examples of other entrepreneurs with long time horizons, but there’s also a pragmatic and logistical component; entrepreneurs cannot plan for the long term if the environment is either highly unpredictable (e.g. worries about safety, corruption, bureaucracy) or the state of their legal status (residency, etc) forces them to focus on shorter time horizons.

A High Level Timeline of Milestones

Anecdote:
A few months ago, we met with someone who approached AstroLabs to potentially collaborate on programs for a relatively new entrepreneurship initiative. Twenty minutes into the discussion we find out the visitor is on a 12 to 18 months consulting project with the government entity he was representing. We immediately lost interest. The hard components of building an ecosystem do not align with the motivations of a short term consultant.

A high level timeline of milestones:

“Fertile soil period”: 2-3 years for some early wins

  • Setting the right culture and supporting players who model the right behavior.
  • The first initiatives are humming, real value is being created.
  • A group of well-intentioned high-value mentors form to support the early founders.

“Healthy herb garden with growing saplings”: 5 years to the first milestone

  • A healthy group of startups is growing and raising seed and early stage investments
  • New funds are forming and actively investing in early stage rounds
  • Angel networks are starting to form organically

“The forest starts to take shape”: 10 years for the first significant success

  • Signs of the occasional startup exit
  • More funding is being raised by VCs and startups
  • Talent is starting to converge from other locations to work at startups, and more graduates are interested in choosing to join a startup instead of a traditional large organization

“A sustainable living ecosystem”: 15 or more years for real impact

  • Founders from previous exits have started heavily investing in startups, some raising funds
  • A significant number of founders has previously worked (apprenticed) at a startup
  • Serial entrepreneurs: founders working on second and third ventures
  • A significant inflow of talent flows to the ecosystem to join or start a company
  • Patterns of clusters and specification start emerging

Considering the length of time that it takes to show significant progress in such long term initiatives it is important to sequence the early wins that will build momentum and catalyze the ecosystem as the flywheel effect takes hold.

For example, while kick-starting long term initiatives early is very important, the most impactful early wins are:

  1. Supporting mid-stage startups: these are ventures that have released a product and have some early traction. Supporting them will in a relatively short period demonstrate impact measured by growth, job creating and fundraising amounts.
  2. Supporting early stage startups: these are ventures that have formed already, have identified a market opportunity and are working on iterating. Supporting them will be the ultimate test in the initiative’s ability to make a difference on the “survival” and scalability metrics.

Focus:

When there’s too much to do, do a few important things really well

Creating a tech ecosystem is an immense and complex task. While doing something is sometimes better than doing nothing (though not always), the trap some initiatives fall into is that they search for the “low hanging fruit”.

While, theoretically, this is a great and recommended idea, in practice there are no shortcuts.
As a result, what we generally observe is the launch of a series of conferences and competitions with prizes for startups. It is easy to spend money on those types of programs but there’s no evidence that any of it has lead to any long term impact. (A longitudinal study of startup competitions in the region, would probably show that most have not generated any significant success, the winners are either non-existent a few years later or marginally successful, and the most successful startups in the region have never participated)

Just like building anything else, the toughest parts of the task must be accomplished first. Laying the foundation is important and tackling some of the areas that will pay off in the long term is better done earlier rather than later. Think about what will make a difference in a few years and get to it, only focusing on short-term programs will not move the needle. For example if building a deep-tech ecosystem is part of the mission then a top priority should be to make sure that students currently in middle-school are exposed and excited about STEM topics and have a immersive exposure to its impact on the world.

When startups build something without ever considering market demand or talking to real customers, the end product usually fails and the diagnosis is that they did not find a “product market fit”. The same goes for initiatives that target current or future founders. Understanding what the ecosystem lacks and what is the best method of fixing this, either directly or through other organizations is critical.

Signal v. Noise:

Beware of the thousand salesmen problem and focus on execution

Something about technology and startups ecosystems attracts a tsunami of noise. This could be because it is “cool” and “trendy” to be associated with the ecosystem; some people think that having the title of “founder” or “angel investor” is prestigious and impressive. Others think that there’s money to be made when large organizations pump large sums, and probably others mean well but believe they are able to advise founders or opine on the state of the ecosystem before doing the hard work first.

Some tips:

  1. Avoid the hype: resist the temptation to do big announcements. Focus on execution, and the success stories will speak for themselves. This doesn’t mean there would be no space to celebrate milestones, but always lean on prioritizing real work instead of PR.
  2. Be ready for the sales machines: it seems every organization ranging from consulting firms to the large tech companies see dollar signs when a new initiative is launched and come running to sell their tools. Focus on what problems you are working on solving and source the specific tools needed.
  3. The time wasters: we experience this one first hand. Since AstroLabs is categorized as an ecosystem building platform, we get contacted all the time by people who want to have a coffee and talk about the ecosystem. That volume only increases when we are featured in the news. When we used to take these meetings, we would soon realize that people who set them up are professionals at “doing coffees” and organizing meetings.
    Now, we rarely do these types of meetings and generally only after a specific agenda with valuable takeaways for all parties is shared.
  4. The buzzwords: the future is unknown, there are many organizations that benefit significantly from selling hype and buzzwords to policymakers and decision makers. Whenever there’s a conference popping up every other month around the topic (e.g. Big Data, Blockchain, Smartcity, Internet of things, 5G, etc) treat the topic with caution. Who is driving the hype behind this topic? Who benefits? What is the end-user benefit of this technology?
  5. The joke partners: It might be prestigious to line up the names of some big corporations but it comes with some of its own baggage. For example, adding corporate partners who just want to position themselves as innovative but are known to have terrible service and frustrating and ridiculous online experiences will damage the image and respect for the initiative among the most serious players in the ecosystem. Another partnership to be careful of is with tech companies that only have representative sales and business development offices in your location, the ecosystem will wonder about the motivations involved, and the eventual direction of the flow of value.

Talent and culture:

Get this one right

There exists no successful startup ecosystem in the world that does not rest on a robust and replenishable sources of talent.

There are many examples of ecosystems that seemed to produce talent before the ecosystem started growing and very quickly talent shortages strangled most potential scale-ups that had to move their technical teams to other locales or relocate altogether. What looks like a deep pool of talent quickly disappears after only a handful of companies start hiring and reach the limit that the local ecosystem is capable of providing.

The common sources of high caliber talent vary but generally revolve around a few sources:

  1. A healthy and adaptive educational system that is in touch with industry.
  2. A growing number of graduates from previous successful ventures or innovative large companies.
  3. Inward migration of talent seeking opportunities in the emerging ecosystem for career and personal reasons.
  4. An upskilled workforce learning the practical tools, mindsets and skills required to support both startup and scale-ups

Risk tolerance:

The only thing you have to fear is fear itself

Startups are risky, and by extension initiatives that support them will not generate successes 100 percent% of the time. Be ready for it.

There is a big difference between supporting a “Theranos”, a case in which hype and bad governance extended to fraud, and supporting ventures who do not succeed.

It seems obvious but, from observation, it seems that entrepreneurial supporters at larger organizations expect a high rate of success thus driving focus on less risky startups. Avoid that.

A governance structure that is comfortable with the vision and trust the initiative leaders should allow for mis-steps as long as they were well intentioned mistakes and lessons are learned.

What this note didn’t specifically focus on:

While the following two topics are important, we felt they are always given too much prominence in discussions around scaling startup ecosystems. These are the obvious topics that consultants and others bring up although in our opinion not the most impactful.

Below are some high level thoughts that we were still tempted to include:

  1. Money
    The automatic reflex of many entrepreneurship initiatives is to either inject or encourage the injection of large sums of money into the ecosystem.
    In our opinion, most of these efforts are misguided and are more destructive than productive.It is exciting to announce hundreds of millions or billions to be invested in startups. However, a large disbursement of capital, like fuel thrown on an open flame, burns bright but then disappears. What is needed is the tactical injection of fuel into a humming engine, and this usually happens organically as other components are put in place. As Brad Feld mentions in his book:“If there isn’t a robust venture capital in your region it’s because there isn’t a vibrant entrepreneurial community with great startups. As venture capital exists to service startup when great startups are built investors will show up.” – Brad FeldThis tactical injection could be phased across time as other milestones in the ecosystem are demonstrated such as new venture launches and ventures looking for funding at Series B or beyond. It is also wise to understand which funding phase is under capitalized and support that tranche specifically.
  2. Regulation
    We agree, regulation highly impacts the development of the ecosystem. That said, our observation has been that announcements around regulation changes to facilitate startups fall into two categories:

    1. “We have reduced the time to create a new company from 3 weeks to 3 hours” maybe useful and definitely appreciated but will not move the needle because very few entrepreneurs that had plans to launch major scaling venture were intimidated by some bureaucratic steps that take a couple of weeks. Frustrated yes, intimidated no.
    2. Major announcements to make it much easier to operate but rarely followed with real implementation.

    Our recommendation on this front is to give some entrepreneurs who mean well and are doing their best some leeway. This is hard to implement, but no one said it was easy.

    One potential alternative is to set a framework that is more open to new business models as opposed to a restrictive rulebook that constricts business.

    We have seen many startups struggle, shutdown or not even set up in certain ecosystems because of intensely restricted activities even though a decision maker with judgement could have deducted that the activity being conducted poses very few risks to consumers and investors.

Anecdote:

One of the most successful startups to launch out of our Dubai co-working spaces, Shedul, a global leading platform for salon and spa bookings, that has recently raised money from international investors at a $105 million valuation was on the brink of not being able to register for a company license because a compliance manager was concerned that taking customer payment for bookings was too much of a risk, a practice that is a standard when you buy a movie, concert or event ticket online.

No startup is risk free, but the risk of a default on a haircut should weigh less than the risk of strangling an ecosystem.

Summary takeaways:


About AstroLabs:

AstroLabs is dedicated to building digital capabilities through our academy and network of coworking spaces.

Since 2013, AstroLabs has been on a mission to develop the tech entrepreneurial ecosystem in the region, supporting hundreds of startups to set up and scale up in the United Arab Emirates and Saudi Arabia. Our academy offers specialized courses across a range of digital transformation topics, teaching global best practices anchored in local context. All AstroLabs courses are co-designed with and delivered by our network of practitioner instructors, resulting in a uniquely interactive training experience.

We offer open-enrollment courses through our academy on topics such as digital marketing, data insights and coding, and our Enterprise Academy partners with the region’s top corporate clients to design custom learning programs that upskill their teams. We also work with governments and large corporates to develop bespoke accelerator programs. The Accelerator Academy is a full-suite accelerator program solution, including design, startup sourcing, and expert-driven curriculum.

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