Friday, March 8, 2019

Self-Sustaining, Regenerative Tech Ecosystems

This is a repost from 2011. As I'm diving back into tech, it feels like a good time to revisit this as I'm now based in the MidWest, which, quite broadly, sports a lot of tech companies and some interdependent ecosystems.

The capital for startups is here, but I'm at the beginning of a raise and am not sure if it's like Central Pa capital--slow, small amounts at low valuations--or competitive with NYC and the Valley.

* unfortunately we lost comments from the original post when I disabled Disqus a few years ago, from Arnold Waldstein, Brad Feld, and a few others. Brad referenced it in one of his posts on startup ecosystems. 

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This post is conjecture from my observations and personal experience, without citations, and was about software ecosystems, though it could be applied to other sectors

For as long as I've been in tech I've heard the term "ecosystem" applied by people in regions outside of the Silicon Valley tech ecosystem to their own regions--aspirationally applied.

Most of them don't have functioning, self-sustaining, regenerative tech ecosystems. 

What's the difference? 

Pennsylvania's a decent example of aspirational efforts to create 
self-sustaining, regenerative tech ecosystems (in the name of complexity, let's give that an acronym: SRTE and pronounce it 'SIR-tee'). 
I'm making this term up, though I imagine someone else has come up with a better descriptor. 

The Ben Franklin Technology Partners Program has created some successes and I like the people I know working in it, but it hasn't created a single SRTE (to my knowledge). So what has it created? 
  • a form-heavy, long process for applying for inadequate funding
  • a bureaucracy for monitoring investments that includes documentation and reporting outside of the normal course of business
  • a network of support professionals and advisors, some of whom are very good and appropriate for startups, others who are not
  • a few great location-based services, including the incubator at Lehigh
  • a number of success stories, and more on the way, in addition to a greater number of failures, which you'll see in the normal startup world too
But it hasn't generated ecosystems. And I think that's partly because its model is not set up to do that, though it's what everyone would love to see.

*2019 note: Ben Franklin has really stepped up and is a now solid player in Pa-- I'm proud to have started one of its success stories.

Let's define SRTE.

A self-sustaining, regenerative ecosystem has these indicators:
  • new startups formed by former employees of earlier startups
  • new startups staffed by former employees of other startups
  • new startups funded by investors and/or employees of earlier startups with part of the proceeds from earlier successes
  • through at least two cycles
Nowhere in there is a long application process followed by inadequate partial funding with substantial non-standard reporting requirements. 

The most important quality: 'regenerative':
  • new startups formed by former employees of earlier startups
    • people learn by doing. The majority of startups fail, and without some level of exposure to building and scaling a startup, first-time founders have higher chance of failure
  • new startups staffed by former employees of other startups
    • this is the key indicator that you have a true "ecosystem": when you have enough viable, growing startups that employees start hopping from one to another, it's clear there's something positive going on--there's energy in the system when there's healthy movement between startups.
  • new startups funded by investors and/or employees of earlier startups with part of the proceeds from earlier successes
    • the system generated dollars that can be plowed back into the next cycle of startups without seed/early stage capital from outside the region--that's self-sustaining.
  • through at least two cycles
    • it must be long enough to get beyond the 'not dead yet' stage to 'thriving'. 
So if you're building a tech startup, why would you choose Pennsylvania or other "flyover" states? 
  • Family: home is home.
  • Relationships: building a new network of supporters elsewhere isn't easy
  • Easy access to your market (true for some, not all)
  • You want to help create a SRTE and believe that it's important and possible. 
Why would you choose to leave? 
  • Capital. PA ranks horrendously low in investing in tech startups, especially in mid-state companies.
  • Talent. You can find developers here, and you can find smart people here, but finding smart people who'll take the risk of joining your early-stage startup is the tough part. We have a more conservative workforce that values stability, and I'll suggest, perhaps wrongly, but in my experience the sense of urgency and ambition is less than what I see in the ecosystems like NY and the Bay.
  • Energy. There's some some something going on in a true ecosystem, and you can feel it, you're revived and propelled by it, you give to it and it gives more back, breaking all laws of physics along the way.
  • Partnerships. It's tough to develop the relationships that lead to partnership discussions, and phone-based partnership development is simply not the same. It takes a lot more work and travel, and you miss out on the random, incidental introductions you get in the true ecosystem. 
If we really want thriving ecosystems in PA, we need to invest in those SRTE qualities. Philly seems to be on its way, but it's missing significant capital flow,* and doesn't have enough exits creating enough wealthy founders and employees to fund the next round of companies ( *this has changed significantly since 2011). 

One or two hits isn't likely enough (Diapers.com was a great one for Philly and I'm looking forward to seeing whether that trickles down); some capital and employees need to be put right back into the ecosystem. 

I would argue against continuing the BFTP program in its current form, and instead choose two or three regions for a 10-year SRTE plan, and focus all energies on that. 

I'd choose regions with one or more recent successes, and organize capital and resources to create at least one successful, self-sustaining regenerative tech ecosystem. I do think having a loose incubator would help, but that it shouldn't be some overbuilt institutional building, it should be an old tobacco warehouse or the like, and simply provide: 
  • hi-speed internet access
  • a Makerbot. Just for fun, if not actual prototypes. 
  • bunch of Arduino kits
  • printers, including a large-format printer
  • desks
  • 2 small conference rooms
  • bathrooms
  • a bit of a lounge area
  • common kitchen
  • scheduled evening classes by participants, local experts, and mentors
  • And some capital--not a huge amount per startup.
This would cost very little. Let's do some math (this is off the cuff--flag it if it's off substantially):
  • 20 startups
  • $25,000/startup (seed only for now)
  • space, etc, which if you live in PA, is cheap and available outside Philly and Pittsburgh. 
  • The list of stuff above
So roughly, $500k to invest, maybe $100k on top of that. Maybe. Likely less. 

To keep the promising startups going, you need additional investment, though I'd hope the startups would have a business model and revenue to shoot for. Quick pseudo-math:
  • half (generously) will survive
  • 8 will have it together enough to take additional capital
  • add 12 months of capital, say with average salaries of $60k
  • 3 people per startup
  • so rounding way up for taxes, marketing, etc
  • $250k times 8 = $2.0 million. 
So now we've risked $2.1 million per region. Out of that, we've created some jobs and opportunities, with 8 companies funded enough to prove out their models. Start the cycle again every year with a new crop. 

Of those, 4 will attract additional capital, 2 will shut down, and 2 will plod along. And of the 4, one will have a decent exit, and the others might be break-even or 2x to 3x. But the one that makes it will return at least 100% of the entire investment

So let's do that annually for 10 years and round up to $3 million. I'd choose three areas: Lancaster, Harrisburg, and Bethlehem. That's $9 million/year or $90 million total, all of which you'd likely make back. Maybe more--we've got some innovative people here. 

The one thing a light incubator like this creates is its own little ecosystem, where startups help each other, and you get the vibe and feel of a some-something going on. That helps, it's energizing, and uplifting.

But I just get the sense we're too process-oriented here, and have spread resources pretty thin to serve too many regions without much to show for it in terms of significant success and they key outcome we had hoped for: self-sustaining, regenerative ecosystems. But we could try. 

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