Consistent Funding is the Necessary Element for a Startup Ecosystem
This is Part 1 of 3 in a series on Global Startup Success
A few years back, I was in a meeting between local tech leaders and a city official. Her responsibility was to oversee entrepreneurial policy for the Mayor’s office of the city of San Diego, California. With a clear agenda, she asked the assembled tech leaders about the San Diego ecosystem. Most of us criticized the lack of a startup funding infrastructure. One attendee who, at the time, managed the only major corporate incubator, recognized the political nature of the event, saying San Diego has so many great founders and startups that we need not worry about the fact there isn’t much funding, since an ecosystems’ success is determined by the the size of the founder pool — the fallacy of the “if you build it they (the investors) will come” philosophy. Nice sounding, but nonsense.
While it is necessary to have a pool of talented entrepreneurs with solid ideas, it is not sufficient. Through my past 25 years of experiences in San Diego and many other emerging ecosystems—from Latin America, to Asia, to Eastern Europe—I know the primary determinate of success is the breadth and depth of the funding infrastructure. More specifically, an abundance of seed-stage capital. The type of investor is also crucial: they need to be comfortable investing in risk capital. Even highly developed capital markets are unable to nurture a local startup ecosystem if the main forms of capital financing are real estate and construction, or commercial and investment banking.
The best sources of seed capital are no longer venture capitalists, as they are increasingly moving up the value chain and there are few of them on the ground in emerging ecosystems, focusing as they do on the Bay Area, NYC, Boston, China, and India. Now, the best sources of seed capital are successful entrepreneurs, both individually and grouped together in angel funds and microVCs. They have the capital and the experience to identify and help the best entrepreneurs with the most promising ideas and products.
The problem is, they focus where capital exists already, in other words, the Bay Area and the few other regions with a series of successful startups. The most promising companies in emerging ecosystems have a simple choice: stay in your preferred geographical location and starve, or move to the Valley and find the capital you need to get to growth and revenue. So most move. And they don’t come back, so their newfound fortunes go to perpetuate the cycle of Silicon Valley successes.
In 25 years of building startups in and out of Silicon Valley, I have experienced the crushing burden of raising consistent funding. In Silicon Valley, this difficult but manageable. In emerging ecosystems, from Santiago to San Diego to Saigon, it is a task that can never be completed.
If an emerging ecosystem wants to develop for the long term, they need to break that cycle — they need to find funding to keep the best founders and companies in their region. This is hard work that has no guarantee of success. The ecosystems that manage it are either so large the pool of risk capital is big enough to sustain a few unicorns (New York and Los Angeles), or have some cultural, structural or industry strengths that are hard to replicate (Tel Aviv, Boston, Salt Lake City/Provo).
How to break the cycle if you lack a differentiable advantage? Government funding is often posited as the solution, but it fails because it crowds-out the actual solution, which is to pool private capital. While most individual ecosystems lack sufficient private investors to develop a large enough pool, global pools have an abundance of potential capital since Silicon Valley’s best investment opportunities are essentially closed to outsiders. This leaves non-Valley risk capital investors outside the circle without good options for investing in the best companies and open to the potential of companies elsewhere. More on this in the next post, “Empowering Excluded Investors”.