I spend a lot of my time meeting with entrepreneurs and investors from all around the world. Just this week I met venture partners from Germany, UK, Brazil and Spain and entrepreneurs from Denmark. Entrepreneurship is blossoming around the world. London & Berlin are becoming huge entrepreneurial hubs in Europe and governments in Russia, Spain, Taiwan, Chile, Italy and probably other countries are trying to establish domestic innovation & entrepreneurship hubs (Disclosure: I’m involved in some of these initiatives). With a high unemployment rate and an economy in decline, everybody thinks that entrepreneurship will save the world and create jobs and therefore they all want to know how to replicate Silicon Valley.
Can Silicon Valley be replicated? Reid Hoffman gave his opinion earlier this week. Let me share my humble opinion.
Silicon Valley can be adapted in some countries.
A healthy entrepreneurial ecosystem is dependent on a number of ingredients. While all of them are summarized at the bottom, let me touch upon some of them:
Human capital – The ecosystem cannot exist without a basic element – entrepreneurs. The supply of entrepreneurs is dependent on two main ingredients:
- Universities – In many countries startups emerged either from academic researches or lab experiments (Stanford Research Institute, known as SRI, was established to commercialize some of Stanford’s research) or by a group of students who studies together and teamed up to build a new venture (sounds like the story of Facebook, doesn’t it?). The demographic of the crowd and their day-to-day activities serves as a fertile ground for innovation & entrepreneurship.
Stanford , which established an incubator named StartX, IE business school’s (Spain) Venture Lab and the Tel Aviv University’s Startau are just some examples of university led initiatives to support student led startups. These incubators work closely with the industry to drive practical innovation.
Germany, in the late 90s, recognized the role of universities in the ecosystem and tried to drive entrepreneurship through universities but the lack of industry involvement led them to focus on research vs. development and the initiative failed.
- Culture – Some cultures express zero tolerance to failure. For others failure means you’re closer to success. Similarly, in some cultures being an entrepreneur means being unemployed. In others, being an entrepreneur means being an Innovator. In Taiwan, for example, the dream of a student who just graduated from university is to work for HTC so he can support himself and leave his parents’ house. At Stanford, a significant portion of the graduates, start their own companies.
Culture has been the number one challenge for most countries. Most cultures are risk adverse but a culture can be adjusted in certain groups with the right incentives and a long term view.
Government support – The government plays a key role in driving the change by incentivizing entrepreneurs, making it easy for them to start companies, establishing funds and STAYING AWAY ! Give entrepreneurs little funding so they can work on their venture and sustain for a few months, offer tax incentives and cheap incorporation, support the establishment of the other building blocks (e.g investors) and STAY AWAY ! In countries where unprofessional government officials started making investment decisions and asking entrepreneurs to send status reports every other week instead of building a company, the ecosystem didn’t stand a chance and failed. Put the capital in the right hands and let it go. Israel & Chile are two examples of how limited government involvement led to the establishment of a healthy ecosystem (more about that on the next post).
Investment vehicles – Very few startups can scale with no funding. The entire model is dependent on investors taking some risk and putting capital in exchange for equity or debt. The ecosystem needs early stage investors (angels, incubators and micro-VCs) and most likely late stage investors (Growth stage VCs and banks). The EU has identified this missing element and has been co-investing in VC funds across Europe (with other pieces of the ecosystem are still missing).
Markets– I’ve outlined two critical elements under the title “markets”:
- Demand/customers – My experience led me to the conclusion that a company needs to be located where its customers are (or competitors/partners) to best understand their needs and decision process. It is easier to build a fashion company in Paris, a car company in Detroit or Aichi, Japan and a consumer electronics company in Korea.
Currently most of the global entrepreneurship landscape is focused around online consumer and e-commerce/social networks in particular, leading to disappointing results in many countries. Very few countries have comparative advantages compared to the Silicon Valley. Sectors such as the financial industry, public sector, fashion, food and enterprise are all waiting for innovation. Some geographies have large incumbents, experienced talent and a pool of customers that can better support innovation in those sectors vs. online consumer.
A big challenge for every startup is getting its first customer. A risk adverse late adopters market can “kill” many good startups. On the other hand, a pool of early adopters can quickly lead a startup to find the right product-market fit.
- Exit/liquidation – Investors, at the end of the cycle, are expecting a return on their investment, either through an IPO or an acquisition. Regulation, posing challenges for companies who wish to IPO, lead to concerns about the ability to liquidate and discourages entrepreneurs and investors.
Support system & Infrastructure – Startups need law firms who can incorporate their company, accountants who can support their financial operations (while deferring some of the fees), conferences where they can either present or learn about the market, co-working space (and infrastructure) where they can meet like minded people to work with etc.
I haven’t done a deep research on that, but I bet that a large portion of the entrepreneurs around the world and in the Silicon Valley in Particular are foreigners. I did see a research stating that 25% of the public tech companies in the US were started by immigrants. The UK identified this critical element and established a startup visa. The US is still struggling with that.
I will finalize with a final element that many emerging ecosystems still miss:
Global mindset – Very few markets are large enough (China, India or the US mind be such). Israel was very successful in building its ecosystem mainly since the domestic market is too small and entrepreneurs had to think globally from day one. That means visiting other countries, establish relationship with potential partners early on, and build a product that meets global market regulation and industry standards. Let me leave you with that thought: What is the likelihood of a non-English speaking entrepreneur selling or taking his company public (they are not zero…true).
In summary, very few countries have been successful in building an ecosystem, mainly since they tried to replicate the Silicon Valley, instead of identifying the missing elements, their core strengths and figure out the right way to bridge the gaps.