I was in upstate New York last week to speak at Rochester’s Startup Weekend. Upstate New York is working hard to create a startup ecosystem in the footsteps of Chicago’s success. Jon Spitz of 43North (a state-funded business plan competition giving out $5M in prizes1) and I were talking about the importance of density in developing a startup ecosystem. Last week, I listed lack of a main tree as 1 the 3 challenges to starting business in Chicago. Here’s why the density created by a main tree can give developing ecosystems a head start.
Why Density Matters
In his Harvard Business Review article “Clusters and the New Economics of Competition”, Michael Porter2 of Harvard Business School fame outlined the importance of “geographic concentrations of interconnected companies and institutions in a particular field” in creating competitive advantage and new businesses. Will Price did a great post building on this framework to analyze the cost premium of being located in Silicon Valley when so much of the world is now online and he could conceivable move his company anywhere to cut costs. He ultimately concluded the cost premium of Silicon Valley is offset by the benefits of a well-developed startup cluster. A main tree and its offshoots create local density which can give startups a critical edge.
In my startup experience, density of closely related companies has 3 main benefits:
1.Employees with deep subject matter expertise
As an investor, I look for entrepreneurs with deep domain expertise. They in turn need a team with both skill and market expertise. Domain expertise cannot be learned from a book and is not easily transferable from one industry to another.
A concentration of closely related companies gives startups a pool to recruit from rather than trying to either impart subject matter expertise. Moreover, it makes it easier to recruit others into the community because the risk of long-term unemployment is mitigated by the availability of other jobs if the venture fails.
2. Collaborators
Risk taking inevitably leads to mistakes. Success (or more accurately not failing) is often determined by how quickly you recover. Learning from someone else’s mistakes and only taking risks in the areas that matter to your specific business is a far easier path.
Some challenges are industry agnostic and the advice of other startups or online is sufficient. Other challenges, often the hardest, make-or break your company sort require substantial know-how. While I was at US Genomics we faced a substantial hurdle scaling our biochip production. A 1 in 10 yield rate might work for internal purposes, but not customers. Our entire business was in jeopardy because of bubbles. We needed a solution. Fast. We spent a substantial amount of time in the labs of experts across academia and thought leading biotechs getting advice that eventually led to a solution. We didn’t have the time or budget to fly across the country and there was no substitute from face to face collaboration.
3. Capital
Investors typically invest in things they either deeply understand or because of a personal relationship. The easiest early money to raise often has both attributes. Concentration of similar companies increase the pool of potential angel investors as one generation funds the next. Concentration also increases the level of attention from professional investors. As a VC, I dedicated my time in hubs where the company activity and investment dollars were mismatched. The return on effort from spending 3 days in Southern California looking at medtech companies significantly outweighed flying to Boise for 1 hot lead.
Building Your Cluster
In the absence of a well-established cluster, here are 3 things you can do:
1. Marshal existing resources
Get companies in your industry together. It doesn’t matter if they are a startup or at scale. Include industry experts and academics most closely related to your business. Even with Boston’s long history in financial services, we found it beneficial to better organize. We started a Financial Entrepreneurs Working group (FEW) to regularly get together and share resources, provide advice and emotionally support each other through the nuances of being a FinTech company. This eventually became a much larger meetup with over 100 people regularly in attendance.
2. Location. Location. Location.
Price, appearance and proximity to food & transportation are important but are not the only factors to consider when selecting your office site. I didn’t fully appreciate that when I moved US Genomics from the Boston University Photonics Center to a northern suburb. Eventually a cluster known as the Biotech Ghetto built up around us, but we spent 6 years commuting back to Kendall Square and the major universities to meet with partners, potential hires and investors.
3. Hit the road
Make it a point to regularly visit the hubs of your industry and carefully select key conferences to attend where you can build relationships. You don’t need an expensive ticket or exclusive invitation to lobby surf. I spent 3 packed days at SXSW, without a badge (it wasn’t in the budget). SXSW had the greatest concentration of companies I needed to meet with so I was there. I missed some great talks but I also made the most of the time I was there.
The lack of industry concentration is a challenge to developing ecosystems but it is not insurmountable. It does require thoughtful attention however or it can be the friction that keeps your startup from taking off.
Notes:
1. Winners of the grand prize must agree to relocate operations to Buffalo for at least a year. Apply here if you’re interested.
2. I was working for Michael Porter’s consulting firm at the time of his article’s publication. I don’t believe this imparts bias but prefer to disclose associations.
