When can a startup ecosystem be considered successful?

In ecosystems, success is a hydra. A many-headed beast. There are as many definitions of success as there are actors and problem definitions in the ecosystem. As you know by now this can be quite a hassle as a mature ecosystem contains a lot of actors.

Why create a startup ecosystem in the first place? Why not just run 4393 programs or hire 432 coaches to do their work? The idea behind the ecosystem is not so much to help individual startups as to create a certain culture. If we can translate this one common goal to all the actors it might be easier to define success for the ecosystem in the long run.

The best long term outcome (see this article on the logical model of ecosystems) would be increased employment, wealth and other (financial) opportunities, and vitality and prosperity in and outside of the ecosystem itself. The hypothesis here is that a deeply embedded culture of entrepreneurship will lead to inspiration among founders, and this entrepreneurial culture will lead to more startups and scaleups, and therefore to more wealth, employment and prosperity.

This seems like a no-brainer but to my surprise a lot of actors in the ecosystem are not able to formulate why they are actually participating in the ecosystem in the first place, and why they choose the means of an ecosystem to get to their goals, instead of using another set of tools (programs, coaching, sponsorship). In other words: if you just want jobs, spend the money on creating jobs, not on the growth of the ecosystem. But if you grow the ecosystem the effect will be much more than just jobs! Then again, it also makes it a lot harder to know if and when you are successful.

Let’s start with taking a look at the success of the most important actor of the ecosystem: startups!

Startup Success

At first sight startup success doesn’t seem too hard to define. You can’t open a business website without getting bombarded with the next unicorn and the same sources can’t stop mentioning the rapid growth of the valuation of Apple, Tesla or Amazon.

But beware! They are reporting on the growth of the valuation, not on the growth of the company itself. It seems as if we have developed a fetish for the valuation of companies, instead of for the companies themselves. And this valuation is already out of control. Just take a look at the net worth of Apple, Amazon or Tesla, it is by no means connected to their real world activities. I can say this, because we know the net revenue of these corporates, the amount of people they employ and some other financial numbers.

What if you do not have these numbers? This absence makes it even harder to value startups in early stages. VCs that invest early on tend to not value them when they invest, instead they bypass the valuation by using a convertible loan.

If valuation is not a good metric for startup success, then what is? Probably something like job growth, customer growth or revenue growth right? That actually depends. Remember the startup growth path? It really matters where you are if you want to define success. Startup Genome wrote about this in their 2019 report. As you can see below inconsistent startups (which tend to slow down on growth in the later stages) actually tend to “grow” faster in the early stages (more customers, more funding, and larger teams). This can be quite confusing, especially if you do not (yet) work with startup phases.

Startup bankruptcy

“Luckily”, on the other side of the success spectrum things are clearer: if startups do not succeed, most of them go bankrupt. And bankruptcy is at least a properly defined concept. You either are, or you aren’t. Bankruptcy is generally considered a bad thing. Unless (here we go again with the phases): the startup has just started. The sooner a startup (and its co-founding team) discover if the business is going to be profitable, the better. If this means that in the first few months people pull the plug, then that’s fine (from the ecosystem perspective). The founding team will start over, or they will land jobs at other startups in the ecosystem. In other words: they will still create value for the ecosystem, just not with their original idea.

As a result success is not as black and white as you might believe. Bankruptcy and success are not black and white, it’s red and all shades of green. It’s actually much better to look at it as a spectrum: on the one end are the ones that go bankrupt (the red on the left), on the other end are the Facebooks, Teslas and Ubers of the world (dark green on the right). We lack a clear definition of probably 70% of the range. Where you are above survival, but not yet an unicorn. We try to fill the gap with zebras, camels, gazelles and cockroaches, but there must be more to it than this!

The result: bankruptcy bias

We have a hard time looking for successful startups, not because there aren’t any, but because success is something different for everyone involved and it changes over time. Because we haven’t yet defined startup success, let alone defined the factors influencing it, it is much easier to analyze and track the startups which went bankrupt. At least there is no discussion on the definition, and as long as we track the important metrics and we do the opposite of what the bankrupted startups do, we’re all good, right?

The chart comes from CB Insights and you can find it here. It shows the top 20 reasons startups fail. It is hard to point your finger at one reason your startup failed, and that’s why CB Insights did a post-mortem analysis on 101 startups. They asked the founders why they thought their startup went bankrupt and everyone could check the boxes (so they could check more than one box, that’s why it doesn’t add up to 100%).

When you look at the content and coaching of programs you could say that a lot of incubators and accelerator programs are geared towards preventing bankruptcy. And YES!Delft was fairly successful in this, we used to say that almost 80% of the deeptech startups in the ecosystem were successful (where success was defined by: survived or made an exit). In other words: not going bankrupt was one of our definitions of success. Does it really work this way? I don’t think so…and I’ll explain why with an example from WOII.

Survivorship Bias

Back in WOII these were the planes which made it back. The red dots are bullet holes, so it made sense to enforce the points which are almost all red, right? Well yes, if you focus on the planes which made it back (the survivors).

“The bullet holes in the returning aircraft, then, represented areas where a bomber could take damage and still fly well enough to return safely to base. Thus, Wald proposed that the Navy reinforce areas where the returning aircraft were unscathed,since those were the areas that, if hit, would cause the plane to be lost.”

If you think about it, the engineers had a relatively easy time. There were just two categories: the ones who survived and came back, and the ones who didn’t. You can’t check the ones who didn’t come back, so you take the reverse of the ones who survived, and you strengthen the white parts of the planes, not the red parts.

Unfortunately, as we’ve seen already, success is not as clearly defined as surviving airplanes. And in this case we don’t have two categories, but basically hundreds. And to make it even worse: they change over time! Solely focusing on the ones which went bankrupt and then reversing the strategies might result in a lot less bankruptcies (orange arrow area), but that is not necessarily what you want, as a lot of them will end up as a startup zombie. Not dead, but also not really alive and kicking.

Circus and zoo animals (and zombies!)

Then there is the survival part: where startups do not go bankrupt, but profitability is a (very, very) long way to go (see survival on the spectrum). There is research done by Paul D. Reynolds which shows that from a society point of view the worst you can get is an “active startup” which is so much as a startup which survives, but is not making a profit (anytime soon), is not growing (fast), is not developing new products but is also not on the brink of bankruptcy (to continue the animal labelling, you could call them circus animals, or zoo animals if you want to: very good at doing a few tricks, but they do not make a lot of progress and or movement, they are also called zombies).

Why are these so bad? They are not creating (a lot of) jobs and they are not providing innovation, yet they are using office space, applying for grants and subsidies and worst of all: the opportunity cost of their founders and employees are extremely high: imagine the amount of energy that goes into running a company, what if that energy would go somewhere else, somewhere successful, imagine the effect of all their energy in a company which does move towards success!

In my own words Reynolds pushes for having profitable businesses as soon as possible (this is not the same as actually making a profit, startups hardly make a profit in the first decade) or to quit the startup as soon as possible and look for a new idea, a new opportunity or a new job.

Startup Success over time

What does this mean for your ecosystem? There are some (counter intuitive) pointers here: a high # of “pulled plugs” in the early months/year is actually a good thing (a sign of success for the ecosystem) and that zero progress in a startup is one of the worst signals there are.

It also shows, again, that the definition of success changes while the startup changes. What can be considered a success in the idea stage (pulling the plug) is considered a failure in the scaling phase. Explosive growth of the team in the scale phase would be excellent, but if this happens in phase 2 that would be a warning sign.

Support Organization Success

As a startup support organization you are one of the interesting actors in the ecosystem. You’re probably the only one there which is solely there to support startups (perhaps depending a bit on your for profit/not for profit status). Media, Universities, Banks, Research, Local Gov, basically everyone finds startups interesting, but are not solely depending on them for their success. But we’ve just seen that the success of a startup is hard to define and it’s changing over time, so where does that leave you?

I suggest a strategy based on three paths:

  1. Define your own startup success and share it
  2. Check your factors
  3. Track over time

Define your own (startup) success

As we’ve concluded above there is no real definition of startup success, so you will have to define your own success and share it with the other actors in the ecosystem (see the spectrum between “success? and “unicorn”). What are you aiming for, and define this per phase of the startups. It is very tempting to start counting everything: # of startups, # of bankruptcies, # of employees, $ sales, $ of valuation, and you should definitely do this (because only by tracking progress you will notice trends) but remember to value the development over time, and not the snapshot! |There is also more to the ecosystem than just quantity. Try to find ways to also count or quantify the quality of the startups in the ecosystem!

The other part of your ecosystem is perhaps even harder to define: you have to go back to why you wanted the ecosystem in the first place: a deeply embedded culture of entrepreneurship, more inspiration among founders, and an entrepreneurial culture. Try to define what, for you, signals success, and this really ties into the different factors.

Check your factors

You’re not just there to develop more and larger startups. You are also in the lead to develop the factors in the ecosystem: network, financial, intellectual, cultural, human, institutional and physical capital. For each of the factors you should find a success definition and different milestones to get there. Again, share these definitions with the other actors in the ecosystem and align them with their definitions. Most of the time they will not have thought about it, or only have vague ideas of what they want to achieve in these areas, so you can be in the lead!

Track over time

Success is not achieved in a year. Just like a forest needs twenty years to grow, you need at least as long to develop an entrepreneurial ecosystem. The ecosystem, just like the startups which are in it, is continuously developing. Therefore a definition of success is not enough. You should define milestones for certain time periods and track your progress. Don’t get discouraged if you do not meet all your milestones in one year! Creating an entrepreneurial culture takes time, setting up institutional capital takes perhaps even longer! If you track your progress over time (bi-annual for instance) this allows you to follow the larger trends of your ecosystem, to understand the mechanism better and to perhaps even influence some of them.

Ecosystem Success

Imagine the following scenario: the forest is growing and growing, it’s developing magnificently, it attracts a lot of different species and the trees are sky high. But: there are also a lot of dead ones on the ground. You occasionally find a dead animal or a forest fire clears out an area of the forest. To top this off: the organization you are working for as a wild life guard is going bankrupt and you will probably get laid off in a few months. In other words: startups can go bankrupt, support organizations as well, and still the ecosystem can be considered a success.

We’ve seen that splitting the success definition towards startups, your own organization’s success and success of the different factors in the system gives more clarity. But an ecosystem is not a linear model. It’s not a formula of startup success + organization success + factor success = ecosystem success. On the other hand: because it is a complex system, it does not mean that you should not try to quantify it and measure it! It is actually the other way around: the only way to understand a complex system is to track its development over time and model its behaviour! This is a tricky misunderstanding! Therefore, end the article a few pointers:

  1. Yes, there are a lot of lessons from studying bankrupt startups, and we should definitely act on them. But we should not expect that this is enough. A high survival rate is not the same as having success.
  2. As the definition of success is already unclear we should spend much more of our energy on redefining what success actually means, and go from there. At the moment we’re using animals to define types of startups (and their success): unicorns, zebras, camels, gazelles, etc. I think we can do much better than this. It’s OK if this definition is not the same for everyone in the ecosystem. It will change for municipalities (jobs, jobs, jobs), for commercial VCs, for public incubators, for universities, and so on. But we should talk about it, and not just assume we all want the same. What are we aiming for as a startup support industry? Is it really just a herd of unicorns, or is it more?
  3. Valuation is very tricky, and perhaps not a good proxy for the value or wealth created by a company. Now link this tricky proxy to the value or success of your ecosystem and it gets even more tricky, so let me be clear: if you build your ecosystem around the hypothesis that you need more unicorns in your society you will build a poor ecosystem, if you succeed at all. This means that the metric that is most used for success is not a good one to use in your ecosystem. At best it is a proxy for the jobs the startup created, the yearly revenue, the innovative business going on. At worst it is a major bubble waiting to burst (think WeWork).
  4. Track the development of the factors! As startups are easy to count, the intangible things are easy to neglect, but they matter just as much (or perhaps even more). Define what you want to develop, and see if you check your milestones. All the factors together will have more influence on your ecosystem than the startups will. You’re better off with 10 startups and a great entrepreneurial culture, than with a 100 startups but no interaction at all. The first one is a healthy foundation to build on, the second one is a forest without water,: perhaps some high trees, but in the end, just waiting to die.
  5. Keep re-defining your definitions of success. Just as a startup, the ecosystem is in continuous development. Actors will drop out, some others will join, you will go through experimentation phases and perhaps onto scaling. And while doing this, what is considered success will change over time.

Success = People

No matter the definition of your success, what the years at YES!Delft taught me is that we do not spend enough time on the people in the startup industry. The individual people, what drives them, what motivates them, why they do what they do, all this is much more important for success than we currently give it credit for. This shows for instance in the way we select startups: based on their TAM, their IP, their traction, their product, their pitch, or their signed pilot agreements instead of their ability to cope with change, to form the best team, to coordinate and communicate, to discuss, and the ability to put their ego aside.

It also shows when we do talk about teams: While we have numerous definitions and criteria for market, technology, and funding, we’ve just started defining what a good team actually is (a hacker, a hustler, and a hipster, come on..), let alone that we’re able to predict their team dynamics, know if they will attract other A-players, and have different milestones for their team development.

And I made the same mistake writing this article. I was lost in all the actors and factors, and forgot the most important part of the system. This is why I’ve saved the humans to the end. Let’s not forget that while all the constructions (startups, support organizations, local government, intellectual capital, network, etc) are important, the core of the system are its entrepreneurs (in the widest definition possible) and the connections they make. So, we have to ask ourselves one more important question:

When can the ecosystem be considered a success as an individual participant of the system? Outside of the constructions of a startup, a support organizations, a large corporate, and all the other different factors and actors.

While reading the article so far, I realized I actually answered this question before. Therefore, I would like to end the article with the conclusion of something I wrote a year ago, when YES!Delft was just awarded a top 5 spot in the global UBI ranking ( ecosystem rankings, beware!).

Last Thursday we hosted an UNConference (thank you Bart & Gerwin for introducing this concept to us!), and there I saw that, at least for me, success can be defined as the ability to be vulnerable. We hosted several sessions where co-founders completely opened up to the audience, explained what they think was going wrong (or could be improved) in their company (or on a personal level) and asked for feedback from the group. The feedback was honest and sometimes brutal, but conceived by everyone as very valuable. These experiences lead me to a slightly different definition of ecosystem success as the rest of the industry uses:

“Success is to create a place where (co-)founders, startup employees and our own team members feel safe enough to be vulnerable, to talk about what they could improve, to reflect on their behavior and to learn through the feedback and experience of other founders, their own employees and/or our team members”.

I firmly believe that once such a place is created, maintained and promoted, success will be the result. This, for me, also answers the role of a support organization: You are not here to claim the success of startups, therefore you should not be ranked by their success. Startups can get funded by themselves, they can also find the right talent and find their own customers. The role of a support organization is not to do it for them (and to claim their success), but to create a place which supports these processes, which enables people to learn and reflect, to make less mistakes than their predecessors and to go through the process faster than the startups before them. Having a place where you can open up, talk about what happens, and most importantly, receive feedback on your actions takes care of all of this.

Startups, scale-ups, accelerators, incubators, business builders, venture growers & ecosystems. Dutchie living in Sweden.