Why do we need a startup ecosystem?

Whenever I talk with people about startup ecosystems it’s usually a matter of time before they ask the “why” question: Why do we need an ecosystem in the first place? Are all the other support systems (incubators, accelerators, VCs, regional development offices, etc) not working totally fine? And yes, a lot of support systems are working fine, but while writing these series and talking to a lot of people, there are a number of trends which keep “popping up” in the conversations, and which, in my opinion, point towards an ecosystem. I’ll talk you through all of them in this post.

Survival Rate of Companies (1970–2000)

Companies are started everywhere and all of the time. You would guess that we, as a society, would become better and better at starting and running companies (as we’ve been doing it for quite a while now..). Just like we design faster processors, and have less failures when launching satellites.

However, the survival rate has been oddly stable over the years. The Kauffman Institute published research in 2010 which contains the figure below, which shows the average survival rate of new businesses over 1977–2001. After 5 years, only 49% is still alive. This number did not change much over the years! In other words: we’ve not gotten better in starting (and managing) companies. You could argue that survival rate is the wrong proxy for “success”, which I did in this article, but it seems to be the only data available (if you have any recent data, or data on the “success” instead of on the survival rate, please let me know!).

If you’re thinking that this represents “general businesses” and that they are different than startups, you’re thinking the same thing as I did. Surely startups are different, right? When you hear the word startup you might be thinking of Facebook, Paypal or Spotify, but High Growth tech Firms (or NVT, New Technology Ventures) have been here for a long time (think of HP, IBM etc.), at least, long enough to do some proper research on. Unfortunately, their innovative character decreases their survival rate compared to general businesses: it goes down to 21.9% after 5 years ( data from 1991 till 2000). Again, I would like to have more recent data, if you have any, let me know!

Scalability (2010 — …)

You could argue that companies like HP or IBM are not comparable with startups that originated after 2000 because of the rise of the internet. The internet made it possible to separate information from its physical carrier, and this resulted, amongst others, in scalability (or at least, a much easier path to scale than ever before). Steve Blank even described scalability as one of the most important aspects of a startup in his first books. If scalability is so important for startups, then let’s zoom in on what happened after 2010.

Dropping costs of starting a company (2010 — …)

Scalability had one major consequence in another field: It dramatically lowered the cost of starting and running a company. And this in turn leads to a dramatic drop in seed-investment costs. Where you would formerly need 3–5 Million USD for a seed round, at the moment 50.000–500.000 USD is enough to check the viability of a business.

A new era of experimentation (2010 — …)

This dramatic drop of costs led to a huge increase of seed-accelerator kind of programmes around 2010 (YCombinator, Techstars, 500 Startups, etc) and these two drivers (the drop in cost to start a business and the ease of scaling that the internet brought) led to an era of startup / investment experimentation (and we’re still in it). This era started with gurus like Steve Blank, Eric Ries, Peter Thiel and Alexander Osterwalder.

You would expect that the rise of the internet, the lowering of the starting and running cost and so much new knowledge on how to run startups in this day and age would increase the survival rate of companies. However, there is no data available to back this up. It seems we’ve just started this new era of business management, and are still experimenting at full force, therefore there is no effect on the survival rate so far.

Knowledge got created (2010), and became free (2020)

A big difference when starting a startup nowadays compared to let’s say 2005, is the immense amount of knowledge we have attained on starting high growth ventures. Back in 2005 you might find an obscure blog of Steve Blank or you could read The four steps to the epiphany (Eric Ries was still a student at Berkeley in 2003, getting lectures from Steve ;)), but lean startup was not a thing back then. Starting a business was really experimenting and programs were highly valued because these programs were moments where you could meet like-minded people, other entrepreneurs who went through similar situations. In other words: these programs were basically your only source of knowledge back then.

Fast forward to 2020 and you don’t need a program anymore to learn about startups. The list of startup books is immense and you are not a successful venture capitalist or serial entrepreneur if you haven’t written about it. This means that startup knowledge is not limited to programs anymore, but is readily available at every bookstore (and for that matter: podcast, ted talk, blogposts, etc)

The final step in this trend are the free (online) programs that a lot of the larger accelerator programs are running. The knowledge is not only available, it is free nowadays, and you can “take” it when you want it/need it. How to fundraise, how to sell, how to market, how to pitch, type it into youtube or join one of the free bootcamps and there are millions of free clips to watch.

Impact on support

This scalability (and freedom of information) did not only affect the startups, it also affects the programmes and support organizations themselves. It seems their roles are changing, accelerated by the covid situation. I’m not saying that people won’t get together anymore in some kind of program, I’m just saying the traditional way of learning will disappear ( this can also be seen in the rise of the MOOC).

Compare the situation with 10 years ago. Lean startup and zero to one have not been written, the business model canvas did not exist yet. People who experienced startup marketing, sales, or start up funding and who are willing to share were priceless. In 2020, all this information is available for everyone, without cost. Instead of showing up unprepared, program hosts will expect a certain knowledge level. And instead of learning from the trainer, the most knowledge will be in the group itself.

As a result founders are not OK anymore with handing over 8% of equity and receiving 50k USD and a handful of workshops on SEO and building an investor deck in return.

The nature of a startup

But these are just trends, they will change in a years time. There is a more fundamental issue at play: the uncertain nature of a startup and its environment, which makes the startup hard to support a startup if you are a (complicated) bureaucratic organisation yourself.

The very nature of a startup is that everything continuously changes: the goals, the milestones, the people, the commitment, the culture, the awareness, the management and management style, the sales, the technology, the products, you get the idea: everything changes. This essence of change makes it a hard customer to cater for, especially if your own organization is on the opposite side of the spectrum (banks vs startups for example).

I mentioned in one of my earlier posts that startups are going through different phases. Different as most startups are, they have these phases in common. It’s almost not possible to skip a phase, and therefore, not possible to skip challenges, milestones and issues. Understanding these phases and using them to group startups together is an important tool to select startups and batch them together. If startups are in the same phase they will have similar challenges to solve, and milestones to reach.

The startup environment

One other thing all startups have in common is their complex nature. We are just barely grasping how startups work (even though we’ve been writing about if for a decade), they are still in the complex area (still somewhat uncertain of the why, and somewhat uncertain of the what). We sort of know how to run a startup, but there’s no magic recipe, especially not when the startup is founded in an emerging industry (also a complex environment!). This is also the big difference between startups and “normal” businesses like bakers and barbers. They know how to make bread, opposed to startups, who do not yet know how to create their products (let alone how to sell them, fund them, produce them and hire everyone to get it done).

Ecosystems

There are two things happening here:

1) A number of trends driving the industry towards a new support structure. One where knowledge is no longer pushed from trainer to startups, but is shared from peer 2 peer. One where we start learning from others mistakes, one where we can actually increase the survival rate of companies.

2) The other one is the basic misalignment of a startup with other “fixed” organizations. This misalignment makes it very hard to support a startup with a fixed structure as a program for longer periods of time. This does not only count for programs, but also for mentors and even for VCs. Everyone has an expiration date if your partner keeps changing and changing and changing. The moment a mentor is out of experiences to share which are applicable to the startups challenges or when a VC can’t afford the next round of financing the support is done for. This does not mean the support is not valuable or meaningful, just that it is limited in time (and therefore in value).

If your goal is to support startups for their entire journey, you could solve this problem by creating a flexible program, or a flexible fund, and this is done by some organizations (However, you are not using the value of the system in that case, I have written about the bottleneck of one central organization in a network). It is, however, much easier (and better for the system!) to accept that the support will end at a certain point, and someone else will take over. Another mentor, more experienced with the next set of challenges, a new VC fund with bigger pockets and a new program.

When you accept the fact that a fixed program, or a fixed coach only has a temporary role, your role as a support organization changes. You will go from organizing and structuring a rigid structure to organizing an ecosystem of trust & support.

You will have to start doing three things:

  1. Making sure the people, organisations and programs are there for every phase, and to make sure the handover between the different actors is smooth (which means, amongst other things, there is trust between all the actors).
  2. Orchestrating this web of actors (founders, entrepreneurs, mentors, universities, incubators, VCs, etc) and factors (financial capital, human capital, intellectual capital, etc)
  3. At the same time creating and managing a culture of trust in the ecosystem is the key to creating and building the ecosystem which is needed for proper lifelong support.

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