Can You Build A StartUp Ecosystem? 5 Things You Have to Have

Posted by Jeff Carter
on February 2nd, 2013

A lot of politicians are interested in pursuing startup ecosystems. When they talk about it, everyone agrees that it’s a good idea. Who can be against job creation and creativity? Everyone wants a Silicon Valley in their hometown. But, saying you want to do it and actually building it are two different edges of the table entirely.

Diagram of the typical financing cycle for a startup company. (Photo credit: Wikipedia)

First, it can’t happen overnight. You have to take the long view. By long, I mean a minimum of twenty years-maybe longer. Why that long when tech seems to be transforming the world at breakneck speed? Because there are a number of factors that need to be present to make it work.

1. Human capital that has the ability to innovate.

No industry runs on machines, even high tech. It’s about people. If you don’t have people, you can’t have a startup ecosystem. Good ecosystems are people dense. They incorporate people with lots of diverse talents. Ideally the first people you need, the base of the pyramid, are engineers. Coders that know how to program the plastic and metal boxes. They can transform ideas into computer language that makes beautiful things happen.

One interesting part of the Chicago ecosystem is Starter League. Instead of persuading people to move here, they are training them here. Graduates pepper the Chicago ecosystem. I have had office hours with several people that took a class in programming here. One of my college classmates, Tony Severino, took classes here and is working on an app to transform his personal business. We are 50.

2. People willing to fund risky ventures.

Companies can’t be built without capital. Venture capitalists are the wrong people to go to when you want to start an ecosystem. They have too much money and won’t invest until a company gets to a valuation of $10M or more. They also pick and choose, specialize, and look to scale companies quickly. That leaves little time for mentoring and tinkering, which is what happens in small startups.

For example, yesterday I met with one of my portfolio companies, Smarteys. They just revamped their website and business. We talked a lot about strategy, who I could network them to, and how the business was operating. I had some suggestions for them. Why don’t you take a look at their website and give them feedback too?

VCs don’t really do that. They aren’t as patient as angel investors.

Chicago really didn’t have an organized network of angel capital back in 2007. There were funds. Hyde Park Angels was the first sustainable group that provided risk capital to startups. Many of the first few angels were traders. Because of that group, other individual angels entered the market. More angel groups were formed and now in the midwest, you can raise seed stage capital.

3. Customers.

Having a larger local population that is willing to be guinea pigs for startups really helps. It’s even better when local businesses get involved and take meetings with startups to try and become customers. Revenue jumpstarts an ecosystem like nothing else. Revenue gives the company a decent idea that they are actually creating some value. If the local population is small, it’s a lot harder to find enough users to get valuable feedback. Sure, it all can be done virtually since most of these companies are web enabled. However, going to meet with someone face to face to interact in human terms can help you learn a lot more than a simple email, comment, or phone conversation.

One of the lessons I learned about startups was the creation of the IMM in 1973 ($CME). They solved a problem and used a startup approach. It was a classic lean start up approach for its time. The cost to start companies has gone down drastically since then-but the creation of the IMM is a good primer on how to innovate.

4. Education, Mentorship, Support

People need to learn how to build businesses. They need to learn from others that have been in the trenches. It helps to have an influx of young people because they can afford to take the risks necessary to build a startup company. They often aren’t encumbered by fixed costs of living. However, they need experienced mentors to help guide their path. Mentorship is extremely valuable. If successful local people don’t pitch in with their time and business intelligence to take founders under their wing, then the years it takes to build the ecosystem just got a lot longer.

While not necessary to have academic institutions close by, it helps. They have a constant influx of new students that are intelligent (no matter what they are majoring in) which gives the ecosystem a source of human capital. Additionally, professors can help with mentorship, advice, and by contributing research that leads to building valuable companies.

Mentors and entrepreneurs will host events. They will network people. They will have hackathons, startup weekend, and all the other stuff that gets people together, thinking, creating and energized. Events begin to stitch together a support network so it’s there to catch entrepreneurs when they fail.

In Chicago, we have a lot of great mentors. I have even seen people you think are not interested in mentorship become mentors. JB Pritzker for example. He hasn’t just paid lip service and invested in Chicago, he has invested his time. Troy Henikoff and Sam Yagan put mentorship at the top of their list when they created Excelerate Labs. Academics at all our institutions: UChicago, Northwestern, IIT, DePaul, Illinois, and Notre Dame have pitched in consulting companies (and mentors too!). We are innovating the ways we mentor in Chicago. Having a good mentorship cadre is something that really helps.

I still have mentors to this day, many of them years younger than me. I want mentorship. I am still learning. I ask for it. The ecosystem supports me when I need it. I thank them for it and am grateful for it.

5. Exits

To get the sexiness into the system, companies have to exit. Exits mean people make money. Exits validate their idea. Exits make investors money and then they are more willing to take risk again. Exits allow founders to step back, think and maybe create another company again. Once you are bitten by the entrepreneurship bug, it never seems to leave you. Building and working with startups is energizing. It keeps you optimistic-even when the rest of the world is falling apart.

In Chicago, we have guys that love to get their hands dirty with companies. Bob Geras for example. He was doing this before any of us knew what a startup was. Bob can quote you chapter and verse on exits of all kinds from acquisition to IPO.

We have had numerous successful exits in the past five years. The kahuna was Groupon ($GRPN). Right on cue, people that made money from Groupon are reinvesting in the local ecosystem with their time and money. It’s a cycle that keeps repeating itself.

Exits are a time to pop the champagne. Everyone in the ecosystem ought to smile and congratulate them. A rising tide lifts all boats. If you want to get a handle on what the Chicago ecosystem looks like, visit Built In Chicago. You will find all the people, companies, fundings and exits there. We also have a couple of local web based publications that highlight what’s going on. Technori, and BlacklineReview give you stuff that’s inside info.

Building an ecosystem is extremely hard work. It cannot be done without people. At the beginning of this post, you may remember I said politicians love talking about entrepreneurship because its something everyone can agree on. In my points, notice how much they had to do with building it.

The other thing to remember. Your ecosystem isn’t isolated. It’s not in a vacuum. It needs to be linked across borders and networks. Politicians like growth in their own area, and don’t like this part of entrepreneurship.

No politician from any party ever creates a job. The best thing politicians can do is keep government small, costs low, streets safe, and the bare minimum of government services (water, heat, electric). Government can become a customer to local startups. That is a help. They can talk about the local ecosystem and persuade people to move there-however the best people to do that are the entrepreneurs themselves. The best thing they can do is stand back and get out of the way.

Start thinking about how to put the pieces in place so you can build an ecosystem in your town. I am seeing the roots of pretty cool looking entrepreneurial ecosystems in places like Madison, Wisconsin. It’s easy to say and want, tough to do. Last piece of advice: Don’t remake Silicon Valley. You can’t. Put your own stamp on your ecosystem and build off the existing industries that make your home great.

Follow me on Twitter, like Points and Figures on Facebook.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.