Anyone Can Build an Entrepreneurial Ecosystem

European Straits #183

Hi, it’s Nicolas from The Family. Today I have the pleasure of reviewing a new book by well-known investor Brad Feld and my dear friend Ian Hathaway: The Startup Community Way.

⚠️ New column in Sifted! Read it here 👉 Dark clouds on the horizon for European Venture Capital 🌩

In their quarterly update about new European venture capital funds, impact investor Stefano Bernardi and Yannick Roux of Semantic Ventures write that it has been “the wildest quarter in a long time”, with “33 new European funds closing almost €3B in fresh new capital”.

📖 Today’s essay is my review of Brad Feld and Ian Hathaway’s new book, The Startup Community Way, which will be released in exactly one week—you should pre-order it without delay! 👇

1/ The Startup Community Way by Brad Feld and Ian Hathaway is special to me because of an American-Israeli investor named Ben Wiener. In 2015, when my co-founders and I decided to expand The Family’s investment business beyond France, I was the one tasked with making us exist in English. I decided to launch a series of long-form essays titled The Family Papers, and to dedicate the very first issue to a topic that was key for us: entrepreneurial ecosystems

Back then, there was a lot to read on the topic, but not much that (for me) was actionable. There were dozens of articles explaining how healthy and thriving entrepreneurial ecosystems work. But I couldn’t find the articles explaining how those ecosystems came to be: the dynamics of it all; what Silicon Valley was like before it became Silicon Valley; what the infancy and teenage years of an ecosystem look like before it starts to churn out successful tech companies.

I decided I wanted to crack that nut, and so I read even more. Then I compared what I was reading with my own experience in Paris and my knowledge of other ecosystems such as Silicon Valley, London, Israel, and a few others (China was not on my map yet). Finally, I came up with what to this day has remained my personal framework to explain entrepreneurial ecosystem building:

At the very beginning, you need three key ingredients: talent (engineers, developers, designers, salespersons, managers); capital (lots of money, either in cash or in terms of infrastructure); and rebelliousness (a widespread consensus that the status quo deserves no respect whatsoever). If you have the three ingredients, you can mix them up so as to build an entrepreneurial ecosystem. If you only have two, you can usually buy the third one from abroad (as Israel brought in missing capital from the US thanks to the Yozma program in the 1990s); but if you only have one ingredient out of the three, well, the cause is likely lost 😢

2/ It so happens that Ben Wiener, the founder of Jerusalem-based Jumpspeed Ventures, read my essay right after it was published and used it to nurture his own work with the local startup community in his city. As Ben himself explains in a flattering quote in The Startup Community Way 🤗

Nicolas Colin of The Family has a fantastic three-part formula for self-sustaining technology ecosystems: (1) technological know-how, (2) capital, and (3) a spirit of rebellion. Jerusalem always had the technological know-how in its academic institutions and large companies. A new generation of primarily young entrepreneurs who were too naive and headstrong to know that Jerusalem was off the radar for Tel Aviv investors led the spirit of rebellion. Capital, which had been present in the late 1990s but vanished after the dot-com bubble burst, was needed. After some time and with some effort, capital started to slowly trickle back in.

(As an aside, I’m honored that Ben also once pitched my essay to John Hickenlooper, then-governor of Colorado and a founder of the microbrewery industry, as he tells in this conversation with Brad Feld.)

All in all, a lot came out of this early (and long unknown) intellectual connection with Ben. Not only did I have the pleasure of finally meeting the man himself when I visited Jerusalem two years ago, Ben is also the connector who put me on Ian Hathaway’s map. Back when we were both still living in London, Ian wrote me out of the blue on Twitter, having just read my essay at Ben’s invitation, and suggested we have breakfast together. We instantly became friends and have been in close touch ever since.

3/ I was lucky to get an advance copy of The Startup Community Way and had a great time reading it. It bridges a gap that’s been widening for far too long: that between the tech world on one hand, and everyone that wants to ‘help’ startups without really understanding them on the other.

There have been many attempts by people in the tech world to explain what building startups is really about. Brad Feld himself wrote the widely (and rightfully) praised Startup Communities, a precursor to The Startup Community Way, back in 2012. Alas, when startup people speak, whether they are Brad, inspiring as he is, or others, they still often use their own jargon and Weltanschauung, making it difficult for people on the outside to understand them. As I frequently explain to startup founders:

You can’t go meet people outside the startup world and start talking to them in terms of “technology”, “AI”, “disruption”, “product/market fit”, “scalability”, “platforms”, “cap table”, “angel investing”, and “venture capital”. Diplomacy is about taking many steps in the other person’s direction and learning to speak their language. Only then will you be able to convey the message you really care about while striking a responsive chord in your interlocutors.

Yet I don’t know of many works (books, blogs) that actually help founders do that. My own book Hedge was an attempt to discuss startups in the language of social policy, economic security, and institutions. I feel it was quite successful with people in the startup world, because they have a clear understanding of the importance of getting closer to regulators and policymakers. But I must admit Hedge failed to raise much interest in the world of policymaking. Despite my own background in government, it’s still very difficult, even for me, to talk about startups and entrepreneurship to people who don’t belong to that world.

This, fortunately, is where I think Brad and Ian’s book will eventually bridge the gap. Because theirs in an approach that goes well beyond my and others’ work in at least three respects.

4/ First, Brad and Ian make a clear (and welcome) distinction between a startup community (“the beating heart of entrepreneurship in a city”) and the related entrepreneurial ecosystem (“a generalized structure that wraps around and depends on a startup community to give it life”).

In concrete terms, the startup community includes all founders, connectors, dealmakers, and investors that literally spend their whole life within startups or working with them. The entrepreneurial ecosystem, on the other hand, is the sum of all actors that contribute to the development of startups but who still have to direct most of their attention elsewhere. That includes large corporations, the government, universities, bankers, lawyers, journalists, service providers, and so on.

A key concept to understand how startup communities and entrepreneurial ecosystems are two categories that are distinct yet complementary is the illuminating idea of a “community/ecosystem fit”:

Cultivation and support of leaders that emerge from the startup community are essential to consistently produce better entrepreneurs and startups. As entrepreneurs succeed, actors in the broader entrepreneurial ecosystem will engage more effectively with the startup community, and a virtuous cycle will develop that draws in more people, resources, and support. This is similar to the entrepreneurship concept of product/market fit, so we call it community/ecosystem fit

5/ Let me add my own bit here. Ian and I had back-and-forths around this concept of “fit” last year. I had sent him this article about ‘product/market fit’ as illustrated by the Secret Service protecting then-presidential candidate Gary Hart in 1984:

“Look,” Johnson said, “I was in Iowa with Senator Hart three weeks ago, in mid-January, and there was nothing going on. But I was back there for the last four days. People are coming up to him. They want to touch him.”

He stopped briefly to take a breath. “I have to keep people from pushing him and trying to get a piece of him. This is always the first indication that something significant is happening for your candidate.”

Indeed, here’s a key insight of Brad and Ian’s book: the startup community always comes first. But then, if it takes off, as Gary Hart did in Iowa back in the 1984 winter, many people push forward and try to get a piece of it, which is “always the first indication that something significant is happening” for startups in a given place. Only then can you start building the local entrepreneurial ecosystem, wrapping that general structure around the local startup community so as to have that flywheel beginning to turn: “The actors in the entrepreneurial ecosystem can engage in a way that positively reinforces both the startup community and the entrepreneurial ecosystem.”

There’s the ecosystem fitting the community!

6/ A second thing that struck me in the book is that, almost in passing, Brad and Ian provide a clear economic explanation of what a startup community is about and why it’s so important. I’m sure they’re not the first to do this, but the magic of this book is that it picks its words so carefully in articulating a rigorous scientific discourse and still resonating with people in the tech world:

Entrepreneurs must acquire more than innovative ideas, technologies, or industry-specific information. They must also amass a team of skilled employees, customers, and suppliers, and support them with the startup funding and know-how that are specific to the venture-building process. The traditional market mechanism, where buyers and sellers exchange goods, services, or information at a specified price and set of terms, doesn’t work well in this context. For startups, this presents two acute challenges. They are especially reliant on the external environment vis-a-vis most other businesses, and they are often deficient in critical resources.

I love this idea of a startup community as a temporary patch to go around a market imperfection. The next step, obviously, is to correct the imperfection and reshape the market so as to optimize allocation over time: this is exactly when the entrepreneurial ecosystem takes over from the startup community. 

7/ Finally, the book’s main intellectual breakthrough is applying a discipline known as complexity theory to a better understanding of startup communities and entrepreneurial ecosystems. I can’t think of a better introduction than this podcast in which Brad shares some background with TechCrunch’s Connie Loizos (at 10:45):

One day, Ian called me, and he said “I’ve come up with the way to think about what a startup community is”. I said, “OK”. He said “It’s a complex, adaptive system”.

I knew some about complexity theory from the 1990s and the Santa Fe Institute. I’d always been interested in it, but I hadn’t gone deep into it. It was startling, though, how well the way that complex systems work then maps onto how startup communities work.

And the key word is ‘evolve’, because complex systems evolve. Anybody who’s in tech that knows Conway’s Game of Life understands emergent behavior. And all these relate to complexity: positive feedback loops, phase changes, contagion...

Brad and Ian’s realization led to the second part of the book, which is a masterpiece at explaining complexity theory, demonstrating how strong and relevant a framework it is for reflecting on growing startup communities and building entrepreneurial ecosystems. 

At first sight, complexity theory often appears to say: “Everything’s so complex, don’t even try to understand it. Whatever happens, happens.” Add a layer of complex graphs and mathematical formulas, and it can all look like Niels Bohr-level quantum theory that none of us mortals can even begin to grasp. 

The reality, however, is much more down-to-earth:

  • A complicated system is about a long and difficult sequence of minute steps that are nonetheless predictable and quantifiable—like, say, auditing Wirecard’s accounts and realizing that some fraud has been going on for years 😉

  • A complex system, on the other hand, is neither predictable nor quantifiable because its state constantly evolves thanks to the interactions of a large number of agents whose individual behavior impacts the system as a whole. Anyone that works in startups knows that this is how the game is played, but being able to abstract it so plainly is a real breakthrough!  

8/ There is sometimes a ‘kumbaya’ spirit in the book that doesn’t really fit with my experience of building an entrepreneurial ecosystem to replace a toxic environment such as 2013 Paris. Brad and Ian insist at every turn that a functioning startup community is all about friendship, having each other’s back, helping each other. What we’ve discovered at The Family, however, is that in some cases you need to embrace a confrontational approach if you want your startup community to thrive and a functional entrepreneurial ecosystem to be wrapped around it. In our experience:

  • In an immature ecosystem there are many different approaches to building up the local startup communities, and that inevitably creates bitter rivalries, toxic gossip, and lots of backstabbing. Yet this doesn’t prevent the startup community from maturing because, in the end, the best practices win out, Darwin-style. Those who had the right intuitions end up with the most successful startups (if they’re founders) or portfolios (if they’re investors). The others are stuck with dysfunctional companies and worthless holdings. 

  • Brad and Ian rightfully insist on the fact that a startup community is never ruled by a king, a boss, or a CEO. To which I would add, as I did in a Sifted piece targeted at US VC firms willing to do business in Europe, “Every ecosystem in Europe is immature. The lack of European tech giants means nobody knows exactly how the game is played here. It doesn’t mean that failure is guaranteed. Rather, it means that multiple groups of people are exploring different ways of building startups. And since it’s too early to know the one best way, there’s no single point of entry in a single city, and definitely not one person who speaks for everyone.”

How you manage these confrontations is critical for the local startup community’s potential success. As often noted by Balaji S. Srinivasan, Silicon Valley works because it makes room for disagreement and doesn’t force everyone to fall in line. If you have another view on a given topic, you can act on it by forking out of the consensus and exploring a different way of solving a given problem.

9/ Overall, I think The Startup Community Way might pave the way for much more than startup communities and entrepreneurial ecosystems. In many respects, it’s a compelling textbook for reflecting about policy in general:

  • I’m sure you’ve observed that today’s policymakers seem unable to change things for the better. They’re still trying to come up with technocratic solutions to society’s problems, but the outcomes are rarely what was intended. The reason should be obvious by now: our national economies, just like startup communities, are complex systems, and you can’t address those with a top-down approach.

  • Why are we still encumbered by this dysfunctional technocratic approach? In part, it’s about power, as Brad and Ian write in the book: policymakers like to control what’s going on. But it’s also because in the past society was more responsive to technocratic nudges since a few large organizations using command-and-control (government agencies, large top-down corporations) had a tight grip over the entire economy. As a result, any policymaker could push just a few buttons and obtain their desired results.

Today’s economy is obviously different, much more decentralized and dominated by free agents. Those free agents have access to increasing computing power and can connect with one another through vast networks that provide unrivaled access to information and various other resources. In other words, today’s economy much more resembles startup communities than did that of the 20th-century Fordist Age. Therefore whatever policymakers learn from working with startup communities following Brad and Ian’s guidelines, they’ll be able to apply to many other policy fields.

This, by the way, is why using complexity theory is so useful. To echo Andy Grove’s vision of a theory, it all provides “a common language and a common way to frame the problem so that we can reach consensus around a counter-intuitive course of action”.

10/ For many years, I’ve been a strong advocate of bridging the gap between startup communities and the rest of the world. This is a message that often falls on deaf ears in Silicon Valley, because people there can afford to ignore the outside world, remaining aloof and insular and simply paying lawyers and lobbyists when their fast-growing business ruffles a few feathers.

Alas, we who try to build (and back) startups outside of Silicon Valley don’t have that luxury. In Europe, in particular, startup communities are immersed in dense and complex environments where they have to coexist with many other participants that aren’t all friendly or understanding when it comes to discovering new business models.

I expect a lot to come from this book finally being available: I urge startup people to use it to better make their case, and I urge non-startup people to read it so as to better understand what the Entrepreneurial Age is all about. So it’s clear as well that I’m grateful that Brad and Ian wrote the book (and that Ben Wiener brought me closer to the whole project in a rather unexpected way).

▶️ Go pre-order it, then read it, and then let me know what you think! 🤗

🤓 Having studied the discipline of ecosystem building myself, I have a lot of articles in my Evernote that cover this topic. Here are a few authors who stand out 👇

  • Steve Blank is more than just the father of the customer development approach to building startups. He also once wrote a compelling “Secret History of Silicon Valley”, of which I’ll share a consolidated and annotated version.

  • Paul Graham became famous thanks to his essays, even before he co-founded Y Combinator. Many of those essays are dedicated to the environment that startups need to thrive. I’ll share the list of my favorites.

  • AnnaLee Saxenian, author of the book Regional Advantage, has contributed a great deal to understanding the path dependency that affects entrepreneurial ecosystems and that can put them on the path to success or failure.

👉🏻 To discover their articles and many others related to today’s edition, become a paying subscriber! The package will be sent to subscribers only with the forthcoming Friday Reads edition 🤗

(Also, later this week, I’ll send my paying subscribers an essay on how a man named Frederick Terman turned Stanford University into the entrepreneurial powerhouse that it is today. I find that this foundational episode in the history of Silicon Valley is still too unknown; yet just like Brad and Ian’s book, it helps us understand what it takes to start building a healthy entrepreneurial ecosystem.)

From 11 Notes on Y Combinator (April 2020):

Early-stage firms, especially self-styled “accelerators”, are misleading for outside observers. We think they are the first brick to be laid out because those firms intervene at the start of business life. But in reality, it is exactly the opposite. Firms such as Y Combinator are rather the finishing touch to an already large and healthy ecosystem (in this case, Silicon Valley), in which we seek to optimize the first steps of the new generations who are following known steps.

In other words, “accelerators” only work well if they have something to pass on. At The Family we have our own doctrine to share, but nothing more. It's ours, not everyone adheres to it, the only thing is that we have worked hard on it, we believe in it, and we keep on refining it day after day. A healthy ecosystem like Silicon Valley has something to convey. But Paris, as an ecosystem, has nothing to transmit that is stable, unequivocal and proven, because it lacks earlier generations of widely successful tech companies.

Therefore it’s impossible to reverse engineer what maximizes the probability of success at the later stages if you don’t have previous generations of companies that have been widely successful. Y Combinator could reverse engineer startup success in Silicon Valley. We in Europe can only guess what could eventually work and try and make it happen.

And in case you missed it:

From Normandy, France 🇫🇷