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How To Build A Great Start-up Economy

Building an economic environment in a microcosm might look a lot like a farmers market.  If you are starting a farmers market, it can only be so big to start.  If you have tons of farmers but not tons of consumers, the farmers don’t make money and leave.  If you have tons of consumers but not tons of farmers, there is not enough to buy and the consumers leave.  You have to start building each metaphorical leg of the stool to achieve big size.

If you are looking for the ad network metaphor, it is the exchange, duh.  You need advertisers to get inventory, you need inventory to get advertisers.

Anyway, lots of people talk about lots of things when it comes to building a great start-up economy, but I wanted to talk about mine.  Here are some stool legs that have to be built for an awesomely vibrant economy:

  • Great schools: Austin has UT.  San Francisco has Stanford.  Boston has some schools, I have been led to understand.  Great schools give start-ups access to people who will work 60 hour weeks for $30k/year – and think they got a good deal!  Cheap, smart talent is critical.
  • Big companies: Austin has Dell, etc..  Big companies retain college grads and put them through monstrous training programs.  Big companies also have skilled individuals who become intimately familiar with markets and disgruntled with big companies.  These people start companies and provide experience when companies need it.  If you were in Austin and needed a young, hungry enterprise sales guy with at least 3 years of experience, there are about 10,000 available.  Big companies also have compensation alignment problems.  Super-duper stars that join right out of school are grossly underpaid relative to their value for 10 – 15 years because big HR requires alignment.
  • Big Success Stories: You need a few companies that won big.  This does a lot of things, but first and foremost, people that worked there think it is easy.  They want to get rich, they want to do a start-up, and they have a built in network of relationships in an industry.  In Baltimore, is a classic example: Millenial Media, TidalTV, LocalRollCall, Deconstruct Media, Lotame and others are all essentially companies inspired by the success of  Further, companies like Carchex, DoublePositive and Blue Sky Factory essentially came from the same network (Ferber relationships) and staffed up via access to people and investors.
  • Investors: I mean A round and seed investors.  And I mean sophisticated investors.  People have to be willing to write checks to these companies.  An environment that seems conducive to funding energizes entrepreneurs and creates the possibility of big hits.  If all of the companies are bootstrapped, you don’t create the network effect of creating Big Success Stories and Big Companies that fuels the economic feedback loop.  Specifically, you need enough investors that there is aggressive competition for deals and pressure to move quickly as an investor.  When I lived in Philadelphia, my constant example was always Safeguard Scientifics.  They were the only big VC firm actively investing in Philadelphia and the result was they felt little pressure to invest.  They could bide their time and wait to see how things turned out.  This is always bad for entrepreneurs because every deal has warts.  Part of what makes Silicon Valley what it is are the legendary “term sheets by that evening”.  There are so many investors and so much pressure to do deals that some deals get funded before they have nailed their business model.  Not every company works out, but enough pivot their way to a business model that the economic loop is fueled.  Alternately, without aggressive funding, the time it takes to pivot a business model is so extended that the loop becomes derailed.  Investors have to aggressively be seeking to fund entrepreneurs.

Those are my four things.  Access to talent and capital and people with the motivation to win and the relationships to get them where they need to go.  If you have that, you are pretty ready.

Y Combinator and incubators are essentially sub-categories of big success stories and funding.  People that have participated in Y Combinator have won!  And they introduce you to a network of people that have won and tell you how easy it is!  (Just work really hard and get a little lucky!)  And they help you raise money!

I left out Government.  I generally think that no government institution will be able to institutionally move fast enough to help small tech companies.

Anyway, that is my opinion: You have those 4 things, you are off to the races.  What am I missing?

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