It’s important to know the environment you’re scanning when building a company or looking to invest in one. When targeting companies for investments or partnerships (venture capital to corporate development), the concentration needs to hit a certain threshold for you to either spend time in that geography or to take it a step further and put a person in that location. On the flip side, when you’re looking to start a company and need a supportive environment, it’s equally important to understand the resources that surround you. Below is a list that is needed in order to have a successful startup ecosystem at scale:
- Government support – local and regional government support is critical. Governments are able to set tax incentives, offer financial support, organize economic events and also be a large player with marketing (yelling “come here!), for both talent and capital. For example, Finland has a program where the government will pay you a nominal salary to start your own company. Finland’s government also provides funding directly to the company (up to $50k) if it’s executing international expansion and also support in R&D efforts by providing a loan at around 1% interest. Additionally if the product being supported does not materialize, that loan can then be converted to a grant for the company. Another example is the United Kingdom. London specifically is known for their advantageous startup programs: London&Partners Business Growth Program (or International Business Program) or the tax advantages, like SEIS, which provides tax relief. SEIS allows investors and directors to receive initial relief of 50% on investments up to $100k and also capital gains tax exemptions for gains on the SEIS shares.
- Accelerators – these programs are usually fixed-term cycles that help a company get started and focused on “soil” and “seed” stage ideas. They provide a platform that will usually begin with a work space that the company can utilize. Additionally, the accelerator will provide expert workshops (pricing, product market fit, legal or hiring), a direct network to investors, as well as mentoring from industry. Dependent on the program, equity may be mandatory for the company to provide as a stipulation, but that’s dependent on the caliber and scope of the accelerator. For example, YCombinator (in San Francisco) takes equity in the form of a SAFE at 7% for every company they accept. San Francisco is saturated with accelerators: there are over 40 accelerators with an HQ in San Fran that have at least made at least one investment in the past 12 months. These are operated by a range of independents who monetize through corporate sponsorships, equity take or are even corporate run, and the scopes cover food to FinTech.
- Capital – close location to investors is becoming less important, but it’s still something that cannot be discounted. Once vital (pre dot-com), it’s now much easier to scale a company in (say) Salt Lake City and receive your seed and series A funding from investors all out of Utah. For example, New York is a hub for transactions, and for good reason: there are over 390 firms that classify to be Venture Capitalists who currently have an ‘open’ fund. This gets larger when we start to look at ‘closed’ or ‘evergreen’ funds’, as well as incorporate Angles and private equity firms. There are also >60 Strategic Acquirers, and >500 others who fall under the Limited Partner, Funds of Funds or Investment Banks in New York. This boiling pot makes New York a hub for transactions. There have been over 400 transactions made in companies out of New York for 2019 (so far) that ranged within the ‘series A – H’. This encompasses deals between $750k to over $500m.
- Talent – when building a company, it’s imparitave that you get staffing correct, the first time. Ideas can be driven home (taken to market) by a number of people, but it’s the right people at the right price point and grit level that matter. But talent is something that London also offers, and it’s special being the European hub. This talent is feed from not only the UK system, but the Irish, Germans, Poles, Italians, Romanians and others come for the opportunity (lets not talk about Brexit just yet). Compound a high flow of entry and mid-level talent from across the European Contintent, with English speaking capability and a pay rate that undercuts the US by a long shot and you’ve got a great environment to find capable talent. A lot of this talent is tech also. For example, A python developer in the US can command an average of $122k while the same developer commands only $74k. Additionally, entry level software developers in London earn on average $36k while the US is $61k. This can be seen in Dublin also, where employee price arbitrage is taken advantage of. Conversely, you’ll see US founded and based companies choosing London (or Dublin) as their next spot for expansion given the salary disparity and large pools to utilize.
- University concentration – Boston comes to mind as this is where I attended graduate school and lived for a number of years. It’s a hotspot of top-tier universities that feed not only New England, but all of America and more. According to the most recent study, as of 2016 there were over 138k students enrolled in higher education (in Boston alone). Boston also boasts 29 universities and 2 community colleges (Harvard, MIT, Babson, Boston University, Tufts, etc.). In Massachusetts there are over 100 universities that have over 300k students enrolled. This translates into a progressive and highly educated population, with more than 48% having earned a Bachelors Degree. This talent pool translates into growth for the economy: Mass has over 2,200 companies that have taken on venture funding between $1 – $100m. A large number of those are spinouts or started after individuals were graduating.
- Entry market – where you base yourself is most likely where the majority of your first clients will be located. For example, if you’re building a FinTech company that’s based within capital markets (say, best price discovery for shorting equities), locating yourself in NYC would be a good start; conversely, if you’re building a platform marketplace for gig-economy workers to supplement their income between jobs, London or Singapore would be ideal. If your first product is affordable and dependent on large scale retail adoption, perhaps NYC would be a better fit given the lack of geographical restrictions (no state or federal highway restrictions), high population density and support from state regulators. Conversely, London would again be a better choice if your product is based on the banking sector and you’re located in another country within Europe (say, Norway). The UK alone has more than 300k individuals who work in the financial sector and this translates into not only a large institutional customer base, but bleeds into the retail side as well.
A Blog 