What Can We Learn from the Startup Genome’s Ecosystem Report?

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The Startup Genome just released their Startup Ecosystem Report for 2012 and there are some great findings that can help Hawaii, or any other ecosystem, better understand the gaps separating them from the top regions.

One critical caveat:  the main premise of the report is that Silicon Valley (SV) is the penultimate startup region, therefore every other region is compared to Silicon Valley. Obviously, when they say “startup” they mean tech. While I’ve written much about not chasing Silicon Valley’s model (as have many others), this report still offers some great insights as to the fundamentals of a successful region.

So why is Silicon Valley seen as #1 throughout the world? Well, other than the obvious huge number of tech startups and startup experience, multiple top-tier universities, huge amount of wealth and investment, and massive amount of talent and skills, there are a few findings that point to the non-tech aspects of SV’s success:

  • Entrepreneurs in Silicon Valley work longer hours daily than those in other regions, with 10 hours per day devoted to their startups.
  • They are more committed to working full time, and are 54% less likely to engage in on-the-side consulting.
  • They understand that investors want to see an actual product with real customers, since 74% of deals are funded during the “validation” stage.
  • They have the confidence to invest in themselves, with 35% of funding coming from their own wallets and those of friends/family (note: level of self-funding had to be over $15k to be counted).

Without comparing ourselves to Silicon Valley’s tech focus, how does Hawaii match up in these other areas?

In general, we’re behind on all of those points. It’s not that our local entrepreneurs are slackers, it’s just that there is a lack of experience and knowledge of what it takes to build and fund a startup. While Hawaii does have several startups that are growing and doing all of the right things (e.g. Volta Industries, GreenCar Hawaii, Tealet, FriiStyle, CreativeMarket…), it’s rare to see the necessary commitment and realism from local entrepreneurs.

This is specifically where the newly-funded accelerators can make an enormous impact. Their up-front cash investments should take care of the need to work on side projects in order to cover living expenses (at least for a few months), but it’s the responsibility of the accelerator managers to push the teams to put in the necessary hours, build out realistic business plans and thorough go-to-market plans, and understand what it takes to get outsiders to invest in their dreams (from their Aunt Mary to a traditional VC).

We’re Not SV…And Neither Are These Regions

Most of the regions in this report are large cities with populations of 2-20 million, multiple top-tier universities, diverse industries, and thriving startup ecosystems, which is why they made the Top 20. A few, however, are comparable to Hawaii in one way or another, so let’s look at those specifically to see what we can learn. To select, I looked at those either not known as a traditional startup hub (i.e. not Boston or New York), or those with small populations.

Los Angeles – differentiating

The report says that, “LA has a great potential for growth by differentiating itself from SV. Objectives for investors might include helping startups get more help from mentors and increasing their risk tolerance by funding more younger entrepreneurs.”

I included this quote because it’s exactly what Hawaii needs to do:  differentiate, involve experienced mentors, and build the ecosystem from the ground up (i.e. let younger entrepreneurs know that they have the support to build a startup in Hawaii).

Here are some other areas where Hawaii can learn from LA:

  • “LA has no funding gaps. It has a healthy mix of capital sources.”
    This has been a frequently-noted gap in Hawaii’s startup ecosystem, although there are two sides to every story. While entrepreneurs lament the lack of VCs and active angels, local and mainland investors point to the lack of viable startups and experienced entrepreneurs. Again, creating viable startups should be job #1 for the accelerators.
  • “40% more of the user base of LA startups are paying customers compared to SV.”
    Wow, that is an interesting stat. But, it points to the fluid (i.e. relatively easy) flow of funding in Silicon Valley and, conversely, the need for LA startups to build a business that survives on revenues as opposed to investors. Similarly, Hawaii startups should think less about VCs and more about customers and profits.
  • “The amount of mentors available to startups in LA is 27% less than in SV.”
    Another pain point for Hawaii’s startups is the lack of experienced mentors. While LA has less, they’ve found a way to get the good ones involved and participate in the ecosystem. Hawaii’s accelerators should help here, as long as mentor quality is maintained and there isn’t an aversion to mainland mentors to deepen the talent pool.

London – no funding

According to the report, “London has a funding gap, with 81% less capital raised by startups before product market fit than startups in Silicon Valley. This is probably caused by a lack of super angels and micro VCs which are designed to target the deal sizes of $500k to 2.5M.”

Again with the lack of funding, but this is a chicken/egg issue in Hawaii. Just because we have entrepreneurs asking for money doesn’t mean that they should be funded. On the other hand, there are a lot of tech-focused entrepreneurs in Hawaii, and our local angels have been burned in that industry, especially during the Act 221 days (although “burned” in those days wasn’t all that painful).

On the third and very visible hand, very few local investors are “involved” in the startup ecosystem here, let alone experienced in startups (and even less experienced in tech). There are complaints about lack of deal flow, but investors here rarely mentor or guide the promising entrepreneurs with more than a “come back when you’re ready.” Hopefully the accelerators can grease the skids in this area and find more experienced, hands-on investors (and mentors) who can really make a contribution.

Tim Dick is one of the most visible and active-in-the-ecosystem Hawaii investors, appearing at, participating in, and even sponsoring most local startup events, and we’re lucky to have him so involved.

Vancouver – population 2.5M

One point that makes Vancouver a clear leader is the experience of their entrepreneurs.  More than a quarter of their startup entrepreneurs have lived in Silicon Valley, which, in my guess, creates a sort of benchmark against which most of their ventures are measured. The experience that they bring back, the knowledge of what it takes to launch, get funded, get customers, run a web or software company–no matter how minimal–elevates their entire ecosystem.  It’s this experience that’s lacking in Hawaii, not the drive or enthusiasm. The accelerators, yet again, should help, but those with relevant experience need to be teased out of their homes and offices and pushed to become active in our ecosystem, or they need to be brought in from the mainland, either physically or virtually. (Or, better yet, maybe tech shouldn’t be our primary startup focus…)

Which brings us to Vancouver’s second point: the number of mentors per startup is almost 25% higher in Vancouver than in SV.  Higher than SV! That’s an amazing testament to the community mindset and cooperative energy that must be pervasive throughout their ecosystem. Either that, or just the fact that Canadians are incredibly nice.

Locally, I’ve seen firsthand the politics within our local startup ecosystem, and it’s not coming from the entrepreneurs. We need to all work together, not just say that we should work together. We need to put the elevation of the ecosystem and success of the most viable teams ahead of building our own resumes or jockeying for our own egos and reputation.

Sydney – beach bums

According to the report, “Sydney is well-known for its beach lifestyle and is virtually surrounded by water. A question often posed is whether Sydney’s laid-back atmosphere hinders entrepreneurs from successfully scaling their startups into large businesses.”

Yep, that’s a challenge for Hawaii startups as well. For anyone who has ever made a business call to the mainland (i.e. everyone), you know that you already have a few strikes against you as soon as the other person realizes you’re in Hawaii. “Must be nice,” they say. “Are you on the beach right now?” they ask. “Bet you’re sipping on a mai tai,” they wonder. It’s BS to any committed entrepreneur, but it’s a challenge nonetheless, especially when most investors and mentors are on the mainland.

At the recent “Accelerating Hawaii” event, I was teasing one of the speakers, Adam Lee, founder of EngageStage, because he wore a suit and tie to the event. In response, he said that he knew that he was starting at a disadvantage with mainlanders for exactly those reasons: they think we’re all sitting on the beach and not committed to work. Wearing a suit helped him to elevate himself above those comments, and it’s a great tactic.

On the funding side, Sydney startups skew towards self-funding, friends/family and incubators and away from super angels and VCs. Why? Because, same as Hawaii, there aren’t any, so be prepared to bootstrap your startup.

Another interesting point about Sydney entrepreneurs is that they are 82% less likely to create a quick flip, 86% less likely to want to get rich, and 37% more likely to want to build a great product.

Wait, what? They want to build a great product and they don’t see dollar signs as the #1 goal?  Interesting.

In talking with scores of local entrepreneurs, it seems that the prevailing wisdom from many–not all–is that running a startup makes you rich, and that those riches come either from VCs or from being acquired by Facebook or Google. That’s a failed approach, obviously, and it appears as though Sydney’s entrepreneurs are much more realistic about what it really takes to be successful:  building something that other people find valuable.

What do you think?  Have you read the report?  What can Hawaii learn?  What can we teach other regions?