Friday, September 17, 2010

Lessons Learned from Vancouver: The 4 Stages of a Rockin Startup Eco-system

This post is too good to not simply repost in full. Thanks Danny.

There isn’t a single regional area that I know of who isn’t desperate to building an internet technology industry in their city.  When my wife and I decided to stay in Vancouver to raise our children, we made a commitment to do whatever we can to make Vancouver the best place to start an Internet company in the world.  Lofty goal, yes, but hey, I’m an entrepreneur, and we’re a group who is plagued with unbridled optimism.
I’m not going to get into what mistakes most cities make, but I will say this: If you’re building an incubation/acceleration/mentor program first, and staffing it second, you’re doing it wrong.  Each city has slightly different characteristics and what works for one probably means it wont work for another.  The biggest of these differences is THE PEOPLE. Find the right people, empower them, and get out of their way.
For the first time in the last two years, since I have been working at building the eco-system in Vancouver, I feel like I finally have clarity about how to communicate the stages building and Internet Startup Eco-System, which I’m sure could be applied to any city:
Stage 1: INSPIRE
  • About: This is the top of the funnel. There are many many people who have an interest of starting a company but just don’t think they can, or think they can afford it, or are worried about what might happen if they fail.  At the same time, they probably can’t get thought of it out of their mind either.  These people are entrepreneurs in making. They just need a little inspiration.
  • Goal: 1) Reach new founders and encourage them to learn more about what it takes to start an Internet company, 2) create opportunities for them to meet co-founders and 3) convince them to quit their day job to start the company.
  • How: Inspiration from networking and socializing with other members of the community. Events, Co-Founder speed-dating, Meet and study other successful founders and their companies, Universities. Dispel the myth that failure is bad. Trying is good, failure is experience, success is rare.
  • Where: Inspiration can occur from many sources including: Universities, Trips to Silicon Valley, PR/Blogs, Industry networking events like co-founder speed dating, Stories from successful exits, Educational seminars.
Stage 2: HACK
  • About: Okay, let’s say you’re a founder and you’ve just quit your day job.  You love your idea. You may even have a co-founder already.  What now?  If you guessed that you should test your idea with customers, you’re right!  But for god-sake, do it as quickly as possible with the least amount of money.  In other words, hack something together, test it live, measure results, and iterate it daily.  They’ll be plenty of time for optimizing your code once you find something that people want, but for now, hunt for the perfect user experience. This is NOT the time to raise money, write business plans, give powerpoint presentations, or project your financials performance.
  • Goal: 1) Design mockups and develop prototypes, 2) Test ideas with target customers. 3) Run cheap customer development tests, 4) Educate, 5) Build community.
  • Startup Metrics for Pirates
    Startup Metrics for Pirates, Dave McClure, Eric Ries
  • How: Get a few laptops, fire up a Joyent instance, register a domain, start a blog and twitter account, create a google accounts for apps, analytics and adwords. Build some landing pages and start testing.  And most importantly, start the conversation with your potential customers/users, listen to them, iterate.
  • Where: I know now that any healthy eco-system requires that founders have access to an open public space to hack.  A place with desks, couches, whiteboards, conference rooms, free WiFi, and, of course, the best coffee known to man.  The space would give founders access to limited professional services, tons of advice from mentors, advisors and potential future Investors.  But most importantly, it would be the focal point for the community. It would have a vibe that can only be created by the collective passion of the few who decide they can change the world with a simple idea in their heads.  It would be a place designed by the community, for the community. The space must be subsidized by government, but most importantly, vertically focused on the Internet and operated by passionate members of the startup community.
  • About: Most founders are first-time founders. While extremely intelligent in building products that people want to use, they have a very limited network of people who have been through the experience of successfully starting and exiting a company.  It’s these people who will provide the credibility they need, and help the founder prepare the company to raise financing required to grow. It’s clear, raising money is hard.  Raising money from people who don’t know you is virtually impossible.  Realistically, founders will need a credible introduction to even have a chance. Being accepted into a true seed accelerator is a great start, and the mentors that you work with while in the accelerator complete the picture.
    Startup Metrics for Pirates, Dave McClure, Steve Blank
  • Goal: 1) Provide seed financing, 2) Measure customer acquisition channels. 3) Develop permanent relationships with mentors, partners, & investors. 4) Develop the investor pitch. 5) Transition from iteration to execution.
  • How: There are a few examples of great Seed Accelerators run by even greater people. In my opinion, the team at TechStars, lead by David Cohen, is the leading the way. Seed Accelerators are NOT incubators. Seed Accelerators are unique from Incubators in the following combined ways, 1) Mentorship focused. 2) Provides a small amount of financing in exchange for equity in the startup. 2) Accepts only a small group of companies at a time, 3) Limited time, about 3 months. 4) Have a physical space.
  • Where: Bootup, YCombinator, TechStars, Capital Factory, Montreal Startup, Extreme University, Year1Labs, and tons more. You can also emulate this by working your own professional networks to get introduced and invested in by Super-Angels.
Stage 4: GROW
  • About: By this stage, founders are finalizing the transition into a working company with the goal of optimizing current user acquisition channels, and discovering more.  Although, product iteration never actually ends, it is much more focused on individual feature adds/removes/updates.  Another way to put it: you change from searching for a product that works to optimizing one that starting to show traction.  This is the time to put the peddel to the metel.
  • Goal: 1) Fund the acquisition of new customers as fast as possible in the cheapest way possible 3) develop new acquisition channels  2) Reinvest revenue and/or raise funding.
  • How: Need a $20M Series A venture fund to act as a local lead investor.  Exits of companies within this fund, will attract additional investment funds to open offices in the region.  The fund will invest in the best local companies it can find, but syndicate with highly connected and reputable super-angels and VC firms in Silicon Valley, New York, etc.  This will bring investment from more firms into the local area more quickly than starting up new firms.  This fund must be able to invest in companies outside the local region in order to be focused on making the highest return possible, but it is also very important to build relationships with well connected and experience firms who consistently get invited to invest in the creme of the crop.
  • Where: A modern VC firm in the local area, preferably within the same building that the Seed Accelerator is in.
What's next? (pick one)
  • Series B Financing.  Further equity financing for growth. onward to becoming large anchor technology firm.
  • Customer Acquisition Factoring. A hypothetical future financing model which I project will be available by the time any company starting today is ready for Series B.  This concept deserves it’s own post, but essentially, in the same way banks factor receivables, they will begin to factor user acquisition channels negating the need for Series B VCs.
  • Merger/Acquisition.  There should NEVER be any strings or attempts made to keep the company in the local region.  While the eco-system is ramping up, chances are a higher percentage of companies will sell to US companies, but not ALL of them.  Over time, as the eco-system matures, more companies will stay.
  • Organic Growth/Bootstrap/Lifestyle.
  • IPO (an option, but only in very rare and specific situations)
  • Fail - Entrepreneur gains valuable experience – goto Stage 2.
Net benefit to ecosystem
  • Higher volume of startups started and a higher success rate.
  • More high paying high tech jobs created
  • Angels are created and reinvest.
  • Increased foreign investment from VCs
  • Investor confidence increases.
  • Anchor technology companies.
  • New entrepreneurs inspired, goto Stage 2.
My hope is that companies will start to feel comfortable regularly communicating which stage their in to each other and investors.  Investors should also communicate which stage their interested in investing in.  Aligning these two groups will help to eliminate a point of animosity between these two groups.  Associations, Governments and Universities should communicate which stage their targeting with their programs.  But an eco-system is only actually healthy and functional when all 4 of these stages are fully active, properly funded, and managed by passionate people who care.
One last thought before I anxiously await your comments.  I’m sure you can cite specific examples of companies that “made it” by skipping one ore more of these Stages.  Please keep in mind that I’m not saying that this is the ONLY way to build ALL companies.  However, I am adamant that this is the only way to build a healthy, productive, Internet technology eco-system that produces a high quantity of world-class companies.

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