The secret ingredient to a successful startup ecosystem: the government
The secret ingredient to a successful startup ecosystem: the government
Governments often provide the impetus necessary to get the ball rolling.
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The classic startup ecosystem Catch-22
I’ve now analyzed over 30 startup ecosystems, mostly nascent ones. I’ve been trying to understand what works and what doesn’t by identifying the patterns between the ecosystems I’ve dove into. One of the main findings is what I like to call the “classic startup ecosystem Catch-22, " which led me to write this article to explain what it is, and where I think the solution to it lies.
The classic startup ecosystem Catch-22 is a phenomenon experienced by all startup ecosystems, from the US to Tunisia. Here’s what it consists of:
A new ecosystem needs “risk capital” such as venture capital firms (VCs) and angel investors in order to finance its burgeoning startup scene.
VCs need to raise money from limited partners (LPs), who are often local “institutional investors” such as pension funds, family offices, or insurance companies.
Most LPs handle other people’s money, and therefore need to be convinced of the viability of investing in local VCs.
However, since local VCs have no money, they have little to no track record, and thus very little material to convince potential LPs that startup investments are viable.
Local VCs thus end up with no financing, which leaves startups with no financing, which severely decreases the probability of startups succeeding, which is a prerequisite for VCs to raise money!
This situation makes it very hard for new ecosystems to truly take off. Some exceptions exist such as Estonia, where a visionary group of founders (in this case the Skype founders) provide an initial flow of capital and talent into the ecosystem. But for most ecosystems, the Catch-22 situation holds.