Discover more from The Realistic Optimist
Why I analyzed 30 countries' startup ecosystems + and what I learned from it.
Plus a taste of what's next :)
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!
Why I did this
When I was at university, I dreamt of a career in international development. I went to the World Bank Youth Summit in Washington DC, and started writing job applications for big governmental aid agencies.
Then covid happened. Locked in my room for an undetermined period of time, I decided to go all in and read all of the literature I could find about foreign aid. Some of the books I read included Dambisa Moyo’s “Dead Aid”, William Easterly’s “The White Man’s Burden”, Jason Hickel’s “The Divide” and Esther Duflo’s “Good Economics for Bad Times”. I was left with a bitter taste. At best, international aid was not having its intended impact. At worst, it was creating pernicious cycles of economic dependence. I then tried to understand why that was the case, and I found something.
Countries can’t be built by foreign consultants on a five-year mandate. A country’s sole path to sustainable, and reliant economic growth is to build itself up. Now that doesn’t mean it should live in complete autarky. But it does mean that local actors have to maintain the upper hand on their country’s development. This realization led me to write my first article on Botswana’s development path, helmed by a visionary leader (Sir Seretse Khama), who skillfully utilized western resources to his country's advantage while keeping a firm grip on the direction he wanted his country to go in.
This got me thinking about whether I really aspired to work in international development. I felt that existing institutions were not delivering the bang for the buck they promised, and that their long-term impact could be more than questionable. I also changed my mental framework from ‘wanting to help developing countries’, which has some problematic paternalistic undertone to it (eloquently discussed in the White Man’s Burden), to instead supporting local change-makers wherever they may be.
Now I had to decide what “type” of change-makers I wanted to get involved with. Did I want to enter the activist, entrepreneur, politician, academic or artist realm? I think you can figure out which one I chose. The reason for that choice was the recent interest I had developed in startups, following the launch of my first “startup” co-founded with Marwan, one of my best friends from university. The startup was called ‘Pygeon’ and aimed to create an app for people to have civilized debates about hot societal topics. We probably failed at about everything we tried and the startup itself was a complete miss. But I think it taught Marwan and me an invaluable lesson: we wanted to try again, together.
During Covid, I approached Marwan with the idea for MoneyMoves, a platform I’d envisioned whereby people could “invest” in SMEs around the world but instead of monetary return, they would get gift cards if their SMEs reached their goals. I know, it’s chaotic. Here’s the intro video I made for it if you’re curious :
Marwan first told me that the name was trash. Fair enough. Then he told me we could change the concept a bit to focus it on Palestine, his home country, and double down on one specific type of entrepreneurship: startups.
That’s how we came up with the idea of GrowHome (a platform connecting Palestinian founders to mentors and investors in the diaspora), which we ran for two years and learned a ton in the process. The whole GrowHome story is a story for another time. The fact of the matter is, that experience made me truly convinced of the society-altering role startups can play worldwide. That’s why I started this newsletter.
After analyzing 30 startup ecosystems from around the world, I’ve been able to sketch out some preliminary thoughts on what I believe is necessary to create healthy and self-sustaining startup ecosystems. Keep in mind that these conditions are what I think is ideal, but it doesn’t mean a country can’t develop a startup ecosystem if they don’t tick all of the boxes.
I’ve divided my thinking into 3 main segments: society, capital, and government.
Feel free to challenge my thoughts in the comments.
Social acceptance of failure and risk-taking. A lack thereof leads to young talents looking for stable jobs (oftentimes abroad) and can truly slow down embryonic ecosystems.
Example: Thailand’s “Seattle Problem”
Relatively positive view of free market economics. I’m not saying the free market solves everything, and there is clearly a need for functioning public services. But demonizing for-profit companies is a sure way to never see a startup ecosystem develop.
Exited founders reinvesting back. Probably the most virtuous cycle for an ecosystem. An ecosystem can’t sustain and renew itself if successful founders don’t give back in one way or another.
Example: Colombia’s Rappi Mafia
Tech-oriented education. An overwhelming majority of startups have to do with tech. A sufficiently large technical talent pool is absolutely crucial.
Cosmopolitanism. The startup world is globalized by nature. Around 50% of successful founders in Silicon Valley are immigrants. And like it or not, the best talent in the world tends to prefer liberal, open-minded, and cosmopolitan places. Adopting a protectionist paradigm when building your ecosystem is bound to fail.
Diaspora engagement. I’ve seen a cheat code in so many of the ecosystems I’ve written about, whereby a diaspora with consulting experience teams up with a local operator to create the country’s first VC or first successful startup. Engaging diasporas is one of the easiest ways for new ecosystems to skip ahead, as they can plug in “mafia effects” from abroad directly into their own ecosystem.
Startup-educated investors. Investing in startups is very particular. Your ROI will be in 5-10 years, with a chance of success oscillating around 5%. In new ecosystems, institutional investors and HNWI (High Net Worth Individuals) need to know what they’re getting into, how it works, and how to treat founders. Failure to do so creates messy and frustrating situations for everyone.
Accelerators and incubators that invest and take equity. To be honest, I’m pretty distrustful of incubators that boast of taking no equity. To me, that’s just a sign they have no vested interest in my startup succeeding. In emerging markets, a real conversation has to be had about foreign aid financed incubators. On the one hand, they’re some of the only ones actually doing the work. On the other hand, their KPIs are fundamentally misaligned with the exit-hopeful, growth-seeking founders that can often be disillusioned by such programs, especially when they represent their only option.
Local institutional investors need to be involved in the ecosystem. Local VCs survive if LPs are ready to put funds in. In new ecosystems, institutional investors such as pension funds, family offices and big conglomerates should allocate even a small amount of their balance sheet to the local VC asset class. Granted, it is harder to convince them in ecosystems with no significant exits (yet).
Adequate fundraising tools. Once again, startup investing has its own set of conditions and thus requires its own set of legislation. In new ecosystems, you can’t blame governments for not having the right tools, as they weren’t needed a decade ago. However, they absolutely need to update their legislature if they want to foster an active local ecosystem.
Legislative separation between startups and SMEs. A coffee shop and a fintech startup barely have anything in common. Legislation for both should thus be fundamentally different. Lawmakers that use the terms SME and startups interchangeably haven’t understood the assignment.
Creation of a fund of funds. Libertarian startup founders in the US often enjoy trashing the government in an ode to the free market, often forgetting the government is why they are where they are in the first place. In new ecosystems, the creation of a fund of funds, whereby the government finances the formation of local VCs (to be run independently thereafter), can truly kickstart the local startup scene.
Sensible startup legislation. In order for startups to flourish, they need a good legal environment in which to operate, in areas such as corporate tax rates, faster hiring/firing processes, recognition of stock options, etc…
High-quality, public-funded digital infrastructure. Tech startups need high-speed internet to flourish.
Pro-innovation government: The government has to enable competition between startups and incumbents. The government can also facilitate startup development by digitizing its own services.
As I said, these are my preliminary findings from exactly 30 ecosystem analyses. Please do comment if you would like to add some, or if there are some you don’t agree with.
On a more personal note: this journey has prompted a few thoughts and open-ended questions that I hope to find answers to.
The concept of an “impact” startup is entirely relative. A mobile-gaming startup can have a massive impact if it employs hundreds of young people.
Startups are not a golden bullet to systemic societal issues. However, I do believe they are an essential component of a healthy economy, especially in emerging markets that can use all of the tools they have to reduce or even reverse brain drain.
A conversation has to be had about startups infinite and hyper-growth models in a day and age where sobriety (mostly in the West) will be more and more necessary in every sector.
Healthy startup ecosystems need governmental support and public money. Let’s stop treating the private and the public sector as a complete antinomy. Instead, let’s view them as two organs that need to be healthy and work together for a country to function properly.
I really enjoyed writing these ecosystem deep-dives, but I now want to move on to a new format. I feel like the deep-dives were my first step into the world of writing about this global startup world I am so interested in, and it’s time to turn up the heat a bit.
I’ll now be posting more extensive and in-depth pieces, once every two weeks. These pieces will be on topics related to the global startup world, which I believe get surface-level coverage but don’t get the in-depth analysis they deserve. The only ones I feel are covering this niche right now include Rest of the World and localized tech outlets such as TechCabal.
To give you a short teaser of what’s to come, here are the first 5 articles I’m planning on writing:
How YC built a mafia in emerging markets
What Nubank’s IPO means for the future of fintech in LATAM
Crypto and remittances: a match made in heaven
Foreign aid, Israel and brain drain: What makes and breaks the Palestinian startup ecosystem
How Indonesia’s two biggest startups make up 2% of the country’s GDP
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