Self-Sustaining, Regenerative Tech Ecosystems

This is a repost from 2011. As I’m diving back into tech, it feels like a good time to revisit this as I’m now based in the MidWest, which, quite broadly, sports a lot of tech companies and some interdependent ecosystems.

The capital for startups is here, but I’m at the beginning of a raise and am not sure if it’s like Central Pa capital–slow, small amounts at low valuations–or competitive with NYC and the Valley.

* unfortunately we lost comments from the original post when I disabled Disqus a few years ago, from Arnold Waldstein, Brad Feld, and a few others. Brad referenced it in one of his posts on startup ecosystems. 

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This post is conjecture from my observations and personal experience, without citations, and was about software ecosystems, though it could be applied to other sectors

For as long as I’ve been in tech I’ve heard the term “ecosystem” applied by people in regions outside of the Silicon Valley tech ecosystem to their own regions–aspirationally applied.

Most of them don’t have functioning, self-sustaining, regenerative tech ecosystems. 
What’s the difference? 
Pennsylvania’s a decent example of aspirational efforts to create 

self-sustaining, regenerative tech ecosystems (in the name of complexity, let’s give that an acronym: SRTE and pronounce it ‘SIR-tee’). 

I’m making this term up, though I imagine someone else has come up with a better descriptor. 
The Ben Franklin Technology Partners Program has created some successes and I like the people I know working in it, but it hasn’t created a single SRTE (to my knowledge). So what has it created? 
  • a form-heavy, long process for applying for inadequate funding
  • a bureaucracy for monitoring investments that includes documentation and reporting outside of the normal course of business
  • a network of support professionals and advisors, some of whom are very good and appropriate for startups, others who are not
  • a few great location-based services, including the incubator at Lehigh
  • a number of success stories, and more on the way, in addition to a greater number of failures, which you’ll see in the normal startup world too
But it hasn’t generated ecosystems. And I think that’s partly because its model is not set up to do that, though it’s what everyone would love to see.

*2019 note: Ben Franklin has really stepped up and is a now solid player in Pa– I’m proud to have started one of its success stories.

Let’s define SRTE.
A self-sustaining, regenerative ecosystem has these indicators:
  • new startups formed by former employees of earlier startups
  • new startups staffed by former employees of other startups
  • new startups funded by investors and/or employees of earlier startups with part of the proceeds from earlier successes
  • through at least two cycles
Nowhere in there is a long application process followed by inadequate partial funding with substantial non-standard reporting requirements. 
The most important quality: ‘regenerative’:
  • new startups formed by former employees of earlier startups
    • people learn by doing. The majority of startups fail, and without some level of exposure to building and scaling a startup, first-time founders have higher chance of failure
  • new startups staffed by former employees of other startups
    • this is the key indicator that you have a true “ecosystem”: when you have enough viable, growing startups that employees start hopping from one to another, it’s clear there’s something positive going on–there’s energy in the system when there’s healthy movement between startups.
  • new startups funded by investors and/or employees of earlier startups with part of the proceeds from earlier successes
    • the system generated dollars that can be plowed back into the next cycle of startups without seed/early stage capital from outside the region–that’s self-sustaining.
  • through at least two cycles
    • it must be long enough to get beyond the ‘not dead yet’ stage to ‘thriving’. 
So if you’re building a tech startup, why would you choose Pennsylvania or other “flyover” states? 
  • Family: home is home.
  • Relationships: building a new network of supporters elsewhere isn’t easy
  • Easy access to your market (true for some, not all)
  • You want to help create a SRTE and believe that it’s important and possible. 
Why would you choose to leave? 
  • Capital. PA ranks horrendously low in investing in tech startups, especially in mid-state companies.
  • Talent. You can find developers here, and you can find smart people here, but finding smart people who’ll take the risk of joining your early-stage startup is the tough part. We have a more conservative workforce that values stability, and I’ll suggest, perhaps wrongly, but in my experience the sense of urgency and ambition is less than what I see in the ecosystems like NY and the Bay.
  • Energy. There’s some some something going on in a true ecosystem, and you can feel it, you’re revived and propelled by it, you give to it and it gives more back, breaking all laws of physics along the way.
  • Partnerships. It’s tough to develop the relationships that lead to partnership discussions, and phone-based partnership development is simply not the same. It takes a lot more work and travel, and you miss out on the random, incidental introductions you get in the true ecosystem. 
If we really want thriving ecosystems in PA, we need to invest in those SRTE qualities. Philly seems to be on its way, but it’s missing significant capital flow,* and doesn’t have enough exits creating enough wealthy founders and employees to fund the next round of companies ( *this has changed significantly since 2011). 
One or two hits isn’t likely enough (Diapers.com was a great one for Philly and I’m looking forward to seeing whether that trickles down); some capital and employees need to be put right back into the ecosystem. 
I would argue against continuing the BFTP program in its current form, and instead choose two or three regions for a 10-year SRTE plan, and focus all energies on that. 
I’d choose regions with one or more recent successes, and organize capital and resources to create at least one successful, self-sustaining regenerative tech ecosystem. I do think having a loose incubator would help, but that it shouldn’t be some overbuilt institutional building, it should be an old tobacco warehouse or the like, and simply provide: 
  • hi-speed internet access
  • a Makerbot. Just for fun, if not actual prototypes. 
  • bunch of Arduino kits
  • printers, including a large-format printer
  • desks
  • 2 small conference rooms
  • bathrooms
  • a bit of a lounge area
  • common kitchen
  • scheduled evening classes by participants, local experts, and mentors
  • And some capital–not a huge amount per startup.
This would cost very little. Let’s do some math (this is off the cuff–flag it if it’s off substantially):
  • 20 startups
  • $25,000/startup (seed only for now)
  • space, etc, which if you live in PA, is cheap and available outside Philly and Pittsburgh. 
  • The list of stuff above
So roughly, $500k to invest, maybe $100k on top of that. Maybe. Likely less. 
To keep the promising startups going, you need additional investment, though I’d hope the startups would have a business model and revenue to shoot for. Quick pseudo-math:
  • half (generously) will survive
  • 8 will have it together enough to take additional capital
  • add 12 months of capital, say with average salaries of $60k
  • 3 people per startup
  • so rounding way up for taxes, marketing, etc
  • $250k times 8 = $2.0 million. 
So now we’ve risked $2.1 million per region. Out of that, we’ve created some jobs and opportunities, with 8 companies funded enough to prove out their models. Start the cycle again every year with a new crop. 
Of those, 4 will attract additional capital, 2 will shut down, and 2 will plod along. And of the 4, one will have a decent exit, and the others might be break-even or 2x to 3x. But the one that makes it will return at least 100% of the entire investment
So let’s do that annually for 10 years and round up to $3 million. I’d choose three areas: Lancaster, Harrisburg, and Bethlehem. That’s $9 million/year or $90 million total, all of which you’d likely make back. Maybe more–we’ve got some innovative people here. 
The one thing a light incubator like this creates is its own little ecosystem, where startups help each other, and you get the vibe and feel of a some-something going on. That helps, it’s energizing, and uplifting.
But I just get the sense we’re too process-oriented here, and have spread resources pretty thin to serve too many regions without much to show for it in terms of significant success and they key outcome we had hoped for: self-sustaining, regenerative ecosystems. But we could try. 

You Are Not Alone

I had the privilege of a great talk with the famous Tisch the other day, and he asked me what I was passionate about (wrt the next startup).

For me it’s strengthening communities, both online and offline, through both online and offline interactions.

A lot of smart people have written about this. Some have built great businesses around it, like Meetup and Skillshare. I’m a user of those tools, along with Eventbrite, which is great for handling an event but not great at supporting the community that develops out of the event.

My thesis is somewhat obvious:

communities strengthen with the number and quality of connections between their members.

And that’s what I’ve become very passionate about, both in my online and offline life. With the offline life, it’s about my hometown–friends, family, colleagues in the startup world, and especially the broader school community of 74,000 people, 11,000 students, and 1600 employees.

Stronger communities make everyone’s lives better.

I talk with a lot of founders–a ton, really. While I’ve thought about charging for services–and I have–the ones who really need the help can’t afford to pay me, which makes it hard for me to spend the time.

So part of my mission these days is to connect founders with founders, and help them develop relationships so they don’t have to go it alone. I want to help to create communities of founders (though that’s not my core mission).

Building a startup can be a very isolating experience, especially as it scales. Sharing the challenges helps us think through them, but it also opens the opportunity for others to help, and to recognize their own challenges.

So we learn.

Startups have a ton of resources I never had in the 90’s, and tons of great advice. James Altucher, Eric Ries, Brad Feld, Steve Blank, Fred Wilson, etc, etc.

But it’s only advice. And it’s generally not interactive advice. There’s something about sitting down with other founders and talking about issues that addresses more of where we are emotionally–our frustations, misgivings, bewilderment, passion–that written advice simply doesn’t address.

One of the best things that comes out of those sessions is positive feedback, support, connection, and affirmation.

That’s a great idea. 

I feel for you–I went through that last year. 

It gets better, you just have to hang in there. 

I know a few people who might be able to help. 

It’s simple, but it makes a difference. Just a little genuine encouragement can lift us up.

Sometimes we leave energized. Sometimes it’s exhausting. And sometimes we leave with more questions than we came in with.

You can start your own thing where you are. Use Skillshare, or Meetup (fee), or whatever, and choose a night, then promote it to the local tech community (exclude non-founders).

Create a safe event where people can air their issues openly. What happens at Founders Night or Startup Night or Commiseration Night stays there. Like Fight Club.

In Pittsburgh?  Call it Startup Pittsburgh. Whatever. Just get it done. Buffalo? Easy one. Startup Buffalo. See? Shamokin? Startup Shamokin works just fine.

You might only find two other founders in your area. Or two hundred. Regardless, get together every month and talk about your challenges. Limit it to two or three challenges per person.

Don’t expect to get answers–that’s not what this is about. Ultimately you have to discover and choose your own answers.

If you want to attend one of mine, follow me on SkillShare.

Startup Lancaster This Coming Monday

The daily post is going to be tough to continue; my head’s been elsewhere–btw code, school board, and life I’m finding it tough to keep up. But I think I’ll keep the punts going. 

Today’s is over to Startup Lancaster, which we started last May. It meets again this Monday evening at Isaac’s near the square in downtown Lancaster.

I’ll be in NY leading a class for startup founders, so I’ll miss it this time, but it’s a great group of startup leaders working on their visions.

If you’re a founder of a tech products startup then please swing by on Monday to meet other founders, talk about challenges, and get feedback. 

Have a great day.

Grimmy on CNN.com

The Grimster has another guest post, this time at CNN. It’s got a pretty good set of advice for startups.

This is my favorite, and kicked my ass this morning:

EVERYTHING NOT MAKE LONG TERM WIN IS FAIL PAINT. WORLD OF WARCRAFT. FACEBOOK. HANG OUT WITH LOSERS. EAT ANOTHER BIG MAC. 

EACH TRIP THROUGH DRIVETHROUGH OF FAIL TURN YOUR TIME AND MONEY INTO MORE NOTHING. 

YOU WANT HAVE SOMETHING? FIND MCDONALDS OF YOUR SOUL. 

BURN IT TO THE GROUND.

Emphasis is mine.

That’s something I’ve been thinking about a lot recently as my life has, well, changed a lot in the past few months. And after a lot of introspection, weeping and gnashing of teeth, I’ve come out the other end with some sobering conclusions, which I’ll get into someday.

Today, though, is sunny and beautiful, and I’m coding up a storm, making calls, hitting the gym, and writing. I can see the sun now because I torched that McD’s of my soul.

It’s easy to give into the lame, especially when things aren’t going well.

Don’t. Keep focused. Don’t look at the tree–you’ll ride right into it. Focus on where you want to go–it’s the only way you’ll get there.

I suspect there’s a lot of personal fast-food arson about to happen among startup founders this morning. Thanks Grim.

Unintended Effects

Brief one today.

Be careful about how you structure your company. Be careful about deal terms if you take investment. Be careful about sales commissions, incentive pay, and pricing gimmicks. 
One thing is clear about human behavior: people respond to what they perceive is in their best interest. They’ll go to great lengths to avoid taxes, to collect income for less work, call more if commissions are tied to volume, close more faster if there’s a large bonus for clearing the pipeline, buy sooner if you drop the price or throw in lots of extras. 
They’ll also operate around the constraints to effectively get what they think they deserve. Entitlement doesn’t always make people lazy–sometimes it’s a motivator. Sometimes toward good behavior, but sometimes toward bad. There’s middle behavior though–the gray area, or white; it’s without any morality applied to it, it just is. 
Consider the downstream consequences. What behaviors can you anticipate? What behavior, constructs, constraints, freedoms do you imagine? What behaviors and outcomes do you want or not want? 
The unintended consequences of how you structure the financial aspects of your company that touch people can really lead to extraordinary, crazy, great, terrible, difficult, enabling, amazing, and baffling results. 
Think ahead. Now think further ahead. That’s it–what do you want the result to be? Design with that in mind. 

Bottom Up

In a board meeting the other day, one of the board members gave an hour presentation about the company’s prospects.

I have four problems with the presentation:

  • the member has no operating experience of any kind (MBA–all hat and no cowboy)
  • it’s an hour of my life I won’t get back
  • it’s the CEO’s role; it’s good when board members contribute but this was over the top and very little of it was relevant
  • the projections were based on top-down analysis.
A top-down analysis is tempting. You identify a market size. You then stake a claim on part of that market, oh, let’s say 1%. 
Really. I was waiting for the punch line, but none came. From there you rationalize that with some simple division based on a hypothetical average selling price to get your target. “If we only add 1000 customers at $1,000 each, we’ll have a million more of revenue”. 
Priceless. 
So what’s wrong with 1%? 
1% tells you nothing about customers. Nothing about product. And nothing about how to get there. Worse, it almost says you’re willing to only take 1% of your target. 
That’s where Bottom Up comes in. 
Bottom up means to break your target down to its component parts: number of leads, number of closed customers, average sale, etc, over a short period of time, and the marketing and sales activities you need to achieve those assumptions. 
The sales and marketing work should be expressed as resources–the spend on each marketing activity (online ads, adwords, SEO, whatever) and sales effort (number of calls per rep, number of reps, number of emails, responses to inquiries, etc. You can automate but early on you’ll have difficulty converting without customer contact).  
You should validate those assumptions through direct contact with your market: call them. Methodically call and have conversations. Take lots of notes. 
Then develop a set of questions to ask to the broader market. Test your assumptions. Don’t vary the questions, unless it seems you’re way off on the initial set. 
Interview enough prospects to be able to reasonably quantify the results. A statistically significant sample is 31, but that’s with a homogenous group, and I’m going to guess that there’s wide variation within the first 31 people you talk with because you haven’t learned how to narrow your market. 
So shoot for 300 completed interviews. It’s a lot of work but it’s the most valuable work early on. 
Out of those, you’ll find some very willing to keep in touch with you and try your stuff, partly because what you’re doing is much more exciting than their daily work, and partly because you’re just so awesome and amazing that they’re happy to help you along to greatness. 
Let’s say you spend 10 minutes per prospect. That’s 3,000 minutes, or 50 hours. Not bad, really. But it won’t really work that way–it will likely take two to three times that long because you won’t connect on every call, and some will last much longer (sometimes because you’re simply enjoying it, and others because they are enjoying it. I once had an hour call with a woman who was simply depressed about her work and life…).

Add in a week of interviews, and another week of following up with those clearly interested. Don’t waste their time; ask a specific question to each of them. Be appreciative and gracious.

The good news? You’ll have a great set of data on which you can base your bottom-up assumptions. You’ll have a much better sense of your market and mission. Your gut will truly be informed intuition. 
Your questions should be about the problem you think you’re solving. Price should be in there–how willing would you be to pay $100/month for something that solves the problem? $75/month? $1000/year? $10 one-time?
Pricing questions can be tough, so I tend to start high and work down from there. I find pricing to be one of the toughest things to set. You have to price against competitors, budgets, value perception, biases, etc. I highly recommend spending some time researching pricing methodologies until you get comfortable–this isn’t easy stuff, and blowing your pricing could leave money on the table or scare prospects away. 
So now that you have your research on which you can base your assumptions, you can start building your model. You might want to close 100 customers per month in your top-down 1% faulty logic, but the data suggests your close rate will be 10%, which means you need 1000 qualified leads and the team and tactics to close them. 
Do you need a sales force? 
Early on, it’s just you–everyone should know how to close a sale. Is it an automated process? Good luck with that. Early on, you’re going to have to have some contact with early prospects so they are comfortable parting with their money. 
I’ve left out a lot of stuff. Steve Blank has a through set of posts (and a book) on customer development. You should buy the book or read through his posts–it’s the most relevant, actionable stuff out there. 
It’s easy to create assumptions out of thin air. Don’t. 
Do the work. Know your market and prospects from the bottom up. 1% of bullshit is still bullshit. Bottom up analysis is the real deal, and you can only nail it by talking with a lot of prospects. 
UPDATE: Brett Topche notes in the comments that top-down is still useful as a reality check on market size. He’s right: you need both top-down and bottom-up approaches to nail your projections. 

Arnold Waldstein

Arnold has no idea I’m posting this. We’re not close friends, I don’t know him that well, we have no business interests together, and he has never threatened me with a bottle opener. Not yet, anyway.

I met Arnold through AVC.com, which is truly a blog community, where people have gotten to know each other and connected outside of the blog comments. It’s weird and wonderful to be a part of.

I started commenting there on the first day back in 2004 or so, and it’s been a great part of my intellectual life. I read lots of other blogs but only comment at a few.

So this guy shows up to AVC a few years ago and he’s really smart and insightful. He’s posting meaningful stuff, and other commenters pick up on it, and conversations ensue.

So I got to know Arnold a bit through what he was saying and the conversations he chose to participate and develop.

And then he starts blogging. He’s a really good writer; he was a way of describing things in a non-linear way. It’s like three-dimensional writing.

We connected in email, spoke on the phone, and met for a drink in Manhattan. Great conversation. Since then we’ve met a few times and email occasionally, usually about community.

Why am I telling you this?

First, I want you to consider hiring him to help you get your marketing, branding, positioning–your story–together. He gets it, and it’s likely you don’t. I haven’t worked with him but I know he gets it from our ongoing discussions about community.

He’s also a very experienced guy (not really that old, frankly). An older guy who can think circles around you and is completely current. I hate age bias (and experienced it out in the Valley this year), and a lot of people simply can’t see that with age comes wisdom, experience, and insight.

Second, I want to point out the power of community. Real community. This blog has hints of community; our wonderful commenters are mostly imported from AVC, though the readers come from around the world. Real blog communities interact with each other, independent of the blogger.

Arnold gets community, which is something I’ve been studying for years but have intensified my interest over the past 6 months. People talk about building communities as part of their startup plans, like it’s something that just happens. Sometimes it does, but it really takes a lot of work. I can’t say I’ve completely figured it out yet.

So set aside some cash and a bit of equity and drop him a line. Or consider making him part of your leadership team. Go read his blog. Read his comments at his Disqus profile. You’ll learn some important things, and maybe get soem great wine tips along the way.

Accounting, Part 1

So you’ve started a business. Great!

The fun part is accounting. Well, ok, it’s not really fun. But it can be painful or not painful depending on the habits you develop and some choices you make early on.

DO IT YOURSELF OR OUTSOURCE?
It depends. You’ll hear me say this occasionally if we ever work together: there are high-value applications of your time and low-value applications of your time.

If building product is the best application of your time, you should focus on that. If selling product is, do that as much as you can. If rallying team members is, then that’s your gig.

DO IT YOURSELF
Here’s my loose rule, after 20 years of building businesses (including my band): start by doing your own accounting. Set up your own chart of accounts, do your own data entry, write your own checks (or print), send out invoices, collect receivables–do the work.

You’ll know your business a lot better, you’ll understand your cash flow, you’ll understand your expense requirements, you’ll deeply know the impact of hiring someone and the costs above salary/wages. You’ll know your stuff.

That knowledge will serve you well as you scale the business, raise capital, plan the future, and develop the slush fund. (oops…).

FRAUD
Speaking of slush funds: when you hire an office manager or bookkeeper and assign accounting to them, do a background check and learn a bit about preventing and detecting fraud. For some reason, Lancaster County has had a string of crazy fraud cases, just bad, bad, bad stuff.

One method of committing fraud is through the chart of accounts. Someone with access to the Chart of Accounts can create fake (or real) vendors, and write small checks to them that add up over time.

If you have a lot of vendors, it becomes tougher to detect. I have a friend who was ripped off to the tune of $250,000. Small business. $250k. Amazing. He’s 65. Trusted someone for years, didn’t manage/control the chart of accounts, and didn’t notice where the leaks were.

THE CHART OF ACCOUNTS
It’s been a while for me, so I’ll keep this brief: set up a reasonable list of categories for organizing your income and expenses. Do this with reports, charts, and graphs in mind. What do you need to know? What do you want to be able to see at a glance?

For example, let’s say you spent $5k on marketing in October. Is it enough to have a single line item–Marketing? What does that tell you when you run your report? Not much.

Break it down to its component parts: Google Adwords, Email Marketing, That stupid direct mail thing that never worked, Blog Ads.

And then break those down too if it matters. Which ad? Well, that might be too granular and is better for your marketing reports, rather than bogging your accounting down with that level of granularity.

SOFTWARE
Don’t get fancy. Buy Quickbooks and expect to use it for a long time, unless you grow past, oh, 100 people. Really. You don’t need NetSuite or some other overloaded SaaS designed for larger companies with supply chains, and it will suck the lifeblood out of you. And your cash. Lots of it–to consultants.

I haven’t tried QuickBooks Online for a while, but I’d simply get the desktop software. Your accountant knows how to use it and can import your file easily.

Today is Moving Day number 2–moving into a place downtown–so gotta wrap this up. I’ll write more over the coming weeks.

Get it Done

I don’t have a lot of time today so I’ll keep this brief: get it done.

  • make your list
  • check it twice
  • get it done
  • something that rhymes with twice
  • make your calls
  • fix those bugs
  • stop reading blogs
  • shut down the twitters
  • simplify
  • and focus.
Go be yer awesome self all day. See you tomorrow. 

Working Remotely

I hate it.

It’s an amazing resource, this internet thing, with Skype and Hangouts and email and online apps and GitHub and Stack.

But I hate collaborating online, when compared to working in an office with people. Phil Sugar just commented on this in response to my comment on AVC:

One way or another you have to be able to assemble a small team and crank the vision, otherwise its a hobby.  I’m old school, but I also like an office, where you come in and work together.

So much more is communicated in person than over a video chat. Or chat. Or phone.

I’ve been working for 3 years out my my home on a few different projects. I’m done with that. My goal is to raise a small round, get a team together, and crank in the same room together and release a great, focused first product.

The last year has been a hellhole of hodge-podge passes at the product. It’s not the quality of the people helping me, it’s our lack of focused, contiguous time together.

I finished up the next beta over the weekend, for the most part. There are some tweaks to the UI I’m working on this week, and given no rush and Christmas coming up, I’m going to do a slow release out to a few trusted people.

And then what? Well, any further work needs server work. Which means I either hire rails developers, learn rails, or move new stuff to Node, which is my inclination.

I’m tired of the remote thing. The goal is to raise enough to bring on a few team members and get us all in the same room. It’s so basic. I’d rather start from scratch with a team in the same place than continue to work the way I’ve been.

It works for some people, but it clearly doesn’t work for me.