7th June, 2021

Week 23/52

Photo: Cloud Forest at Gardens by the Bay, Singapore

This is a Queen’s Birthday Weekend special edition of Top Three, for one time only posted on a Monday… 🤨

First up this week, the next instalment of the series about building an ecosystem of innovative technology start-ups in New Zealand.

To briefly recap the ground I've already covered, for those who just got here...

I started at the very beginning1, with the question: What is a start-up? We found that label is used to describe a wide range of ventures - from early-stage companies, still trying to find a market for their product or service, right through to high-growth companies focussed on scaling rapidly. Rather than using this single umbrella term, I suggested we should try to be more specific about what we want at each stage.

Next I asked what it means to be a New Zealand company, and again found that this label is complex, because increasingly young high-growth companies are multi-national with customers, staff, and investors based all around the world. I suggested we need to get our heads around this if we want to capture more of the value, and think better about our competitive advantages.

Then I looked at technology and the often repeated but vapid claim that the tech sector is our third biggest exporter. I suggested that rather than putting our energy into defining what is and isn't included in the tech sector, and reaching for participation trophies on that basis, we should instead focus on how we can apply technology to make every organisation better.

Finally I tried to define innovation and discovered that this word is also mostly meaningless, because it's used by different people to describe a wide range of activities. Often we conflate innovation and invention (which demands one new idea). But I suggested that if the goal is to build great companies then what matters more is execution and scale (which requires getting thousands of little details right, repeated over and over).

Do you notice the pattern yet?

In addition to all of this I've also covered a few related topics:

I went deep on the ideas shared by Paul Callaghan over 10 years ago now and found many of these myths still hold today. I reviewed some of his specific prescriptions to help close the growing productivity gap with other developed countries, so we can have the nice things we all want to make our lives better. I suggested he was right about some of them (e.g. “be the place where talent wants to live”) but I reckon he would have evolved his thinking about others (e.g. “all it takes is 100 crazy founders”).

I recommended a framework for thinking about how to scale something, from first experiments to genuine system level growth, based on the approach I observed at a company building private schools in Kibera in Kenya: prove you can do it once, then replicate it, then several at once, and then (and only then) so many at once that it will only work if your systems are great.

I described some examples of so-called “hockey stick” growth, to try and demonstrate what growth actually looks like in the early-days. I explained the importance of having at least one measure that is growing from the beginning, even though the numbers will necessarily be small to start with. I suggested the key is to balance patience with regular milestones along the way.

I wrote about some of the solutions we've attempted to import from overseas and why this is often a waste of time. Specifically I tried to explain why our attempt to bootstrap a venture capital industry inspired by the Israeli Yozma scheme failed so completely and the enduring myth that there is a shortage of capital for start-ups in New Zealand. I suggested a vibrant venture capital sector is a consequence of a successful start-up ecosystem, not a cause.

Then I put the spotlight on what I called “start-up derivatives” (all of the people and organisations that are part of the ecosystem, but which are not themselves start-ups) and came up with four simple questions we can use to assess the impact of these initiatives. I also applied these criteria to some specific examples of derivatives: Incubators, Accelerators and Angel Clubs.

Finally I wondered out loud why the Reality TV approach to building start-ups has gotten so much airtime. By comparison, I suggested there is huge value of sucking in obscurity while you make mistakes and learn in the early-stages of your venture.

So, building on all of that, in this penultimate part of the series, let's get into “the ecosystem”...


🏷 Define (part 5)

Q: What's an ecosystem?

When we talk about the natural world, an ecosystem is the word used to describe the combination of living things (the biotic) and the environment they live in (the abiotic).

An ecosystem is constantly changing in response to external and internal forces - things outside the ecosystem that cause the environment to shift, or natural lifecycles that occur within the ecosystem.

Diversity within the ecosystem determines how healthy it is, how well it can cope with external shocks and whether it lasts to span multiple generations.

So, is it weird to talk about an ecosystem of start-ups?

Maybe not. Many of these concepts do translate.

When we talk about the start-up world, an ecosystem is the combination of the founders, the ventures they start and grow, and the people working directly on those (the biotic) and what I've called start-up derivatives (the abiotic) - i.e. the things that exist to support, encourage, protect and grow these ventures: incubators (aka innovation hubs + clusters), accelerators, shared working spaces, venture funds, angel groups, government economic development agencies, etc.

This start-up ecosystem is also constantly changing in response to external and internal forces - new ventures are started and funded (through investment or grants or both), some quickly die, some grow large, some are acquired which creates a feedback loop, releasing capital and people with relevant experience back into the system to the benefit of the companies that follow them.

As Semisonic memorably taught us all in the 90s: every new beginning comes from some other beginning’s end.

And, again mirroring the natural world, diversity within the start-up ecosystem determines how healthy it is, how well it can cope with external shocks and whether it lasts to span multiple generations.

How do we build a start-up ecosystem?

We don't, obviously! We grow one. We are growing one!

It's tempting to think of the ecosystem as a single entity, in and of itself. And, even, the thing of primary importance over and above any of the individual components.

But, think about the specific things that actually cause the ecosystem to grow: a start-up hires a new team member or wins a new customer or attracts new capital investment. These things all occur one company at a time, from the bottom up, not by design or diktat from the top down.

Unfortunately, when we talk about the start-up ecosystem, it often feels like start-ups themselves are forgotten, while we struggle to get beyond debating the merits of various derivatives. But describing the ecosystem by listing the public and private sector programs that support start-ups is like describing our national parks by showing the Department of Conservation org chart.

This is a chicken-and-egg problem. Species struggle without an environment to live in, but equally just creating an environment and hoping that biodiversity follows is idealistic.

The examples of start-up derivatives I listed above and more could all have an important role to play in the start-up ecosystem, but only if they actually work and contribute what they promise.

We're quick to celebrate success as an ecosystem - already this year there have been a lot of opportunities to do that. But we've done a terrible job of connecting the dots between the various initiatives we've used to try and encourage success and the things we celebrate - e.g. Movac was both the fuel and the exhaust of Trade Me. The reality is that there are very few successes that have emerged from incubators or accelerators or angel groups or the various government programs intended to bootstrap the ecosystem. And, meanwhile, there is a growing list of founders who have mostly ignored this noise and created successful companies.

Yes, we need to be patient. Because growing an ecosystem is going to take time. Generations, in fact! But, just continuing to do the same things without any clear milestones or indicators of progress or attribution is going to continue to disappoint. Sooner is over. It's later already. It's well past the time when many of these things we've been doing for the last decade or more should have had more scrutiny.

We also need to make sure that we identify and remove systemic constraints - the things that make it difficult for ventures to start and scale and which cannot be solved by any individual company in the ecosystem alone - e.g. next I will write about recruitment, which in my opinion is the biggest constraint currently. But, let's start to listen to the constraints that founders have, rather than the constraints that derivatives have - e.g. for many years the whole shape of the ecosystem in NZ has been distorted by the incorrect idea that capital was the constraint, while at the same time many great founders were out there raising millions of dollars to fund their growing ventures, including all of the founders of and early investors in the companies we've celebrated recently.

What can one person do?

As I’ve hinted at previously, here is my advice to anybody who would like to contribute to growing the start-up ecosystem:

Pay attention to the people who want to talk to you about the start-up they are working on. Think about what you can do to help them with that specific venture - this could span from very high-fidelity things such as working with them as an employee or adviser or investing cash right through to lower-touch but sometimes still impactful things like giving them your perspective on a problem they currently have, based on your experience.

But, if somebody wants to talk to you about the ecosystem ... run! 2

Focus on creating one great company. That’s hard enough in my experience! If enough of us create one, then the meta problem of the ecosystem mostly solves itself.

If you're a founder, try not to be distracted by the ecosystem. Don't worry that there are not yet enough start-ups in your country. Apply your own mask first, and then you'll be in a much better position to help others.

Be aware that all participants in a start-up ecosystem have a business model. Just as your own venture has a business model. It’s okay to stop and ask if others’ business models make sense for you and your venture. Often they won’t. You should not feel obliged to engage with anybody else, just because you are both part of the same ecosystem.3

If you're an investor, try to contribute more value than you capture. Keep in mind the lessons from Kibera: first you crawl, then you walk, then you run.

If you're working on a start-up derivative, make sure you ask yourself these four important questions:

  1. Who does this help?

  2. What constraint do they have?

  3. How do you hope to reduce or remove that constraint for them?

  4. How will you show it's working?

And ask yourself if you could actually work directly for one of these companies you're advising. It always makes me sad to see smart people trying to “build a start-up ecosystem” when existing successful start-ups can't hire people they need.

I appreciate that many people will be underwhelmed by this advice. It's much more grind than silver bullet.

But, I can say from experience, it works.


But, why?

Where does this leave us?

The question that has kept coming up right through this series, but which we've never quite gotten to is: what do we actually want from this ecosystem of innovative technology start-ups?

Here the “we” is important. There are many benefits that flow, if we get this right and the ecosystem continues to develop, and I think it would be useful to be more specific about which of those are individual and which are collective. That would give us a basis to better assess the things we do, individually and collectively, to contribute to this growth.

After more than 20,000 words, next week we'll finally get to the why.


“I stopped attending startup workshops because being at them started to feel like I was reading Cosmo: reality is often spliced up as glossy and digestible as opposed to a complicated mess that’s unique and painful and beautiful”
Adele Barlow


☝️ Ask

Niki Scevak from Blackbird asked this excellent question in response to my previous post on impact measurement:

Loved all of this but the post left me hanging! :) How should people measure the impact they bring? What are some of your suggestions for the different initiatives in the ecosystem and how they should measure if they are working or not?

Perhaps the answer I gave him is interesting to you too:

It's curious that when I ask people who are promoting an ecosystem building initiative "Is it working?" they nearly always answer with another question: "How can I measure it?".

The implication, I guess, is that measurement is hard and attribution is even harder and so the question I was asking is impossible.

The four questions I posed [see above] are the best starting point I can offer.

Rather than jumping directly to measurement just ask: Who is this for? What problem do those people have? How do I address that problem? Often these questions will reveal some obvious things to track and measure, and point to milestones you can use to show that you're on track, even where there is a leap of faith required to get to the eventual destination.

These are the same questions we expect founders to ask about their market, right? Who is the target customer? What value do you provide? How do you reach them? etc.

To quote Seth Godin, just asking "But, how will you know?" opens the door to a conversation about who the thing you're working on is for. And also when to know that you're done and should move on, either because the original purpose has been achieved or is no longer a priority.

So, when somebody (cough … me!) asks “How will you know?” don’t start with what you can or cannot easily measure. Start with the person you’re trying to help and work backwards from there towards the metrics.



🌎 Change

Q: How do you change the world?

I think it’s interesting, when they consider that question, how many people start with the big: the world.

Because the world is a big aspiration.

But you don’t have to start there. You can start with the small: the change.

Because, at least to start with, the change you can make is definitely going to be small.

You just need a slightly different emphasis in the way you ask the question:

What can you change in the world? What can you change in the world?

Start there and then you might actually change the world, rather than just wishing you could.


Top Three is a weekly collection of things I notice in 2021. I’m writing it for myself, and will include a lot of half-formed work-in-progress, but please feel free to follow along and share it if it’s interesting to you.

1

A very good place to start!

2

Hat tip to Toby Manhire, who inspired this advice in the recent Are the Arts Essential debate at the Auckland Arts Festival. Did you think I was joking when I said that everything is better when you substitute technology with poetry!

3

My advice should come with a warning: others in the ecosystem may call you selfish.

For example, in 2014 this was Dave Moskovitz in a Facebook post reacting to my criticism of the first Lightning Lab accelerator program:

It's easy for Rowan Simpson to take pot-shots from the sidelines. He has no idea how many people slogged their guts out, both out front and behind the scenes, how many people have backed this effort over a number of years, just to help everyone lift their game and improve the general environment for startups in Wellington and NZ. I'll pay more attention to what he says when I see more evidence of unselfish behaviour on his part.

And my response:

I can handle being called a hater. I’m a big boy. Sticks and stones, etc. I was being dismissive. The blog post that started this thread explains my rationale. So far the responses I’ve read seem to focus on what has been invested rather than the impact created. I think that’s the wrong way to measure it. Actually, the purpose of my post wasn’t to put the boot into those involved, it was to highlight to would-be founders and investors that there is an alternative approach which I believe is better.

However, I do take issue with being called selfish. My days are full to overflowing working closely with a few selected ventures into which I’ve chosen to invest my money and my time, post Trade Me and Xero. My approach is to be founder centric, and so I rate myself based on how much the specific founders I work closely with feel I'm contributing. I’m confident that I’m creating more value than I’m capturing, even if you don’t read my name in the newspaper much (actually, that’s generally the way I prefer it - I think it’s pretty stinky when I see investors who want to make the success they are part of all about them, unless they are also happy to take responsibility for the failures too).

For example, Vend was just Vaughan when I got involved. We’ve now raised ~$35m of investment from a dream list of early-stage investors. The team has grown to ~140 people (and counting!) and, more importantly, 10,000+ stores around the world are using our software to run their business. That sort of growth doesn’t just happen. I continue to work on it closely and it soaks up a good portion of my time. 

More recently, I have followed a similar track with Ryan and Andrew at Timely, where I was the first non-exec investor. They have grown significantly since then, by every measure. We now have 12 people on the team and just announced that we have raised $1.3m to fund the next stage of growth. 

But, focus means saying no, and in my case that means not getting sucked into endless coffee meetings and community events. I have no interest in spreading myself thinly across lots of things. My aim is to be involved in a small number of great ventures, not the most ventures. Don’t confuse that with selfishness. This is how all of the companies that people cite as role models were successful. I’ve been fortunate to see that first hand. Hopefully I can convince more of those people putting their time and money into trying to create an ecosystem indirectly to instead get involved in one venture and do what they can to make it awesome. Then we’ll have an ecosystem!

Depressingly this was seven years ago. Some advice changes. Some stays the same!