'Connecting with global venture capital creates new mutually beneficial collaborative possibilities that are necessary in order to build a thriving global business.'

There are a number of metaphors for an entrepreneurial ecosystem: rainforest, operating system and religion. All are helpful but joining them through last month’s paper by Mark Fenwick and Erik Vermeulen is the cloud as the most plausible way of understanding the virtual innovation capital ecosystem.

Their paper, Alternatives to Silicon Valley: Building Global Business Anywhere, tries to help answer the question of where an entrepreneur should base themself to have the best chance of building a global business.

The standard answer has traditionally been Silicon Valley in California, which remains the favoured location on almost any metric, including those used by the excellent Compass’ Global Startup Ecosystem Report 2015, which ranks the top 20 locations for entrepreneurs, excluding China, Taiwan, Japan, and South Korea.

But with a cloud, or virtual innovation capital ecosystem, entrepreneurs and regions can use unique advantages in other locations and still benefit from the expertise and capital available in the Valley and elsewhere.

And this willingness to tap the innovation capital cloud is perhaps the most important determinant for their and their region’s future success, outside the entrepreneur’s own drive, idea and execution and luck.

Traditionally, regions wanting more entrepreneurs and successful companies based on innovative industries have tried to provide all the elements themselves – effectively try to recreate Silicon Valley through building the sum of the parts.

Compass’ 2015 report recommends four areas where improved policy can impact the success of an ecosystem:

  1. The first is to find ways to stimulate the financial foundation of your ecosystem by offering matching grants to VC funds and direct grants to startups. Many ecosystems like Tel Aviv, Singapore and Santiago have found these policies to be very successful, especially in the beginning stages of an ecosystem’s formation.
  2. Create policy that minimizes the friction of incoming flow of foreign capital and foreign talent.
  3. Simplify regulations for startups, allowing for low legal cost of startup formation, startup bankruptcy, and liquidation on startup exit.
  4. Differentiate your startup ecosystem and accentuate its strengths. Startup ecosystems can differentiate by focusing on a stage of the startup lifecycle such as how the Start-Up Chile Grant Program has done for very early stage startups. Or, focus on particular markets or product types, such as media in Los Angeles or hard science in Boston.

These are good recommendations and through a cloud metaphor, regions can concentrate on their unique advantages and then try and download the other bits.

As Fenwick and Vermeulen’s paper says: “Connecting with global venture capital creates new mutually beneficial collaborative possibilities that are necessary in order to build a thriving global business….

“Ideally, the leaders of the process of connecting the local ecosystem with the global ecosystem should be the entrepreneurs themselves. However, this is where entrepreneurs often need help. This task of bringing the local DNA [unique advantages of a region] to the world is where so-called ‘conductors’ come in.”

Conductors, a term used by venture capital firm Andreessen Horowitz in its blogs (hear its podcast by MIT’s Fiona Murray here and read Marc Andreessen’s Politico article here), help connect people and create a space and attention on the entrepreneurial scene.

This builds on the apparent successes of regions, such as Israel, Ireland, China and Chile, in using their national or religious diaspora or migration patterns to connect people, ideas and capital. Vivek Wadhwa, an academic at Stanford and Duke universities, by email said in helping design the highly-regarded Start-Up Chile programme, “the simple message was that, rather than focus on industry and clusters, we need to focus on people, people, people.  With diversity, need, and open exchange of ideas comes innovation.” 

Fenwick and Vermeulen’s paper argues the best conductors are “highly successful serial entrepreneurs already connected to the national and world innovation systems” but, with a potential dearth of these types in provincial regions, “the state, therefore, has an important role to play in this regard”.

Taking the example of two hypothetical entrepreneurs considering this problem of where to start up and whether their home city of Fukuoka, Japan, could help, Fenwick and Vermeulen explore how the local mayor’s vision and regulatory reforms have been relatively successful. The city is second behind the country’s capital, Tokyo, by number of startups.

The next step is attracting the global investors to these entrepreneurs.

“In the context of a global, interconnected economy, the primary challenge in developing a global business, as well as a local innovation ecosystem, is to unlock, local entrepreneurial advantage by connecting with the resources (capacities, know how, experience, as well as capital) contained within this global innovation system….

“What should Fukuoka do in this regard? One can start with more international events, developing the online footprint of the region, more English language blogging, more participation at an international level to raise the profile of Fukuoka. But even this may not prove to be enough. Perhaps the most important step is to get serious about outside investment.”

It might then start raining capital.