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GeoTech Cues

December 18, 2020

Silicon Valley’s role in foreign policy and what others can learn from it, Part II: Ecosystem building advice and policy recommendations

By Alexandre Lazarow (Guest Author)

Alexandre Lazarow is a guest author who works as global venture capitalist and author who contributes to GeoTech Center work on tech innovation and funding. He is presently a venture capitalist with Cathay Innovation, a global fund that invests across North America, Europe, Asia and Africa. He teaches entrepreneurship at the Middlebury Institute for International Studies at Monterey.

Spurring innovation and entrepreneurial ecosystems is at the top of policy agendas worldwide. However, building the next Silicon Valley is not easy. Increasingly, it is also not the right framework for the diverse world we live in.

As a follow-up to Part 1, where we explored the critical advantages to local innovation ecosystems, in Part 2, we will explore strategies to bolster local startup ecosystems, in particular the role of government and other ecosystem builders. While success requires a unique strategy for each location, there are broad principles that should be considered.

Principle 1: Don’t copy Silicon Valley– Leverage local strengths

Silicon Valley is its own unique ecosystem. It is hard to replicate.

Here is the bad news: not every country or ecosystem is going to be the global center of excellence for innovation, or the capital for a particular sector. Yet, at the same time, every region has unique advantages and specialties. When considering what to prioritize, ecosystems need to consider what industries will thrive within their borders. These decisions can be based on existing and successful multinational industries, geographic features, natural resources, strengths in rule-of-law, etc.

For example, London became a hub for financial technology firms because its finance and banking industry was both long-established and global. The fact that it still maintained currency independence while being a part of the European Union and in close proximity to its marketplace made it even more enticing to start a financial business there. Minneapolis, too, branded itself as an American medical technology hub because of its top-tier research and hospital institutions, which spawned the growth of medical device companies like Medtronic, which in turn caused more small companies to headquarter themselves there to tap the talent and resources invested in the healthcare industry. Estonia is positioning itself to become a leader in e-government based on local strengths and infrastructure. Tel Aviv, likewise, is becoming a hub for cyber security.

Each innovation ecosystem operates in a unique environment defined by a political economy,  macroeconomic circumstance, and an ecosystem of individuals in the sector. Any ecosystem also necessarily includes a broader industry environment and set of expertise. These can be leveraged to scale local innovation ecosystems.

Principle 2: Support ecosystem infrastructure

Launching a startup today is easier than ever thanks to platforms like Amazon Web Services, which allows anyone to rent a super-computer by the hour instead of building their own servers internally, or Shopify, which allows new ecommerce retailers to have a modern store, payments and logistics set-up with just a few clicks. Yet at the same time, many ecosystems have acute innovation infrastructure gaps that hamper the growth of the ecosystem. Over 3 billion people don’t have an address, making online deliveries challenging or impossible. Over 1.5 billion people are unbanked, roadblocking payments to online merchants.

Some countries take it upon themselves to offer infrastructure through national programs. In India, for example, the government is leading a project called Aadhaar, a national identification system. This not only provides access to government services, but in the innovation world it is part of the customer authorization “stack” that aims to reduce fraud. This way, the system becomes a shared resource that should raise all ships  while also protecting citizens from data privacy violations by corporations. As Nandan Nilekani, cofounder of Infosys, told me, “The objective with these programs is to create digital public goods. The first was Aadhaar, which provides a public, verifiable identity. Subsequently, the National Payments Corporation of India offers a successful interoperable payment network called UPI. The next stage is data empowerment, where data is put in the hands of users to use for their own benefit. Our vision is that, enabled with all this infrastructure, magic can happen. All kinds of products and services can be reimagined.” Instead of one or two companies building this themselves and creating an identity authentication tool by their own rules, the government has stepped in to level the playing field. The creation of Aadhaar has used the power of APIs to act as a catalyst for new types of innovation to be built upon a shared technological resource.

Principle 3: Build a launching pad to go global

As discussed in Part 1, innovation today is “born global.” Over 45 percent of South East Asia’s billion-dollar businesses are in Singapore, a country with less than 1 percent of the region’s population. Dubai raised the only non-Israeli MENA billion-dollar business with only 1.5 percent of the area’s population. Singapore and the UAE thrive off their ability to provide an easy place in which to do business while opening up a regional market. Singapore is second in the entire world in the World Bank’s ease-of-doing-business rankings, and the UAE is first in its region and sixteenth overall.

Becoming a global launching pad is no easy feat and requires some basic building blocks like efficient and flexible regulation, a stable currency, and legal and financial services organizations among other infrastructure. Regulatory environments need to be flexible when it comes to experimentation, which allows companies to test products and make more informed estimates about how the product will fare in similar markets in the region. In that same vein, IP protection needs to be robust and should allow companies to have stronger legal protection regionally as well as nationally.

To develop, and to attract the talent required to develop, a startup ecosystem necessitates equal levels of thoughtfulness and strategy.Even before the current pandemic, more and more startup teams were starting to become more distributed across the world. No longer do companies need to have headquarters in downtown offices. One of the best ways to capitalize on this shift towards remote work and distributed teams is to become a hub for global talent, even if the company itself is not located within a country’s borders.

Countries should make two efforts to this end. First, they can build the talent pool by educating citizens in relevant fields like entrepreneurship and computer science. Second, they can improve immigration laws. Again, these new minds may be absorbed into the local startup pool, but with the growth of distributed teams, these are great opportunities to also increase employment (and therefore income tax revenue) that would not occur otherwise, while the actual startup headquarters is elsewhere.

Principle 4: Support cross-pollination of ideas

On the one hand, it is critical for countries to develop ecosystems that can thrive in an increasingly born-global environment. The flip side is to also support cross-pollination of people and ideas. In a post-COVID-19 world, it may seem easy to devalue connectivity across borders, but the reality is that it is essential to innovation’s development. New ideas rarely come out of thin air but are instead iterations on other concepts that were iterations before that, all passed on via an innovation supply chain. Go-Jek, for example, took lessons from Uber, the premier global ridesharing app, and from a number of Chinese super-apps like WeChat, to come up with its own regional flavor of an on-demand rideshare, courier, and financial services app. Its model and evolutions, in turn, influenced the original.

We are seeing the importance of global idea cross-pollination as COVID-19 reshapes the innovation supply chain. Companies, trade organizations, and industry organizations are having to pivot to invent new ways to interact, engage partners, and share ideas. Virtual collaboration is leading to new global hackathons and even vaccine collaboration. International communication and collaboration thus are critical to generating the next wave of innovators.

Nations can accomplish this starting with their education systems. States cannot be too insular when it comes to international study from an import and export perspective. International students need to be incentivized (or at the very least the state should not  impede them ) for the same reason that some local students should be incentivized to study abroad–this exchange leads to new ideas and new solutions to problems both global and local. Research has found a correlation between GDP growth and the rate of international education. The opposite is also true: a lack of cross-pollination may hamper innovation.

States can also support industry dialogue, either through conferences, sister city programs, or by assisting joint ventures or cross-border R&D projects. Programs like Start-Up Chile and Start-Up Brazil are state-run and look to institutionalize cross-pollination by encouraging entrepreneurs from around the world to start their businesses locally. While these programs have had mixed success in relocating startups, they can drive cross-pollination, an even more important objective.

In a world with COVID-19, conferences and meet-ups are going to look different, surely. But this makes the need for cross-pollination even more dire. It will require more creative solutions so that nations and startup communities do not miss out on the benefits of collaboration across borders.

Principle 5: Incentivize corporate as well as philanthropic involvement

Governments have only so much influence in startup ecosystem development. In fact, a lot of support for startups comes from people who live and breathe business andare often overlooked: other corporate leaders. They have a large role to play and a vested interest in being mentors to new entrepreneurs and providing an environment for the growth of new ideas, as building out their local ecosystems leads to opportunities to capitalize on the ensuing growth and development.

Governments can create the meeting grounds for these individuals to collaborate via trade organizations, mentorship programs, or sometimes state utility companies. M-Pesa, for example, was an offshoot of Safaricom, a Kenyan telecom operator. It was originally launched as a public-private sector initiative, and it tapped into international development funds as well. It functioned like a startup with autonomy from its inception but with enough access to the pipes at Safaricom to grow the business at a rapid scale.

Corporations can not only be a source of capital for small companies but also a landing path for acquisition for those that are less successful, which decreases the risk of starting.

The philanthropic and non-profit sectors in a region can become powerful allies. The social sector is also looking to solve intractable problems, often leveraging technological tools. Impact investors and philanthropies are becoming important innovation funders, particularly in the most frontier markets.

Principle 6: Support older siblings

Just as elder siblings often face unrelenting parental resistance, first generations of entrepreneurs in nascent ecosystems often find it challenging to succeed. As they forge ahead, they create the ecosystem and environment they need if they are to realize success, and, by breaking down barriers, they benefit their younger siblings. It should be a priority of the government to make life a little easier on these older siblings, as they are the same companies that come to be fundamental to the ecosystem building effort later on.

A few trailblazing older siblings can make all the difference. In Latin America, for example, older siblings from three companies, including MercadoLibre, the largest e-commerce platform in Latin America, are linked to 80 percent of startups in the region. After the IPO, one of MercadoLibre’s founders, Hernan Kazah started Kaszek Ventures, a VC firm aimed at getting new startups funding, mentorship, and encouragement. He also served on the board of LAVCA (Latin American Private Equity and Venture Capital Association) and co-founded ARCAP (an Argentinean association for private investing). Supporting these older siblings in their efforts to build the next generation of entrepreneurs is paramount to success.

Older siblings’ efforts are compounding, too, and they tend to have a disproportionate impact on their ecosystems. Endeavor refers to this phenomenon as the “multiplier effect.” As successful older siblings scale, they support many leaders of the next generation, who then go on to replicate their success, building upon the prior generation’s success. In China, after its first unicorn scaled in 2010, it took five years to achieve its fifth, and the very next year the count skyrocketed to twenty-one. A similar dynamic is unfolding in India, the United Kingdom, and Latin America, where similar numbers of unicorns cropped up. Looking at startup ecosystems around the world, there seems to be an inflection point when  three to five older siblings bring their companies to exit, depending on the size of the market.

The reason for this exponential success often lies in the networks that are created by older siblings. For example, in Silicon Valley, more than two thousand companies—including Instagram, Palantir, WhatsApp, and YouTube—can be linked to eight individuals who co-founded Fairchild Semiconductor back in 1957. A staggering 70 percent of public Bay Area technology companies have some link to Silicon Valley’s metaphorical patient zero, Fairchild. These key individuals at successful companies are able take the lessons learned, combine it with their own ideas, and beget success on an even greater scale.

Key Recommendations
Don’t replicate Silicon Valley. Understand the unique strengths and positions of one’s own ecosystem, and what can fit that world best.
Examine key infrastructure gaps in a country or region. Many startups in more nascent ecosystems are forced to build a range of enabling infrastructure, just to provide an end product. Solving these roadblocks will unblock innovation. Building platforms for the ecosystem can catalyze it.
Understand the global nature of innovation. This means being a friendly place to do business, and being a launching point for entrepreneurs, both as a market but critically also as a place to recruit to. Immigration is a key lever for team building and welcomed thoughtfully.
Foster the cross-pollination of ideas. This can come from education and exchange programs. Of course, immigrants are the ultimate cross pollinators
Work with corporations, philanthropies and the social sector in ecosystem to bring them at the table. Building an ecosystem cannot be done alone.
While it can be tempting to get points on the board, and support nascent ecosystems (new companies formed), what will really move the needle are companies that scale.
Perhaps most importantly, serve entrepreneurs. The idea is not for the government to create the ecosystem. Rather, it is to provide innovators and the entrepreneurial community with the tools and resources they need to succeed. Foster older siblings since they will be catalysts.

Parting thoughts

As in Part 1, innovation ecosystems can be incredible assets, not just for domestic strength but also for national competitiveness and foreign policy. To scale innovation ecosystems worldwide will take novel strategies. These principles should be used to start thinking about where to invest and where to start building; namely, in the tools and systems that entrepreneurs need to survive and subsequently thrive. New startup ecosystems can be fragile, so they benefit immensely from investments in infrastructure, education, exchange programs, and regulatory reforms, among other initiatives, to begin to reap the many benefits of creating a startup ecosystem–one that will strengthen a domestic economy, improve a country’s international standing, and shore up technology security.