The United States is a wonderful anomaly. This is the case for many reasons, but in the context of entrepreneurship it is anomalous for its off-the-charts strength in each measurable ingredients of company building: risk capital, customers, founders culture, and talent.
The Rubric
The quality of a startup geographic ecosystem can be captured in terms of four major categories. Considering these elements separately can be helpful for assessing the strength of leading ecosystems like SF and NYC or emerging ones like Toronto and Austin. These categories are:
- Risk Capital: The money, and thus investors, with the risk-return appetite to make investments early and at a valuation that facilitates upside for great founders.
- Customers: Budgets for software experimentation and a population of buyers who are willing to adopt better solutions.
- Founders Culture: A healthy glorification of founders that convinces smart people to do the irrational thing of founding a company.
- Talent: Technical and sales talent who see the financial and societal value of working for a startup.
While they will prove distinct as we consider some ecosystems in which I have invested, these characteristics can also interrelate. For instance, Founders Culture can follow Risk Capital as a healthy population of investors telling you, the perspective founder, that you deserve to raise money and be successful just might breed such a belief.
The Fully Integrated US Ecosystem and Some of its Cities
On a nation level, the United States is the strongest ecosystem in the world in each category and in combination. It is simply without compare and the result is the best place in the world to start at company. Risk capital flows through a the network of angels, VCs, growth investors, and debt slingers, providing the financial runway to gain speed and takeoff. The largest and most powerful companies in the world demand for cutting-edge solutions validate markets and create customers. A celebration of ambition, resilience, and a willingness to embrace failure is the ingredients for a founder culture. Leading universities and immigration ensure a steady stream of skilled innovators, as much as politicians seem to try to meddle with the latter.
The city level is a healthy competition between established giants and scrappy upstarts in which edges within the four categories are utilized to build competitive advantages. SF leads thanks to its concentration of tech giants, serving as early customers and a source of talent, and the best network venture investors providing the risk capital. The result is the epitome of a founders culture. New York thrives on its financial clout and diverse industries. Boston leans on academia, sometimes to its detriment, to fuel research oriented areas like biotech and AI. Meanwhile, cities like Miami, Austin, and Denver are trying to artificially generate the ingredients for an ecosystem through lifestyle appeal, tax policies, and investor networks.
The real interesting stuff is when we start considering the countries and cities that don’t come to mind first.
The Ecosystem Rubric Applied to Toronto
Let’s apply this framework to one of my favorite cities to visit when I was working, Toronto. Unlike in leading entrepreneurial ecosystems where, generally, most forces row in the same and right direction, Toronto is a city of contradiction.
As it relates to customers, Toronto is an incredibly diversified economy with a breadth of large companies, potential startup customers, from RBC and TD Bank to Bell and Rogers to Sanofi and J&J. However, this fertile land of large budgets is spoiled slightly when one considers which types of companies are in Toronto. Dominated by financial services, media, life sciences/healthcare, and manufacturing, the industries that represent the deepest pockets in the ecosystem are risk-adverse and far from early adopters.
As it relates to talent, Toronto has one of the most educated workforces globally out of top institutions the likes of University of Toronto, Ryerson, and Waterloo. The technical talent pipeline is truly incredible. Further, with an immigration policy we ought to be jealous of here in the United States, the city can tap into global brains. However, big tech recruiters are no dummies and have taken notice, creating a competitive market for this engineering talent, providing an attractive career option on campuses that lack the celebration of startup culture reflected in their American peers. Additionally, while sometimes forgotten as a result of their smaller paychecks, without a robust history of successful scale-ups, the city is lacking in experienced sales talent.
There is then the element of risk capital. If the limitations of the Toronto ecosystem was a crime scene, here lies the taped outline of the body. Toronto’s venture ecosystem is how I imagine VC behavior before “founders first” became in vogue. While there are exceptions and individuals I consider friends, the conservative investment and oddly skewed investor-founder power dynamic litters the market with highly dilutive rounds, sharp elbows, and under financing. I point the blame for the city’s small founders culture squarely towards this reality. Even with jaw dropping centers of mentorship and community like MaRS, DMZ, and Velocity, behavior ultimately follows incentives and nothing incentivizes better than money.
While the above analysis likely reads very critical of a place I said I loved, in my eyes it actually represents an incredible opportunity once an investor understands the strengths and limitations using a consistent framework.
Additionally, while Toronto is my choice of case study as it is a city that impresses me, the same game can be played for any other city left out of the typical investor spotlight.
Call to Action: The Opportunity as a US Investor
Abundant access to the ingredients for startup success creates opportunities to play a role in those cites that lack such abundance. Specifically, for US investors with healthy funds, strong customers and talent networks, and the ability to build community, ecosystems missing one or two of the four core ingredients represent opportunities. This can be achieved by identifying the holes in an investment environment and over indexing on your capabilities to supplement them.
For instance, let’s consider how to invest effectively in Toronto. As covered, Toronto has an incredibly diverse set of large enterprises and an engineering talent pipeline that warrants jealousy. That said, this spark of entrepreneurship is most dramatically suffocated by a conservative investor culture and lack of growth capital. With the rubric analysis of the ecosystem in mind, I would want to be on-the-ground in Toronto building relationships with founders before the local funds with an ability to invest more aggressively than most in the market. Similarly, I would want to get my Toronto-based companies in front of friendly follow-on investors early to supplement the dearth of growth capital locally. I would also want to invest heavily in my recruiting support capabilities tapping into the talent pipeline locally competing with big tech while supplementing a lack of seasoned sales talent with introductions to US-based talent pools. By supplementing what is lacking locally in an environment by “importing” such from the US, I believe investors can unlock the strengths of great ecosystems like that in Toronto.
One of my great personal joys is a morning run in a new city. Having been fortunate to travel to a number and engage with local startup ecosystems, I believe there is opportunity to be found in each. Thus, with the right consideration, analysis, and approach, value can be unlocked for those willing to put the time and money to work to do so!