Where Einstein Meets Edison

How can you attract start-ups to your region?

How can you attract start-ups to your region?

Oct 26, 2013

Cities around the world look with envy at places like Tel Aviv, Boston, Cambridge, San Francisco, and Silicon Valley. After all, these regions have managed to attract a critical mass of talent and capital that yields a vital stream of ever-expanding start-up activity.

To be sure, such entrepreneurial booms create challenges for their policymakers, as the rising tide of wealth does not lift all boats. People who are unable to participate in the start-ups end up paying higher rents – as happened when social media ventures flocked to San Francisco’s South of Market area – and more people clog highways and strain public transportation.

Start-up Commons Attract Entrepreneurs
Who Build for the Region’s Future

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But on balance, the benefits outweigh the costs of a vital Start-up Common (see figure) — six regional elements: pillar companies, universities, human capital, investment capital, mentoring and values — that get strengthened in each generation of start-up success and failure. The benefits include lower unemployment rates, rising wages and housing values, and higher tax revenues.

If your city lacks a robust Start-up Common, what can you do to create one? This is a question that I have spent the last four months talking about with policymakers in Worcester, Massachusetts, Barcelona, the Azores; and Santiago, Chile.

Read on for examples of how Tel Aviv and Ithaca transformed themselves into hotbeds of start-up activity and three principles that your region can follow to get started on that journey.

Creating a Start-up Common requires a region to convert potential entrepreneurs into actual ones. First, create an environment that appeals to local entrepreneurs. An independent-minded subset of entrepreneurs I call pioneers– contrary to “buzz,” which herds entrepreneurs to, say, Boston’s Seaport district – see a sleepy city like Worcester to be a great place to live, work and play.

Such pioneers decide that opening a business in a less vital region will help them to attract and retain local talent while paying lower rents and other operating costs. If these pioneers achieve financial success, they will attract more entrepreneurs who will be better able to attract private capital investment. This will create a success cycle that can boost the level of entrepreneurial activity in your region.

Here are two examples of regions that did just that: Tel Aviv transformed itself from a city that bought into Israel’s socialist values to a start-up haven and Ithaca, NY turned its universities’ technology and people into a vital Start-up Common.

Israel: From Socialism to Start-up Nation

Israel has lots of start-ups now. In 2012, 660 Israeli high tech companies received $1.9 billion in venture capital, of which a mere 24% came from local investors, according to IVC Research Center estimates and Canaan Partners’ Izhar Shay. For perspective, in 2012 Silicon Valley startups received $10.9 billion and New England start-ups received $3.2 billion that, according to PWC’s MoneyTree survey.

Up until the 1970s, Israel was a socialist country but the cancellation of a government-funded military jet project threw 10,000 workers and 50,000 contractors out of work. Reckoning that the era of all-providing government was over, Israelis started companies that would commercialize military technologies. NICE Systems, for example, developed technology to record sound for companies such as insurers and it went public three years later.

Another start-up, Gilat Satellite Networks, developed a communications system using military satellite technology that enabled retailers to validate peoples’ credit cards fast. Gilat sold its product to big U.S. companies in 1985 and in 1988 had a $100 million IPO, which was then a big number.

The 1990s brought to Israel about a million Russian immigrants, many of whom were trained as mathematicians, physicists and engineers. The government created Yozma, a tiny, $2 million project to draw global venture capital to Israel. Yozma matched every $1 in investment from a U.S. venture capital firm with $2 from the Israeli government. When the VC sold its shares, Israel required the VC to repay the $2 to the Israeli government – leaving most of the profits for to the VCs. Yozma ultimately co-invested $100 million with 10 foreign VCs.

Israel also sponsored incubators that took equity in the start-ups and big companies such as Intethat hired entrepreneurs for R&D. According to Keshet’s Steve Gray who worked with Intel Capital in Israel, beginning in 1991, Israel’s chief scientist paid entrepreneurs for two years’ worth of R&D if he/she kicked in 20% of the start-up’s capital. According to Gray, Intel and Teva, a generic pharmaceutical company, were among this program’s corporate sponsors that covered operating expenses.

These programs – plus the demonstration effect in which envious VCs wanted to get in on the Israeli start-up investment success of their more adventurous peers — have spurred investment in Israeli start-ups that have yielded good returns.

Ithaca Links Universities To Business

Ithaca’s unemployment rate of 5.7% is significantly below the 7.5% national average. This low unemployment rate can be attributed to Ithaca’s entrepreneurial success, stemming from collaborations between universities and businesses. Cornell University and Ithaca College “poured hundreds of millions of dollars into the economy and created thousands of jobs for everyone from professors to landscapers, and also fostered new companies,” according to the New York Times.

Ithaca’s mayor, Svante Myrick, said that Ithaca had been successful “because our universities have partnered with our private industries.” The Times went on to praise the partnership, acknowledging a strategic relationship between the two sectors extended beyond simply businesses selling “sandwiches and beds” to visitors and students.

Four Start-up Common elements highlight the biggest reasons for Ithaca’s success.

Universities: Cornell has two centers that spur startups: “the Center for Technology Enterprise and Commercialization, which manages licenses for a range of tech and other inventions, and the Kevin M. McGovern Family Center for Venture Development in the Life Sciences,” according to the Times. And Cornell plans to open a business incubator in downtown Ithaca later in 2013.

Human capital: Local graduates choose to stay in Ithaca. Ithaca’s “colleges and community entrepreneurs help create everything from skateboard companies to high-tech startups,” reported the Times. More than half of Ithaca’s residents older than 25 hold a bachelor’s or higher degree. As Gary Ferguson, executive director of the Downtown Ithaca Alliance, a nonprofit development group told the Times, “This is the classic place where you have baristas with Ph.D.s. You have people with incredible skill sets who choose to remain here.”

Investment capital: In Ithaca, venture capitalists that are in upstate New York or that invest in upstate New York put capital in Ithaca first, according to the Times.

Values: Ithaca values the ability to monetize intellectual property and progressive initiatives to boost diversity and sustainability. As Robert M. Simpson, the president of the CenterState Corporation for Economic Opportunity, told the Times, Cornell and Ithaca had been “increasingly successful in translating that into patents, license income and startups,” which in turn create jobs for local residents.

Attracting More Start-ups To Your Region

Regions with the most start-up activity apply three principles when shaping policies to attract start-ups:

  • Build the Common’s resources to attract a specific industry. Entrepreneurs locate where the Start-up Common’s six key elements best match the resources that are most critical for their start-up’s growth. For example, Israel’s strong military and entrepreneurial human capital spawned companies such as Check Point Software and Imperva that are global leaders in information security.
  • Create an environment where industry leaders want to live, work, and play. Well-established Start-up Commons host industry-specific resources – such as engineers, marketers, and capital providers that specialize in fields such as information storage or mobile consumer services. Entrepreneurs locate close to the resources that fit their start-up’s industry. As Ithaca’s mayor has done, policymakers should create places to live, work and play that will make it easier for entrepreneurs in the industry in which a region specializes to hire the talent they need.
  • Articulate clear regional values backed by action. Of the six start-up common elements, values are among the most important. Two value dimensions – appetite for risk and investment horizon — are crucial for entrepreneurs picking the right Start-up Common. For example, Silicon Valley’s leadership flows from its high appetite for risk and willingness to wait a long time for a return on investment. If an entrepreneur lives in a Start-up Common that is risk-averse and has a short-term investment horizon, she may want to relocate her venture. Policymakers should follow the examples of Ithaca and Israel to shape their values in a way that attracts entrepreneurs.
Peter Cohan

About

Strategy consultant, start-up investor, teacher, corporate speaker, pundit and author Peter Cohan has invested in six start-ups, three of which were sold for a total of $2 billion. Before founding Peter S. Cohan & Associates in 1994, he worked with HBS strategy guru Michael Porter and at Index Systems, a consulting firm founded by four former Sloan School professors. Cohan has run over 150 consulting assignments for corporations and governments and engaged corporate audiences from Barcelona to Beijing. He teaches business strategy and entrepreneurship at Babson College. His eleventh book is Hungry Start-up Strategy: Creating New Ventures With Limited Resources and Unlimited Vision.

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