Beyond Silicon Valley
More than 40 percent of publicly traded US companies listed after 1979 were once startups. The economic value of startups has doubled as a percentage of global gross domestic product (GDP) since 1992.
If we are in the age of innovation, then its economic, philosophical and spiritual center is Silicon Valley. They were the center of innovation. But not anymore. Now innovation can take root everywhere.
Silicon Valley has codified what a startup should look like, dictated how it should be built, and defined what its culture should be. The gospel according to Silicon Valley covers everything from a startup’s raison d’etre (to ‘disrupt’ existing industries with new technology, more-efficient processes, and a fresh attitude), to the yardstick of success (to grow as rapidly as possible, with the hope of becoming a unicorn), to an entrepreneur’s comfort with risk (to “move fast and break things” in hope of scaling rapidly).
Silicon Valley has exported its model globally – and, like the Washington Consensus, it doesn’t work everywhere.
Silicon Valley may be about to have a Detroit moment. At its peak there were more than a hundred emerging car companies in Detroit.
The world of innovation needs a refresh. And that refresh is already well underway of what I call the Frontier, which collectively refers to innovation centers located outside Silicon Valley, and its closest counterparts.
By Frontier, I mean the nascent urban and rural startup ecosystems in developed countries like the United States and Europe as well as in emerging markets.
Looking at startup environment author is focused on two particular dimensions. The first is economic. Factors unrelated to the startup ecosystem that reflect the general level and stability of the environment. The second dimension is the strength of the local startup ecosystem. Is there sufficient capital available? Is there experienced technical or digital talent. Do corporate laws support startups. Ecosystem intensity is the name for that dimension.
Frontier Innovators embody three specific qualities:
- They are entrepreneurs of opportunity. In many markets, people become entrepreneurs as a last resort. These are the entrepreneurs of necessity. They identify a market failure and proactively choose to leave gainful employment to solve it.
- Frontier innovators leverage some sort of innovation. Leveraging any combination of business model and technological innovation that underpins the opportunity-capturing approach.
- Entrepreneurs who aspire to scale their business.
Frontier Innovators as entrepreneurs of opportunity who operate outside the most developed startup ecosystems, leverage technological or business model innovation, and seek to scale their business.
Ten elements of this new model for innovation:
- Frontier Innovators are Creators. Creators of new industries.
- Where Silicon Valley strives to breed unicorns, the Frontier raises Camels – organizations that can capitalize on the opportunity but also can survive in a drought. Frontier Innovators do not focus on growth at any cost; they focus on sustainability and resilience.
- Frontier Innovators also cross-pollinate. They tap into global networks for capital and resources.
- Frontier Innovators build the fabric and machine of the organization in a distributed way.
- At the Frontier, innovators build A-teams with a growth mindset toward employees and a long-term outlook.
- Frontier Innovators are also Multi-Mission Athletes who interweave both profit and impact-based goals.
- Frontier Innovators manage risk, build customer trust, and formalize their industries.
- Venture capitalists at the Frontier are themselves innovators in their own right because they are adapting the model for challenging environments.
- Frontier Innovators often feel isolated. They don’t just scale their startups; they take an active role in building their ecosystem.
Create
In 2014 more than half the world did not have street addresses. In Kenya, only 2 percent of all buildings have them.
OkHi’s crowdsourced digital addresses – a unique combination of a GPS point, a location’s photo, and additional descriptors.
Frontier Innovators are often creators of new industries and not only disruptors. Creators do three fundamental things simultaneously. First, they offer a product or service that solves unserved, acute pain points in the formal economy. Second, creators offer a solution for the mass market. Finally, creators are focused on game-changing innovations that fundamentally rethink a market and a sector. Technology is often a key enabler.
M-PESA is Kenya’s largest mobile money platform. It was incubated inside the leading Kenyan telecom Safaricom. M-Pesa had to educate its customers. The first-mover disadvantage.
For creators competition is not always a bad thing. With more players, the large investments in customer education and infrastructure development are shared.
Creators are often supported by the ecosystem around them.
Creators don’t just build companies. They create industries.
Foster the Full Stack
Silicon Valley’s asset-light modus operandi is enabled by a rich tapestry of companies that provide the necessary infrastructure for disruptors.
Many Frontier Innovators must build physical enabling infrastructure, rather than only software.
The decision to build more pieces of the stack should not be made lightly. Some questions to answer:
- Does the Ecosystem Have the Infrastructure You Need?
- Can Others Provide the Stack?
- Can You Stage the Full Stack Over Time?
Frontier Innovators often enjoy three types of full-stack moats. Competitive, capital, and technical.
One way how Frontier Innovators build full stack is through the horizontal stack.
Gojek is a company from Nadiem Makarim, that addresses the issue of traffic in Jakarta with regulated low-cost motorbike taxis. They had to offer more than transport. The first element was support for digital payments. They build a payment platform. They also offer food delivery, commerce, massages, shipping, and cell phone airtime.
Raise a Camel
Coined in 2013 by Aileen Lee, a Silicon Valley venture capitalist, the unicorn represents an elusive objective – unique, pure, and perfect – referring to the near-impossible milestone of being valued at more than a billion.
Between 2003 and 2013 only 39 unicorns were started in Silicon Valley. As of March 2019, there were 326 unicorns around the world.
When being a unicorn is the objective, very rapid growth is the method. Reid Hoffman and Chris Yeh: “Blitzscaling is prioritizing speed over efficiency in the face of uncertainty.”
Operating in a system where capital is not so accessible demands a new approach. Frontier Innovators are pioneering an alternative model. The camel model is more appropriate for the frontier. Camels live in and adapt to multiple climates. Camels prioritize sustainability, and thus survival, from the get-go by balancing growth and cash flow.
When growth is fueled with VC usually you only have “make or miss” results. And the system is fueling more and more aggressive financing of needed growth. Money intensifies both successes and failures. The burn rate at startups in Silicon Valley is the highest it has been since 1999.
At Frontier, there is less capital. Funding timelines are also longer. The cost of failures for founders is considerably greater. There is a limited safety net for founders.
Frontier Innovators focus on sustainable growth from day one. They manage costs, charge for the value they create from the get-go, ingest capital on their terms, understand the levers for action, diversify the business plan, and take a long-term outlook.
Monica Brand Engel: “Breakeven is the new black.”
Silicon Valley would dismiss this approach since it leads only to linear growth and not exponential. But that means you are not building a business; you are building a financial investment.
Frontier Innovators understand that a product’s price is not a barrier to adoption but rather one of its features, reflecting its quality and positioning in the market.
At the Frontier, existential threats could come at any time and from anywhere.
In Silicon Valley, startups operate like mosquitoes, having a singular focus. Frontier Innovators often take a more financially sane strategy, by building diversification into their geography and product mix.
At the Frontier the average time to exit is more than thirteen years.
A movement called Zebras Unite is focused on raising awareness for the range of startups for which the Silicon Valley unicorn-chasing growth strategy is not appropriate. The movement now had more than forty chapters and fifteen hundred members around the world.
Cross-Pollinate
An entrepreneur builds companies based on their life experience. And a twenty-two-year-old’s experience is short, local, and often myopic. At the Frontier, a typical innovator’s lived experience is longer and spans geographies, sectors, and industries.
The average founding age among leading startups in Latin America, Africa, and Southeast Asia is thirty-one. They have 1.65 university degrees on average (compared to 1.45 in the developed market) and worked at an average of 2.8 companies.
Frontier Innovators are thus cross-pollinators. They bridge information across geographies, industries, and sectors to create novel business models or solutions.
Silicon Valley is only one of many hubs that matter. China is emerging as a global leader, and certainly, some of the pioneering models in e-commerce and fintech outshine what we’re seeing in the United States. Kenya remains the place to go for innovation in mobile banking on non-smartphones. Toronto and Montreal are artificial intelligence hubs. Minneapolis is a thriving healthcare hub. Tel Aviv is a leader in security. London is a leader in fintech.
Frontier Innovators balance an understanding of global trends while rooting themselves in the local market and the needs of their customers.
Access to a global network helps with access to innovation’s two most precious resources: capital and talent. A cross-pollinator’s perspective brings unique insights and resources to a problem.
Repatriates are citizens of a country who choose to return after spending meaningful portions of their careers abroad. Immigrants are citizens of various countries who settle elsewhere.
Between 1995 and 2005, immigrants co-founded 32 percent of all technology startups in Silicon Valley. More than 50 percent of US-based unicorns were founded by immigrants.
Be Born Global
Frontier Innovators don’t share Silicon Valley’s myopic local view. They build their startups in a different way: they are “born global”. There are three dimensions to being born global: the founder, the company, and the team.
Frontier startups expand to other markets early in their life cycles.
UiPath is perhaps the fastest-growing enterprise sales company of all time.
In many emerging markets, the local TAM is too small for the company to scale to a meaningful size. Entrepreneurs in Estonia or Singapore are forced to think globally, whereas startups in India and Brazil often focus locally.
Being born global can also function as a learning strategy.
Different markets have different margins and different risk profiles.
Three drivers explain whether certain players come to dominate markets globally while others remain more regional or local:
The first success factor is centered on the nature of network effects.
The second driver that predicts whether global models succeed relates to resource intensity. Where there is higher resource intensity, global winners are more likely to emerge, whereas models that are more asset-light are more likely to be local or regional.
The third predictor of whether a startup becomes truly global relates to local complexities.
Being a multimarket company doesn’t mean taking a shotgun approach and expanding haphazardly. A key early question is whether some markets are testers and others are must-win. It often makes the most sense to expand from an established anchor market to similar markets in the region. Scaling across countries is much easier if they are proximate, not only physically but also culturally and administrative.
Building a flexible product is essential to scale across markets. So is building a flexible team.
For Frontier Innovators, being born global is often a necessity rather than a choice. By taking a multimarket approach, Frontier Innovators piece together a large opportunity from fragmented regional markets.
Establish a Distributed Team
Entrepreneurs in emerging ecosystems face a tough decision: Should they go where the customers are but where finding the right staff will be more challenging? Or should they optimize for places where team building is easier but that are farther away from the customer base?
Distribution refers to an organizational structure in which the team is dispersed in multiple locations. There is no one-size-fits-all model for distributed organizations.
- Earth and moon models are perhaps the most centralized among the distributed options. A dominant headquarters (Earth) tends to be the center of the organization.
- A second model of distributed teams involves separating the customer-facing operations from product and technological development. Some refer to this approach as reverse offshoring.
- Some firms go one step further and build a multipolar model, in which different regions run different core functions.
- Finally, some companies are fully remote, more akin to a flat network.
Many sales-driven companies scale successfully out of Salt Lake City. Maybe the city’s sales expertise is partially founded on the resilience, strength, and experience of its residents.
Building distributed companies is also a powerful way to manage labor and other costs.
Frontier Innovators often select candidates based on demonstrable independence.
Building a decentralized culture is easier than ever in our high-tech, globalized world.
Three aspects of the born global nature: cross-pollination, being multimarket, and building distributed teams.
Build A-Teams
In Silicon Valley, a kind of mythology permeates stories about founders.
In Silicon Valley, companies and employees see their relationships as short-term affairs. Retention rates are among the lowest in the United States. More than 13 percent of staff turnover every year. To keep employees engaged, Silicon Valley’s primary retention tool is economic: stock options.
Capacity and merit are evenly distributed across the world. Unfortunately, the opportunity is not. The availability of trained and experienced talent is a near-universal pain point for Frontier Innovators. Startups live and die by the quality of their talent.
At the Frontier, innovators focus on character, behavior, and demonstrated skills, rather than the perfect resume.
Frontier Innovators must leverage the best talent from wherever it arises. This often means looking beyond the current location for talent. Immigration (both in-country and international) is a powerful tool.
In many Frontier ecosystems, employees are more loyal than those in the Valley.
The best Frontier Innovators look to offer perks and financial compensation that reflect their unique strategy, organization, and location. At the Frontier, it can be challenging to replicate stock options. Silicon Valley’s de facto financial retention tool.
Train to Be a Multi-Mission Athlete
The most successful Frontier Innovators are not solely focused on growth and financial returns; they consider social impact a central goal from the start, a stance that is reflected in the problems they’re tackling as well as the customers they serve. Many if not most are Multi-Mission Athletes.
Compared with their Silicon Valley counterparts, Frontier Innovators tend to target human needs that are lower on Maslow’s hierarchy.
At the Frontier, startups tend to focus on the mass market from day one.
The central element of a social enterprise is the use of business-minded approaches to solve social problems. Some social enterprises consider scalable or profitable businesses a secondary objective to their desired social impact, while others see profit generation and scale as the engines that drive impact.
For Multi-Mission Athletes, the impact is directly correlated with business success. A Multi-Mission Athlete’s chosen impact metrics are necessarily unique to its industry context, and business model.
Some people argue that balancing multiple missions of scalable businesses and social impact requires trade-offs. For Multi-Mission Athletes, however, there is rarely such a dichotomy.
Manage Risk
An acceptance of failure and an audacious approach to rapid product and company development represent a cornerstone of Silicon Valley’s risk-taking culture.
Frontier Innovators view risk – particularly certain risks – as an externality that should be avoided or at least mitigated. Managing risk is about determining upfront which risks are acceptable and which are non-negotiable.
Frontier Innovators are offering products and services to a customer base that has more to lose. They build reliable products that are worthy of trust, and they foster relationships with their customers to build that trust.
The arrogance of Silicon Valley has no place at the Frontier – nor, increasingly, in Silicon Valley itself.
Reinvent Finance
In innovation, perhaps the strongest symbiotic relationship is between entrepreneurs and venture capitalists.
Venture capitalists have a nearly universal business model, which is composed of a fee and profit-sharing system (often referred to as “2&20”. The typical fee structure for venture capital funds, consisting of a management fee and “carry”, explained shortly). The now-standard profit-sharing structure was pioneered in the 1800s in New Bedford, for a completely different industry: whaling. Like mid-nineteenth-century whaling, venture capital is a risky investment strategy. The risk inherent in the venture capital model is offset by its potential reward.
Despite its global dominance, the traditional venture capital model does not perfectly translate to the world outside Silicon Valley.
After ten years, half of venture capital firms provide worse returns than comparatively investing in low-interest checking accounts.
Being a Camel may lower the speed at which outsized success is reached, but it decreases the likelihood of a total bust.
Frontier venture capitalists have a lower likelihood of outsized unicorn-level success, but also a lower likelihood of failure.
For Frontier venture capitalists, multiregionalism is common. Also, syndication is more often used for financing.
Keith Harrington joined forces with Carlos Antequera and they used a model from mining, to create a revenue-sharing financing model.
The newest investors at the Frontier may be customers themselves.
Initial coin offerings (ICO) are a form of crowdfunding.
Lay the Foundation
The greatest challenge in building a Frontier startup is operating at the Frontier, especially when you are the first to arrive.
All Frontier Innovators are the architects of their ecosystems, and they are using every tool available to build something that lasts.
Fuckup Nights (FUN) talking about failure. Pepe Villatoro.
Tighter-knit entrepreneurial communities can assist with another key challenge: finding a co-founder. They say it takes a village to raise a child. The same is often true of startups: a strong mentorship community directly impacts success.
In Frontier Innovators therefore often build their own companies and generously support others in parallel.
PayPal and Infosys are examples of two environments where founders and people around the companies are actively launching new companies.
It Takes a Village
Developing an entrepreneurial ecosystem is a top priority for nations worldwide.
Traditional theories of entrepreneurial ecosystem development fall into three broad subsets: input-driven models, network-driven models, and entrepreneur-driven models.
The advantage of the Camel model is its focus on sustainability and resilience. Drowning an ecosystem model in capital risks undercutting a camel approach and the success it achieves.
Through policy, countries can make themselves attractive as innovation sandboxes.
A few principles to develop an entrepreneurial ecosystem strategy:
- Keep the entrepreneur at the center.
- Focus on big wins, too.
- Take a long-term view.
- Collaborate.
- Be creative and take risks.
The Future Is at the Frontier
Frontier Innovators create industries rather than disrupt them, focus on acute pain points in ecosystems, and build products that target the mass market.
It’s a playbook, not a rule book. Context is the key. Relativism is what innovating at the Frontier is all about.
Silicon Valley needs a refresh.
