How to Build a Successful Startup Ecosystem

The (kind of) Obvious Case for Emerging Startup Cities like Austin, Denver, Atlanta, and More

By Collin West and Matt Harris (Draper Associates)

With the support of Draper Associates, Ensemble VC explores what makes a successful startup ecosystem and how countries, states, cities, and companies can collaborate during these unprecedented times.

We worked with Startup Genome, who conducted the research that underpins this report. They write an incredibly rich and detailed annual report you can find here. Startup Genome is the leading research and policy advisory organization committed to accelerating the success of startup ecosystems and we love their work.

Their research is vital because so many components of the global startup ecosystem are in transition and moving – in every sense of the word – at an unmatched pace.

Given where we are, during a time of remote work, the question is: What can your local startup ecosystem do to attract the founders who will build the next big thing?

The Case Study of Austin’s Growth During COVID

Following a decade where Austin's population increased by 100 people per day, “Austin could set a record in 2020 for the amount of jobs brought to the city through corporate relocations,” said the Austin Chamber of Commerce.

Through September 2020, 28 relocating companies have announced 9,325 new jobs, compared to 4,648 jobs in the entirety of 2019. There is no sign of a slowdown for Austin. The pandemic is accelerating the influx of talent into Austin and remaking the global startup ecosystem.

In a recent Startup Genome internal analysis, Austin had among the “lowest intent of moving out” by startup founders. Another reason Austin is winning the talent war is a combination of being a livable city with low cost of living, high happiness, and a well-rounded economy.

For instance, while San Francisco and San Jose over-perform Austin in tech startups and high-growth companies (GSER 2020 Startup Genome; Startup Genome & Inc. Magazine Surge Cities 2020), Austin over-performs the Silicon Valley metro areas in population growth, net business creation across industries, and percentage growth in job creation.

Moreover, there is a temporary window for governments and communities to attract, support, and retain founders. With that said, let’s dig into the important factors that create a vibrant startup ecosystem.

Why Are People Moving?

First and foremost, people are leaving expensive areas and looking for larger homes, backyards, and a more affordable cost of living. This is particularly true for talent that can work remote, and demand high salaries whether they live in a San Francisco highrise or in a suburb of Colorado, Arizona, or Texas.

For example, the median home price in San Francisco is 273% higher than the median home price in Austin (source)!

We also know the best tech talent is mobile. They’re engineers, designers, and marketers who can work from anywhere. And they are choosing to move to places like Austin.

“What attracts and keeps great companies is an open secret. You need a trustworthy government with light-touch regulations, low-or-no state income taxes, great education starting with young kids, fun stuff for people to do, and stakeholders that want to see companies grow,” says the CEO of Draper Associates, Tim Draper.

Where Will the Talent Flow and Value Accrue?

According to Startup Genome, the winners will be the cities that combine global connectivity, diversity of jobs, established early-stage venture capital funds, high levels of education, and high quality of life.

Many city, state, and federal governments are trying to “hack” the system and skip steps when creating and nurturing their ecosystem. For example, certain cities are supporting later-stage venture capital and funds of funds.

However, the focus for developing ecosystems should start by supporting founders and investors at the earliest stage. Supporting late-stage VC does not work if you skip helping early-stage companies mature and grow.

“One of the most important aspects to any ecosystem is a strong angel and seed investor community who bring capital along with business and industry expertise, and connections to customers and global startup ecosystems,” says the CEO of Startup Genome, JF Gauthier.

Let’s be honest: you cannot shortcut your way to creating unicorn companies. It’s important to start with the truth of where your ecosystem is in its development cycle when thinking about how best to nurture and grow value via policy.

Unicorn companies are the result of a healthy, supportive ecosystem, not something that you can index for.

You can, however, index for education, ease of migration, low cost of living, the density of startups, well-aimed innovation budgets, supporting angel groups and institutional seed capital. Being well-rounded is important to create a community that is durable and resilient.

The Value of an Ecosystem

The Chief Innovation Officer at Startup Genome, Arnobio Morelix says, “There is a clear tipping point for the success of a startup ecosystem: You need more than 1,000 startups operating at a given time to start really hitting escape velocity, benefitting from network effects, and growing your exit rates.”

“To grow your ecosystem – to get to more than 1,000 startups – you really have to spend time supporting the earliest of investors. Help these folks by removing regulatory hurdles and plugging them into local and global resources. This is the foundation of a startup community and builds a culture that accepts risk-taking,” says Arnobio.

Data from Startup Genome also shows that if you 3x the number of startups, then you 5x the ecosystem value created. This speaks for the value created by having more and more startups in a local ecosystem. For each startup you add, you create increasingly more value.

There is a clear linear relationship between the proportion of startups that raise a seed round (excluding grants) and the proportion of exits because it is the beginning of the pipeline of fast-growing startups. For an ecosystem to thrive, you have to build the right foundation at pre-seed and seed.

Conclusion

Startup ecosystems like Austin are maturing and have a bright future ahead of them. These unique cities attract tech talent that can live and work remotely – while also offering global connections, diversity of jobs, established early-stage investors, great education, and high quality of life.

Many of these folks have always wanted to flee to an area with lower cost of living, more space, and an easier place to raise a family. Today, during COVID, people are choosing well-rounded ecosystems – places like Austin, Denver, Las Vegas, and Atlanta.

What should Austin continue to do to attract talent? Support companies and investors in the earliest stages of the pipeline. The data shows it. The more startups you have, the more successful your ecosystem will be.