A vibrant innovation ecosystem involves numerous complementary and accretive elements that need to work together in tandem and harmony to be successful.
Having been involved in numerous ecosystems globally – especially in the Silicon Valley and India – I have seen some common themes.
Usually the bedrock of a lot of innovation activity – think Stanford, Berkeley and CMU West in the Silicon Valley, IITs and IIMs/ISB in India, Harvard and MIT in Boston and you get the picture. A lot of groundbreaking innovation either originates or gets supported directly by these institutions or by graduates from these highly pedigreed colleges. Add to the fact that startups in these proximities can easily hire smart interns from these institutions, and you have a wonderful pool of technology talent literally at your doorstep.
An important outgrowth of innovation at universities is the presence of on-campus incubators that literally give birth to companies.
These incubators are a great asset to young, brilliant, 20-something engineers that are on to something big and need basic setup elements – incorporation, taxation, ESOPs, non-compete agreements etc. to be taken care of at minimal cost (sometimes at zero cost, and in return for equity)
Early stage investors
Arguably the most important component of this ecosystem – investors that can make calculated, risk-adjusted decisions in backing early stage companies. These investors provide the much-needed runway for startups to keep growing where other sources of capital simply don’t exist. And in doing so, provide a classical ‘growing and sharing the pie’ dynamic that works in alignment with the startup’s growth trajectory.
This investor group is broadly of two types – Angels and early stage VCs (with Angel groups activing like a hybrid of these two). Angels – often the friends and family round – is usually the first outside money and is needed to take an idea to a bare-bones functioning business – with a viable Beta product, early interest in POCs for Enterprise startups and promising traction for Consumer startups.
Early stage VCs – by definition the first institutional capital into a company – is to take a startup to the next growth trajectory. And by adding a certain aura that comes along with good institutional backing – an aura that helps assure elements in the startups own ecosystem – employees, partners, and customers of the company’s viability.
Often working in tandem with early stage investors, and sometimes in isolation, accelerators help startups hit stride – by helping with getting early customers and to fine
Accelerators help by converting POCs to paid customers and ideally into a couple of solid beachheads. By rounding out the management team with highly pedigreed people and industry expertise. By refining go-to-market strategy and associated deliverables – marketing messaging, target segments, sales ‘cheat sheets’, pricing approaches and more. By opening new markets, geographies, and channels through own industry connections.
Private equity players
I am using ‘private equity’ to represent Series C/D/E and growth capital here. Private Equity players are very important because they provide feasible exit options for many early stage entrants – VCs, Angels, Angel groups, Advisors and even key employees in some cases. This is because a large infusion of money usually results in ‘Capital Table simplifications’ – a euphemism for buying the shares of the entities mentioned above.
Consequently, private equity players create an environment that encourages risk taking at earlier levels – since they provide for liquidity options aside from outright M&As or IPOs. And give plenty of further reason for all participants to take risk at earlier levels.
In this context, I am referring to ‘pure secondaries’ that is ones that buy entire liquid portfolios or Partners interest in Funds. Other Secondary activity – that is buying startup shares is consummated by Private Equity players as described above.
Secondary players (simply ‘secondaries”) play an important role in the ecosystem by helping shift horizons – something that is very important in scenarios where markets take longer to mature and late-stage ecosystems are not sophisticated. They help provide liquidity to investors that would otherwise have to wait longer than desired, and in some cases, where no other liquidity options are in sight. And, in a similar vein to the Private Equity players, they provide confidence to early stage investors by establishing plausible liquidity options that are not predicated upon portfolio companies achieving dazzling success within a VC Fund’s time horizon.
Corporate development teams
Corporate Development Teams – both M&A groups and Corporate investing arms – are important cogs of the innovation systems, but for somewhat different reasons. M&A teams, more obviously, provide for clean exits – to the satisfactions of startups, angels, VCs etc – and thereby help round out the entire investing cycle.
They provide a nice ‘destination’ for startup companies – to reside in and continue innovating, albeit without the pressure of worrying about subsequent funding rounds.
Good corporate innovation team form a critical part of a large corporation’s growth strategy and an essential element of a thriving innovation ecosystem.
The providers of picks and shovels for this great (Technology) Gold Rush – the lawyers, investment bankers, CPAs, part-time CFOs, Trustees, escrow providers, and even free-to-a-point technology providers like AWS all provide important, timely and valuable resources necessary for early stage companies to seamlessly move ahead with their key activities – innovating and scaling.
Forward thinking governments create favourable environments to foster ecosystem growth through a variety of incentives – tax holidays, sovereign wealth funds, incentives to hire employees and lots more. In some cases, as in India, they’ve set up SME exchanges that facilitate the ‘listing’ of startups for investors – thereby facilitating transactions and wealth creation – two valuable elements of a good innovation ecosystems.
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