Posted Thursday 8th August 2013 by Ivan Nikkhoo

A Healthy digital ecosystem

“Do you know what my favorite renewable fuel is? An ecosystem for innovation.” Thomas Friedman

A Healthy digital ecosystem

A digital ecosystem is defined as a distributed, adaptive, open socio-technical system with properties of self-organisation, scalability and sustainability, inspired from natural ecosystems.

Most high-growth tech startups have emerged from a select few ecosystems. Clearly, Silicon Valley is and will remain the most significant digital ecosystem. It has taken decades for that happen. That is because creating such an ecosystem is difficult, full of risk and takes a very long time. There will always be unmet expectations as well as bumps along the way in large part because digital ecosystem models are informed by knowledge of natural ecosystems, especially for aspects related to competition and collaboration among diverse entities.

But many major cities and some countries have decided that creating digital ecosystems will be imperative for their futures. As such, they are willing to make the appropriate changes and investments in every shape and form necessary to ensure the success of their strategy. That is why we now see the rise of incredible communities in Israel, Berlin, London and Singapore, among other places.

However, a healthy digital ecosystem must take into account the needs and challenges of tech startups during each stage of their lifecycle, and not just during incubation. That’s because, the requirements for the team, type of capital, advisors, business relationships, and services change during each stage.

So what are the key fundamental building blocks in creating such an ecosystem? What are the challenges? Let’s examine the basic questions:

1. Government & Regulation

  • Do regulations and tax laws promote risking capital and investments or punish them?
  • Is the geography open to innovation and what it entails?
  • Do immigration laws make it easy to get visas for foreign talent?
  • Are the tax and employment laws and regulations employer-friendly?
  • How are capital gains and losses treated?
  • Is it easy to set up a company?
  • Is there ease of incorporation and low cost of compliance?

2. Infrastructure & Services

  • Are there experienced and competent service providers and advisors in the community?
  • What are the cost structures of setting up and running a company?
  • Is the cost of living reasonable?
  • How are the educational institutions and training programmes?
  • Are there well-defined networks of entrepreneurs, advisors, and agencies?
  • Are there regular, informative events?
  • What is the quality of healthcare, living standards, transportation, and logistics in the area?

3. Culture

  • Is there an entrepreneurial culture?
  • What is the image, perception, and general acceptance of risk and failure?
  • Do people work 9-5, or are they willing to work to get the job done?
  • Is there free exchange of ideas?
  • Do people have access to the necessary decision makers?
  • Are there local networking and education events and conferences?
  • Do the entrepreneurs have the necessary promotion skills?
  • Is there a high degree of motivation and ambition?

4. Capital

  • Are there any incubators and accelerators with experience, capital, and track record?
  • Is there a network of experienced angel investors?
  • Are there any government investment vehicles?
  • Is there access to seed and early stage institutional VC funds?  
  • Is there access to venture debt, working capital, as well as business development relationships?
  • Are there growth funds locally, or do entrepreneurs have to go outside as their companies grow?
  • Are the ample exit opportunities?

5. Talent

  • Is there a sufficient pool of experienced individuals starting, joining and guiding startups?
  • Is there a network of experienced CEOs with a track record?
  • What is the engineering talent pool like?
  • Are local schools providing the quality and quantity of engineering talent needed?
  • Are there schools to recruit from?
  • Is talent being priced-up too high?
  • Are there advisors and board members available for guidance and support?

6. Market

  • Is there a large and growing market to motivate entrepreneurs and investors?
  • Can the local market support a specific set of clusters in certain verticals?
  • Are there local ecosystem champions that promote entrepreneurship in the area?
  • Are there local exit opportunities?
  • Is there access to business development and collaboration opportunities?

In such dynamic environments, if entrepreneurs can’t thrive, they will relocate. If there is too much capital, valuations and talent become overpriced. If there is not sufficient capital during each phase, talent flees. So creating a sustainable digital ecosystem becomes an ongoing, market-driven balancing act. With this in mind, there are 10 key factors:

  1. Creating a digital ecosystem is a marathon, not a sprint. It takes a very long time, and a long-term commitment is needed.
  2. A lifecycle approach is imperative to ensure sustainability.
  3. Managing expectations is key. Not every city will be the next Silicon Valley. The local culture will determine what kind of an ecosystem will grow.
  4. The role of the government, although important, needs to be limited. Government incentives and policies should be aimed at making it easier to start companies, not to pick winners and losers. Ecosystems are market and talent driven, not government run.
  5. The life style, cost of living, and the local infrastructure have to accommodate the talent.
  6. Clusters of expertise based on the local areas of competitive advantage are great starting points.
  7. Local champions need to bring together people to create a sense of community.
  8. Substance should supersede hype. Focus should be given to strong entrepreneurs and company builders, and not self promoters.
  9. Without good exit opportunities, the cycle is not complete and entrepreneurs will turn away.
  10. There is no substitute for competent, experienced advisors to guide startups and entrepreneurs.

It is a great time to be an entrepreneur. And if you are lucky enough to be in one of the places where the digital ecosystem is mature or maturing, opportunities will be boundless. As Ron Conway said, “The tech community is a closely knit group, which is why it's so powerful. All of these companies have an affinity for each other, even if they compete with each other.”