What are the ingredients that have driven today’s tech startup centres to prominence?
One of the recurring topics this site keeps returning to is how cities like San Francisco and London have seen an explosion of tech startups in recent years.
Probably the spectacular of all the cities that have shot to prominence is New York; a decade ago tech startups in the city were a rare thing, today there are thousands.
Today I had the opportunity to visit AlleyNYC, one of New York’s biggest tech accelerators. It’s impressive how a venture two years old can be so successful.
A question I asked was ‘what has driven the change in New York?’ The consensus was the combination of the Great Depression and the success of high profile companies like Facebook.
The success of high profile startups has validated the business model in the eyes of both investors and founders, people who would have been reluctant to leave their jobs and start a business now see the opportunities while investors can see there are returns to be made.
What’s notable about cities like New York, London and San Francisco is the depth of industry expertise, capital, networks, education institutions and diversity. These are key factors in attracting tech startups.
For other cities aspiring to be ‘the next Silicon Valley’, it would be worthwhile considering where their strengths lie compared to these giants.
It’s not a given that any of today’s global leaders will be the future centres of industry, but other cities and regions will need to have a very strong reason for businesses to choose them over the incumbents.
The Global Innovation Index rates nations on their ability to adapt and compete in the global economy, the authors believe the measure is more than just economics
Last Friday the Global Innovation Index was released rating nations on their ability to adapt and compete in today’s global economy, the authors though believe the measure is more than just economics.
The Global Innovation Index is a joint venture between Cornell University, INSEAD, and the World Intellectual Property Organization which measures 81 economic factors that across 143 countries.
Its release in Sydney last week was part of the B20 conference – the business offshoot of the G20 Heads of Government meeting taking place in Cairns later this year.
European countries top the list with Switzerland, the United Kingdom, Finland and the Netherlands making up the leading five. The US and Singapore break the European monopoly at the sixth and seventh positions.
As the results indicate, rich countries have a natural advantage in the index with index scores tracking national GDP – the highest ranked middle income country is China at 29th and the leading low income nation is Kenya at 85.
Innovation index versus GDP
Kenya, and Sub Sahara Africa in general, is one of the highlights of this year’s report with with countries in the regions being nominated as ‘innovation learners’ with them performing above their expected level of GDP.
“What we find in Africa is growth rates are stabilising,” says Francis Gurry, the Director General of WIPO in discussing the report. “That creates the space for better policy and investments.”
Smaller is better
A key finding in the report is that smaller countries tend to perform better; “there’s a slight bias in the index,” says Gurry “as there’s more evenness across the economy.”
This works against larger countries like the United States while favouring countries such as Switzerland and Singapore.
Being affected by the 2008 financial crisis doesn’t help economies either; “the countries you see on top like Switzerland and the Nordic countries have been less affected than countries like Spain and Greece” says Bruno Lanvin, the Executive Director of the ISEAD Global Index.
Europe’s growing divergence
“Yet Europe remains a land of innovation,” continues Lanvin. “Europe has no choice, it is an aging economy and it has to innovate its way out.”
“A divide has been recreated within Europe, the whole European edifice has been a terrific machine for convergence. This has disappeared with the crisis where we see a new divergence.”
“We see countries like Spain and Italy, not to mention Greece, where the proportion of research and development has been decreasing which has not been compensated by private investment.”
This lack of private investment is a concern that constantly came up in the B20 discussions; despite the world being awash with capital, little is finding its way into infrastructure funding and business lending.
Falling R&D spending
Another area causing concern for the index compliers is the falling rates of research and development spending, noting that support for R&D efforts seems to have lost momentum in some countries with most growth in this area over the near future expected to take place mostly in China, the Republic of Korea, and India.
Innovation by Region
Rank in Region
GII 2013 Overall Rank
Country Name
Central and Southern Asia
1
76
India
2
79
Kazakhstan
3
86
Bhutan
Sub-Saharan Africa
1
40
Mauritius
2
51
Seychelles
3
53
South Africa
Southeast Asia and Oceania
1
7
Singapore
2
10
Hong Kong (China)
3
16
Korea, Rep.
Latin America and the Caribbean
1
41
Barbados
2
46
Chile
3
52
Panama
Northern Africa and Western Asia
1
15
Israel
2
30
Cyprus
3
36
United Arab Emirates
Europe
1
1
Switzerland
2
2
United Kingdom
3
3
Sweden
Northern America
1
6
United States of America
2
12
Canada
While the index was notable for its stability among the top ranking countries, there were stand out performers with the United Kingdom charging from tenth in 2011 to third in 2013 and second this year.
Along with ethnic diversity, the advantages of having deep, varied economies and societies is emphasised by the report.
“When you’re measuring all of these, you’re measuring the ability of a country to compete;” says Gurry. “The intensity of competition will only increase between countries in respect to both regulatory regimes but also between enterprises.”
For all the talk about the importance of innovation Lanvin sees limits to what governments can do; “innovation is not a matter that can be decreed or implemented by governments alone, government can give the right signals and create an environment.”
Creating a mindset
“In the end it is the dynamics between business, government, academia and civil society that create the right mindset for a country to become an innovator,” continues Lanvin.
Lanvin also observes that innovation is about more than technology, “clearly technological innovation will remain a critical component, but you should expect to see social innovation and political innovation.”
“When we need to address the major challenges of this planet like the environment you need more than technological innovation; you need creativity, new mindset and new attitudes.”
Reservation Hop illustrates all that is wrong with the current startup culture
Reservation Hop is a good example of many of the current breed of parasitic startups that want to create a new class of middleman.
The hospitality industry is tough work and something guaranteed to irritate restauranteurs are reservations that don’t show up.
One startup that seems almost certain to attract the ire of the restaurant industry is Reservation Hop – “We make reservations at the hottest restaurants in advance so you don’t have to.”
Reservation Hop makes table reservations at popular restaurants and then sells them through their website.
We book up restaurant reservations in advance. We only book prime-time restaurant reservations at the hottest local establishments, and we mostly list high-demand restaurants that are booked up on other platforms.
This is probably one of the worst examples of the middleman culture that dominates much of the current startup thinking.
Almost certainly there’s a market need for proxy queue jumpers – although one wonders how profitable it is when the transaction fees are under $10 – but this service will deeply irritate restaurant owners and diners who are crowded out by these ‘parasite’ services.
In many ways, Reservation Hop illustrates the problems with this phase of our current startup mania; the rise opportunistic businesses that are more akin to parasites than services that add value.
The Reservation Hop website assures patrons that there’s a 99% chance their booking will be honored by the restaurant on the night, we can expect establishments to start messing with that statistic as they wise up to the business.
Many in the startup sector speak about how new technology improves the world, services like Reservation hop illustrate that not every idea is a step forward.
Judging from the Computing UK article that description hasn’t impressed the rest of the British tech community as it confirms in their minds there is, as usual, too much focus on the capital and Livingston’s view also raises the question of whether London really wants to be another Silicon Valley.
Like all global industrial hubs Silicon Valley the result of a series of happy coincidences; massive defense spending, determined educators, clever inventors and savvy entrepreneurs all finding themselves in the same place at the same time.
Trying to replicate the factors that turned the region into the late Twentieth Century’s centre of technology is almost impossible – even the United States couldn’t afford the massive defense spending over the fifty years from 1941 that underpinned the Valley’s development.
Apart from the spending; the culture, economy, geography, markets and workforce of Silicon Valley are very different to that of London’s.
This not to say London doesn’t have advantages over Silicon Valley; access to Europe and relatively easy immigration policies make Britain a very attractive location for tech businesses. If the local startup community can tap The City’s banking resources then London could well be the next global hub.
If London is the next global tech centre – history will tell – it will almost certainly be very different to Silicon Valley.
Strangely, the event Lord Livingston was speaking at reflects how the Californian tech sector is evolving; Salesforce is a San Francisco company and represents a shift in the last five years from the suburbia of San Jose and Palo Alto to the quirky city life of SoMa and the Tenderloin.
At the same time Silicon Valley itself is evolving into something different, just as it did in the 1990s with the switch from microprocessor manufacturing to software development.
That shift illustrates the risks of trying to imitate one industrial hub; by the time you’ve build your replica, the original has moved on.
If you spent your life trying to knock on the door of heroes you want to imitate, it would be shame to finally make it only to find they’ve moved.
In a presentation at this year’s RSA conference Chang explains some of the underlying themes of his book, particularly the point that the various schools of economics theory are based on their own sets of cultural assumptions and that every group struggles to explain the world, especially when asked to fit Singapore into their models.
Chang’s five points are a call for the average person to understand economics and be prepared to challenge the orthodoxies being trundled out by business and political leaders.
You should be willing to challenge professional economists (and, yes, that includes me). They do not have a monopoly over the truth, even when it comes to economic matters.
As economists have been allowed to become the high priests of modern society — or possibly the court jesters of the corporatist world — it may well be time to challenge them.
By trawling through the AirBnB database, The Chronicle found 4,800 properties for rent in the city to glean a great deal of information that the company is not keen to share.
A key point from the survey is that over 80% – 3200 – of the properties are householders renting out spare rooms or their places while they are away, which is exactly what AirBnB claim their service is designed for.
The other, professional hosts are what’s attracted the wrath of regulators in cities like New York, where it appears unofficial hotels are skating around taxation and safety regulations.
A new breed of middleman
Catering for these professional hosts has seen another group of middlemen service pop up and The Chronicle features Airenvy, a service that helps landlords manage their properties.
Airenvy is now the biggest San Francisco host, managing 59 properties on behalf of its clients and charging 12 percent commission for dealing with the daily hassle of looking after guests. Since launching in January it employs twelve staff.
Unlike many of the internet middlemen, Airenvy does seem to add value to the renting process above being a simple listing service. For absentee hosts, the fees would seem to be worthwhile in reducing risks and problems.
For non-convention visitors, particularly those visiting family or friends, AirBnB is an opportunity to get a place out of downtown.
The price ranges reflect the service’s diversity as well; from $18 a night for a couch through to $6,000 for a mansion. The average though is close to a typical hotel rate of $226 a day.
The effects of AirBnB
What the survey shows is AirBnB has diversified San Francisco’s accommodation options without the problems being encountered in New York.
If we want to understand how to adapt to a rapidly changing world, we could learn from our great-grandparents.
“We’re looking at a future where every aspect of our lives could be utterly different to how it is now,” declared ABC Radio host Linda Mottram in our semi-regular technology spot on Monday.
Linda’s concern was based around our talk on 4D printing and the future of design and she’s absolutely right – life is going to be totally different by the end of this century.
We won’t be the first generation to experience such massive change to society and the economy, our great grandparents at the beginning of the Twentieth were born into a world without electricity, the motor car or antibiotics.
Those who survived the two world wars and lived to a ripe old age in the 1970s saw life expectancy soar, childhood mortality rates collapse and the western economies shift from being predominately agricultural to mainly industrial and service based.
From our position, it’s difficult to comprehend just how radically life changed in western countries during the Twentieth Century.
When we wonder where the jobs of the 21st Century will come from, it’s worth reflecting that many careers we take for granted today didn’t exist a hundred years ago and the same will be true in a hundred years time.
The technology we’re using may be new, but adapting to massive change isn’t.
Throughout world banks have effectively stepped out of the small business market, despite the world being flooded with cash to keep the global economy afloat over the last five years. Hanna writes about the US experience;
big banks currently reject more than 8 out of 10 loan applicants, and small banks reject 5 out of 10. Some estimates suggest that investment in small businesses has dropped as much as 44 percent since the Great Recession in 2008.
While the Great Recession had a lot to do with the collapse in small business lending in the US and Europe, the decline in bank support for main street dates back to the first Basel Accords established in 1988.
Basel judged banks’ risks on the classification on their assets – government bonds were the safest and domestic property was the preferred private sector asset with small business lending being a long way down the risk.
Following the cues from regulators, banks favoured mortgages which they could them securitize and onsell to investors; this gave rise to the sub-prime lending markets, Collateral Debt Obligations and eventually the Great Recession itself.
Six years after the great recession started and despite massive amounts of capital being injected into the banking system, the small business sector is still being capital starved.
As Hanna and Hoffmann state in their article, crowdfunding sites like Kiva and community initiatives are changing the banking system and it could well be that today’s trading banks.
Having neglected their core purpose of funding business and industry, are now as vulnerable to disruption as other industries as small businesses, entrepreneurs and communities look elsewhere for their capital needs.
A business that relies on government funds isn’t really a business.
Australia’s new Federal government handed down its first budget yesterday with savage cuts to scientific research, training and business support.
I dissected the implications of the budget for businesses in a piece for Technology Spectator with the conclusion that modern Australia is turning its back on technology, the young and the entrepreneurial.
Some of the critics of my Tech Spec piece made the point that if your business relies on government grants then you aren’t really an entrepreneur.
I’d tend to agree with that, having spent a few months working for a state agency responsible for business development programs I realised that for most businesses the time cost of applying for and administering a government grant was often greater than the value they received from the programs.
What’s worse, governments can axe these programs at short notice which leaves the businesses short handed. Which is exactly what happened last night.
Indeed that’s the problem for Australian businesses, each time a government changes the new administration axes the previous one’s programs and this lack of certainty and continuity is one of my concerns about the viability of Australia’s startup scene.
The truth is though, if your business does need government funds to survive then you’re at the mercy of bureaucrat’s whim rather than the rigours of the market.
If you’re comfortable with owing your existence to a bureaucrat then you probably don’t really have a business and you certainly aren’t an entrepreneur.
While the headline – which wasn’t mine – is inflammatory, there is an element of truth to it as Australian companies have become far more insular and comfortable in the last twenty years.
It wasn’t always like that, for a brief period in the late 1980s and early 1990s corporate Australia was prepared to take on the world. But something happened in the mid 1990s.
John Winston Howard
One of the key turning points was the election of the Liberal government in 1996, John Howard’s fundamental belief was that things were better in the 1950s and Australia should return to those days. He delivered.
The Australian people thought his vision was a great idea, having become exhausted by the reform agenda of the 1980s Hawke and Keating Labor governments that had opened and reinvigorated the economy.
Howard was helped by the Labor Party abandoning its reformist agenda with its successful 1993 campaign against the Liberal’s policy of changing the tax system. As George Megalogenis pointed out in his book The Australian Moment, Paul Keating’s populist victory over John Hewson demolished any appetite for meaningful reform among Australia’s political classes.
Cosy clubs
The centerpiece of Keating’s economic reforms was the compulsory retirement savings system; while the idea was good in principle, the practice of private fund managers looking after the savings has meant most of the investment has been concentrated in the top ASX stocks.
As a consequence, Australia’s top companies were relieved of the chore of answering to stroppy shareholders as their registries were dominated by their friends from Sydney’s Balmoral Beach Club and the hallowed halls of the Melbourne Club.
Domestic duopolies
Compounding that problem was another failure of the Hawke-Keating years of allowing domestic monopolies to develop on the basis that Australian companies needed a strong local footing in order to compete in global markets.
For a while that worked until Australia’s now powerful duopolies decided it was more profitable to exploit their domestic market strength rather than competing as global players. This happened around the time Keating won the 1993 election, by time Howard became PM the practice was well established.
The combination of tame shareholders and comfortable markets is why Australian corporations haven’t responding to global pressures; they simply don’t have to. Which leads us back to the conclusions of the PwC report.
Australia needs to lift its game. We are lagging behind our peers globally and are not considered a leader of innovation. The Organisation for Economic Co-operation and Development in its Science, Technology and Industry Outlook 2012 rates Australia as average against its key drivers that measure competency and capacity to innovate. Change is required.
It’s difficult to see where change is going to come from for Australia while everyone – business leaders, politicians and the population at large – are comfortable. As the long as The Lucky Country stays lucky it can afford not to invest in the 21st Century.
Uber’s fight with taxi regulators is part of a broader business disruption
I’ve a story up on Technology Spectator that pulls together Uber’s fight with taxi regulators around the world with the Australian government’s Commission of Audit.
While the story is written in an Australian context, the key message about business disruption is universal; as barriers to entry fall, no incumbent can assume they are immune from having their business upended.
For Australia, this is a particularly important message as the affluent economy is kept afloat by consumer spending underpinned by a favoured and protected housing market.
The economy though is nowhere near as untouchable as it looks; along with being way over invested in property, Australia’s industries are hopeless uncompetitive and have a cost base similar to Germany’s.
It’s an entire country ripe for disruption, it will be interesting to see if the Lucky Country’s luck holds in the 21st Century.
