Startups Blog

What Makes a Good Startup Ecosystem? The Fundamentals

Startups are relatively fragile entities that need a lot of support to achieve sustainable growth and lasting success. Like many organisms in nature, startups need the right conditions to take root and thrive.

startup ecosystem

 

Technically, anyone from anywhere can have a new idea and decide to launch a startup. However, as most people in business know - startups tend to fail. Despite there being 31.7 million small businesses in the U.S., 90% of them fail at some point:

           20% within the first year.

           50% within five years.

           65% within ten years.

The surrounding environment plays a considerable role in startups' rate of failure or success. In this article, we'll break down and explain the elements that make up a good startup ecosystem.

What is a startup Ecosystem?

An ecosystem is like taking a bubble of a particular area where different elements like plants, animals, micro-organisms, water, land, and weather combine and interact to form an interdependent system.

Similarly, a startup ecosystem consists of all those elements needed for startups to incubate and thrive. Like all things, startups do not exist in a vacuum. Startups and ecosystems need to source their employees, resources, capital, etc., from somewhere. They also need to offer their products or services to someone.

The creation and shaping of startups are influenced by their surroundings - the local infrastructure, community, organizations, economy, etc.

The Elements of a Good Ecosystem

By ensuring that the correct elements are in place, leaders and communities can give startups the best possible opportunities to "make it."

The ideal startup ecosystem will vary depending on a number of factors, including the location, level of development, culture, industry, etc. However, we've come up with some of the most important and essentially universal elements needed for a healthy startup ecosystem:

Startups

Considering the low survival rates and high competition, having more startups occupy the same space may seem counterintuitive.

 However, local startups shape the scene and pave the way for others to follow in their footsteps. They help foster a culture of innovation, bring new ideas to the table, and help employ and prepare a startup-ready workforce.

Even startups come in all different shapes, sizes, roles, and types. From small business startups to buyable startups to scalable startups - each has a unique role to play in the local ecosystem.

Different startups in related fields can also become each other's service providers and partners. This can lead to even greater innovation and growth potential as they acutely understand each other's needs and progress together.

Universities

Universities are the wellsprings of talent and human resources for local startups. In startups, budgets are tight, and the demand for highly-skilled employees demanding entry-level salaries is exceptionally high.

Not only that, but higher education institutions are the incubators where the next generation of entrepreneurs is born.

The educational paths and quality at local universities determine the kind of talent that is available. Startup ecosystems need universities specializing in marketing, business studies, IT, and entrepreneurial studies to fuel their needs.

Importantly, successful businesses can reinvest in these institutions to ensure an uninterrupted supply of skilled talent.

For example, Microsoft recently announced a $20 billion drive to train up more than 250,000 cybersecurity professionals nationwide.

Funding

33% of employer startups start with less than $10,000 in funding. And, in 2018, 82% of businesses that went under did so because of cashflow problems.

In most cases, the dream of launching a "garage unicorn" with no startup funding is just that - a dream. It usually takes significant time, money, and effort before a startup starts seeing profits. Most new businesses need 18 to 24 months to reach profitability.

Without a consistent and reliable influx of liquid cash, most small businesses simply suffocate under this weight.

Luckily, there are many potential avenues for startups to secure funding:

           Angel investors

           Equity/venture capital firms

           Development, regional, or bilateral banks

           Crowdfunding portals

           Loans and grants

           Governmental programs

Of course, the type and amount of available funding depend highly on the country or environment in which the ecosystem is located.

Accelerators and incubators

Accelerators look to help existing startups grow. Typically, they offer access to mentors and small seed investments. The process typically takes the form of a formally developed program that lasts for a certain period.

The idea is to provide startups with the knowledge to avoid common pitfalls and help alleviate funding issues. As the main stumbling blocks, removing them is key to accelerating growth.

Incubators, on the other hand, exist to help entrepreneurs or ideators develop their ideas into solid business models. Incubators can be the brainchild of a single entrepreneur or organization. However, it can also be a project launched by an angel investor or venture capital firm looking for a new idea to invest in.

Incubators aim to create spaces and conditions where new, disruptive ideas can be developed. Co-working spaces where entrepreneurs and ideators mingle have become an important feature of the incubator scene.

Service providers

Startups are usually created to solve a specific problem. For example, a next-gen payment solution FinTech or a rapid pharmaceutical testing business.

However, any business also relies on several other functions unrelated to their core competencies. For example, finances, legal advice, human resources, supply-chain management, and logistics.

Typically, outsourcing these functions to service providers can be more cost and time-effective than trying to do it all alone. This will free up the startup's resources to only focus on its core mission statement.

Good mentors

An experienced and knowledgeable mentor can help startups navigate early obstacles and improve their chances of success. 70% of mentored businesses survive five years, double the rate of unmentored companies. And another 92% of small business owners say mentorship has a massive impact on their success.

Often, it's not just the advice that helps but having an unbiased third party that keeps you accountable and on track.

Luckily, studies show that 60% of small business owners mentor others, with 58% explicitly mentoring younger entrepreneurs.

Elements of a Good Startup Ecosystem

While these are the elements of most immediate concern, many outside factors also play a role. For example, the national, local, or global economy, level of government support, and level of business maturity.

It may not guarantee success, but creating the right conditions for a healthy startup ecosystem is crucial to give burgeoning businesses the best chance. While it differs from context to context, the universal elements of a good startup ecosystem are:

           Startups

           Universities

           Funding

           Accelerators and incubators

           Service providers

           Good mentors

Even those not looking to begin a new startup can support their local startup ecosystem via these elements.

 

Topic: Startup Ecosystem