Author: Diana Carranza

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McNair Center Startup Ecosystems

Ranking Startup Activity in Cities

Are startup hubs exclusive to a handful of U.S. cities? Or is high-technology entrepreneurship spreading throughout the country? To answer these questions, the McNair Center recently published The Top 100 U.S. Startup Cities in 2016,  ranking startup activity by tracking venture capital deals in U.S. cities. The report found that roughly 70% of startup activity is concentrated in 50 American cities. While the top seven U.S. cities for entrepreneurship are San Francisco, New York City, Boston, Cambridge, Palo Alto, Austin and Seattle, startup clusters are also forming in many American cities.

There are several rankings of startup activity. While these rankings use different methodologies, the results point toward the same trends in startup activity. This blog post compares the McNair Center’s methodology and that of rankings published by the Kauffman Foundation, City Lab /Martin Prosperity Institute and Startup Genome. We also identify the consistent themes across the rankings.

Kauffman Foundation: Startup Activity by Rate of New Entrepreneurs

The Kauffman Foundation ranks U.S. metropolitan areas by new business creation activity and the number of people engaging in business startup activity, using the following three metrics: the rate of new entrepreneurs, the opportunity share of new entrepreneurs and startup density.

The rate of new entrepreneurs measures the percentage of the adult population of an area that became entrepreneurs each month. Opportunity share of new entrepreneurs provides the percent of new entrepreneurs who were employed before starting their business; this metric tracks entrepreneurs who started their own businesses because they saw a market opportunity. Startup density is the number of startup firms per 1,000 companies. Startup firms are defined here as as small businesses that are less than one year old and employee one person in addition to the owner. This web-based ranking is dynamic, and the data can be downloaded. Users have several options such as measuring startup activity by larger or smaller states and by growth entrepreneurship. While the overall rank is a weighted average, users can also change the ranking for each individual measure.

City Lab / Martin Prosperity Institute: Measuring Global Venture Capital

A 2016 ranking prepared by City Lab with the help of the Martin Prosperity Institute provides the geography of venture capital investment in high-tech startups for more than 200 U.S. metro areas for 2016. This analysis ranks metro areas in terms of the total dollar amount of VC investment, as well as their share of national venture investment. The ranking provides individual rankings for venture capital investment, deal share and venture investment per capita. According to their findings, “No matter how you slice it, venture capital-backed high technology remains spiky, and if anything, it may be getting spikier.”

The Martin Prosperity Institute’s 2015 ranking, The Rise of the Global Startup City, finds that the U.S. accounts for nearly 70% of total venture capital worldwide, followed by Asia (14.4%) and Europe (13.5 %). Both the 2016 and 2015 rankings rely on venture capital investment in absolute numbers and percentage as their key measure for startup activity.

Startup Genome: Global Focus with Eight Success Factors

Startup Genome has identified eight factors that drive the growth of high-technology firms: funding, market reach, global connectedness, technical talent, startup experience, resource attraction, corporate involvement, founder ambition and strategy. Startup Genome’s ranking assesses 55 startup ecosystems across 28 countries and ranks the top 20 for 2017. Analyzing roughly 100 metrics that measure the eight external and internal factors, Startup Genome measures startup performance by growth over the first years of operation.

The top five regions in the 2017 ranking are Silicon Valley, New York City, London, Beijing and Boston. Startup Genome finds that greater global connectedness leads to higher ecosystem performance. Startups’ ability to reach out outside their own ecosystems highly correlates with attracting global customers.

McNair Center for Entrepreneurship and Innovation: Measuring U.S. Venture Capital

Our research paper analyzes startup activity based on three venture capital metrics: the dollars invested, which measures the total amount of growth-oriented venture capital invested into startup firms in a city; the number of new deals, which looks at the number of startups that received their first-ever round of venture capital financing; and the number of startups backed by venture capital, which gauges the overall scale of a city’s ecosystem.

We ranked cities on each of these three measures for 2016 and then assigned them an overall rank by equally weighting the component metric rankings. Our methodology is similar to the global ranking produced by City Lab/Martin Prosperity Institute, but we create a composite ranking of U.S. cities based on the weighted average of each measure, while City Lab/Martin Prosperity Institute publishes individual rankings for each metric.

Common Trends

The top 20 cities for each ranking is compiled in Figure 1. Across all the rankings, startup activity is highly concentrated in a handful of U.S. cities. The global assessment done by Startup Genome shows that the U.S. leads the world in high-technology entrepreneurship.

Other trends include:

• San Francisco ranks number one for McNair and City Lab/Martin Prosperity
• New York City takes the second spot for McNair, City Lab/Martin Prosperity and Startup Genome
• Boston-Cambridge, San Francisco Bay Area/Silicon Valley, Austin, Seattle, Chicago and Los Angeles are consistently the U.S. cities with the highest rankings across the four studies
• California cities are spread all over the rankings, confirming the spillover effect in the San Francisco Bay Area
• San Francisco and Silicon Valley are at the top of all of the rankings except for the Kauffman Foundation. The Kauffman Foundation ranking measures entrepreneurship by new business creations, which combines small businesses and startups. For example, the Houston metropolitan area has the 9th spot on the Kauffman Foundation ranking, yet it is not shown as part of the top 20 in any other of the rankings. This result reflects a high rate of small business creation in Houston, not its startup ecosystem.

Figure 1. Top 20 Cities across 4 Rankings

Conclusion: Why Is Venture Capital Our Preferred Measure?

Venture capital provides comparable and systematic information on investment that can be directly linked to specific geographical locations. The amount of venture capital invested in an area shows the supply of financial capital available in the ecosystem.

Venture capitalists invest in high-tech, high-growth startups, not small businesses. This difference is key to assessing the innovation taking place in any given area. High levels of venture capital indicate that there is a healthy demand for this kind of financial capital. This increased competition creates the virtuous cycle that feeds a top ecosystem.

 

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McNair Center

Interview with Dr. Armen Orujyan

Athgothon 5 brought budding entrepreneurs and students from over 50 universities in 35 countries to the World Bank headquarters in Washington D.C. in 2013. Photo courtesy of Athgo.
Dr. Armen Orujyan
Photo courtesy of Athgo

Dr. Armen Orujyan is the founder and chairman of Athgo, an entrepreneurship platform that is in consultative status with the United Nations Economic and Social Council, U.N. Department of Public Information and the World Intellectual Property Organization. Athgo advances innovation ecosystems in Europe and Africa and has established recurring global innovation forums at the U.N. and World Bank. Orujyan earned his bachelor’s degree from the University of California, Los Angeles in 2000 and his doctorate degree from Claremont Graduate University in 2007. In 2017, Orujyan joined the Baker Institute’s Board of Advisors.

The McNair Center’s Diana Carranza recently interviewed Orujyan about his experience in social entrepreneurship.

What is your definition of Social Entrepreneurship?
I would characterize, albeit no longer classify, social entrepreneurship as building enterprises that create both financial wealth and communal value. The approach advances the idea that “doing good” and “doing well” can and should coexist. I just call it constructive entrepreneurship. Constructive entrepreneurs create short-term value through the provision of products and services, and long-term value through enterprise operations. Their activities incorporate two characteristics: positive net income (wealth creation) and positive net value (communal value creation). To be successful, constructive entrepreneurs expand performance criteria to measure and communicate both net income and net value.

How did you get involved in Social Entrepreneurship?
While in college after doing advisory work for U.S. political campaigns, including Vice President Gore’s Presidential run in 2000, I led a human rights movement that brought over 40,000 young people and concerned citizens onto the streets of Los Angeles. Leveraging the power of social media and the convening power of youth, the movement has since turned into an annual observance, attracting in effect of 160,000 people.

The experience of passionately following a vision and watching tens of thousands of people from all walks of life join to pursue a common objective was humbling and at the same time powerful and enlightening. I began seeing that with a slight push, direction and a compelling story, not only I, but also all individuals on the margins, especially young people, can realize their potential.

The success of the movement was emotionally gratifying and intellectually fulfilling, and it paved the way for my next phase in life. I wanted to do well in life by empowering young adults avoid many of my own past challenges and encourage and aid those with great ideas.

Athgothon 5 brought budding entrepreneurs and students from over 50 universities in 35 countries to the World Bank headquarters in Washington D.C. in 2013.
Photo courtesy of Athgo.

There are three ways of living: 1. Live aimlessly, 2. Live for a purpose and 3. Purposefully live. I went with number 3 and founded Athgo as a nonprofit that provided a stage for young people pursuing common objectives but lacking direction, access or means.

We launched with a small program at UCLA with 20 students, but Athgo quickly evolved into a global entrepreneurial platform powered by a proprietary quantitative behavioral framework and with recurring Innovation Forums at the United Nations and the World Bank headquarters as well as in Europe and Africa.

Over the years, the Organization, has provided intellectual, networking and financial opportunities to over 10,000 young adults from over 600 universities in 80 countries while building support from Fortune 100 firms and cultivating partnerships with leading academic institutions and the United Nations system.

What are the current misconceptions about Social Entrepreneurship? For example, there is a general association of the term social with not-for-profit startups.
This is one of the reasons why I stopped using ‘social’ and instead use ‘constructive’ to classify our work. Constructive enterprises produce both positive net-income and positive net-value, whereas nonprofits are not structured to be profitable, essentially relying on donors’ buy-in to be successful.

What are the current main areas of focus and challenges for social ventures?
The challenge becomes incorporating both of these features, net-income and positive net-value, into project and management performance measures. While each constructive enterprise must create financial success and communal value, there are varying definitions and varying degrees.

In the case of not-for-profit ventures, how can success be measured?
The nonprofits predominately focus on producing social impact at all costs, as long as it is within the allocated budget. The concern with this is that the budget allocations for many of these initiatives are done subjectively rather than based on deep market analysis. The question has been whether the efforts of the nonprofits are established based on a ‘need’ or a ‘desire’ of the organization to produce the value.

How can ecosystems address the need of social entrepreneurs?
In order to successfully execute constructive enterprises, there must be an effective management reward structure that incorporates both communal value and financial success. Without clear definitions of how performance will be measured, management will be conflicted between competing goals.

Existing performance measures do not always support this enterprise type. Attempting to create a management reward system based on blended return without performance measures can lead to conflicting goals, which will threaten viability and undermine long-term stability.

These performance measure limitations lead some enterprises to produce superior revenue accentuation and some entities superior value accentuation. Ecosystems should have a system in place that promotes and rewards a pre-established balance between revenue and communal value. It ought to establish for companies both financial hurdles and communal value hurdles. Managers then will look to achieve a pre-established balance between revenue and communal value.

Are there niche entrepreneurship ecosystems for social ventures?
We are what we observe ourselves to be – a rock star or a rock under a star – our choice. It really does not matter where you are geographically. Companies such as Tesla, Facebook and ERI are successfully operating as constructive enterprises away from federal and state capitals. Yet, if we want to promote more rock stars, the ecosystems would need to implement favorable legal frameworks, which will reward the constructive approach. For the time being, this is still a dream.

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Accelerators McNair Center Startup Ecosystems

Social Capital Wins over Financial and Human Capital

Entrepreneurship can spur economic growth and job creation. As a result, state and local governments are seeking ways to establish entrepreneurial ecosystems. One way to strengthen an ecosystem is to increase its social capital. Social capital is the networks of relationships among people who work in a particular field.

Lack of social capital is among the top reasons that nine out of ten startups fail. Money and skills are not enough for success in entrepreneurship. Aspiring entrepreneurs also need social capital, which along with financial and human capital, is essential to grow a business.

Human, Financial and Social Capital

It is useful to differentiate between human, financial and social capital. Human capital comprises the knowledge and skill sets that enable people to successfully create new enterprises (Davidsson and Honig 2003; Snell and Dean 1992). Financial capital is the funding needed to get a business off the ground, sustain growth and develop operations.

Human capital is further classified into general and specific capital. General capital is associated with education, which provides the knowledge and the skills to solve problems. Specific human capital refers to the know-how for entrepreneurial activities, which has few applications outside of this context (Becker 1975; Gimeno et al. 1997). An example of specific human capital is the previous startup experience demonstrated by serial entrepreneurs.

Financial capital is key for early-stage startups to fund their ventures. Personal funding, debt, equity, crowdfunding and grants are among the funding sources available for entrepreneurs.

In entrepreneurship, social capital refers to all the interpersonal and interorganizational relationships through which entrepreneurs have access to the resources needed to discover and exploit business opportunities and succeed (Davidsson and Honig 2003; Wiklund and Shepherd 2008).

Social capital is, in simple terms, equivalent to individual and community networks. Networks can have strong or weak ties. Strong ties occur between people or firms with a family, working or professional history. Through these ties, people tend to develop high levels of trust, and therefore, are willing to share more detailed information and are more apt to collaborate. Weak ties occur between people or firms working within different contexts or economic clusters where contact is sporadic. These ties provide access to new information and new contacts outside of existing networks.

Figure 1 illustrates the relationship between the three kinds of capital.

Source: Patricia H. Thornton

Why Is Social Capital the Key to Entrepreneurship?

The obstacles entrepreneurs encountered due to a lack of knowledge or skill and a lack of funding can be solved through social capital. Networks connect entrepreneurs to the right people who will provide information, collaboration and partnerships as well as access to financial resources.

Entrepreneurs with higher social capital have greater chances of getting funding for their ventures.

Fried and Hisrich (1994) noted that since investors receive multiple funding requests, social connections play a significant role in determining the allocation of capital. The findings show investors tend to finance the entrepreneurs and ventures they have heard about as part of their network.

Based on a study of 202 venture capitalists in the priming phase, Shane and Cable (2002) observed that direct and indirect links between entrepreneurs and investors have a positive impact on the selection of projects financed. Shane and Stuart (2002) also noted that social capital of company founders represents an important endowment for early-stage organizations.

Social capital can also increase the human capital of a venture since the network can further advance innovation by merging ideas from different individuals. Investment in social relationships leads to the creation of socially embedded resources that can be mobilized by individuals (Lin 1999). Assuming that the social resources of entrepreneurs are more important than the possession of personal resources, social capital assists in achieving financial and human capital objectives that would be otherwise difficult to obtain (Lin 1999).

Social Capital in Nascent versus Mature Ecosystems

The genesis of startup communities is fueled by entrepreneurs’ individual attributes, their human capital. A high-impact startup can find traditional financing, such as personal funds, loans or investment by friends and family, yet social capital may remain as a challenge. Startups founded in regions with poor infrastructure lack the agglomeration needed to transition their ideas into successful companies.

In the absence of a cohesive startup network, incubators and accelerators can serve as a substitute for entrepreneurs from regions with less social capital. Local stakeholders who sponsor and support these programs have an interest in strengthening entrepreneurship in their communities.

The presence of accelerators or incubators can bring the community together as a destination for entrepreneurship and bolster local social capital. A study by the University of South Wales notes accelerators’ direct impact on entrepreneurial skills for the start-ups supported by accelerators and their positive indirect impact on the broader ecosystem. Acs (2001) recognized that entrepreneurship can be more challenging in underdeveloped areas, given their remoteness, which limits their access to skilled labor, technology, capital and networks. The alliances built by accelerators and incubators are the strongest assets in ensuring sustainability and building an ecosystem.

Cities with mature ecosystems reflect strong social capital, which plays a major role in fostering entrepreneurship. Kwon et al. (2013) sees a community’s social context as a public good. In high-social capital communities, entrepreneurs are able to take advantage of high levels of community trust and well-being, as well as more robust social networks. Individuals who feel support from cohesive communities will experiment with innovative ideas.

Conclusion

Social capital theory explains the value of networks as an integral part of a successful entrepreneurial ecosystem. Entrepreneurs need to increase social capital to increase funding and improve the human capital in their ventures.

As ecosystem actors come together to strengthen startup culture, communities should foster social capital through strong and weak ties. The Harvard Kennedy School’s Social Capital Building Toolkit is a valuable tool for understanding and creating social networks.

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McNair Center Startup Ecosystems

Entrepreneurship for All: Washington D.C.

Washington D.C.

Washington, D.C. is known for its politicians and bureaucrats, but it’s also where the top-20 U.S. government contractors are based. In recent decades, high-tech, high-growth entrepreneurship has been on the rise in the U.S. capital. Startup ventures, coupled with a diverse economy, largely fueled by the federal government, have led D.C. to emerge as a strong entrepreneurial ecosystem.

History of Entrepreneurship

The diversified needs of the federal government have led to a varied ecosystem. Feldman 2001 concludes that two unique conditions impacted the development of D.C.’s entrepreneurial culture: underemployed skilled labor caused by federal job cuts and the commercial exploitation of intellectual property rights from publicly funded research.

Changes in federal employment policy through the Civil Service Reform Act of 1978 led the federal government to outsource goods and services in an effort to reduce civil service jobs.

The Federal Technology Transfer Act of 1986 created the Cooperative Research and Development Agreements (CRADAs) as a mechanism whereby nonfederal entities can collaborate with federal laboratories on research and development projects. CRADAs aim to promote technological competitiveness and technology transfer to marketable products.

Biotech found a partner in the federal government through CRADAs. Proximity to federal labs has created an important biotechnology cluster attracting Merck and Pfizer among others, as well as startups MedImmune and Human Genome Sciences, later acquired by GlaxoSmithKline.

Other notable startups that emerged under the public-private sector collaboration include Stinger Ghaffarian Technologies, Inc. (SGT), who provides scientific and IT service solutions to a wide array of federal government agencies nationwide including NASA and the U.S. Department of Transportation.

Government outsourcing opportunities benefitted the Information and Communications Technology (ICT) industry. The earliest ITC entrepreneurs were government contractors, who began working on ARPANET, the predecessor of the internet.

When the federal government removed the commercial restriction on the use of internet in 1989, former contractors became tech startups with ample opportunities to grow their ventures.

Resources in D.C.

AOL is a prominent ICT company launched in the D.C. metropolitan area during the 1990s dot-com boom. AOL is also credited for shaping the region’s entrepreneurial ecosystem. Prior to its relocation to Manhattan, AOL funded Fishbowl Labs, a business incubator located at its Dulles campus. Fishbowl Labs provides resources to startups at no cost and a mentorship program through its employee network.

The company also invested in firms such as the D.C.-based tech hub incubator 1776. The incubator is modeled after 1871 in Chicago and the General Assembly incubator in New York. Notable companies currently working with 1776 include Babyscripts, Cowlar and MUrgency. 1776 organizes networking events for the government innovator community to promote the interconnectivity of startups and D.C.’s main consumer, the federal government.

Washington D.C. boasts four top universities in the immediate area with entrepreneurship programs: The Sustainable Entrepreneurship and Innovation Initiative at American University, Startup Hoyas at Georgetown University, Mason Innovation Lab at George Mason University and The Office of Entrepreneurship and Innovation at George Washington University.

Current D.C. Startups

Washington D.C.’s economy is stable and diverse. As of February 2017, the area had an unemployment rate of 2.5% and the gross product of the area was $471 billion in 2014, making it the sixth-largest U.S. metropolitan economy.

D.C.’s ecosystem has historically been linked to government agencies, but more recently, the startup community has had greater diversity. Notable startups out of D.C. include LivingSocial, iStrategyLabs and CoFoundersLab. Advertising company iStrategyLabs has created devices and advertising campaigns for 21 Fortune 500 companies. CoFoundersLab connects entrepreneurs via an online network.

The success of LivingSocial has invigorated the D.C. ecosystem with a new generation of startups. Borrowing Magnolia, a wedding dress rental business, Galley, a freshly prepared food delivery service, and online custom framing business, Framebridge, are among the ventures founded by LivingSocial alumni.

Venture Capital in Washington, D.C.

The D.C. startup scene is home to a number of influential venture capital firms that help invigorate the ecosystem. Venture Capital investment in D.C. has reached around $350 million in investment for years 2014 and 2016, with investment lower than $200 million in 2015.

According to a report from the Martin Prosperity Institute detailing worldwide VC investment in high-tech startups, D.C. is ranked eighth in the world with a total cumulative venture capital investment of $835 million until year 2012 (the most recent year these detailed data are available).

Data indicating the number of first-round deals in D.C. illustrate a stable ecosystem with an average of 36 first-round deals per year in the last five years.

One of the largest venture capital firms in the world, New Enterprise Associates (NEA), calls both D.C. and Silicon Valley home. In 2015, NEA’s fourteenth investment fund closed with $3.1 billion in investor capital, making it the largest venture capital fund ever raised. NEA invests in technology and health care companies around the world, but continues to support companies in D.C. such as online movie player SnagFilms and software producer Cvent. 

A diverse portfolio of venture capital firms are settled in the ecosystem to guarantee funding sustainability. Fortify Ventures, an early stage technology investment fund, nurtures investors and entrepreneurs. Fortify has received $100,000 in funding from the D.C. mayor’s office. D.C. startup, Social Tables, recently raised $13 million in Series B funding from Fortify Ventures and other investors.

Other notable venture capital firms in the D.C. area include Groundwork VC, a fund for minority founders, New Atlantic Ventures, a firm that invests in early stage startups and NextGen Venture Partners, which transitioned from an angel network into a venture capital firm this year.

D.C. venture capital investment is strong, but compared to areas such as San Francisco, which posted over six billion dollars in venture capital investment, San Jose (approximately $4 billion) and Boston (approximately $3 billion), VC investment in D.C. still has room to grow.

Startup-Friendly Government Policy

Local government policy incentivizes companies to move to or remain in D.C. The District waives corporate income taxes for the first five years and provides new-hire wage reimbursements for startups. However, D.C.’s regulatory environment still implies high costs for obtaining business licenses and permits.

Washington’s venture capital firms, angel networks and private investors cannot compete with the extensive network and resources in established ecosystems like Silicon Valley or the Research Triangle in North Carolina. According to Dow Jones VentureSource, about 50% of all venture capital invested in the United States goes to companies in Silicon Valley.

Despite Silicon Valley’s dominance, D.C.’s location, culture and resources position it as a strong ecosystem. D.C. will continue to take advantage of the resources and opportunities presented by the federal government.

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Accelerators McNair Center

MassChallenge: Connecting Startups and Big Business

MassChallenge was located at One Marina Park Drive until 2014.

Corporations and startups are moving toward early stage interactions. MassChallenge, a highly successful nonprofit accelerator, has been connecting corporations and startups since its 2010  launch in Boston. MC has several US and international locations, which accelerated 372 startups in 2016.

MC delivers positive results and has been listed among the Best Startup Accelerators by the Seed Accelerator Rankings Project, led by Baker Institute Rice faculty scholar Yael Hochberg.  There are over 1,000 MC alumni, who have collectively raised more than $1.8B in outside funding, generated $700M in revenue and created over 60,000 jobs. According to a 2016 MIT study, MC startups are 2.5 times more likely than non-MC startups to hire at least 15 employees and three times more likely to raise $500,000 in funding.

With seven years of history, notable MC alumni includes Ginkgo Bioworks, which designs custom microbes to produce chemicals, ingredients and industrial enzymes. As a startup, Gingko Bioworks raised $154M in funding and signed a deal for 700 million base pairs of designed DNA — the largest such agreement ever made — with Twist Bioscience. Other remarkable graduates of the program include Ksplice, Turo, Sproxil and LiquiGlide.

An Attractive Alternative for Startups

MC is similar to other startup institutions such as Techstars and Y-Combinator. However, the nonprofit differentiates itself by not taking equity. Entrants to the accelerator must be early stage startups, defined as companies with no more than $500K of investment and $1M in annual revenue. As part of the four-month program, selected startups receive mentoring, co-working space, access to a network of corporate partners, tailored workshops and the chance to win a portion of $2M in zero-equity funding. Additional prizes are provided by partners such as The Center for the Advancement of Science in Space (CASIS) and Microsoft’s New England Research and Development Center.

For entrepreneurs in regions with mature ecosystems like Silicon Valley and Boston, MC is one option among an array of accelerators and informal networks. This  density of resources is called  agglomeration, a geographic concentration of interconnected entities increases interactions and the productivity. The MIT study suggests MC acts as a complement to the prior advantages of startups in established ecosystems by providing key resources and access to social capital  and also found evidence that startups founded in regions with higher access to early stage investors had on average higher quality ideas, but that their chances of success were not higher conditional on the quality of their idea.

For startups in nascent ecosystems the resources provided by MC can become the only option to pitch their ideas to investors and advance their company at no cost other than the time invested on the program. Of equal value is the endorsement received as a MC graduate inferring the quality of the startup venture.

A Model Built on Strategic Partnerships

As a nonprofit, MC depends on the support of a network of public, private and philanthropic partners, with the vast majority of their funding coming from corporations. Governments and philanthropic foundations fund MC with the goal to foster regional economic growth. Founders John Harthorne and Akhil Nigam, former consultants at Bain & Company, garnered early support from the Commonwealth of Massachusetts, successful entrepreneurs and large corporations such as Blackstone, Microsoft and the nonprofit Kauffman Foundation.

MC could have faced financial challenges by providing accelerator programs at no cost and with no equity commitment. However, MC was able to become a bridge between large companies’ need for innovation and startups’ need for capital. Large companies have the scale of resources, customer information and market experience, but may lag in innovation. Startups, on the other hand, lack the resources but innovate with sometimes disruptive and successful ventures, frequently taking incumbents by surprise (Airbnb, Uber).

MC serves as a channel between startups and established companies to meet the need for fast-paced innovation. Companies like Bühler and PTC partner with MC to source high-potential startups for the development of advanced technology. Companies can also source tailored programs or tracks for specific needs.

A study done jointly by MC and innovation firm Imaginatik looked at how startups and corporations interact in new collaborative ways. The research team surveyed 112 corporations and 233 startups from various industries. 82 percent of the corporations considered startup interactions important, and 23% stated that these interactions are “mission critical.” Startups have a high interest in working with corporations with 99% stating it is important for them to interact with potential corporate customers, marketing channels and strategic partners.

Expansion

MassChallenge was located at One Marina Park Drive until 2014.

MC communicates its impact and vision to donors by demonstrating the cost-effectiveness of alliances between startups and corporations. A solid accelerator program, global vision, robust network and a sustainable funding strategy have set up MC for success. As stated in the MC Impact Report 2016, the accelerator is committed to running 12 locations annually by 2020, including at least one on each populated continent.

Before establishing an MC accelerator, the metropolitan area is evaluated for the quality of its research universities, urban setting, level of entrepreneurship opportunity and investment capability. As government and private stakeholders partner, a sense of shared ownership becomes crucial to consolidating efforts. This engagement guarantees that the resulting ecosystems are seen as a shared legacy.

The next MC sites are yet to be announced. Currently in five locations with global impact, MC’s 2020 vision is on a path to become a tangible reality.

The author and editor would like to thank Tay Jacobe for assistance with researching and drafting this post.

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McNair Center Startup Ecosystems

Mile-High Entrepreneurship

Boulder has long been considered Colorado’s startup hub, but Denver is emerging as a strong contender. Mentoring and venture capital support have helped Denver’s ecosystem expand rapidly so that it is well on its way to becoming self-sustaining.

Denver has garnered a reputation as one of the best places for high-tech, high-growth ventures.The total number of tech startups located in downtown Denver has increased by 13% in the last two years; 4% above the national average in new startup growth. Denver has collected accolades that ranging from the Best Place for Business and Careers by Forbes to the third Best Place in the Country to Launch a Startup according to Washington D.C.-based accelerator, 1776.

History

Colorado has a history of high-growth entrepreneurship ranging from telecommunications (Dish Cable) to restaurant chains (Chipotle and Quiznos). The state’s venture capital-backed startup activity began in the 1980’s when national venture funds such as Access Ventures, Vista Ventures, Sequel Ventures and Heritage Group invested in local Denver startups. By 2000, Denver was supporting a startup ecosystem, but successful companies left the state or were sold to out-of-state purchasers. VC funding collapsed after the tech bubble burst.

In 2006 Jared Polis, Brad Feld, David Cohen and David Brown established Boulder-based Techstars, which brought the nascent startup ecosystems of Fort Collins, Denver, Boulder and Colorado Springs together. Accepting only 1% of applicants, Techstars is extremely competitive. Graduates of this three-month program average approximately $1.8 million in outside financing. In exchange for 7-10% equity, Techstars provides $18,000 in seed funding, a $100,000 convertible debt and mentorship opportunities. Denver alumni include UsingMiles, FullContact, Revolar and MeetMindful.

Techstars is not the only catalyst for the entrepreneurial community in the region. Former Denver mayor and current Colorado Governor John Hickenlooper, himself an entrepreneur before entering politics, implemented policies that made supporting startups a central focus for economic recovery and growth.

Colorado’s Entrepreneur Friendly Policies

Colorado policymakers has made entrepreneurship a central focus. The state legislature has lowered tax rates and lifted regulatory burdens for the business community. Colorado taxes business at a flat rate of 4.63%, one of the lowest business income tax levels in the country.

Governor Hickenlooper has championed programs such as the Colorado Innovation Network (COIN), which works to connect the 29 Colorado research facilities with entrepreneurs. In 2014, the Colorado Impact Fund was launched, a public-private fund that estimates making 10-15 investments through 2020.

Home-Grown Resources

Since 2010, downtown Denver has added an average of almost 16,000 residents per year, resulting in a population increase of over 13% in the past five years. This remarkable growth has been accompanied with an increase in the number of homegrown startups. As a result, there is a significant number of resources available for Denver entrepreneurs.

Established in 2012, Denver Startup Week draws entrepreneurs from across the country. In 2016, Denver Startup Week attracted 12,500 people from across the country with 300 events, making it the biggest free entrepreneurial event in North America. Entrepreneurs participate in an elevator pitch competition and interact with VC fund representatives.

The Commons on Champa is a high-tech co-working space that brands itself as “Denver’s public campus for entrepreneurship.” Entrepreneurs have access to networking events, panels, workshop and onsite mentors.

The Rockies Venture Club (RVC) helps to bridge the gap between Denver entrepreneurs and investors. RVC is a Denver angel group that provides educational programs. In addition, RVC hosts events where entrepreneurs and investors can meet and make deals.

The University of Denver’s entrepreneurship initiative, Project X-ITE, brings a number of resources to students. Ranked as one of the top 30 entrepreneurial universities in the United States by Forbes, Project X-ITE is a cross-disciplinary initiative focused on the intersection of innovation, technology and entrepreneurship.

The second quarter of 2018 will mark the opening of Catalyst HTI, which will serve a dual role as incubator and accelerator. Catalyst HTI will bring together entrepreneurs in technology and health care to create state-of-the art incubator and accelerator in downtown Denver. Companies such as CirrusMD and Revolar have already committed to joining the community.

Entrepreneurship for Women

In 2013, Denver was named one of the best places for women to start a business as by Nerdwallet. There are several female-focused resources in the city. Denver’s female entrepreneurs have found support from startup accelerator program MergeLane, which specifically invests in female-led companies. Recently, the Commons on Champa also launched Women on the Rise, an initiative aimed to support and celebrate the success of female entrepreneurs.

Other notable resources include The Coterie, Denver’s first women co-working community, and Women Who Startup, which hosts monthly meetings. SheSays, an international trade organization based in the UK, launched in SheSaysDenver in 2014 and counts over 1,000 women as members. SheSaysDenver provides free mentoring and events to women working in technology and business.

Venture Capital

Overall, Denver VC investment is reflective of nationwide trends, with investment decreasing after the Great Recession, and recovering around 2010. Denver firms such as the Foundry Group, Grotech Ventures and Access Ventures are anchoring investment in the ecosystem.
Local VC received a significant increase in 2015 after Welltok raised a massive $45 million round of investment. VC investment has stabilized around $500 million in investments each year since 2014. However, the 2016 Colorado Startup Report notes that the total funding raised in 2016 was distributed across more than 129 different technology companies, indicating a greater distribution of capital. The Downtown Denver Startup Report indicates that in 2015 alone, more than 165 tech startups were founded in Denver in 2015.

Data indicating the number of first round deals in Denver illustrate a stable ecosystem with an average of around 50 first-round deals per year.

Looking to the Future

Denver entrepreneurs have noted that there is a significantly lower amount of early stage fundraising in the ecosystem. However, this is a reflection of a nationwide trend of cautious investing in early-stage investment.

Denver does have early stage VC investors, but in many cases, does rely on angel investors to supply funding. The University of Colorado’s Silicon Flatiron recommends the continued support of Colorado and Denver super-angel funds, also known as Micro-VCs, which are about $2-$10 million in size and specialize in early stage investing.

In the coming years, it is likely that Denver’s ecosystem will reach critical mass and consolidate as an attractive option for local and out-of-state entrepreneurs. With a strong and growing infrastructure for entrepreneurship, Denver’s startup growth and success is likely to continue.