The Globalization of Startups

The non-Silicon-Valley startup?

Startups are going global and it is time to get a feel for how the world outside the Silicon Valley and the United States is adapting to and thinking about startups.

The effects of the globalization of startups may be most pronounced in countries outside the US and Western Europe where enterprises set up based on a cost motive - in particular in regions loaded with brilliant technical people (I'm thinking especially about Central and Eastern Europe, Russia, India, China, and Brazil, among others.)  Cost-centric thinking has created a big opportunity for the value-oriented thinkers at the high end of the labor market.  In some cases, it seems that one can snag top experienced people at roughly the cost of entry level people in the U.S.  What is the best way to capitalize on this? Startups. 

However, not just any startups - certainly not the traditional startups aimed at doing outsourced development.  While consulting work may be a viable way to bootstrap, I am talking specifically about startups focusing on R&D based product development full of smart computer science, mathematics, physics, and engineering people. Bear in mind that this is different from the efforts of Google or Yahoo who set up international offices *after* they become successful and acquire layers of middle-management bureaucracy.

I have three international guest authors, so let's hear what they have to say about this, and then close with how to act on this and why the Silicon Valley should care.


Ravi from Bangalore, India

Paul Graham says in his essay  "I've claimed that the recipe [to building a technology hub] is a great university near a town smart people like". Bangalore is the latter but doesn't have  the former.  India as a whole doesn't really have great research universities. Even the much acclaimed IITs have fairly rigorous (if not particularly creativity focused) bachelors education but have trivial amounts of research output when compared to Stanford or CMU or MIT. The industry-university tie up is spotty as well.

The "cool" companies in India, to which young people aspire, fall into three categories - the bodyshoppers like Infosys, Wipro and TCS,  the "offshore development centres" of American service and product companies, and (on the higher end,) research labs of companies like IBM, Microsoft, Google and Yahoo. One would expect a lot of good technology to come out of the latter. But in practice, they often end up playing second fiddle to the offices in California, especially where cutting edge research is concerned.  Very little influential research in Computer Science comes out of India. Breakdown of the papers published at any major CS conference or in the best CS  journals, or the most cited papers, by country of origin to illustrate this.

So much for the demand. On the supply side, the universities have ramped up to supply warm bodies (hence the term "bodyshoppers") to the "IT" industry. In India, the "cool" companies are bodyshoppers like Infosys.  There are also social forces that nudge bright young people to "safe" jobs - like arranged marriages, where "status" is an important differentiator in acquiring a good wife or husband. One component of such status is the "prestige" and name-recognition of your employer and scrappy startups have very little. The fact that Indian VCs (with a few honorable exceptions) look for the next big "scalable" services company doesn't help either.

The people who are interested in research often leave India for the USA or end up working for the  Indian government in one of the many defense or space agencies. While some of these labs do some good work, by and large they are part of a vast impersonal bureaucracy not known for delivery of usable systems. Academics, by and large, are terrible at programming and there is an almost complete absence of people who can do research *and* program.
So with all that working against great research work being done out of India is there still opportunity here? Maybe. Good research (and software based on such research) doesn't need many people. Unlike a bodyshopping company like Infosys, a company that focused on innovation and research (or even great engineering or usability) can be very s

mall.

Things are changing in India, albeit (a) very slowly and (b) under the radar. I know people who chose not to get into the bodyshopping/enterprise programming mode and are striking out in search of something more fulfilling. Deliberately avoiding the "replicate Facebook in an Indian language/for India" type localization, they try to build cutting edge text to speech systems, or search engines, or computer vision systems and so on.  A good example of this new generation of startups which attempt technically difficult products is Notion Ink. As the Indian economy grows stronger, I would be very surprised if a new generation of Indians will content themselves with maintaining legacy enterprise systems for the West.  I don't know what products or new technologies will emerge from India, but I can't wait to find out.

Michal from Prague, Czech Republic

The startup community is Czech Republic (CZ) is in its infancy; making it an excellent opportunity for outsiders from countries with a longer "startup tradition". People are just starting to think about startups, investments and VCs. You can find some startup meetings here and there, and a couple big websites. We have some successful entrepreneurs here - the best example being Roman Stanek (who built Netbeans, Systinet and now Good Data).  But entrepreneurship is still very unusual.

When we started Inmite 1.5 years ago, everyone told us we were very brave to quit our regular jobs and jump into an uncertain future. But this perspective is slowly changing.

People are beginning to see that startups have a lot of advantages.  Enterprises pay well, but CZ engineers are beginning to see that startups are an investment in their future.  Although most CZ engineers feel they have gained overall from their enterprise experience, they want to build software in small self-driven teams, use new technologies, and avoid lengthy bureaucratic idea-to-production cycles.  The beuracracy is often even worse in CZ satellite offices for overseas companies - the smartest engineers do boring work like localization, and all the important decisions are made somewhere in oversees HQ. Our startup attracts talented people with the openness of our environment, and the ability to work on interesting projects that go into production fast and are used by lots of people. The CZ is not a large country like the US, India, or China.  We only have 5 or 6 large (over 100k people) cities, but each has a couple of universities - with the largest concentration of universities and business in the capital city, Prague. Although some universities have a very good reputation (like Charles University in Prague), low salaries make it hard to keep the best people in CZ to continue their research.

One advantage for local startups is that you can get EU innovation funding.  But there is a lot of bureaucracy around the process for getting EU funding. Nevertheless, thanks to this, you can find a couple of "incubators" in CZ.  These incubators have offices at reasonable rental prices, and other resources you need for starting a company. Services include shared meeting rooms, seminars, etc.  We have our office in one of these facilities.  However, this kind of support is moving from bigger cities to smaller regions now. So even though it is a bit unusual to do startups here, and we may not have an active investment scene, we are happy to bootstrap our startup and excited about the future.

Fredrik from Vienna, Austria

Vienna is "The next Silicon Valley" (German article, translation not 100%), at least according to Martin Weigert. This is due to Vienna having produced a number of successful startups during 2008-2009.  The city which has long been a traditional behemoth is slowly getting into its startup groove.

At a population of about 1.7 million people, out of which around 10% have a degree and a hundred thousand are working on one, Vienna has a great density when it comes to academical knowledge. Many corporations have their Central European headquarters in the city. We have a number of investors, but mainly in the private equity sector. 

So what is missing for a boom of startups in the city? It comes down to four things:

1. First of all it is a question of supply and demand: there are lots of ideas, but venture investors are hard to find. 
2. The standard of living is high, which generates a habit of low risk taking among the inhabitants. The common philosophy is one of tradition and safety. There is an anti-failure philosophy in Austria: once a failed project, always a failed person. A bit frustrating.  There's a saying which goes "In case of armageddon, go to Vienna. Here everything happens 20 years later."
3. There has been little or no collaboration between startups in the area, but this is beginning to change.  We are changing this with initiatives like the startup mixer organized by tupalo.com and the two Startup Weekends by START Vienna. Shared office spaces are popping up, which is great for young projects.
4. Low transparency and no public highlighting of local startups. The sex appeal is quite low.

This aversion to risk and lack of early stage investors which hinders Vienna is slowly fading away - very slowly. The arrival of investors in the seed sector (i5invest, FLC) is a great start. The governmental grants and subsidies programs are opening up a bit and lately several friends of mine have received backup from them. The Public Employment Service Austria (AMS) launched a program which gives new founders 800€/month during the first year, which will most likely have a great effect on the number of small projects making it from sketchbook to realization. Next, I want to talk about Vienna as the gate between Western and Eastern Europe.  The city is and has always has been a stepping stone for Europeans heading east or west, this goes all the way back to the Romans. Many bright minds come from Bulgaria, Czech Republic, Slovakia, Poland and other Eastern European Countries to continue their education. From there many head off to Germany or make Vienna their new home. Some of the smartest people I have met at the tech and business university of the city are from Serbia, Bulgaria, the CZ, etc. Brad mentions an interesting idea above about setting up shop looking for quality over quantity in eastern Europe.  Speaking against it is the fact that many wish to leave to receive a higher income or standard of living.

Lately my organization has been working on a startup event in Prishtina, Kosovo, where you can find half a dozen universities in a city of 600,000. I believe that Prishtina has great potential, but still lacks the infrastructure to launch itself. Many leave directly after finishing their studies. Given the choice between working for a local startup or research institution, or heading off to Germany, the UK, or the US, what would you choose?

Setting up a research driven startup would be intriguing and would most likely attract the brightest minds. But will it be able to keep them once offers come in from bigger companies offering work at other locations?  As Brad mentions, you'd likely have to step into the scene as a co-founder - bringing equity, experience, and the works. That's a great thought and one I'd love to follow up on! I totally agree with Paul Grahams thoughts, also mentioned above by Ravi, on the need of great tech universities and people in order to produce great startups. I believe that a few more things are needed for a startup scene to take root:

• Diversity of people
• Diversity of knowledge
• Proximity to money, be it in the form of investments or governmental aid
• Events to bring them all together

Can the foundation of this ecosystem come from outsiders? Or does it have to be fostered and allowed to grow on its own from within? We will hopefully find part of the answer to that question heading to Prishtina in March.

How can locals and Internationals get things started?

OK, we're back to Bradford speaking.  We've gotten a good perspective from our guests, and now it is time to think through how to act on this.

1) Don't try to copy the Silicon Valley
Cities both in and outside the United States have tried to replicate the success of the valley, but to little avail. The primary reason that these efforts fail is that they try to duplicate the valley rather than reflecting on their own circumstances and finding how how to create a center of innovation in their own way. 

As Ravi mentions, some think great technical universities in the vicinity are the key.  Others think that access to venture capital and angel funding is the key, however, in the beginning of the valley's rise, there was no venture capital.

If you read Steve Blank's Secret History of the Silicon Valley, you may notice that the valley grew by a series of chance events, special circumstances, and the passion of different people during different periods of time.

So the way to create the next Silicon Valley is to not try to create the next Silicon Valley, but to reflect on your passions, circumstances, and resources, and then innovate accordingly.

2) New, not a knock-off

Just as creating an innovation center isn't going to happen by attempting to duplicate the valley, it is likewise not going to happen by duplicating products or ideas in general.

In the beginning of the valley, innovation was research driven.  Most of the blockbuster successes have been the result of research breakthroughs, or first industrial application of previous research breakthroughs. Similar circumstances occurred in the innovation centers of the industrial revolution - often with a mix of technology and business process innovation.

If you want to create a center of innovation, then by definition you have to innovate.  Don't just create localized versions of products that already exist.  Don't worry about what seems to have been successful elsewhere.  Solve your own problems.

3) Risk and Capital

A culture of innovation requires a willingness to take risk, and the acceptance of failure as a learning experience rather than a shameful experience.  As I like to say, "you have to be comfortable being uncomfortable."  Embracing this attitude is one of the hardest parts for people seeking to create a center of innovation in a place where this mentality goes against societal norms.

Once you have the risk-taking mentality, you'll need something to risk.  In startups, we risk time and money.

Although some say the costs of funding a startup are lower than ever, it still takes money. There is much talk about the perceived "broken" VC industry in the US, but there is nevertheless a pretty good capital infrastructure available to entrepreneurs here - to a varying degree depending upon your location, of course. 

An innovation center eventually leads to an established pipeline of capital for ventures, and an established pipeline of ventures for capital.  It is encouraging to see such pipelines starting to spring up outside the US.
In a TechCrunch article on changes in the venture capital business, the topic of Seed Camp came up. 

...in Europe and Israel, there’s not that same level of experimentation on the part of venture funds...The closest is Saul Klein’s firm Index Ventures...it’s encouraged him on a project called Seed Camp, that scours Europe and Israel for good companies and makes Y Combinator-style investments in them.  So far Seed Camp has invested in 21 companies and mentored nearly 300. Klein brought a crop of them over to Silicon Valley this week to meet with investors, get grilled by the press, and get mentored by success stories like Google. “Given that the raw natural material for venture capitalists is entrepreneurs, I find it strange that the venture community does nothing to help develop those raw materials,” Klein says. (There’s much more on his blog about this topic here.)

The Opportunity outside the valley

The Silicon Valley is a great place - I run into a larger concentration of amazing people here than anywhere else I've seen. But we have our issues, and we are but a small place in a big world.

The general level of success in the region seems to elevate the general level of ego, and big egos tend to stultify progress.  We don't have the number of innovative visionaries that one might think.

Contrary to popular belief, my perception is that the valley has a shortage of top talent that can execute on the most interesting and challenging problems of our times.  We can't find enough people to deal with scalability and distributed systems, applied research, or understand how productize ideas.

We are not the only place in the world full of brilliant engineers with a passion to change the world with their innovations. We may have Stanford and Berkeley, but m

any folks around the world also have strong backgrounds in mathematics, physics, and computer science - exactly the kinds of folks we need for research-driven startups. 

As you can see from the contrast between places like Vienna and Bangalore, the specifics of the scenarios differ, but the opportunity for tapping into pools of high-end talent remains the same.  The key theme is the contrast of high-end labor shortages in expensive markets like the valley vis-a-vis the opportunity that cost-centric thinkers have created for the value-oriented thinkers at the high end of other labor markets.

If you think your city/country has a great opportunity, let's hear it in the comments, on twitter or via email.

Photo credits:

   - top 3 photos by my Petiatko

   - bottom photo from Startup Weeked Tokyo