INFORMAL INNOVATION A report from The Economist Intelligence Unit Sponsored by
INFORMAL INNOVATION For decades, cities have been trying to capture the elusive formula that transforms them into thriving entrepreneurial hubs. Re-create Silicon Valley here might describe the mission city fathers have set themselves as they ve poured investment into technology parks, incubators and other structures designed to nurture innovative start-ups. Some top-down projects meet with success; more don t. Many create benign tax and regulatory regimes to help fledgling businesses onto their feet; some even manage to create the right conditions for venture capital (VC) and other finance to flow into start-ups. Governments are vital for getting the formal structures in place, however, other participants in a cities start-up community have a vital role to play. In recent years it has become apparent that entrepreneurs helping entrepreneurs in informal networks are a core component of what s become known as a start-up ecosystem. 1 Access to finance, talent and ideas are integral to any such ecosystem, as are the formal structures which facilitate such access, such as incubators, accelerators and co-working spaces. Entrepreneurs connections with their peers, however, have been shown to be as important to start-up growth in some cities as the role of institutions. 2 New research from The Economist Intelligence Unit (EIU), sponsored by Infocomm Development Authority of Singapore, confirms that informal entrepreneur communities are instrumental to start-up success in several world cities that are known for their nurturing of innovation. If you don t have an ecosystem of people you can tap into for support, to help out with, say, finding talent or just making contacts, it s 20-30 times harder to get your business off the ground. Bryce Keane, co-founder, 3beards (London) Founders of new businesses naturally rely on banks, VC funds, seed or angel investors, and sometimes government grants, for funding. They often turn to industry associations for 1 A prominent elucidation of the concept was advanced by Compass formerly Startup Genome a research group which has published an annual Startup Ecosystem Ranking since 2012. 2 See, for example, The Power of Entrepreneur Networks, a study of New York City s start-up scene published by Endeavor Insight in 2014. 1 The Economist Intelligence Unit Limited 2016
advice on legal or regulatory conditions. Incubators and accelerators may also offer help in these areas, as well as the physical space in which to operate. But people embarking on their first ventures don t necessarily know how to identify and tap into these sources. They often don t know who s who in their ecosystem. They re often in need of advice about their business model, the technology best suited to their circumstances and where to source it, where to recruit skilled specialists, or about marketing do s and don ts. Sometimes they re just in need of encouragement to overcome the fear of failure. This is where informal networks prove their worth. What informal networks look like? Entrepreneurs have always connected with their peers, whether in ancient agoras, medieval guilds or Renaissance coffee houses. But leaps in digital capabilities particularly the Internet and mobile technology have led to the formation of new types of entrepreneur communities and energised grass-roots networking activities. Indeed, many such communities today reside online. Entrepreneurs are avid digital networkers. Over half the participants in our survey are hooked into entrepreneuroriented social networking groups on global platforms such as LinkedIn, FaceBook or WhatsApp, and most of these people participate in multiple groups. Just over one-third also connect with other entrepreneurs in locally oriented online groups. Other communities focus on in-person networking. These activities which are mobilised through digital channels frequently take place in an informal setting. In London, for example, Shoreditch bars are popular venues for get-togethers of technology entrepreneurs. In New York, they may meet each other at cocktails hosted by a university alumni association. In Singapore it may be hackerspaces which bring together technology innovators, or university departments even individual professors who invite their alumni to get-togethers along with other industry contacts. If I want to find out something that I need to get done or to get or make an introduction to someone new, my natural tendency is to meet over a coffee or a beer. That s the first step. Rob Findlay, founder, NextBank; SVP, DBS (Singapore) The online and face-to-face communities appear to play different roles as forums for support. The online space, according to Alice Bentinck, co-founder of Entrepreneur First, a London-based accelerator, is where practical issues are typically addressed, such The Economist Intelligence Unit Limited 2016 2
as recruiting challenges, finding office space, or understanding specific health and safety regulations. For higher level inputs, she says, such as advice on one s business model or marketing strategies or alternatively for making useful contacts or simply sharing war stories nothing can replace the faceto-face environment. Hybrid communities In a start-up ecosystem, online and offline networks and activities are complementary rather than competing sources of support. So too are informal and formal communities. Accelerators, for example, focus on developing select groups of start-ups in highly structured programmes of finite duration, sometimes in return for equity. But many accelerators, recognising the value of peer advice and experience-sharing, also facilitate informal networking events involving the wider community of entrepreneurs. According to Patricia Lahy-Engel, director of The Hive by Gvahim, a Tel Aviv-based accelerator, these also serve the purpose of recruiting new participants. communities in 180 cities around the world. Another is 3beards, the facilitators of Silicon Drinkabout, which began in London in 2011 as a Friday night get-together for tech-sector entrepreneurs. Local affiliates now run weekly drinkabouts in 17 cities on different continents. Large or small, highly organised or ad hoc, such facilitators share the common objective of creating spaces, virtual and physical, where entrepreneurs connect with each other on their own terms to solve problems, offer moral support and ultimately to help each other grow. Where do such communities thrive? The EIU has researched 10 cities that enjoy a reputation as centres of innovation in one form or another. Informal and formal entrepreneur networks co-exist in all of them, but their relative importance varies considerably from one to another. The types of support such communities are good at providing also differ across each city. Informal, unstructured networking activities require dedicated teams working in structures to organise them. In many cases, what started five or seven years ago as small groups of volunteer event planners with day jobs are today larger not-for-profit (and sometimes commercial) organisations whose mission is to facilitate entrepreneurial communities. Examples include Startup Grind, which launched its maiden Silicon Valley chapter in 2010 but now supports 3 The Economist Intelligence Unit Limited 2016
Age range Gender 36-45 32% 41% 26-35 46-55 14% 59% Male Female 41% 7% 18-25 > 55 7% Entrepreneurship status Annual revenues > $10bn 2% $5bn-10bn 1% YES I have started a company which is still operating. 50% YES I am actively planning to start a company but it is not yet operational. 34% $1bn-5bn 4% $500m-1bn 6% 32% < $1m $250-500m 7% $100-250m 10% YES I started a company but it failed. 13% YES I started a company but sold it. 3% 22% $1-10m $10-100m 16% Technologies associated with their business 39% Internet of Things 26% Financial technology 20% Smart manufacturing 17% Smart / intelligent homes 7% Digital government 5% Digital health 3% Smart city / nation 3% Other 19% None of the above The Economist Intelligence Unit Limited 2016 4
A WORLD OF COMMUNITIES Global summary of the research results Even in the most business-friendly cities, starting a new company is anything but easy. New York City trails only Silicon Valley in the 2015 edition of the Global Startup Ecosystem Ranking, yet only 32% of New York entrepreneurs in our survey say it was easy to launch their business there. In the San Francisco Bay area itself, the figure is only slightly higher, at 33%. In Tel Aviv, which comes 6th in the aforementioned ranking, 67% of entrepreneurs have found it difficult to start a new business. The most problematic city for start-ups in our group of 10 is Seoul, where 71% have found the process difficult. The easiest, by contrast, is London, but even here no more than 35% of respondents report a smooth ride in launching their business. Not surprisingly, a dominant challenge facing new business founders around the world is a lack of funding. Entrepreneurs devote a large amount of their time in the pre-launch, start-up and scale-up phases to sourcing angel or seed investment or bank loans. But tight financing is far from their only hurdle. Large numbers in the survey complain of being unable to identify or tap government support, and of being burdened by red tape. Two other oft-cited challenges are more intangible a fear of failure and a lack of entrepreneurial role models. In such circumstances, the advice of peers and mentors is sorely needed. If you don t have an ecosystem of people you can tap into for support, to help out with, say, finding talent or just Greatest challenges entrepreneurs face in starting a new business (Top responses) 46% Lack of financing Lack of entrepreneurial role models Difficulty in starting a business from a regulatory perspective 20% 27% 39% Lack of formal government support Fear of failure / 30% Afraid of the unknown 5 The Economist Intelligence Unit Limited 2016
making contacts, it s 20-30 times harder to get your business off the ground, says Bryce Keane, co-founder of London-based 3beards, which facilitates entrepreneur networking events in the technology sector. Finding good advice Against this background it should not come as a surprise that informal communities have become important sources of support to entrepreneurs when starting their businesses. Globally, new business founders rely heavily on banks as well as industry associations for help during the start-up phase. But informal communities and activities are as, or more, important to our survey group than formal structures such as incubators and accelerators, and are nearly as important as associations. In Tel Aviv where launching a start-up is comparatively difficult (see above) meeting fellow entrepreneurs in informal settings is the single most important source of support. The same is true in New York and London. For Sharon Klapka, chairwoman of New York Hearts Tech, a community set up to support online businesses in the fashion, beauty and lifestyle industries, this finding is self-evident. Formal structures such as incubators and accelerators are useful, but to a limited number of entrepreneurs and in a limited fashion, she believes. Participating in community networking activities, says Ms Klapka, can expose people to a larger universe of peers in informal, comfortable settings, where they can get advice on any number of issues. 78% agree The informal environment will be important or very important to their business over the next three years Most important sources of support when starting your business (% responding important or very important ) 61% Banks or other financial institutions Other informal entrepreneurial community activities, such as events, co-working... 51% 59% Business / industry associations Government agencies / departments 53% 55% Other entrepreneurs met in informal communities or activities Incubators / accelerators 54% The Economist Intelligence Unit Limited 2016 6
Entrepreneur communities are rich sources of business model advice for new business founders. Are we targeting the right market segment with our product? Are there potential partners out there who could help us reach that segment faster? Could our model be undermined by lower cost or bigger rivals? Mentors organised through incubator or accelerator programmes help answer such questions. But similar questions are posed to peers in informal settings, such as those organised in London by 3beards, where founders demo their products and get group feedback in monthly gatherings. Communities are also useful forums for getting practical advice from peers. This might take the form, as highlighted by the survey respondents, of referrals to potential customers or suggestions of how to resolve particular technology issues (naturally a frequent topic of discussion given that technology underpins most start-up business models today). In Singapore, according to Ted Chen, a co-founder of Evercomm, an energy start-up, informal communities also point new business founders to the various sources of government support that exist there for new businesses. Especially for first time entrepreneurs, informal networking is needed just to gain an understanding of the local ecosystem. Ted Chen, co-founder, Evercomm (Singapore) Networking comes naturally Entrepreneurs are avid networkers. Over half of the survey group (58%) are hooked into Most valuable types of support received from informal communities of entrepreneurs 42% Advice on business model Advice on management or operations issues 22% Mentoring 27% 28% Referrals to potential customers Advice on technology 28% 7 The Economist Intelligence Unit Limited 2016
entrepreneur-oriented social networking groups on global platforms such as LinkedIn, FaceBook or WhatsApp. Over one-third (36%) also connect with entrepreneurs in locally oriented social networks or meetup groups. And they are tapped into not one but several such networks: half of the survey respondents are involved in six or more global networks (28% in more than 10), and 44% participate in six or more local online groups. When it comes to global networks, entrepreneurs in Ho Chi Minh City emerge as the most polygamous : 39% of respondents there are involved in more than 10 groups. Singapore and San Francisco entrepreneurs are only slightly less active, with 34% and 32% of respondents respectively, taking part in more than 10 networks. Participation in physical networking activities is less frequent than the online variety which is logical given that the former requires a larger time investment. One exception to this is Shanghai, where the various forms of online and physical networking are similarly high; the other is Seoul, where networking activity in general is considerably lower than elsewhere. Online and physical networking activities do appear to be complementary, rather than mutually exclusive. Nearly three in 10 (29%) in the global sample Types of informal activities engaged with the most when starting a business and which was the most helpful Most engaged in Most helpful 48% 39% 25% 23% 15% 12% 15% 12% 16% 13% 16% 13% 17% 16% 7% 6% Other Locally organised physical networking Visiting co-working spaces Events by business associations Internationally organised physical networking Visiting innovation parks/ hubs Local online networking Global online networking The Economist Intelligence Unit Limited 2016 8
attend physical networking events organised by business associations in their city, and nearly the same number visit co-working spaces or innovation hubs or some sort. Just over one quarter (26%) attend networking events organised by supra-national groups such as international alumni associations, and 23% attend these events when organised by locally-oriented groups, such as high schools or community organisations. Active networking appears to have a positive impact on the performance of entrepreneurs businesses. Among the global sample, the greater the number of networking activities entrepreneurs engage in whether they are in social media groups, in physical events, in visits to incubators or co-working spaces, or taking other forms the more likely it is that they will deem themselves stronger than their competitors in terms of profitability, revenue growth, innovation, capitalisation and talent. 3 Knowing where to look Founders of all new businesses are chronically strapped for time. Setting aside some to identify and learn about the communities that can help them is a challenge, and particularly so Entrepreneurs involved in more than 10 online networking groups Global online networks Local online networks 31% 31% 32% 34% 39% 23% 25% 26% 28% 24% 24% 18% 20% 20% 18% 19% 11% 7% 5% 0% Seoul Taipei Shanghai London New York Tel Aviv Hong Kong San Francisco Singapore Ho Chi Minh City 3 Caveat: Respondents were asked to assess their firms performance vis-à-vis their industry peers, so some personal bias may colour their responses. 9 The Economist Intelligence Unit Limited 2016
for first time entrepreneurs just learning the ropes. The good news in this context is that the overwhelming majority (87%) of survey respondents say that their knowledge of the entrepreneurial communities in their city has improved in the past three years. Online groups are really powerful [for entrepreneurs] in Singapore. The best are mobile-based chat groups. They re great for throwing an idea out there and seeing what everyone else thinks, as a bit of a feedback loop. Rob Findlay, founder, NextBank (Singapore) Less positive is the result that 55% of them find it difficult to access informal communities because their ad hoc nature makes them hard to find. Hong Kong and Seoul respondents find this a particular challenge. But neither is it straightforward, apparently, in Western cities such as London. Mr Keane of 3beard finds this surprising, suggesting that browsing the web should quickly yield the identity of a number of relevant communities. He and other community facilitators acknowledge, however, that many, if not most, of their participants come to them through word-of-mouth referrals. The larger communities likely to have prominence on the web are also a relatively recent phenomenon, emerging in the past 5-6 years. Can (and should) governments help? In many cities, governments are active supporters of formal support structures such as technology parks and incubators. National or local government departments may be financial sponsors of some organisations, or provide other forms of financial support. It is generally not the case when it comes to entrepreneur communities, especially the informal kind. The majority of survey respondents (55%) gave positive marks to their governments for broad support to entrepreneurship in their cities. This does not extend to communities: seven out of 10 believe official support for entrepreneur communities is insufficient (a notable exception is Shanghai, where this is the view of only 43% of respondents); nearly nine in 10 say government should do a better job of supporting them. (On this latter point, Shanghai entrepreneurs wholeheartedly agree.) This is not, however, a universally held view among community facilitators. Some doubt the value of government support for what is by nature grass-roots networking. For others, government support comes with uncomfortable strings attached. We value our independence, says Mr Keane. The Economist Intelligence Unit Limited 2016 10
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