A Changing Landscape
The Need for an Ecological Approach to Building Start-ups
This chapter is a part of the book “How to Build Thriving Start-up Ecosystems: Five Information Patterns for Success.”
There is a sort of mythology of the start-up founder as a lone visionary (generally a man) that toils away in his garage, seeing a future no one else does. This myth has always ignored much of the ecosystem of investors, mentors, and collaborators around a founder that made their trajectory possible, even if it makes for a compelling story.
As the investment landscape globalizes and AI accelerates incumbent companies’ power, clinging to the myth of the lone entrepreneur undermines the creation of entrepreneurship infrastructure when collective effort is needed most for the United States to keep its place as a global hub of entrepreneurship.
Is Entrepreneurship Worth Saving?
The numbers of people in the United States that start small businesses like restaurants, hair salons, and landscaping businesses has declined since the middle 1980’s while the rate of people that start potentially scalable start-ups has increased over the last two decades. While more people now try to start scalable ventures, fewer of these potential companies succeed. Where in the last two decades one out of ten start-ups succeeded in maintaining long term profitability, today this number has dropped to one in twelve (Failory).
While the average American likely cares little for the success rates of start-ups, the dynamism of a country’s start-up ecosystem has ripple effects on labor productivity and income inequality that impacts Americans as a whole. The flagging rate in both small business creation and start-up success is worrisome because small businesses and start-ups represent an outsized contribution to positive job growth compared to older companies.
Start-ups are also responsible for an outsized portion of positive labor productivity, which has decreased from 2.2% in the previous five decades to a .9% annual growth rate today. The labor productivity rate is a good indicator for increased standard of living. Start-ups are “disproportionally responsible for truly radical innovations — the airplane, the railroad, the automobile, electric service, the telegraph and telephone, the computer, air conditioning” (Litan). A slow increase in labor productivity means that people are not seeing a future that is markedly better than their past.
Start-up success also combats inequality both directly and indirectly. And the more equitable a society’s wealth distribution, the lower its social unrest, unemployment, and improved overall economic growth (Dabla-Norris). Start-ups reduce income inequality directly when founders offer equity compensation which enables early employees to benefit from a company’s growth, or, when they utilize crowd-funding models that enable early supporters to benefit from the company’s later success (Kauffman).
Start-ups also indirectly decrease income inequality by disrupting traditional monopolies, boosting affordability and choice via competition. Uber and Lyft disrupted the taxi industry to make taxis more convenient and affordable for people while these platforms enabled entrants into the job market that might not have been able to access traditional employment (Wallsten). Shopify made it easier for small and medium-sized businesses to build online stores, while Etsy has made it easier for small artisans to connect to a wider array of customers. BetterUp has made it possible for even low-income people to gain access to mental health services, while Chime provides fee-free banking services to those that experience barriers in traditional banking.
Vitally, start-ups are also more adaptable to rapidly changing market conditions than larger companies because of their smaller sizes and lower overhead. Startups’ flexibility will become increasingly important in a world that will face more hurricanes, wild fires, and globalized pandemics due to climate change. A high rate of start-ups enables the economy as a whole to be more adaptable and resilient to rapidly shifting market conditions (Friedman).
The message is clear: for social mobility, societal progress, and economic resilience, start-up success rates are worth worrying about. But increasing start-up success rates is easier said than done in today’s economic and geopolitical landscape.
David Is Now Owned by Goliath
One of the reasons for entrepreneurship’s decline is due to the nature of today’s entrepreneurship. Many of today’s start-ups rely on platforms where incumbents have the advantage of powerful network-effects where each additional user makes the product or service more valuable to all other users. Network effects make it harder for new entrants to compete since it is harder for them to add greater value initially (Surowiecki).
Many new products are even built on the platforms of large incumbents; this makes it hard for start-ups to challenge the bedrock on which their codebases and marketing channels are derived. Few start-ups can tackle a new way to search when people are likely to find out about their platform on Google, and not many start-ups can build a new kind of app store when the Apple and Android stores come pre-loaded on people’s phones. This makes radical shifts — -an entirely new way to search, new paradigms of thinking about what an app can be, or what communication devices can look like outside of phones — -hard for founders to even imagine or begin to explore.
Easier to Start, Harder to Scale
Investors also increasingly expect founders to generate revenue before they provide any investment. This is in part because many of the splashiest tech companies of the last economic cycle, from WeWork’s failed IPO, Uber and Lyft’s lack of profit, BlueApron’s rapid decline in stock value, and Peloton’s struggling user rates after the pandemic, have left investors with lackluster returns and in turn more reticent to part with their funds. Investors now want profitability before investment and put the onus on founders to find this path on their own.
Rising interest rates over the course of 2022 to 2024 have also impacted the pre-seed and seed investment markets. When loans become more expensive to pay off it is more of a risk for investors to provide start-ups capital, and angel investors shift towards more certain investments such as bonds (Schmidt).
A funding climate where there are fewer early stage investors leaves founders needing to make up the shortfall, and often only those with personal savings to pay for rent, healthcare, and technology development costs can cross this gap. With net worths decreasing against inflation across ninety-nine percent of the U.S. population, fewer and fewer people are able to make this leap.
A Widening World
At the same time as America’s start-up founders grapple with powerful incumbents and changing investment strategies, international shifts in investment flows have made American founders suddenly need to compete with other founders globally. Nations around the world have begun to develop targeted investment funds to develop and retain potential founders, which has meant fewer startups that relocate to the United States to get their big break and fewer global angel investors that feel the need to invest in American start-ups (Florida).
Three large players that have emerged in the global entrepreneurship ecosystem have been Saudi Arabia, Singapore, and China. The Saudi Venture Capital Company utilizes government funds to disperse over three billion dollars into dozens of venture capital companies that have in turn invested in over eight hundred companies. This top-down influx of cash has essentially created a start-up oasis in the region overnight.
Meanwhile in Singapore the government created Enterprise Singapore to help companies both with funding as well as other business services. Enterprise Singapore provides business matching programs that connect Singaporean companies to partners overseas to expand their reach, SG Equity co-invests in promising start-ups, and Startup SG provides mentorship, grants, and leadership development for start-ups in the country’s ecosystem.
China has also emerged as a major venture capital player, with a 375% increase in venture capital spend over the last decade to bring them from 4% of global venture capital investment in 2005 to a quarter of global venture investment in 2017 (Florida). These investments are also increasingly being put into Chinese, rather than American start-ups as globally regions become more insular.
American founders can no longer expect that the angel investors of the world will choose American start-ups as their first choice for investment. And once successful start-ups are built outside of America, they are likely to build agglomerations of universities and local companies around them, making further successes increasingly likely and the pull of America and American companies weaker.
AI Comes to the Fore
AI has shifted the economy faster than perhaps any other technology in history. It has enabled the automation of routine emails, blog posts, logistics, data processing, art, graphic design, AI voice overs, and customer service chatbots (De Cremer). This advanced task automation has created a steep drop in work for many customer service reps, artists, voice actors, writers, and editors in a matter of months. At the same time AI demand has increased the roles of data scientists, AI/ML engineers, and created new roles like AI prompt engineer and AI ethics professional. The rise of AI has created a rapid polarization in the market, with many creative and administrative jobs disappearing overnight to be replaced by smaller numbers of AI specialists (Ellingrud).
For the start-up ecosystem, the emergence of AI has enabled a single founder to move further alone with the help of AI tools that can help them bring a product to market faster, auto-generate content needed for Search Engine Optimization, and automate emails to potential investors. AI has been the magic word that has opened up investor wallets even in a time of high interest rates. In 2023, 25.9 billion was invested into the AI industry for the full year (Bloomberg). In the first six months of 2024, investors put 26.8 billion dollars into 498 generative AI deals, surpassing their investment dollars of the year before in just the first two quarters.
So many investors are rushing to fund AI start-ups because a pivotal component of the strength of AI models is data. A start-up that has vastly more data than another will likely have more accurate models, leading to more people using it, which enables it to collect even more data in a perpetuating cycle. Data presents a huge first-mover advantage that makes a future scenario where the dominance of two or three corporations’ AIs becomes increasingly likely — especially if large incumbents can provide clear value before smaller start-ups can establish themselves.
If only two or three AI companies dominate the market with agents handling most of the world’s repetitive white-collar tasks, existing biases in hiring, investment decisions, mortgage lending, and other areas could become deeply entrenched and amplified by AI. Startups play a critical role in challenging and diversifying the decisions made by these dominant AI systems.
Past the Lone Founder Mythology
The mythology of the lone founder threatens America’s future as a global innovation leader by obscuring underlying systems behind individuals’ success or failures.
AI is strengthening the positions of incumbent companies, off-shoring of creative work is hollowing out Americans’ long term skills for start-up building, all while investment increasingly flows to ecosystems outside of the country. American founders in the coming years will find that they need to compete harder for investment dollars to get them to a global stage, and find the stage increasingly crowded when they get there.
One risk for America’s entrepreneurial ecosystem is to devolve into a mass of social media start-ups that distract many, finance start-ups that are only relevant to a few, and crypto/gambling start-ups that actively prey upon the financially illiterate. This is a future where the people aware of big problems are not in positions where they can also build solutions.
An ecological view of entrepreneurship acknowledges the systems around a founder’s success and actively creates environments where a wide range of companies and founders can be successful. Historically this ecosystem perspective of entrepreneurship has materialized in the creation of incubators, accelerators, and venture investment firms. While these structures are vital, they are often slow to create or procure, expensive to maintain, and hard to replicate across most regions of the country.
The second half of this book presents a more nimble way to provide supportive entrepreneurship ecosystems. It does this first by deconstructing the mental processes a founder goes through to start and scale a company. In understanding a founder’s mental journey, Community Information Designers can design more adaptable and accessible support systems. This book then explores strategies that replicate the benefits of traditional support systems in faster, cheaper ways. These information patterns and strategies can enable a broader range of entrepreneurs to access the resources they need to build transformative ventures.
This book aims to define a vision of adaptable, nimble entrepreneurial support beyond traditional hubs and models, ensuring innovation is inclusive, resilient, and responsive to the diverse challenges and opportunities of our time.
