|Updated: 5/23/2007; 7:58:14 PM|
Dispatches from the Frontier
Musings on Entrepreneurship and Innovation
Serious Changes in the Global Startup Ecosystem
We shouldn't be surprised that the forces of globalization apply to the venture capital and startup industry, too. In an excellent essay posted to the AlwaysOn Network, Sanjay Anandaram, a partner with the venture capital firm of JumpStartUp, asserts that "Silicon Valley will be impacted in a serious way over the rest of this decade and beyond" due to two broad trends: the evolution of the VC into a global network choreographer and the professionalization of the startup.
VC as Global Network Choreographer
I had just finished posting my observations on how a venture capital affiliation network is a foundation for smarter money when I saw Anandaram's intriguing post, sub-titled: "Expect changes in the SV startup ecosystem. A peek at the new micro-multinational." His experience suggests the following:
No longer can the VC only make investments in companies that are a short driving distance away. As startups become micro-multinationals with offices, employees, customers, and partners around the globe (in many cases, the bulk of the employees and customers are outside of the United States and the Valley), it is hard if not impossible for the VC to remain local. This implies the creation of affiliations and partnerships among Silicon Valley VCs and those in India and China ("Think global, act local").
I agree, and apparently so do the likes of Draper Fisher Jurveston and Village Ventures in their targeted geographies. After all, notwithstanding differences in magnitude, the "offshoring" of venture creation and innovation processes apply to Boise as well as Bangalore.
The parallel that Anandaram draws between the players in the venture creation ecosystem and the multinational corporation ("MNC") is apt. Increasingly, the core functions of the MNC include (a) raising capital, (b) allocating capital, and (c) managing affiliation networks composed of firms having specialist knowledge and capabilities. My friends Jan Twombly and Jeff Shuman at The Rhythm of Business can attest to the heightened interest among MNC's in how to cultivate the entrepreneur's choreography skills in order to effectively manage affiliation networks. Although the VC's role as choreographer is nothing new, the requisite geographic scope has expanded*.
Take Village Ventures, for example. The firm's Boston location gives it a strategic advantage in raising and accessing investment funds, as evidenced by the firm's ties to the deeper pockets at Bain Capital, Highland Capital, and Sandler Capital Management. In turn, Village Ventures is able to validate the efforts of its national network of affiliates - Highway 12 Ventures in Boise, for example. Highway 12 has a greater ability to raise capital in a size that fits the local market opportunity while mitigating the risk of being too small to support the long-term needs of its portfolio companies. In the fractal nature of the Russian matryoshka doll, Highway 12 manages an affiliate network of its own to help cultivate its corner of the startup ecosystem, as exemplifed by the relationship between Montana-based Strategix Vision, a design firm, and DDI, an Idaho-based portfolio company.
Whether your startup is in Hamburg, Mumbai, or Missoula, Montana, opportunities and standards of execution are increasingly established on a global scale. Ultimately, the resources and expertise you need are going to be located somewhere else - often somewhere far away. VC firms such as JumpStartUp, Flywheel Ventures, and Highway 12 are harbingers: local focus connected to national and global capability.
The Professionalization of the Startup
After all these years, it is clear that Adam Smith was right: A well-coordinated team of specialists will kick the butt of the brightest, hardest working generalist. As communication and coordination costs fall, the domains of specialization narrow as their geographic distribution broadens. So, Anandaram is right when he asserts that globalization is inevitable. The real question is what are the implications of globalization to the way startups are organized and managed. I believe that Anandaram is dead on when he asserts the following:
Startups that had taken pride in being disorganized and had taken pains to differentiate themselves from big, global, established public companies will have to focus on creating a management culture that's process oriented, global in worldview, and experienced in managing different people, offices, and customers...The MNC relies on processes, project management techniques, and management systems to manage its global operations...[T]he micro-MNC will now have to invest in and learn these softer, and much more difficult, aspects of management. Technical wizardry will have to march lock-step with management capability and experience.
In other words, globalization offers a competitive advantage to firms that can effectively tap and leverage a network of truly global expertise and resources. But, the coordination of such networks is very difficult and requires a systematic management approach. There is risk in not pursuing such a strategy, but pursuit of a global strategy entails significant execution risk, as well.
Anandaram's hypotheses echo those of my Venture Dynamics Group colleagues. In order to help investors and growth companies identify and reduce execution risk, we've brought together system dynamics modeling and simulation skills, collaboration techniques, and expertise in intra- and inter-organizational alignment. These are skills and tools that, up to now, have been applied primarily at MNCs. Curiously enough, however, they have their roots in a little technology startup called DEC.
*The seriousness of JumpStartUp's interest in the management of affiliate networks is evidenced by the fact that the firm's advisory board includes Prashant Kale, a professor at the University of Michigan who studies the management of alliance portfolios.
|Copyright 2007 © W. David Bayless.|