(or: what would you do with €100 million?)
I’m fascinated by the rise and fall of civilizations. Guns, Germs and Steel, a Roberto Caro-esque account of how geographical and environmental factors shaped the modern world, is my favorite book.
When a friend mentioned there was a book on why some Asian countries succeeded and why others didn’t, I immediately clicked Buy Now. I’m glad I did.
How Asia Works argues that there are three critical interventions that government can use to speed up economic development.
- Redistribution of land to maximize output from agriculture by household farming. This makes use of all available labour in a poor economy (typically ¾ of the population) and the initial productive surplus boosts demand for goods and services.
- Industrialization by directing investment, subsidies and entrepreneurs (often in no-so-nice ways) towards manufacturing and exports. Unskilled farmers who start to emigrate out of agriculture can be re-trained to produce tradable goods.
- Capital controls to target money towards efforts with long term payoffs (agriculture, manufacturing), not short-term gains, free market speculation and individual consumption.Where these interventions have been employed most effectively in Asia (Japan, South Korea, Taiwan, and now China) they have produced the quickest progressions from poverty to wealth that the world has seen.
In short, How Asia Works is a simplified playbook for turning a developing country intro a world powerhouse.
Why am I boring you with all this crap? Because today is all about playbooks. So bare with me for a minute.
This weekend I read that to start writing, don’t think about an idea but a question.
“Shift your emphasis from ‘what’s the right answer’ to ‘what’s the right question?’” - Michael Gelb, from How to Think Like Leonardo da Vinci
So I’m going to do just that. And the question for today is: how would you build a tech hub in Europe if you had €100 million?
I don’t know the answer to that question. But I’m going to do my best to take a step back and attempt to come up with a playbook for it.
Let’s do it.
A playbook for building a tech hub in Europe
When Tyler Cowen asked Sam Altman how would he revitalize his hometown of St Louis, Missouri, Sam answered that he would invest in startups on the condition that they all move there at the same time.
“TYLER COWEN: I asked Larry Summers this exact same question: If you had, say, $200 million to distribute, you could do with it whatever you wanted to help St. Louis — just St. Louis, not the world — what would you do to help St. Louis?”
“SAM ALTMAN: So I would spend all of the money trying to get a few really interesting, high-growth startups that I was confident in to go move to the city of St. Louis and build enough of an ecosystem around them to make them successful and let that regenerate the talent pool in much of the city. No, literally what I would do is make a venture capital fund, get really good GPs to do the advice, and fund the companies to come be in St. Louis.”That’s a great start but it’s just a soundbite for a short on-stage interview. I think there is more to it.
Something that I’ve been thinking quite a bit about is how a single large exit can kick-off an entire startup ecosystem. Skype and Estonia is an emblematic case, but you don’t need the DeLorean to find an example. Just look at Minsk.
“A number of successful acquisitions of Belarusian startups (maps.me acquired by Mail.Ru, MSQRD by Facebook, AIMATTER by Google, etc.) started a boom in the Belarusian startup ecosystem.” - Yury Melnichek, Bulba Ventures, State of European Tech Report
My playbook would try to mimic those same dynamics, without requiring the acquisitions. So here it goes.
Define the city.
The first order of business would be to pick the right starting point. Where you start the race is a pretty good predictor of success.
The imperative criteria is that the city needs to be small enough that network effects are easily achievable.
Another (counterintuitive) idea is that the city shouldn’t be affordable (think Chiang Mai or Tbilisi). Ambitious people are attracted by other ambitious people, and cheap cities do just the opposite. Expensive cities also have, by definition, capital to deploy in startups.
There are a few more things that are important but not crucial: a working level of English, easy access to universities (or talent in general), decent bureaucracy and good government relationships. Maybe Orbán’s Hungary isn’t ideal.
Set up an incentive structure.
In the 1950s, the Philippines tried their hand at land redistribution but because of policy fuckups and entrenched local cronies it never worked. In the absence of any real chance of household farming success, Philippinos famously rented their land, put their capital into a karaoke machine and “sang in a shack.”
Human behavior comes down to incentives, so we need to come up with a structure attractive enough to counter the fact that 60% of European founders would prefer to stay home that move somewhere else.
Money? Guaranteed liquidity? Tax breaks? Quality of life? Fame? Social status? Everything is game.
More concretely, I would invest at least half of the €100 million in Seed-stage startups (or even individuals?) on the condition that they move to a single neighbourhood.
Here’s the criteria:
- The potential to be global
- The ability to scale with follow-on capital
- Being the first(ish) money in
- Willingness to move to a single neighbourhood.
This isn't a good idea though.
Maximize network effects.
We know they are important for businesses. But why are they important for ecosystems?
“We at Y Combinator always say we want to get a lot bigger because this is a network effect, this is a network that matters.” - Sam Altman
In the Y Combinator case, the “user” in the network is a startup, and YC creates a pretty amazing network effect for those startups going through the program. This includes:
- Peer based help. YC plugs you directly into this network of peers. Many YC founders will ask other batchmates for their advice, feedback, and recent learnings.
- Early advice and mentoring. It’s key to have people a couple years ahead of where you are at. Network-based communities provide this. YC founders can tap into founders at almost any stage of the startup lifecycle to get advice on what to expect next.
- Customers & learnigns. YC provides an initial boost in revenue and learnings by fostering startups going through the program to work with companies in previous batches.
- Capital. A great network, particularly one established over a few year, can provide capital and validation at every stage of the game, particularly those hard early dollars.
- Branding. If the network is successful, the brand of the winners feeds back to increase the brand value of the newbies. This is why people add “@ycombinator S19” to their Twitter bios. Most importantly, a network like this is a loop. The more successful startups in the network become, the better the network becomes so it’s easier for new members to become successful. As with branding, newbies feed from the winners. And when those winners are Stripe, Airbnb and Dropbox, there’s a lot of feeding going on.
The most obvious attempt at maximizing network effects is putting everyone in one room. But as someone who has gone to an accelerator, I can tell that that is a recipe for too many foosball games.
I’d go a different way: first, an online directory, leveraging software in different ways to maximize contact among the nodes in the network.
And maybe throw in a series of weekly events, a la YC Dinners to bond, and provide accountability.
Remove barriers to follow-on capital.
Access to capital at all stages can hinder a potentially successful ecosystem. No capital means no growth, and no growth means no ecosystem.
Other than funding startups with the €100 million, two quick thoughts:
First, I’d try to fix early stage capital by making it cool (and financially rewarding) to become an angel investor. As Alex danco puts it, “angel Investors in the Bay Area aren’t just in it for the financial returns; they’re also in it for the social returns.”
Second, I’d fix access to later stage capital (Series A and beyond) by saving a portion of the €100 million to lead a few follow-on rounds. No access to follow-on capital is as dangerous as no capital at all, and first money in is always the hardest, so providing it would in theory kick start the fire.
Remove barriers to talent.
As important as capital is talent. Without Great Talent, you can’t build a great company. So we need to make sure that Great Talent wants (and can) move to the new St. Louis Missouri.
Again, two quick thoughts:
First, redefining immigration. One of the biggest barriers to entry for outside talent is immigration. I would borrow a page from the Estonia playbook, and make immigration easy and quick for talent and affordable for companies.
Second, fixing stock options. Stock options in Europe don’t work like their US counterpart does. Fixing them (at least at the country level) to provide an incentive good enough for talent is great.
Policy and needs fluctuate
If you only get two things out of this blog post, make them these two:
First, this is my attempt at figuring out what would it take to kick-off today in this decade. But I’m an idiot who’s playing with Monopoly money, so don’t take my word for it. Never trust Monopoly money.
Second, policies are solutions to specific moments in time, so logically, good policies that remain unchanged turn into bad ones. Joe Studwell puts it better than I ever could.
“Economic development is a complex and dynamic process of stages that requires constant and unending adjustment. There are no one-stop solutions to economic progress.” - How Asia Works
I think the same holds true for most things in life, and definitely for building a tech hub. What lights the spark might be completely different to what generates scale and unicorns. And everyone wants unicorns.
Bonus: The real opportunity is outside tech.
I looked at population, capital raised, companies started, meet-up density, universities, cost of living, developers per capita and more to come up with an idea of where would I start a tech hub.
There are a few non-obvious choices that fit the bill – Rotterdam, Aarhus, Leuven. Here’s my Monopoly answer: Zürich.
It’s small-ish, expensive, well-educated, well-connected, in a trust-worthy and attractive country and there's enough access to capital, great early-stage startups (Utrust, DeepCode, Yova, Legartis) and talent to kick things off. Or at least that's how it looks like from Barcelona
Plus, it looks like this.
My question to you: what would be YOUR city?