Posted By Simon Montford on Oct 29 2015
One of my passion projects is organising and hosting IoT events such as meetups, hardware hackathons, and conferences in Edinburgh and London. As an entrepreneur I also start businesses. My most recent venture is a text input and word prediction technology called Tusi, that has been designed specifically for very small touchscreens; ideal for smartwatches, interactive domestic appliances, and in-car touchscreen interfaces.
The purpose of this post is to explore how European tech clusters can be developed and utilised to breed "unicorns". It was inspired as a result of a conference I spoke at this week at the University of Edinburgh Business School called "Scotland's Mid-Market Businesses: Supporting and Enabling to Make The Middle Mighty". What I essentially said was that the "Mid-Market" (in Germany it's referred to as the Mittelstand) should be a transition point, not a destination. In my view, British entrepreneurs should be encouraged to build "blockbusters" not "lifestyle" businesses.
This is why I spoke about the importance of thinking big, even when you're still small, and how failure is an inevitable part of the journey to success (unless you are very lucky), which is why the ecosystems must be tolerant to failure, if they are to breed unicorns.
Think BIG, or Go Home!
Whenever I think of an idea for a new business, I always think BIG. If there's not the slightest possibility of it ever becoming a billion dollar venture, I move onto the next idea. Of course, building billion dollar businesses is extremely difficult, which is why they are so rare, hence why they are named after mythical creatures.
So far, I have only created one multi-million dollar startup, and have many failed ventures under my belt, but that hasn’t stopped me from continuing to try to breed my very own unicorn.
For ambitious entrepreneurs like me, aspiring to be just a "gazelle" is not good enough. The thing about gazelles is that although they are fast and nimble, they are also prone to getting eaten by predators. Being a small-to-medium-sized fast-growing company should, therefore, be a transition point. Often these types of companies get acquired, or reach a certain size and stop growing. Either because the founders lack the ambition to scale the business further, or because the business becomes hampered by geography or market conditions.
The Importance of rapid growth
Most sectors within the technology industry are dominated by a few very dominant players. Exemplars within the consumer Internet space include Google (search), Facebook (social network), Apple (electronics), Amazon/eBay (online retail), Uber (transportation). This is also often the case within the enterprise sector. Examples include SalesForce (CRM), LinkedIn (business network), Amazon AWS (hosting). This "winner takes all" phenomenon is primarily due to the "network effect", because once a platform, or a standard, has obtained critical mass, the players that "own" it cannot be easily usurped.
This means that if European clusters are to produce unicorns they must embrace a "get big or go home" attitude. In Silicon Valley, if you don't have an international expansion strategy from the outset, and a compelling rationale for market domination, you will have little chance of attracting investment. It goes without saying that if you don't obtain enough growth capital (the rocket fuel that funds growth), you won't be able to grow fast, so like a gazelle, you will become "snack food" (you'll get acquired) or "roadkill" (you go out of business).
The challenge with this highly ambitious mindset is that it takes a huge amount of belief, not only from the founders, but also everyone in the ecosystem that surrounds them. Mentors, investors, advisors, and governments need to believe, and encourage, those that have bold visions. Of course it is also up to entrepreneurs to play their part, as they need to be able to sell their vision to not only the aforementioned, but also co-founders, key employees, and strategic partners.
Belief is a key ingredient
When attempting to take my last startup global, one of the first things I did was set up a US subsidiary, and open an office in San Francisco. What I routinely witnessed throughout The Valley was an infectious belief among the startup community that they would succeed. Perhaps not today, or tomorrow, but eventually. I witnessed this attitude in both entrepreneurs and investors. Another key differentiation is that almost everyone gets the benefit of the doubt, even those that have failed in the past.
In the event that the venture fails, they simply move on to the next opportunity. Giving entrepreneurs the freedom to fail fast, and often, enables them to carry out low-cost experiments that can be used to test hypotheses. If their experiments fail, they simply pivot, or quit and move on to the next opportunity. If they get validation they double down, and scale the business.
If Europe is to create world-beating companies we will need to emulate this culture. We're pretty good at creating "snack food" for larger, usually foreign, companies, but we haven't been particularly great at creating our very own home-grown "Blockbusters".
Things in Europe are changing
The number of unicorns in Europe has grown 33% from the same time last year, from 30 to 40 companies. The UK has so far, according to investment bank GP Bullhound, created more unicorns than any other country in the EU, 14 to be exact, two of which are Scottish; SkyScanner and Fanduel. Sweden and Russia come in joint second, with five unicorns each, followed by Germany with four, and France with three.
A word of caution. The term unicorn is a misnomer that's rapidly becoming anathema in Silicon Valley. That's because a unicorn isn't real until it has exited either via IPO or acquisition at a $1 billion+ valuation. We haven't seen this level of activity in the Internet sectors since 2000, and we know how that played out!
Perhaps our ability to breed unicorns is genuinely due to a shift in attitude, not just inflated expectations in advance of another market collapse akin to the Dotcom Bubble circa 1995-2000. Playing Devil's Advocate, one could argue that if a correction comes, most of these so-called unicorns will end up becoming what unicorns are, in reality; non-existent.
Charge of the unicorn brigade!
Let's assume, for now, that these unicorns are the real deal. As unicorn breeders, we must go on the offensive, or risk continually getting out-innovated by foreign entities. Take China for example, they are churning out herds of the things (assuming herd is the correct collective term). These are now expanding beyond their shores, and into Apple's, and other tech Goliaths', back yards. If they're not concerned, they should be!
From a personal perspective, a couple of years ago I ditched my iPhone in favour of a far cheaper, but just as good (in my opinion) Nexus 5 by LG (S Korean), but this year I will almost certainly upgrade to the far superior Nexus 6P by Chinese OEM Xiaomi. This is because it's not only better than the Nexus 5X, but I simply can't justify the cost of an iPhone 6S when the Nexus 6P is technically on a par. I know I'm mixing apples with oranges (no pun intended), as these are hardware companies, not software, but there are plenty of others like WeChat, and Alibaba that are on the warpath.
In order to become a European unicorn, international expansion is, in most cases, a necessity as the domestic market of most EU countries isn't large enough to sustain growth. The company will, therefore, need to expand globally, but this process is a bit like sending a rocket into outer space. It involves reaching "escape velocity", or the rocket will fall back down to Earth. Startups brave enough to expand abroad must overcome not only major psychological barriers, but also significant logistical, and cultural ones too.
Exporting goods and services is important (and much easier in the era of SAAS and PAAS), but to be a market leader you still need to get your troops on foreign soil, which means boots on the ground. It's a huge commitment that's expensive, very risky and potentially terminal, if your rocket crashes and burns. I should know because my own rocket exploded, which represented three years of my life up in flames! I was devastated at the time.
I was told once by the CEO of a British startup that the shores of the United States are full of the tombstones of failed British companies. At the time I thought he was being dramatic and cynical, but he turned out to be right on that occasion.
My previous startup was called Vibio (UK) Ltd. I had global aspirations from the outset, raised a million-dollar seed round, and set up a US subsidiary called Vibio Inc. I then opened an office in San Francisco, started to scale the business, but something completely out of my control happened. It only took around five minutes, but changed my life. It meant I was unable to operate the company, so it had to be shut down.
Embrace failure, as it is the path to success
Churchill once said "Success consists of going from failure to failure without loss of enthusiasm." Well he was right!
The reality is that starting a business tends to involve a seemingly endless series of setbacks, so before success can be obtained you have to experience a lot of failure, unless you are incredibly fortunate.
As I mentioned, I've started a lot of different ventures. Some succeeded, one even went public, but many have failed.
Another quote I really like is by Thomas Edison: "I have not failed. I've just found 10,000 ways that won't work"; the epitome of Churchill's famous quote!
Confronting and dealing with challenges strengthens one's mental resilience, but can lead to a loss of enthusiasm, or even burnout. Being a little battle-hardened is fine, but if you can't retain your passion, it may be time to quit. If you can't be passionate about your startup, you can't expect others to be.
The process of starting, building and scaling businesses is, therefore, very challenging, and many don’t make the grade. If it was easy everyone would do it. It's a cliché because it's true!
In Silicon Valley there's not only an abundance of social proof, and an eagerness to be open and collaborative, but you regularly rub shoulders with entrepreneurs who have been there and done it; exited not just once, but several times.
This willingness to risk it all, sometimes repeatedly in the case of people like Elon Musk, sets American entrepreneurs apart from those originating from Europe and elsewhere. Also, after exiting they often re-invest the proceeds of their winning ventures back into the ecosystem. They do this either by starting new ventures from scratch, or becoming angel investors and mentors to help guide other entrepreneurs through the startup process.
First time entrepreneurs really need support, because most won't succeed. This is depressing but true. That's why so many entrepreneurs tend to be blind optimists. Science has proven that being a moderate optimist is, however, preferable because blind optimists tend to get disillusioned and quit. Moderate optimists understand that it's going to be tough, but believe that even if they don't succeed today, they will tomorrow.
So belief and mental resilience is really important, not just in an individual sense, but also in a collective sense, which is why establishing, nurturing and scaling clusters, networks, and communities of like-minded people is so important.
The ingredients of a successful tech cluster
Clusters not only need successful entrepreneurs to give back, but they also need other crucial ingredients. Firstly they require established firms to play their part. They are often referred to as "Flagships". Large corporate tech firms that either locate their HQ or a regional office within the cluster can support entrepreneurs by helping them become the "blockbusters" of tomorrow via incubation, open innovation, mentorship, sponsorship etc.
The next component is academia. Centres of academic excellence, of which there are plenty throughout the UK, are vital as they funnel talent, IP and research into the ecosystem.
Then you need private capital from angels, venture funds, and corporate innovation funds, plus government funding.
Lastly, you need excellent advisers such as startup-friendly bankers, lawyers and accountants, and mentors (preferably, as previously mentioned, serial entrepreneurs with real-world experience). Lack one of these pillars, and the ecosystem will not function effectively.
Other vital ingredients include "social proof" and "connectors". "Social proof" is when people look to others for cues concerning the correct behaviour or attitude, so it can be highly positive or negative. This really only comes about after a sustained period of success, because then everyone can see tangible real-world evidence resulting in a "well they did it, so why can't we" attitude. Usually there's a tipping point that happens when there's a sudden shift in collective consciousness. This is where breeding unicorns really serves to ignite the virtuous cycle. Like money breeding money, unicorns can breed unicorns (providing they exit successfully).
"Connectors" are people or entities that are really good at joining the dots within the ecosystem. They supercharge knowledge exchange, acting like pulses of electricity, passing from neuron to neuron.
One of the purposes of WEB3//IOT is that I want to do my bit to assist with this process. By hosting IoT events, and pushing relevant content to the website, I aim to help promote collaboration by facilitating introductions, brokering deals, and doing what we can to help the British ecosystem.
So I think, in summary, we can all agree that in 2015 the nation’s tech clusters are doing a really good job of breeding unicorns. My only hope is that this isn't a flash in the pan, but a sustainable trend that will last well into the future, so that Great Britain can remain a world-class breeder of unicorns.
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