How to create innovation ecosystems?

Advances in communication and information technology are transforming many of the planet’s economic, political and social activities. These advances allow us to exploit data on a massive scale to gain new knowledge, favoring a worldwide scientific, cultural and technological exchange that transcends all geographic barriers, political divisions and windows of time.

However, despite the fact that technology is more accessible, innovation is still an enormous challenge for businesses, cities and countries, all of which desperately need to innovate due to the pressure of ever more demanding, dynamic and personalized social and market forces. In this sense, the holy grail of innovation is the ability to create innovation ecosystems in specific geographic environments. The proof of this are the hundreds of cities that try to emulate the ecosystems of Silicon Valley, Berlin, London, or Tel Aviv, unfortunately with little success.

Obviously, the consolidation of an innovation ecosystem has many advantages. The main one is job creation. Business Dynamics Statistics has data on job creation and destruction in the United States over the past thirty years. As you can see in the graph, startups create an average of three million jobs a year, while big corporations destroy a million in the same timeframe. That is, the engine of job creation in the US is startups.

If we bear in mind that these ecosystems produce startups at a sustained pace and that startups are the job creators of the future, it’s not at all strange that every city wants to create one. The question we need to ask ourselves is: is it possible to come up with a model to create innovation ecosystems? Unfortunately, no one has found a way to industrialize innovation. It’s a concept that’s too complex and disruptive that we’re only now beginning to understand. However, there are success stories and new approaches that I’m going to analyze below and surely we’ll be able to see some important key points.

"Startups create an average of three million jobs a year, while big corporations destroy a million in the same timeframe"

The Three Basic Elements

Before getting into the analysis of some successful cases of innovation ecosystem creation, below I list what seems to be an extended consensus of the absolutely necessary ingredients for innovation to arise. They are:

• Ideas. The germ of all innovation is ideas. Ideas come from people who are entrepreneurial, curious, creative and imaginative, and who are inclined to seek improvements and alternatives to any problem. There are institutions such as universities, technological centers, technical schools, etc., where this mental framework is predominant. That’s why innovation ecosystems always integrate these types of entities.
• Talent. While ideas are the seed, they cannot prosper without being accompànied by talent. In my article The Startup Value Chain, I explained that it’s necessary to cover all the necessary roles to face challenges with a minimum guarantee of success. In this category are included people with leadership, execution, sales and financial skills. That’s why it’s important for the ecosystem to include, in addition to the entities named above, business schools, large companies, SMEs, independent professionals and, above all, all the networks of informal encounters that form around entrepreneurs where experiences are shared, such as in Meetups, EventBrite, investor forums, etc.
• Money. Many projects, especially startups, need financing in their initial stages until they reach their growth stage. It must be kept in mind that startups imply innovation and scalability. Innovation means creating something new that has to go through a technical validation (meaning it can be done) and a market validation (meaning someone’s willing to pay for it), and that abyss is where 80% of startups fail. That’s why the money must be high-risk; that is, it must come from investors who know the characteristics of this type of investment, and who accompany the startups so that they can reach their growth stage, where the investment becomes highly profitable.

While these three things are necessary, they’re not enough. The next challenge is combining these three elements for innovation to arise. Here too is another great advance, because now we know which component makes the combination of these three ingredients possible in order to innovate: relationships.

So now, let’s see what approaches have been taken in some successful cases around the world, and which other approaches are emerging so as to connect and relate ideas, talent and money.

"The absolutely necessary ingredients for innovation are: ideas, talent and money. And then relationships must be built between them in order to create an ecosystem"

The Cambridge Innovation Center (CIC) approach

The CIC has the mission to create innovation communities by offering collaborative work environments and contact networks with local agents who help entrepreneurs develop their projects. Through these relationships, they also help develop and strengthen the local innovation ecosystem.

In the following video, Tim Rowe, the founder and CEO, summarizes the vision at CIC, the place that houses the greatest number of startups in the world.

A few days ago, I participated in a meeting with Tim in which he explained, with the clarity that you can only get from a founder explaining his vision, which are the keys of his business. The idea is tremendously simple and overwhelmingly correct. His approach for creating relationships between ideas, talent and money is proximity.

That’s right, proximity is a determining factor in relationships. In fact, if we stop and analyze it for a moment, our friendships, partners, jobs and practically all our relationships are based on proximity. Therefore, it’s quite normal to think that innovation also happens between ideas, talent and investors when they are close. So, the greater the concentration of the three elements, the greater the possibility of creating relationships and the greater the potential for innovation.

The CIC has taken this idea to its limits, designing spaces and activities in their buildings with surgical precision in order to encourage contact between all the actors in innovation, and thereby augment the probability that opportunities will arise. Their business model is based on renting out spaces in very different formats. This approach is different to incubators and accelerators, which are more focused on mentoring and accompanying startups in very specific life stages, normally in exchange for equity. Although the CIC doesn’t offer mentoring services, there are many professionals providing services to the startups at CIC, who have come there because of the attraction of the concentration of innovation, which is an evidence that the model works.

However, it’s not enough to just concentrate the agents of innovation. There are two other factors to bear in mind:

• density. A minimum critical mass is necessary for new relationships to happen, and for this traction to attract other agents that make the ecosystem sustainable.
• diversity. The agents must be different, not just in their role among ideas, talent and money, but also in their cultures and beliefs. It’s all about finding synergy between people who come from different mental structures and perspectives, which is the primordial soup of innovation.

To get enough density, the CIC first identified locations that have the three elements from above (ideas, talent and money), and then analyzed the potential and the commitment of the different parts to concentrate in one building. So, they established relationships with the government, big companies, entrepreneur networks, etc. and then decided whether there was enough commitment density for the model to work.

Once they had enough density, the CIC tried to make it more diverse. Tim explained the importance of diversity with an anecdote from a large company that, attracted by the innovation at CIC, decided to send a small team of three people. Surprised by the level of new ideas and opportunities, they rushed to send fifteen more people. After several months and the launch of new innovation projects, they took the leap and enlarged the team to fifty people. And later even more, moving 200 people and renting a whole floor all to themselves. Paradoxically, the isolation on the floor sharply cut off the level of interaction with the rest of the ecosystem, which brought them back to the original situation of isolation that had caused them to initially seek innovation at the CIC. The company, in the end, decided to move back to their offices, since the cost of renting a whole floor was not worth the level of innovation, which was now at levels similar to the ones seen before entering the CIC. Definitely a good lesson.

The CIC is currently in the middle of an international growth process. Tim shared with us that his vision is to democratize innovation to the whole planet, opening up to fifty new buildings in the next few years. With a mature model that works, and tested in different contexts such as in Boston, Tokyo, Rotterdam and Miami, they’re now preparing to grow. For this, they just got an investment round of $58 million. Their goal is to connect all the CIC centers around the world so that ideas, talent and investors can innovate globally.

CIC approach for innovation is the proximity of ideas, talent and money. They concentrate them with enough density and diversity to foster relationships and make the innovation happen.

The SystemicUP approach

SystemicUP is an initiative whose purpose is to turn startups into the engine of economic and social change via a new paradigm of startup creation called conscious startups.

The new paradigm is based on the idea that business and all human institutions are part of the same interrelated, interconnected and interdependent reality. Conscious of this interconnected nature between all humans, it seeks to maximize the potential of people and to have them participate in the creation of a better world for all.

In accordance with this unique reality, the purpose of conscious startups is to augment economic prosperity while favoring human wellbeing and contributing to a healthy environment. So, they offer a startup lifecycle model that proposes different practices and tools for each of its stages that help the team overcome all the challenges of being a business, of interpersonal relationships and of caring for the planet.

Among its values is collaboration that is positive and proactive with the local and global innovation ecosystem. This means that conscious startups include, in their activity, a percentage of time and optionally capital to collaborate with and develop the ecosystem.

That is, unlike the CIC, which bases its strategy on the proximity of the agents of innovation, SystemicUP is based on the commitment of its startups to collaborating and sharing their time, knowledge and capital with the ecosystem. As more conscious startups come in, there will be better relationships and support for the innovation ecosystem.

To find an analogy, it’d be similar to the cooperative movement, in which, by philosophy, co-ops acquire a series of rights and obligations with other co-ops and the ecosystem that unites them [1].

For Conscious Startups it is about philosophy and values. They commit a percentage of their time and capital to collaborate with and develop the local ecosystem.

Conclusions

Innovation has become a social and business need worldwide. Many cities are trying to transform their economies based on more traditional business ideas into ones based on innovation. To do so, they must integrate ideas, talent and capital into their ecosystems, and then try to find the correct combination to relate those three elements.

The most avant-garde innovation ecosystems in the world have already gone through this process:

• Israel had ideas and talent, but not capital. The Israeli government, in close collaboration with entrepreneurs, created Yozma, a government program to create a vibrant venture capital industry, which was seeded with $100 million at the beginning of the 1990s to create ten venture capital funds.
• London had capital and ideas, but no talent. Its strategy was to take advantage of the fact that it was already the financial capital of Europe to turn itself into the capital of financial innovation. For this, they made it easy for entrepreneurs to move into the City, and then they designed very favorable immigration policies to attract talent from other countries.
• Silicon Valley had capital and talent, but no ideas. It all started with a company called Fairchild Semiconductors in Silicon Valley, which curiously was a subsidiary of Fairchild Camera & Instruments on the East Coast. There, Robert Noyce and Gordon Moore couldn’t handle the limitations placed on them by their mother company, and decided to abandon the company to found Intel. The decision to start up, which was uncommon at the time, was enough to transform the local ecosystem into the largest growing innovation economy in the world. You can find a summary of their story here.

These three cases perfectly exemplify the process of constructing an innovation ecosystem. First, get the ideas, talent and money. Then weave a network of relationships that connect them. But, there is one final step that is necessary to make the system self-sustainable, known as the entrepreneurship acceleration cycle, summarized below.

It all starts with the entrepreneur, and it must all continue with the entrepreneur. Time has shown that all the public initiatives that have tried to create innovation ecosystems that were not based on the entrepreneur have been artificial. To make the ecosystem sustainable, it is necessary for entrepreneurs to go through the startup lifecycle successfully, and to stay in the ecosystem creating new projects, investing in other initiatives, and helping other entrepreneurs to be also successful. This creates a self-fulfilling cycle that attracts ever more ideas, talent and capital.

To make the ecosystem sustainable, it is necessary for entrepreneurs to go through the startup lifecycle successfully, and to stay in the ecosystem creating new projects, investing in other initiatives, and helping other entrepreneurs.

[1]. SystemicUP was born in the Basque Country, an international reference in the cooperative movement.

[2]. Disclaimer: I am a co-founder of SystemicUP.