Top tips for entrepreneurs
When Estonia regained its independence from the Soviet Union in 1991, less than half the population had a telephone line. A decade later, Denmark’s Janus Friis and Sweden’s Niklas Zennstrom chose its capital, Tallinn, as the launch pad for what would become one of the world’s most valuable start-ups – Skype. Similarly, in the mid-2000s two Swedish music enthusiasts, Eric Wahlforss and Alexander Ljung, were looking for a location to create a website. They visited Silicon Valley and initially set up a small office in Stockholm before relocating to Berlin, a city then in a state of economic decline. Their business SoundCloud went on to become one of the biggest audio-sharing websites in the world, attracting more than 250 million listeners each month.
The entrepreneurs’ choice of location and subsequent success is somewhat of a surprise. These “black swan” start-ups are a wake-up call to governments who direct substantial resources towards emulating existing innovative hubs without fully understanding what really influences entrepreneurs to enter or exit a location.
Other cases where high-tech start-ups have succeeded in places not usually associated with such endeavours include the Arabic portal Maktoob, which was launched in Amman, Jordan, while the successful online ticket sales company Sofizar was born, and continues to thrive in Lahore, Pakistan. What makes Skype and SoundCloud even more interesting, however, is that their founders originated from, and conceived their business ideas while living elsewhere.
What makes a start-up hub?
Analysts and researchers have identified a long list of reasons why Silicon Valley and other US regions have been able to attract new talent and develop strong technology hubs. Factors such as a strong entrepreneurial culture; availability of skilled talent; a high level of spin-off activity; the existence of research universities, institutions and anchor firms and access to venture capital all contribute to the allure for the entrepreneur.
Outside the US, economies with strong, innovative tech sectors such as Bangalore, Beijing and Taiwan offer many of the same advantages. However in these regions entrepreneurs are even more interested in a city’s low business costs; infrastructure; access to global networks and governments committed to putting appropriate frameworks in place.
So what factors influence entrepreneurs to choose to locate in regions not traditionally supportive of start-up activity?
Succeeding outside a hub
When examining the factors that contributed to the entrepreneurs’ choice of location and the companies’ subsequent success, we discovered tmany of the so-called “key factors” to technological entrepreneurship were not behind their decision.
Take Skype, for example. When reflecting the company’s success after its US$8.5 billion takeover by Microsoft in 2011, the Skype CEO Tony Bates noted: “Because of the harsh end of the Soviet Union you could view Estonia as a start-up country … it generates a culture where it is easy to build a start-up company.”
Skype’s founders noted that the Estonian government actively encouraged entrepreneurship and was dedicated to the development of a digital economy. The Tallinn community included a large pool of computer scientists and engineers, while the economy ensured relatively low start-up and business costs.
Finding your own comparative advantage
The Sofizar creator Zafar Khan, a Pakistani-born US resident, looked outside his new homeland when deciding on a location for his fledgling business. In Pakistan he could afford to set up on his own without investors and employ high worth IT engineers.
Lahore, explained Mr Khan, had talent, low costs and convenience in that he knew the neighbourhood, customs and language.
In explaining the decision to relocate SoundCloud to Berlin, Mr Wahlforss noted in an interview that, “Berlin as a city, feels a bit like a start-up. It’s a melting pot of art, tech and creators.”
The five Cs
In each of the cases studied, the traditional variables associated with successful entrepreneurship did not seem to shape the entrepreneurs’ decisions. Instead these companies appeared to make location decisions influenced by what we refer to as the five Cs:
Cost – factors such as rents, living costs, wages
Convenience – including the entrepreneurs’ familiarity with a place, government policies, regulatory and legal environment, proximity to key markets and technological readiness
Community – networks and social capital
Calibre – the quality of the workforce and infrastructure, such as roads, airports and ICT
Creativity – the resourcefulness and ingenuity of the local community.
There is no clear-cut, one-size-fits all formula to finding the perfectly location. These five Cs are not automatically a “surplus” or asset in themselves. Essentially, it is up to entrepreneurs to match the opportunities and challenges of a location with their products’ capabilities and needs.
Sami Mahroum is the founding director of Insead’s innovation & policy initiative in Abu Dhabi.
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Updated: June 5, 2014 04:00 AM