Does a tech start-up become a success because of talent or where it's based?

A new socioeconomic phenomenon is emerging, one that we don't fully understand

For Peter Vesterbacka, one of the main people behind Rovio, the company that created the Angry Birds computer game, Helsinki and Espoo were the best places to start a tech company. Reuters

In 1970, Albert Hirschman introduced the notions of Exit, Voice, and Loyalty in his classic book of the same name to describe how individuals weigh the benefits of staying with or leaving an organisation. Hirschman stipulated that individuals who find themselves benefitting from an organisation tend to be most vocal about its deficiencies, while those who benefit less exit it quietly. Hirschman saw individuals behaving towards organisations as they behave towards consumption: they look for a surplus of benefits.

In my book Black Swan Start-ups, Understanding the Rise of Successful Tech Start-ups in Unlikely Places, I find the same among technology entrepreneurs. Take the story of SoundCloud, a music streaming company, its founders Alexander Ljung and Eric Wahlforss left their hometown Stockholm for Berlin in 2008, after they realised they could attain a greater surplus of benefits in Germany. An abundance of IT and music talent, a large underground music scene and cheaper cost of living and doing business made Berlin a location with a greater "place surplus" than Stockholm. After years of revenue growth and expansion, SoundCloud opened offices in San Francisco and London with the aim of tapping the place surplus in other locations. Yet, recent news suggests that SoundCloud could not make the same gains in these locations and contracted back to Berlin.

Likewise, Niklas Zennström and Janus Friis, founders of Skype, now owned by Microsoft, left Sweden in 2003 for the Estonian capital Tallinn. Despite consistently being ranked highly for quality of life, ease of doing business, competitiveness and innovation, Stockholm did not afford Skype the type of advantages that it wanted. Tallinn, on the other hand, offered top talent, an open and upbeat business environment at a much cheaper cost.  Skype eventually expanded to other locations, changed hands and its destiny moved far away from its birth place.

But not every successful tech-startup story is a result of a relocation. Most are stay-home firms, although their founders may hail from elsewhere.

StormGeo, the largest weather intelligence company in the world, was a spin-off from a private TV station in Bergen, Norway. Siri Kalvig, the weather forecaster, made the deliberate decision to quit Oslo to retreat to her home region in the west of the country for its convenience and lifestyle. Bergen was also the birthplace of modern meteorology and had an abundance of geophysicist talent. For Ms Kalvig, it was the best place to start her company, she recruited her classmates from the local university and had her former employer become  her first client and main investor.

A similar sentiment was shared by Peter Vesterbacka, one of the main people behind Rovio, the company that created the Angry Birds computer game. For Peter Vesterbacka, Helsinki and Espoo were the best places to start a tech company. Helsinki has a flat social structure with little hierarchy. Espoo also has the sense of a small community that is competing globally on the periphery of larger economies. But what helped Rovio more than anything else was the advent of the app store. Rovio could now create games, upload them and reach a global audience directly. This was a game changer.

Digital platforms allow entrepreneurs to shop around like online shoppers.  They assess local availability, cost and quality and decide on where to best source their needs.  In doing that, they compensate for local deficiencies by sourcing from elsewhere.

Zafar Khan, founder of an algorithm based digital markets research company, runs a multi-million dollar business out of Lahore, Pakistan, operating almost entirely on digital platforms. Mr Khan was hindered neither by Pakistan’s crumbling infrastructure nor by its red-tape. He invested in a power generator, his own computers and used his knowledge of algorithms to develop a search engines analytic tool that customises and segments digital markets. After spending years on the US west coast and in the Far East, Mr Khan realised that Lahore had a greater place surplus than anywhere else he was familiar with: the cost of IT engineers and business in general was significantly lower than that in the US and none of its shortcomings affected his business plans.

In fact, the relationship between entrepreneurs and locations is a two-way street: locations furnish entrepreneurs with various social, physical and financial resources, and entrepreneurs enrich locations with social, intellectual and financial resources that they create or bring with them. The founders in the examples above did well not least due to the social capital and business networks they had already developed in previous endeavours.

Today, digital platforms are making the necessity to relocate less impeding. This is good news for policymakers, development officials and place planners. For development and geography economists however it raises a host of new questions. What are the implications of the digital platforms on the notions of centre and periphery, on the comparative and competitive advantages of places, on clusters, and on path-dependency theories.

As academics and researchers, we are in front of a new socio-economic phenomenon, which we still don’t fully understand. Today, start-ups in the Middle East are being born multinational with offices in Amman, Beirut, Cairo and Dubai. Successful startups like Maktoob, Bayt, Kareem, Souq, Anghami and others operate seamlessly between Amman, Beirut, Cairo, Dubai and beyond.  Digital platforms are enabling new entrepreneurs to re-distribute their operations across different locations in the region allowing them to mitigate the shortcoming of one place and leveraging the surplus of another.

What emerges as the most important criterion for success in a particular location is the ability of the founders to transcend domestic shortcomings and to leverage digital platforms to tap into extended business, intellectual and financial capital that resides elsewhere.

For policymakers and planners too, this new development means that a location, a region or a city, does not need to be competitive in every respect, but instead concentrate its efforts and resources on the few factors that they can generate a surplus for potential entrepreneurs. As Estonia with its e-residency programme showed, those entrepreneurs do not even have to be residents in your city or region. The question on the policymaker’s mind thus should be what is our place surplus and what could it be?

Sami Mahroum is director of the innovation and policy initiative at Insead in Abu Dhabi

Sami Mahroum

Sami Mahroum

Sami Mahroum is a senior fellow at the Issam Fares Institute for Public Policy and International Affairs at the American University of Beirut and a professor at the Free University of Brussels