How to Build Startup Ecosystems

Startups can disrupt entire industries and grow into some of the biggest companies in the world. 

Successful startups, however, are the exception and not the rule, as 90% of them end up failing. Finding product-market fit and raising capital is always challenging, especially for a first-time founder. 

That’s why startup ecosystems exist: to help founders overcome obstacles in their businesses and support them in trying again when an idea fails. 

What is a startup ecosystem?

A startup ecosystem is a network of resources — people, investors, institutions, and companies — that works together to create an environment for startups to thrive.

 A startup ecosystem can be a physical place, like Denver, or an online space, like the Trends community. But even as the tech world is moving toward remote work, ecosystems are still primarily defined as physical places.

Here are the top startup ecosystems in the world, according to a 2022 report from Startup Genome: 

• Silicon Valley (#1)
• New York City and London (tied at #2)
• Boston (#4)
• Beijing (#5)
• Los Angeles (#6)
• Tel Aviv (#7)
• Shanghai (#8)
• Seattle (#9)
• Seoul (#10)

Startup Genome measured several factors — like startup performance, funding, and the experience level of talent in each ecosystem — to calculate these rankings.

While startups in various places around the world are garnering more and more investment capital, startups in the top ecosystems still enjoy the lion’s share of funding.

Components of a startup ecosystem

There are many building blocks that need to be present — and interacting together — for a startup ecosystem to thrive. These components include:

• Startups: The more, the better. Ecosystems tend to gain more traction when they have 1k+ startups. NYC, for example, has 25k+ startups. Hong Kong, a top emerging startup ecosystem, has closer to 4k.
• Entrepreneurs: Dedicated, inventive entrepreneurs who are excited to build something exceptional are needed. Entrepreneurial-minded people become startup founders, employees, mentors, and investors. 
• Talent: This includes product managers, sales managers, software engineers, and many other professions. A good startup ecosystem has access to top talent to fill critical roles. 
• Mentors: Founders need guidance from people who’ve done it before, to help lower the learning curve. An abundance of advisers, or mentors, is essential to a successful startup ecosystem. 
• Investors: You need money to grow a startup. To build a successful startup ecosystem, you need investors who are willing to fund budding businesses. 

Take Silicon Valley, the epicenter of startup financing. Startups in the Silicon Valley ecosystem received $247B in VC funding between 2017 and 2021, which is about 55x the global average VC investment in an ecosystem. 

• Incubators and accelerators: These institutions help founders sharpen their ideas and launch their businesses. Specifically, accelerators provide resources and mentorship to companies that have a prototype, to help them scale quickly. 

The programs are usually three months long and can also provide seed funding. Many successful startups, like Airbnb, Dropbox, and ClassPass, went through accelerator programs.

• Educational institutions: Research inside universities can spark startup ideas, and universities sometimes fund budding ventures. Stanford, for example, supports the Silicon Valley ecosystem by investing in startups through StartX. 
• Community/events: Being a founder can be lonely. Startup communities help founders connect, share ideas, and keep each other motivated. Communities typically host meetup events, too.

As Tori Hanson transitioned from a career in media to entrepreneurship, she was searching for other people who were building businesses. Hanson lives in NYC, a major startup hub, but was lacking a community of entrepreneurs to brainstorm with. 

So she started a meetup group that turned into the Knowledge Shop — a community where founders meet in person to help each other develop their businesses. Hanson says most people in her group are “looking to make friends, to learn from each other, and to feel like they’re part of something.” 

• Coworking spaces: Having access to coworking space allows startups to remain lean and flexible. Instead of entering into a long-term lease — and purchasing desks and other furniture — startups can rent space on a short-term basis. 
• Corporations: Big companies can be a customer pool for new startups. If a startup is solving a problem a corporation has, there’s a chance it’ll use the product. 

The corporation might also try to acquire the startup down the road, if it sees the business as a value add — or a threat. (Think Facebook acquiring Instagram in 2012.) 

• Professional services organizations: Many startups can’t afford (or don’t need) to hire full-time CFOs, HR reps, or lawyers, so having access to services like accounting, consulting, and legal, is helpful. 

Startup ecosystem maturity

Silicon Valley is the classic example of a mature startup ecosystem. It’s the world’s leading ecosystem, and includes all the essential components to promote startups. But many other ecosystems are gaining traction.

Startup Genome put together a framework for understanding the various phases of the startup ecosystem life cycle. 

If you’re trying to develop a startup ecosystem in your city, it might be helpful to assess which phase you’re in and consider the actions your ecosystem can take to reach a more mature phase.

Activation phase

What it looks like:

• Experienced startup talent and investors are scarce
• Not many startups (1k or fewer)

How to improve:

• Focus on increasing funding opportunities 
• Engage entrepreneurial-minded people and foster a supportive community
• Identify a couple of strong industries in your local economy (e.g., life sciences, insurance, or agriculture) and develop programs to accelerate innovative ideas around these fields

Globalization phase

What it looks like:

• More people with startup experience enter the ecosystem and build startups. This leads to exits that are impressive for the region (usually $100m or higher, depending on the country)
• Around 800-2k startups (depending on population)
• Exits attract more resources to the region (i.e., more startups, entrepreneurs, talent, and investment dollars)

How to improve:

• Network with founders in top ecosystems (in part, to bring more attention to your ecosystem)
• Help startups in your ecosystem stretch their early global market reach
• Urgently address gaps in performance, funding, connectedness, market reach, knowledge, and talent/experience 

Attraction phase

What it looks like:

• More than 2k startups (depending on population)
• Globally impressive unicorn valuations and exits above $1B that bring more resources to the ecosystem
• Very few success factor gaps

How to improve:

• Continue building the ecosystem and filling success factor gaps
• Continue to attract resources and talent by removing barriers to immigration and influencing policy

Integration phase

What it looks like:

• More than 3k startups
• Ecosystem is very well connected, and startups build cutting-edge business models that garner high global market reach

How to improve:

• Share knowledge and resources with other ecosystems 
• Influence policies that support the continued growth of the ecosystem
• Spread benefits to other parts of the economy and country

Fostering a startup and innovation ecosystem

There are many ways to build a startup ecosystem. Here are some top tips from VCs and experienced entrepreneurs:

Play to your strengths. Understand what makes your place unique. Is it a pharmaceutical hub? Is the auto industry there? Is the military a major employer? Ecosystems should lean on the expertise in their region — and build connections among universities, startups, and corporations — to encourage innovation and funding opportunities. Trying to copy/paste an ecosystem from elsewhere is often not the best approach.

Encourage early-stage investment and reinvestment. Early-stage funding is a good indicator for the health of an ecosystem. VC Collin West wrote on LinkedIn that ecosystem development “should start by supporting founders and investors at the earliest stage.” 

Late-stage funding doesn’t work, he argues, if you’re not helping early-stage companies. Strong ecosystems experience reinvestment, too. When investors exit a company, they should be encouraged to reinvest some of their gains back into the ecosystem. 

Measure your progress. It’s important to track key data like the amount of capital raised, the amount of investor value created, the number of startups formed, the number of jobs created, and the number of exits (and their value). 

By keeping track of these key performance indicators, an ecosystem can assess whether it’s improving and use this data to attract more investment.

Centralize your resources. It’s important for founders to know where to go to get the support they need. When Eric Weissmann was building out Cincinnati’s startup ecosystem with Cintrifuse, they made an ecosystem map for founders. 

The map defines four phases of the startup journey — incubating, demonstrating, market entry, and growth — and lists local resources to pursue at each stage. 

Weissmann recently started a new position leading an ecosystem-building organization in Greenville, South Carolina, and is mapping out Greenville’s startup resources in a similar way. 

Ecosystem building takes time, and it can look different from one city to the next. To build successfully, your unique location — and the needs of the entrepreneurs who live there — should be front and center.

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