The Market for Credit and Supporting Entrepreneurs

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Over the last few years of growth in Accelerator or Incubator programs, the overall media coverage of early stage tech startups has increased in Canada. The lack of coverage before the programs existed made media coverage a metric of success. For any entrepreneur support program to be relevant there is a requirement to be mentioned in the media resulting in the Alumni Success Metric as a key metric used to identify success of any program.

I think we need to find a better way to measure these programs and the effect on the problem they are solving.

As more and more programs compete on this metric they spend more on marketing to rise above the others which results in an increase in the costs to deliver a program. I believe competing on this metric can foster animosity between programs and hurts collaboration between a large number of extremely talented people.

What is the problem?

Founders are taking advantage of everything offered to them (as they should) which results to this common scenario in Canada (not based on any particular company).

  • Founders went to University of Toronto (and/or Waterloo and/or Ryerson and/or WLU and/or insert school here) and worked out of Banting and Best (and/or the Garage and/or the DMZ and/or any coworking space).
  • Someone else on the team took a pre-accelerter or some other community education program.
  • They are clients of MaRS and Communitech and Halton Innovation and…
  • OCE has awarded them a grant., MaRS IAF will invest in them, IRAP might have had a role.
  • They might get into another accelerator program before they finally get a few key investors at the table and start to grow.

When they get VC funding or something big worth a media push, what happens? Up to 10 organizations want to be listed and each of them release a story about how proud they are. Few if any list the other organizations or programs or people that helped (because the list is huge).

How this may hurt entrepreneurs?

Funding and product announcements aren’t success, they are a milestone that is blown way up in the local media as a result of everyone getting excited (excitement is good, celebrate the good things). It is possible that the positioning of programs media releases could confuse the market that the company needs to reach.

That said, the media coverage froth is likely localized to Canadian media so it probably has no effect on where the companies market likely is: the United States.

This intense market for credit can be frustrating for everyone who delivers programs. In reality it takes a community to raise a startup. From funders that have done it before to programs designed to focus attention, lower the risks associated with getting started, and build peer groups. We should all celebrate the entrepreneur and collectively be excited there is so many people out there helping them.

The metric is good for something.

Where I think the Alumni Success Metric does work is that helps inspire new founders. Knowing that good things have happened for those that come before them in the same program is the same metric Higher Education uses to recruit undergraduate and graduate students.

How do we avoid the zero sum game around credit?

The metric is not useful for defining the success of any program as most of the support happens in parallel in accelerators or incubators. It is extremely difficult to know what helped and when and where or what made the difference. It creates something for programs to compete over when they should be collaborating.

The stories about companies growing shouldn’t be “x program’s y company has done z” but instead be about how the company achieved this milestone and all the people that helped along the way.

A metric needs to exist that can demonstrate how effective a program is without having each program battle it out with marketing.

Step #1 is that we have to stop thinking of service organizations or accelerators or incubators as startups. They aren’t. They are philanthropic organizations offering a support group and networking services for founders, funders, and service providers.

The main goal is not to build sustainable models around these organizations (how can most realistically generate revenue outside of an education or philanthropic model?) but build a sustainable ecosystem that doesn’t require the current level of philanthropic support. Every philanthropic organization should hope that one day the problem they are solving is no longer a problem. That should be no different with supporting entrepreneurs and everyone should work together to achieve that outcome.

How does research spending in higher education translate to startups?

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The issue of startup funding falling short in Canada is talked about in startup circles just as much as the weather in this country. This topic is something I have shared my opinion on before but that post was aimed at early stage companies. I am not sure if there really is a problem with funding or just with the companies in Canada that are at that stage. A more serious worry about this conversation is the rational that academic research (ergo the institutions that conduct them) are less important than VC investment in economic development:

“We’ve bought into the idea that academic research is the engine of economic development and that’s a fallacy,” says Dr. Patricia Lorenz, chair of NAO.

Canada spends roughly $11.3 Billion on Higher Ed based research. The top school on research spending is the University of Toronto with $915 Million of that. The next highest school is at $575 Million (UBC) then at #6 it drops to $325 Million.  This isn’t far off from US schools but there are a lot more schools with research spending over $100 Million. Alumni from ‘top schools’ in the US have received $12.5 Billion in funding across 559 deals since 2007. These are people that have been exposed directly or indirectly to the environment that is created around the research spending of those schools. We don’t have similar data in Canada (that I know of).

What were the Federal (government) research dollars spent at the “top schools” in the US?

  • Stanford University ($840 million)
  • Harvard University ($686 million)
  • University of California, Berkeley ($694 million)
  • New York University (I couldn’t find a number)
  • University of Pennsylvania ($770 million)
  • Massachusetts Institute of Technology ($677 million)

If you assume NYU is a bit above the average of the above in spending, that amounts to an annual of roughly $4.5 Billion in research spending at just 6 schools. Schools develop the talent that builds the companies that require the funding. Those are big number unless you contrast that with Canadian company R&D spending which is pegged at $10.9 Billion last year (I don’t know what amount of that goes to sponsored research in universities). RIM and Bombardier, top of that list, account for $1.54 and $1.34 Billion each.

In total, three times the research spending of the University of Toronto is going to closed research to aide mobile devices, snowmobiles, planes, and trains. I am not saying that is a bad thing at all. What I wanted to point out is that, relatively speaking, Universities really don’t spend that much on research factoring in the diversity of the research and the number of people that benefit from it directly or indirectly.

The persistant question that people tend to oversimplify, how much of that research spent at Universities translates into economic development? The answer to that depends on your metrics. Typically I think people point towards the commercialization results of a university. That is a only a part of the picture. The numbers above from 6 schools in the US that spend $22.5 Billion over five years ($4.5/yr) turned out students that raised $12.5 Billion in financing. Are you going to question any of those top US schools commercialization or their role in being an “engine of economic development?”

btw, ATI was founded in a dorm room at UofT in 1984 and exited for how many billions after changing the world of computers? Ebay? WattPad? Do we need to list them all? We probably do.

The “Dormcubator” and the entrepreneur by-products of higher education

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Having had a great opportunity over the last year and a half to work at VeloCity I am convinced that the “Dormcubator” (The Globe and Mail made it up, not me, but have you Google’d it?) model in higher education is a hugely important effort as part of an overall student success strategy in higher education. This, in my opinion, is because it leverages a by-product of higher education and therefore is actually easy (with regards to the relative cost of new investment) to make relatively successful but it also essential to consciously enhance the experience for those students that enter University for other reasons than academic development.

The business take of by-products is pretty well explained in this Think Vitamin article, here is my take in the context of what I am doing at VeloCity in Higher Education.

Why are entrepreneurs a ‘by-product’ of Higher Education?

Higher Education is tooled to create more academics, not employees (and yes, the government talks about direct influence on job growth and training but the economic impact of higher education is itself arguably by-product). The process of undergraduate to graduate student to post-doc to finally a prof (with a few steps in-between) is a long held process to find the best of the best academics. It attracts the some of the smartest people in society to push themselves and give it a try. Pretty close to all of those that try don’t go all they way to a PhD but that doesn’t mean they aren’t hugely intelligent and capable people, they just aren’t academics.

This talent that ‘falls off’ after their undergraduate or even graduate experience is what fuels the job market with highly skilled and knowledgeable work force. Those that go on to do research fuel development of new technologies, develop greater understanding of how technology or others influence us and our world, and educate the next generation of talent. Those that don’t go on to become academics and do research and/or teach are a by-product because the primary product that higher education focuses on is the academic or researcher.

At the University of Waterloo it is a bit different. The University recognized early on that Engineers aren’t going into Engineering to be PhD’s — they go to be Engineers. Consciously or not, the University was focused on creating professionals as well as academics and researchers which crosses all Faculties. Developing the worlds largest co-operative education program made perfect sense. The University’s second core product was born, a highly skilled and educated professional worker. The University of Waterloo produces amazing Engineers, Actuaries, Optometrists, Accountants, Pharmacists, etc. All roles that could get PhD’s but it isn’t the primary focus of the program.

Enter the Entrepreneur as a professional product of higher ed

The Entrepreneur is a different professional and much harder one for a University to create a program for. An Entrepreneur tends to not fit in any one program, likely aren’t attracted to or perform well in the lecture style environment, and they come from just about anywhere without a set academic career goal. They likely go to University because it is an interesting and a challenge, not because they want to conform to a system. Waterloo has the coders that are entrepreneurial but we also have the business or medical or physics or math or recreation and leisure entrepreneurs. Even the Co-op program isn’t ideal as it is focused on getting  the student a job and a great experience as an employee. However, my theory is that the Co-op program along with new leading edge academic programs attract some of the most talented and entrepreneurial students in Canada.

Campus culture in Canada and Waterloo is weak

Where the University of Waterloo has fallen short overall is on building a campus culture and experience. The challenge of the co-op grind every 4-8 months (month 1 is apply to jobs, month 2 is interviews and midterms, month 3 is midterms, assignments, and maybe interviews, month 4 is exams, repeat), the constant moving, the lack of real community connection and culture in the City of Waterloo, along with a bunch of other things means the positive experience and culture is difficult to create. A lot is changing though.

Enter the frat house for entrepreneurs that make stuff

Certainly by no means an Animal House, VeloCity is a fraternity of entrepreneurs that share a common goal in life but come from all sorts of different programs and/or streams on campus. The living environment allows Waterloo students to establish solid friendships with future co-founders, expand their network, and find some of the best co-op jobs at startups that are out there. This has been called a “dormcubator” as it mixes a dormitory setting with an incubator like program.

The advantages to students are numerous but I think there are a few core things:

  • Broader base to build relationships with fellow students: connections across educational streams means students meet people they likely would have never met, Computer Science and Software Engineering students rarely go to class together and then we through a Business student in there.
  • A common experience: the experience in the environment gives those that live there a common but exclusive connection even if they weren’t living there at the same time. These connections are stronger than simply the ‘you went to Waterloo?’ connections — which are also fairly strong given the grind all of Waterloo Alumni have experienced.
  • Leveraging connections the University has already: Startups based in Silicon Valley, Montreal, Toronto, Boston, etc have a self selecting group of entrepreneurs to aim for at the start of every term they are looking to hire. This gives the students easier access to learn from other startups and still keep their debt loads down.

The residence, in my mind, is one part of an important shift to improve the student experience outside of the academic streams recognizing that students go to university not only for the lectures and assignments. This is something that is easier for Waterloo to do given the Co-op program is something it is already deeply committed to and it certainly is not an academic process. I would challenge other schools to look at similar ideas.

The Ryerson DMZ is another take on this model in Canada that is really exciting, lets see some more.

There is a likely a PhD in waiting on this topic so yes I oversimplified this but it is a blog post after all ;)