Last year, I wrote about Elinor Ostrom, an American political economist, who was awarded the 2009 Nobel Prize in Economic Sciences for her work on cooperation and collective action. Ostrom studied how rural communities self-organized to sustainably share scarce natural resources in the absence of formalized governance structures. In her Nobel acceptance speech, she described her work in the following way:
“Carefully designed experimental studies in the lab have enabled us to test precise combinations of structural variables to find that isolated, anonymous individuals overharvest from common-pool resources. Simply allowing communication, or “cheap talk,” enables participants to reduce overharvesting and increase joint payoffs, contrary to game-theoretical predictions.”
In other words: we tend to cooperate with people we know, trust, and frequently engage with, but find it easier to defect against people we don’t. This thinking is central to startup communities (or ecosystems), which rely on flows of ideas, talent, and capital that are enabled by a set of norms and relationships built on trust, reciprocity, and stewardship. For that reason, I awarded her the Nobel Prize in Startup Communities (credit goes to Victor Hwang for originally connecting Ostrom’s work to startup ecosystems).
Earlier this week, Abhijit Banerjee, Esther Duflo, and Michael Kremer were awarded the 2019 Nobel Prize in Economic Sciences "for their experimental approach to alleviating global poverty." On the surface there may not appear to be a crossover between poverty alleviation and startup communities, but there is if you look deeper into why they were given the award.
There are at least six lessons learned from the work of Banerjee, Duflo, and Kremer that can inform and improve upon the practice of building startup communities. To guide the discussion, I’ll draw from a Twitter thread by the University of Michigan economist Justin Wolfers summarizing their work:
Here are my takeaways from his thread, applied to startup communities (or ecosystems):
Use “experts” wisely. As a movement takes shape around building startup communities, cities will want simple solutions to what are inherently complex problems. They’ll want to enlist the most confident, authoritative voices to “fix the problem”, many of whom will be crossovers from existing advisory (management consulting or economic development). The reality is that startup community building is a lot of guesswork and trial-and-error. It requires curiosity, humility, an informed intuition, and a general comfort with not having all of the answers. “Experts” from traditional domains tend to exhibit none of these, and research has shown they are often ineffective when encountering unfamiliar situations. Instead, startup communities should source a diversity of talents from the bottom-up.
Change must come from within. Meaningful change cannot be driven by outsiders. The right type of outside advice can be valuable for ensuring that startup community is well educated, equipped, and supported. But even the very best advisors can only do so much. It is not the job—nor would it ever work—for people outside of your community to build one for you. Instead, it requires motivated leadership from many local stakeholders, including governments, universities, corporates, and many more. Most of all, a startup community cannot exist in any meaningful way if it is not lead by local entrepreneurs who have a long-term commitment to helping other entrepreneurs succeed.
Be a curious interdisciplinarian. There is no definitive guide to the theory and practice of startup community building as of yet. It’s still a relatively new field and the inherent complexity of these human social systems makes them challenging to understand and conceptualize. With no textbook to turn to, practitioners must be curious—pulling from a range of existing domains spanning economics, geography, sociology, network theory, management, political economy, anthropology, physics, evolutionary biology, and more. I’ve synthesized a lot of sources from these disciplines to develop and support the ideas in my upcoming book. I’ve been thinking deeply about them for a sustained period of time and still feel that I’m only scratching the surface. Practitioners need to be curious, resourceful, and approach learning with the openness of a “beginner’s mind.”
Experimentation is required. Theory and frameworks are needed but can only take us so far. The surest path ahead is to test ideas; to try things and see what can be learned; to figure out what works and what doesn’t; and to iterate and improve on that process. This is hard work. Capturing feedbacks is a challenge—there are often delays between action and reaction, and many factors affect outcomes simultaneously. Because of that, one must carefully think about data capture before a course of action is taken and build measurement into a program from the outset. Just as entrepreneurs frequently design experiments to learn from customers, community builders must as well. The best way to determine what will work in your community is to discover it through sustained effort and a comfort with systematic trial-and-error.
Moonshots are not required. What defines Banerjee, Duflo, and Kremer’s work the most was their insistence on looking for small, yet effective ways to improve the lives of the poor. Their goal was not to “solve poverty”, but simply to help people. This ran in stark contrast to the dominant approaches of the time by the World Bank and influential thinkers like Jeffrey Sachs, who advocated large-scale, top-down interventions to “push” one billion people out of poverty. But the track record of such approaches has been abysmal. The same is true for startup communities (or ecosystems). Instead of looking for ways to “solve” your startup ecosystem (a parallel line of thinking being — let’s have X unicorns per year), just look for ways (large or small) to help entrepreneurs succeed.
There is no silver bullet. Perhaps the single most important lesson of all is that startup communities are not defined by one course of action. Each community is different; vastly so. What works in one place may not work in another or at this point in time. It is not possible to reverse engineer a startup community based on what worked somewhere else. Practitioners should let go of the illusion that quick fixes exist and reject any overly formulaic solutions to the complex challenge of improving startup communities. There is no formula or playbook. There is no one model or no clearly defined set of parameters to tune up or down. If there was, we’d all be living in high-performing startup ecosystems. But we don’t. Embrace the inherent uncertainty in this work and rest assured that the answer is in the process.
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So, what’s the point of making a crossover between a Nobel Prize in poverty economics and the development of startup communities? Well, on a personal level, it’s fun for me to merge two of my worlds—economics and startup communities.
More importantly, I’d like to make the case that although startup community building still lacks a clearly agreed-upon set of theories and practices, we can nonetheless improve on it today by drawing insights from other domains. As our economy and society become more complex, the practice of analogous thinking is essential. The story of how poverty alleviation had been approached for decades before these visionaries illuminated a new way has remarkable parallels with many popular but misguided strategies that exist in startup community building today. We can learn a lot from this experience, and point to it as evidence that a different approach exists. As this discipline continues to take shape, we’ll need to do a lot more analogous reasoning to make the case to funders and other stakeholders that abandoning the old way (ala World Bank) and embracing the new way (ala Banerjee, Duflo, and Kremer) is the right path. And what better way to do that than by pointing at not one but two Nobel Prizes?
