Categoría -startup

How to create innovation ecosystems?

Ecosistema de innovación
Advances in communication and information technology are transforming many of the planet’s economic, political and social activities. These advances allow us to exploit data on a massive scale to gain new knowledge, favoring a worldwide scientific, cultural and technological exchange that transcends all geographic barriers, political divisions and windows of time.

However, despite the fact that technology is more accessible, innovation is still an enormous challenge for businesses, cities and countries, all of which desperately need to innovate due to the pressure of ever more demanding, dynamic and personalized social and market forces. In this sense, the holy grail of innovation is the ability to create innovation ecosystems in specific geographic environments. The proof of this are the hundreds of cities that try to emulate the ecosystems of Silicon Valley, Berlin, London, or Tel Aviv, unfortunately with little success.

Obviously, the consolidation of an innovation ecosystem has many advantages. The main one is job creation. Business Dynamics Statistics has data on job creation and destruction in the United States over the past thirty years. As you can see in the graph, startups create an average of three million jobs a year, while big corporations destroy a million in the same timeframe. That is, the engine of job creation in the US is startups.

If we bear in mind that these ecosystems produce startups at a sustained pace and that startups are the job creators of the future, it’s not at all strange that every city wants to create one. The question we need to ask ourselves is: is it possible to come up with a model to create innovation ecosystems? Unfortunately, no one has found a way to industrialize innovation. It’s a concept that’s too complex and disruptive that we’re only now beginning to understand. However, there are success stories and new approaches that I’m going to analyze below and surely we’ll be able to see some important key points.

The Three Basic Elements

Before getting into the analysis of some successful cases of innovation ecosystem creation, below I list what seems to be an extended consensus of the absolutely necessary ingredients for innovation to arise. They are:

  • Ideas. The germ of all innovation is ideas. Ideas come from people who are entrepreneurial, curious, creative and imaginative, and who are inclined to seek improvements and alternatives to any problem. There are institutions such as universities, technological centers, technical schools, etc., where this mental framework is predominant. That’s why innovation ecosystems always integrate these types of entities.
  • Talent. While ideas are the seed, they cannot prosper without being accompànied by talent. In my article The Startup Value Chain, I explained that it’s necessary to cover all the necessary roles to face challenges with a minimum guarantee of success. In this category are included people with leadership, execution, sales and financial skills. That’s why it’s important for the ecosystem to include, in addition to the entities named above, business schools, large companies, SMEs, independent professionals and, above all, all the networks of informal encounters that form around entrepreneurs where experiences are shared, such as in Meetups, EventBrite, investor forums, etc.
  • Money. Many projects, especially startups, need financing in their initial stages until they reach their growth stage. It must be kept in mind that startups imply innovation and scalability. Innovation means creating something new that has to go through a technical validation (meaning it can be done) and a market validation (meaning someone’s willing to pay for it), and that abyss is where 80% of startups fail. That’s why the money must be high-risk; that is, it must come from investors who know the characteristics of this type of investment, and who accompany the startups so that they can reach their growth stage, where the investment becomes highly profitable.

While these three things are necessary, they’re not enough. The next challenge is combining these three elements for innovation to arise. Here too is another great advance, because now we know which component makes the combination of these three ingredients possible in order to innovate: relationships.

So now, let’s see what approaches have been taken in some successful cases around the world, and which other approaches are emerging so as to connect and relate ideas, talent and money.

The Cambridge Innovation Center (CIC) approach

The CIC has the mission to create innovation communities by offering collaborative work environments and contact networks with local agents who help entrepreneurs develop their projects. Through these relationships, they also help develop and strengthen the local innovation ecosystem.

In the following video, Tim Rowe, the founder and CEO, summarizes the vision at CIC, the place that houses the greatest number of startups in the world.

A few days ago, I participated in a meeting with Tim in which he explained, with the clarity that you can only get from a founder explaining his vision, which are the keys of his business. The idea is tremendously simple and overwhelmingly correct. His approach for creating relationships between ideas, talent and money is proximity.

That’s right, proximity is a determining factor in relationships. In fact, if we stop and analyze it for a moment, our friendships, partners, jobs and practically all our relationships are based on proximity. Therefore, it’s quite normal to think that innovation also happens between ideas, talent and investors when they are close. So, the greater the concentration of the three elements, the greater the possibility of creating relationships and the greater the potential for innovation.

The CIC has taken this idea to its limits, designing spaces and activities in their buildings with surgical precision in order to encourage contact between all the actors in innovation, and thereby augment the probability that opportunities will arise. Their business model is based on renting out spaces in very different formats. This approach is different to incubators and accelerators, which are more focused on mentoring and accompanying startups in very specific life stages, normally in exchange for equity. Although the CIC doesn’t offer mentoring services, there are many professionals providing services to the startups at CIC, who have come there because of the attraction of the concentration of innovation, which is an evidence that the model works.

However, it’s not enough to just concentrate the agents of innovation. There are two other factors to bear in mind:

  • density. A minimum critical mass is necessary for new relationships to happen, and for this traction to attract other agents that make the ecosystem sustainable.
  • diversity. The agents must be different, not just in their role among ideas, talent and money, but also in their cultures and beliefs. It’s all about finding synergy between people who come from different mental structures and perspectives, which is the primordial soup of innovation.

To get enough density, the CIC first identified locations that have the three elements from above (ideas, talent and money), and then analyzed the potential and the commitment of the different parts to concentrate in one building. So, they established relationships with the government, big companies, entrepreneur networks, etc. and then decided whether there was enough commitment density for the model to work.

Once they had enough density, the CIC tried to make it more diverse. Tim explained the importance of diversity with an anecdote from a large company that, attracted by the innovation at CIC, decided to send a small team of three people. Surprised by the level of new ideas and opportunities, they rushed to send fifteen more people. After several months and the launch of new innovation projects, they took the leap and enlarged the team to fifty people. And later even more, moving 200 people and renting a whole floor all to themselves. Paradoxically, the isolation on the floor sharply cut off the level of interaction with the rest of the ecosystem, which brought them back to the original situation of isolation that had caused them to initially seek innovation at the CIC. The company, in the end, decided to move back to their offices, since the cost of renting a whole floor was not worth the level of innovation, which was now at levels similar to the ones seen before entering the CIC. Definitely a good lesson.

The CIC is currently in the middle of an international growth process. Tim shared with us that his vision is to democratize innovation to the whole planet, opening up to fifty new buildings in the next few years. With a mature model that works, and tested in different contexts such as in Boston, Tokyo, Rotterdam and Miami, they’re now preparing to grow. For this, they just got an investment round of $58 million. Their goal is to connect all the CIC centers around the world so that ideas, talent and investors can innovate globally.

The SystemicUP approach

SystemicUP is an initiative whose purpose is to turn startups into the engine of economic and social change via a new paradigm of startup creation called conscious startups.

The new paradigm is based on the idea that business and all human institutions are part of the same interrelated, interconnected and interdependent reality. Conscious of this interconnected nature between all humans, it seeks to maximize the potential of people and to have them participate in the creation of a better world for all.

In accordance with this unique reality, the purpose of conscious startups is to augment economic prosperity while favoring human wellbeing and contributing to a healthy environment. So, they offer a startup lifecycle model that proposes different practices and tools for each of its stages that help the team overcome all the challenges of being a business, of interpersonal relationships and of caring for the planet.

Among its values is collaboration that is positive and proactive with the local and global innovation ecosystem. This means that conscious startups include, in their activity, a percentage of time and optionally capital to collaborate with and develop the ecosystem.

That is, unlike the CIC, which bases its strategy on the proximity of the agents of innovation, SystemicUP is based on the commitment of its startups to collaborating and sharing their time, knowledge and capital with the ecosystem. As more conscious startups come in, there will be better relationships and support for the innovation ecosystem.

To find an analogy, it’d be similar to the cooperative movement, in which, by philosophy, co-ops acquire a series of rights and obligations with other co-ops and the ecosystem that unites them [1].

Conclusions

Innovation has become a social and business need worldwide. Many cities are trying to transform their economies based on more traditional business ideas into ones based on innovation. To do so, they must integrate ideas, talent and capital into their ecosystems, and then try to find the correct combination to relate those three elements.

The most avant-garde innovation ecosystems in the world have already gone through this process:

  • Israel had ideas and talent, but not capital. The Israeli government, in close collaboration with entrepreneurs, created Yozma, a government program to create a vibrant venture capital industry, which was seeded with $100 million at the beginning of the 1990s to create ten venture capital funds.
  • London had capital and ideas, but no talent. Its strategy was to take advantage of the fact that it was already the financial capital of Europe to turn itself into the capital of financial innovation. For this, they made it easy for entrepreneurs to move into the City, and then they designed very favorable immigration policies to attract talent from other countries.
  • Silicon Valley had capital and talent, but no ideas. It all started with a company called Fairchild Semiconductors in Silicon Valley, which curiously was a subsidiary of Fairchild Camera & Instruments on the East Coast. There, Robert Noyce and Gordon Moore couldn’t handle the limitations placed on them by their mother company, and decided to abandon the company to found Intel. The decision to start up, which was uncommon at the time, was enough to transform the local ecosystem into the largest growing innovation economy in the world. You can find a summary of their story here.

These three cases perfectly exemplify the process of constructing an innovation ecosystem. First, get the ideas, talent and money. Then weave a network of relationships that connect them. But, there is one final step that is necessary to make the system self-sustainable, known as the entrepreneurship acceleration cycle, summarized below.

It all starts with the entrepreneur, and it must all continue with the entrepreneur. Time has shown that all the public initiatives that have tried to create innovation ecosystems that were not based on the entrepreneur have been artificial. To make the ecosystem sustainable, it is necessary for entrepreneurs to go through the startup lifecycle successfully, and to stay in the ecosystem creating new projects, investing in other initiatives, and helping other entrepreneurs to be also successful. This creates a self-fulfilling cycle that attracts ever more ideas, talent and capital.

1. SystemicUP was born in the Basque Country, an international reference in the cooperative movement.
2. Disclaimer: I am a co-founder of SystemicUP.

What is an organization based on people?

Innovation in organizational models has introduced new concepts and expressions in the language of business that specialized media have worked hard to make popular. However, all too often, the market and competition exercise an invisible pressure that pushes companies to hoard these new terms and wildly incorporate them into their discourse, believing that this way, they’ll project an innovative and avant-garde image of their organizations. The generalized habit of this practice ends up creating media noise, where a small minority is truly honoring innovation, and a great majority are pretending. So, how do you tell them apart?

Framework influences perception

I often fantasize about having a list of questions, or a checklist, for each innovation which would allow me, when in doubt, to separate the wheat from the chaff quickly. In this post, I set out to create one, with keys to differentiate those organizations that are truly based on people, and those which are not.

However, due to the scope of the concept company based on people, before drawing up that list, I’m going to go deeper into its meaning with a very daring exercise: exemplifying the process of adopting a concept from two opposing perspectives:

  1. From the traditional company point of view. That is, a manager operating from within a mental framework based on the current company model.
  2. From a new systemic point of view. That is, a person operating from within a mental framework with a wider perspective, where the company is one more element within a system in which in necessarily needs to collaborate and keep other actors in mind.

To do so, before digging into the assimilation process from the different mental frameworks, it’s necessary to understand the importance the framework itself has on how we process information. There are three fundamental truths regarding this:

  1. the existence of the framework itself. The mental structures that make up the framework through which we see reality are made up by our accumulated experiences and beliefs. Being aware of its existence allows us to relativize our understanding of reality, and, if necessary, change the framework. That is, it allows us to choose, and therefore makes us freer.
  2. the framework sets our way of feeling, seeing and doing. The beliefs and experiences that make up the framework influence how we perceive reality when we look through it. That is, it influences what we feel, think, and do when we’re interpreting a new situation.
  3. if we don’t choose our own framework, we unconsciously adopt the one that’s culturally accepted. It’s a truth that we all see the world through a framework. If we’re aware of that, we can build one based on our values and beliefs. But if we’re not, we’ll unconsciously adopt the one that’s socially accepted by those around us. That is, without knowing it, we’ll take on the beliefs of others as our own.

Now, let’s look at the influence of the framework on each of those cases.

The traditional perspective: accumulative improvement

Third point above, the unconscious adoption of a framework, is probably the most common and most interesting to analyze. If this is the case, the question to ask would probably be: what is the socially accepted framework through which we look at companies?

To answer that, we’ll have to go back to the end of the 19th century, when in a context of exploding population and demand growth, engineers Frederick Winslow Taylor and Henry Fayol introduced an innovative administration model for the time. Until then, it was believed that the worker was the one who had the most accumulated experience on the production line, and therefore he was trusted to organize the work as he saw fit. But under the pressure to increase production, this belief was discarded to make way for a new one in which the most efficient way was to simplify and specialize the tasks in order to reduce time and errors, and to also make it possible for more workers with fewer skills to take on the tasks that had now been defined and simplified.

Among other concepts, this process brought about the rise of the hierarchical organization, the division of work into departments, specialization, bonuses for reaching goals, the definition of the best practice of administration based on planning, organization, management, and control. Despite the fact that, in their origin, the principles that motivated these practices were praiseworthy and made sense back then, with time and especially with the evolution of the socio-economic context, they have become limiting, if not outright obsolete.

Therefore, the socially accepted mental framework that we look at companies through today was created over a century ago, in a context in which factories worked as closed systems, disconnected from the outside, where activity was organized based on a purely technical and economic vision, which turned companies into machine divided into pieces that labor (or handiwork) ensured worked.

It’s important to highlight that businessmen, managers, and people who are not aware of their company-minded framework face the analysis of the new concept based on people with all that baggage that comes with these beliefs and models that have been instilled in the collective unconsciousness over the past century. In that consciousness state, the adoption of this innovation is doomed to have to fit into the current model. That is, since the interpretation of the innovation has no meaning in this century-old model, it’s molded and adapted until it’s forced to be coherent with the current model, thereby corrupting the original concept and turning up the noise.

Following this line of thought that does not reconsider the model, the interpretation of the concept based on people produces new terms and semantics that, from that perspective, make sense, but which have very little to do with their real meaning. For example, the area of Human Resources (the use of the word resources makes clear the mental framework), pushed by social progress, has acquired, in this context, ever more relevance, going from an administrative role to a more strategic one. However, despite having advanced in terms of training, the development of talent, benefits, etc., they’re all constrained by the traditional mental framework. And that’s how we end up with expressions like human capital, personnel, etc., which are nothing more than attempts to advance, but which are still synonyms born from the same technico-economic vision from the 19th century.

So, it’s clear, the improvements that can arise in this process are accumulative, and the value they add is limited by the model itself.

Systemic perspective: a radical change

The main virtue of the systemic perspective is being aware of the existence of the mental framework and its influence. It also understands that the company is in a symbiotic relationship with all the other systems, with which it must necessarily relate and cooperate; among these are other organizations, society, the planet, etc.

Of the awareness of the interdependence arise two new ideas:

  1. when going from an individual focus to a collective one which implies keeping in mind the interests of all the systems, the only possibility for understanding an organization is focusing on people, because in the end, everything is being done for their development and well-being.
  2. if the organization is not based on people, it turns into a parasitic system, because its objectives are no longer pursuing the sustainability of the whole. This instability will, sooner or later, bring the system collapse.

Bearing the above in mind, it’s not odd that, from a systemic mental framework, questions start being asked that give new meaning to organizations. Why are we creating this organization? What are the principles and values that will guide our activity? How are we going to be environmentally sustainable? How are we going to have a positive impact on society? What are the structures and practices that are best for maximizing people’s potential?

Unlike the traditional focus, where innovation is limited to adapting the concept to the established framework, in this case, all that is put up for close inspection:

  • what should the relationship between property and workers be like in order to encourage the development of the whole organization?
  • how do you divide the power in an organization to encourage the maximizing of people’s potential?
  • what organizational structure is ideal to get people to develop, collaborate, and communicate?
  • what should work spaces be like in order to favor authentic relationships between people?
  • what culture and practices help improve the commitment and creativity of people?

Each organization needs to find its own answers that are adapted to the singularity of the people who make it up and the goal being sought. However, thanks to the advances in neuroscience and psychology, what is ever clearer is that the structure of the current company, unaltered for over a century, is incompatible with the development of people and social, economic, and environmental sustainability. Furthermore, it doesn’t adequately meet market needs.

Although there is no magic recipe that works for all organizations, there have been advances regarding principles, values, and alternative practices that are aligned with the concept of an organization based on people. Some of the most important are:

  • systemic vision: Moving away from an EGO-system, which only seeks to benefit self-interest, towards an ECO-system, where all the related people and systems are born in mind to pursue the sustainability of the whole.
  • integral vision. In addition to the traditional economic and technical dimensions, we must also add the human one, which becomes the center of organizations. This implies bearing in mind the values, principles, and emotions of people and, because of this, placing great emphasis on the relationships between them.
  • autonomy. Power is democratized and therefore the hierarchies that structure them are eliminated. People manage themselves and are responsible for the commitments they take on with other people.
  • transcendence. People only try to make big changes that can be achieved only with the synergies obtained from combining the abilities of many people. They look for a meaning that transcends their abilities as an individual.
  • development. People need to feel that they are developing in every sense, and the organization becomes a space where this is not only possible, but encouraged. The more people develop, the better organizations, ecosystems, society, and the planet are.

Based on the above points, the following supporting practices can be derived:

  • transparency. Autonomy is not possible if there isn’t complete transparency of all the information an organization has with the people that make it up.
  • organizational decisions. When decisions are being made, all affected people need to take part in that decision-making process, since it is they who have the authority to do so. If strategic decisions need to be made, the whole organization will take part.
  • measurement. You can’t tell if you’re improving without measuring. Once the indicators that will measure the organization’s progress toward its goal are agreed on, they will be continuously measured and shared with everyone. This way, both the organization and its people will know where they’ve been, where they are, and where they’re going.

In addition to these practices, there are many others that allow all the effort of the people to align with the principles and values stated earlier. Unlike the traditional focus discussed in the first section, here the praxis is focused on creating and maintaining the best relationships possible between all the people in the organization.

Conclusions

As usually happens with every disruptive innovation, the term based on people requires a certain mental framework to be completely understood. Otherwise, the concept is reinterpreted to be coherent to the established model, and it loses its power to transform. In this case, the key to getting the right mental framework is consciousness.

Consciousness is the sum of the knowledge that something exists and the attention we pay it. Specifically, it’s about being conscious of the collective, which forces us to modify our relationships with ourselves, with others, with society, and finally, with the planet. All these relationships have a two-way influence, which we must now pay adequate attention to.

Nevertheless, the process will be slow. Only when the most innovative organizations adopt this innovation and can show their notable improvement will other, more conservative organizations, take the same step. And so on and so forth until the innovation is completely adopted, at which time it will cease to be new and will become the established model. With the growth of a collective consciousness, organizations’ modus operandi will transform into the symbiotic coexistence with change, operated by and for people, which will end up being an unprecedented social advance.

The impact of this innovation is even greater, because it means innovating people themselves, as, in the end, we’re the only ones who can create innovation. What’s more, it arises from the growing demand of society, even more so in the younger generations, such as the millennials, who are already adapted to the current social context and are demanding a different way to live. This means that this innovation does not arise from a market demand, but from a social demand, with must greater implications that companies will progressively have to face.

Checklist for organizations based on people

Finally, below, I propose what I promised at the beginning of the post: a checklist to see if a company is really based on people. It’s easy to use. Ask for the concepts in the middle (gray column) and depending on the answers you will distinguish them.

The role of startups in the emerging paradigm

The current socioeconomic model is reaching its limits [1]. It’s beginning to break down, causing collateral damage that none of us wants, but which increasingly affect us. The planet has reached the limit of the CO2 that it can handle, causing a greenhouse effect and global warming. We’re reaching the limit of inequality, with just 1% of the population holding 90% of the world’s wealth, causing massive migration from less developed countries. The speculative economy is also reaching its limits, representing 7500% of the real economy, and negatively affecting it. Technology is more focused on reducing the symptoms rather than finding sustainable solutions to the problems they’re generating. We citizens are reaching the limit of consumerism, confusing it with happiness and wealth, causing unhappiness, superficiality, depression, and other conditions. And, unfortunately, governments can’t do anything to rise to these challenges because they’re still held back by the model, unable to transcend it and to find new approaches. In summary, we need a new, sustainable model that solves the current socioeconomic model’s problems.

We need to expand our vision

But where to start dealing with such a challenge? Many authors turn to systems theory to get the broadest view possible of what’s happening. Following this line, if we assume that the planet is a system, understanding how it works from this new prism can provide new keys that will help us in building a new model. For that, briefly, it’s enough to know that all systems are made up of components that are dynamically related for a common purpose. These relationships between components make up structures that are what provide an order to that system in order for it to fulfill its purpose. On the other hand, there is a set of processes that define the behavior of the system and regulate its life cycle. What’s more, systems have the peculiarity that when they’re created, new properties emerge from their component parts, suggesting a synergetic relationship where the whole is more than the sum of the parts.

From a composition point of view, if we analyze the components that make up systems, we’ll see that they’re actually subsystems. Also, if we get even more abstract, we’ll perceive that our system is actually an element in a more complex system. Therefore, if we examine any system, we’ll observe that it’s made up of its own subsystems that are in turn made up of even more subsystems. Therefore, like a matryoshka doll set, we can go from the scale of the solar system down to the subatomic particles of a flower on earth, following all the relationships that join them together.

If we apply the system theory to the current socioeconomic model, we’ll quickly come to three realizations:

  1. Everything is connected, meaning that every action in one system affects the other systems.
  2. The relationships between components make up structures that give order to the system.
  3. The systems provide more value than their individual components separately.

Our socioeconomic model is an ego-system

The main problem with the current socioeconomic model is that it does not take into account the impact of its actions on other systems, causing all those issues mentioned at the beginning. And who is responsible for this? Well, if we analyze it in terms of a system, we find that the components that make up the current socioeconomic model are people. And the structures that give order to the system are our relationship models. And what is the purpose of the system? What are the processes that define its behavior? Who defines them? In the current socioeconomic model, the processes are created by very small and well organized groups (lobbies), with their own interests, which they systematically impose on other groups that, due to their size and asymmetry, can’t effectively organize (citizens, consumers, etc.). This centralization of power ends up with a purpose that does not represent the common good, and, what’s worse, is generally unknown.

In this situation, in which we the people are not aware of the purpose of the systems nor the negative consequences it produces, we live in a kind of nebulous flow that takes us surreptitiously towards a destination we do not choose. In this progression, we do not make decisions consciously, but we inevitably make them unconsciously. Or, as happens in this case, the decision-maker is the collective unconsciousness, accepting what the model prescribes, which means following a route set out by the lobbies. The result is that this unconsciousness creates hidden dynamics that come to be materialized in reality as negative consequences, such as those mentioned before. The big problem that underlies this situation is that, since we’re not aware that we’re connected, we don’t think about the complexity of the relationships between systems or their impact. All this leads to a conclusion that has to be faced sooner or later, and that is that the people responsible for the negative consequences of the current socioeconomic model are the unconscious people. And if we don’t do something soon, the system will collapse in order to re-arrange itself once again.

The current alienating situation

But how did we get here? This is actually a normal situation in the process of social evolution. Experts say that social progress is the result of the interaction between the social challenges that arise and the solutions to them. When social powers can’t give creative responses to challenges, there is a replacement of structures, where new ones substitute the obsolete ones. These changes never happen gradually, but rather usually abruptly. That is to say, the system balances itself out when the common purpose does not represent the vast majority. And we are now in that precise moment, with challenges that the current socioeconomic model cannot solve, and wherein new structures are emerging.

The structures that need to be modernized, that is, the ways that we related to one another until now, are the fruit of several social evolution processes that are heavily marked by the industrial revolution. A clear example of that is education. Schools and universities are designed to produce people who respond to the needs of companies, rather than to the needs of society. That’s why there’s so much emphasis placed on learning scientific subjects to the detriment of the arts or humanities, where people who possess deep knowledge of one specific subject while having a limited view of society and relationships.

These people will then go into companies where the best will rise through the ranks to accumulate status and money, the symbols of success of this model. Those who are less well adapted to the companies’ demands will have to settle for dedicating a set number of hours a day to doing a job the management wants in exchange for a salary to live on. The companies themselves compete amongst themselves for shares in markets that quickly get saturated, without bearing in mind the collateral effects of this on the planet or on society. All of these attitudes have something in common: an egocentric viewpoint that prioritizes the benefit of the individual, or the company, forgetting the remaining components of the system. And this inertia will continue until the consequences of the model affect the most developed countries. While the secondary effects occur far away in space and time, we will continue on, immobile and unconscious, accepting the alienating and egocentric character of our modus vivendi as normal. That is, we’ll continue living in the nebulous flow.

A new vision: startups as change makers

So what’s the solution? The solution is a socioeconomic model with a systemic viewpoint, that bears in mind all the components of the system and their relationships. That is, how we relate with ourselves, with others, with the community we live in, and with the planet. Only by keeping everything in mind will we be able to transcend the current socioeconomic model, correcting the collateral effects and building a model that guarantees the common good and sustainability.

However, to build this new world, we have to wake up. We have to look up and be aware that we belong to a system in which we necessarily have to relate with one another, and collaborate with others to make the system sustainable. Unfortunately, this process only occurs in one of two ways: either people go through a life experience which forces them to look deep inside themselves, which almost always brings with it a complete reordering of values which then leads one to search for alternatives to the current model; or, they received an alternative-style education and/or possess a special sensibility and insight that allows them to perceive this new paradigm intuitively. The rest will only be mobilized when the first create a new model that makes the old one obsolete or the system collapses.

In this sense, many of us entrepreneurs want to create a culture that favors autonomy, evolution, and the purpose of the people who make up our startup. Nevertheless, if we’re able to widen our horizons, we can achieve so much more. We can participate in this change, and build a socioeconomic model that’s fairer and more sustainable. To get it, we must transcend the status quo and design a new company paradigm with a systemic viewpoint. If we do this, the startups we create today will be the organizations of the future, with projects specialized in different domains and oriented to the common good. Professionals will be conscious people who will choose these organizations according to their purpose and values, and they will get involved with them by collaborating and contributing value, while at the same time developing their skills and vocation. They will be sustainable systems, truly based on people who relate completely naturally will other systems to create synergies. Bur for that, we must first face the biggest challenge of them all, evolving the way we relate; that is, evolving the human race. And there is no doubt in my mind that this is the most disruptive innovation possible, because, in the end, it’s the one that leads to all the rest.

Notes

1. Authors Otto Scharmer and Katrin Kaufer describe, in great detail, what they call version 3.0 of the socioeconomic model. In this paragraph, I briefly highlight the most relevant points.

Keys for distributing equity

Regardless of the type of corporation of the startup, there inevitably arrives a moment when the development team has to decide how to distribute the company’s political and economic rights; that is, what percentage of the company each partner gets. On many occasions, be it because of the pressure of getting financing, or to avoid uncomfortable conversations with your partners, or due to a pure lack of awareness, the division of the company is done in a very unprofessional way. My experience is that the mistakes made in distributing equity become enormous internal problems in the future which can take the company up a dead-end alley that, in the best-case scenario, requires traumatic solutions that require people to come in or leave, or, in the worst-case scenario, ends up closing the startup.

After having gone through this situation personally, and having lived others’ up close, in this post I’m going to share some keys that have helped me understand and establish a tried method to not only avoid these situations, but rather to make sure your startup has an attractive cap table, referring to the distribution of property among the partners, which allows for growth and the incorporation of new partners without any setbacks.

The value of the company is called equity. The ownership of this value is distributed among the partners via shares or equivalent term depending on the type of the company. Without getting into formal judicial definitions, what’s important from the point of view of the entrepreneur is that you’re distributing the value of the company. Specifically, the equity of a startup represents its future value. This idea is fundamental for understanding the spirit with which its allocation should be managed. Therefore, if this means distributing the potential future value, it will be necessary to identify who is going to contribute value and distribute the ownership equitably between them. Here again, the term equitably is essential, because if the distribution does not represent the value to be contributed by each partner, problems will arise in no time. It’s not a coincidence that the value of the property is called “equity”.

But the question here is, how to quantify the value? To help us identify and quantify the value of the contribution, I turn to the startup value chain. According to this model, the value is divided into five intimately related sections:

  • vision.
  • execution.
  • customers.
  • financing.
  • leadership.

Attending to each division, and knowing that the five elements are necessary, it seems reasonable to distribute a priori 20% of the equity to each of them, while obviously being able to adjust the weight for each specific case. In my experience, this simple criterion is what most faithfully represents the process of creating value in a startup and is the most effective in the long term.

However, even though this distribution model is useful for the initial distribution among the entrepreneurial team, it’s a good idea to bear in mind that in the future, there are going to be investing partners, managers, and key employees. Below, I’m going to go deeper into this model so that everyone can fit in.

Overview of equity distribution

The simplest and most conventional way to divide equity is in three big groups:

  • founders.
  • investors.
  • employees (options pool).

When creating the company, it’s most likely that the founders will have 100% of the equity. As time goes by and the startup grows, the founders’ share will be diluted (they’ll get a smaller and smaller percentage of the company) because they’ll cede it to new investors and employees. As the startup grows and incorporates new partners, the founders will continue to get an ever smaller share until the time comes when the majority of the ownership is in investors’ hands.

During this period, it is supposed that the company will have increased in value, and the founding team will have gone from having 100% of something that was worth very little to having 20-30% of something worth quite a lot. The crux of the matter is to always bear in mind that as long as the company wants to continue growing, equity must represent the future value to be built. And here, value does not mean economic value. Although in the end the equity will be quantified with money, actually, it is the consequence of offering the value produced in the startup to its customers.This second value, which is none other than the construction of the vision, is the essence of your startup and has the potential to transform reality and the world.

How to distribute among the founders

Once we’ve divided up the equity between the founding team, the investors, and the employees, and we know what percentage to apply to each group, we’re going to divide up the pie piece given to the founders. For this, we again turn to the startup value chain. The first step is to weigh up each one of the five links. This will depend on the type of startup. If, for example, it’s a one with a large technological base, the execution area should probably have more weight. In any case, this decision must be taken by the founding team, as it is the team that best knows where the company’s greatest challenges lie. The next chart shows each with a weight of 20%, that is, the founders have decided that each of the areas is equally important.

The next step is for the founder team to agree how much each one of the founders contributes to each one of the five links. This is a very important conversation, which must be entered into with integrity and sincerity. In general, the startup will come out of this meeting stronger, with aligned vision and expectations. The exercise is done by assigning ten points among the developers to be distributed among the different areas. For example, in the above chart, you can see that of the 10 points for vision, 7 are contributed by Founder 1 and 3 by Founder 2, and that Founder 3 contributes nothing to this area. The total for each area must add up to 10. Depending on the calculations for each link, and what each founder contributes to each, we’ll have what percentage would be a fair distribution for each founder (the last row of the table).

It may also happen that you all are surprised by the value each one thinks they contribute to the startup. If the conversation gets difficult, and it’s taking you too long to reach a consensus, it’s not worth it to try to force the situation. In any case, it’s unlikely that the startup can survive such a circumstance.

How to distribute among the investors

The share that each of the investors gets is a rule of three between the money they invest and the value of the company. That is, if your startup is valued at €800,000 and the investor invests €200,000, they will receive a share of 200,000 / (200,000+800,000) = 20%. The value of your startup before the investor adds their money is called pre-money value, which in this example would be €800,000. The value after the investor’s entry, that is, after the close of the round, is called post-money value, in our example, €1,000,000.

Obviously, calculating the percentage that belongs to each investor is very simple. The big challenge is trying to convince the investor to invest in your company and agree on a value. This process is complicated and can take between one and six months, including pitches, metrics, business plans, team meetings, due diligence, etc. Going back to the 5 links in the value chain, an investor contributes primarily to the area of financing, and probably also to marketing, with their network of contacts, or even to leadership if they have entrepreneurship background. According to how the five areas are calculated, and keeping a clear image of what the investor is contributing, this will give you a percentage to negotiate.

Another key part of the negotiations with investors is the partners’ agreement, which defines and regulates the rights and duties of the partners, their share in the equity, the administrative bodies, and everything that has to do with the workings of the startup. The partners’ agreement is a concept that is sufficiently complex enough to warrant several articles. I mention it here because in addition to what we talked about earlier, it also defines the type of shares that each partner has. Not all shares are equal; there are several types:

  • ordinary. These are normal; they give the bearer the right to vote in the Shareholders’ Meeting and to the profits corresponding to the percentage of equity.
  • preferred. These have the right to receive dividends preferentially, which, depending on the partners’ agreement, can be accumulative (if no dividend is paid, it is accumulated into next year’s). However, they may not have the right to vote.
  • silent. They don’t have the right to vote in the Shareholders’ Meetings, but they usually have the right to a minimum dividend.
  • privileged. These give greater voting rights to their bearers, meaning they have more decision-making power.

Therefore, when distributing equity, you have to keep in mind the type of shares and the partners’ agreement. My advice here is still the same. The distribution of equity, the rights, and the duties have to line up with the building of future value, as well as the common good of all the partners and employees. I’ve seen partners take advantage of the ignorance of other partners in legal matters to tip the balance in their favor, hiding their strategies behind complex partners’ pacts, or documents that were too complex and therefore not clear enough. My opinion is that this type of positioning that tries to find an advantage in the negotiations is not a smart move, since an unfair distribution of equity or a lopsided partners’ agreement towards any of the parties will always eventually come out and destroy the startup. Really, these attitudes arise from a lack of confidence in the founder team, of wanting to overprotect oneself by assuming less risk than the rest or by thinking that they contribute more value than they really do. As when distributing among the founders, these differences must be resolved with integrity and transparency, remembering the shared future that all want to create.

How to distribute among employees

It’s a good idea to reserve part of the equity to attract talent later on and compensate them with part of the company. This piece of the equity pie is called the option pool, because normally they’re a group of options about the share of equity. This means that equity is not directly granted to the employee, but rather that the employee is going to earn it in a period of time that is normally between 1 and 3 years. If the employee stays in the company that whole time, they will start to own equity. If for any reason they abandon the startup, they’ll lose their options. This resource is quite a common way to compensate the employees’ commitment.

Nor are shares given to all employees. Normally, this type of remuneration is proposed long-term to people who it is supposed will contribute most to the startup. As time goes by, the options that are offered are fewer, because the uncertainty of the startup, and therefore the assumed risk, is also smaller. For example, you could consider this option pool plan:

  • managers (CEO, CTO, CMO, CFO, COO): 0.01-10%.
  • mentors, counselors: 0.01-2%.
  • key employees: 0.01-1%.

In the case of managers, it is understood that they do not belong to the founding team but rather that they are hired later on. That is, if the founders already occupy the jobs of CEO, CMO, and CTO, these options will not be added to their equity. The necessary managers will be hired, offering them between 0.01% and 10% of the option pool, depending on their experience, their knowledge of the business, contacts, etc.

Consequences of a poor distribution schema

As I said at the beginning of the post, when the equity is not distributed equitably according to the future value to be contributed, sooner or later this imbalance will emerge, and will become a black hole that absorbs all the energy of the developers and partners. Some examples are:

  • A partner who is not in the founder team has the majority of the shares from the first round. The problem is that investors invest in people’s talent. And the only way to guarantee a long-term commitment of the talent is to give them a significant percentage of the equity. If the founder team does not have the majority of the equity, the investors in later rounds will mistrust in their commitment and will not invest, closing the door to private capital.
  • One of the founders with a greater share disagrees with the vision of the CEO who is also a founder. The problem is that the startup ends up having two heads with two different strategies. If the problem is not solved in a prudent amount of time, the five value creation areas will need to be looked at again, to see who contributes more to the startup. Normally, this situation ends with one of the partners leaving and their part being bought out by the rest.
  • A founder has stopped believing in the project after a year and decides to stop being an employee, but continues to be a partner. The problem is that if the founder doesn’t sell their part to the rest, they leave the company without the ability to substitute them with new talent, which makes the startup less attractive.
  • There is no option pool. If the startup can’t offer equity, it dramatically reduces its ability to hire new talent.

When a startup gets to one of these situations, the solution is to redistribute the equity according to the future value to be contributed. However, to make this possible, all the partners must understand the spirit behind equity. And they must understand clearly that if the problem is not solved, the company will end up closing. The maxim that the small percentage of something highly valuable is much better than a large percentage of nothing takes on more meaning in this situation.

The Startup value chain

After having created several startups, and having seen and analyzed hundreds of them, and especially after making so many of the same mistakes we entrepreneurs always seem to during this complicated process, I’ve learned that, on too many occasions, startups don’t make it due to avoidable mistakes.

In most cases, what’s missing is some basic education about what a startup is and what minimal elements need to be guaranteed in order for the startup to fulfill its mission. I’ve seen too often how the lack of this overall perspective makes entrepreneurs spend more time dealing with “noise” that this lack causes than trying to show that the startup is viable.

Despite the fact that many excellent books have been published on this subject, I’ve always noticed the absence of a simple pattern to follow. So, over time, I’ve conceptualized a very simple model that’s helped me to have a good overview of what a startup is.

My experience and that of my entrepreneur friends has shown me that if you don’t have and don’t understand the five links of the value chain that make up this model, sooner or later problems will arise that will put your startup in danger. And unfortunately, you’ll use up all your time and energy trying to put out fires instead of devoting them to the vision that got you to start up a new business.

I’m afraid to say that following this model will not ensure success. I wish. In order to have success, you have to solve a relevant problem by radically improving the market’s predominant solution. According to Ben Horowitz, “radically” means that you have to do it at least ten times better. If you have a product that’s only two or three times better, you won’t get customers to change over to your product fast enough or with enough volume. When you have a product that’s ten times better, then you have to conquer the market.

What this model does provide you with is an overview of the resources that will avoid the collapse of your startup while you’re trying it. This vision should become the framework through which you lead your project.

The 5 links of the value chain

This model is based on five elements or links that form the value chain of any startup:

  • vision.
  • execution.
  • customers.
  • financing.
  • leadership.

In order for your startup to have a chance at success, you need to respond to these five aspects, and to especially understand how they’re related. When you’re clear on this, it will help you make up an appropriate team, to know what each member provides and how much value it is worth, and that in turn will serve to clear up how you should distribute your company’s equity, which will later help you to talk with investors as a professional, along with other aspects I’ll be explaining in future articles. Let’s take a look at them, one by one.

Vision

Even today, I still find people who confuse the vision with the idea. They think that the idea is everything, and therefore refuse to share it, fearing someone will steal it. This attitude is the clearest example of the lack of knowledge of how a startup works, and therefore, of the startup value chain. If a startup is going to thrive, it must successfully cover all five links. The idea is only one of those links, which means that in the best of cases, with an idea all you’ll have is one fifth, or 20%, covered. However, what you actually have is nothing, as I’ll explain a bit later.

What’s more, the idea is not the same as the vision. The idea pops up when several points align in your head, and a spark turns on that little light bulb: Eureka! The idea is a necessary condition, but not sufficient. On the other hand, the vision is the idea with context, which is the argument why that idea makes sense. In this argument, you need to explain what goal it’s pursuing, what differential advantage it provides, why it makes sense now, what target demographic it’s aimed at, etc. From this vision, your pitch will come.

Therefore, instead of keeping your idea secret, what you should do is shout it out from the rooftops. And you should do it with an attitude of continuous improvement. Use the feedback you get as an opportunity to improve your vision. Constructive criticism, even destructive criticism, will help you find your weak points and to develop a more solid argument. The next time someone gives you the same feedback, you’ll have a better response. The quality of your vision is directly proportional to the amount of feedback you get.

Execution

Execution is the ability to develop the solution that you propose in your vision. Depending on the type of startup you’re creating, your ability to develop your product or service will be greater or lesser. For example, projects with a technological base will require a team of excellent engineers, with demonstrable experience in similar projects that will guarantee the technology gets developed. On the other hand, if your project is based on logistical services, you’ll need an expert in logistics. What you need to ask yourself is, What is the minimum viable product I need to get my first customers? Do I need them all at the beginning or can I incorporate them as the startup grows?

An important factor to keep in mind is that entrepreneurs must be experts in the core matters of their startup. For example, in the earlier examples, include a technology developer or logistics expert who shares your vision. It’s suicide to delegate the core of your startup to third parties. No one knows what you need better than you, and no one is going to put in as much time, energy, and precision as you will when developing your product or service. I’ve seen a lot of startups freeze up or burn out because the business’ core was handed out to third parties who didn’t meet expectations. Don’t delegate your core business.

Customers

This link refers to the ability to specify, detect, and acquire the customers who will use your product or service. In my experience, this link is by far the least worked on by startups, especially technology ones. As with execution, depending on the type of product or service you’re developing, the search for customers is going to be very different. For example, it’s very different to get customers for a B2B model than a B2C model, or an SaaS business when compared to a traditional one. Each one has its own channels for reaching customers. Nor are all the necessary profiles the same. If you’re creating an e-commerce site, you’ll probably need growth hacking, inbound marketing, etc. If you’re creating a video game for a console or a PC, you’ll need a PR person to connect with publishers and platforms, etc. The questions you need to ask yourself are, Who is my target market? Who knows how to reach those customers? How much will it cost me to reach them?

Make sure you include someone on your team who can answer these questions, and who has done so in the past. Again, I’ve seen many entrepreneurs think about customers when they’ve already created a product, with the consequent frustrations and unhappy endings. I’ve even seen entrepreneurs who don’t even want to discuss customers until they have a completely finalized product. The risk these traditional waterfall-type approaches take is that they may find out, after several years of development, that the product doesn’t interest anyone, or that they’ll need another year to get it into the market, and they don’t have enough financing. Nowadays, there are a multitude of agile methodologies, like Lean Canvas, which emphasize finding potential customers early on, in rapid development cycles. Use them.

Financing

Financing is probably the easiest aspect to understand because its impact is felt from day one. You notice when you’re not making any money. The most common thing to do is to create a growth hypothesis, where, in addition to defining how you think your revenue will grow, you also reflect how much financing you’re going to need over time. The responsibility of this link is to guarantee the financial viability of the company under all circumstances. Here, the questions to ask are How much money am I going to need to create the first stage of my startup? How am I going to get it? Should my financing by private, public, or a mix? How much am I going to need for the later stages? How much can I burn through in a month? How much time do I have left with this money?

As with the other links, depending on the startup, the financial needs and the ability to get that financing will vary widely. So, for example, securing public financing, with its requirements, amounts available, preparation time, and conditions is very different to securing private financing with investors or bankers. It will all depend on your needs. The most important thing is, once you know how much money you’ll need, you’ll need to figure out how you’re going to get it. If you opt for private investors, you should know that it’s a full-time job and you’ll have to plan well. Therefore, you need a team member with experience in fundraising, or a mentor who can guide you.

Leadership

Leadership is the ability to align and coordinate the work of the other links in order to grow your startup into a big company. There absolutely must be at least one project leader who will be the person who provides the official face and voice of the company. Leadership is a tremendously complex concept, but an imperfect summary would be that the project leader has to: be comfortable in situations of extreme uncertainty, have a well-developed ability to communicate and persuade, have a lot of emotional intelligence, have the ability to prioritize tasks quickly, have the ability to make difficult decisions, have a strategic mindset, and know everything that’s happening inside the company and out, promptly. The team leader must be able to create a free-flowing communication network between all team members, to implant agile work methodologies that provide measurable knowledge, to define the company’s vision and mission, and to stimulate and maintain a company culture that is based on the values of the startup. Take that!

The links don’t add up, they multiply!

The fact that there are five links doesn’t mean you need five people. What’s most common in the initial stages of a startup is that there’s one person in charge of several areas. It’s very frequent for a promoter to cover the vision and the leadership, and perhaps even the financing. And then there are two other people, one for customers, normally with a marketing background, and another for the execution, normally with a technical background. However, the distribution will depend on each startup and each team member.

The most important thing about this model is not the identification of the five links of the value chain, but rather how they’re related. The vast majority of first-time entrepreneurs are fed up with hearing about the importance of covering these areas, but most of them don’t get that these links don’t add up, they multiply! That is, most think that each link adds up between 0 (the link is poorly covered) and 1 (the link is perfectly covered), so if a good team is put together, 1+1+1+1+1=5. So, for example, if my marketing person has never actually done marketing before, but is my cousin and is eager to work and learn, well, that’d add in a 0.4, making 1+1+1+1+0.4=4.4. Not bad, right?

Unfortunately, it doesn’t work that way in reality. Teams are not ruled by sums. If one team member fails, everybody fails. A chain is only as strong as its weakest link. If a link is broken, the chain will no longer fulfill its function. Startups work the same. What I’m trying to say is that the values don’t add up, they multiply. So, in our example above, with our cousin the new marketing graduate, it’s not 1+1+1+1+0.4=4.4, but rather 1×1×1×1×0.4=0.4. So now, our best possible result is 1×1×1×1×1=1, and our worst 0×0×0×0×0=0. So a 0.4 would be just under a passing grade of 50%, simply because one link is not adequately covered. So, what happens with startups that haven’t covered all the links of the value chain? Well, anything multiplied by zero is zero. You can have top people in the other areas, but if one fails, you’ve got nothing. It’s that simple, and that tough.

Therefore, the value of this model is not only that it’s necessary to cover the vision, the execution, the customers, the financing, and the leadership, it’s also in that you need to cover them all masterfully. Any deviation in any of the links will directly affect the whole startup, be it positively or negatively.

Next steps

Once you know what areas you need to cover, and the vital importance of doing so adequately, you suddenly realize you’re unconsciously identifying which people are providing the most value to the company, and you can even quantifying it. This matter will be fundamental to deciding how to divide up the company’s equity, define bonuses, give out stock options, etc. We’ll deal with these topics in future articles.