Uber and Carnegie Mellon and Pittsburgh

Richard Florida wrote series of tweets on the recent news that Uber as 'poached' around 40 senior researchers from Carnegie Mellon University. CM has a fantastic reputation in robotics and automation research and is one of the leaders of work on autonomous cars. Uber has made no secret of its interest in automated cars in order to disrupt the 'poor immigrants get a foothold in a new country' market'. The article he was responding to sees this as a problem: Uber has made no secret of its interest in being a leader in the self-driving car market and is throwing its sizeable resources into hiring the best minds in the business. The fact that they set up a research office in Pittsburgh is testament to how great CM is at this. The MarketWatch and WJS article views this as an attack on CM and that by stealing away their top researchers they've weakened the university's robotics program. The point that Florida was making is that there is no reason to see this as a threat. Indeed, that this is the entire point of university research!

Now, before we get going talking about this, I just want to make two points. One, the real market for disruption by self-driving vehicles is the trucking industry not the taxicab market. Two, is anyone else confused about why a gypsy taxi dispatch company is valued at 50 billion dollars?

But, let's put that aside for now. What made me interested in this topic is that I'm currently reading through Christophe Lécuyer's brilliant book on the history of Silicon Valley. It's no surprise that one of the reasons for the emergence of Silicon Valley as a technology cluster was the interaction between local tech entrepreneurs, defence contractors, and researchers at Stanford University.

Stanford was a leading research location for the self-driving cars of the 1950s: microwave radio tubes and klystrons. The highest of the high tech. Varian Associates was the Uber of the mid 1950s, an high-tech, engineer-led company near San Francisco that was beating the pants off of its competitors like RCA. Its secret was hiring physicists with a great theoretical understanding of the basic science and pairing them with the skilled trades people drawn from the region's burgeoning defence industry.

Key to their success were their close linkages with Stanford. These connections went far deeper than just drawing on the tech developed at the university, they hired graduate students and directly funded relevant research. In some cases Varian "relocated its engineering staff to Stanford to reinforce the firm's close connection with the university's research programs" (p. 110)

The same thing happened when in the development of the transistor and microprocessor. The main developer of this technology, William Shockley wanted to hire a Stanford professor onto his company but the professor declined as he was more interested in his academic research. But over the next few years they "reproduced Shockley's laboratory on campus. As a result, Standard was probably the first university to have the capability of making silicon diodes and transistors" (p, 138).

So, what does this have to do with CM and Uber? From the university's view Uber is a threat to their research. They've hired away 6 PIs and it sounds like 30 odd advanced post-doc or phD researchers, which is a huge deal. Those researchers are taking hundreds of person-years of experience out of the university. CM can try to replace those PIs, but even if the new hires are of the same caliber as those who have left it will take them years to get their own labs up and running.

From Uber's perspective this a great thing. By locating their research office in Pittsburgh they've gained access to knowledge spillovers from CM for years but now thanks to the *ahem* ambitious valuation of the company they're in a position to hire on these researchers and become *the* world leader in self-driving cars. From a regional economic development angle, this is great too. Uber's advantage in this industry will grow, helping them create even more high-skill, high-pay jobs.

But the history of Silicon Valley provides some useful insight into this. Lécuyer's history helps me understand something that isn't much talked about in academic research on the role of universities in economic growth. In order of importance, here is the contribution of universities to the economies of high-tech regions:

  1. Producing highly skilled students who go on to work at local companies
  2. Acting as a magnet to attract highly skilled researchers to the region who then go on to work at local companies
  3. Knowledge spillovers from university research to local firms
  4. Academic spinoffs and commercialization of university tech
  5. Students spending lots of money on beer before leaving
  6. Proceeds from sales of CDs from student a cappella groups
  7. Sports?

A University's role as a producer of skilled graduates and magnet to attract skilled workers is their most important role in supporting economic development. Other things like knowledge spillovers and spinouts are secondary at best.

So, on one hand Uber's hiring of CM researchers is great. CM has acted as a magnet for attracting the top autonomous robotics people in the world and Uber is able to take advantage of that.

But by hiring away the PIs, Uber might have killed the golden goose. PIs with large grants and labs are great training ground for new highly skilled researchers. They attract top PhD students and post-docs and help them become world leading engineers and researchers. It's hard to know what the role of these PIs will be within Uber, but if they're not publishing or applying for grants it will be hard to attract the world's best researchers.

In many ways, history tells us that it would be better for Uber to support the PIs within their university labs. Give out large, undirected grants and let the researchers do what they do best. Give them lots of money to bring in more researchers and then hire the best of the best. Encourage spinouts from the university by being a early-stage customer and acquire those with the best product.

So, Florida is right that we shouldn't see this as an attack on the university because this is exactly what should happen. Local companies should hire the best talent that's produced at a university which in turn helps the region develop a stronger knowledge-based economy. But we should also be concerned that by poaching PIs, Uber has reduced the capacity of CM to produce and attract the world's best researchers which at the end of the day does a disservice to them, Carnegie Mellon, and Pittsburgh as well.

Crashing oil prices and entrepreneurship in the oil sector

What an interesting time to be alive. Oil prices have dropped precipitously over the past 3 months. Down from over $100 to around $61 at the moment. There are various explanations for this. Saudi Arabia is trying to pull the rug out of the fraking boom in the US by reducing the profit margin on expensive production sites in North Dakota and Pennsylvania. I like the super geo-political-diplomatic explanation that the US cut a deal with Saudi Arabia to cut oil prices in order to hurt Russia (it doesn't sound true, but maybe it is!) What I'm interested in is how this will affect entrepreneurship in regions whose economies are dependent on oil extraction. For the past year I've been conducting a study about technology entrepreneurship in these sorts of regions. Places like Aberdeen in Scotland and St. John's in Newfoundland. I've just returned from 6 weeks of intensive fieldwork in St. Johns, made all the more interesting by the falling oil prices.

These places tend to have very, very high levels of entrepreneurship and self employment. The hugely capital intensive projects associated with sucking oil out of the seafloor brings in lots of money to the region but it also attracts some of the smartest and best trained engineers and scientists in the world to work on these projects. Entrepreneurs are able to find plentiful opportunities in these sorts of markets — many begin by serving the local market as contractors or sub-contractors on big projects before developing a technology that can be exported to other oil service centres. Think new software tools to manage the flow of resources into projects or submersible technologies that can be used to inspect offshore installations anywhere.

It's hard to figure out what the decline in oil prices mean. In the short term we're going to see very swift retrenchment by the major operators. They're going to cancel projects and lay off workers. But developing an on-shore or off-shore oil field is a major investment that'll most likely be in operation for several decades. You don't make decisions like that on major, but quick, fluctuations in the price of oil. After all, oil is still a non-renewable resource and it's still getting burned off like crazy. The price will return to very high levels eventually.

But in the meantime it will do some major damage to entrepreneurs in this sector. The major oil producers are really, really good at externalizing everything that isn't sucking oil out of the ground and selling it. As far as I can tell with projects in the North Sea, most of the design, development, installation, and maintenance work on offshore rigs are outsourced either to international oil service companies like Haliberton or to smaller local specialized firms. These opportunities will be the first to dry up, the entire point of this system is to be able to quickly drop projects and contractors during periods of cyclical decline. This will not be a fun period for entrepreneurs. Many will fail and others will either see a substantial loss of profits or the need to scour the world for new business.

But I think in the long-term this kind of short term shock can be good for the regions (if not the individual entrepreneurs). The economies of resource regions are tied to the fate of a highly variable commodity whose use will hopefully decline over the next 50 years. Anything that pushes firms to move beyond the oil and gas industry is a good long-term move. For example, I can see lots of maritime engineering firms and subsea technology companies in Aberdeen shift to offshore wind development. These installations require really advanced work to be build and maintained in one of the world's harshest environments. However, the payment for working on these projects is far lower than what they would expect to get for oil projects. When times are good these firms wouldn't have the resources to take on a project like wind power but in leaner times they just might. And by doing this they develop capabilities that can be exported around the world, helping the firm survive and reducing their dependence on the oil industry.

Mapping UK Startups

Since I first washed up on the chalky (more peaty, I guess) British shores, I've been doing my best to get an overview of the geography of UK startup activities. That's my job after all: to figure out where the entrepreneurship hots spots are and why those places are great areas for startups. I forgot about this for a while after being buried in other work and teaching, but I was reminded about this by a recent report by Startup Britain about the the UK's entrepreneurial hotspots. They were kind enough to release the underlying dataset, which was produced by Companies House. The data is a report of how many new firms were registered in every postal code area in the UK.

This data set helped me rediscover the joy and the pain of making maps while watching re-runs of Law and Order.

Plugging the data from Startup Britain into QGIS (a nice, open source GIS platform that actually runs on OS X!) produces a nice visualization of where the UK's entrepreneurs are. UK Startups

This is a pretty diverse geography of startups, but it's about what we'd expect. High levels of entrepreneurship in the Southwest and up into the Midlands, lower levels of entrepreneurship in the Northeast and in the Highlands.

We can make this a bit simpler to get an even broader overview of the UK's entrepreneurial geography. This is an equal area map of the average number of startups in the postal code areas contained within 25 KM hexes I think this is the prettiest map I've ever made.

With this, you can see a very clear pattern of high rates of startup activity in the area between London and Manchester, with fewer activity elsewhere.

But XKCD teaches us that most maps just map population.... XKCD teaches us every lesson.

So, we've got to control for population. This is where I ran into the wall of horrible data collection. It's pretty dang easy to get population for postal code areas England and Wales from NOMIS. But, because of Events over the past 700 years, Scotland gets it's own census and it's not very good at showing what data they have and letting you have it. After several hours of yelling at the computer, I finally found what I needed and could make a map of the number of startups per 1000 people in every area code in the UK (except for northern Ireland, Gibraltar, and the Channel Islands, because I just couldn't bring myself to care.) Startups per 1000 people

This is..... ummm.....less interesting. London is really the only place where we see huge deviations from the mean of 20.66 new firms per 1000 people. Indeed, if we look at a histogram of the log of startups per capita, we see it's really concentrated around the mean. Has anyone writen a history of histograms?

This is because there is a very clear relationship between the population of a postal code area and the number of startups. The correlation coefficient is 78%! This is very apparent when you graph population against startups. The colors! From the graph, it's clear that there are very few regions that have an exceptionally high rates of startups per capita, but there are plenty of regions in the North and the North West which have very low rates.

This is even more apparent when we make a box plot of startups per capita by region. I guess it's more of a violin plot than a boxplot. London does have a lot of areas with exceptionally high levels of entrepreneurship per capita. Of the 6 area codes that have more than 1 reported startup per person, 5 are in London (EC1V, SW1Y, EC4A, W1B, W1S) and one is in Birmingham (B2). I imagine these codes are some weird corporate or historical zones where no one actually lives (maybe just the Queen and her Dogs), which totally throws off the per capita calculation. But even with that, the average startups per capita in London is still significantly higher than the national mean.

So, where do we go from here. The first thing I want to do is try to break this down by industry. In terms of economic development, all new firms aren't created equally. A consulting LLC will likely never employ more than a few people, but a new manufacturing firm can employ many people and export products abroad. We also need to look at firm births as well as death. What regions are gaining startups and which are losing them? We also need more data to figure out what's driving entrepreneurship. High populations do mean more economic activity, but this doesn't help policy makers figure out how to encourage entrepreneurship. We need to look at things like education, levels of immigration and migration, and that fun stuff.

So, I've got a lot of librarians and statisticians to yell at. I want to thank everyone on the twitter-sphere who encouraged me to make these maps, it was a great excuse to learn some new tools and data sources.

Everywhere is an ecosystem

I hate analogies. To quote Britta Perry, "It's a thought.....with another thought's hat on it." Ot, as Ron Swanson said this week, "That's why my favorite book is Moby Dick: No froo foo symbolism, just a good simple tale about a Man who hates an animal" And yes, to answer your questions, I did not exactly excel in high school English classes. The biggest issue for me is when biological concepts are used as analogies for social or economic processes. When we borrow a basic concept from biology, like evolution, we also mentally import a lot of the scientific perspective on that concept that doesn't really apply to the social world. Evolution only occurs between generations, but evolutionary economics allows for change within firms during their lifetimes (who are the animal in this analogy). Yes we still think of firm evolution in terms of spinoffs and deaths. Should we be talking about Darwinian or Lamarkian evolutionary economics? What about Lysenkoisms?

I've been thinking a lot about the problems of analogies in the context of entrepreneurial ecosystems. The term ecosystem is decidedly biological. To quote the hive mind, an ecosystem is a:

community of living organisms...in conjunction with the non-living components of their environments...interacting as a system.

The entrepreneurial ecosystem is a combination of living (hopefully) actors like entrepreneurs, investors, and workers and non-living institutions like social networks, government polices and universities, that contribute to a vibrant entrepreneurial community. At its base, an ecosystem is a pretty good metaphor for what we're looking for, a biological ecosystem. An entrepreneurial ecosystem should be self-sustaining and depend on complex interactions between the various living and institutional components that reenforce and reproduce their functions.

However, the usefulness of the ecosystem concept starts to break down once we think about it a bit more. Much of the writing on entrepreneurial ecosystems are based on the question of how do we build ecosystems in new areas. How can policy makers and community leaders foster the institutions and people that will help build a strong ecosystem the likes of Silicon Valley, Waterloo, or New York City? This is based on the assumption that only a few communities have ecosystems, but we should all be working towards building them where ever possible.

There is where the analogy starts to fall away for me. In nature, everywhere has an ecosystem. There's not a place on the earth (from the atmosphere to deep sea trenches) which don't have some kind of ecosystem. Sometimes these are rich, vibrant, and sustainable ecosystems with lots of components, like those in a rain forest or savannah. Others are thin, with few components and resources, like a desert or the arctic. Some human-designed ecosystems, like those of a sorghum farm, could not exist without continual human intervention and involve a number of species (including bacteria) that you could count on two hands.

From this perspective, instead of saying we should build entrepreneurial ecosystems, we should instead recognize that all regional communities already have an ecosystem. Some of these ecosystems support the kind of high-growth, innovation-based entrepreneurship that we like to associate with successful regional economies. Others discourage entrepreneurship, either because there is no support infrastructure to help people start new ventures or there is a cultural discomfort towards the risks of entrepreneurship. In most cases I imagine, the ecosystem has no positive or negative influence on entrepreneurship, the ecosystem is simply neutral towards starting new firms.

A successful entrepreneurial ecosystem isn't created out of whole cloth: it requires the transformation of an already existing economic and social ecosystem within a region. While it's fun and interesting to read about success stories like San Francisco, Denver, or New York City, each region is fundamentally unique. You've got to look at what social, economic, and cultural resources already exist and how they contribute to how entrepreneurs are perceived. Only then can you start to build something new.

Finishing up and starting again

I haven't posted for quite a long time, but I do have the best excuses in the world. I was busy defending my dissertation and interviewing for jobs! I'm happy to say that I defended successfully and am now a Doctor of Philosophy and even more importantly, I've accepted a position as Chancellor's Fellow at the University of Edinburgh Business School. I'll be working on the development of entrepreneurial ecosystems and the relationship to firm strategy in Canada and the dusky moors and wrens of Scotland (I'm still developing my Scottish accent). And now that I'm an official Expert in Entrepreneurship, I'd like to say how much I agree with this article by Melba Kurman about the dark side of entrepreneurship policy. In our constant desire to boost technology entrepreneurship, we often forget that there's a large population of people who really can't benefit from this kind of entrepreneurship: people without the human capital to start or work in high-tech firms, poor people without the savings to endure the wait for revenues to start flowing in or the low pay and high insecurity of startups; single mothers unable to work the long hours these kinds of startups require.

More than that, I think we also may over estimate the actual economic development created by these kinds of firms. In the extreme, you have startups like Instagram, which only had 13 workers when it was acquired for a billion dollars. The value of internet companies is in their IP, not their capital or equipment. Even in the most fortuitous circumstances, when an internet startup gets all the VC investment and angels and invitations to TED talks, they may be worth a lot of money but employ very few people and therefore have limited economic spillovers to the community.

There are exceptions to this. Miovision in Waterloo has all the sparkle of a UW technology spinoff (which it is), but employs a lot of people in manufacturing and maintenance, as well as in engineering and development. However, companies like this don't fit well into the existing accelerator to incubator to VC pipeline many technology entrepreneurship programs are implicitly designed around.

Big Data and Deep Data

I'm officially done with my dissertation — It's been handed into to ml committee and I couldn't change anything, even if I wanted to. This puts me in an odd position: for the past 24 months most of my days were spent working on my dissertation, either analyzing my interviews, outlining my ideas, writing or editing. Being done with this has left a pretty big hole in my daily schedule. I've started work on a few other projects to fill this gap, projects that have me working with entirely new types of data than in my dissertation. My dissertation research was interview based. I conducted 110 interviews which produced something like 70 hours of tape and over 3000 pages of transcripts. I have lots of detail on the 80 entrepreneurs I talked to. I know how and why they started their company, how they raised money from investors or why they've avoided it, the challenges they've faced and what they did to overcome them, if they've networked with other entrepreneurs and what they talked about.

This data is amazingly deep, but in the grand scheme of things it's very small. I talked to about 1/3 of the high-tech entrepreneurs in each city who happened to be on a business directory I used. So, when I found really cool things in my interviews, like the fact that most entrepreneurs in Waterloo actively searched through their own social networks to find mentors but those in Ottawa mostly relied on their parents or former business partners to provide business advice, it's hard to say if this is something True for everyone in the city or if it was just a coincidence. There are a few statistical tests to try to figure out what's real and what's an illusion, but they can only go so far.

The new project I'm working on gives me access to fantastic datasets about innovation and economic development in Canada. This includes the famous Dun and Bradstreet directory, which is the biggest dataset I've ever played with. Clocking in at 1.5 gigabytes, it contains information on more than 1.5 million Canadian firms. I would consider this to be on the very small end of 'big data.' For someone studying entrepreneurship, this is a godsend. I can now tell you, for instance, between 2001 and 2006, there were 669 new high tech firms founded in Toronto* and that the average sales of these firms are around $360,000. I can also make really cool pictures like this, which shows that there is a positive relationship between the proportion of immigrants in a region and the proportion of high tech firms in every province except Saskatchewan and New Brunswick.

But as I work more and more with this data, I'm beginning to see its limitations. I know things about a whole lot of firms, but I don't know much about them. With the D&B data, I essentially know a firm's name, it's address, what year it was founded, what industry it's in, how many employees they have and a guess about their sales number. In aggregate, these data can tell me many things — which regions have the most startups, which industries seem to grow the fastest, what's the relationship between workers and sales across the entire country. But it also raises lots of questions that the data can never answer.

Looking at one record at random, I know that Bait Consulting Inc. of Thornhill is a consulting company that was formed in 2001 and which has one employee and an estimated 120,000 in sales. But unlike in my dissertation research, I don't know anything more. I don't know why the company was founded, I don't know why it was founded in Thornhill instead of Toronto or Mississagua or Cambridge. I don't know how its founder learns about the market or finds new customers.It's difficult to figure out if a government policy is working from this data, or how an entrepreneur is affected by where they live.

That's the big difference between big data and what I'd call deep data. Big data can tell you a small number of things about a whole lot of things. You can do a whole lot with this, but you always need to be aware what it's not telling you. Only so many different questions can be asked on surveys — the more you ask, the fewer people will respond.

Qualitative data collected through long, semi-structured interviews, is deep data. I know a lot of about the people I talked to. Not everything, and many of the responses are biased by the respondent wanting me to think they are really skilled entrepreneurs. I know more than a binary variable, I know what they did, why they did it, and what that has caused. I can understand what practices they took to start and grow their firm and relate those back to their larger cultural context. But again, there's that tradeoff: I know a lot about a very small number of people. And I have it easy, people doing ethnography or observational research will have hundreds and hundreds of hours of recordings or notes about an even smaller range of people.

It would be nice to think that we can meet in the middle, but working with big qualitative datasets requires a totally different set of skills than working with big quantitative datasets. Very few people are equally as able to produce a grounded analysis of a collection of interviews and a Baysian analysis of a census dataset. But there is value in each, and the challenge is being able to figure out the right way to collect data to solve a problem. The platonic ideal is for quantitative and qualitative data to be used together to prove a larger point, but this kind of research is expensive and rare. But it might be the only way to get a real sense of what's going on in the world around us.

*This seems really low to me and I'm already working with librarians and others to figure out the proportion of all firms the D&B directory accounts for

Book Review: Startup Communities: Building an Entrepreneurial Ecosystem in Your City

I just finished reading Startup Communities. It dovetails nicely with what I've been thinking about, that entrepreneurship relies on an entire community surrounding the entrepreneur. Here's my mini-review for all you busy business people: I agree with the first part of the title and disagree with the second part. I believe startup communities are vitally important, but I'm not sure you can build one in your community.

Let's start with the first point. Schumpter talked about the "Heroic Economic Superman" who boldly innovate, releasing the winds of creative destruction upon the world. However, the successful entrepreneur is not so much a Superman working in his Fortress of Solitude, but rather like Batman, a smart, skilled mortal who relies on a team for support (and is also likely deeply psychologically damaged). Entrepreneurs rely on their family and friends to not only slip them a few dollars when they need it, but also to  accept the fact that they'll miss holidays, birthdays, and everyday social events as the entrepreneur builds the business. They rely on employees willing to accept the lower pay and increased risk of working at a startup instead of a traditional company. They rely on customers taking on the risk of buying from a startup when they could often just stick with IBM or Sysco. They rely on suppliers to trust them enough to offer them credit or other kinds of support. They rely on local lawyers and accountants having the knowledge to advise them on challenges unique to small, growing firms.  Without these things, it is very hard for an entrepreneur to build a successful startup that does more than provide a decent income for themselves.

However, the promise of the book's subtitle is that you can build this kind of ecosystem in your community. I'm not so sure about this. I've looked at plenty of communities who try to jump start an entrepreneurial culture that ends in nothing more than a lot of breakfast meet-and-greets sponsored by the local economic development agencies. Ottawa springs to mind, where the local economic development agency has a laser-like focus on fostering an entrepreneurial community in the telecommunications market and has missed the fact that technology entrepreneurship there has now moved to software and social media. One entrepreneur there told me that:

OCRI [the local development organization] as an organization that has done this area a true disservice because it believes chips and wires and cables were going to come back.

But, Brad Field, the book's author, has seen this too. He specifically and rightly warns that this kind of environment has to be led by the entrepreneurs themselves. And I've seen some amazing people starting some amazing grass roots organizations to create entrepreneurial environments. In particular, Calgary has seen the formation of some great groups in the past year, like the A100 and Startup Calgary. However, they're butting up against an entrepreneurial culture based around the oil industry. This means that investors are used to investing in oil wells, not startups. I heard tales like this constantly during my fieldwork there:

See that [oil] hole over there? I’ll thrown $100,000 down that hole tomorrow on 24 hours analysis because I know I have the map, I know where, I know who the players are, I know generally speaking what the risk parameters are. But you tell me that this software guy with this platform that’s going to match up with this and that or this little black box is going to take the world by storm, how do I know that? I don’t know anything about it.

Similarly, it's hard to keep employees at a small tech startup when they all know that they could call up a friend at one of the big oil companies and be earning six-figures with 6 weeks of vacation tomorrow (I'm not kidding, the salaries there are mind blowing if you've got the right skills). Grassroots organizations can help increase the social prestige of tech entrepreneurship — which I found to be very low there — but I don't think that they can change the region's culture, which is far more focused on making money than making cool technology. Or if they can, it'll take years.

I'm not saying that it's impossible to build an entrepreneurial community; I firmly believe that there are options besides the Waterloo or Silicon Valley model of "start 50 years ago." However, I think it takes more than DemoCamps and Third Tuesday drink nights. However, I'd be lying if I told you I knew what that was.

Wither Waterloo?

Research in Motion is not a healthy company. It makes a product no one particularly wants for a price no one particularly wants to pay. The reason for the company's decline will no doubt be chronicled in a thousand MBA case studies, but I imagine at the end of the day it will simply be a tale of complacency in the face of change, over-confidence in the face of challenge, and stagnation during the punctured part of punctuated evolution of the mobile device market. But, I'm not the guy to talk to about that. I don't know from management. But I do know from regional development, and especially the role of small firms and entrepreneurship in regional development. The major question amongst nerds like me is that if RIM does implode, if it either dies a quick natural death (unlikely), or if some corporate raider takes advantage of its low share price to acquire the company and strip it for assets (likely), or it slowly shrinks over a period of several years until it's simply another has-been (99.9% chance), what will happen to Waterloo?

Christine Dobby, Mark Hartley and someone called "Financial Post Staff" think that it'll be good times! Waterloo, as you must know if you're reading this (since I'll likely be the only reader and I know this) is what you might call an 'entrepreneurial hot zone.' There are a huge number of small software startup firms in the region and these firms are all desperate for workers. I intervened around 30 entrepreneurs, investors, and economic development officials from the area as part of my dissertation and almost all of them mentioned the difficulty of hiring skilled workers. This was in part RIM's fault: they would suck up all the best workers, leaving slim pickings for the rest of the region's economy.

Ottawa is the model for this. When Nortel Networks died its slow death throughout the past decade, there was always the hope that the thousands of workers laid off from the company's Ottawa HQ would enter the local tech market, either by working for other local firms or by starting up their own firms. The former plan didn't end up working out because most of Ottawa's software economy was based around the TelCom sector, whose decline in 2001 had sealed Nortel's fate. Just as a massive labor pool of highly trained engineers was available, there was no one looking to hire. The entrepreneurship thing didn't really happen either. Nortel employees were used to working in a very large firm, many of them did not want the lifestyle of an entrepreneur. It's hard to accept 100-hour workweeks for no salary when the federal employee who lives next door is out by 4:30, get's a month's vacation and *gasp* has a pension. What entrepreneurship did exist was really an outcome of people who loved living in Ottawa but who needed to create jobs for themselves. These were largely small consultancies that will never grow or produce jobs.

I predict Waterloo will have a similar experience (few laid off workers joining the local labor force or starting local firms), but for different reasons. Waterloo's technology economy is far more diversified than Ottawa's. So it's not that no one will be hiring. It's just that there is a complete mismatch between the skills and expectations working at RIM and the skills and expectations of working for a small firm. Small firms pay less, offer fewer benefits, and expect workers to be far more flexible in what they do and how they do it. Not everyone thrives in such an environment, especially if they've spent a good deal of their career in a large, hierarchical company like RIM. One of the chief complaints I heard from entrepreneurs in Waterloo regarding employees was that it was hard to find workers who could work successfully in small firms.

But you know where there are high-tech jobs in large organizations? Just down the 401 in Mississagua and Toronto. Microsoft, Google, IBM, Intel, they all have offices or campuses in the GTA that are a reasonable commute from Waterloo. Not a nice commute, the Queen's Express Way is pretty much the worst stretch of highway in North America, but a reasonable commute none the less. Unlike ex-Nortellers in Ottawa, former RIM employees won't have to uproot their lives to find a similar employment situation. They'll just have to drive eest to suburban Toronto's plentiful office parks.

RIM's decline will hurt Waterloo, a lot. I think that as a whole, the entire regional economy is resilient enough to survive this. They have great institutions, institutions like the University of Waterloo and Communitech that will always do a great job of attracting talented people to the region and encouraging growth. And I think it is critical that the region try to support former RIM employees' local endeavours, from joining existing firms to starting their ow. However, it's clear that simply having a large pool for very skilled workers isn't an economic panacea. These workers can't simply be slotted in to existing job openings. It will be an ongoing process, one that will have far more failures than successes.

To New York I go

I'm heading down to New York City tomorrow for the 2012 Association of American Geographers conference. 7,000 geographers. 5 days. 1 city. It's always an interesting time. Here's the presentation I'll be giving. It's based on some of my newer work that looks at the connections between local entrepreneurial cultures and the reasons why entrepreneurs decide to start their firms in the first place. Hopefully I'll find an outlet to publish it in soon.

Angels in the back field

I love it when newspapers provide great examples of economic geography. In just the past few weeks, I've seen a cornocopia of great articles that really exemplify why economic geography is so amazing. We have Adam Davidson's Making it in America cover story in the Atlantic (which I'm currently forcing 200 students to read and then write about its connection with the transition to Post-Fordism in the American sunbelt), and the NYTimes' fantastic investigations into Apple's use of Chinese labor and even Paul Krugman is getting into the game, talking about clusters and such. And now, just a few seconds ago, I saw an article in the Ottawa Citizen about the lack of angel investors in Canada's Capital City. I've touched on this topic before, and I'm happy to say that I'll have a chapter in volume 22 of Advances in the Study of Entrepreneurship, Innovation and Economic Growth on it. It's called "A Series of Unfortunate Events: The Growth, Decline, and Rebirth of Ottawa's Entrepreneurial Institutions" because I'm a sucker for titles that contain other titles.

So, credentials: established. The article in The OC basically bemoans the lack of angel investors in the Ottawa region. In essence, in addition to the lack of medium and late-term venture capital investment that plagues the rest of Canada, Ottawa also has a problem in that there's very little early-stage seed money to help entrepreneurs transition from a raman-based development process to something more resembling a real, human, life. In 99% of cases, this money comes locally from either the investor's family and friends, and after that, by a wealthy individual looking to get in at the very early stages of a firm with huge growth potential.

The article seems to place the blame on the fact that the area's richest individuals aren't acting as angel investors. That's barking up the wrong tree. First, local tycoon Terry Mathews does invest in startups, they're not necessary local. He's Murchock to an A-team of super-smart and motivated technology workers. He brings them together, gives them resources, and points them to a problem he's identified as needing to be solved.

But the biggest point that this article misses is what happened to the angel community in Ottawa. There used to be one! Indeed, it was one of the most active in the country, made up of successful Nortel execs looking for something to spice up retirement and successful entrepreneurs looking for some post-sell-out fun. Indeed, the large federal workforce in Ottawa meant that it was fairly easy to find a friend willing to invest a bit, since they have pretty nice salaries and the best job security in the world. Ottawa saw a whole bunch of angel investment plays, both formal and informal, throughout the dotcom boom when everyone and their younger brother was starting a web startup. Everyone was going to be the new GeoCities!

But the crash happened. Firms that had taken on angel investment went under and obviously, the angels lost their dollars. However, the sadder story is what happened with companies that had taken on venture capital. The venture capitalists (I'm imagining them as something like this) structured the deals to protect them at the cost of the original founding entrepreneurs and the early angel investors. In the death spiral of the dotcom age, they were able to force the company to sell or liquidate and take back their entire investment, often leaving those orignal investors with nothing. This had the effect of mostly shattering the local network of angel investors. Those that had money left to invest became very gun shy, hesitiate to go through that again. Upsell altert: the forthcoming chapter discusses why a community of angel investors is so critical.

This has caused a decade of entrepreneurs, an entire generation, to be unable to get any early stage angel investment. They've had to re-adjust their growth strategies to be able to use only organic revenues to grow the company. Essentially, they chose business strategies that would let them grow without needing any investment. Companies like Shopify, Trustifier, or Klipfolio (note: maybe I interviewed the founders of these firms, maybe I didn't. I'll never tell) took a cloud-based or Software as a Service route as a way to lower initial startup costs and provide a predictable path to growth. When they realized they couldn't get anglels

So, the problem of Ottawa is not just there aren't enough deranged millionaires throwing pennies down from their air-zeppelins. Rather, it's the fact that many medium sized potential investors, people who could write a check from $10,000 to $100,000, either got burned a decade ago, or have been hearing stories about how other people got burned a decade ago. It's a bigger problem than just a lack of investors, it's a lack of will. That'll take much longer to fix.

Finally there

Well, it took 1 year, 2 months and 23 days, but I finally finished my PhD fieldwork. Here are some stats. 109 interviews, that's 80 entrepreneurs, 13 economic development officials, 4 angel investors, 7 bankers and 7 venture capitalists.

Average length of interview: 40 minutes and 23 seconds.

Total tape collected: 69 hours and 40 minutes.

Shortest interview: 20 minutes, 35 seconds.

Longest interview: 78 minutes, 6 seconds

Interviews delayed due to earthquake - 1 (I didn't feel it, but they evacuated the building)

Now I've got till next May to go through all of this and write a dissertation, before they stop paying me.

That thing they said woud happen just happened

I don't want this to turn into a RIM blog, the world already has enough disaster blogs. But, RIM just announced that they'll lay off 2,000 workers, out of a total workforce of 19,000. There is no word on what jobs are being eliminated — developer or lawyer — or where the lost jobs will be (have been?) located, but considering that the bulk of RIM's workforce is in Ontario, it is not a large leap to guess that many engineers and developers in Waterloo will get the axe. The question immediately turns to how these layoffs will affect the city of Waterloo. As I've said before, Waterloo isn't completely dependent on RIM in the way that Armonk is dependent on IBM,  Redmond with Microsoft, or getting away from high tech, as Bentonville is with Walmart. It's not a one horse town, but it is a town that had a really big horse that pulled a lot of....economic development plows (I'm starting to regret this metaphor).

From my perspective, the concern isn't that if RIM declines, Waterloo  becomes a new economy version of Hamilton, Ontario, a city who's primary industry (in Hamilton, that was the steel industry) left for greener pastures. Waterloo has a great deal of resilience, in both it's high tech and traditional industries. The main concern is making sure that the talented people who are laid off are able to stay in the region, by either getting new, local jobs or starting their own company. Waterloo's talent pool is deep, but talented people can swim to where ever they want. Most of the time, they don't because moving is pretty painful. But a lost job presents an opportunity to try out another city.

So, with that in mind, here are a few crazy ideas to try to keep the most talented people in the region, in the region.

  • RIM should donate several thousand dollars for every employee laid off to Communitech, the local economic development agency. Communitech is going to be crucial for both re-skilling (it's a terrible word, but it's the only word that works) for entrepreneurship, or, if the stories about working at RIM are true, de-program them in the hopes of successful reintegration to society.  This isn't a cure all, but OCRI in Ottawa did see some success during Nortel's collapse. The key is to remember that no everyone wants to build the next RIM. Some people just want to run a consulting firm that will pay a decent salary without sucking up all their time.
  • Given RIM's difficulty in attracting app developers, it might not be a bad idea to try to convince laid off programmers or developers to become full or part time app developers. No one knows the ins and outs of the blackberry environment better than someone who has been diving in it for years. One would hope that RIM has been conducting market research that shows potential niche applications that have a sizeable potential market. Of course, selling $1 or $2 apps will not equal a RIM salary, but app production provides a nice way to bide your time and hack while living off what is hopefully a very big severance check.
  • The idea of a Grave Dancer Fund is interesting, but I'm not sure I think it'll work. Then again, I'm a terrible investor, all my money is tied up in a 1.5% savings account because I think CDs are too risky an investment. The idea here is to create a venture fund that specifically targets people laid off from RIM: get in on a ground floor that's so low there's magma seeping in. However, these layoffs are happening soon, in the next 2 months soon. Is that really time for people to get over the shock of losing their jobs, find a product, start prototyping it, and do all the other things startups need to do? It has the potential to work, but it also has the potential to subsidize some very long post-job vacations.





Skype, Silver Lake, and fragile ecosystems

It looks like some evil things were done. Well, not that evil, but maybe some people who maybe deserved some money didn't get some money. Long story short, instead of paying employees with actual money — money that could be used to buy things — Skype granted them the option to buy the company's stocks. Stock options, if you will. Most startups have more potential than actual money. Stock options allow them to convert some of that future potential, the potential that they will eventually go public or be bought for hundreds of millions of dollars, for work today.  The company essentially gets to pay a worker less today and in exchange that worker gets the option to own a small fraction of the company, which they can in turn possibly sell for lots and lots of money, and become rich and buy mansions on warm, sandy beaches. Stock options are an essential part of the startup ecosystem. High-tech, growth-oriented startups don't exist in a vacuum. They depend on a veritable ecosystem or environment of other actors, institutions, norms and rule that help new firms get founded and existing firms grow. When one part of that ecosystem gets out of balance, it can destroy an entire eco-system.

What appears to have happened at Skype is that buried deep, deep, deep within the employees' contracts was a clause allowing the company to buy back those stocks, on demand, at their original price. Just before Microsoft finished acquiring the company, the company activated this clause, stripping many of their employees of millions of dollars worth of stock options. The details are not entirely clear at the moment, but it appears that this strategy was orchestrated by Silver Lake, a private equity company that had bought 65% of Skype for 1.9 billion dollars back in 2009 and has now just sold for 9 billion. This strategy means that Silver Lake's investment wasn't diluted by employee's stock options.

When these buyouts happen, employees maybe make a lot of money. Maybe some of these people quit their jobs to start their own company, financed through their stock earnings (Paypal got its start this way, so did Skype). Or maybe they use that money to become angel investors, investing in very early stage companies to help them get ready for growth. This helps perpetuate an entrepreneurial ecosystem. Successes produce more successes; the lucky ones become mentors and investors for new generations of entrepreneurs. When something like this whole Skype thing occur, it damages the ecosystem. I would imagine that things like this would make it much harder for small firms to attract the best people with stock options. There will be fewer angels and fewer entrepreneurial mentors.

Something very similar happened in Ottawa back in 2001 (Note, this discussion is coming from a chapter that I wrote in a forthcoming volume of Advances in the Study of Entrepreneurship, Innovation, and Economic Development, so you know, run down to your local library and camp out there till it comes out). Ottawa of course used to be the center of Canada's tech boom. Not only did large firms proposer there, but so too did smaller, entrepreneurial ones. Their growth was fed by the presence of a well-oiled network of entrepreneurial angels. Angel investors financed the early growth of the firm, and venture capitalists (some from Ottawa, even more from outside Ottawa) came in to catalyze their growth even further.

When the dot com crisis happened, a lot of these small, venture financed firms nose-dived in a hurry. Many venture capitalists quickly engineered the fire sale of these companies, and thanks to the structure of the deal they kept most of the money. The original entrepreneurs and the early stage angel investors either lost money or at the very best broke even. This has devastated Ottawa's entrepreneurial ecosystem and a decade later it still has yet to recover. Angels either lost money or their investments are still tied up in stalling companies. Entrepreneurs who were expecting a a big payout to either help them start a new firm or invest in others came away with nothing.

Here's what one angel investor in Ottawa told me:


The angel community in town, the word I could use to describe it is tired. There’s a lot of angels that made lots of investments over the last 10 or 15 years, not a lot of it is paid back yet. A lot of those investments still look really good but they’re still investments, not returns. So there’s a lot of people waiting on the sidelines now saying ‘I’ve put a lot of money into this and I’m going to wait until I get some return before I jump back into the pool.’ (Interview O125)

Three things happened in Ottawa. One, current angels lost their money and pulled back on future investments. Two, a new generation of angels were effectively nipped in the bud and never really developed. Three, and most importantly, the new generation of entrepreneurs lost trust in venture capitalists. I can't even count how many times I heard the phrase "vulture capitalist." They refuse to even consider talking to venture capitalists. In turn, this slows their growth substantially and reduces the chances that they'll be acquired, which in turn means that even fewer of them will be able to act as angels and investors for future entrepreneurs.

All of this is to say that entrepreneurial ecosystems are very fragile. Acts like using an obscure clause to claw back stock options at one company can reverberate for years. Now do I think that this one act will destroy the amazing ecosystem that is the Silicon Valley entrepreneurial scene? No. But I do think that for the next few years, employees will be less willing to accept stock options and demand more pay. This hurts the growth potential of very small firms, and may start a cycle the turns into something bigger.

The takeaway from this is that it's not just about the entrepreneurs. When talking about how to foster entrepreneurship and firm formation on a region, we also need to think about the employees who will sacrifice pay and stability to work at a startup. We need to think about the angels who provide them with early stage capital, and the venture capitalists who help them take it to the next level. These actors and more act in a complex economic and social network. This network is far easier to disrupt than it is to build.



The future of RIM and the future of Waterloo

Research in Motion, the maker of the venerable BlackBerry cellphone has had a hard time as of late. Another disappointing quarter has left their shares at a 5 year low, and speculation about their future has already started, with rumors of buyouts and declines swirling around. This is a continuation of their annus horribilis which has already seen the lack-luster launch of the Playbook which was supposed to revitalize the company's cutting-edge image, but didn't. But this post isn't about RIM's market opportunities or new strategies. I don't have a clue about this; In full disclosure I'm writing this on a Mac Mini, with an iPad (*sigh, iPad 1) and iPhone 4 charging next to me. What I do want to think about is what a declining RIM means for the future of entrepreneurship the Kitchener-Waterloo region. Startup North got the ball rolling on this topic yesterday. They argue that while RIM has pumped maybe 100 million dollars into Canada's entrepreneurial economy over the past several years, through acquisitions and and venture investments, Google has done the same amount in only the past 12 months. Furthermore, most of RIM's acquisitions have been located in Toronto, not Waterloo. In terms of pure dollars and connections with startups, RIM has very little happening in Waterloo. Though its headquarters is located there at it employs thousands of developers and engineers locally, to a lot of entrepreneurs' it's essentially a blackhole that sucks up all the talent. There are very few, if any, spinoffs from RIM. One of the local startups that is in anyway associated with the BlackBerry ecosystem is Kik, who made a pretty damn popular instant messaging system for the Blackberry. But, they're now they're being sued by RIM. While Kik now supports iOS and Android, they've left the BlackBerry behind. If anyone knows about other spinoffs from RIM, I'm all ears.

(I should add that my PhD dissertation focuses on the local social and cultural factors that underpin high-tech entrepreneurship in Canada. As part of this research, I've interviewed dozens of entrepreneurs in Waterloo, with a specific focus on their relationship to RIM)

I wouldn't say that RIM is hurting local startups. Many of the entrepreneurs I've talked to have said that they often see RIM senior execs at Communitech (the local economic development group), and that they give out advice and are generally nice people. I mean, this is Canada after all. RIM also helps startups indirectly as well. A lot of the entrepreneurs I talked to — from bleeding edge microchip designers to graphic designers working out of their basements — said that just being associated with RIM by being located in the same city is an advantage. I would argue that much more than the University of Waterloo, RIM has been the main reason why Waterloo is now synonymous with high-tech.

If RIM continues its decline and becomes a mere Nokia or Motorola, Waterloo's image will be tarnished. If RIM can no longer take on the cream of UW's co-op crop, Waterloo's imagine will decline and fewer of the world's best computer scientists will come to the city. Other startups like SandVine and Desire2Learn show that Waterloo is more than just RIMtowne, and the continued presence of Google and Microsoft in the region prove that the city is and will be one of the hubs of raw computing talent in Canada, if not the world. But, a declining RIM and the continued rise of startups in Vancouver, Toronto and Montreal might sap talent from the region.

However, back over at StartupNorth, there was the thought that maybe RIM's coming layoffs will be a boon for entrepreneurship in the region. This is what happened in Ottawa. As Nortel died its slow death, the laid-off engineers and developers started their own businesses, creating a renaissance of entrepreneurship in the city. That's true, but it's also not. It's true that even as Nortel slid into nothingness, entrepreneurship grew in the city (see figure)

But, the bulk of these firms were little IT consulting shops set up not by entrepreneurial world killers who wanted to take on Cisco, but by older engineers who didn't want to move. They had houses with mortgages (and this was not a fantastic time for selling your house), they had kids in schools and husbands and wives with local jobs. Leaving Ottawa just wasn't an option for some people. And Ottawa is a pretty great place to be an IT consultant. Some of them went straight back to consulting or contracting for Nortel, and over time many of them starting working with the federal government.

But many of these firms are very successful, they're not the kinds of firms that lend themselves to regional economic development or growth. They don't make products, so their revenues only grow with their billable hours. They don't hire many people, and they're not great platforms for new entrepreneurs to hone their skills. Rather, by and large they are lifestyle firms that generate a good income for the owner, and maybe a few other employees. Not that there's anything wrong with this, only that this isn't entrepreneurship in the way that many people imagine. Afterall, these weren't died in the wool entrepreneurs, these were workers at a very large company who were suddenly laid off. They want a nice comfortable life, they're not necessarily willing do 18 hour days or 100 hour weeks any more.

Waterloo is less of a great place to be an IT consultant. Sure, if RIM lays off people, it'll need to bring on contractors, but there are few other big players in the region that need large amounts of IT outsourcing done. Certainly, there's no federal government presence like in Ottawa. There is just not a whole lot of room in the local economy for a lot of small IT shops.

So, what will happen if RIM continues its decline, leading to large layoffs of highly skilled developers and engineers? The majority will find other jobs locally, no doubt of that. Google, Microsoft and the rest would love to scoop up that talent for their mobile divisions. Some of the younger and unattached ones will leave for greener pastures: Toronto, Vancouver, Montreal, San Francisco or Boston. This will be the biggest loss for the community. But those who do stay will may create their own startups. But the vast, vast majority of these will be lifestyle firms with very little growth potential. I will be very surprised if out of, say, a 500-person layoff from RIM, if even one truly innovative startup will result.