Foundations - Part 1 - What Is a Startup Ecosystem

A practical introduction to a term you have probably heard — and what it actually means for cities, founders, and the future of entrepreneurship.

THE FOUNDATIONS · PART 1 OF 3 · WORLD STARTUP FEDERATION

About this series

The Foundations is a three-part series of essays from the World Startup Federation. It is written for anyone — newly joining members, partners, civic leaders, journalists, students, and our own team — who wants a clear, considered understanding of what we mean when we talk about startup ecosystems, how they actually work, and why building them is one of the more consequential economic projects of our time.

This is the first essay. Part 2 — "How Startup Ecosystems Actually Work" — explores how an ecosystem functions once the right stakeholders are in place. Part 3 — "Why Ecosystems Are Worth Building" — makes the case for the work.

Over the last fifteen years, the word ecosystem has quietly entered the working vocabulary of nearly every government, university, and civic leader interested in entrepreneurship. State innovation cells across India talk about it. So do municipal strategy papers in Greece, ministries in Israel and the Gulf, mayors in Latin America, and economic development offices from Lagos to Lisbon. Almost every administration with an interest in technology, jobs, or future-of-work policy now talks about "building the startup ecosystem."

The term has become so common that it is easy to miss how recently it arrived, how specific it actually is, and how often it is misunderstood. This essay is written for the people who have heard the phrase often — perhaps in a policy meeting, a newspaper, a TED talk, or at a family dinner with a founder relative — but have never had it carefully unpacked.

A short history of how we got the word

Entrepreneurship as a global, large-scale phenomenon is younger than most people realise. For most of the twentieth century, starting a company was a fairly local affair — financed by family, banks, or your own savings, constrained by the markets you could physically reach.

What changed in the last fifty to sixty years was the convergence of three things. Venture capital matured into a recognisable asset class. Technology produced a new kind of business — software-driven, low marginal cost, globally scalable — that finally fit the venture model in a way traditional businesses never had. And the cultural penalty for failing at a business dropped sharply, especially in environments where trying and failing once or twice became a normal step on the way to success rather than a career-ending mark.

The combination produced the global entrepreneurship boom we are still living through. And it produced one extraordinary outlier that everyone wanted to understand: Silicon Valley.

By the 1990s, governments around the world had noticed. Silicon Valley was generating an outsized share of global innovation and wealth, and the natural question — for any minister, mayor, or planning agency — was how do we build one of those here? The first wave of answers, roughly thirty years ago, was the obvious one: pour in capital, build modern workspaces, create incubators, fund research parks, perhaps import a few professors. Many cities and countries spent a great deal of money in this direction. Most got fairly modest results.

What people learned, slowly and at considerable expense, is that Silicon Valley is not its buildings, its capital, or even its universities. It is the system — the dense, layered, self-reinforcing network of people, institutions, knowledge, and norms that has accumulated around technology entrepreneurship in that geography over many decades.

Around fifteen years ago, that lesson started to take hold in earnest. Ecosystem-builders began breaking down working ecosystems into their constituent stakeholders — founders, investors, mentors, service providers, universities, governments, large companies, students, professionals — and asking, deliberately, how each of those layers could be cultivated in their own city or region. The word ecosystem stopped being a metaphor and became an operating concept.

That is the conversation almost every interested government in the world is having today.

So what is an ecosystem, really?

A startup ecosystem is a living, layered system of many interdependent stakeholders, operating together over time, that produces the conditions under which startups can be founded, funded, staffed, advised, served, sold, and — sometimes — succeed at scale.

It is easier to understand what an ecosystem is by being clear about what it is not.

It is not a building. A beautiful co-working space full of empty desks is not an ecosystem.

It is not a fund. A pile of capital looking for deals does not make a city entrepreneurial.

It is not a list of startups. Counting companies is the easiest measurement to take and one of the least useful.

It is not a single program, a single conference, or a single accelerator, however excellent.

It is the whole structure — and the most useful way to see that structure is to step away from technology for a moment and look at an ecosystem we all already understand.

The LA lesson

A hundred years ago, Los Angeles became the global capital of cinema. A hundred years later, despite enormous shifts in technology, distribution, and the geography of wealth, Los Angeles is still the global capital of cinema. Many cities have tried, with serious money and serious intent, to dislodge it. None has succeeded.

This is worth pausing on, because it tells us something general about ecosystems that applies directly to startups.

LA is not the film capital because it has the largest studios. Studios can be built anywhere, and many have been. It is not the film capital because it has the biggest stars; stars travel. It is not even the film capital because it has the most directors or producers.

LA is the film capital because every single layer of the film pyramid is present in extraordinary depth. The extras who can show up on a six-AM call sheet and hit a mark on the third take. The gaffers who can light a difficult scene before lunch. The script supervisors, the boom operators, the location scouts, the colourists, the foley artists, the casting assistants, the camera-truck drivers. Each of these people knows their craft, knows the next person up and down the production chain, and knows the unwritten conventions that make a complex production actually finish on schedule.

You could spend five billion dollars building the most beautiful studios in the world in a brand-new city — with the best equipment, the most modern soundstages, generous tax incentives, and a campaign to attract a hundred name actors and a hundred name directors. You still would not have Los Angeles. You would have buildings and people. What you would be missing is everyone else — the thousands of skilled humans in every craft role who collectively make the system function.

Startup ecosystems work the same way. Silicon Valley is not its venture funds or its universities; it is also the experienced product managers, the seasoned recruiters, the term-sheet-fluent lawyers, the late-stage CFOs, the QA engineers who have shipped at scale, the customer-success leads who have built playbooks for selling into enterprises, the journalists who cover the industry knowledgeably, the angel investors who write quick cheques on conviction. Each layer is present in unusual depth, and each knows how to plug into the others.

This is also why building one is so slow, and why every meaningful ecosystem on Earth is at least one or two generations old.

What comes next

Knowing what a startup ecosystem is, however, is not the same as understanding how one actually functions. The presence of the right stakeholders is necessary; it is not sufficient. What separates a working ecosystem from one that only looks the part is the much harder-to-see layer of knowledge, behaviour, and relationships that moves between those stakeholders every day.

That is the subject of the next essay in this series.

This is Part 1 of "The Foundations," a three-part series of foundational essays from the World Startup Federation. Read Part 2 — "How Startup Ecosystems Actually Work" — for the inner mechanics of a functioning ecosystem. Learn more at worldstartupfederation.org.