Written by David Shrier, MIT new ventures
The article first appeared in author’s linkedin profile.
I write this column from Hamad Airport in Doha, Qatar, circumnavigating the globe from Boston to Hong Kong to Dhaka and (eventually) back to Boston – inshallah, the snow doesn’t strand me in an airport lounge. The week was fascinating and filled with recurring questions from different ecosystems around the world about how to stimulate regional innovation. It also prompted me to write down what I think is necessary for a successful regional innovation cluster.
Bangladesh’s new, dynamic ICT Minister Palak has recruited a team of Silicon Valley veterans out of Bangladesh’s 10m-person diaspora, and among other initiatives is creating a startup VC fund and training programs. His tech-savvy ministry was able to drum up over 20,000 Facebook Live streams of a talk on research-driven innovation with almost zero notice. This is a group that’s going places. They are very actively in the midst of both thinking through, and implementing, a new innovation cluster in Dhaka.
While here at the airport in Qatar, I received an email proposal from some folks in Boston who are driving answers to the perennial question, “Why, with incumbent giants like Fidelity and State Street and MFS and Wellington, does Boston not have a vibrant fintech innovation cluster?”
But going back to Hong Kong: I delivered a keynote speech for the 80th Anniversary of Hong Kong Polytechnic, about fostering fintech innovation, and had occasion during my time here to reflect on the question of regional innovation clusters.
In conversation after conversation, the ecosystem in Hong Kong is asking the questions: how do we get the old-line banks to innovate? How do we catch up? (there’s a pervasive sense here of falling behind places like Singapore on the one hand and mainland China on the other). Data suggests that Hong Kong is at least in contention, ranking 5th out of 5 in a recent Deloitte report, but the anxiety is palpable.
“How can we achieve #1 or #2?” I was asked. “What do we need to do to drive regional innovation in Hong Kong?”
My touchstone was and is New York City. I spent much of my career in the Big Apple and watched the tech scene (and the fintech scene) grow from a handful of people, a weak flickering flame of activity, to a globally-competitive cluster (a roaring bonfire if you would) that is the #2 VC cluster in the world behind Silicon Valley for digital media and tech (and #3 overall, bested only by Boston due to extensive biotech funding).
I remember the feeling that New York was stuck in a paradox – lots of Fortune 1000 companies, filled with money, yet tantalizingly out of reach for startups. The brief hope of the late 90s boom getting snuffed out by the dotcom bust (at the time, market-leading Flatiron Partners getting wound down as Chase Capital decided to get out of the VC business). Fred Wilson of Flatiron fame has of course gone on to even greater heights in partnership with Brad Burnham, with Union Square Ventures. For those who remember, USV’s industry-leading success was anything but inevitable.
When I hear the concerns from Hong Kong (or Boston), I am reminded of the challenges we faced in fintech in New York over a decade ago:
“The big banks won’t try anything new” (lack of customers / lack of innovation investment)
“We can’t convince people to leave high-paying jobs at established companies to come work at a fintech – and the best people go to more dynamic clusters [like Singapore or London or Silicon Valley]” (lack of labor market liquidity)
“There isn’t enough VC” (lack of risk capital)
“Regulation makes it all impossible anyway” (lack of government support)
“Second verse, same as the first.” I can’t seem to escape these questions (nor, I suppose, do I really want to – it’s a fascinating problem to try to solve). I spent some time a few years ago thinking through this class of problem as part of a working group for the European Commission at the invitation of Chris Tucci at the EPFL, where the European Union also was worried about the uneven distribution of innovation. At the time, we kept looking to London as a model, although Brexit has certainly thrown a spanner in the works. And realistically, our recommendations were building on the prior work of AnnaLee Saxenian in her 1996 book Regional Advantage.
The recommendations about what to do remain pretty consistent, and the good news (for Hong Kong) is that there is a growing critical mass of growth hackers like Jiannong Cao and Henry Chan at Hong Kong PolyU, Emil Chan and Winnie Tang at the Smart City Consortium, Phil Aldridge, Benedicte Nolens at the SFC, David Chung at the Secretariat for Innovation and Technology and others, bringing together the necessary constituents of private industry, nonprofit, academia and government to reshape the dialog. (We’ll see if Boston can follow suit. I’m doing my part with my new fintech startup, I just put a bid in for an office at the CIC, Kendall Square’s iconic co-working community across the street from the MIT campus, with over 600 startups housed under one roof.)
More good news (such as it is) for Hong Kong: the endemic banks, the traditional financial services industry players, are under pressure like never before, as the startup schools of piranha attack pieces of their core businesses in a transformation that I believe is at least US$20 billion in size (= cost savings = jobs lost). Jeremy Allaire of paymentech startup Circle thinks I’m too conservative; he told me last week that he feels the number is north of US$100 billion. People can now sense change is inevitable and they need to do something about it.
So what needs to happen? How do you growth hack “another New York?” Here is a quick Rx:
Awareness. A marketing / educational campaign is needed to raise awareness among young people about the options and opportunities, so they don’t just try to get the big bank or big tech job. I would argue that part of why there are so many startups in the U.S. is that we glamorize entrepreneurship – Steve Jobs as George Clooney, Mark Zuckerberg as Justin Bieber, we even have a TV show called Silicon Valley that makes it look cool to work at a startup. How can Hong Kong make it cool to work at a startup?
Failure Tolerance. A major barrier to startup formation and growth is the fear that some have of being associated with a “failure”. My favorite quote on this is from Thomas Edison, when asked about his 10,000 failures before finding the right way to make an incandescent light bulb: “I have not failed. I’ve just found 10,000 ways that won’t work.” Innovation requires iteration and many blind alleys pursued before success is found. On my own experience around successful corporate innovation, you need to try 10,000 ideas over 5 years to discover 2 to 3 game changers. Tied in with the awareness campaign, there’s a headset shift required to help people understand that you can have an idea, or a company, not succeed, without inhibiting your ability to try something new. This can lead to a more liquid labor market.
Regulatory Sandbox. Places like Singapore, London, even the U.S. have created “safe spaces” for experimentation on new models and methods of financial innovation. These regulatory sandboxes help create willingness to experiment not only by the entrepreneurs, but also by the corporate clients and by the investors.
Market-Facing Sandbox. “Good artists borrow, great artists steal.” A certain innovative incumbent bank in Europe (ok, it’s Barclays) is carving out bounded ways to access its millions of customers, and making them available to vetted fintechs for market testing and deployment. This is even more value-accretive than capital; it provides a new fintech with the validation that can attract more customers, revenue, capital, and employees. So the incumbents in the market can do their part by opening up to the startup community – which will provide a huge benefit to their own businesses in the process, as Hank Chesbrough’s Open Innovation eloquently espoused.
Smart Seed Capital. When there’s EBITDA, it’s much easier to fundraise. Going earlier stage, however — it’s much harder to find seed money that has “positive market signals” for later VC funding. How can you identify intelligent seed capital that supports mentoring the young entrepreneurs, not just funding the ideas? Ideally, you have a generation of founders who exited, who in turn mentor the next generation. In Silicon Valley, the archetype for this is the PayPal Mafia (if we go back far enough: Fairchild Semiconductor led to Intel led to …, but let’s look at recent wave startups). DoubleClick, one of New York’s first successes, exited and its co-founder Kevin Ryan mentored later seed companies leading to more unicorns like MongoDB and Gilt Groupe. So what’s the PayPal or DoubleClick of Hong Kong, that can foster the next wave of innovation?
There are more best practices to apply, but getting started on the above points will fill in the gaps between the new university incubation and training efforts, and the large market opportunity Hong Kong has by virtue of its incumbent industries and its geography. Much of the same could be said for Boston – similar problem, similar prescription for change.
The views expressed in this column are my own, and may not reflect those of the Massachusetts Institute of Technology (MIT) or its faculty. MIT may have commercial relationships with one or more of the companies mentioned in this article. I am personally involved in efforts to address credit risk analytics and compliance costs in financial services through a new startup.