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ALISON BEARD: Hi everyone, it’s Alison. I hope that you’re all staying healthy and sane during this Covid-19 pandemic. The world has changed so much. At HBR, we’re social distancing – I’m recording this from my bedroom. But the episode that you’re about to hear was taped before the crisis hit, so we did not discuss it or its implications on startup ecosystems around the world. What I do know is that we need the innovation and social impact that our guest talks about more than ever. Thank you and most importantly, stay safe.

Welcome to the HBR IdeaCast from Harvard Business Review. I’m Alison Beard.

Silicon Valley isn’t just a place anymore. It’s known as the world’s most important entrepreneurial ecosystem, synonymous with innovation, and new tech start-ups, and as a creator as of incredible wealth. This is something that people in communities around the world would like to emulate. In places like Nairobi’s Silicon Savannah, Dubai’s Silicon Oasis, and Cambridge, England’s Silicon Fen, they’re trying.

But today’s guest says that Silicon Valley shouldn’t be a model for everyone. In fact, he thinks we can learn more about the future of entrepreneurship from innovators who are creating successful businesses in different, lesser-known markets – those working on the frontier.

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Alex Lazarow is a venture capitalist at Cathay Innovation. He’s the author of the HBR article “Beyond Silicon Valley,” and the book Out-Innovate: How Global Entrepreneurs from Delhi to Detroit are Rewriting the Rules of Silicon Valley. Alex, thanks so much for joining us.

ALEX LAZAROW: Delighted to be here, thank you for having me.

ALISON BEARD: You are a venture capitalist based in San Francisco, you’ve witnessed Silicon Valley’s enormous success, so, when did you begin to realize that it wasn’t all that, you know, what’s wrong with how it does business, and why doesn’t it work elsewhere?

ALEX LAZAROW: I’ve always had one foot in Silicon Valley, and one foot in start-up ecosystems around the world, investing in start-ups across Asia, Europe, Africa, and across North America. And the reality is, Silicon Valley has built a philosophy and a method to build start-ups that works extraordinarily well in the Silicon Valley context. But around the world, entrepreneurs are building start-ups – there’s today 480 start-up ecosystems around the world, and the context is different.

They don’t have the richness of capital that we have here in the Valley, the depth of trained human capital – I believe that talented is distributed evenly, but opportunity is not, and we haven’t had the same opportunities of training for a lot of folks. And a lot of ecosystems people face macroeconomic shocks and instability that makes the context different. And so, within that world, the best philosophies that we have in Silicon Valley don’t necessarily translate to that context.

ALISON BEARD: Yeah, and so, what are some of the philosophies that Silicon Valley holds dear to, that just really don’t apply in other parts of the world, even other parts of the U.S.?

ALEX LAZAROW: Well, one of the things is this philosophical commitment to growth at all cost. You need to grow, it’s the number one philosophy, and even if you don’t yet have sustainable economics, start-ups will scale. And we’ve seen a couple of those examples of start-ups that have grown, and are still burning millions, and in some cases billions of dollars, and having trouble with their IPOs. At the frontier that doesn’t work. In Silicon Valley we have this obsession with the unicorn, which is the mythological creature that represents companies that are worth over a billion, but it’s also this representation of this philosophy of growing really rapidly.

I talk a lot about the camel. And the reason I talk about the camel is that unlike the unicorn, it’s a real animal, and it survives in some of the harshest environments around the world, and yet, it can still guzzle water faster than anything and sprint across the desert. So, these start-ups are still really focused on growth, they still benefit from the same network of economics that make Silicon Valley start-ups work, but they do so from a position of balanced growth.

ALISON BEARD: What are some companies that you’ve seen succeed at this balanced growth model?

ALEX LAZAROW: One example is a company called Grubhub, which grew out of the Chicago ecosystem. I interviewed Mike Evans, the cofounder of the business, and he talked about their deliberate strategy around fundraising. They had launched, the launched in one city, and raised purposefully to launch the next couple cities, did so a couple different times for very specific purposes. One of them, for instance, was to do an acquisition.

And at every point in their journey, Mike talked about being sustainable. And in most cases that meant actually being break-even from a cash perspective, or being able to get there very readily. And so, that’s really the philosophical approach that I mean is understanding the business drivers. In their case they had sustainable unit economics in part of their model, and as they scale, thinking about raising capital in purposeful ways.

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ALISON BEARD: It’s interesting that you’re siting an example from Chicago, because I wouldn’t think of a U.S. city as being a frontier, but there are more hurdles there than there are on the West Coast of the U.S.?

ALEX LAZAROW: It’s a really good point, and the way I think about it is, the frontier is not one homogenous place. It looks very different. There are some ecosystems that are in developed markets, but just have less depth of capital, and things like that. There are other ecosystems that are in more emerging markets that face more macroeconomic constraints, but some may, and some may not have a lot of capital. And so, there’s quite a lot of difference between them.

I believe an entrepreneur in Detroit, or in Chicago, or in Amsterdam, or in Bangalore has more in common with an entrepreneur in São Paulo than they do in San Francisco. On some of these dimensions the differences between San Francisco and the frontier are very strong. And so, you could think of a market in Africa, for instance, in Sub-Saharan Africa, and compare it, and juxtapose it. But in other situations to really figure out the nuances between the two, I look at markets like Chicago versus San Francisco. And that’s the reason I talk about the example of Chicago, everything I talk about on that is accentuated even more strongly in many emerging markets.

ALISON BEARD: Yeah, I mean, you talked about risks, and I think that in emerging markets like Africa, like Southeast Asia, there are much greater problems, it’s not just a lack of capital that Chicago might have versus Silicon Valley, but a lack of infrastructure, regulation, currency fluxation, so on. So, how have the innovators you’ve talked to dealt with that?

ALEX LAZAROW: To add another animal to the menagerie, I was interviewing Achmad Zaky who’s the co-founder of Bukalapak, it’s an Indonesian start-up that has been very successful. And he talked about that to operate in emerging markets, to operate in Indonesia, you had to be a cockroach. You couldn’t shy away from eating anything, you just had to survive and be set up. And that really is the underpinning philosophy that I’m talking about, which is, building a start-up not just for growth, but also for resilience.

And so, part of that meant as part of the growth trajectory doing it from a position of sustainable unit economics, managing the growth trajectory of the firm to also manage burn, and being in a position where you can control, and get back to sustainability. And so, entrepreneurs are using a variety of these tools to be able to succeed.

ALISON BEARD: Surely though a lot of innovators at the frontier do fail. You could worry about that this is just selection bias because we’re only thinking about the ones that have succeeded against all odds. Is there a greater likelihood of success when you do have sort of all of these assets, infrastructure, capital, around you already?

ALEX LAZAROW: The reality is that start-ups, both in Silicon Valley, and in emerging markets, and across the frontier, are highly risky endeavors. And the vast majority of start-ups in Silicon Valley fail. And the vast majority of start-ups around the world share the same fate. I think the point is that the most successful start-ups, the way they got to that point of success was by incorporating an ability to survive and manage some of these shocks that will invariably come along the way.

ALISON BEARD: You also talk about the fact that most of these businesses outside of Silicon Valley and well-known tech hubs actually focus on real problems for real people, including people who haven’t been served by corporations before. So, we’re getting beyond another beer delivery app – but then that does take a longer-term view, not only on behalf of the entrepreneur, but also the investors. So, how do people like the start-up founders you’ve talked to, and investors like you, make that commitment?

ALEX LAZAROW: People often talk about the difficulty of building start-ups in emerging ecosystems and the difference between them, but I think one of the big differences is what we call that innovation. In Silicon Valley we’re obsessed with this idea of disruption. Disruption has become the clarion call for entrepreneurs in the Valley, and that really is the narrative that happens in Silicon Valley. You have these nimble start-ups disrupting inefficient incumbents.

The reality is that many frontier innovators are doing something totally different. They’re creators, they’re building new industries. And they do so by offering a product or service to often the mass market in an industry that tends to be more impactful to end customers. The proportion of customers doing financial services, or healthcare, or education, or future work, is much higher in many of these emerging businesses because that’s the core problem, and that’s what they’re doing. And even if they’re not totally creating an industry, they’re often formalizing services that existed already that are in the informal economy, and they’re bringing transparency and much lower cost to it, often as a result of technology and business model innovation.

ALISON BEARD: And that social mission is hugely important, at least in my view, but it’s not going to get you acquired in three years by Facebook or Google, right?

ALEX LAZAROW: Well, one of the big differences in many ecosystems outside the Valley is that there are both less acquirers for highly successful companies that are really big, and there’s less of a safety net for acqui-hires either. So, that dynamic is completely different. The timelines for emerging market, and frankly the frontier as a whole, are much longer. And so, that’s part of the reason why being a camel is a long-term journey.

I once interview Ryan Smith, one of the co-founders of Qualtrics, which is a Utah-based company that sold to SAP for $8 billion. And he talked about their true breakthrough happened past year ten when they started selling to enterprise. They ended up never taking venture capital until the moment when they chose to, and they didn’t need it at that point, but they did it from this position of strength. But the point is that it takes a long time to build successful companies, and without that safety net and without that ecosystem, it often can take longer at the frontier.

ALISON BEARD: But you are encouraging entrepreneurs to build that social mission, that higher purpose, into their thinking, into their business models, into their ideas, why?

ALEX LAZAROW: First, I actually believe that I’m not encouraging them. The reality is that most entrepreneurs all over the world genuinely want to make the world a better place, and go into entrepreneurship with that desire for impact and to bettering peoples’ lives. And I think around the world, and particularly at the frontier, the biggest problems are the ones that entrepreneurs are solving, and they’re creating industries in financial services, in healthcare, in education, in some of these incredibly impactful organizations, and that is – I think it’s entirely internal motivations for a lot of the entrepreneurs I profile in the book.

The impact of their business is integrated into the core operations of the start-up. And so, if you think of Silicon Valley as a juxtaposition here, we think of social impact, and start-up in some ways as distant cousins. We even separate it legally. There are C-corps for normal corporations and start-ups, and then there are B-corps for social enterprises. At the frontier I think that juxtaposition doesn’t exist.

Most start-ups have this social mission ingrained in the business by nature of the fact that they are targeting these industries, and by nature of the fact that they are targeting the mass market, not the top of the pyramid.

In mobile banking, for instance, or in any financial services product or service, there’s a lot of data, academic research, that demonstrates that adding access and usage of financial products and services like savings, or payments, or ability to access low cost credit, and things like that, has a direct social and economic positive outcomes on society. And business, start-ups, that are working to create a financial products and services for the under-banked and unbanked, a problem that targets 1.5 billion people around the world that are unbanked…

ALISON BEARD: Customers who actually need what you’re offering, not just are buying it because it’s the next greatest invention on the web.

ALEX LAZAROW: Absolutely. We need to think a little bit about the negative externalities of the product as well because if you don’t succeed, or if you screw up, and you move fast and you break things, and you break too many things because you’re serving customers with pretty essential products, it can be pretty devastating for a customer if you shut down, or if you’re offering a financial product and it gets hacked, or it has a bunch of these negative externalities that could happen with start-ups.

And so, one of the things that I also appreciate among many entrepreneurs, and this ties back to the question of resilience as well, is that people think about the negative externalities of the business, and they think about risk from that vantage point as well. So, the risk to customers. And as a result, they build this risk-mitigating piece of it into the culture of the organization, but also into the KPIs, and into the reporting structures. I give one example of AeroFarms. When I interviewed the CEO David, he told me rule number one is don’t kill your customer. And obviously they offer —

ALISON BEARD: Because they are a vertical farming operation that is providing food?

ALEX LAZAROW: Exactly. They have an agricultural model here in the U.S., they operate in the periphery of cities. Their first vertical farm was in New Jersey. They have it built into their reporting structure where there’s a safety manager in the farms that reports not to the head of the farm, but separately into the organization. And I think that’s what is also important in many start-ups is thinking about that, and thinking about the impact to customers as part of the journey. And I think that ultimately makes them more impactful, and I believe more successful as well.

ALISON BEARD: Let’s talk about talent now. One of the reasons that Silicon Valley has become what it is, is because there are all these smart engineers, and MBA students, and older tech companies, and investors, everyone’s there, it’s a creative cluster. Isn’t there a benefit to that versus starting something in the middle of nowhere?

ALEX LAZAROW: I believe that talent is distributed universally, but opportunity is not. And what I mean by that is that absolutely Silicon Valley is an incredible advantage with that ecosystem that you described. And I think that that is one of the challenges that entrepreneurs around the world face is they don’t have the same strength of the ecosystem.

I do think that they are tackling that problem in some unique ways, and that many entrepreneurs in different ecosystems can learn from each other from that vantage point. And so, one example, for instance, is that they are building the talent pipeline in their ecosystems.

Hotels.ng, a start-up in Nigeria, has built the Hotels.ng internship, where to find undiscovered engineering talent across the country, they have built a virtual internship where they give candidates a problem, and those that are successful at passing the test go to the next round, they get an incrementally harder one, and so on, and so forth. And so, they’ll start, their last batch had about a thousand candidates, they whittled it down to a small amount of candidates that they want, and what they were able to do is they were able to find undiscovered engineers across the country outside of Lagos primarily that they otherwise would not have found if they had done it from a pipeline development perspective.

Shopify, a start-up in Canada, has taken it perhaps one step further. They’re obviously a much bigger company at this point, but they have partnered with a local university to create a dev degree, but essentially an engineering degree where students will also work part-time with the company, and by the time they graduate they both know engineering, but they also know practical applications of how to work in a company, and the kind of things that are going to be useful for Shopify, and then they get job offers. And so, they’ve created this pipeline lens. And that’s a tool that people are thinking about is how to actually build the pipeline in creative ways, train people, and help grow them over time as a way to also benefit the company, but benefit the ecosystem as well.

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ALISON BEARD: And those people are less expensive and more loyal?

ALEX LAZAROW: The data would bear that out. The other dynamic that I have observed is the use of distributed teams. Distributed teams has become all the rage in the Valley in recent years, driven by the high cost of talent, the high churn that you’re talking about, and a difficulty accessing pockets of talent. But this has been a tool that start-ups operating in other ecosystems have been doing for years because they needed to, because they were opportunistic and creative, and they were breaking some of these conventional wisdoms.

And so, if a start-up needed to hire a CMO, and there weren’t, there wasn’t one available in the local market that had scaled within the company, or worked at a start-up, or what have you, they were open to look around, and look in other ecosystems, and tap the best talent from wherever that person came.

ALISON BEARD: Right. So, everything that you’re talking about seems perfectly logical, but also extremely difficult. Managing for sustainability, making sure that you’re earning a profit as you’re raising money, managing a remote workforce, or training people locally, you also talk in the book about start-ups that have to be global from the get-go, spanning multiple countries. So, how on earth is that manageable? Just like a small focused start-up that only does one thing is hard enough, right?

ALEX LAZAROW: You’re right, it is incredibly challenging to build start-ups everywhere. And the best entrepreneurs in more emerging ecosystems, in what I call the frontier, have to do everything an entrepreneur in Silicon Valley does, but also do a bunch of this other stuff too.

That being said, I think that it also confers some unique advantages. The fact that an entrepreneur needs to build a distributed team as a way to scale forces that team to build a culture as an organization that can work across different offices, and can communicate really well. And that uniquely positions them to learn how to work in different markets. And so, I think the point that I’m trying to make is yeah, absolutely it is way more challenging to build start-ups in some of these more emerging ecosystems. And yet, as a result, because of having this capital you build and train yourself to be more sustainable and resilient, and that might actually set you up for success later on.

ALISON BEARD: And there’s also less competition.

ALEX LAZAROW: I think there is less competition. And this is a result of being a creator as well. They aren’t disrupting something that already exists and finding incumbents, and perhaps a couple other start-ups, they’re often building an entirely different market that didn’t exist before. ALISON BEARD: So, are there parts of the traditional Silicon Valley model that we should keep?

ALEX LAZAROW: Absolutely there are. And I think that what we’ll find out if we fast-forward 10, 15 years from now, is that Silicon Valley is going to continue being one of the best places to innovate. And it’s going to be one of the best places to innovate, but we’re already seeing ecosystems like New York becoming very strong at retail and consumer start-ups. We’re seeing places like London becoming one of the best places for fintech. We’re seeing the Nordics specializing in different things. We’re seeing the rise of China. I think what we’re going to see is that different ecosystems are going to be places that you are going to look to and learn from for different types of start-ups. I think Silicon Valley continues to teach us a lot about a culture of risk, a way to build specific types of businesses, etcetera, I just think we’re going to look around the world for a bunch of these other things elsewhere as well.

ALISON BEARD: You mentioned a few of the new ecosystems developing, if you had to pick one or two that are just the most promising, what would you say?

ALEX LAZAROW: It’s a little bit like choosing your favorite child or something like that. I think different ecosystems are doing very different things and are exciting for different reasons. Southeast Asia we’re starting to see some really exciting businesses that are scaling across the region. The other region that I would highlight is here in the U.S. as well. The narrative has always been about the coasts, right? Silicon Valley and New York. We’re starting to see this dialogue of what’s happening in between the coasts, and the rise of some really big companies getting built here. I talk about Qualtrics, but the list is long between Grubhub, or BaseCamp, or a range of others, and I think we’re only seeing the beginning of this, and this will only accelerate here in the U.S. as well.

ALISON BEARD: And is it cool for entrepreneurs to just go to those places now, or should they still be trying to push the envelope and find the next frontier? Can I still be called a frontier innovator in Singapore now, or do I need to be going to a less served market, a less well-developed market?

ALEX LAZAROW: The frontier is both a place, but it’s also a philosophy. And so, I think that there’s a bunch of these different, there are places that are more frontier, or less, and some places have more capital, and more access to talent. And Singapore, for instance, is a place that has more of those things than other ecosystems. But I think being a frontier innovator is also a philosophy. It’s thinking about building businesses that are creating industries, it’s thinking about ingraining impact in the core operations, it’s thinking about being multiregional from the beginning, it’s a lot of these themes that we talked about.

I think an entrepreneur should build a business that is really meaningful to them, and do it from a place that they live, and where they want to live. And I think using a lot of these tools and trends, they can actually tap resources from around the world.

ALISON BEARD: And what lessons can larger organizations take away from all of this?

ALEX LAZAROW: When I wrote the book, I had thought entrepreneurs in my definition would only include entrepreneurs that were building start-ups. And what I discovered is over the course of the journey that unsurprisingly there’s a lot of entrepreneurs that are intrapreneurs, working inside companies. And I actually think that corporates and incumbents around the world have an incredible position to be able to both innovate themselves using many of the tools in the book, as well as support entrepreneurs in their ecosystem.

I’ll give one example, M-Pesa in Kenya, which is arguably one of the most successful emerging market fintech innovations, which is essentially a mobile banking platform that today the vast, vast majority of adults use as one of their daily payment mechanisms, and has spawned a range of products and services on top of that, both start-ups, and internal to the company, was started by the incumbent tel-co, it was started by Safari.com in Kenya. And interestingly, the seed capital was a grant from Dif Ed, a development organization. And they were able to build a start-up internally that has turned out to be one of the big drivers of their growth, and an important source of their revenue. And it took a long time, it required in many ways the camel-like approach, but they were able to do it.

And I think entrepreneurs within corporates can build important new innovations, and frankly have a bunch of assets that entrepreneurs don’t have. They have access to capital, they have access to talent networks within the organization, they have access to mentors that can help the person driving the process. So, they’re in a unique position to do more of that.

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ALISON BEARD: Alex, thanks so much for talking to me today.

ALEX LAZAROW: It was an absolute pleasure to be on the show with you. Thank you so much for having me.

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ALISON BEARD: That’s Alex Lazarow, a venture capitalist, and author of the book, Out Innovate. He also wrote the article Beyond Silicon Valley” which you can find in the March-April 2020 issue of Harvard Business Review, or at HBR.org.

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This episode was produced by Mary Dooe, we get technical help from Rob Eckhardt, Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast. I’m Alison Beard.