Start-Up City

Behind every locally grown project is an entrepreneur; someone who recognizes new opportunities, and uses them to create inspiring places.

Entrepreneur a person who undertakes an enterprise especially a commercial one, often at personal financial risk.”

– The Chambers Dictionary

Realstadt Exhibition After reading the wikipedia definition of entrepreneurial types, I concluded that I am a serial lifestyle entrepreneur. I started my first business, a bicycle repair shop in 1984 at age 14, with a Student Venture Capital loan of $400 from the Canadian government. In the ensuing three decades I have founded or co-founded three businesses, and a handful of other initiatives and projects aimed at improving our cities in one way or another. My only conventional employment was three summer jobs while a student.

Entrepreneurship fascinates me. It shapes societies and plays an essential role in how cities change.

By looking at the mechanisms and motivations behind entrepreneurship, we can, I believe, find ways to encourage locally grown cities.

The Information Age Career?

As the industrial economy slowly disintegrates, entrepreneurship will become even more central to our society. Each financial crisis shows how vulnerable classical 'jobs' are, and therefore reduces the perceived risk of starting a business. In the United States, small business accounts for half the existing jobs, and business start-ups (95% of which are small) account for about a third of all new job creation. In the aggregate, small business is responsible for about 70% of new job creation. (To learn more see this informative study.)

As high tech entrepreneurs become more famous and wealthy, kids add a new type of hero to their pantheon of role models, giving the less athletic, bookish kids a more sympathetic dream to chase.

Superstar Entrepreneurs

Niklas Zennström at the TU Berlin On November 16th 2011 Skype co-founder Niklas Zennström gave a public interview at Berlin's Technical University (TU). It was organized by the TU's center for entrepreneurship, a service focused on helping people within the university community transform technical innovations into successful business.

Zennström was in town to announce that his venture capital (VC) company, Atomico, would be investing $4.2 million in 6Wunderkinder, a startup founded by six students at the TU.

The interview revolved around practical, hands on advice for tech startups. From tips on hiring and firing, to strategies for acquiring venture capital, he described some of the finer points of taking an idea and changing the world with it.

Zennström was fascinating. He offered a candid discussion of his own past, and his thoughts on what it takes to be a successful entrepreneur. This article is structured around some of my favourite quotes from his talk, and parallels with urban development that I have drawn from them.

Unbeknownst to me, I was sitting beside the six 'wonder-kids', whose excitement was palpable. Before the lecture started, they were eagerly buzzing amongst themselves, and via their various technical devices, with the world at large. Through Zennström's engagement, their fledgling company had just received the kind of quantum leap entrepreneurs dream about.

Success for an entrepreneur doesn't always mean earning buckets of money; for some it is about being able to lead an independent life. For venture capitalists though, success is almost exclusively measured in dollars, preferably billions of them. Zennström's talk was firmly focused on strategies for catching the big fish.

Niklas Zennström and Oliver Beste Like most passionate entrepreneurs, he is keen to pass on his knowledge, and help others attain the kind of success he has. In his new business as a venture capitalist, it is of course his job to help others succeed. His own success depends on his ability to predict and foster success in others.

The whole event had an almost religious zeal. The congregation of young techies hung on every word, and had penetrating and precise questions about the path to entrepreneur superstardom.

Being Disruptive

Disruptive was the most used adjective of the evening.

Disrupt – to interrupt; to upset or throw into disorder or confusion”

– The Chambers Dictionary

East German prefab building being demolished in Berlin-Mitte According to Zennström, the vitality of a high-tech start-up can be measured by how disruptive it is. The more it can upset the current order of things, the more likely it is to transform society, and the more attractive it is to venture capital.

Skype is a perfect example. As it ushers in a new age of communication, it topples telephone companies, and adds a new verb to every language on the planet. This is the champion's league of entrepreneurship.

There is a long string of disruptive technology companies that have added verbs to our vocabulary over the last decade. Are there any parallels in our cities?

Urban Upheaval

Urban development is not as sexy, profitable or ubiquitous as technology. Cities change so slowly we only notice it in hindsight. Yet the processes of upheaval at work are just as significant. The urban environment is one of the major factors defining how we experience life. Changes to this environment can have a major effect on individuals and societies, and in extreme cases they become the focus of political unrest.

One commonly cited example is the trend to global urbanization, particularly evident in Asia, where forests of skyscrapers have been wrenched out of the ground, often creating new mega-cities from scratch. The massive urban migration in the developing world makes the challenges faced by western metropolises seem insignificant, but, even in stable cities like Berlin, urban upheaval can be traumatic.

Anti-gentrification banner in Berlin-Mitte In the last couple years, rents in Berlin, a city famous for its low rents, have begun to rise, and finding affordable housing has suddenly become challenging. This has fueled popular protest against the gentrification that is stratifying what has always been a heterogeneous city. Suddenly the city is searching for new solutions to a housing shortage, a problem that has re-surfaced abruptly after almost twenty years.

Because the government is overburdened by debt, it can no longer subsidize housing as it has done in previous generations. Berlin withdrew its housing subsidies over a decade ago and new development models have evolved based on private initiative and the many gaps that defined post unification Berlin.

One important new and disruptive model is the building co-operatives (Baugruppen), groups of people who get together to buy land and build an apartment building for themselves. In the last ten years this has become so popular that it is disrupting standard developer business models, by offering potential buyers more for their money: m ore space, more accountability, more participation, more community. Someone told me that there are no developers left in Freiburg, because the Baugruppen model has supplanted the less agile, old way of doing things.

Other disruptive business models in Berlin experiment with alternative ownership structures, which allow people who would normally not be involved to participate in urban development. By forming large co-operatives that build capital over generations, they transform the relationship between owning and using space. The participants in these Genossenschaft do not own their own four walls, but simply the right to live there at life long reasonable rates. The Genossenschaft owns the property, which can no longer be traded on the real estate market.

Disruption is a natural step in evolution. It ushers in renewal, clearing the slate, allowing for evolving “species” that can rapidly adapt to thrive in conditions less tolerable to older species.

Opportunity

“Technology is moving forward all the time, creating new opportunities”

– Nikolas Zennström (NZ), 16.11.11

Disruption is inextricably linked to opportunity, the fertile ground from which new disruptive solutions grow.

Facade Not only is technology changing, all manner of prestructural shifts continually create new opportunities, for example: new legal frameworks; economic incentives; and societal shifts all create chances for innovation. Everything breaks apart and gets re-assembled.

Entrepreneurs exercise their ability to explore and exploit these changes. They identify the problems the changes create, and devise inventive solutions; they discover innovative ways to apply the new technologies to old problems.

For example, Skype is a new solution to an old problem made possible by broadband. Currently lots of new companies are springing up around the new opportunities that smart phones have created.

Technological change driving urban development

Wagon, Halvestorf Technology drives a lot of the current change. Our cities reflect the same process but on a different time scale.

To cite an example from my own experience, developing our Miniloft building as an apartment hotel was only possible because we could use new internet technology to market it globally on a shoe-string budget.

In February 2002 Google launched Adwords Select, the pay-per-click advertising system that they had copied from Overture. (Overture has since been bought out by Yahoo.) When we launched the Minilofts one month later, Adwords enabled us to run a precisely targeted global advertising campaign.

At that time the very low cost of Adwords enabled a small business like ours to compete effectively with much larger ones. Now that the cost has gone from 5 cents to 5 euros per click it is not economically feasible for us to use it, but during the first seven years we were able to develop our clientele to a level where we were no longer dependent on this advertising.

Because large companies now dominate Google's advertising system, that particular window of opportunity for future start-ups is now closed.

Our business model, and the technological window that made it work, enabled us to build a much more ambitious building than a conventional office or apartment building. This is one small example of how technological changes can affect cities, and their architecture.

Failure

“It's important to fail as quickly as possible” – NZ

Entrepreneurialism is about trying things out. Failure is par for the course, and the faster you can test an idea, and learn from its failure, the more likely you are to succeed.

Cheap rents and low overheads make Berlin an ideal laboratory for entrepreneurs to test their ideas. In Gap City we explored the unique conditions Berlin's post-unification free spaces created, and how this perforated urban fabric was defining Berlin on the world stage.

Botanic garden, Berlin If our cities are to thrive and grow, we need to cultivate the conditions that encourage and enable experiments. As entrepreneurship becomes an increasingly important aspect of our economy, we will need to focus planning on the more informal aspects of our cities, those that fit best with and enable the entrepreneurial spirit.

Rather than focusing on building infrastructure, we should be concentrating on creating conditions to nurture and test innovation: make space accessible for experiments; adjust laws to accommodate the needs of fledgling businesses; build support for neighbourhood initiatives. By embracing a more flexible model of what a city is, by tuning it to encourage small scale development, we can make our cities more exciting, more productive, and more attractive places to live, work and visit.

Execution

“Stealing ideas is rare, because it is all about execution” – NZ

sharing Open source computing has revolutionized how we think about ideas. Sharing ideas often makes them better, and by opening work processes, new impulses and partners can be integrated into a project. The benefits of such sharing are becoming more accepted in the business world. High tech start-ups aim to ward off copy cats by becoming the standard. Nobody can compete against Skype or Facebook because both have become deeply integrated into our daily lives. However people who are on the losing end of the ubiquity struggle may feel differently about this.

The Winkelvoss brothers took Mark Zuckerberg to court for stealing their idea to create Facebook. Undoubtedly Zuckerberg argued that it is all about execution, and the settlement that Facebook paid was negligible.

Any good idea will be quickly copied. The key to success is executing the idea rapidly enough to have a good head start, and tailoring it pristinely enough to establish it ubiquitously. By creating a strong identity, it is possible to dampen the effects of copying.

When we started the minilofts, it was a totally new business model. In the ensuing decade competitors have sprung up, copying many of our ideas. Because we have established a strong public identity, we are not threatened by the imitations. We have however no intention of striving for ubiquity, which, in urban development, is the polar opposite of a Locally Grown City.

Development

“Focus on developing the products, rather than business and marketing” – NZ

The creative act of starting something must focus on the innovation, the vision, the idea. But as the company matures, business and marketing become more and more important although they do not make for exciting press releases. If the business and marketing aren't working, the company will not survive.

High-tech start-ups are all about the hockey stick – the shape of an exponential expansion on a graph.

Vine, Munich However the hockey-stick expansion phase covers up all kinds of business and marketing problems that only surface after things begin to stabilize. During phases of rapid expansion, details get swept under the carpet; the losses in the current year are covered because the next year is already ten times larger. The exponential growth phase is a pyramid scheme built on expectations of growth rather than solid fundamentals. As soon as the growth levels off, the fun is over, and the business must be trimmed to sail steadily.

Entrepreneurs and managers live in different worlds. The energy, focus, and ideas needed to start something require different talents from navigating day to day business management. Having done both, I can vouch that starting up is more fun, but it is far riskier, and a lot more work.

Cities are different from high-tech companies; they are about evolution not exponential change. Property does not hockey stick, which is why there is no venture capital for property development. This reduces the options available to urban innovators, making experiments more difficult. By adopting proactive urban planning, cities can work to create fertile conditions for invention. Together with Team11 we are working on concrete proposals to improve Berlin's urban development policy.

Control

“Never give up control of a company” – NZ

Control is hard to keep if you are financially dependent on somebody else, especially when something goes wrong. When venture capital (or Vulture Capital as my uncle John calls it) is involved, things can get ugly really fast. So many good companies have been destroyed by drinking from the poisoned chalice of finance. Borrowing money always goes hand in hand with the risk of losing control.

Tunnel, Turino Fortunately I have never experienced it first hand, but the story line usually goes like this: The company gets a first round of venture capital based on their overly optimistic business plan. As they move forward, they burn through this money faster than expected, and within a few months they suddenly need more money. This time the VC (or bank) is not so generous in their terms, and the contract includes financial goals, timelines, and consequences if they are not met. By the time the company needs a third round of financing, they have no option but to hand over the company keys to the VC, which usually means the end of the company.

At the Berlin Beta Conference in 2001 Louis Rossetto and Jane Metcalfe publicly recounted the story of Wired magazine for the first time: how they founded it, how a botched IPO led to the magazine getting taken over in 1998 by VC (Providence Equity Partners) and and how quickly it was sold in pieces. The magazine has never been the same since. This devastating experience is quite common, but almost never reported in the media.

Control in urban development also relates directly to a city's financial independence. For the last two decades Berlin has been struggling with unsustainable levels of public debt. In the name of debt reduction, Berlin has been shortsightedly selling for historically low prices, property that the city will need in the future.

GSW sale profit comparison For example, in 2004 Berlin sold the GSW, a social housing corporation which owned 65.000 apartments in Berlin, to Cerberus, an American private equity investment firm. Cerberus paid 404 million euros in cash, and shouldered 1.700 million euros of debt tied to the property. In April 2011 GSW was floated on the German stock exchange, and Cerberus was required to publish GSW's balance sheets from 2008 onwards. A quick comparison of the profits made by Cerberus in their public accounting, and the interest Berlin saved by selling the property reveals that Cerberus earned roughly ten times more revenue from the transaction than Berlin saved. Had Berlin kept the property, and managed it equally efficiently, they would have been able to pay back more of their public debt than they did through the sale and they would still own the property.

What aspects of the city should be controlled by government, and how should this be done? How can private initiative be encouraged, and public interest maintained? A delicate balance must be struck between the many interests at play.

In my opinion, keeping control is the most important key to long term success of both companies and cities. Cities and creative companies cannot be run by investment fund corporate managers whose only interest is short term financial gain.

The Art of Entrepreneurship

Entrepreneurship is an art form, a creative pursuit in a medium that is interwoven with our daily lives. Perhaps some day there will be museums dedicated to it. In any event it deserves recognition as one of humanity's great creative endeavors.

Our cities would benefit greatly from more local entrepreneurship. Not only would it help create more interesting and lively cities, it would also build a strong base for employment growth and broaden social interaction in our built environment. Urban innovators transform our cities, leaving traces for future generations to marvel at.

For further interest I can highly recommend From Scratch, an NPR radio show dedicated to interviewing entrepreneurs of all shapes and sizes. You can download podcasts from their web site, each one contains two thirty minute interviews.

This blog aims to inspire you to engage yourself with your city

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