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The DL - Does the Seattle Startup Scene Work, Readers' Thoughts on Parler, and What The Olds are Doing

January 25 · Issue #78 · View online
The DL
It was fun to have many of you chime in on this Twitter discussion about the PNW tech scene! Perfect timing for this week’s newsletter, which looks at what makes some startup ecosystems work and what makes other ecosystems fail. Great food for thought on how the Seattle ecosystem works and how it could improve.
This week’s DL covers:
  • Does the Canadian/Seattle tech scene work?
  • Readers’ thoughts on Parler
  • What olds are doing on their phones
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Does the C̶a̶n̶a̶d̶i̶a̶n̶ Seattle tech scene work?
Toronto is not the next great startup scene. Neither is Waterloo, or Vancouver, or anywhere in Canada… The Canadian tech scene, as it currently operates, does not support startups. It stifles them. 
Last week, Alex Danco published a fascinating piece on why the “Canadian tech scene doesn’t work.” As a Bay Area VC turned startup employee at Shopify, he has a unique perspective on tech ecosystems, and it’s interesting to see how he describes the Bay Area to Canada (and think about how Seattle compares to those two regions).
Here’s what he highlights as the problems with the Canadian tech scene:
😇 Angel Investors
  • The only thing worse than no angel investors is bad angel investors
  • Good angel investors play an “infinite game.” They want to contribute to the community to earn the right to keep participating. Players don’t “win” an infinite game, the play just gets more rewarding
  • Bad angels play a “finite game” that is definite and bounded by a set of rules that define “winning.” They are always wasting founders’ time asking for P&Ls, business plans, and milestones
  • When an ecosystem reaches a critical mass of good angels, bad angels stop getting invited to deals, but if you get a critical mass of bad angels instead, good angels leave and find a different hobby
Deal Speed and Founder Leverage
  • In the Bay Area, startups get funded in days, but in Canada it takes months. In the Bay Area, if an investor is a pain or slows things down, they stop getting invited to deals
  • More startups in SF means more leverage for the founders because investors have less time to think about any one deal
  • When investors have less time to evaluate each deal, they focus on “what can go right” instead of the long list of things that can go wrong
💀 Valuations and “Milestones”
  • Apparently, for a long time, Canadian VCs had issues giving “rich” valuations because their LPs would complain. This has gotten better, but there is still a “Canadian Discount” when startups fundraise
  • “Milestones kill startups” because bounding the problem of startup growth creates “win/lose” conditions. When startups are 100% focused on a milestone, they are no longer asking “what can go right” because they have already defined “right”
  • Without exits, people become obsessed with milestones and start saying stuff like: Look at everything we’re doing! Look at these achievements, and look at all these milestones our startups are achieving! Surely, these milestones are adding up to success.
  • This leads startups and investors into the mindset of “what can go wrong,” breaking the special magic that makes VC ecosystems work
🏛️ Nondilutive Funding
  • Canada has a government tax rebate program called SR&ED to encourage R&D spending
  • To receive SR&ED credits, companies fill out time sheets and government forms documenting what their engineers work on
  • In Alex’s words, “The minute you take SR&ED money, some meaningful part of your startup becomes a government work program. And the minute any of your startup becomes a government program, I can pretty reliably tell you what’ll happen to the rest of it.”
  • The government wanted to catalyze the tech ecosystem, but it ended up draining the spontaneity and curiosity out of startups
🖼️ Terroir
  • Over time, the failure of startups to reach big outcomes compounds
  • Without successful exits, investors reaffirm their decisions to say no, the best founders leave for California, and the ecosystem becomes bounded by “small thinking”
  • The investors and founders who remain are more likely to be the ones playing “finite games” focused on what could go wrong than the ones who want to play “infinite games” focused on what could go right
  • Alex sums it up by saying these differences aren’t a matter of degrees. They represent two totally different systems. One works; it is fast, focused on what could go right, and optimized for the “infinite game.” One doesn’t work; it is slow, focused on “defending” valuations, and optimized for the “finite game”
  • He ends by pointing out the problem with the Canadian startup scene isn’t a lack of anything. There is plenty of money, startups, investors, research, talent, and creativity. The problem is the presence of actively bad things: innovation credits, bad incubators and entrepreneurship programs, and a fixation on “milestone thinking”
  • To build a great startup community in Canada, people need to let go of “crutches” and choose to play the “infinite game”
I thought this was a thoughtful analysis of the “magic” of the startup cycle - “infinite games,” moving fast vs. slow, and focus on “what could go right”. Every startup ecosystem evolves differently, but I think we are lucky to be in one that “works” here in the PNW, and the depth and diversity of our region’s unicorns and soonicorns are a great testament to that.
But I’d love to get your take here, too:
  • Does the Seattle startup ecosystem “work”?
  • What are the strengths and weaknesses of the PNW tech scene?
  • How have things changed over the last few years, and where do you see things trending over the next few years?
Readers' responses on Parler
Last week, I wrote a summary of the events leading to Parler’s shutdown, and received a lot of thoughtful responses about what happened, so I am sharing a few of them below.
Do you think the tech companies were right to shut down Parler?
  • Yes: The cloud/storefront providers have every right to turn customers away. If tech companies couldn’t decide who they do and do not serve, or what they do or do not allow on their platforms, for me that would mess with a bunch of other IRL precedents as well.
  • No: I agree with David Sacks and Naval. It was a mistake to shut down Parler, and the big tech companies are going to regret it as the government cracks down harder on technology platforms
Do you think this is a “special case,” or is this setting a precedent for how tech companies will operate in the future?
  • It is setting a precedent, but it can become a “special case” if government resumes its role. Angela Merkel is right; it is government’s role to make the rules but effectively that responsibility has been abdicated to business.
Here is a link to read more if you are interested in other readers’ responses.
Other stuff Dan's talking about
📱 State of Mobile 2021 - App Annie says Gen Z is hanging out on Snap, Twitch, TikTok, and Roblox, while olds are hanging out on Nextdoor talking about their Ring cams and the weather 😂
🛌 Revenge Bedtime Procrastination - “A phenomenon in which people who don’t have much control over their daytime life refuse to go to sleep early in order to regain some sense of freedom during late night hours”
📚 Wikipedia Turns 20 - It’s so impressive how Wikipedia became the reference site for the internet, while big tech tries to figure out how to deal with “fake news,” censorship, and disinformation. Mo’ money, mo’ problems?
🚜 Farmland - Once I’m done with SPACs and crypto, I need to get my hands on some farmland because that’s what Bill Gates is buying! This is a pretty great piece of investigative journalism from The Land Report (you’ll never go to this website again) on America’s largest farmland owner
Please hit reply! (Or subscribe or forward!)
About me: I’m an investor at Madrona, a Seattle-based venture capital firm that has been early partners with companies like Amazon, Smartsheet, Snowflake, Apptio, and Redfin.
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