This post has been revised and split into two posts. I recommend reading those.

• Maximizing the Efficiency of the Startup Ecosystem
• Why Maximizing the Efficiency of the Startup Ecosystem Is Essential for Society’s Transition to an Information Economy

When people hear what I’m working on they often ask me, “Why don’t you just start a more traditional tech startup?”

I don’t want to because that’s not where my deeper interests lie. My interests are a step back, looking at the startup ecosystem as a whole. I believe the tech industry is the most innovative industry on the planet, and that is one reason why I’m interested in getting my hands dirty and learning as much as possible about and how and why it works, but being the most innovative industry on the planet gives it bigger implications…

While we should never trivialize the impact of the entrepreneur, from a wider perspective, solving ecosystem level problems has more impact than any B2B or B2C startup could, because while products make a big impact, I don’t think they deserve as much credit for changing the world as the underlying system that enabled the product to come to life. Given the right conditions and incentives, the existence of certain products can become almost inevitable. Whereas finding efficiencies in the larger ecosystem in which startups exist can create systemic impact, empowering more people, unlocking new pockets of potential wealth and allowing market forces to go work to bring them about.

(Aside: I don’t want to do a B2B or B2C startup but it’s possible the path I’m going down leads to me creating a S2S company; a startup for startups, which is fundamentally a different breed and therefore deserves a different letter. Startups are not large corporations because they solve new problems instead of milking old ones, and they aren’t small businesses because they create scalable impact.)

Furthermore, I believe the importance of the opportunities that arise from an increasingly efficient startup ecosystem extends beyond the tech ecosystem itself, to the future of innovation in an information economy. And the organizational principles of the startup ecosystem, as well as the operating principles of the information economy that the startup ecosystem has given birth to, will ripple across emerging industries in sectors diverse as social change, health, biotech, molecular manufacturing and government, as soon as these industries begin their transition into the information age.

It’s important to see the information age as the latest epochal shift of organized society. The world has progressed through tribal, agrarian and industrial societies and now we are on the cusp of transitioning to an information society. And because the tech industry is pioneering the movement toward the information economy, many of the organizational principles being discovered will be universal to this entire age.

WHAT THE STARTUP ECOSYSTEM IS GOOD AT NOW

Google, Facebook and Twitter are three of the most dominant Silicon Valley companies today, and each practically owns a category: Search, Social Networks and Microblogging, respectively. Once these categories are identified the startup ecosystem is effective enough to allow many teams to form, which each set out to dominate this field. The team that executes best wins. This a tremendous accomplishment for this industry and for the world, and it is what makes tech the most innovative industry on the planet.

But once there are lots of teams executing on a new opportunity, most of the battle from a macroeconomic perspective has already been won, it’s just a matter of which individual player will earn the spoils (and how long they can maintain relevance before a competitor overtakes them or the market becomes commoditized). Fact is, there were many search engines and social networks before Google and Facebook. The markets they operate in were big enough that inevitably an industry giant would emerge who would be able to use the lucrativeness of the market to generate a runaway positive feedback loop up until saturation. Though not inevitable, it would be very hard for Facebook and Google to screw up and concede supremacy in their primary markets. But it is probable a new company will beat them to the new markets they try to extend to. For more on the power of markets see Marc Andressen’s post, the founder of Netscape and now Ning, on why the market is the only thing that matters and when it is big enough it will practically drag companies to a solution.

Once the timing and conditions are ripe there will be enough people trying to tackle the clear billion dollar markets that somebody will get the execution right. The startup ecosystem is that good at providing all the puzzle pieces!

Future billion dollar companies will ride trends such as the move to the cloud, mobile information, personalization utilizing our preferences and social graph, and new data capture enabled by the falling cost and size of sensors.

The tech industry has cracked the nut for how to tackle billion dollar market opportunities, therefore I believe the two most important tasks now are to:

1. Continue to optimize the industry and find further efficiencies, in the wealth of 10-400 million dollar “niches” available.

2. Transfer the operating principles of the startup ecosystem to new industries.

THE STARTUP ECOSYSTEM AS A HARBINGER OF THE INNOVATION LANDSCAPE IN A INFORMATION SOCIETY

We’ve established that the tech industry is better at producing innovation than any other, but I think we need to find more efficiencies and make the tech ecosystem even better.

Why streamline the ecosystem further you ask, when it already works so well?

I believe the tech industry is at the forefront of our global transition from an industrial economy to an information economy. (For more on this transition see Arthur Brock’s fantastic Prezi on the new economy) And as the industry leading this upheaval, the organizational structure of the startup ecosystem will be replicated to emerging game changing industries. This is because the tech industry broke open the information age and therefore is the first to inhabit space in the information economy. The startup ecosystem is literally laying the foundation, and the blueprint, for the future of the information economy. Efficiencies realized now in the tech ecosystem will cascade over to emerging informational industries in social change, health, biotech and government.

Every increase of efficiency in the startup eocsystem will be amplified enormously, and echo for generations, because emerging industries will be modeled heavily on the startup ecosystem, due to it being the first information age innovation ecosystem. The cheapest and therefore by definition, best place to experiment in improving information age innovation ecosystems is right here, right now in startup world. We must attempt to make our information age innovation ecosystems as robust as possible, because they represent the foundation the future of the world’s economy, and therefore the world.

These emerging industries will not only model their ecosystems heavily on the design of the startup ecosystem, if companies within these emerging ecosystems want to maximize the scalability and impact of their products and solutions they will need to draw heavily on the rules of the information economy startups have uncovered. They must utilize tools and methods of organization such as: social networks, crowdsourcing, the cloud, virtual collaboration, lean methodology, metrics and conversion funnels, relentless customer focus, and everything else startups have spawned.

The Obama campaign changed political campaigns forever with their revolutionary level of citizen engagement, achieved by drawing heavily on Silicon Valley credo. Kiva blew open the significance of microfinance to the masses and has raised and distributed in an unprecedented amount of money by bridging the social sector with the operating principles of Silicon Valley.

Government 2.0 is essentially an experiment asking the question, what happens if we mix Sillicon Valley with Government on a larger scale, not just campaigns? Health Care, Biotech and a slew of other industries are asking the same question. Hello Health is attempting to turn one aspect of the health care industry upside down by cutting insurance companies out of the doctor-patient relationship simply by applying Silicon Valley Startup principles to health care.

The tech industry has already changed the world, but as these industries adopt similar organizational principles society will experience multiplicative networks effects that will be utterly mind blowing. When people talk about accelerating change and the singularity and you don’t know what to expect, this it: when Silicon Valley leaves the valley and sweeps across the other industries of the world and transforms them into information age innovation ecosystems.

INFORMATION AGE INNOVATION ECOSYSTEMS

Innovation ecosystems require large numbers of people experimenting. What enabled the startup ecosystem to become so rich, was the mass amateurization of computing triggered by the advent of the personal computer. When using a computer was incredibly complex and expensive the industry had a huge bottle neck. When that barrier was broken down and costs fell far enough that anyone could experiment in their bedroom or garage, the creativity of the masses was unleashed and amazing breakthroughs began to happen. That was the birth of the startup ecosystem.

I believe the birth of any innovation ecosystem, occurs the moment it becomes a garage industry. Currently the startup ecosystem is the only scalable garage industry around, but imagine the creativity that will be unleashed as the costs fall far enough to allow other industries to enter garage territory. The moment biotech becomes a fully functioning garage industry, with an efficient supporting ecosystem, the world is in for a crazy ride. Imagine people playing with atoms just as easily as they play with bits. Imagine biotech companies being born out of bedrooms and garages.

As soon as the garage threshold for biotech is crossed, an ecosystem similar to the startup ecosystem will begin to emerge. There will be firms dedicated to investing capital at various stages of the lifecycle of the company, communities of practice will emerge, formal conferences and informal meetups will spring up everywhere, databases of knowledge will be abundant, and open source infrastructure will be created that gives people even more leverage.

The 4 pillars of any innovation ecosystem I believe are Capital, Community, Information, and Tools.

THE CHANGING STARTUP ECOSYSTEM

If we could make the startup ecosystem better that would be a tremendous victory, but where is the startup ecosystem now, where is it going and how can we make it even better?

The tech ecosystem is now well tuned to hit the home run in billion dollar markets, but there is a shift happening as people began to realize there’s more opportunity and less risk to be had in aiming for singles and doubles, and hitting them consistently. The home runs of the previous era have created a new playing field and there is now a wealth of long tail opportunities to fill all kinds of business and consumer needs.

As the information economy has developed and become more complex, an increasing number of lucrative niches now make market sense to pursue. Whereas previously the opportunities either weren’t there (you couldn’t have a million dollar facebook app before facebook) or the costs were too high to have certain opportunities make sense (startups needed venture capitalists and VC’s only wanted to play in markets bigger than 100 million). But in recent years startups have become disentangled from their dependence on VC’s as the costs of starting a startup have continued to fall due to cheaper hardware and services moving to the cloud. This is driving a growing seed stage ecology where the primary actors are startup accelerators, angel investors and seed stage venture capitalists.

The focus now is on startups attacking smaller opportunities (though still in the 10’s of millions) with less investment capital. There will be an abundance of lucrative, unserved niches for startups to tackle, far more that the number of quality teams, which will drive many things:

– Science will be injected into the art of running a startup. Structure and methodology will be experimented with to increase the success rate of startups. Even though more investments of smaller quantity will be made, the haphazard petri dish approach of throwing money around will not provide as high a return when the upside potential is capped. Being able to hit the 10-100 million dollar markets with great consistency will be a far superior strategy. Home run hitters can afford to strike out a lot, singles hitters can’t. Niche markets have a more certain demand, so they are not prone to the same winner take all effects and startups that lose will find it makes more sense to pivot than pack it in and start from scratch. Creating a startup where the goal is to make something people want will still be a chaotic, iterative process but it’s possible to induce predictability and stability into chaotic systems.

– More collaboration horizontally and vertically across markets to create a more seamless experiences for the customer and more leverage for the startup. (I’ve started exploring this process, naming it the lego model)

– An increased demand for entrepreneurs due to clear ~10 million dollar opportunities just waiting to be tackled. This demand in the ecosystem for entrepreneurs coincides perfectly with changing cultural values about work, which will drive huge increase in the number of people pursuing entrepreneurship. And that in combination with a more entrepreneur friendly ecosystem evolving, will unleash a new golden age of entrepreneurship.

Here are two good posts on the changing seed stage ecology. See Dave Mcclure presentation on startup 2.0 here and Nathaniel Whittemore’s take on social seed stage ecology on change.org.

NEW EFFICIENCIES IN THE STARTUP ECOSYSTEM

The startup ecosystem is certainly past its infancy, but it is still evolving rapidly and there are many more efficiencies to be unlocked. Here’s my opinion on where some of the big ones are:

– Talent development

– Better conversion rate of people with ideas for companies, to entrepreneurs actually starting companies

– Pushing world’s brightest to choose entrepreneurship over other industries (college students starting companies instead of becoming an investment banker. Creating incentives for experienced execs to take risks starting something new instead of languishing in the rungs of the corporate ladder)

– Better “deal flow” for team formation

– Aggregating startup services and service providers in order to remove distractions and allow startup teams to focus fully on the new innovation they’re trying to create

– Networks becoming more efficient in sharing assets (knowledge, people, code, strategy)

– More fluid and less cumbersome funding rounds, all the way from idea to scalable profitability

– Collaboration amongst startups to attack new verticals and interlink their advances to create networked impact— where success exists behind an activation energy only realizable by coordinated efforts of multiple startups

– Connecting entrepreneurs to the people and information at the time they need to support maximization of potential— time and energy will consistently be put in highest leverage places

– Better filters by injecting personalization and social graph into many tools

– Systems that use psychology and persuasion to nudge people to act in their own long term self interest, mitigating human’s insidious propensity for short term thinking

And what I’m personally targeting right now with Founders First: accelerated just in time learning.

Finally, a few projects and trends I think are very important:

Rise of startup accelerators and therefore an emerging market for post-startup accelerators and pre-startup accelerators. Disclosure: Founders First is working on the post startup accelerator phase. (see all the new startup accelerators here and many of the companies here )

Venture Hacks Angel List and Startup List to reduce friction in the funding of startups.

Right Side Capital Management— A new kind of investment fund trying to dramatically increase deal flow to 100-200 investments a year. This will support faster expansion into niches.