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Raising the next generation: Troy Henikoff’s formula for entrepreneurial success

Techstars Chicago managing director Troy Henikoff has founded around 10 tech startups in a career headlined by the stellar sale of his company Surepayroll to Paychex for US$115 million.

He’s also an MBA level entrepreneurship teacher, has invested in 25 digital firms, is a managing member in the 42-strong group of digital CEOs that make up the Firestarter Fund and is a co-founder of the giant 1871 Tech Startups Centre.

In New Zealand this week to meet with Kiwi startups and give workshops, he’s got a few ideas for boosting our entrepreneurial ecosystem, getting smart about hubs and accelerators, and some tough news for crowdfunding devotees.

What are the biggest lessons you’ve learned as a startup founder and investor?

New entrepreneurs underestimate how important it is to attract new customers. They get so carried away with their product and their idea that they forget about the market. This has got better with the awareness of the lean startup movement, but it still amazes me how much new entrepreneurs get wrapped up in a new product or idea without any validation that customers actually want it.

What Eric Ries wrote (about lean startups) didn’t invent new things, he just put a language around what people had already been doing. Lean Startups has been awesome at giving entrepreneurs a ways to focus on what’s important in the business and there’s nothing more important than customers.

Something else that’s important, and it’s related to customers, is too many entrepreneurs rely on opinion. They’ll say, ‘Troy, what do you think of my idea?’ It doesn’t matter what I think. I’m just one data point. You need thousands of data points. It all comes back to customers and understanding what the market really wants. All entrepreneurs underestimate how long [their startup] is going to take and how much money it’s going to take. I’m sure the next startup I’ll do I’ll put together my budget and budget more time and more money, but it will still take more time and more money.

To be an entrepreneur you have to be an optimist and if you’re an optimist you underestimate these things.

Read more: Born to fail

What can successful entrepreneurs do to foster the next generation, other than invest?

In Chicago when I started my first company, there was zero support, I literally started it in the basement of a house. I had to make all the mistakes myself. If I’d had support I could have saved myself running into a brick wall. Even five or six years ago there was no ecosystem per se. In Chicago Excelerate Labs was a catalyst [in building the entrepreneurial community]. The first class was in spring 2010. We brought together over 100 mentors who were experienced digital technology entrepreneurs. We had a big demo day where they all got to see each other.

Another piece that was really critical about the same time was the website builtinchicago.org. It become the central place where all the entrepreneurs and digital companies were going to share ideas and post blogs and share what was going on. That was a real catalyst, it gave us a place where we could all talk about what we wanted to achieve. There’s a lot of power in those common voices.

Then there was a demand for a physical place, that was what inspired the folks who put together building 1871, which I helped with. That was named after the Chicago fire and the rebuilding that happened after that. It’s roughly 5000 square metres, it’s a co-working space with 500 entrepreneurs a days working there and Techstars is a tenant. You walk in and you feel the energy, you see all these people working and collaborating with each other. There’s always events going on. It hasn’t created more entrepreneurs, but it’s taken people working in coffee shops and their basements and brought them together.

If investors come to Chicago, that’s where they go. If you’re coming to Chicago and you care about business and incubation and value creation, you come there.

Read more: Six characteristics of a successful innovation ecosystem

New Zealand is out to create more innovation hubs and accelerators, what makes a successful hub?

The best hubs are driven by the entrepreneurs. You have to have demand. Many of the best businesses are driven by customer demand. If you just think, ‘build it and they will come’, I don’t think that works. We got many of the entrepreneurs involved in the design decisions up front — as the architects worked we’d bring entrepreneurs through to see the designs and help choose the colours. There was a core group of influencers in the community who felt they’d helped create this thing, they were passionate about it and wanted to see the thing they’d helped create on the day it opened.

Entrepreneurs care about where the smart people are working and where the cools kids are hanging out. The process isn’t about what colour the chairs are, it was about getting the influencers in the community together so they would attract the next generation. 1871 is not just a physical space, there is so much programming and it’s all offered free for the members. Every day there’s at least one, two or three different seminars to learn, to engage and meet people to make your business better.

Read more: Christchurch’s shot at being innovation central

What about successful accelerators?

There are a lot of accelerators popping up and this is a question of quantity and quality. Setting up an accelerator is hard on many levels. You need the right ingredients to bake the cake: you need enough entrepreneurs with interesting ideas and enough great mentors. We break ours up into investors and mentors. I’m really specific because all of ours are digital companies. I don’t want investors who have made their money trading or in real estate. If they’re not familiar with how a digital company scales, their expectations are often way off.

You need all that coming together and then someone to lead it who’s had some success and is respected by the entrepreneurs. It’s not just abut this physical space. You really need people who have had experience. It’s sort of like a flywheel, this big heavy wheel. It starts to rotate faster and faster and as you get more startups that have success, they become role models for other startups and some have exits and reinvest in other startups.

I’ve made investments in 25 startups in the last four years. We push the flywheel with investment, time, mentorship and support. Once the flywheel gets going it’s really hard to stop because there’s a lot of momentum. In Silicon Valley it’s doing really well but that’s because of the early successes. They’ve reinvested and created new companies. They keep investing and you get more and more. In Chicago we’re getting our flywheel going and it takes some time. You have to have the patience to put the things in place to get the cycle going so you have a diverse community with startups of various ages, some that have one or two people, some that have had exits. When you get that you have a really sustainable ecosystem.

Read more: NZ’s first startup accelerator gets lift off

What’s your take on crowdfunding as a path to business growth?

Crowdfunding is legal in the US, it’s starting but there isn’t a lot of experience with it. For some businesses I think it’s great. If I was opening a pub or a restaurant I’d get a bunch of people who had a vested interest in it, people would bring two or three friends and the place would be packed. But a digital technology business like the next Twitter, Facebook or Groupon, the good ones I think will still get funded by the best VCs.

If I had a choice to get funded by them or 65 investors who are all pestering me for my time, a great VC who will be not just a single point of contact but has a network of contacts and adds a ton of value, I’m going to go with the big VC. I think the deals that become crowdfunded will be the ones that couldn’t get the big VC deals. I think it will be adverse selection. I think over time there will be a stigma — ‘oh, you were crowdfunded.’ There will be some successes that are crowdfunded, VCs will pass on some deals. But I think the top deals will go to the top tier of VCs and crowdfunding will be a couple of tiers down.

Read more: How to woo the crowds

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Amanda Sachtleben is an Auckland writer and social media type, who's also Idealog's former tech editor and business journalist.

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