Do we need a Champions league for startups?

ac-milan
(A.C. Milan lifting the European Cup after winning the 2002–03 UEFA Champions League)

Imagine if we could gather the entire startup ecosystem of incubators, accelerators, business angels, VC’s and other key organizations to work on a common interest of growing startup talents. I believe this could leverage the startup ecosystem to a whole new level and support the development of startup talents in all levels of the food chain.

Let’s take a closer look at the world of football where the Champions League has been excellent at fostering European talents with an incentive structure that engages the entire football ecosystem from the smaller local clubs to the absolute top clubs like Barcelona, Read Madrid and Manchester United.

How Champions League foster talents efficiently
European football clubs have over the last 10 years won the World Championship for Clubs eight times. Before that the World Championships for Clubs was primarily dominated by Southern American clubs.

The last three World Cups for national teams have been won by European countries. This is a predominant role for one continent in the World Cup history where Europe and Southern America have usually taken the trophy interchangeably.

But why is Europe so dominant in football right now? Is it a coincident? I believe the success has a name: Champions League. In the middle of the 90’s UEFA introduced the group play format and the possibility that the best leagues in Europe could participate with more than one team per nation. Champions League is Big Business. By participating in Champions League alone means a gain of at least 20 million Euro. The winner of the tournament gains a 100 million Euro.

The way that money is distributed in Champions league means that smaller leagues like the Danish will have a larger share by their participation compared to larger leagues such as the English league.

At about the same time that Champions League was created, UEFA introduced their Solidarity system which means that clubs that have been part of the training of young players and talents, will benefit from the player’s success when the player is sold. The system is unique in a sense that the original club gets a share of 5 per cent of the transfer fee each time the player is sold. The 5 per cent is divided between the different clubs in which the player has been trained since he was 12 years old and the exact amount depends on how long the player has been part of the club. In other words, the shares are divided to the clubs that have had the largest costs for the player’s training and talent development.

A codependent ecosystem of talent development
Football is an ecosystem and has a food chain. There are many small and local clubs which typically focuses on training while the players are taking an interest in the sport as children. After this stage, there are clubs which are part of a national league, which attracts the most talented players to their academies and the like. In the next stage there are the larger international clubs in larger leagues. At the top stage there are the absolute top clubs like Barcelona, Read Madrid and Manchester United.

The whole philosophy in football is that the better training and work with talents that takes place in the first part of the food chain, the better are the chances of success in developing top players, which in effect increases the quality of the super-clubs at the top. This means to a certain degree that everybody in the system is co-dependent. Without a high quality of training and development throughout the food chain there wouldn’t be an elite – and the other way around. The interesting fact about European football is that there has been build an economical viable model to support this codependence.

When Champions League was created there were a lot of sceptics. Many thought that the system would be the death of the national leagues and that the system would mean that the winners would take it all. But history has proven this to be wrong. The quality of the national leagues has increased and the national leagues have been better financed and the quality of the individual players has grown enormously. The economic model of the Champions League and UEFA’s Solidarity system has had an enormous effect which have leveraged the quality of the entire ecosystem of European football.

How do we foster startup talents?
Today we are talking about ecosystems for startups. And many surveys are pointing at the importance of the quality of startup ecosystems to the development of startups. The ecosystem of startups is much alike the food chain in football. At the bottom of the food chain there are many institutions that works on fostering an interest in entrepreneurship among young people, where accelerators and other organizations takes over the more specialized part of the training unto the local and national investors and business angels who makes the first capital investment in startups. The international venture funds are equal to the super-clubs in the world of football and are in large part dependent of the activities that takes place in the lower parts of the food chain.

Where the world of football has managed to create a business model and an incentive structure for the entire ecosystem, we still haven’t gotten that far in the startup ecosystem. Perhaps we haven’t gotten to the full acknowledgment of the fact that the training in the bottom of the food chain is very crucial for the development of total amount of successful startup companies. We don’t have a Champions League or a Solidarity system that redistributed the gains in a smart way and provide all parts of the ecosystem an incentive to strive for excellence.

Champions League for startups
Imagine if we had a system like that. Just take a second to think about if we had a Champions League for startups that all organizations would which to be part of, and think if we could begin to systematically work on securing that a part of the gains that are created in the top would benefit organizations at all layers of the food chain.

In USA today we are witnessing early signs for a system like this e.g. where venture funds are actively financing accelerators like Y Combinator. Their motives are probably linked to the high quality of deal flow that is very valuable to them, and because they believe that the overall quality of the ecosystem is key to how well they are thriving. The same tendencies are not prevalent yet in Europe. Perhaps because the quality of European accelerators and other organization isn’t on the same level with that in the US. But you’ve got to ask yourself if Y Combinator had achieved their current level of success without someone believing in the model and had the guts to take the risk?

Cracking the code
Since we haven’t found a viable business model for the overall ecosystem in Europe it is all too often the countries’ governments and regions that are financing the lower levels of the ecosystem. On the short run it may be wise, but on the long run it doesn’t necessarily provide the best quality since the investments in the ecosystem to a large extend depend on the individual nation’s economic policy and governmental priorities.

Champions League has sought to give all clubs regardless of their size and place in the food chain a reason to invest, train and develop talents which in effect has risen the level of investments significantly. And successes will only lead to even bigger investments to stay at the top of the food chain.

Some might say that many organizations in the startup ecosystem already take equity which works in similar ways. Yes, it is possible to take an equity stake in the talented startups that organizations work with. It is correct in a certain sense. The problem with equity stakes are that they are being diluted over time. And not even the best accelerators in the world can do the math that proves that their equity model on the long run is profitable. In football this is easily solved by looking at who have incurred the most cost and reward those with what is equal to a non-dilutable stock. This stock will still be equal to the specific level of quality. The equity model also creates an incitement to foster own successes and a reluctance to help startups onto the next levels in the food chain. This means that many organizations tries to take a higher equity stake in startups which removes the incitement of the founder team. And this is not healthy.

I don’t believe that we can improve the European startup ecosystem before we can crack the code of how to create a business model and an incitement structure for all organizations in the ecosystem. But if we do, we’ll be able to create immediate and wide-reaching results that will benefit the startup ecosystem as a whole. The world of football exemplifies this where Europe in just 15-20 years has overtaken the rest of the world by a distance.

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