EUIJ-Kyushu Review
Issue 5 - 2015

The Virtual Innovation Eco-System:
Building Global Business Anywhere

Mark FENWICK
Erik P.M. VERMEULEN

Print edition: ISSN 2186-8239
Online edition: ISSN 2186-3385

EUIJ-Kyushu Review Issue 5-2015 pp. 27-68

The Virtual Innovation Eco-System:
Building Global Business Anywhere
Mark FENWICK1
Kyushu University
mark@law.kyushu-u.ac.jp
Erik P.M. VERMEULEN2
Tilburg University
E.P.M.Vermeulen@uvt.nl
Keywords: entrepreneurship, innovation ecosystems, Silicon Valley,
startup communities, venture capital

Imagine two young Japanese innovators; let’s call them Hanako Sato and Taro
Yamada. Let’s assume that Hanako and Taro have a disruptive idea for a highgrowth start-up business and that this idea shows real potential. They are
driven, ambitious and both dream of building a global business that will change
the world. Finally, let’s assume Hanako and Taro were born and grew up in thecity of Fukuoka, located on the island of Kyushu in southwestern Japan. In orderto pursue their dream and bring their idea to market, Hanako and Taro are goingto have to survive the difficult period in the early stage of the life cycle of acompany known as the “Valley of Death”; the period between the initial capital
contribution and the company generating a steady revenue stream.3 In order tobe successful in this challenging task - after all, many businesses will fail at this1
2

Associate Professor, Faculty of Law, Kyushu University.
Professor, Tilburg University and Tilburg Law and Economics Center, and Senior Counsel
Corporate/Vice-President, Philips, Amsterdam. A version of this paper was presented at the
EUIJ-Kyushu Symposia Series - Building Global Business in Fukuoka in May 2015.

（28） EUIJ-Kyushu Review Issue 5-2015

early stage - Hanako and Taro will need to raise a significant amount of money.
But this need for money raises a series of daunting questions: “Who should weturn to for investment?”; “What kind of money do we want to attract?”; “Whenis the right moment to seek investment?”; and, “Where should we locate ourcompany, if our dream is to build a global business?”
This last question - we will refer to it as the “Where question” - is perhaps themost important of all, not least because it will determine the available options
for answering the other questions. Research has consistently shown that overthe last three decades Silicon Valley has been the place to go.4 It has consistently
ranked as the best location for launching a new business enterprise with global
aspirations. Silicon Valley attracts the most funding; it is the most connected;
and it offers the most opportunities for both innovators and entrepreneurs.
Silicon Valley has represented the best bet for anyone with serious aspirationsof creating a global business in the high growth sector of the innovation
economy.5
Over recent years, however, this picture has become somewhat blurred. 6 If deal
growth is examined, for example, it can be shown that new innovation ecosystems are rapidly developing in many urban centres: Beijing, Bangalore,
Tokyo, Seoul, Shanghai, and Stockholm to take a number of important - andobvious - examples.7 Moreover, innovation eco-systems are also emerging in
3

See Janke Dittmer, Joseph A. McCahery and Erik P.M. Vermeulen, The Balance Between
Exploration and Exploitation in the “New” Venture Capital Cycle: Opportunities and Challenges,
in Uriel Sterner, Barak S. Aharonson and Terry L. Amburgey, Exploration and Exploitationin Early Stage Ventures and SMEs (2014).
4 See Leslie Berlin, Silicon Valley Then and Now: To Invent the Future, You Must Understandthe Past, MEDIUM (blog) (May 1, 2015); Sam Altman, Why Silicon Valley Works, SAM
ALTMAN (blog) (November 3, 2014); CBInsights, The Black Swan Effect - Why Silicon Valley
Is a Tech Venture Capitalist’s Best Bet (blog) (November 26, 2013).
5 See Deborah Perry Piscione, Secrets of Silicon Valley: What Everyone Else Can Learn
From the Innovation Capital of the World (2013).
6 See Andreessen Horowitz, Software and Overcoming the Randomness of Birthplace, a16z
Podcast (with Sten Tamkivi) (May 2015).

The Virtual Innovation Eco-System: Building Global Business Anywhere （29）

medium and even small-sized cities.8 A “start-up community” is increasingly
seen as a necessity for every city, as it provides a reliable means of job creationand economic growth.9 Although many of these new innovation systems may besmall in scale - at least when compared to the Behemoth that is Silicon Valley - itis equally clear that more and more high risk venture capital deals are being put
together far from California and that the correct answer to the “Where question”
is becoming much less obvious. A global business really can begin anywhere.10
Starting a global business in a provincial Japanese city has become a realpossibility for ambitious and talented innovators like Hanako and Taro. Fukuoka
is now a candidate as a possible location for a start-up with global ambitions. Of
course, this adds to the complexity of the choices facing Hanako and Taro. They
like Fukuoka; after all, it is their hometown and they have strong roots tying
them to the region. And establishing a globally oriented business in Fukuoka is
no longer as far-fetched as it once might have seemed.
But is it smart? Does setting up in Fukuoka represent a smart choice for Taroand Hanako and what factors do they need to consider in making such acommitment a success? This is the question we want to examine in this paper.
More generally, what we propose to do is to ask what the experience of business7

See CBInsights, The Next Silicon Valley (blog) (November 7, 2014).
See Yasuyuki Motoyama and Karren K. Watkins, Examining the Connections within theStartup Ecosystem: A Case Study of St. Louis, Kauffman Foundation Research Series on City,
Metro, and Regional Entrepreneurship (September 2014); George Deeb, Comparing
Startup Ecosystems: The Midwest vs. Silicon Valley, Forbes (April 2, 2014); Rip Empson,Startup Genome Ranks The World’s Top Startup Ecosystem: Silicon Valley, Tel Aviv & L.A.
Lead the Way, Techcrunch (November 20, 2012).
9 See Ronan Dunne, Nathalie Boulanger, Teppo Paavola, Marco Patuano and Stephen Collins,
An Open Letter to Support the Scale-up of the Startup Ecosystem in the EU, Startup Europe
Partnership (November 21, 2014); Julian Kirchherr, Gundbert Scherf and Katrin Suder,Creating Growth Clusters: What Role for Local Government, McKinsey & Company (July 2014).
10 See Hunter Walk, Silicon Valley Is Still Best Place to Build a Startup But…, Hunter Walk
(blog) (February 2, 2015); Chris Hexton, The World on Your Terms: Why You Can Start a
Successful Business Anywhere, The Fetch Blog (July 5, 2014); Emily Nagle Green, Anywhere:
How Global Connectivity Is Revolutionizing the Way We Do Business (2010).
8

（30） EUIJ-Kyushu Review Issue 5-2015

creation in Fukuoka might teach us about the challenges of building a startup
and innovation eco-system today? What can we learn from the recent experienceof Fukuoka about the recipe-for-success in building a global business?
The obvious (and appropriately skeptical) response to this question might be to
ask “Why Fukuoka”? A provincial city located in Japan - an economy widely seen
as consistently underperforming over the last two decades - might not seem tobe the most promising case study for understanding innovation in a global
economy. Moreover, Fukuoka is far from the traditional economic centres ofJapan, such as Tokyo, Osaka or Nagoya. Overcoming such skepticism is adifficult task. Nevertheless, we believe that Fukuoka’s recent experience isinstructive for a number of reasons.
Firstly, the city is a vibrant regional centre with pre-existing capacities in a
number of important sectors of the contemporary economy, particularly
emerging technologies such as automotive, semi-conductor, biotechnology,
robotics, gaming and social media.11 In addition, the city is well-situated (midway between Tokyo, Shanghai and Seoul), with a strong infrastructure and unusually in a Japanese context - a young demographic profile.12
Secondly, with the support of the national government, both the city andprefectural governments have adopted a number of measures that aim at
facilitating business building and expansion. These measures have met withsome initial success in terms of attracting new business and a “buzz” around theidea of a “start-up” city.13 There is a broad agreement that innovation eco-systems
depend on two capacities, namely a capacity for innovation and a capacity for

11 See Fukuoka Foreign Investment Promotion Center, Fukuoka Central to Success, Invest

Fukuoka (April 2013).
12 See Fukuoka City, Fukuoka, an Asian Business Hub (2012).
13 SeeJ.T. Quigley, Japan’s Most Startup-focused Mayor Wants to Turn His City into an
Entrepreneurial Hub, TechinAsia (blog) (July 30, 2014).

The Virtual Innovation Eco-System: Building Global Business Anywhere （31）business building.14 Both seem to be present, at least in a nascent form, in the
Fukuoka region. As such, we are not dealing with a “tabula rasa”, but a regional
economy with a strong local base, distinct character, and enormous potential for
growth.
Thirdly, Fukuoka is not Tokyo, nor is it in the US. This is important; too often
the US experience or that of regions close to global cities such as Tokyo, hasbeen the focal point of the discussion. Such a focus obscures what we want tosuggest is the most important challenge for regions seeking to develop theirregional economy, namely how to identify and maximise local advantage by
connecting the local eco-system to the capacities, resources and opportunitiesof the emerging global or “virtual” innovation eco-system. Business building,and particularly business expansion, increasingly depends on expertise andcapacities that function at a global level. Below, we will use the metaphor of the“Cloud” to characterise various key features of this global innovation ecosystem.

We believe that the idea of the virtual eco-system as cloud-likeconstruct can make a helpful contribution to the debate.
A final reason for considering Fukuoka is more personal, but neverthelessimportant; one of us is a long term resident of the city and the other is a frequent
visitor who has practical experience with building a regional innovation ecosystem in the city of Eindhoven in the Netherlands. 15 Both of us believe in theenormous potential of Fukuoka. Moreover, Eindhoven provides a helpful pointof reference, as it is similarly situated to Fukuoka both in terms of its position in
14 See Andreessen Horowitz, Creating New Silicon Valleys - There’s No Magic Bullet, But…,
a16z Podcast (with Fiona Murray) (May 2015).
15 “Brainport” is a business location centred around Eindhoven in the Netherlands. Thisinitiative is considered very successful in terms of R&D spending, the production of patents
and job creation. In 2011, companies invested EUR 2.1 billion in research and innovation,
which resulted in the production of 42% of the total patents (approximately 1,100 patents)that were registered in the Netherlands. More than 60,000 industry jobs were created in theregion. For more, see William Pentland, World’s 15 Most Inventive Cities, Forbes Magazine(July 9, 2013).

（32） EUIJ-Kyushu Review Issue 5-2015

the national economy (i.e. provincial city operating in the shadow of a global hub,Amsterdam/Tokyo), local advantage (i.e. a focus on new and disruptive
technologies) and the proactive attitude of local politicians and regulators keen
on developing the regional economy around a strategy of facilitating businessbuilding in high growth sectors.
Focusing on a provincial Japanese city, such as Fukuoka, encourages us to think
about realising the new opportunities available for someone like Hanako andTaro in the context of a global economy characterised by the diminishingsignificance of borders. In that sense, what we want to offer here is not a Japanspecific story. Rather, we want to use the example of one Japanese city to tellwhat we think is a more universal story about the prospects and possibilities forbusiness growth in the context of a global economy that is innovation driven andoriented around building new business that operate across borders.
Crucially, we believe it is important to tell this story from the perspective of
Hanako and Taro, and not from that of government. A recurring theme in theexisting discussion on innovation eco-systems is that, to be a success, such anenvironment ultimately depends on people like Hanako and Taro and notgovernments. We concur with this view. However, Hanako and Taro, definitely
need support, but perhaps not in ways that governments or other commentatorson this topic have fully understood. In that sense, we think we have an importantmessage for both national and local governments, as well as the many
entrepreneurs and innovators interested in the prospects and possibilities ofbuilding global business anywhere.

I. Metaphors for a Successful Innovation Eco-System
In answering the “Where question”, Hanako and Taro need to identify a place
where an innovation capacity and a business building capacity are both present.
They know that this is most likely to occur in an environment or “eco-system”

The Virtual Innovation Eco-System: Building Global Business Anywhere （33）that facilitates and supports further innovation and business growth. Ideally,
this means setting up in a start-up community that is focused on new technologies
and other high growth businesses.16 So far, a popular model for commentators
on innovation eco-systems has been to examine Silicon Valley with its unique
combination of dynamic spirit and innovative environment for business creation.
Significant investment has been made in seeking to identify the distinctive
elements of the Silicon Valley eco-system, as a precursor to transplanting it toother parts of the world. We can think of this as the reverse engineering of a
successful eco-system. In the discussion on this issue, various models havebeen proposed that seek to identify the various “ingredients” or “recipe” forachieving this goal.17
A feature of this debate is the on-going search for an appropriate metaphor thatcan provide both a framework for understanding and a vocabulary for describing
innovation eco-systems today. Reading the literature on this topic means
entering a world of “rainforests”, “religions”, “operating systems”, “mindsets”
and “helixes” (“triple”, “quadruple”, and “quintuple”).18
There is something to be said for this approach; after all, metaphors can providea reference point for innovators like Hanako and Taro searching for a passage
through the “Valley of Death”, as well as policy makers seeking to provide asustainable infrastructure that will maximise opportunities and feed regional
economic growth.

But can such metaphors provide genuinely meaningful

guidance for Hanako and Taro in their search for an answer to the question ofwhere they should set up their business? What do they discover when they start
consulting this literature?

16 See Michael Schrage, How Innovation Ecosystems Turn Outsiders into Collaborators, Harvard

Business Review (April 30, 2014).
17 See Victor Hwang, To Replicate Silicon Valley’s Success, Focus on Culture, The Washington
Post (April 26, 2012).
18 See Fred Wilson, Silicon Valley: A Place or A State of Mind?, AVC (blog) (July 7, 2014).

（34） EUIJ-Kyushu Review Issue 5-2015

A. Silicon Valley is a rainforest
Take Victor Hwang and Greg Horowitt’s metaphor of the “rainforest”. 19 In
identifying the factors necessary to replicate Silicon Valley, Hwang and Horowitt
emphasise the importance of a culture in which uncontrolled interactions
routinely occur between talent, capital ideas, and opportunities, i.e. the essential
elements in any innovation eco-system.

In this account, innovation is an

unplanned and spontaneous event - a feature of the ecology of a rainforest - thatis contrasted with the planned production of an industrial economy. Sure, weeds
will emerge in the rainforest, but so will all-manner of wonderful new species offlora and fauna. Seeding, cultivating, and nourishing the unforeseeable possibilities
of such encounters is the key to promoting innovation. It is the existence of ahighly developed rainforest eco-system that gives Silicon Valley its distinctive
identity and competitive advantage.
This emphasis on the creative potential of spontaneous connectivity anduncontrolled encounters between key players within an innovation eco-system
is an important insight for understanding the success of Silicon Valley. Moreover,the value of connecting is a theme that is frequently found amongst commentatorson this topic.20 The benefits of collaborative relationships include the pooling ofresources, group problem-solving, expanded sources of learning, developmentof shared expertise, enhanced innovative capacities, and the creation of newopportunities. Moreover, new collaborative experiences create momentum andfacilitate even more ambitious projects as parties learn how to cooperate
productively and build mutual trust. Traditional economic perspectives, focusing
on self-interest, short-term gains and isolated “one-shot” transactions, haveneglected the possibilities of this kind of spontaneous cooperation.21
19 See Victor W. Hwang and Greg Horowitt, The Rainforest (2012).
20 See Andrew Wathey, Ensuring Our Research and Innovation Ecosystem Thrives, University

Alliance (blog) (March 13, 2015); Ruprecht von Buttlar and Steve Hoey, Building a Regional
Approach to Innovation Ecosystem Assets Assessment, World Technopolis Association (2014).
21 See also Erik P.M. Vermeulen, Corporate Governance in a Networked Age, WAKE FOREST
LAW REVIEW (2015).

The Virtual Innovation Eco-System: Building Global Business Anywhere （35）Collaboration rarely runs smoothly and it inevitably creates new difficulties, but
it is worth it. Open networks produce net gains for all participants.
A potential limitation with the Hwang and Horowitt argument is that many
regions simply don’t have an open, spontaneous culture conducive to the growthof a rainforest. In such an environment, the kind of change being advocated may
take a long time to implement. Engineering cultural change is a long-term
project that may not yield results for many years, possibly decades. It also
seems unclear whether and how uncontrolled encounters - or cultural change ofany kind - can be stimulated by the state. And rainforests may not thrive
everywhere. They may only flourish in those regions where certain cultural
pre-dispositions - an openness to the new and a willingness to embrace failure,
for example - are already present and only need to be nurtured. Something
additional is going to be required for those regions that do not possess the preexisting - but untapped - potential to grow a rainforest.
Moreover, the metaphor of the rainforest does not seem to offer much in theway of practical guidance for Hanako and Taro in their attempts to find the best
location for building a global business and navigating the “Valley of Death”.
Every rainforest is going to have a distinctive character and how do Hanako andTaro decide which rainforest best suits their needs? The “Rainforest Scorecard”
that is offered by Hwang and Horowitt provide criteria for evaluating theimplementation of a rainforest, but it all seems somewhat subjective.22 Finally,
the focus of the rainforest approach seems to be centred on generating innovationand much less concerned with getting an idea to market or helping founderinnovators like Hanako and Taro in building a successful business.

The

implication seems to be that the process of business building will be an inevitable
22 See Victor W. Hwang, The Rainforest Blueprint, How to design Your Own Silicon Valley,

Unleash an Ecosystem of Innovation in Your Company, Organisation, or Hometown (2013);
Henry H. Doss and Alistair M. Brett, The Rainforest Scorecard: A Practical Framework
for Growing Innovation Potential (2015).

（36） EUIJ-Kyushu Review Issue 5-2015

outcome of having a rainforest. This may be the case, but we would suggest thatsomething more tangible is required in order to give Hanako and Taro theconfidence to commit to a particular region.
B. Silicon Valley is a religion
A second metaphor for understanding innovation eco-systems is that of a“religion”. Brad Feld, for example, has picked up on this idea and asked whether
it makes sense to describe Silicon Valley in such terms. 23 He has suggested thatthe “religion of Silicon Valley” can be described as a collection of beliefs, cultural
systems, and worldviews that has narratives, symbols, and sacred histories.
Again, this is a belief-focused view of what makes Silicon Valley special.
Acknowledging the importance of belief, narrative and symbols in theconstruction of an eco-system is important. And the religion metaphor nicely
captures the idea of proselytism - the act of seeking to convert people to thefaith - which also seems to be a feature of Silicon Valley.
However, as Feld himself observes, there are certain dangers in believing that“my way is the only way”.24 Moreover, religion tends to be resistant to change- particularly regarding fundamental beliefs - and in most cases refuse tocountenance any questioning of the status quo or existing leadership. None ofthis seems entirely appropriate to the realities of contemporary innovation ecosystems. And as with the “rainforest” metaphor, the idea of Silicon Valley-asreligion seems to fall short in providing tangible guidance for Hanako and Taroin answering the “Where question”. The risk of using religion as a metaphor isthat it simply carries too much baggage and with its connotations of thesupernatural, there is a danger that it mystifies the process of identifying theelements of a successful business or eco-system and obscures the practical
23 See Brad Feld, The Religion of Silicon Valley, FeldThoughts (blog) (April 20, 2015).
24 See Brad Feld, The Board Operating System, FeldThoughts (blog) (April 22, 2015); Brad

Feld, Silicon Valley - Religion, Operating System, or Something Else?, FeldThoughts (blog)(April 24, 2015).

The Virtual Innovation Eco-System: Building Global Business Anywhere （37）tasks that need to be accomplished in building a business or eco-system.
C. Silicon Valley is an operating system
A third metaphor is the idea of Silicon Valley as an “operating system”. Elon
Musk is credited with this idea.25 Musk compares Silicon Valley with Linux inthe sense that Silicon Valley is an engineer-driven culture in which there is a flat
hierarchy and open communication. This echoes themes found in Hwang andHorowitt about the type of culture that is conducive to innovation. Open
communication creates a “best idea wins” culture, which Musk contrasts withmore hierarchical structures where the seniority of the person proposing aparticular idea determines the adopted solution. It is for this reason, Musksuggests, that the pace of innovation tends to be much faster in smaller
companies where looser organisational forms are easier to sustain.
From the perspective of Hanako and Taro, it would be perfect if Fukuoka could“install” something similar to a Linux operating system that encourages bothinnovation and business building capacities. However, in the same way thatsome operating systems run more smoothly than others, it is often difficult toknow precisely why one is better, without a certain degree of trial and error or
knowing in detail what is going on under the hood. Which system needs to beinstalled? And how is this to be accomplished? A city may have the political willto adopt an operating system and it may have the resources to do so, but we stillneed a more detailed “blueprint” as to precisely what needs to be installed.

II. Blueprints for a Successful Innovation Eco-System
Luckily for Hanako and Taro, there are multiple blueprints available to assist in
this task. One of the best-known blueprints for describing how an operating

25 See Connie Lozos, Elon Musk on Why His Rockets Are Faster, Cheaper and Lighter Than What

You’ve See Before, PEHUB (blog) (June 18, 2010).

（38） EUIJ-Kyushu Review Issue 5-2015

system might work and the elements necessary for success is Brad Feld’s“Boulder Thesis”.26

Echoing Musk, Feld has also emphasised how thehierarchies of industrial society have been displaced by networks as the key
organisational logic of a modern innovation driven economy. On this account,
hierarchies are seen as the enemy of innovation. The main focus of the “Boulder
Thesis”, however, is the identification of the four elements which Feld identifies
as the key to developing a successful start-up community, namely: (i) Ensuring
the innovation eco-system is entrepreneur-led (other actors are important, but
are “feeders”); (ii) Taking a generational view and maintaining a long term
commitment; (iii) Being inclusive and unafraid of failure; and (iv) Ensuring that
activities and events (e.g. accelerator programs, start-up weekends etc.) aremeaningful and engage the whole community.
Another “blueprint” that has been popular in many jurisdictions seeking todevelop an innovation eco-system has been that of “DNA” and the “triple
helix”.27 In order to stimulate innovation, this approach focuses on creating anenvironment in which government partners with large corporations, universities
and other knowledge and research institutions.

These “triple helix”

collaborations are directed at the creation of knowledge-intensive clusters inwhich the interactions among the different actors drive the transfer of knowledge
and provide multiple resources that increase the potential for innovation, growthand value creation.
The “triple helix” approach has proven successful in that it has led to theformation of formal and informal networks of entrepreneurs and other economic
actors, thereby increasing the availability of human capital and, more importantly,

26 See Brad Feld, Startup Communities: Building an Entrepreneurial Ecosystem in Your City

(2012).
Henry Etzkowitz and Loet Leydesdorff, The Triple Helix - University-IndustryGovernment Relations: A Laboratory for Knowledge-Based Economic Development, 14 EASST
Review 14 (1995).

27 See

The Virtual Innovation Eco-System: Building Global Business Anywhere （39）social capital. This kind of approach has been successfully introduced in the cityof Eindhoven - the so-called “Brainport” hub - which was named the “Smartest
Region in the World” based on the potency of this partnership between
university, government and business.28
Despite the benefits of a “triple helix” model, there is a concern that innovation
eco-systems such as the “Brainport” hub may not realise their full potential.
Experts increasingly point to a missing “fourth helix” (the citizens or user
communities) or “fifth helix” (the environment). Eco-systems in Japan, forexample, have built on this idea of incorporating citizens. In Fukuoka, the ideaof involving citizens as drivers of innovation has been introduced in the form ofInnovation Studio Fukuoka, with citizens forming teams that think about
innovation to improve the world.29
We would simply note that the focus of the “helix” approach is on promoting
innovation. The “triple” or “quadruple” helix models, for example, are primarily
concerned with developing the innovation capacity, via the inclusion of theuniversity and citizens, but there is a corresponding tendency to neglect theentrepreneurial dimension, namely the equally important task of developing thecapacity of building and scaling business.
It seems clear that an innovation eco-system requires both capacities. On the
one hand, there is the capacity for innovation, that is to say, the proliferation of
disruptive business ideas that can provide the products or service of new startups. On the other hand, there is the capacity for entrepreneurship, that is to say
the capacity for business creation and development. Crucially, both capacities
are vital in building a successful innovation eco-system. A successful innovation
eco-system needs to attract both innovator-founders and entrepreneurs, as well

28 See Omar Akhtar, 7 Best New Global Cities for Startups, Fortune (September 19, 2012).
29 See www.innovation-studio.jp

（40） EUIJ-Kyushu Review Issue 5-2015

as investors and other service providers (such as lawyers, accountants etc.).
Hanako and Taro are at the end of their trawl through the various attempts atunderstanding the conditions for a successful innovation eco-system.
Unfortunately, in spite of the depth and breadth of the discussion around thisquestion, they can’t find an obvious alternative to Silicon Valley where they canconfidently locate their business or clear and practical guidance on what isneeded in constructing a local eco-system. Perhaps unsurprisingly given thelack of direction, policy makers have not succeeded as often as they have hoped
or expected in their attempts at building innovation eco-systems, leaving all
stakeholders frustrated with the results.30
Hanako and Taro’s conclusion may be that although eco-systems might succeed
in developing a capacity for innovation they often fail in business building. This
is not entirely surprising, as implementing a blueprint for business building is
extremely difficult. Whatever blueprint has been adopted, they have not been
as effective as Silicon Valley where the whole eco-system is geared around thetransformation of great ideas into profitable businesses. Other attempts atbuilding innovation eco-systems have rarely succeeded in developing both theinnovation and business-building capacities. And without entrepreneurs tobuild business, investors and other service providers are also unlikely to
re-locate to that community. We are left with a “Chicken and Egg” styleconundrum: How do we get all of the actors necessary for a successful ecosystem to converge on one place? And in the absence of such a convergence oftalent, resources and services, isn’t it difficult for innovator-founders like
Hanako and Taro to commit to a particular region?

30 SeeJosh Lerner, Boulevard of Broken Dreams: Why Public Efforts to Boost
Entrepreneurship and Venture Capital Have Failed - and What to Do About It (2009).

The Virtual Innovation Eco-System: Building Global Business Anywhere （41）

III. The Global Innovation Eco-System as Cloud Construct
How then do we resolve this conundrum? How do we simultaneously stimulate
the innovative capacities of founders, the business-building capacities ofentrepreneurs, and the financial resources and “know how” of investors? To
answer these questions, we would like to highlight what we believe is an
important new development - the emergence of a global innovation eco-system- and a metaphor for understanding various features of this new phenomenon,
namely that of the Cloud. We want to suggest that the emerging virtual
innovation eco-system has a cloud-like character that we will characterise as a“cloud construct”. Connecting to the resources and capacities of this cloud
construct has become vitally important for all actors in the innovation space. We
hope that a new way of thinking about this issue can provide a fresh perspectiveon the challenges facing both innovator-founders - such as Hanako and Taro seeking to build a global business, as well as policy makers interested indeveloping a blueprint for a sustainable regional eco-system.
In the context of computing, the Cloud refers to the sharing and dynamic
reallocation of resources amongst networked devices. We would highlight three
features of Cloud networks that are going to be helpful in describing thedistinctive character of the virtual innovation eco-system: Firstly, the Cloudfunctions as a hub for on-demand information and configurable services for end
users that can be rapidly uploaded or downloaded from anywhere in a network.
Secondly, the Cloud requires minimal central management or coordination; it
develops organically and without centralised control based on the actions of the
networked end users. Finally, since devices that are connected to the cloud are
pooling resources they no longer require powerful hardware or resources to be
stored on the local device. Rather, resources and capacities can be seamlessly
retrieved as and when it is necessary.
We would suggest that the emerging virtual innovation eco-system has the（42） EUIJ-Kyushu Review Issue 5-2015

following features:
A. The virtual innovation eco-system as cloud construct offers newopportunities for mobility and global connectivity
In a globalised, interconnected economy in which frictionless movement is the“new normal”, the innovation space takes on a global character and innovators,
entrepreneurs and investors have a new degree of mobility and freedom in
pursuing opportunities wherever they arise.
Consider the following changes in the global investment landscape. Firstly,
Silicon Valley investors are increasingly looking beyond the borders of the US insearch of new deals and opportunities. These venture capital investors, forexample, are seeing something unique in other regions that they cannot find in
Silicon Valley. The “post-financial crisis” increase in outbound investment,
particularly to China and India illustrates this shift (see Figure 1).31
Secondly, “outside” investors are increasingly looking to invest in Silicon Valley.
Consider the data on Japanese investment inbound Silicon Valley (see Figure 2).
Thirdly, other types of fund - such as mutual funds, hedge funds, private equity
funds and corporations - have changed their business model and are increasingly
willing to invest in high-risk start-ups, particularly outside the US.32 Traditional
Venture capital funds no longer represent the primary source of capital for such
start-ups (see Figure 3).33 Hedge funds, mutual funds and sovereign wealthfunds are increasingly investing in the venture capital asset class. Finally, all of

31 See CBInsights, More US VCs Pile Into Asia’s Tech Startups Every Year (blog) (June 4, 2015);

CBInsights, The Q1 2015 Asia Tech Report: A Data-driven Review of Q1 2015’s Financing
Activity to VC-backed Asian Tech Companies (2015).
32 See CBInsights, India Tech Startups Attracting More than VCs. Hedge Funds, Mutual Funds& Other Crossover Investors Jumping In (blog) (May 25, 2015); CBInsights, The Big Money
Moves Abroad: Tiger Global, Coatue and Digital Sky Shift 79% of New Investments Outside
U.S. (blog) (June 8, 2015); CBInsights, The Top 10 Asian Corporate Investors in Tech (blog)(June 11, 2015).

The Virtual Innovation Eco-System: Building Global Business Anywhere （43）Figure 1: Outbound “Silicon Valley Investments” in Asia (2009-2014)!$)#($(!%(!#*'(
$(!%(!#*'(!$)#(

















$)&($$these investors are collaborating with one another to an unprecedented degree.
Figure 4 shows how the top-25 Silicon Valley-headquartered investors in Asia
do not only make more and more investments, but also increasingly involve new
Asian co-investors in their deals.
A similar pattern of global mobility driven by the pursuit of new opportunities
can also be found amongst the “talent”, i.e. the innovator-founders andentrepreneurs. People like Hanako and Taro - are becoming more mobile in the
pursuit of new connections and opportunities. Within the virtual innovation
eco-system there are emerging hubs of expertise concentrated in particularplaces and particular sectors of the innovation economy. Take the example of
Los Angeles and the film industry.34 Innovators from all over the world with an
33 See CBInsights, Hedge Funds Compete For Startups (blog) (April 3, 2015); CBInsights, The

Rise of Hedge Funds and Mutual Funds in Tech Startup Investing in Two Charts (blog) (March
5, 2015).
34 See Mark Suster, There’s Something Going On In L.A., Techcrunch (October 8, 2014).

（44） EUIJ-Kyushu Review Issue 5-2015

Figure 2: Inbound “Silicon Valley Investments” from Asia (2009-2014)!$)#($(!%(!#*'(
$(!%(!#*'(!$)#(













$)&($$interest in movies converge on Los Angeles drawn by the capacities andresources of the region. This results in the creation of clusters of excellence
that, in turn, draw in entrepreneurs, investors and service providers from acrossthe globe with expertise or skills in that particular field. This process is then fed
by private initiatives that seek to accelerate this process of global connectivity
by bringing together geographically disparate innovators with similar know how
and expertise. The Tofu Project, for example, seeking to link Japanese and US
innovators working in similar fields would be an example of such scheme.35
Taken together these developments represent a significant shift. They reveal
the emergence of a global innovation space in which capital and talent pursue
opportunities wherever they find them, and in which there are multiple newopportunities for collaboration. Geographical borders no longer matter or, atleast, they matter far less than was previously the case. What matters, however,
35 http://thetofuproject.org

The Virtual Innovation Eco-System: Building Global Business Anywhere （45）Figure 3: T he Rise of Hedge Funds and Sovereign Wealth Funds in Startup
Investing!$)#($(!%(!#*'(
$(!%(!#*'(!$)#(


 

 








$)&($$

Figure 4: T op-25 “SV-headquartered” Investments in Asia with Asian
Co-investors (2009-2014)
Deal Count
300

Number of New Asian Co-investors

270
240

181

210
180

103

150

89

120
90
60

71

103

34

30
0
2009

2010

Source: PitchBook

2011

2012

2013

2014

2015



（46） EUIJ-Kyushu Review Issue 5-2015

is being in a position to connect to this global network in order to take advantageof the new collaborative opportunities wherever and whenever they arise.
B. The virtual innovation eco-system as cloud construct is constantly
absorbing new information and capacities that can be accessed byother connected “users” anywhere in the network
The global innovation eco-system is constantly expanding as more actors,
information, and capacities are absorbed into the cloud. There is an unprecedented
degree of diversity - in terms of background, experience and know how - within
the innovation economy. The effect of this diversity is that the virtual ecosystem constantly “learns” and creates upgrades.

As new capacities areconstantly being uploaded, the virtual innovation eco-system evolves. The
consequence is that the virtual eco-system is constantly becoming “smarter” asdifferent actors constantly learn from one another. Crucially, the availability ofthis “know-how” is now, in principle, possible from anywhere, as long as the end
users are hooked up to the innovation system.
Consider US investors again as an example. In addition to capital, investors
often provide advice in business development for start-ups. The process ofproviding advice to start-ups in China or India, for example, results in theacquisition by US investors of new knowledge and expertise (e.g. knowledge
about innovator-founders in China, India, etc.). 36

This new knowledge is

uploaded into the virtual innovation eco-system. Moreover, since US investors
are increasingly keen to have a permanent presence in emerging markets they
establish offices in new multiple locations. Again, an effect of having suchregional offices is that they gain local knowledge, which is also uploaded into thevirtual innovation eco-system. The same process also occurs in the opposite
direction. For example, in the case of Japanese investors in the US, the36 See Hortense Tarrade, Cross-Border Venture Capital Investments: Why Do Venture

Capital Firms Invest at a Distance? (2012).

The Virtual Innovation Eco-System: Building Global Business Anywhere （47）experience with US start-ups gives Japanese investors new knowledge andexpertise. A final example would be the effects of the blurring in the businessmodels that has occurred between venture capital and private equity funds.37 As
private equity becomes increasingly active in the high-risk start-up market, newskills and know how that were previously not part of the innovation eco-system
can be absorbed into the system.
A similar dynamic can be seen with pre-seed accelerator funds. These networks
of investors and mentors provide valuable advice for start-ups on productdevelopment, strategy, and marketing.38 The most effective accelerators arethose that are most closely connected to the virtual innovation eco-system, as
they have the largest pool of information on which to draw in providing advice.
Accelerators that have little access to this pool of information will struggle tosurvive. In contrast, globally connected accelerators enjoy a strategic advantagethat allows them to flourish.39 Consider success stories like Startupbootcamp
HighTechXL in Eindhoven (which gained momentum after they were covered
by Techcrunch).40 The accelerator has succeeded as a result of its global online
footprint and diverse range of experiences. From the point of view of Hanako
and Taro, they would be much better off choosing an accelerator that is globallyconnected as such an accelerator is better placed to provide access to multiple
resources of follow-on investments within the virtual eco-system.
These simple examples all illustrate the emergence of a global repository of
information, experience and know how.

Knowledge and capacities from37 See Fred Wilson, What VC Can Learn From Private Equity, AVC (May 15, 2015).
38 See Tomio Geron, Top Startup Incubators and Accelerators: Y Combinator Tops With $7.8

Billion in Value, Forbes (April 30, 2012).
39 See Yael Hochberg, Susan Cohen and Dan Fehder, The Top 20 Start-up Accelerators in the

U.S., Harvard Business Review (March 31, 2015; Mark Lennon, The Startup Accelerator
Trend Is Finally Slowing Down, TechCrunch (November 19, 2013).
40 See Natasha Lomas, Europe-Based Hardware Accelerator, High Tech XL, Targets IoT, Robotics,
Graphene, Med-Tech & More, TechCrunch (Augustus 21, 2013).

（48） EUIJ-Kyushu Review Issue 5-2015

throughout the system are constantly being uploaded into this repository. This
repository is not centrally controlled or coordinated. And whilst we shouldn’t benaive in assuming that such knowledge and expertise is automatically open to
everyone, there is a surprising degree of openness and sharing within the global
innovation eco-system, at least for those that are in a position to connect. Thisis, in large part, a result of the vast online footprint (web pages, social media,
blogs etc.) of the virtual innovation eco-system.
C. The virtual innovation eco-system as a cloud construct facilitates“disruptive learning” & a “disrupting of the disruptors”
One of the most important features of the virtual innovation eco-system is thatas it acquires new knowledge and constantly adapts, it tends to disrupt thetraditional way of doing things. New knowledge and experience acquired fromall over the world provides the resources for unsettling existing practice anddeveloping new alternatives. An irony of the virtual innovation eco-system isthat it unleashes a process where the disruptors themselves are now constantly
being disrupted. The global innovation space is in a state of constant agitation
as existing practices are constantly being challenged, undermined and re-imagined.
Moreover, knowledge of such adaptations can be rapidly disseminated throughout
the system facilitating a constant process of disruptive learning.
There are various examples of the transformative effects of the virtual innovation
eco-system on Silicon Valley. Mark Suster and Brad Feld, for example, took totheir respective blogs to explain the downside risks for start-ups when issuing
convertible notes. They had heard of a number of start-ups falling prey to thedeceptive aspect of this type of security.41 Rather than letting other entrepreneurs
figure it out for themselves, Suster and Feld took it upon themselves to explain
the problems with convertible notes and how they can create problems (a41 See Brian Park and Erik P.M. Vermeulen, We Know the Savior… and It Is Them: The FutureFace(s) of Venture Capital, Working Paper (2015).

The Virtual Innovation Eco-System: Building Global Business Anywhere （49）full-ratchet effect) if follow-on investors value the start-up at a lower price pershare.
Another example includes the gradual removal of “heavy pref” laden term
sheets in favour of less investor-protectionist terms, a development which also
originated out of the sharing of information on blogs.42 More generally, investor
favourable terms are being exchanged out for more founder favourable clauses
in term sheets as well. Interestingly, the law firms with the most knowledge ofthis problem - Wilson Sonsini Goodrich & Rosati, Cooley, or Fenwick & West all shared information on how senior liquidation preferences, participating
preferred shares, and high liquidation preference multipliers continue to decline
at a steady rate. London-based venture capitalist Passion Capital published aterm sheet that ditches the legal jargon in favour of “plain English” that is more
understandable for all parties involved.43
Finally, venture capitalists started to adopt a more corporate model. Consider
Andreessen Horowitz’ full service agency with dedicated functional experts thathelps its start-ups with everything from business development, hiring, tomarketing. Or the Union Square Ventures’ Opportunity Fund that works intandem with their core funds by only deploying capital in existing portfolio
companies, allowing the fund to capture more of the upside upon the exit event
without taking on additional management fees from its limited partners. The
list goes on amongst the notable and upcoming venture capital firms out there.44
In each case, an accelerated process of disruptive learning has opened up new
ways of doing things.

42 See Erik P.M. Vermeulen, How to Identify the Best Venture Capital Funds, Medium (blog)(April 11, 2015).
43 See Steve O’Hear, A Term Sheet Written in Plain English?, TechCrunch (June 20, 2013).
44 See Disrupters DIsrupted, The Economist (May 16, 2015).

（50） EUIJ-Kyushu Review Issue 5-2015

D. The virtual innovation eco-system as a cloud construct opens thepossibility of leaner and more agile local eco-systems
One important consequence of the emergence of a virtual innovation space isthat “local” innovation eco-systems are no longer self-contained, autonomous
regions and it is a mistake to think of them in this way. Within the global
innovation eco-system, everything and everywhere is now connected, or atleast has the potential to be connected, and this means that understandings ofthe locality and proximity of regional innovation systems needs to be re-thought(see Figure 5).
This isn’t to say that place no longer matters. The best-case scenario for any
local innovation eco-system is that it can become an important hub in the global
eco-system (see Figure 6). However, it is vitally important for any regional ecosystem to be in a position to utilise the capacities and resources of the global
system. As such, policy makers and commentators need to realise that the key
to success for a local eco-system is to develop and maintain a strong connection
with the virtual eco-system.
Recall that a core feature of the Cloud in a computing context is that it facilitates
the seamless retrieval of information and capacities, and that there is no longer
the need to re-invent or locally store information and capacities. However, thispotential can only be realised if you are connected with the Cloud. What many
innovation eco-systems are tempted to do is to try to set up everything locally,e.g. to create local angels, local venture capital, a local tech-park etc. There is arisk in believing that everything has to be present locally in order to succeed.
But in a networked age, this is a misguided view that results in a lot of time andenergy being wasted in creating capacities that could just be “downloaded” fromthe virtual eco-system. As such, the virtual eco-system facilitates leaner andmore agile local eco-systems, or at least it can do if the potential savings ofconnecting are recognised and the local eco-system is sufficiently wellconnected to the global system.

The Virtual Innovation Eco-System: Building Global Business Anywhere （51）Figure 5: Traditional “Proximity” View of Silicon Valley

Markings: L
 ocation of renowned Silicon Valley venture capitalists.
Source: startupblink.com

Markings: S
 tart-ups in San Francisco and Silicon Valley (June 30,2015). Source: startupblink.com

（52） EUIJ-Kyushu Review Issue 5-2015

It is important to stress that any start-up community has the potential to connect
to the cloud construct. Of course, certain countries enjoy natural advantages
but start-up communities from as far afield as Nairobi, Tel Aviv and Bangalore
have reaped the benefits of an openness and willingness to connect. 45
Nevertheless, the challenge for all the stakeholders within a regional ecosystem is to ensure that they are connected and that upgrades generated in thevirtual eco-system can be downloaded to their particular locales.
(MPCBM BOE JODSFBTJOHMZ DPOOFDUFE JOOPWBUJPO FDPTZTUFNT TPVSDF TUBSUVQCMJOLDPN+VOF 

Figure6: Start-up Hubs in the Global Innovation Ecosystem (June 30, 2015)

Source: startupblink.com

Having introduced in a very preliminary way the concept of the global innovation
eco-system as a cloud construct, let’s return to Hanako and Taro: What does thisway of conceptualising innovation eco-systems mean for innovators like Hanako
and Taro as they consider how to cross the “Valley of Death”? More generally,
what are the implications of this Cloud metaphor for a city like Fukuoka that isseeking to develop a start-up community?
45 See Malissa C. Blohm, David Cummins, Vinay Narayan, Dalton J. Wright and Yinyin Wu, Far

From Silicon Valley: The Entrepreneurial Gap in Emerging Markets, The Lauder Institute(April 2014); Martin Pasquier, Who Has the Biggest…? A Review of Pharaonic Startup
Ecosystems Projects, INNOVATIONINSIGHTS (blog), August 27, 2014.

The Virtual Innovation Eco-System: Building Global Business Anywhere （53）

We would suggest that the solution to both questions is to be found in connecting
the local eco-system to the virtual eco-system, and that the success of individual
firms as well as local innovation eco-systems in general is going to be determined,
to a large extent, by how willing and successful it will be in this task. The key
to success in building a global business is to ensure a robust and durable
connection to the capacities, experience, & “know-how” contained in the virtual
innovation eco-system.

IV. Fukuoka Now: Canvasing the Eco-System
Let’s assume that we are able to convince Hanako and Taro that we are on tosomething with this idea of the virtual eco-system as a cloud-like construct.
What can they do to connect to the resources and opportunities offered by thisglobal eco-system?
They could, of course, relocate to Silicon Valley. After all, Silicon Valley still
represents the best point of access to the virtual innovation eco-system (seeFigure 7).46 Nevertheless, this option is becoming harder and harder.47 Not only
are the costs of relocating prohibitively high,48 but immigration and visa
requirements are increasingly stringent.49 Moreover, starting from zero in an
unknown part of the world, far from home makes no sense when they don’t haveany network in California. And anyway, Hanako and Taro like Fukuoka. They
don’t want to begin again when they already have strong ties with their homecity.
46 See Vivek Wadhwa, Silicon Valley Can’t Be Copied, MIT Technology Review (July 2013).
47 SeeArmando Biondi, Silicon Valley Has Evolved - It’s Not About Startups Anymore,
VentureBeat (blog) (August 14, 2014); Eliot Brown, Tech Expansion Overruns Cities in
California’s Silicon Valley, The Wall Street Journal (April 27, 2015).
48 See Shira Ovide, Tech Boom Hits San Francisco Rental Prices, The Wall Street Journal(June 26, 2012); Pete Carey, Bay Area Rents, especially in Silicon Valley, Are on the Rise, San
Jose Mercury News (July 21, 2011).
49 See Raven Jiang, Revisiting Silicon Valley’s Obsession with Immigration Reform, The Stanford
Daily (January 4, 2015).

（54） EUIJ-Kyushu Review Issue 5-2015

So what can Hanako and Taro do? Our advice would be to canvas the current
situation in Fukuoka and ask themselves the following questions: What are theunique features of Fukuoka that can add value to the global innovation ecosystem? To what extent are innovators, entrepreneurs, investors and service
providers in Fukuoka already connected to the global innovation eco-system?
Does Fukuoka have the potential to connect even more closely to the global
innovation eco-system? And what can we (Hanako and Taro) ask the government
to do in order to help this process of connecting us – and the local start-up
community, more generally – to the global innovation eco-system?
A. “Local DNA” & the unique selling points of a region
Although we inhabit a rapidly globalising economy, locale – place – still matters.
Within the virtual innovation eco-system there are concentrations or hubs oftalent and expertise and these hubs are clustered, in particular places. Silicon
Valley - and the US more generally - remains the most important hub of the
global eco-system. The Valley, for example, is characterised by a particularexpertise in computer related technologies, as well as being a hub of venture
capital. And other places in the US, such as Los Angeles or Boulder, Colorado,
are hubs with special expertise in other fields. Outside the US there are similarclusters of innovation. Eindhoven, for example, has strengths in hardware,largely as a result of the presence of Philips and its spin-out companies in thearea.50 Beijing is now the 2nd largest venture market in the world (less than
20% of the size of the US, but rapidly expanding) with expertise in gaming,
cloud and education. Similar clusters of expertise can be found elsewhere andnew clusters are constantly popping up.
The local character and path dependencies of a region are a valuable resource.
The construction of a regional eco-system needs to be built - at least, initially on existing capacities, what we would call the “local DNA” or “unique selling
50 http://www.startupdelta.org/techhubs/

The Virtual Innovation Eco-System: Building Global Business Anywhere （55）Figure 7: Fukuoka and the “Virtual” Innovation Ecosystem

points” of a particular region. In the short term, it makes no sense to attempt
to replicate other regions, but rather to ask how can existing areas of expertiseadd value to the global eco-system.51 The danger is that potentially exciting
developments at the local level fizzle out as result of a failure to connect with thevirtual eco-system, leading to frustration and disappointment. In this respect,
time is a crucial and ever diminishing resource. Many commentators speak ofbuilding a start-up community as a multi-generational project and - of course - itis important to retain a long-term view. However, the risk of failing to connect
local advantage with global capacities is that a destructive skepticism can gain
traction and that progress can falter and stall.
From Hanako and Taro’s point of view, the best-case scenario would be that
Fukuoka is so unique that the virtual innovation eco-system comes to Fukuoka

51 See Marc Andreessen, Turn Detroit into Drone Valley: How to Build Innovation Clusters

Beyond California, PoliticoMagazine (June 15,2014).

（56） EUIJ-Kyushu Review Issue 5-2015

in order to absorb the unique qualities of the region into the cloud. What thenare Fukuoka’s unique selling points? Hanako and Taro immediately reel off anumber of features of the region: Location of the city (midway between Seoul,
Shanghai and Tokyo); demographics (a young, growing population, unusually forJapan): high quality of life (consistently ranked amongst the most liveable cities
in the world); excellent infrastructure (e.g. excellent public transport, centrally
located airport with direct flights to Asia, Europe and the US, good universitiesetc.); digital and creative; a strong local economy; and, attractive naturalenvironment (located between sea and mountains).
But are these features enough to attract the virtual eco-system to Fukuoka? Or,is something else required? In order to find answers to these questions, Hanako
and Taro need to canvas the start-up community more closely in order to findout more about what is happening right now in the Fukuoka start-up scene.
B. The prevalence of local innovators, entrepreneurs & investors
already connected to the virtual eco-system
As Hanako and Taro start to look around Fukuoka, one key question they willneed to ask is how many founder-innovators, entrepreneurs and investors are
already hooked up to the virtual innovation eco-system? They know that preexisting tie-ups between local entrepreneurs and global resources can only be of
benefit to them in their efforts to build a business in Fukuoka. This builds
confidence, both on the local side, but also from the perspective of the virtual
eco-system.

It also creates space for the spontaneous connectivity andserendipity that everyone agrees is so vital in creating a business, as well as astart-up community.52 What their initial canvasing exercise reveals is that there
is a lot of activity and innovation in Fukuoka, as well as a number of global
success stories.

52 See Jay Winder, How Tokyo is Different to Silicon Valley, MakeLeaps (blog) (November 2014).

The Virtual Innovation Eco-System: Building Global Business Anywhere （57）

Take the global success stories. Nulab, Inc., for example, was established by
Masanori Hashimoto and two co-founders in 2004 and has grown to be aninternational player in the field of collaborative services: Back Log, a project
management tool; Cacoo, a diagraming tool for drawing diagrams in real timeand Type Talk for collaborative chat.53 The head office is still in Fukuoka, with
branches in Tokyo, Kyoto, Singapore, Taiwan, and, more recently, New York.
Level 5 would be another example.54 Founded in 1998 by Akihiro Hino, thisgaming company has become one of the top ten gaming companies in Japan and- with its Professor Layton series of games for the Nintendo DS - a major gaming
player. More recently, they have expanded into the field of anime. As with
Nulab, they have not moved their head office to Tokyo or elsewhere, but haveremained a Fukuoka-based company.
Aside from these success stories, even a quick search of publicly available
information on entrepreneurship in the region allows Hanako and Taro to
generate the following map of start-ups in central Fukuoka (Figure 8).
This is all very encouraging and shows that there is an “active” start-up scene.
Similarly, if one compares Fukuoka with other cities in Japan, one discovers that,outside of Tokyo, Fukuoka has most start-up activity of any Japanese city (Table
1).

53 https://nulab-inc.com/about/;http://www.disruptingjapan.com/japan-startup-masanori-hashimoto-nulab/
54 http://www.level5.co.jp/index.php

（58） EUIJ-Kyushu Review Issue 5-2015

Figure 8: Startup Companies in Fukuoka

Table 1: Online Footprint - Japanese Startups (searching TechInAsia’s article
history up to May 2015)
CitiesOnline Startup Stories

Fukuoka

225

Osaka

215

Kyoto

195

Sendai38

Sapporo32

Okinawa

14

Source: TechInAsia

However, if Hanako and Taro perform a similar search of investment activity,
they may be disappointed. In spite of these success stories and the relatively
high levels of entrepreneurial activity, the investment picture is somewhat
different. One does not see high rates of international investment in Fukuoka
nor does one see high rates of investment from Tokyo. In fact, using publicly

The Virtual Innovation Eco-System: Building Global Business Anywhere （59）available data on the main entrepreneurial activity databases (Crunchbase,Mattermark, PitchBook & AngelList) only three significant investments inFukuoka-based start-ups were revealed between 2009 and 2014: JAFCO (aTokyo investment fund) invested $2.9 million in i3 Systems. CyberAgent
invested $83,000 in Imanee and an angel investor invested $30,000 of seedcapital in Fukuoka start-up Yamap. Moreover, whereas 393 Tokyo companies
registered on the start-up platform AngelList in June 2015, there was not asingle Fukuoka company listed.
Rather, the focus of Fukuoka start-ups seems to be on bootstrapping and building
a company with personal finances and early stage operating revenue. Nulab, forexample, used this form of financing.55 And although this can be a successfulmodel with various advantages when compared to other modes of financing(founders can retain control, for instance), it exposes founders to a much greater
degree of financial risk and may not provide the necessary levels of investment
for the company to survive the “Valley of Death”.
Hanako and Taro might find this relative absence of investors somewhat
disconcerting, particularly as they launch their business. Having read theliterature on start-up communities they are aware of the importance ofconnecting to the resources of the virtual eco-system. They now know that it isimportant not to be afraid of global venture capital or investment from establishednational corporations. The success of both individual firms, as well as local ecosystems, is going to be directly affected by whether such fears can be overcome.
Mistrust of existing Tokyo-based elites or of foreign influence - particularly inthe form of foreign venture capital - is understandable, but the risks are worth
it. This is not a “zero-sum” game situation in which the gains of investors aregoing to be at the expense of founders. Connecting with global venture capital

55 See J.T. Quigley, This Bootstrapped Japanese Startup Is Proof That You Don’t Need To Be in

Tokyo to Go Global, Techinasia (July 11,2014).

（60） EUIJ-Kyushu Review Issue 5-2015

creates new mutually beneficial collaborative possibilities that are necessary inorder to build a thriving global business. In that sense, it is important not to stopat Tokyo but to expand cooperation and to build connections with global
accelerators and other actors, particularly those with ties to Silicon Valley andother global hubs of expertise.
C. The role of government in feeding the “buzz” & creating an
innovation space
Ideally, the leaders of the process of connecting the local eco-system with theglobal eco-system should be the entrepreneurs themselves. However, this iswhere entrepreneurs often need help. This task of bringing the Local DNA to
the world is where so-called “Conductors” come in.56 Conductors can bethought of as particularly important type of “feeder” in Brad Feld’s sense of the
supporting cast of an innovation eco-system.

Conductors are crucial in

performing two crucial tasks. Firstly, they facilitate multi-layered connections
between all actors within an eco-system, as well as between local, national andglobal eco-systems. Secondly, they feed the “buzz” around the idea of a start-up
city by “shining a light” on what is going on in the local scene and creating aspace in which entrepreneurship can flourish. In this regard, conductors are
crucial architects of successful innovation systems.
Who performs this function? Ideally, highly successful serial entrepreneurs
already connected to the national and world innovation systems can “give back”
to their hometown in this way. Assume Hanako and Taro go on to become
hugely successful. Maybe they will relocate their business to Tokyo or Silicon
Valley, but we shouldn’t be afraid of this. Firstly, success breeds success and,secondly, people often give back to the community that made their successpossible. Giving back can take the form of financial donations, but also can

56 See Andreessen Horowitz, Creating New Silicon Valleys - There’s No Magic Bullet, But…,
a16z Podcast (with Fiona Murray) (May 2015).

The Virtual Innovation Eco-System: Building Global Business Anywhere （61）involve a mentoring role. Robert Huang, for example, a prominent alumnus ofKyushu University made a large contribution to the university that created
QREC with the intention of creating a venture business laboratory.57
However, in provincial cities such as Fukuoka or Eindhoven, the number ofentrepreneurs well-connected to the global innovation eco-system and able toperform this type of “mentoring” function may not be sufficient. The state
therefore has an important role to play in this regard. Local and national
government are particularly well-positioned to perform this supporting role, as
are universities. The primary function of government on this type of account istherefore the indirect facilitation of multi-layered connectivity between the local
start-up scene and the virtual eco-system.
So what do Hanako and Taro discover when they look at local and national
government activity in Fukuoka? They discover that there is a young, populist
mayor - Soichiro Takashima - who has staked his political reputation on the ideaof Fukuoka as a start-up city. Mayor Takashima seems to understand thatfeeding the buzz around this vision of Fukuoka is at least as important asregulatory reforms aimed at the “top down” planning and control of businesscreation. As such, he seems to be creating a space for a sustainable local start-up
scene. Commentators have noticed how successful Fukuoka has been; whenstartups from other Japanese cities become big, they tend to move their
headquarters to Tokyo. Those from Fukuoka, however, tend to open an office inTokyo but continue to keep their base in Fukuoka.58
Moreover, by constantly talking about Fukuoka as a start-up city, the Mayor is
performing a crucial function in fuelling the creation of a social movement
around the idea of business building in Fukuoka. This is where civil society - the57 http://qrec.kyushu-u.ac.jp
58 See Tim Romero, Masanori Hashimoto - Nulab, Disrupting Japan (blog) (December 23,2014).

（62） EUIJ-Kyushu Review Issue 5-2015

so-called “fourth helix” - comes into play. It is often argued that civil society canprovide incentives to the innovators, entrepreneurs and state actors to drive
economic, social and environmental innovations to the market faster and more
effectively.59 The movement functions as inspiration pushing people to join theeco-system. A “bottom up” social movement that sustains and feeds the nascenteco-system is vital, and local government can play a key role in driving such a
movement.
The risk for any early-stage innovation eco-system is that a few setbacks candestroy everything. A successful innovation system depends on the belief andparticipation of the wider population, but there are also risks in dreaming big.
For example, in the late 2000s, Amsterdam had a “dream” of exploiting Euro
membership to becoming a global financial centre that could “overtake” London,
but the dream fell flat after initial progress was slower than hoped.60 A few
failures or disappointments allow skepticism to overwhelm progress andconfidence can be quickly eroded. Eco-systems are fragile and skepticism iseverywhere, especially amongst incumbent elites. A social movement built
around the narrative of a start-up city can provide a certain degree of insulation
against failure.
Moreover, local government also need to place a greater emphasis on connecting
local innovators with the global eco-system and this kind of strategy involves aparadigm shift in how governments conceptualise the issue of international
cooperation. Governments - both local and national - have long recognised theimportance of international connections in developing local economy and haveoften tried to identify regional partners elsewhere in the world in order todevelop capacities and create synergy effects through such cooperation. Such
59

See Elias G. Carayannis, Thorsten D. Barth and David F.J. Campbell, The Quintuple Helix
Innovation Model: Global Warming as a Challenge and Driver for Innovation, 1 Journal of
Innovation and Entrepreneurship 2 (2012).
60 Holland Financial Centre Disappoints the Sector: FD,DutchNews.nl (July 11, 2012).

The Virtual Innovation Eco-System: Building Global Business Anywhere （63）efforts have often resulted in the formalisation of cooperation between
governmental units, for example, the conclusion of MoUs or other types ofpartnership agreement. This strategy of trying to identify regional partners
with whom a particular region has common interests makes a lot of sense fromthe point of view of policy makers who are familiar with the logic of employing a
top-down approach to solving problems. However, governments may not bevery good at selecting suitable partners and the result of such an approach may
be an inefficient use of resources. As Hwang and Horowitt have observed acentrally controlled approach to international cooperation seems likely to fail.
Instead, government should concentrate on an indirect approach aimed at
facilitating cooperation between those local actors most central to the successof a regional innovation eco-system - namely innovator-founders - withentrepreneurs and investors that are well-integrated into the global
eco-system.
In this regard, it is crucial that government fears about possible loss of control
need to be set aside. Connecting to the virtual eco-system can only have apositive impact on nascent innovation systems such as Fukuoka. Moreover,Fukuoka will make the cloud smarter as resources and capacities are absorbed.
Such a process encourages a mutually beneficial relationship between the local
and global, which opens more doors for innovators, entrepreneurs and investors.
At a national level, the Japanese government has also taken some importantmeasures. A key plank of so-called “Abenomics” has been the creation of anumber of special economic zones (SEZs).61 The list includes Japan’s wellknown cities, such as Tokyo and Osaka-Kyoto-Kobe. Fukuoka was selected to
attract fast-growing companies by offering tax benefits and modified labor laws.
These deregulatory measures aim to provide incentives to entrepreneurs to

61 See Jonathan Soble, Japan To Pursue Reforms in Six Economic Zones, Financial Times (March

28, 2014).

（64） EUIJ-Kyushu Review Issue 5-2015

relocate to particular regions within Japan. Moreover, by structuring the zones
in different ways, a degree of regulatory competition between the zones is
introduced - what we might think of as policy “experimentation” - that allows
policy makers to identity the key factors in promoting economic success.
The rationale for such local deregulation seems clear.

By confining suchmeasures to a particular region, the expectation is that investment and talent
will migrate into those regions and that a flourishing economic eco-system will
emerge. The resulting synergies between the various stakeholders stimulate
sustainable regional economic growth.

The positive economic effects

experienced at a local level then seep over into the rest of the economy thus
benefiting the nation as a whole. The earlier preferential treatment of thespecial zone is thus justified on the grounds that it ultimately brings benefits toall.
And yet, perhaps the real importance of SEZs may be that they shine a light oninnovation and entrepreneurship and add to the buzz around the idea of local
innovation. Again, the regulatory aspect may be less significant. Certainly, if
one looks at the details of the Fukuoka SEZ, it appears that many of the initially
proposed measures were diluted as a result of internal opposition from various
government ministries.62
Nevertheless, it is important to recognise that a potential risk with this strategy
is that the competition that is introduced into the system is actually unhealthy
in that it undermines the spirit of collaboration that builds connections bothwithin Japan (between local eco-systems), but also between Japan and thevirtual eco-system. SEZs may feed the kind of zero-sum game thinking that isless likely to create collaborative possibilities and more likely to simply feed
mistrust and suspicion.
62 See Caslav Pejovic, Japanese Labor Law: Challenges Ahead, Working Paper (2015).

The Virtual Innovation Eco-System: Building Global Business Anywhere （65）

D. Service providers & the creation of a commercial framework tobring a great idea to market
Hanako and Taro’s canvassing of the Fukuoka scene would also need to focus on
the presence of service providers willing to provide the kind imaginative
thinking necessary in designing a commercial framework for transforming agreat idea into a great business. Let’s take the example of lawyers as anindicative example of what service providers can do in order to add value to aparticular start-up scene.63
The problem for lawyers is that there is often an in-built reluctance to becoming
involved with start-ups. This may be a result of the disconnect between thecosting structures and staff practices of the tradition law firm business model.
Loss-leading clients - such as start-ups approaching the “Valley of Death” - arenever going to be an attractive proposition as prospective clients, at least for
more traditional law firms. And yet, as Michael Stern has graphically observed,
law firms played a crucial role in the early history of Silicon Valley:“But steep discounts, deferred fees, equity in lieu of cash, a light drafting pen
and even lighter billing pencil were all tools the Valley firms could and did
deploy. This earned the derision (oh ye careless cowboys, lacking research,rigour, adequate boilerplate or relationships with regulators) and ethics baiting(isn’t owning stock in a client a potential conflict of interest?) of our big-citybrethren. But we were the ones creating the commercial framework for ourclients’ new products and services to get to market.”64
Moreover, lawyers can be vital in connecting founder-innovators to early-stage

63 See Ronald J. Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94

The Yale Law Journal 244 (1984); Lisa Bernstein, The Silicon Valley Lawyer as Transaction
Cost Engineer, 74 University of Oregon Law Review 239 (1995).
64 See Michael Stern, Viewpoint: Isaacson’s “The Innovators” Leaves Out the Lawyers, The
Recorder (December 10, 2014).

（66） EUIJ-Kyushu Review Issue 5-2015

money.65 This also seems to have been the experience in Silicon Valley, where
the law firms functioned, firstly, as a bridge between innovators and venture
capital, and, secondly, as a bridge between innovators and Wall Street. Moreover- as the above quote emphasises - lawyers played a crucial role in designing thecommercial framework in which technology businesses operate. In developing
this framework, there was a degree of openness and a sense of being engaged ina collective endeavour. In this way the benefits of competition and sharing werecombined in order to identify the best business model, contract clauses andnegotiating strategies.
However, when Hanako and Taro check the Fukuoka scene they don’t find an
online footprint indicating the presence this type of lawyer. Of course, if
Fukuoka is able to connect to the resources of the virtual eco-system there is noneed to re-invent the wheel, but some local capacities are necessary, at least in
the early stages of business building.

IV. Lessons Learned
The narrative of Hanako and Taro has allowed us to think about the challengesof building a global business from the perspective of two innovator-founders
based in Fukuoka. Now that they have ended their journey, what lessons havethey learned about creating a global business in an innovation economy andbuilding a flourishing start-up community in a provincial Japanese city.
Perhaps the first lesson is that it makes no sense to attempt to recreate Silicon
Valley in Japan. Rather, Fukuoka must look to develop local capacities. The“local DNA” or “unique selling points” of the region have to provide thefoundation for the regional innovation eco-system. In this regard, Hanako and

65 See Andrew Romans, The Entrepreneurial Bible to Venture Capital: Inside Secrets fromthe Leaders in the Startup Game (2013).

The Virtual Innovation Eco-System: Building Global Business Anywhere （67）

Taro are confident that Fukuoka has huge potential: a “liveable city” possessing
strong infrastructure (transport, education, public services), safe and clean
environment, existing industries with capacities in key technologies etc.
And yet, these are not sufficient conditions for building a global business or
innovation eco-system. In addition, we need “conductors” - especially local
government, universities, and other service providers - to shine a light on thisprocess and to create momentum around the idea of a start-up community.
From this, a broader social movement can emerge, in which citizens - civilsociety - embrace the narrative. This social movement affords a degree ofprotection against the business failures that will inevitably occur.
But still we need more. Central and local government need to employ a rangeof mechanisms that aim at indirectly stimulating “bottom up” activities that feed
the eco-system.

These can be regulatory (removing red tape), but more

important are events, programs, support, information etc.
All of this can be found in Fukuoka. But all of the above is still not enough.
Crucially, connections with the global innovation system are under-developed.
In the context of a global, inter-connected economy, the primary challenge indeveloping a global business, as well as a local innovation eco-system, is to
unlock, local entrepreneurial advantage by connecting with the resources(capacities, know how, experience, as well as capital) contained within thisglobal innovation system. As we saw, the virtual innovation eco-system has a
cloud-like character that facilitates leaner and more agile local eco-systems. At
least, it can do if the local eco-system is sufficiently well-connected to the global
system. The risk lies in believing that everything has to be developed locally inorder for a region to be successful, and that connecting with the global networkis neglected.
How then are connections forged with the virtual innovation eco-system? What（68） EUIJ-Kyushu Review Issue 5-2015

should Fukuoka do in this regard? One can start with more international events,
developing the online footprint of the region, more English language blogging,
more participation at an international level to raise the profile of Fukuoka. But
even this may not prove to be enough. Perhaps the most important step is to get
serious about outside investment. Bootstrapping is not the best model fornavigating the “Valley of Death”. One important strategy is to partner up with
Tokyo. This is crucial as investors there are already relatively well-connectedto the virtual eco-system and can provide a gateway to global resources andcapacities. Building competition between the regions of Japan makes no sense
and feeds an unhealthy zero sum view in which one region’s gains are anotherlosses, rather than regarding each other as partners in a bigger game.
At the end of their journey, Hanako and Taro now realise what needs to be done
and they have some ideas about how to do it. But they have also realised
something equally important, namely that they have to take responsibility forthis project. Government and other institutions can be important partners, but
in the end, this is not a task for government, either local or national. Rather, it
is a task for entrepreneurial individuals with ambition, drive and innovativeideas for business. Hanako and Taro realise that it is their responsibility toensure that Fukuoka is connected to the virtual innovation eco-system, as
pursuing this goal both serves their own private interest, but also the interest of
the region as a whole. What is good for them is good for Fukuoka. They realise
they have a mission: the task of connecting the potential of the local with thecapacities of the global.
Received on 15 July 2015
Approved for publication on 24 August 2015