Startup the $h!t out of city problems

Startup the $h!t out of city problems

Urban Us Public Benefit Corporation was incorporated two years ago. When we began, we speculated that there might be strategies we could apply to help founders who want to make city life better.

Our initial research [2] is now more than two years old (or about 14 years old in startup years). So we wanted to share what we’ve learned from our 19 startup investments as well as our growing community of over 800 founders, investors, and experts.

What we’ve learned

For each section, we’ll begin with one of our original statements from two years ago and then offer an updated perspective.

Sell to Citizens – citizens are willing to pay directly for some of the benefits such as convenience or cost savings in areas like mobility, energy and services.

When we mention cities, most people immediately think we mean city government. Sometimes we do, but mostly we mean the people who live in cities (and elect city officials). City residents are essential to transforming cities because their purchase decisions impact everything from how they move around to how they use electricity. That’s why nine of our 19 investments to date sell directly to consumers.

To paraphrase Onewheel creator Kyle Doerksen, consumers let you sneak public benefits into the world. You can sell a fun rideable device while sneaking zero emissions commutes into the world. You can sell a better way to donate to friends in need, as HandUp does, and sneak a new layer of social services funding into the world. Or you can sell the convenience and financial savings of a connected sprinkler, and sneak in dramatic water savings, as Rachio does.

When we think of B2C successes that make cities better, we think of Tesla, Solar City, Uber, Lyft, Waze, and Nest. These aren’t just hugely valuable companies and great investments; they also have the added benefit of shifting everyone’s expectations about what is possible. This drives debate and spurs competition, so we’re coming to expect faster, better, and cheaper even as we create public benefits like reduced emissions.

Citizens can do more than consume, so we were quite optimistic about ideas like the sharing economy.

Work with Citizen Crowds – crowdfunding, crowdsourcing and the sharing economy are a core part of delivery more with less.

We think the term “sharing economy” is misleading. It’s might be more appropriate to call it the  “subscription economy.” Then again, the difference might simply be who owns the asset that is being used? For example a common early refrain from AirBnB hosts has been that they use income to pay mortgages (again, who owns the underlying asset?). But it’s increasingly common to see landlords using AirBnB to generate more returns from their assets.  And talk to a Uber driver and it soon becomes apparent that many are making monthly payments to a company that has financed their car.

Why does this matter? Neighbors sharing has a certain appeal because it feels like more than a transaction. On the flip side, more investors are looking for assets that they can purchase and “share”. We think the end result is still being able to do more with less because risk is being spread across multiple parties. We’re beginning to see this for hardware startups. Even at an early stage, they are able to tap into more debt options directly, or take a half step towards subscription, by offloading risk to third party services like Paypal Credit or Affirm to offer financing to customers.

Beyond sharing their assets, crowds remain interesting in other ways. They’re still participating in funding and feedback, but now they can also provide access to data from their devices. Dash is working with various businesses and governments to help them learn more about how we drive. In very specialized areas, such as preventative maintenance, firms like Logcheck can benefit from aggregating data across multiple supers, buildings, and building management firms to arrive at more optimal maintenance programs.

Crowdfunding is here to stay and has been especially important for hardware. It started with using Kickstarter and Indiegogo to pre-sell or simply to “self-start.” Similarly, equity crowdfunding websites, like Angellist and Crowdfunder, offer important ways to expand early access to accredited investors. Finally, our friends at Neighborly might yet prove that the biggest crowdfunding disruption can come from the original crowdfunding tool, municipal bonds. Ideally, this will be accompanied with a big change in procurement.

When we began, we were inspired by some of the changes we were seeing in procurement.

Participate in Open Challenges – open challenges are increasingly being used by cities for procurement and discovery of promising ideas.

Open challenges offer the promise of better procurement. They’re open to more participants, particularly small and medium sized businesses. Citymart has a few success stories in this area. Early on, Citymart matched companies like Socrata and Connecthings with new opportunities. These early successes provided critical reference clients that in turn helped secure new business with local government. Citymart continues to grow, but has taken relatively few additional steps to open up procurement to startups. But there are other ways to work with local governments.

In the largest startup ecosystems, like the Bay Area, New York, Boston, Austin, and D.C., entrepreneurs are finding more ways to connect with important decision-makers in local government. These organizations help founders to run pilots and win critical first referenceable contracts. And they’re becoming effective at using their communications platforms to share successes.

Additionally, there is now more focused media coverage highlighting startups for interested local government agencies. Publications like Govtech Magazine and CNNMoney regularly feature successful cases of startups working on city problems. Awards such as Code For America Technology Awards, 1776 Challenge Cup, and NYC Bigapps Challenge are providing visibility for startups, making them easier for the most innovative local government agencies to find.

Build on Open Data – data is not only open, but increasingly being standardized across cities.

Open data feels a little like revealing a map. By one estimate, in U.S. cities, we’re about 30 percent [3] along at moving from “Here Be Dragons” to revealing a first map of what cities have. We’re already seeing signs that open data is not just useful for enabling political “gotchas,” but is becoming core to product offerings, and perhaps even to sales.  

One of our favorite data usage examples is from Smartprocure. Imagine what could happen if your business could easily see what products and services were being used by a large sample of your customers. This is what Smartprocure makes possible, using FOIA (Freedom of Information Access) requests to access local government procurement data.

Part of the reason for our excitement about open data is that we’ve already seen benefits based on federal data, including weather and seismic data, from teams like Rachio and 1Concern. And we’ve seen a number of startups benefit from local transit data, while others are beginning to piece together local zoning and transaction data in order to understand real estate opportunities.

At the same time, we’re beginning to see how open private data can enable city agencies. Last year, Fast Company explained how NYC was using Yelp data to uncover health code violations. There is a lot of public and private activity around transit. Waze and Uber have begun working with cities, and so has Dash. We know BRCK has had some interesting discussions in this area, too, as it works to provide WiFi data in cases in which there is no conventional access.

And we’re beginning to see interest in data for the built environment, in areas like water and energy, with potential opportunities for Rachio, Radiator Labs, and Flair. How far are we from ongoing inspections using drones? Skycatch knows. What can HandUp reveal to local policymakers as it tracks the progress of neighbors in need? We expect city governments to begin to use a lot more private data.

Looking down the road, we’re watching Mark43’s first police software deployment in Washington D.C. Mark43 is focused on better and faster collection of high quality data. The goal is ultimately to enable more analysis, but also to reduce costs associated with data collection.  We expect that as the benefits of open data grow, there will be increased focus on improved collection, quality assurance, and analysis.  

Understand Policy Making – cities are adopting policies that make it easier to innovate in areas like mobility, energy and economic development.

We think early stage startups are best served by focusing on building something their customers will love. Why? First, it’s hard enough to create something customers want and then to find customers. But it turns out that without the support of customers, there is little to suggest that new businesses will be welcomed by regulators or policymakers. If their electorate has not signalled any interest, why should they bother?

This idea has been echoed by our friends at Tumml, as well as by U.S. Representatives Fred Upton and Greg Walden of the House Energy and Commerce Committee, who talked with a16z and urged founders to focus on building something that customers love. They were quick to highlight the power of markets in helping regulators understand what voters/consumers want.

As an example, commercial customers quickly saw the value of drones and this enabled startups such as Skycatch to begin working with agencies like the FAA. Blocpower has succeeded in working closely with local government at the city and state level on energy projects in underserved communities. Part of their success stems from their ability to offer a new approach to older problems like affordable housing.

Helping founders find product-market fit, is the main idea behind accelerators, which is one of the reasons we like them.

Work with Urban Accelerators – cities are operating programs to enable startups to research and test ideas and prototypes.

It’s appropriate that the winner of the 2015 Techcrunch Disrupt award in San Francisco was Agrilyst, from NYACRE [4] . NYACRE sponsors include the New York Economic Development Corporation, New York University, and the New York State Energy Research and Development Authority. ACRE is a great example of the benefits of domain-specific accelerators, but also of the potential of collaborating with local government. We’ve invested in two ACRE companies: Radiator Labs and Blocpower.

Beyond city and state organized programs, there have been some important developments in specialized accelerators. Tumml is graduating a steady stream of high growth startups, including a number of teams that have gone on to do well at the very best generalist accelerator programs, such as YC and 500. Tumml is being joined by more specialized accelerators, like Metaprop, which focuses on real estate. Additionally, corporate accelerators like Verizon and Cisco are also choosing to focus on city challenges.

Another notable development over the last two years has been the emergence of hardware accelerators like HAX, Bolt, RGA, and Highway1. Why hardware? Nearly half of the startups that we’ve invested in make hardware. Unlike software, hardware skills remain much more concentrated in a few ecosystems, such as the Bay Area, Denver, Shenzhen, and Berlin. Beyond the skills concentration, shipping hardware adds more risk and complexity, so we expect hardware accelerators to play a growing role in helping seed stage companies.

Other organizations can also help startups; some are already focused on city challenges.

Build with Foundations – a number of foundations are active across multiple areas including policy, funding and understanding challenges.

The Knight Foundation is perhaps the most active in this area. It has funded initiatives such as Code for America, and also runs the Knight Cities Challenge. It also funded our annual event, Smart City Startups, and it invests in startups via the Enterprise Fund. While not a foundation, Omidyar Network is having similar impact. It also supports Code for America, as well as Tumml, and has made a number of direct investments in startups.

Newer programs, such as Rockefeller Foundation’s 100 Resilient Cities, may also prove to be useful to early stage startups. They are beginning by helping startups connect with Chief Resilience Officers.  

We’ve discovered even more foundations that care deeply about issues related to city life. Unfortunately for founders, most are organized to support non-profits and not startups, but this is starting to change.

What we missed

So far, we’ve focused on updating and correcting our early assumptions. In some cases, we didn’t anticipate at all, the impact of some stakeholders or strategies.

Work with Corporate Investors – a rapidly growing universe of corporate investors are providing funding and support to early stage, urbantech startups.

When we began, corporate venture capital barely seemed relevant main because historically, CVC’s preferred to participate in later stage financing. However, this has changed as more CVC groups have begun participating in seed and series A deals. But there is something else going on.

The sectors that shape urban life include real estate, automotive, logistics, energy, water, waste, communications, insurance, etc. These large sectors are developing ever more complex product pipelines and they’re acutely aware the a new company might emerge to disrupt some or all of the core businesses. Investing in startups to gain insights and options regarding future partners and acquisitions makes more sense today than it ever has. But should founders work with CVCs?

Many traditional VCs remain deeply skeptical of CVCs, in part because CVCs are likely to be less focused on direct financial return. The real return is seen in the benefit to their operating business. At the same time, the data suggests that there are quite a few VCs who are happy to co-invest with CVCs [5]. The feedback from our founders has been positive so far, from the dealmaking process to ongoing support. Some active firms interested in city themes include Motorola, BMW, Verizon, Honeywell, American Family Insurance, Samsung, Google Ventures, and Amazon.

Choose the right cities – important stakeholders are concentrated in key metro areas. Access to these areas is essential.

Talent is everywhere and so are customers. The “rise of the rest” is quite real; however, other stakeholders also matter to startup success. As some of our previous examples illustrate, local government, angels, VCs, media and manufacturing capabilities have an impact in a number of areas of import to startups that want to build solutions to city problems.

We started Urban.Us in Miami, and we intentionally avoided having a stated geographical focus. Instead, we believe that the best startups will scale quickly, on the order of 100 cities within five years. In our minds, where they begin is secondary to where they will have impact. Despite this, we’ve still ended up with 70 percent of our investments in the Bay Area and New York City.

We mentioned BRCK earlier—BRCK is a team-building hardware startup in Nairobi. Nairobi is not known for showing up on global lists of startup cities, but the BRCK team is thriving. They’re also an unusual group because they’ve done a lot of this before—many of them helped to build Ushahidi, also in Nairobi.  

Additionally, there is the matter of city by city expansion. As investors begin to express a preference for profitability over growth, city by city expansion will change. Valet Anywhere is in the midst of an interesting market related to demand parking. It has focused on building a profitable business in NYC, even as better funded competitors have quickly expanded to multiple metro areas. Beginning in the Bay Area might have made it possible for Valet Anywhere to access more capital, but being in New York provided access to more customers.

Tell the world – there are many people who want to help you succeed. They just need to know you exist.

The most important thing we’ve learned in the last two years is that an enormous number of smart and generous people give a damn. They want founders to succeed at solving hard city problems. They’re willing to help with expertise, introductions and even funding. So tell people what you’re working on. We suspect you’ll quickly meet some of the fantastic people who have been helping Urban.Us.

NOTES

[1] Apologies to Drew Goddard, who adapted Andy Weir’s terrific book, The Martian. “I’m going to have to science the shit out of this” is likely to be repeated often in all manner of contexts. We couldn’t resist adapting it to the cause of startups who want to solve much more terrestrial issues.

[2] During the summer of 2013, I worked on research under the watchful eye of the GigaOm Research team (thanks to David Card). This research resulted in Smart Cities: Opportunities for Startups. This report looked at startups like Waze, Nest, Canary, Embark (acquired by Apple), Aunt Bertha, FirstFuel, Uber, Lyft, Sidecar, Public Stuff (acquired by Accela), coUrbanize, and Citymart. It also took some of the first steps toward identifying various important contributors (investors, communities, etc.) such as the Knight Foundation, Omidyar Network, and Code for America.

[3] The Open Knowledge Foundation, the Sunlight Foundation, and Code for America have worked with volunteers to compile a list of open data for U.S. cities. The available data sets cover everything from service requests to procurement.  Details are available at http://us-city.census.okfn.org/.

[4] Past TechCrunch Disrupt winners include a number of notable startups like Dropbox, Yammer, Mint, Qwiki and Alfred. More on 2015 TC Disrupt SF results.

[5] CBInsights highlights a number of corporate venture trends up to the middle of 2015. The data includes overall investment trends, as well as co-investment data. Additionally, there are a number of general comments and opinions from traditional VCs about corporate VCs. By their own admission, many CVCs are not particularly focused on financial returns. Beyond other real concerns, this is a likely source of some VC hostility towards CVCs. Our view is that it’s hard to lump all CVCs together. In much the same way as there are great and mediocre VCs, so we expect some great and not-so-great CVCs.