Part IV: The Quest for Growth—the Startup of Start-up Communities



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Guest Post By Tom Nastas – Scaling up Innovation – (VC, Mentor, Blogger)

Tom Nastas a 25 year VC veteran in US, int’l and emerging markets wrote a series for Startup Rev on the ‘spark’ which sparked the startup of Russia and how the development of start-up communities in emerging markets are shaped much more by the cultures of risk vs. what we investors and entrepreneurs face in the USA.  An interesting read, below are the individual posts and content for each one.

Subjects in this Part IV post include:

1.)   Clonentrepreneurship or Alternative Paths to the Startup of Start-up Communities?
2.)   Change the Culture & Amazing Things Happen

In Part III, the Power of Clones, subjects presented:

1.)   Drive Growth and Innovation in the Supply Chain
2.)   Sidestep the Obstacles that Impede Scaling Up
3.)   Controversy of Clonentrepreneurship: Cloning the Idea or Hatching a Start-Up?
4.)   The Spread of Clonentrepreneurship

Read Part III.

Read Part II

Read Part I

Read Introduction (to the series)

The ‘take-away from Part III.

Cloning and Clonentrepreneurship is belittled since many criticize it as being incremental and not creative, a waste of time, money and energy.  While cloning is neither gamechanging nor disruptive, the results it achieves to drive forward more entrepreneurship and investment validates its contribution to the startup of start-up communities around the world.

Given the contributions of clones to spark the startup of start-up communities, are they a panacea to growth? Do alternatives exist in the quest for growth? And what lessons can we apply from clones and Clonentrepreneurship to impact investor DNA for more seed and early stage investment?

Clonentrepreneurship or Alternative Paths to the Startup of Start-up Communities?

Brazil and China like Russia are large population countries with a growing middle class that is ripe for more consumer-facing clones, clonentrepreneurs and Clonentrepreneurship.  Certainly the selective transfer of some cloned business models to low-medium population countries like Costa Rica, Chile, Argentina, Kenya and Ghana have merit as consumers in these countries seek products and services to save money, to have more choice, to enrich the quality and joy in their lives with clonentrepreneurs, investors and Government all benefiting.

Clones are not the same. The ones with the best chances of survival in the emerging markets against the innovator globalizing are those which require localization for the domestic economy and not just for language(s) spoken: but product sourcing, logistics, payment systems, merchandising and other business practices to satisfy conditions on the ground and to comply with the huge number of local regulations that impact how e-commerce is transacted.[1]

Cloning Western business models is only one direction for entrepreneurs and investors to pursue for profit.  Israeli entrepreneurs and venture investors took a different approach to create a start-up nation through the development and commercialization of disruptive and gamechanging technology for global markets, directly primary toward enterprises.

The Israeli Government pushed success forward through a variety of initiatives which sped Israeli tech to market including but not limited to the transfer of military technology to the private sector and its open door policy to immigrants (many were scientists from the Soviet Union). Other success factors include an Israeli industrial policy that funded R&D to create deal flow and the unplanned creation of entrepreneurs through military training in the ‘8–200’ intelligence unit.[2]

Government policy makers and their sovereign wealth funds can catalyze the start-up communities in other ways.  Riches earned from oil and other natural resources funded Russian initiatives like the $10 billion Russian Corporation of Nanotechnology, the $1 billion dollar fund-of-funds called the Russian Venture Company and the Russian Government’s multi-billion dollar Skolkovo program—to seed development of gamechanging tech, investment and the creation of a new set of entrepreneurs.

While small population countries may not have the sovereign wealth of oil, natural assets like Costa Rico’s location to America creates advantages for its ICT entrepreneurs to scale its start-up community.  Costa Rican entrepreneur Manrique Ulloa Steinvorth of ieSoft created a consortium of companies (IT Innovation Group) to expand access to the US; “Instead of competing for the same opportunities, we get together and offer a whole solution. If a project needs ten developers and I only have five, I will search within the consortium for a partner that can provide the other five, and the company that brings the project will manage the project” he says.[3]

Croatia is another small country with ambitions for more start-up communities.  Its location on the Mediterranean is an ideal spot to transform selected coastline into logistics, transportation and warehousing tech start-up centers to serve Central and East Europe.[4] Investors and the Croatian Government might collaborate to co-create ‘deal flow funds’ which invest in the technologies required to transform this underutilized asset into wealth.[5]

Entrepreneurs and venture investors ask me “Which path should we choose; the road of disruptive technology or Clonentrepreneurship (or something in between)?”

My answer is that it’s not an ‘either…or’ decision.  It’s a combination of all with the percentage blend influenced by:

1.)   Your natural and technology assets
2.)   The sources and amount of money you have or can raise for the execution of your business model
3.)   The types of investors in your country, their sources of capital and their behavior to risk
4.)   The time, patience and determination you and your investors have to continue in the face of disappointment, risk, false starts, failure and forces working for your demise.

As you execute, your specialties and expertise will shine to guide your footsteps forward.

In Russia and in other countries clonentrepreneurs are sensitizing local investors to the rewards and risks of investing in technology.  Over time expect that some investors whom financed clones will develop the confidence and risk appetite to selectively invest in technology that will be more innovative at first—disruptive later—vs. cloning.  These investors and entrepreneurs will be the ground-breakers that establish the precedence for investment in new thinking thereby attracting co-investors from around the world to their home country.

One never knows:  Perhaps the next Facebook-type success is hatching right now in some Russian laboratory?

Change the Culture & Amazing Things Happen

Is this actually possible?  Change the culture—investors’ DNA—for more seed and early stage investment, leading to the startup of start-up communities?

Yes it is, but to change the culture one must first impact it, with investors earning money to their requirements and tolerance for risk.

As I detailed in Part I, Russian entrepreneurs deployed business models which generated quick revenues after their market launch, solutions which matched the behavior and attitudes of Russia investors to risk.  Impacting the culture came about not through grand ambitions to create gamechanging technology but practical steps to generate immediate revenues and execute quickly.

So what are the small but meaningful steps you can take to impact the culture for more investment, entrepreneurship and innovation?

For Next Time, Part V:  Scaling Up Investment for More—Impact & Outcomes

In Part V, I answer this question and suggest initiatives for entrepreneurs, investors, Government staffers and investment officers at development finance institutions to ‘Scale Up Investment for More—Impact and Outcomes.’

Comments, opinions and questions are welcome here or send directly to me atTom@IVIpe.com

Be well and be lucky.

Tom Nastas

 


[2] Source, ‘The GoForward Plan to Scaling Up Innovation,’ by Thomas D. Nastas, June/July 2007, Russian edition, Harvard Business Review (in Russian), in English.  See also October 2007 ‘Scaling-Up the Innovation Ecosystem,’ Hungarian edition, Harvard Business Review, (Hungarian); Sept. 2008, ‘Innovation for Growth,’ Latin America edition, Harvard Business Review (in Spanish)

[3] Source, Costa Rica’s Startups Fight Through Bureaucracy and Focus on Diversifying, by Patrick Haller, Part II: “Diversify or Die,” 15 November 2011

[4] Source ‘Creating a Venture Capital Industry in Croatia,’ report of Thomas Nastas to staff of the World Bank, 18 March 2011

[5] Source ‘Bridging the Valley of Death,’ slides 117-128, presentation of Thomas Nastas to staff of the World Bank & IFC, 29 November 2011

 Part IV: The Quest for Growth—the Startup of Start up Communities

Part II: The Cultures of Risk—Financing the Startup of Start-up Communities



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Guest Post By Tom Nastas – Scaling up Innovation – (VC, Mentor, Blogger)

Tom Nastas a 25 year VC veteran in US, int’l and emerging markets wrote a series for Startup Rev on the ‘spark’ which sparked the startup of Russia and how the development of start-up communities in emerging markets are shaped much more by the cultures of risk vs. what we investors and entrepreneurs face in the USA.  An interesting read, below are the individual posts and content for each one.

Subjects in this post:

1.)   The Cultural Divide:  What Investors ‘Buy’
2.)   What Investors Fear
3.)   The Culture of Venture Capital:  Friend or Foe?

Last time in Part I, I discussed:

1.)   First, Three Definitions
2.)   The Russia Tech Scene
3.)   Growth in Russia
4.)   What Changed for Growth to Emerge
5.)   The Spark that Ignited the Start-up of Russia

Read Part I.

Read the Introduction to the series.

Summary from Part I:  Beginning about 2006, innovation became a priority of the Russian Government to diversify its economy from oil/gas with its multi-billion dollar investments in the Russian Venture Company and the Russian Corporation of Nanotechnology. Even with these investments, the needle of tech investment crept up ever so slowly in venture stage companies.

But everything changed beginning in the 2nd half of 2010; Russian entrepreneurs cloned US business models in Internet e-commerce, social and mobile with 20+ startups attracting more than $400 million in less than eighteen months through 2011.  For 2012 investment in start-ups and venture stage companies is estimated at between $800 million to $1 billion.

The ‘take-away. Russian entrepreneurs demonstrated that cloning established Western Internet business models and localizing them for the domestic market captures growth.  This was what domestic investors needed to open up their pocketbooks and spark the startup of Russia.

Ok, so, uhm—what’s so revolutionary about entrepreneurs cloning the ideas of others and investors financing start-up clones?

To answer this question, I discuss the culture of risk in the developing countries and how it impacts the behavior of local investors and their willingness to finance seed and early stage tech business models.  Then I contrast how their investment behavior differs from investors in the developed countries.

The Cultural Divide:  What Investors ‘Buy’

The Clam and Pearl Part II: The Cultures of Risk—Financing the Startup of Start up CommunitiesAmerican tech and start-up entrepreneurs ‘sell opportunity’ to raise money. This works great in the United States since angel investors and venture capitalists are comfortable with risk, ambiguity and uncertainty, and willingly pay the costs of failure when business models don’t work, founders pivot and start-ups evolve into something different from entrepreneurs’ initial intentions.

Except for the very few, most local investors from Manila to Moscow and from Shanghai to San Paulo approach risk differently. Sure, opportunity is required for the financing of ventures.  But the risks of execution are more importance as the deciding factor since emerging market countries are opaque and with their lack of transparency—invisible risks and obstacles can cause even the most experienced investors to lose their entire investment:  Capital preservation drives financing decisions.

Consequently they buy ‘risk’ by investing in the known and understandable;  businesses and projects with markets and customers a 100% guarantee, where the risks of the investment are in the execution of building a factory or constructing a warehouse, creating a bank, establishing a chain of shops or restaurants as examples. These are the uncertainties they have dealt with as businessmen and investors, and have the experience to help entrepreneurs solve—avoid.

Risks Financed + Source Info Part II: The Cultures of Risk—Financing the Startup of Start up Communities

What Investors Fear

The risks of financing innovative firms, i.e., does a market exist, will customers buy, achieve promised performance—often technology based—are uncertainties too great for domestic investors in emerging markets since they add additional layers of risks to those of execution and involve a different sort of risk assessment—skills and experiences they frequently lack.

Risks that Scare Investors + Source Info Part II: The Cultures of Risk—Financing the Startup of Start up Communities

Clones overcome these fears since many generate revenues immediately, some from day #1, demonstrating that a market exists, the tech works, customers show up and pay.  With these risks behind the venture, the way forward is managing execution—risks that local money in emerging markets ‘buy:’  the tolerance of emerging markets investors for the US model of entrepreneurial experimentation, trial and error and the funding of pivots is zero.

Why is this so?  And how do we use this culture of investor risk-taking as our ally, to make amazing things happen; more entrepreneurship, more innovation and more investment for the start-up of start-up communities not only in Russia but throughout the emerging world from Chile to China, Kazakhstan to Kenya, India to Indonesia?

The Culture of Venture Capital:  Friend or Foe?

To obtain a deeper understanding why entrepreneurs and investors behave as they do in the emerging markets, we must look at an unlikely place to frame this discussion:  Silicon Valley.

“Silicon Valley is the only place on Earth not trying to figure out how to become SiliconValley.”[1]

Silicon Valley Attributes and Attitude to Risk + Source Info Part II: The Cultures of Risk—Financing the Startup of Start up Communities

Silicon Valley’s greatest attribute is not its ability to finance the future and failure, but investors’ attitude to risk which shapes their risk taking, their acceptance of ambiguity and uncertainty to early stage tech deals, thereby attracting entrepreneurs with the wildest (and craziest) ideas.

This behavior to risk is exemplified by the 2-6-2 distribution of returns rule.[2]

For every ten investments made by investors, two fail with all money lost, six return the original investment + a low to modest rate of return, with the remaining two generating breathtaking profits (Facebook, Google, Apple, Cisco, Oracle, Instagram and Microsoft as examples). These ‘superwinners’ as they are called, produce the superior rates of financial return that compensate for losing investments and slightly profitable ones.[3]

Of course one never knows in advance which investments will be superwinners or also-rans. Since Silicon Valley investors know that statistically they’ll invest in their fair share of superwinners, they have the confidence to finance the wild and crazy, a few which become successes. Superwinners breed or attract others to launch start-ups.  As more entrepreneurs enter the market, the number of new companies financed increases with less time required by investors to make the investment decision. More choice is what investors need since for every one investment, 99 are rejected;[4]  to consummate ten investments (the 2-6-2) an investor needs to see 1000 opportunities.  More choice attracts more capital to the start-up community as other investors jump in to finance the next set of superwinners.  The start-up community prospects and perpetuates to a thriving ecosystem.

Many superwinners did not start on the path to greatness, and they only found it after experimenting with different business models until they hit the bulls-eye;  others started down a path only to change direction—pivot—to find what the market and customers would accept.  Silicon Valley investors willingly finance early failures since they know statistically, many pivot to success as Google, Instagram, Facebook, YouTube, PayPal and others did to achieve superwinning status. While it may seem counterintuitive, investors must finance failure since without them they are not taking enough risk.[5]

It’s this willingness to finance ambiguity and uncertainty that makes Silicon Valley—uhm—Silicon Valley.

The National Venture Capital Association (USA) estimates that in 2010 the US venture industry invested the equivalent of $3,945 per person living in the Silicon Valley area vs. $43 per person in the rest of the US, including other start-up communities like Boston and New York. That’s a 91:1 ratio.[6]

Go to my home state of Michigan and the number falls to $15 per person, a ratio of 263:1.[7] So the likelihood of a Detroit startup raising venture capital in Michigan is more difficult vs. Silicon Valley.

In Russia and other emerging market countries the amount of capital invested/population is even less than Michigan;  these regions lack the quality and quantity of deal flow that typifies the Valley and local investors are unwilling to fund experimentation, pivoting, trial and error in business model creation.  Since domestic investors buy the ‘risks’ of execution by investing in the known and understandable—businesses and projects with markets and customers a 100% guarantee (experimentation/pivoting not necessary)—the chances of superwinners being created and financed is remote:  Yet an increasing flow of future ‘superwinners’ is what’s required for local investors to invest in, and for a start-up community to crystalize.

In Russia and other emerging market countries the amount of capital invested/population is even less than Michigan;  these regions lack the quality and quantity of deal flow that typifies the Valley and local investors are unwilling to fund experimentation, pivoting, trial and error in business model creation.  Since domestic investors buy the ‘risks’ of execution by investing in the known and understandable—businesses and projects with markets and customers a 100% guarantee (experimentation/pivoting not necessary)—the chances of superwinners being created and financed is remote:  Yet an increasing flow of future ‘superwinners’ is what’s required for local investors to invest in, and for a start-up community to crystalize.

We have met th enemy and it is us Part II: The Cultures of Risk—Financing the Startup of Start up Communities

That is until an event or series of events breaks this cycle to change the trajectory of the market.  In Russia it was the early and fast liquidity from the Groupon clone that demonstrated the merit of cloning Western business models plus the IPO of Mail.ru that minted the money for clone investment.  With the United States as the engine of start-up creation in the world, it was natural for Russians to copy, localize and paste clones into Russia, to capture the eyeballs and wallets of the Russian consumer. And then—the pocketbooks of investors too.

The chasm between the cultures of risk-taking by local investors in Russia and the risk of start-ups was crossed. Foes became friends. The start-up of Russia began. 

“But this is not the only contribution of clones to the startup of start-up communities.”

For Next Time—Part III:  The Power of Clones

In Part III, I discuss the multiplier effect in start-up creation that clones have in local market.  Clones do more than just build a local network of supply chain partners thereby increasing the # of startups for a startup community to emerge.  Their successes impact the DNA culture of investors to risk as they build new experiences in seed and early stage risk.  And they do so without taking the risks of opportunity that is normally associated with early stage companies since clones[8] demonstrate that a market exists, the tech works, customers ‘get it’ and pay.

Subjects in Part III:

1.)   Drive Growth and Innovation in the Supply Chain
2.)   Sidestep the Obstacles that Impede Scaling Up
3.)   Controversy of Clonentrepreneurship: Cloning the Idea or Hatching a Start-Up?
4.)   Spread of Clonentrepreneurship

Comments, opinions and questions are welcome here or send directly to me atTom@IVIpe.com.

Be well and be lucky.


[1]Quote from Robert Metcalfe, father of Ethernet, founder of 3Com, author, pundit & conference host

[2] Author’s note:  The 2-6-2 distribution of returns rule is a term to describe the distribution of investment returns in a venture capital or private equity portfolio. The 2-6-2 rule comes from data collected and reported on the industry’s financial performance over a 40 year period from Cambridge Associates, the National Venture Capital Association and the Small Business Administration (which tracks investments made through the Small Business Investment Corporation program of the US Government).

[3] Author’s note:  While the 2-6-2 distribution of returns is an industry average, individual funds will have a different distribution of financial performance, e.g., some might have a result of 4-4-2, others a 1-9-0, others a 0-7-3, etc. Approximately 2% of investments since the 1980s have produced 98% of the financial returns realized in the venture capital industry (USA)

[4] Author’s note:  A rule of thumb in the industry.  Naturally some firms will be in the flow of ‘better’ investment opportunities and able to transact the necessary number of investments with a lessor number of total deals evaluated

[7] Source: Ibid

[8] Certainly all clones are not alike.  Prudent, wisdom and understanding of the local market is required in the selection of which business models to copy, localize and paste into an emerging market

 Part II: The Cultures of Risk—Financing the Startup of Start up Communities

Part I: The Start-up of Russia. The Startup of Start-up Communities: The Power of Clones in Russia—& Beyond



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Guest Post By Tom NastasScaling up Innovation – (VC, Mentor, Blogger)

Tom Nastas a 25 year VC veteran in US, int’l and emerging markets wrote a series for Startup Rev on the ‘spark’ which sparked the startup of Russia and how the development of start-up communities in emerging markets are shaped much more by the cultures of risk vs. what we investors and entrepreneurs face in the USA. An interesting read, below are the individual posts and content for each one.

Last time I introduced the questions as topics for answers in this five part post series:

1.)   What is the ‘spark’ that ignites the startup of start-up communities?
2.)   How does the ‘start-up’ of startup communities differ—emerging markets vs. developed countries?
3.)   Why is the US entrepreneurial model of experimentation, trial and error and pivoting a death sentence for entrepreneurs in the emerging markets? And what you can do about it.
4.)   How does the culture of risk and failure in emerging markets impact investor DNA—what they finance and what they won’t
5.)   What is Clonentrepreneurship, where is it spreading from and to, and why is it a model for more—innovation, startups, and venture investment?

Read the introduction here.

I conceived this series for StartUp Communities, the blog of venture investor Brad Feld (Foundry Group, Boulder, Colorado, co-founder of Tech Stars, blogger Feld Thoughts).

Subjects covered in this post include:

1.)   First—Three Definitions
2.)   The Russia Tech Scene
3.)   Growth in Russia
4.)   What Changed for Growth to Emerge
5.)   The Spark that Ignited the Start-up of Russia

First—Three Definitions

You might be unfamiliar with this phase ‘start-up community.’ So here’s a short intro to what it is and why it’s important to every country on Planet Earth.

A start-up community is a place where entrepreneurs with ideas come together to start new companies, and can actually find the money and the talent to get their start-ups financed, staffed and launched.  Most start-up communities offer appealing lifestyles, are cool places to live, to work, to have fun and do more—faster.  Over time as more and more start-ups are created and financed, an entrepreneurial ecosystem takes root with success begetting success leading to a thriving start-up community.

In the world of venture capital (VC), entrepreneurship and start-up creation, Silicon Valley is the quintessential start-up community in the United States, with the MIT/Boston area as #2.  The term start-up community can be attached to a country as Dan Senor and Saul Singer did in their 2009 book Start-Up Nation: how Israel became a start-up ecosystem with sixty-three publicly Israeli companies traded on the NASDAQ stock exchange in the United States, more than any other foreign country.

Start-up communities attract and breed entrepreneurs.  Entrepreneurship drives economic growth and development, new jobs and of course, wealth creation. It’s this prosperity that cities, states, regions and countries around Planet Earth are trying to create, attempting to replicate—duplicate, to get things going; for their survival and renewal, by inspiring wannabe entrepreneurs to take the leap into the unknown and supporting resident entrepreneurs.

I craft two other phrases in this series, Clonentrepreneurs and Clonentrepreneurship; words put together from Clone-Entrepreneurs and Clone-Entrepreneurship (but without the hyphen).

Clonentrepreneurs are entrepreneurs that clone a business idea or a business model of a company and implement it too, sometimes with improvements, sometimes not.  While the word clone may be a 21st century phenomena, clones have been around a long, long time.  Over the years these two companies have taken different paths to growth, but over 100 years ago it was “Coke or Pepsi?”

The Russia Tech Scene

Startup Genome 150x99 Part I: The Start up of Russia. The Startup of Start up Communities: The Power of Clones in Russia—& BeyondStartup Genome recently published research on the most active start-up ecosystems around the world. It listed Moscow as #10.

It’s great to see Russia’s largest city rocket into this spot, given that in 2001 less than $100 million/year was invested in Russian seed and early stage tech vs. billions of dollars of private equity money invested in fast moving consumer goods, real estate, construction, wholesaling, retailing, natural resources and other sectors that lifted a post-Soviet economy into the 21st century.  Ten years ago only a handful of emerging growth tech companies existed in Russia includingYandexOzonMail.ruAbbyy and Kaspersky to name five.  The first three served primarily the Russian speaking market, the last two—international customers around the world.

In the latter half of the decade, innovation became a priority of the Russian Government to diversify the economy from oil/gas with its investments in the Russian Venture Company(fund-of-funds with ? $1 billion under management) and the Russian Corporation of Nanotechnology (Rusnano, ? $10 billion under management, making fund, project and international investments in nanotech). Even with these efforts, the needle of tech investment crept up ever so slowly to $200 million ± 10% for seed and early stage investments in all sectors.

But everything changed in 2010; investment in seed, start-ups and early stage companies more than doubled from 2009 and in 2011, doubled 2010 results.  In 1Q 2012 the top Internet 10 investments raised over $80 million. Some pundits claim that investment will exceed $1 billion by end of 2012.

What caused this acceleration in investment in just two years, and what are the take-ways for your start-up community; to increase the # of start-ups in your country and entrepreneurs making the commitment to new projects, the amount and velocity of venture money invested with the ‘Scaling Up’ of entrepreneurship, risk-taking and innovation for more?

Growth in Russia

Russia Internet Users + Info on Source Part I: The Start up of Russia. The Startup of Start up Communities: The Power of Clones in Russia—& BeyondCertainly as the Russian economy rebounded from the lows of the global financial crisis, consumers and businesses were in the mood to spend. Russians increasing lived and breathed on-line with entrepreneurs serving up Internet models to capture their eyeballs and wallets.

Online video advertising in 2011 doubled to $37 million from $15 million, Russian contextual advertising jumped to $430 million in the first half of 2011, an increase of 60% from 2010, Russian Internet advertising clocked in at $1.4 billion, up 56% from 2010 with display (banner) advertising’s 2011 spend up 45% to $510 million from 2010.  GP Bullhound an investment bank based in the UK estimates that only 18% of the 53 million Russian internet users shop online, with online advertising consuming only 9% of Russian ad budgets.

Russia Digital Spend + Source info Part I: The Start up of Russia. The Startup of Start up Communities: The Power of Clones in Russia—& Beyond

All of this growth translated into increasing revenues for Internet and Web companies withForbes.ru listing the top 30 Russian Internet companies by their 2011 sales.

Top 30 Russian Internet Companies Forbes + Source Info Part I: The Start up of Russia. The Startup of Start up Communities: The Power of Clones in Russia—& Beyond

Such growth attracts investors as honey lures bees.  But it’s the nature of the deal flow that better explains the huge jumps in VC investment in less than two years and the wave of new entrepreneurs doing start-ups.

What Changed for Growth to Emerge

2010 was a ‘tipping point’ for the start-up of Russia through two liquidity events and underlying forces in the country. First was the acquisition of the Russian Groupon clone called Darberry by Groupon.

Darberry 300x169 Part I: The Start up of Russia. The Startup of Start up Communities: The Power of Clones in Russia—& BeyondFrom their formation in February 2010 to its purchase by Groupon in August 2010, Darberry showed the investment path for entrepreneurs and investors in Russia, business models with a real shot at attracting capital.  While a handful of clones existed in Russia, Darberry’s sale was a major inflection point for more Russian entrepreneurship.

The second event was the minting of a few billionaires and dozens of new millionaires from the IPO of Mail.ru (valuation—$5.71 billion, November 2010).  After this new wealth splurged on cars, clothes, homes and travel, it financed new start-ups.

Since these liquidity events, dozens of new start-ups raised hundreds of millions of dollars in 2010, 2011 & 1Q2012 with capital invested by new Russian funds formed to finance mainly e-commerce, social and gaming startup clones with US and European venture capitalists co-investing since they had experience with these business models in the West.

Prior to 2008 the Russian tech scene had no role models, no ‘mojo’ and little connection to the world other than oil/gas.  It was widely known that Russia had deep human talent in mathematics and the physical sciences, yet few knew the route to exploit these assets for commercial ventures.  Some took the path of outsourcing (India model) or system integration to build enterprises like LuxoftIBS and TerraLink to name three.  A few others walked a different road like Acronis and Parallels:  creation of gamechanging technology for global customers (Israeli model) with R&D conducted in Russia and headquarters located in the United States.

Neither of these endeavors generated the velocity of new start-ups being formed nor an explosion of venture capital investment.  Yet if these were not the paths forward for the creation of a start-up community, then what was—since there was no clarity to what business models would capture the wallets of Russian customers and the cash of Russian investors?

The Spark that Ignited the Start-up of Russia

Certainly the creation of several dozen angel investors with tech experience was an impetus to the start-up of Russia as the market lacked ‘smart’ money. But that money has to find a home, and that’s where clones showed the way forward.

Darberry demonstrated that cloning established Western Internet business models and localizing them for the domestic market captures growth. While profits eluded Darberry, it scaled quickly with revenues multiplying exponentially day-by-day.  This was the signal that Russian investors needed to open their pocketbooks and finance the start-up of Russia.

From Sept. 2010-2011, 20+ new start-ups and development stage companies raised over $400 million.  Most are clones and a small sample of these seed and early stage companies which raised capital is shown below.

Small Sample of Russian Transaction Clones + Source Info Part I: The Start up of Russia. The Startup of Start up Communities: The Power of Clones in Russia—& Beyond

New capital continues to flow into clones.  KupiVIP (clone of USA shopping club Gilt Groupe, itself a clone of French deep discounter Vente-Privée) grew from launch (October 2008) to $200+ million revenue by 2011 with $65 million of new capital raised in 1Q 2012.  In May 2012, Avito.ru, the Russian clone of Craigslist raised a whopping $75 million.

Ok, so, uhm—what’s so revolutionary about entrepreneurs cloning the ideas of others and investors financing the start-up of clones?

For Next Time—Part II:  The Cultures of Risk

To answer this question I’ll examine how the cultures of risk—developed vs. developing countries—impact the DNA of investors and their willingness to finance seed and early stage tech business models, with some investors ‘buying’ opportunity while others ‘buy’ risk.  A preview of the subjects in Part II:

1.)   The Cultural Divide:  What Investors ‘Buy’
2.)   What Investors Fear
3.)   The Culture of Venture Capital:  Friend or Foe?

Comments, opinions and questions are welcome here or send directly to me atTom@IVIpe.com.

Be well and be lucky.

 Part I: The Start up of Russia. The Startup of Start up Communities: The Power of Clones in Russia—& Beyond