The most frequent complaint I hear from entrepreneurs in the emerging markets is the lack of risk capital in their country; investors willing to finance start-ups and early stage companies. Many founders travel to America seeking money and connections in the US venture ecosystem. While a few are able to raise cash, most don’t—and return home empty handed—to face an unknown future.
With trillions of dollars invested in food & beverage, fast moving consumer goods, retailing, wholesaling and construction to name just a few, plenty of money exists in the developing world—from Beijing to Buenos Aires to Bangalore—and from Moscow to Manila to Mexico City. So if there is so much capital seeking opportunities, why is it such a struggle to get local investors to open their pocketbooks and finance technology, 1st time entrepreneurs and early stage SMEs? And what actions can entrepreneurs implement to ‘shape’ their business models to the risk attitudes and behaviors of investors + learn to ‘sell risk, then opportunity’—to raise $ for their ventures?
I spoke on these subjects to entrepreneurs, investors and government officials from East Europe as the invited guest of US Ambassador to Croatia, Mr. Kenneth Merten and his economic section chief Thomas Johnston at the Brown Forum. This event commemorates former US Secretary of Commerce Ron Brown’s (Clinton Administration) efforts over 20 years ago to initiate trade between states of the former Yugoslavia—after years of war and conflict—and the United States. The theme of 2013’s event was ‘Entrepreneurship & Venture Capital in South East Europe.’
Topics in my 16 minute video talk include:
- Investor behavior is driven by the cultures of risk: What it is, how it differs in the emerging markets vs. Silicon Valley and actions to make risk your friend—not your foe
- Debunking myths—what investors (do/will) finance in emerging markets. Risks ‘bought’ by investors in the developing world & risks which scare them (beginning with slide #39)
- Business models which unlock capital—& those that don’t
What I ask of you
With a deeper understanding and insight into the risk behavior of capital, entrepreneurs can create and ‘shape’ business models to unlock the wallets of customers and investors. So please write me with the solutions and strategies you used to overcome the cultures of risk and raise $ for your venture.
An entrepreneur myself, I created Innovative Ventures Inc., (www.IVIpe.com) in 1986 to invest venture capital (VC) into university
technology from Michigan State University and the University of Michigan.
Then I Did Entrepreneurship and Venture Capital in International Countries
In 1990 with a few coins and lots of energy I led IVI’s international expansion into Canada & Europe, then Africa, later into Kazakhstan and Russia, created new venture funds and grant program to finance technology and entrepreneurs across these continents and countries through equity, debt, grants & royalty structures: $300+ million committed from Governments and development banks like the US Government, the European Bank for Reconstruction & Development, the World Bank and its investment arm the International Finance Corporation, Canadian Development Bank, European Commission, the Government of Kazakhstan and institutional investors.
I’ve lived, worked and invested in Canada, Europe, Africa, Kazakhstan and Russia (in Moscow for 10 years). Over the last 20 years I’ve acquired a deep understanding of investing in tech and non-tech companies/entrepreneurs (with domestic investors and Governments) in these regions, what works & does not (& why) in countries with different economic environments, cultural practices and legal regimes that require new protocols of doing business to balance the interests of all stakeholders to achieve success. Now I split my time in Michigan, Russia & Kazakhstan, and other places where contributions are needed.
Part I: The Start-up of Russia. The Startup of Start-up Communities: The Power of Clones in Russia—& Beyond
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.
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
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
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 includingYandex, Ozon, Mail.ru, Abbyy 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
Certainly 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.
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.
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.
From 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 Luxoft, IBS 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.
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.
Fred Wilson from Union Square Ventures has an extraordinary post up titled The Darwinian Evolution of Startup Hubs. Fred was part of the first cycle of the NYC startup community in the 1990′s and has played a key role in the development of evolution of it, while not limiting himself to only participating in startups in NYC. As a result, he’s got broad perspective about startup communities and the post he writes is right on the money. The conversation in his comments are great – go participate over there if you have comments.
This weekend finds NYC in between Internet Week (which I largely missed because of my London trip) and Disrupt NYC (which I will be at on and off this coming week). So the development of NYC as a startup hub is very much on my mind. And so I thought I’d post about the development of startup hubs.
This theory, which I like the call The Darwinian Evolution of Startup Hubs, is not new and I certainly didn’t come up with it. But I think it is important for everyone to understand and so I’m going to blog about it.
If you study Silicon Valley, what you see is something that looks like a forest where trees grow tall, produce seeds that drop and start new trees, and eventually the older trees mature and stop growing or worse, die of disease and rot, but the new trees grow up even taller and stronger.
In my mental model of Silicon Valley, the first “tree” was Fairchild Semiconductor (founded in 1957) which begat Intel (founded 1968) which begat Apple (1976) and Oracle (1977), which begat Sun (1982), Silicon Graphics (1981), and Cisco (1984) which begat Siebel (1993) and Netscape (1994), which begat Yahoo! (1995) and eBay (1995), which begat Google (1998) and PayPal (1998), which begat YouTube (2005), Facebook (2004), and LinkedIn (2003) which begat Twitter (2006) and Zynga (2007), which begat Square (2010), Dropbox (2008), and many more.
If I left out important foundational companies of this mental model, please forgive me. That was not meant to be a comprehensive history. It was meant to illustrate how this evolutionary scenario plays out over time.
If you drill down a bit deeper, you see that the founders, investors and early employees generate a tremendous amount of wealth from these big successes. The later employees don’t make as much wealth but they do learn a ton and make enough money that they don’t need to work for someone else and so they strike out on their own and are often funded by the folks who made the big money in the prior startup. That’s how the seed drops from the tree and starts a new tree growing. This continues on and on and on.
If you look at that history of silicon valley, you see that in the forty year history (since Intel’s formation), there have been close to ten cycles of maturation and new company formation, and those cycles are getting shorter and the number of important foundational companies that are formed each cycle are increasing.
That makes total sense since this darwinian evolutionary model is non linear. One company begets two and those two companies beget four, and so on and so forth. Of course there are exogenous factors that also play out, like technology changes, financial market cycles, and the availability and cost of talent, and they impact how fast the startup hub economy expands.
This darwinian evolutionary model of startup hub development is not limited to silicon valley. We have seen it play out in other places, most notably Boston, and increasingly in NYC. It is also playing out in markets like Boulder Colorado and Austin Texas and many other parts of the US and many parts of the world.
When I look at a startup hub, I like to figure out what the “Fairchild Semiconductor” of that market was and when it got started. That tells me how far along the development cycle that startup hub is. In NYC, that was Doubleclick which was founded in 1996, the same year as my first venture capital firm, Flatiron Partners, which was founded on two premises, that the Internet would be big and that NYC would be an important locus of Internet innovation. We did not invest in Doubleclick (sadly) but we did invest in a lot of interesting Internet companies in NYC in the late 90s.
So NYC’s startub ecosystem is 16 years old now. And we are two cycles in. The companies that are getting started and funded right now in NYC are akin to the Apple/Oracle stage of silicon valley. If you want to push, you could suggest that we are three cycles in now and the companies that are getting funded right now are akin to the Sun/Silicon Graphics/Cisco era. That might be right.
But in any case, NYC’s tech sector is not anywhere close in terms of fertility to silicon valley. It will be there in another 25 to 30 years. And silicon valley will be even further along.
Unless, of course, something else happens.
The technological revolution that preceded the digital revolution was autos and airplanes. They were invented in the late 19th and early 20th centuries and the first commercial startups emerged in the first decade of the 20th century. The auto/airplane revolution played out until the 1960s/1970s. That suggests that a technology revolution lasts around 75 years.
The transistor was invented in the late 1940s and by 1958 we had commercial startups working on the technology. So if this revolution is anything like the last, the next big thing will be invented any day now and within a decade or two we will be on to the next technology revolution.
And in that case, all bets are off. Silicon Valley could become the next Detroit and who knows what will be the next Silicon Valley.
But of course, all of this is conjecture. History doesn’t repeat itself. But it does rhyme. That comes from Samuel Clemens (aka Mark Twain). One of my favorite people ever.