Scaling Up Start-up Communities: Engage Risk as Your Friend, not a Foe



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

How Impact the DNA of Investors11 Scaling Up Start up Communities: Engage Risk as Your Friend, not a Foe

 

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 opportunitieswhy 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:

  1. 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
  2. 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)
  3. 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.


Tom Nastas Scaling Up Innovation 300x289 Scaling Up Start up Communities: Engage Risk as Your Friend, not a FoeAn 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.

 Scaling Up Start up Communities: Engage Risk as Your Friend, not a Foe

The Kentucky Thesis



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Guest Post By Kent OylerOPM Financial – (President)

OPM Financial Logo The Kentucky ThesisNot long ago the guys from Awesome Inc arranged for startup guru Brad Feld to speak at the Kentucky Center about the Boulder, Colo., startup phenomenon. Somehow Boulder has attained the mythical entrepreneurial status we also attribute to Austin, the San Francisco Bay Area and Research Triangle.

Now back in the post-Nam days, when I was a longer-haired undergrad at CU-Boulder, the only local entrepreneurs I can recall utilized baggies to distribute their product. Gnarly for sure, but definitely not a global hot spot.

So, I wondered, what changed since the late ’70s, besides the merciful death of disco? How had the most liberal college town in America transformed itself into one of the preeminent entrepreneurial communities in the world and a birthplace of TechStars?

Maybe Feld’s speech would provide some answers, so I bought a ticket (and later, his book).

From Boulder to Louisville

In Feld’s TED-style talk, he used a flip chart to quickly lay out what he calls the “Boulder Thesis” (which he stretches to 200 pages in his book, Startup Communities). In short, Feld’s Boulder Thesis states that a vibrant entrepreneurial community must:

  1. Be led by entrepreneurs who
  2. Have a long-term commitment, and
  3. Be inclusive of anyone who wants to participate in it, and
  4. Continually engage the entire entrepreneurial stack.

Understand that Boulder, which is fondly referred to as “eight square miles surrounded by reality,” sports five major research labs and the most degreed population in the United States. So it’s a pseudo-Oz, and whatever they do or (now legally) smoke out there might not translate to Kentucky.

OPM Financial The Kentucky ThesisBut what if it does? What if our most ambitious people self-organized into the best job and wealth creation machine this side of the Rockies?

I’m here to proclaim that the soul of the Boulder Thesis is, indeed, beginning to trend right here in the Bluegrass. Granted, we don’t yet match their 2013 Rockin’ Mountain High community, but (cue Journey) we are at least in the ’80s, or maybe even (fade to Pearl Jam) the ’90s in Boulder time, edging ever closer to the so-2009 Black Eyed Peas’ “I Got A Feeling.” (Way to remix those metaphors.) 

My point is that this region is slowly but surely crafting its own energetic entrepreneurial community under flag bearers such as Phoebe Wood, Doug Cobb, Bob Saunders, Kimberly Nasief-Westergren, David Jones, Charlie Moyer, Tendai Charasika, Mark Crane, Greg Fischer, Adam Fish, Alex Frommeyer, Kris Kimel, Brian Raney, Suzanne Bergmeister and many others.

This isn’t a planned and managed affair; it’s organic and authentic. It’s like cat herding. It’s highly inclusive and spans the “stack” from investors to entrepreneurs to supporters. It includes long-standing groups such as Venture Connectors, KSTC, Nucleus and Enterprise Corp.; alongside rogues like Forge and Startup Weekend.

With the Gil Holland-led re-entrepreneurization of NuLu, the community even has a homeland.

From Louisville to the Commonwealth

To paraphrase Brad Feld, we are witnessing the birth of not just the Louisville Thesis, but the Kentucky Thesis, which I might point out is miraculously overcoming basketball rivalries and connecting with like-minded clusters of entrepreneurial diasporas from Paducah to Lexington to Covington.

A good thing? I damn well think so, and cheer on all comers who are willing to pitch in, whether by starting a company, investing, working, sponsoring or just showing up. We don’t have to become Boulder.Who needs weed dispensaries and 300 days of sunshine anyway? We just need to be ourselves and stick with it.

We have strengths in logistics, healthcare, food and manufacturing combined with that bull-headed Kentucky long-rifle sense of independence – hey, not every region is so blessed. We have plenty of bright people and ideas. And nobody sees us coming.

Granted, it was probably a hair easier to grow a vibrant entrepreneurial community in progressive, highly educated, uber-cool Boulder. But when we do it here, Mr. Feld will have an even better book to write.

Or maybe we’ll just write it ourselves.

 The Kentucky Thesis

Engaging Women in Tech



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Guest Post By Lesa MitchellThe Kauffman Foundation- (Vice President )

Camp ORD Engaging Women in TechThe book Startup Communities: Building an Entrepreneurial Ecosystem in Your City clearly states the need for inclusiveness as a basic tenant of a good startup community.  Since the pipeline of women with STEM degrees has been bursting at the seams for years (except in engineering) one would think these women would be spilling over into our startup community events and activities.

Not so much.

I recently attended an awesome maker/tech event hosted by Zach Kaplan (Inventables) and Brian Fitzpatrick (Google) called ORD Camp in Chicago. It was an amazing example of a Startup Community in action.  I noticed something different about this event that I thought was important to share – the guys tried hard to engage women in their vibrant tech entrepreneurial ecosystem. In 2009 when they launched the event they had only 6.6% women participants, but this year that number went up to 26%.

It is not unusual for me to get calls from organizers across the country who are thinking hard about what they can personally do differently to engage women in their tech community. So my advice is simple – learn from Zach and Brian’s work. Before and during the event they took what I would call extraordinary measures to make sure women not only attended, but were fully engaged in leading sessions. I would call this work heavy lifting not for the shy or uncommitted.  It is important to note (I am a witness) that many times female entrepreneurs and STEM leaders are invited to events but back out at the last minute. Entrepreneurs are super busy so this isn’t unusual, except the problem here is that there are already so few of them in the STEM areas that when they don’t attend, it leaves few women and you end up having a guys event.

 

The extraordinary measures these guys took in planning were as follows:

  • They invited way more women than they thought would show up, knowing
    shrinkage would happen.
  • They hired a well known “sitter service” located close to the event and
    publicized this to all invitees/attendees.  The previous year, women that
    canceled, named “sitter problems” as a reason.  One man had also
    noted this problem so they realized this service may benefit a large
    number of attendees.
  • They posted a detailed no harassment of any kind notice on their invite.  As many in the tech crowd are aware, they are not the first to take this overt action.  Tim O’Reilly led this charge for his events a couple of years ago so these guys followed suit.  And I mean detailed – do not do this kind of thing with examples.  This provides a strong positive signal to women (especially when there are late night events with alcohol).
  • They put women on the advisory board to help select and encourage other women to attend once they were invited.
  • They made sure that a number of the women attendees were going to come prepared to lead discussions and demonstrations.  The young women from Google who led a demonstration of physics and food science was amazing.
  • They alerted local police that women and men would be leaving the building late at night.

 

Feedback from attendees:

This was an un-conference, so at the event, I posted the “how do we get more women into tech” on the wall and waited to see if anyone would vote on it as a topic.  They did. Then to see who would show up – a lot of people showed up. Note – six years ago I did this at another well known event and three people showed up in the room all women and one guy. This time we had a large group show up and it was 50% men.   I opened the conversation with an overview of all the above observations and asked for ideas about what we were still doing wrong and what we could do more or less of to get more women into the tech/maker network. The women in the session provided the following feedback:

    1.  “I almost didn’t come here because I hadn’t been to this before, I never heard of anyone that had attended, I don’t know any of these guys running it and it looked so crazy I was worried about what I was getting into showing up by myself.”
    2.  “I am too busy to go to something that looks like it involves late night boozing with people I don’t know.  If I didn’t know other people who had attended and told me it was amazing, I never would have showed up. If you think the 1950′s are over you are wrong, the young tech guy crowd still treat women as second class citizens and I don’t want to spend a weekend having to shout to get a word in the conversation.”
    3.  “I work at (insert well known company) as an engineer and attended last year, I learned a lot here and it has created a broader support community for my work.  This year I nominated other women to attend and then followed up with them to make sure they understood the purpose of the event and what to expect.  They all showed up!  I hate being separated into the boys and girls clubs so I am doing my job of bringing women into what have been predominately men’s fields, but actually finding women engineers is hard.”

The session was not only productive because of the honesty of the participants, but also because they came up with great ideas about specific things happening on the ground in their city and what they could all do (both men and women) to bring more women into the pipeline and into leadership roles. Bless the men that took an hour and attended this session and are carrying out their acts of support today.

If you really want to engage women (and that is the topic of this post) in your startup community – it requires an effort.

According to Zach, ORD Camp is a meritocracy and they knew there was a large pipeline of highly qualified women in the community that weren’t being represented.  They needed to get these women involved in the same way they needed to get leaders from the Ruby community AND the Python Community from companies like Google, Facebook, and Apple.  This wasn’t about lowering the bar for women it was about getting women involved that earned the right to be there.

Look around at your next Startup Community event/program and see if the majority of the faces are all men. We know there is a large pipeline of highly qualified women, so if you don’t have many at your event and you want to change that – you may need to change what you are doing.

If you are organizing events focused in an area that is already devoid of women in the pipeline – you need to find a woman willing to be your co–organizer so that right up front it is obvious that this isn’t an all male event.  I personally think this is vastly more important in the middle of the U.S. than on the coasts simply due to the small number of women tech entrepreneurs.  CA, Boston and NY already have a lot of women leading or co–leading startup community programs/events/gatherings and they have been working hard at this for years.

Hats off to all of them.

-Lesa

 

 Engaging Women in Tech

Part V: Scaling Up Investment—Finance 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.

In Part V, subjects discussed:

1.)   For Entrepreneurs—What are You Selling to Investors?
2.)   For Investors—Let’s Be Realistic
3.)   For Governments/Development Finance Institutions—Atypical Leadership Needed
4.)   Concluding Remarks
5.)   My Next Blog Series—Mobilize Local Capital to Finance Your Dreams
6.)   About Me
7.)   Links: Evolution of Runet (Russia Internet) & the Russia Tech Scene

Last time in Part IV, the Quest for Growth, I discussed:

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

Read Part IV here.

The ‘take-away from Part IV.

Clonentrepreneurs sensitize local investors to the rewards of investing in technology since clones match the behavior of local investors to risk. As results are achieved and money is made by all, investors open up to new investment opportunities a bit more adventuresome and innovative—disruptive vs. cloning.

Cloning and Clonentrepreneurship is one strategy to impact the DNA of local investors in emerging countries to spark the startup of start-up communities, but of course others exist.

What are the other actions which each you can take to achieve your objectives and fuel the startup of start-up communities?

For Entrepreneurs—What Are You Selling to Investors?

Entrepreneurs raising money too often attempt to shape investor risk behavior to their investment opportunity. Instead, shape your business model to match the needs of not only your customers but investors too.  Think creatively to find the solution which your customers will pay for—no matter how little the revenue is per customer—to craft your business model to match investors’ DNA to risk.  Design your business model and its execution to systematically attack each of their fears to early stage tech deals.

Risks that Scare Investors + Source Info Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Once you have this business model executed with paying customers, approach investors by ‘selling risk, then opportunity,’ i.e., demonstrate how you’ve eliminated risk in each of the four categories to prove your great investment opportunity. Once you raise money, execute yes but also pay forward in your start-up community; be the role model to other entrepreneurs, teach/mentor them in the solutions which you executed to overcome the fears of local investors in emerging markets.

For Local Investors—Let’s Be Realistic

Rarely will Western clones match the big returns as your investments in telecomm, real estate, construction, food/beverages, fast moving consumer goods, wholesaling and retailing have performed.  Yet as the economy in your country progresses and incomes grow, populations and enterprises open their pocketbooks to products and services which better match changing needs.

In the Chinese online travel industry for example, Ctrip and eLong have millions of registered users. Entrepreneurs seeking money to compete against them is risky and uncertain; however opportunities exist for unorthodox business models. For example, Chinese company Qunar is a travel search engine for online travel services. It aggregates travel information like air tickets, hotels and holiday offerings so Chinese consumers can make better and more informed travel decisions. Qunar serves the evolving needs of consumers and achieves success by approaching the market differently by making competitors—its partners.

Tell entrepreneurs your needs for business models which generate revenues in the immediate term; postpone your demands for immediate profits and cash distributions. Be creative in deal structuring and flexible to valuations since tech business models scale better across customers and geographies to justify higher prices paid vs. investments in brick and mortar.

Structure the investment agreement to align and incentivize entrepreneurs to your attitudes and behaviors to risk.  Oh, how does that work? An example:

American investor financings typically include an equity option plan for founders and employees.  In some emerging countries, legislation permits the issuing of equity options to management of start-ups. When permissible, distribute equity shares based on revenues realized vs. traditional metrics like length of time served in the company or # of users engaged. If legislation does not permit this action, structure the investment agreement as equity earn-ins held in escrow with shares issued when agreed-upon metrics are achieved.

For Governments/Development Finance Institutions—Atypical Leadership Needed

Governments and their finance institutions conceive venture initiatives to catalyze venture funds, to finance the startup of start-up communities.  Frequently these funds are modeled to the program called Yozma, the Israel Government’s fund-of?funds.

Yozma was capitalized with $100 million; $80 million which financed new VC funds with $20 million for direct investment into Israeli tech SMEs.  It invested $8 million into a private VC fund with a minimum of $12 million/fund invested by Israeli and foreign venture capitalists. Yozma financed ten VC funds with a total capitalization exceeding $200 million. These funds went on to finance innovative companies and spur the development of the high tech SME and VC industry in Israel, where one did not exist before. Fast forward 10 years and the 10 funds supported by Yozma were managing over $3+billion with the VC industry in Israel managing $10+billion.

Yozma-type schemes offer economic incentives to induce investment and build learning experiences in seed and early stage tech investing such as:

1.)   Commit up to 49% of the capital to the creation of a new VC fund
2.)   Offer preferential returns to investors
3.)   Take 1st losses on failed investments
4.)   Cap financial returns to the Government so as to boost profits to investors
5.)   Subsidize management fees &/or pay the costs of investment due diligence
6.)   Allow private investors to ‘buy-out’ the Government’s equity, usually within the 1st five years of fund operation, at cost + a bank interest rate of return

Yozma worked exceedingly well in Israel and a few industrial nations.[1]  But results in China, Russia, Chile, and other emerging countries has not been so spectacular; local investors didn’t respond in the #s or volume of investments in the seed and early stage sector as expected and targeted by sponsoring governments.[2]

HmmmmReality sets-in as staffers scramble for new solutions and a chair before the music stops. “Let’s try something different.”

When domestic capital does not change its risk behavior to seed/early stage tech, government staffers work vigorously to create a new class of investor—angels—since their risk behavior better matches the profile of entrepreneurial ventures. While angel investors are welcome in all countries, developing this community takes years to accomplish with multiple false starts and entrepreneurs seeking money now going unfunded.

Hmmmm—let’s rethink what the initiatives should be.”

Plenty of money exists in the pocketbooks of local investors in emerging markets to finance start-ups for a start-up community to emerge.  What’s required is the unlocking and mobilizing of local capital for investment in technology, 1st time entrepreneurs and early stage tech SMEs. Certainly encouraging a cloning strategy in the entrepreneurial community is one solution to unleashing local capital as the successes of Russian clonentrepreneurs proved.

Another solution is to think forward—design venture schemes which better match local investors’ behavior to risk and the mentoring of local investors in early stage tech investment. Include in this mentoring ‘show & tell’ sessions of other financing solutions: royalty based or technology performance financing schemes, i.e., capital invested in technology SMEs with investment returns generated from the cost savings and/or revenue enhancement earned by customers.

What else might you do, say with founders and management teams?

Organize a mentoring program; get them the mentors they need to ‘shape’ early stage tech business models to the risk attitudes & behaviors of local investors + ‘sell risk, then opportunity.’ Until investors can understand and ‘buy’ the risk in start-ups & early stage SMEs in the emerging markets, little capital will flow to them.

But what can you do if you seek to do something more ambitious, i.e., generate knowledge creation to disrupt industries and attract local investors for the needed finance?  Deal flow funds are one solution to attack both needs.

Deal flow funds finance entrepreneurs and SMEs executing to a single technology, product or service platform, technical challenges that require new thinking in science and engineering to accomplish.  What might be an example of technical challenges in need of solutions?  Take a look at these slides which tell this story.

Slide1 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Slide2 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Slide3 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Slide4 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Slide5 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Slide6 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Slide8 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Slide9 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Tech Solutions not Ldt to Russia+source info Part V: Scaling Up Investment—Finance the Startup of Start up Communities

A ‘deal flow’ fund finances technology development and commercialization.  And in Russia for example, development of the Shtokman field is a national priority of the Russian Government, not only because of its wealth potential but also the promise of new economic prosperity to the Russia Far North.  The linking of technology to a country’s national priority helps assure local financiers that innovators deploying the tech have a market and paying customers.  It’s this matching of tech solutions to customers which harmonize the risk behavior of local investors to the risks of start-ups and early stage SMEs.

Concluding Remarks

Emerging markets face huge obstacles in finding talent, capital, knowledge, and yes, the business models which match the risk appetite of local investors.

Spark Points3 Part V: Scaling Up Investment—Finance the Startup of Start up CommunitiesClones are one solution to spark the startup of a start-up community since they generate the revenues which local investors demand as a precondition for investment.  As Clonentrepreneurs achieve success, it encourages others to try entrepreneurship too.  Some are a bit more venturesome and launch improvements to models cloned from the West.  Others do something different and inject their own notions of creativity by innovating new solutions layered on top of Western platforms like Russian beta-stage start-up ClipClock is doing to YouTube or IVI.ru is doing in the Russian video streaming industry.

Start up Nitroo Part V: Scaling Up Investment—Finance the Startup of Start up CommunitiesAnd isn’t that what we want?

More entrepreneurs driving business and economic growth, irrespective of the business model or the platform technology. We all want more investment, more initiative and more conversation with more saying “I can do that” and “I can invest too.” Such actions generate the growth, the economic opportunities for citizens, and the prosperity that all countries, regions, cities and towns desperately seek.

 

 

My next Blog Series: Mobilize Local Capital to Finance Your Dreams

This is one of the topics I mentored 80 entrepreneurs from 36 countries—at Singularity University, located in the heart of Silicon Valley.  These entrepreneurs learned about exponential technologies to solve global challenges, and my job was to work with them—selecting ideas, developing and shaping business models to investors’ behavior to risk.

I was one of approximately 16 or so team project advisors selected from around the world to mentor these entrepreneurs at Singularity University, created by x-Prize Foundationfounder/CEO Peter Diamandis and inventor, entrepreneur and futurist Ray Kurzweil.

Nastas Title Slide Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Till then, be well and be lucky

Question slide Part V: Scaling Up Investment—Finance the Startup of Start up Communities


[1] For explanation why Yozma worked great in Israel and not so well in emerging countries, see ‘The GoForward Plan to Scaling Up Innovation, page 4 (English). For my Russian readers, go to ‘The GoForward Plan to Scaling Up Innovation,’ by Thomas D. Nastas, June/July 2007, Russian edition, Harvard Business Review.  Hungarian readers go to October 2007 ‘Scaling-Up the Innovation Ecosystem,’ Hungarian edition, Harvard Business Review; Sept. 200. Spanish readers go to ‘Innovation for Growth,’ Latin America edition, Harvard Business Review

[2] For explanation, how local investors in emerging market typically behave-invest, when managing Yozma-type schemes, see slides 50-68, ‘Bridging the Valley of Death,’ presentation of Thomas Nastas to staff of the World Bank & IFC, 29 November 2011

 

About Me

IMG 70411 300x200 Part V: Scaling Up Investment—Finance the Startup of Start up CommunitiesI am a venture and private equity investor since 1986, financing university tech in Michigan with liquidity events including Neogen (NEOG: NASDAQ), AISI Inc. (acquired by ESI, ESIO: NASDAQ, USA) & Personal Bibliographic Systems (acquired by Thompson Financial, NYSE: TRI) as examples.  An entrepreneur myself, I left Michigan in 1992, created int’l and emerging market funds in Africa, Canada, Europe, Kazakhstan and Russia, for ROI & economic development, i.e., >$300 million invested to advance entrepreneurship, innovation and growth in int’l and emerging market countries.  I am past/current Independent Director, Board of Directors of eighteen (18) companies over the past 25 years, USA & international enterprises.

I can work with you in four ways.

1. As an investor advising LPs and GPs in your country for emerging market investment, create venture initiatives (+ raise capital). I invested my own capital + established and managed cash flow, venture, private equity and fund-of-funds as shown in the 1st picture below. The 2nd picture shows the deal structures and strategies executed to localize money for investment in each country and to match local investors’ behavior to risk.

Nastas Infographic VC Funds2 300x225 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

Nastas Infographic VC by Deal Structures2 300x225 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

2.  As an advisor to Governments & development finance institutions.

  • Design & execute venture initiatives: My clients include Development Bank of Canada, European Commission, European Bank of Reconstruction & Development, IFC/World Bank, Russian Venture Company, Govts of Slovakia, Croatia and the US Govt’s USAID—create, startup, finance & execute:
    • Venture capital funds
    • Venture lending funds
    • Private equity funds
    • Royalty based & cash flow funds
    • Fund-of-funds
  • Design & execute grant schemes—to advance tech dev. thru commercialization:  With six other directors, I manage the $85 million technology commercialization project in Kazakhstan, making grants to finance and advance science from proof-of-concept thru 1stcommercialization.
    • We established the policies/procedures for grant investment, criteria, tender & selection process including all documentation for program execution
    • Selected & committed $22.5 million to 21 development stage SMEs and R&D groups in 2011 & 2012, average grant ?$1MM
    • I lead the creation of 1st technology commercialization office in Kazakhstan, to transfer Kazakhstan tech to market.  I established strategy, programs, key performance metrics, deliverables and all tasks for commercialization & execution-budget is $2.8 million, staffing of four international experts + five Kazaks.
  • Design & execute int’l—cross border tech transfer & commercialization initiatives:  Conceive programs and connect—Russian Corporation of Nanotechnology (Rusnano)—& int’l organizations
    • Created project to establish technology proof-of-concept tech dev. & commercialization program between Rusnano & tech transfer offices of US universities (e.g., Colorado, Utah & Michigan). I established the trust and confidence in the parties to negotiate & secure signed agreements

3.  As an entrepreneur mentoring founders & entrepreneurs as an Independent Director, member of the Board of Directors or member of the Advisory Committee.  I established legal entities, hired & managed staff in Africa, Canada, Europe, Kazakhstan and Russia, all costs of market entry and operation financed by me. Living, working and      investing in these counties—paying the bills too—developed in me the experiences to counsel:

  • Founders of mid-size companies, revenues to $100 million, solutions to integrate their firms into global markets, harmonize products/services & the organization for this global expansion, raise int’l capital and build the 2nd tier layer of management for execution
  • Entrepreneurs of early stage companies, my contributions include conceive/negotiate partnerships for 1st commercialization, raise 2nd round VC financing, ‘shape’ business models to the risk profile and behavior of local money in the country, mentor/counsel management team in growth & development

My other contributions to global entrepreneurship:

Nastas Country Experience 300x225 Part V: Scaling Up Investment—Finance the Startup of Start up Communities

4.  As a thought leader & advocate of VC, entrepreneurship and innovation to solve global challenges, I conceive and deliver keynote talks and Master Classes to engage stakeholders with the ability, interest and resources to finance technology commercialization and early stage venture capital.  View my publictions which spread ideas—solutions to create more investment, innovation and entrepreneurship.

Let’s engage on how to make an impact, make money and have fun. Contact me atTom@IVIpe.com. Learn more at Scaling Up Innovation.

Links: Evolution of Runet (Russia Internet) & the Russia Tech Scene

Top 10 Web Start-up CEOs in Russia, 2011

Top 10 Russian Web Startups of 2011

Top 30 Russian Internet Companies (Forbes, 2011)

Top 10 start-ups of 2009

Top 10 Internet Entrepreneurs, 2009

Top 10 Internet CEOs in Russia

Top 10 Russian Venture Capital Internet Investors 2009

Top 10 Russian Web Startups, 2008

Top 10 Russian Web Apps & Sites, 2007

http://www.eddy.lt/2011/12/10-must-know-facts-about-russian.html#!/2011/12/10-must-know-facts-about-russian.html

http://goaleurope.com/2012/04/21/eastern-europe-weekly-news-from-eastern-europe-baltics-russia-ukraine-and-poland/

http://thenextweb.com/russia/2012/04/19/skolkovo-stimulating-russias-it-industry-by-spending-stupid-money-smartly/

http://thenextweb.com/russia/2012/04/20/already-europes-largest-internet-market-and-still-growing-astoundingly-fast-russia-by-the-numbers/

http://thenextweb.com/russia/

http://www.marchmontnews.com/Archive/News/18636.html

 Part V: Scaling Up Investment—Finance 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

Introduction: The Startup of Start-up Communities; The Power of Clones in Russia—& Beyond



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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.

What are the elements of a start-up community?  What can you do to startup a start-up community in your city, or help it do more—faster?

Venture investor Brad Feld (Foundry Group, Boulder, Colorado, co-founder of Tech Stars, blogger Feld Thoughts) writes about these subjects in his other blog StartUp Communities with his new book titled ‘Startup Communities: Building an Entrepreneurial Ecosystem in Your City.

If you don’t know Brad, he was and remains the protagonist and instigator that transformed Boulder from a sleepy Rocky Mountain hippie town into one of the most vibrant entrepreneurial tech start-up communities in the United States.  It is his individual contributions to this success that makes Brad’s advice sought by investors, government policy makers and entrepreneurs from around the world.

Recently Brad accepted my offer—I contribute a post on the startup of Russia to StartUp Communities.  As I started writing, one subject led to another, with the result too much for one individual post.  Over the next few weeks I’ll upload the content as a series of posts for you:  the investor, the entrepreneur, the Government policy maker, staff of international development finance institutions.

In this series I answer five questions:

1.)   What is the ‘spark’ that ignited the start-up of Russia?

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?

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?

There is much happening in Russian cities like St Petersburg and Novosibirsk as two regional hubs of innovation and entrepreneurship.  Even so, I’m confining my discussion to Moscow since what we are seeing in the Russia capital is being replicated in other cities in the Russia Federation, only to a lesser degree.

Here’s a preview of the topics in each post.

PART I: THE START-UP OF RUSSIA

  • First—Three Definitions
  • The Russia Tech Scene
  • Growth in Russia
  • What Changed for Growth to Emerge
  • The Spark that Ignited the Start-up of Russia

 

PART II: THE CULTURES OF RISK

  • The Cultural Divide:  What Investors ‘Buy’
  • What Investors Fear
  • The Culture of Venture Capital:  Friend or Foe?

 

PART III: THE POWER OF CLONES

  • Growth and Innovation in the Supply Chain
  • Sidestep the Obstacles that Impede Scaling Up
  • The Controversy of Clonentrepreneurship: Cloning the Idea or Hatching a Start Up?
  • The Spread of Clonentrepreneurship

 

PART IV:  THE QUEST FOR GROWTH

  • Clonentrepreneurship or Alternative Paths to the Start-up of Start-up Communities?
  • Change the Culture to Make Amazing Things Happen

 

PART V:  SCALING UP INVESTMENT—FINANCE THE STARTUP OF START-UP COMMUNITIES

In this final post to the series I answer the question:  “What are the small but meaningful steps you can take to impact the culture to change the culture for more investment, entrepreneurship and innovation?”

  • For Entrepreneurs—What are You Selling to Investors?
  • For Investors—Let’s Be Realistic
  • For Governments/Development Finance Institutions—Atypical Leadership Needed
  •   Concluding Remarks
  • My Next Blog Series—Mobilize Local Capital to Finance Your Dreams
  • Links: Evolution of Runet (Russia Internet) & the Russia Tech Scene

 

I hope that these subjects will help you to ‘Scale Up,’ more entrepreneurship, more investment and more tech start-ups in your country, with Russia as one experience to learn from.

How might this happen you ask?

Frequently a mismatch exists in the business models that entrepreneurs launch in the emerging markets and what local investors finance.  Struggling to raise money, entrepreneurs label capital as risk adverse with investors blind to potential, seeking guarantees and sure things.  Investors respond that entrepreneurs of venture stage companies fail to transform potential into paying customers fast enough and in the volumes needed for the business to scale.  Add in their need to generate a rate of financial return required for their own survival, and it’s logical why local investors in the emerging world finance expansion stage companies.

This conflict spills into the public stage with Governments called to action.  They conceive and invest taxpayer money to catalyze an early stage tech venture capital industry to fill market voids.

What happens next is perplexing to the creators of these investment schemes.

These new funds have a mandate to invest in venture stage tech companies, but they behave differently in execution. They invest in tech, but at the growth stage of company development, not at the startup stage.

But what if seed and early stage business models exist with the revenue growth characteristics of expansion-stage companies?  If such business models do exist, what are they? Can they impact the DNA of local investors to risk and catalyze investment at the earliest stages of company formation?  And can they spark the start-up of a startup community? While such business models seem to be an illusion and counterintuitive to the natural evolution of market development, I explain in this series that such models do in fact exist in Russia—& beyond.

Subjects I discuss in Part I:

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

Reactions & opinions welcome in the comments box or send directly to me atTom@IVIpe.com.

Be well and be lucky.

 Introduction: The Startup of Start up Communities; The Power of Clones in Russia—& Beyond