Scaling Up Start-up Communities: Engage Risk as Your Friend, not a Foe—to Impact Investor DNA—& Raise $ for Your Venture

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:

  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.  I’ll share your stories here.

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

(Nastas note to readers:  From 6-22 August I was in Silicon Valley, mentoring 80 entrepreneurs from 36 countries on selecting, developing and shaping their business models to investors’ behavior to risk as I discuss in this blog series.  I was one of approximately 15-16 team project advisors selected from around the world to serve in this capacity at Singularity University, created by x-Prize Foundation founder Peter Diamandis and futurist Ray Kurzweil.  Click on the icon below to view the presentation.

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 here.

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 at Tom@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

Insider View, Twists & Turns in International Venture Capital

In January I delivered a lecture to MBA students, Ross School of Business at the University of Michigan. David Brophy, Director of the Office for the Study of Private Equity Finance & Associate Professor of Finance invited me to speak at his private equity class about my experiences in doing VC since 1986, with what he calls “Tom is 3 feet deep into VC, with mud on his boots.”

If you don’t know David you should, as he was the instrumental force in developing the venture capital and private equity industry in the State of Michigan. He was the creative force behind business plan competitions in the Midwest of the USA, in 1980, way before anyone in the world was thinking of bringing companies and investors together to mix, interact and network around this asset class we know as venture capital.  His event, called the Michigan Growth Capital Symposium is one of the longest running programs in the USA, in operation since 1980.

I quote from the Symposium’s web site, “Celebrating its 31st anniversary, the 2012 Michigan Growth Capital Symposium is the Midwest’s leading event for attracting the best investors from across the U.S. and showcasing high-quality investable companies. In the past decade alone, more than 300 companies have presented. About 70% of these have raised capital totaling more than $1.7 billion in investments and nearly 20% have realized successful exits. Video: MGCS Celebrates 30 Years

Year after year, the MGCS has brought greater awareness and opportunity to startups emerging from research departments of leading universities across the country. Over the past 10 years nearly a quarter of the presenting companies have been university-based spin-outs, raising capital totaling some $430 million in investments. About 70 percent (a total of 49 companies) have come from Michigan’s University Research Corridor institutions—U-M, Michigan State and Wayne State and one-fifth of these companies have realized successful exits.

MGCS is presented by the University of Michigan Zell Lurie Institute’s Center for Venture Capital & Private Equity Finance at the Ross School of Business in partnership with the Michigan Venture Capital Association.

I am grateful to David for his interest in me and his invitation to speak to his students.  David, thank you.

I’ve upload two icons.  Click on the 1st to view the PowerPoint. Click on the 2nd to view the video of the lecture.  If you watch the video, I suggest that you scroll to the eight (8) minute mark to start viewing.

As always, comments are welcome here, or write me directly at Tom@IVIpe.com


The Valley of Death. Market Failure? Or Rational Behavior of Investors to Risk?

Governments, development banks and investors poured billions of dollars to finance entrepreneurs in the ‘Valley of Death.’ Add in the millions of hours of human energy and thought devoted to creating solutions too, and the investment is truly staggering. Yet the Valley of Death still exists.

Conventional thought defines the ‘Valley of Death’ as a market failure. But is it? Or is the Valley simply the rational behavior of investors to risk? If the Valley is a reaction to risk, not a market failure, then perhaps we need to reframe the discussion: what initiatives might influence investor behavior to close the gap that separates entrepreneurs and investment?

I delivered a program at the invitation of the World Bank and it’s investment arm, the International Finance Corporation, ‘Bridging the Valley of Death.’ In it I discuss solutions that match the behavior of investors to risk, to encourage investment to tech SMEs in the Valley of Death.

View the PPT by clicking on the below icon. After the icon is the description of the event and the invitation for World Bank and IFC staff to attend.

I added dozens of slides to make the Powerpoint understandable without my speaking (the audio), but more importantly, to make it a story of solutions and ideas worth spreading to influence the culture of risk and failure, and ways to impact investor behavior in emerging markets.

Add your comments or write me at Tom@IVIpe.com.

Description of the Event 

“Innovation starts with an idea to do something different, to improve the lives of customers, to make work that matters. Each step of the innovation process requires different forms of funding and different institutions to drive ideas forward, from R&D (grants) to Series A (equity-VC). But if the challenge was just to make funds available, the solution would be relatively easy.

US entrepreneurs ‘sell opportunity’ to attract investors, raise funds. This works in the USA since investors are comfortable with risk, ambiguity and uncertainty, and willingly pay the costs of failure when business models don’t work, founders pivot & models evolve into something different from entrepreneurs’ initial intentions.

Except for the very few, most investors in developing countries approach risk differently. They invest in known and understandable risks, mainly the risks of execution. These are the uncertainties they have dealt with as businessmen and investors, and have the experience to help entrepreneurs solve– avoid. The risks of financing innovative firms, i.e., will customers buy, are profits possible, achieve promised performance from new ideas – often technology based– involves a different sort of risk assessment – one that investors in developing countries are not used to. The result is that domestic wealth is not as big a source of funds as predicted, resulting in tech start-ups going unfunded, entrepreneurs frustrated and Governments wondering what to do next.”

In this brown bag lunch, Tom Nastas will discuss how policy-makers have tried to bridge this “valley of death” with a focus on public policy solutions to influence investor behavior toward angel, seed and early stage venture capital drawing on lessons from the battlefield.

1. Successes and disappointments. The cases of Croatia, Russia and Kazakhstan. Encouraging deal flow where opportunity is assured, to circumvent the risks of opportunity and ‘jump-start’ more investing, entrepreneurship and set the conditions for local knowledge creation to begin. The case of Boulder, Colorado — a world class hub for entrepreneurship, technology start-ups and venture capital without world class research universities in the local community.

2. Financing structures, grant programs & funds to better match the (im)maturity of developing ecosystems, solutions to overcome market barriers and smooth the entry of investors to early stage tech.  Role of government, DFIs & PPPs to support & encourage; do more faster.

3. Proof-of-concept program and skill transfer: the Nastas project with Russian Corporation of Nanotechnology, Universities of Colorado, Michigan & Utah

4. Deal flow funds to catalyze more ideas, achieve tech performance

5. SBIC venture lending-type funds to engage local pension funds in early stage SMEs

6. Illusion of ‘fund of funds’ :  when execute, when not to, how channel capital to tech

‘Scaling Up Entrepreneurship:’ A Master Class in Mentoring

The seed for this Master Class came about from a request of the US Embassy Moscow  to me in May 2010.  The Embassy was asked by the the Governor of Novosibirsk, Russia to organize a conference on solutions the region could implement to stimulate more innovation, venture capital and entrepreneurship.  My 60 minute presentation generated numerous questions that demonstrated the audience’s lack of understanding of what entrepreneurship is, how it and venture capital works, and actions government can implement to spur more innovation, technology creation and investment.

John Hoxmeier, Associate Dean, Graduate Studies at Colorado State University (CSU) learned about the Novosibirsk event and asked me to create a 3 day Master Class around the subjects of innovation, entrepreneurship and venture capital for CSU’s Executive MBA program in Kazan, Russia.  Students in the program hold senior positions in state owned enterprises, Ministries of ICT, Industry, Trade & Development, the Tatarstan Presidential Administration and Tatarstan’s sovereign wealth fund with responsibilities to help create more technology and knowledge based companies in the region.

Thereafter I added new content to the Master Class, and I’ve delivered it to staff of investment funds, entrepreneurs, incubators, technoparks, universities, economic development agencies and senior government officials in Croatia, Kazakhstan and the World Bank.

Click on the icon below to view the program in English, its content, learning and ‘Scaling Up Innovation’ objectives. Write me at Tom@IVIpe.com to learn more about this program & its delivery in your region or country to stimulate more innovation, entrepreneurship and venture capital.

To view the program in Russian language, just click on the below icon.