INTRODUCTION: THE STARTUP OF START-UP COMMUNITIES; THE POWER OF CLONES IN RUSSIA—& BEYOND

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,’ to be published in the fall of 2012.  You can read his first draft, outline here.

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 at Tom@IVIpe.com.

Be well and be lucky.

Michigan State Univ., Silicon Valley, Hungary & Emerging Markets

 

On 2 February I spoke to graduate and undergraduate students of Dr. Zsuzsanna Fluck at Michigan State University (MSU).  Zsuzsanna teaches graduate and undergraduate courses in private equity and venture capital at the Eli Broad Graduate School of Business.  Zsuzsanna is also the director of MSU’s Center for Venture Capital, Private Equity & Entrepreneurial Finance.  A few weeks ago I delivered this same lecture to graduate students enrolled in the private equity class of Dr. David Brophy, Ross Graduate School of Business at the University of Michigan.

 

 

 

 

 

MSU is on an ambitious journey to build a more vibrant entrepreneurial community in mid-Michigan.  MSU has new programs and new money commitments to encourage start-ups from university technology, under the leadership of Charles Hasemann and Ian Gray, VP of Research.  All the best to them in this endeavor.

Zsuzsanna was born and raised in Hungary. As an economist she worked on international joint ventures and then moved to the US to pursue doctoral studies in economics and finance. She and I talked extensively about the parallels of entrepreneurship between Hungary and Michigan, the perils that entrepreneurs from both face in capitalizing their businesses, and lessons they can learn from one another to do more-faster.

Silicon Valley’s greatest strengths are its comfort with risk, ambiguity and uncertainty; Valley investors willingly pay the costs of failure when business models don’t work, founders pivot & models evolve into something different from entrepreneurs’ initial intentions. This willingness to finance the wild and crazy is what attracts entrepreneurs to the Valley with gamechanging ideas that develop into businesses that truly change the world. These successes draw more investors and their money to these entrepreneurs, and the cycle repeats. As this happens over and over, the ecosystem lives, breathes and renews itself from one economic cycle to another.

Michigan entrepreneurs and its venture investors are more conservative, due to the culture that developed around the auto industry and its supply chain.  Ways of doing business that flow from one industry that dominate a region or country’s economy often leads to an investment culture that rejects early stage innovation, the untested and undeveloped ideas of innovators and entrepreneurs that makes Silicon Valley, uhm, Silicon Valley.

Decades ago I worked in engineering at Ford Motor Company, and new innovation had to be well proven before it worked its way into cars and trucks. If technology failed on the road, people can get hurt or die, risk unacceptable to all; in such circumstances the risks of failure are logical and understandable.  While times are changing, such thinking created a culture and way of doing business and investing directly opposite to the risk appetite in Silicon Valley. Conservatism to risk does not make Michigan and like-minded Rust Belt states bad, just different.

Except for the very few, most investors in developing countries approach risk differently than Silicon Valley. 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 – is simply too much for them. While the risk appetite of Midwest investors is greater than their counterparts in emerging markets, they share more commonalities than differences due to shared values toward uncertainty, ambiguity and failure.

So specifically, what actions can entrepreneurs and participants in the local ecosystem execute to create a more risk friendly venture community?  Let me suggest two:

  1. Mentor entrepreneurs to ‘Sell Risk, then Opportunity.’ The prelude to this is of course the building of business models that sell risk and opportunity by incorporating cultural attitudes to risk and failure since they drive investment decisions & the entrepreneurial process in the local community.
  1. Entrepreneurial ventures need ‘spark points’ to capture the attention of the market, users, and investors.  While spark points are easy to see in hindsight vs. foresight, they frequently result when overcoming the friction that exists in commercialization, leading to minor revenue, but huge leaps in confidence.  Keep the eyes of your entrepreneurs open to these accomplishments and transform them into events that are publicized to the market.

I’ll be writing about these subjects in future posts so stay tuned for more.

In my next posting I’ll comment on the Kauffman Foundation proposal (taxes & capital gains) as a solution to finance the ‘Valley of Death.’

Comments, opinions welcome here or send directly to me at Tom@IVIpe.com.

Be well and be lucky.