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.

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

‘Path to Commercialization:’ An IVI Master Class in Mentoring

I created this program as Part II in my Master Class series of ‘Scaling Up’ at the request of John Hoxmeier, Associate Dean, Graduate Studies at Colorado State University (CSU).  John is managing CSU’s executive MBA program in Kazan, Russia with students holding senior positions in state owned enterprises, Ministries of ICT, Industry, Trade & Development, the Tatarstan Presidential Administration and Tatarstan’s sovereign wealth fund.

This Master Class was conducted 3-5 November 2011 in Kazan, Russia.

CSU earned the personal attention and congratulations from the President of Tatarstan, Rustam Minnikhanov on the 1st of December 2011, and I’m honored to have played a small role in this success for John, CSU and the USA.

To view the program in English, its content, learning and ‘Scaling Up
Innovation’ objectives, just click on the icon below. 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.

 

‘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.