Posted on Friday, Dec 6th 2013
In the last five years, there has been a distinct globalization of entrepreneurship. There is a lot more romanticism about startups now, a lot more startup related events, organizations, incubators, so forth and so on.
However, the seed capital eco-system around the world is inadequate. How do we change that?
New York has made the greatest progress in becoming a major seed capital eco-system, most likely because of its natural concentration of wealth, and general comfort with the idea of speculation.
Elsewhere, entrepreneurs are still struggling to find capital.
Where angels and seed funds are developing, they are tentative and unwilling to lead a round.
Some people believe that the government needs to provide seed capital. Israel has seen some success with this model. My take is that the Israel model works because the Jewish culture is extremely savvy financially, and it is also very focused on supporting other Jewish people.
France also provides a lot of grants, but has seen less success.
Chile has attracted a lot of media coverage with its Startup Chile program, but there really is no Seed Capital infrastructure in Chile outside of the program, hence, it is unclear how entrepreneurs go from the incubation to a proper seed round.
India’s efforts to become a significant player in the startup world has progressed slowly. Part of the problem there is that VCs jumped into the fray without the seed capital network. So there has been an illusion of capital, but largely not deployable due to the stage and growth rate of the companies being developed. Some of the leaders of the Indian eco-system believe that the eco-system will do well once there are a few exits, and there is truth to that argument. Entrepreneurs who experience the power of seed investment are the ones likely to invest in other nascent ventures. [More in my book: Seed India - How To Navigate The Seed Capital Gap In India (Entrepreneur Journeys)]
I have thought a lot about the issue, and have come to the following conclusions:
- The vast majority of entrepreneurs working today around the world will end up having to bootstrap their startups for several years until they hit enough traction and momentum to attract the attention of investors with the risk-profile that exists today in most geographies. Indian company, ApartmentADDA bootstrapped for over four years before drawing its seed round.
- While I do agree that M&A exits will help, those are unreliable and scarce events. Exits may increase the number of angel investors, and they will definitely give those investing currently confidence and resources with which to keep investing. To the extent we’re dependent on Silicon Valley companies doing most of the buying, this remains a very low probability event. How many companies in Brazil or India or Indonesia is Facebook likely to acquire in a year? So exits are necessary to improve the conditions, but they are not sufficient. They are, also, a slow path.
- Entrepreneurs will have to consider moving to Silicon Valley, New York, or Boston in search of capital, and also to improve the odds of their finding an exit path. However, this is tricky, because the cost structures in those geographies are way higher, and in some cases, the talent wars are extremely acute. Plus, there are visa issues that add friction in case of international moves. Nonetheless, serious entrepreneurs everywhere are considering this as an option.
- One of the issues plaguing the system is the lack of seed investors who can lead a round. There are a lot more followers in the system than leaders. So ‘lead investor training’ may be a worthwhile exercise. Perhaps AngelList should address this one.
- ‘Friends and Family’ are critical in bridging the lack of seed capital everywhere. This is one area where policy can help. Making it attractive through interesting tax incentives for entrepreneurs to invest their own savings, as well as the savings of their friends and family into startups will unlock money closer to where it can be most easily put to work. The greatest advantage of friends and family is that they invest in friends and family, not in a billion dollar idea so much. Throughout history, this has been the real source of seed capital around the world.
- Of course, creating tax incentives for angel investors would help as well, IF the ‘lead investor training’ can go hand-in-hand with the increased ‘desire’ to invest it would create. Note, ‘desire’ is not the same as ‘expertise’.
- Crowdfunding may provide some liquidity, but it won’t change the game significantly unless the ‘expertise’ issue is addressed.
Over and above everything else, the greatest pay-off will come from creating large pools of bootstrapped businesses that can sustain themselves for 4-5 years, such that, towards the end of the decade, they will be ready for financing.
This means, we need to make bootstrapping glamorous.
Would love to hear more thoughts and ideas.