Venture capital without friendly climate to entrepreneurs like pouring water into sand

Venture capital without friendly climate to entrepreneurs like pouring water into sand


Wednesday, September 18, 2013

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IN a brilliant presentation for the Development Bank of Jamaica's Venture Capital conference, keynote speaker Paul Ahlstrom, chief executive of Alta Ventures and author of Nail it then Scale it, gave the widest ranging presentation of the drivers of a venture capital ecosystem that I have seen.

He started by noting that worldwide there were over one hundred attempted copycats of Silicon Valley, but only a small number had truly worked. Venture capital requires, he argued, three key things : a critical mass of capital (financial capital, human capital and intellectual capital/innovation capacity), trusted informal networks, and finally an entrepreneurially friendly environment (predictable) that included government, business and education. Without all three, he argued, investing in venture capital is like "pouring water into sand".

The first need was deal flow, which would then attract money. Financial capital availability needed to be the full range of capital all the way from the opportunity (mainly sweat equity), seed/start up (US$50,000 to $500,000), development (US$500,000 to $5 million), expansion funding (US$5 million to US$20 million) up to continued growth (over US$20 million). The financing gap, particularly in developing regions, was normally in the US$50,000 to US$5 million range. Venture capital typically started through the 'family offices' and other investment vehicles of influential, wealthy families, which combined with the innovations of a critical mass of leading research universities, meaning mainly Berkley or Stanford in the case of Silicon Valley, or corporate research labs like Xerox PARC and IBM Research.

Human capital included a critical mass of entrepreneurial activity, a high trust culture, deep bench strength in terms of the talent available (particularly engineers), and social dynamics that said it is OK to fail or be rich.

Trusted informal networks included trusted support service providers (lawyers versed in technology, an accountant like Ernst and Young, or a Silicon Valley Bank), a shared community vision and a predictable and supportive government.

One of his key points, as he put it, was that "business happens at the speed of trust". Trust (honesty and individual integrity) is so important to the development of a successful entrepreneur ecosystem because trust enables speed and flexibility, flexibility provides freedom to fail, which in turn leads to creativity, innovation deal flow and finally investment that fuels growth. He argued that corruption is "sand in the gears of business", and that the reduction of "the number one emerging market problem" would lead to a 400 per cent increase in GDP.

Ahlstrom argues that there is a high correlation between innovation capacity and venture capital investment, and that if you are not generating "patents", you are not relevant. He is part of a business plan competition that makes key patents available to entrepreneurs (technium). He defines innovation as the intersection of invention (science) and insight (industry). He described the development of a venture capital ecosystem in Utah in the late 1990's, a process that was driven by a crisis when Corel bought Word Perfect in 1996, and laid off hundreds of employees. The unexpected results of this "creative destruction" was that unemployed engineers started companies. The key lesson (in addition to those already mentioned) is that "Entrepreneurs are the change agents". Interestingly from a Jamaican standpoint, the Winter Olympics in Utah in 2002 marked the positive turning point in Utah's entrepreneurial self confidence. For him and many others, the most memorable part of their Winter Olympics was the Jamaican Bobsleigh team, which was supported locally reflecting their entrepreneur's desire to root for the underdog. Fifteen years on, in 2012 Utah was labelled America's top state for business by key financial media (number one by the Wall Street Journal, number two by CNBC) and from zero now has well over thirty groups managing more than US$4 billion in venture capital, including his, which has now expanded into Mexico. Importantly, Utah's Provo is now the third city to get access to Google Fibre, so that access to broadband "flows like water".

Ahlstrom's other key lesson is that no business plan survives first contact with a customer. In an interview with the Musson Group's Dr. Nigel Clarke, he covered many of the key ideas in his book, Nail it, then scale it. He believes entrepreneurs can be made (definitely something that can be learned) and don't have to be born (great entrepreneurs have a process, however, knowingly or unknowingly). He would always hire an A team with a B idea rather than the other way around. Although 95 per cent of entrepreneurs will always say they need more money, the biggest failures for investors were those companies that got large- scale access to capital before they "nailed" their value proposition. Successful companies were often starved for capital until they figured out "their business model". A common mistake was to hire good talent before they had something to sell. In his experience, a successful team required a hacker, huckster, and a hopeful, meaning someone to build, sell and a visionary to "sell a future state where you want to go and live".

He believes it important to debunk the myth of the entrepreneurial hero, as often strengths "belief in the rightness of one's product" sometimes turn out to be weaknesses. The correct attitude is "my job is not to be right, but to innovate and adjust to the marketplace", and must never be "the customer is too stupid and just doesn't get it". A successful entrepreneurial experience is more like a surfer "catching a wave", and requires that the entrepreneur "listens to the marketplace", be humble, takes it all in and "pivots" as required. The entrepreneurial hero of myth is not teachable, being more interested in making money than satisfying a customer's need, and is not passionate about the customer. In short, the entrepreneur needs to be both confident and humble.

One of his key learning points was a chief executive who said, when making a decision, "I ask how it will affect the front line worker : negatively, neutral or positively, and would I be happy if my decision sat on the front page of my hometown newspaper." Finally, Ahlstrom argues, in creating a venture capital ecosystem, Jamaica should seek to avoid the "crabs in a barrel" attitude. In Brazil, with the help of the IDB, the venture capital funds worked together, because they realised "if another fund in Brazil fails, I fail because investors look at us as a region and move on".

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