ELIAN D. ALVAREZ

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What do Venture Capitalists Look for in a Startup?

May
26

Billions of dollars are invested in new startups every year. Therefore, it has become even more important to find the answer to the following question: what do venture capitalists want?

A venture capital firm called Draper Fisher Jurvetson (DFJ Venture Capital) that has injected funds in around 2 dozen unicorns, including Twitter, Tumblr, Skype, and Box. One of its partners, Steve Jurvetson, shared his views on what he looks for in a startup when he plans to make an investment

 

Enthusiastic Founder

Jurvetson said that the first thing he notices is how enthusiastic the owner of a startup is – someone like Elon Musk who can convince that their idea will work. However, he added that it has to be in a sector which will contribute to the rapid growth of an economy during the times of huge disruptive change.

 

Innovation

In today’s rapidly changing world, innovation is a key to success. Products, such as electric cars, rockets, synthetic biology, etc., have proven to be the game changers in the IT sector. They never managed to attract venture capital in the past decades, but are high in demand nowadays. These industries have undergone massive change in the past few years, which is good for startups.

Investing in anything that takes an investor out of his comfort zone is worth it, because it leads to those crazy ideas that can change the world. However, it should be noted that it is those successful ideas that were never considered good in the beginning.

Jurvetson said that if an idea is strongly supported by a few number of people who believe it to be the future of the world, but the majority is against it, then it is a good sign.

 

Respect for the Team rather than Individual

Another factor he looks for is a founder who has respect for the team rather than individuals at work, a trait that contradicts the cult of a one man (in this case, a CEO) running the show. Having the self-confidence to stay humble about the proposals made and respecting the team are some of the additional attributes of a good startup owner.

 

What Sectors to Invest?

When talking about what sectors should venture capitalists invest in, Jurvetson hinted to Moore’s law as to how it’s penetrating into different sectors and turning lousy, low margin businesses into innovative software based businesses. Tesla is a great example that changed the course of different industries. Its contribution in the Planet labs, SpaceX, or automobile industry is a prominent example of the transitions made.

It took decades for these sectors to see entrants who transformed these industries through product enhancement. A number of investments failed during the process, yet, they are all IT based now and have gone through a massive transformation. Innovation has brought so many changes in the IT sector. For example, application of machine learning was considered a geeky subject a few years ago and only a few people at Google and other companies that worked on image recognition were familiar with the concept. But these techniques will now be widely recognized in every industry as they represent a new way of doing engineering.

 

A Way Forward

Remember, it is a two-way street. The world will experience the breakthroughs only if big companies welcome the evolution of technology. Jurvetson said that large companies that embraced innovation were the most exciting ones. A good example of this is Apple and its achievements over the years. Most of the large companies do not welcome meaningful innovations, which represent a connotation of disruption to depict the change. Embracing the change doesn’t mean a mere 10 percent improvement in processes, it shows a wow factor, such as freeing the automobile sector from gasoline consumption.

Similarly, back in the days, going to space was considered a tough job. Only a fighter pilot could qualify for a space mission with lots of training. But it is not going to be the same in future. SpaceX will soon launch a robot spacecraft where an astronaut will sit back and take a ride on the spacecraft. If the company is successful in doing that, space flights will become as frequent as air flights providing the same level of safety and fun.

Therefore, for a new idea to be successful, investors will have to support the change and big companies should embrace it. Not only will it be beneficial for a global economy, but will also make room for game-changing breakthroughs.

Startups Worthy of Investment … or not

May
11

It seems like those days are long gone when venture capitalists used SPRAY and PRAY strategy in the hope that one of the startups in the entire portfolio would make it big.

In other words, it is about time that startup companies show their ability that they are worthy of the venture capital (VC) funds.

 

Decline in the Number of VC Funded Companies

The PitchBook released the first quarter of the 2017 issue in collaboration with the National Venture Capital Association (NVCA). The statistics presented in that report were based on the thorough analysis of VC activity in the United States. According to that report, $16.5 billion was raised by 1800 companies alone. PitchBook and NVCA also observed that even though the amount of investment in the Q1 of 2017 was a bit higher than the capital invested in the fourth quarter of 2016, the number of startups has dramatically decreased to its lowest level since the fourth quarter of 2011.

 

VC Investors and Entrepreneurs Exercising Caution

It looks like the VC sector is facing a gradual decline after experiencing effervescent days of glory back in 2015.

John Gabbert, the CEO of PitchBook, said that during the past few years, the VC activity managed to attain intensified growth in the United States and now it seems to be coming back to earth. He further added that it feels like startup founders and investors have started following a more disciplined approach to investing the funds and taking reasonable caution by adopting measures, such as due diligence. These activities are carried out to secure fair deals on both sides so that each party gets something good out of it.

Ernst & Young, a London based auditing firm, reported that companies in the United States raised about 41.3 billion dollars in 2,802 VC deals in the third quarter of 2016. The San Franciso Bay area represented a total of 916 deals having a value of 16.9 billion dollars.

Jeffrey Grabow, the leader of VC in the U.S. based Ernst & Young, said that VC funding has slowed down and there are various reasons for the declining trend. The prominent reason, however, is the fact that investors want the market to absorb the already distributed capital in the market. Momentum capital has reached a later stage of VC funding and injected capital in almost every that was available in the market. Therefore, it is about time to see how it all turns out.

 

Comparison of the Number of Exits

In spite of the huge funding to a limited number of IT companies, a lot of companies fueled by $9.05 billion worth of venture capital took an exit in the first quarter of 2017. This exceeds the combined value of the IT companies’ exits in 2006, 2008 and 2009. The situation is relatively close to how it was back in 2007. If the same trend and immensity of initial public offerings and acquisitions follow, 2017 will either reach the same figure of 2014, i.e., 39.74 billion dollars, or might exceed it. Only time can tell what is to come next, but it continues to happen at the same pace, it would probably exceed the value of 2014.

IT firms around the world continue to leave behind all other kinds of businesses that are funded by venture capital. According to the NVCA and PitchBook report, Initial Public Offering of Snap and acquisition of AppDynamics by Cisco has been ranked among the top 10 biggest exits of their types during the past 10 years.

 

Investments in VC Activity

California has left behind all other states in the United States in terms of the number and value of VC investments. A total of 560 investments was made in 556 companies, which were worth 8.3 billion dollars. As far as the number of investments was concerned, New York was ranked second with a total of 218 investments. Whereas, Massachusetts was in the second position in terms of investment value as it was slightly higher than 2 billion dollars. Although, there may be a rising trend in the remote work among startup companies, yet, the concentration of venture capital is still high in the Silicon Valley.

Gender Balance in Venture Capital

May
04

Venture Capital has been in existence for a very long time.

However, the sector has experienced growth and massively evolved during the past two decades. From Facebook to Google, organizations supported by venture capital firms have contributed a lot to the economy. Although the industry is still young as compared to other sectors, one in every five public companies in the United States uses this mode of financing. It is basically used by innovative minds that are high risk takers. Not only do venture capital firms provide funds, but also offer network access, strategic guidance, mentorship, etc.

However, despite the continuous growth, the industry still faces a huge gap between genders as men are leading the venture capital market. In other words, the more it changes, the more it stays the same, especially after analyzing the demographics based on gender.

 

Gender-wise Statistics of the Venture Capital Market

According to a survey, the percentage of women as decision makers in the U.S. based venture capital firms is 7 percent and they control only 4.7 percent of the venture capital (VC) invested in the market during the past five years. Moreover, out of 1,019 professionals who take strategic decisions in 227 VC firms in America, the number of females was just 72. Furthermore, 169 of these firms had no females at a strategic level. These firms managed to raise about $153 Billion within a period of four years from 2012 till 2016, and only $9.51 billion of it was controlled by women.

 

Development Over the Year

Another analysis was conducted last year on sample years between 2011 and 2015. According to that analysis, the percentage of female decision makers was just 5.7 percent in the U.S. based VC firms. It shows an increase in the overall number of women in the industry, representing a 17.7 percent increase in female decision makers at a strategic level.

 

More Investment in Companies with Male Executives

Furthermore, when it comes to which firm gets the venture capital, male majority takes the lead. According to the CB Insights, organizations with men in executive positions receive 98 percent of the venture investments, which is about $1.88 billion.

All in all, there is a need for a lot to be done especially for women in the VC industry. Megan Quinn, a growth investor at Spark Capital, said that every individual has a role to play in this industry, whether it is an entrepreneur, press, or existing VC firm, and she doesn’t agree with the notion that there are not enough qualified women to be in this sector. A small percentage of women depicts the issue of gender inequality in the VC sector and also in the world of technology.

 

Why Lack of Women in VC Persist?

Ann Miura-Ko, a partner at Floodgate, also share the same thoughts as Quinn’s. She said that there was a time when most of the small firms had female decision makers and firms experienced a small increase in applications from women. She further stated that women feel welcome in places where there are more female colleagues as they usually question whether they can fit into male-dominated organizations or not.

The managing partner of New Enterprise Associates (NEA), Scott Sandell, talked about the reason why the VC firms around the world don’t usually have female partners. He pointed out the fact that some women simply leave the place for personal reasons. He also said that people working at a strategic level are usually promoted from within a firm. They make their way up from an associate level all the way to the top. However, he admits the fact that although there is no conscious bias against women, there is probably an element of unconscious bias, which is represented in the form of a small number of females at a strategic level. NEA is currently holding trainings to remove any sort of unconscious bias that may occur in the VC firms. He further added that this issue can easily be resolved and it has a tendency to sort itself out, but it does require attention.

 

Today, women constitute more than 50 percent of the consumers’ spending power and studies have revealed that the absence of female perspective in the board room will ultimately affect the profits.

How Important is Experience in Venture Capital?

Apr
21

In the world of information and technology, innovation is a key factor that drives the economy. Media is filled with success stories of founders in the Silicon Valley. On the other side of it, however, stands the venture capitalists who help these entrepreneurs materialize their dreams into successful businesses.

The venture capital sector in the United States is considered one of the key sectors that contributed to its economic growth. With the passage of time, the industry has faced massive growth around the globe and there is an increasing competition among investors to make it big. Some of the famous venture capitalists of earlier times are Tom Perkins, Tommy Davis, and Arthur Rock. In addition to the capital, it was their investing knowledge and experience that contributed toward the expansion of a tech industry.

 

Do You Need Talent for Venture Investing?

The venture capital industry has continuously evolved during the past few decades, and with that, some contradictions are brewing in the market. For example, the investors who dominate the market claim that they know how to choose a winner who would experience the same success as Facebook or Twitter did, yet, they expand the horizon of their bets, hoping that at least one of these will make it big.

This gives rise to a question:

Do you need talent for venture investing?

If so, what would it be?

The answer to this is simple; no! You do not need any special talent. Accounting or financial modelling skills are useful for venture capitalists, but it is important to note that early stage companies are not the same as public markets. In fact, they are run by owners who are still paving their way to success. The only thing that counts is the experience and skill of people who have already worked with startups and are ready to do whatever the job demands. Moreover, there is a common perception in the market that venture capitalists with a huge network of proven founders are the right choice, yet, you cannot rule out the fact that proven founders tend to ask for big checks, which reduces the share of a limited partner. New venture capital firms, on the other hand, are hungry to win and have the drive to listen to what startups want.

 

No Transparency in the Venture Capital Market

The venture capital market is not transparent, which is good news for venture capitalists, but not for the general public. Venture capitalists usually put their cash in long term investments, due to which, their outcome is not immediately visible. Therefore, it is difficult to measure the success and failure of any investment in the short run. Only a few estimations are publicly made available to compare the relative performance of one venture capital firm against another.

 

European Investment Fund – Evaluating Venture Capitalists Performance

European Investment Fund (EIF) is one of the very few institutions that have great access to venture capitalist funds for many years. In a recent report by EIF, analysis was conducted on the activities performed by venture capital firms in Europe over the last 20 years. Between 1996 and 2015, there were more than a thousand startups that were fueled by 355 EIF backed funds. According to the report, venture capitalists who were investing for the first time performed equally well as venture capitalists (VCs) with broader knowledge and experience, especially when the economy is booming.

 

Experience and Skills Matter

However, the explanation given in the EIF report was quite ordinary as they claimed to have good skills when it comes to choosing venture capital funds. It was further stated in the report that even the new VCs that have their backing perform well. But it did not have the coherence with another conclusion they reached in the same report, i.e., venture capital firms that carry out investments for the first time give a worse performance when markets are not doing well and these are the times when experience plays a vital role in defining the outcome of any investment.

 

This gives rise to another aspect of VC investing that is opposite to the perception of the industry; selecting a winning startup during the times when markets are booming is something newbies do as good as the experienced ones do, yet, the real test lies in avoiding losers and this can only be achieved with experience and the right skills.

Women Still Struggling in the World of Technology and Innovation

Apr
13

Although, it seems as if things are moving in a positive direction for female entrepreneurs, there is yet a lot to be done. Women have made accomplishment in every field, but they are still facing a number of challenges, especially when you talk about the increasing number of female startup owners and their ability to get funding.

David S. Ricketts, the senior innovation scholar at the Technology and Entrepreneurship Center at Harvard, said that this is the number one challenge they face when their businesses are experiencing growth.

 

Challenges Faced by Women Entrepreneurs in the IT Sector

Female owners of IT companies have to come across various obstacles when they try to raise capital from venture capital firms. This holds true in case of the Silicon Valley and tech hubs in Amsterdam, Berlin, London. Not only does it adversely affect the progress of women entrepreneurs, but it is also bad for the technology sector, because restraining their leadership and talent hampers the overall growth and impede innovation. Moreover, the gender gap is rapidly increasing around the world, with 90 percent of the venture capital going to male entrepreneurs and only 10 percent retained by female founders. In addition to that, only 10 percent of the strategic level positions in tech companies are occupied by women.

According to the report by the National Women’s Business Council, women invest half the amount of capital invested by men in the startup businesses. It was further mentioned in the report that firms with female founders usually get far less equity financing from venture capitalists and angel investors as compared to companies with male owners, i.e., 14.4 percent vs. 3.6 percent.

Furthermore, only 1.8 percent of the women ask their close family or friends to raise capital as opposed to 9.2 percent men.

 

Female Entrepreneurs in the European Market

A similar trend has been observed in the European market as well, wherein, the IT sector is on the boom, yet the percentage of women leaders is a lot less as compared to men and only a small percentage of venture capital is allocated to startups led by female entrepreneurs. The United Kingdom (UK) is the second biggest startup hub after Berlin. 86 percent of the startups in the UK that receive venture capital funds are owned by men. Whereas, the percentage of angel investment secured by men and women is 56 percent and 44 percent respectively. Unfortunately, even in the IT sector, the distribution of capital is not based on merit.

With such funding constraints, women owned startups in the UK only represent 15 percent of the entire sector. They either revert to self-funding or seek crowdfunding opportunities to survive in the long run.

 

Female Entrepreneurs Generate More Revenue than Male Founders

It is worth noting that female owner companies earn 12 percent more revenue as compared to companies run by men in the IT industry, and their return on investment is 35 percent higher than the firms owned by their male counterparts. If they are given appropriate support, not only do they give better performance, but also make exceptional achievements. This holds true for women living in any part of the world.

 

How Can Female Entrepreneurs Contribute to Better and Sound Economy?

According to one estimate, if women in the UK, who wants to have their own startup companies, get the right support, they can instantly generate more than 300,000 new businesses and create more than 400,000 employment opportunities. Moreover, female-led businesses can contribute to innovation and better quality products with great consumer satisfaction.

 

The U.S. Firms, such as Backstage Capital and Kapor Capital, and the UK firms like Albright are some of the prominent examples of women-led capital firms that have proven to be the game changers in the venture capital (VC) community. To let the innovative and productive ideas flowing in the IT market, VCs should open the doors to give female-led companies a head-start, because it is possible that the owner of the next big unicorn is a female entrepreneur.

European Startups Seeking Assistance of Family Office Investors

Apr
06

There have been a number of stories about the connection between family offices and startups. Family offices are basically private wealth management instruments that are formed by rich families. There are a lot of venture capital companies that established their worth through family offices, including Greylock Partners, Bessemer Venture Partners, Atomico, and Frog Capital.

There are so many well-off families that have built their empires via entrepreneurship or by making seed stage investment.

 

Rising Trend of Family Offices in Venture Capital

It has been estimated that family offices around the world have $4 trillion worth of capital available for investment purposes. Moreover, there has been a rising trend of family offices in the world of venture capital.

An increased appetite for venture capital has been found among these investors. Interviews with 300 family offices around the globe, revealed that 70% of them were either actively investing in the startups or assessing the investment exposure to technology VC. However, there is another group of investors who had mixed reviews. They were still in the process of either recovering from a sudden shock or were still unsure of how to go about investing in startups effectively.

 

Consequences for Europe’s Tech World

Venture capital firms in Europe have experienced a huge funding gap with the United States. There are more technology companies in Europe as compared to the United States with high production of developers, yet, startups in the European region only receive a small percentage of investment in relation to their United States counterparts. Unless there is an improvement in this section, Europe will always lag behind in the production of tech unicorns and famous brands like Google or Apple.

Apart from large companies, family offices that currently have $759 million in asset under management should also contribute in bridging this gap.

 

Higher Returns

If you look at it from a startup or venture capitalist’s perspective, the involvement of family offices is not a big deal. Having relatively relaxed procedures, family office investors have created a stronger network as compared to institutional investors with an ability to open more avenues effectively.

It is totally understandable if you look at it from another angle. For example, family offices always look for those investment opportunities that offer a higher return. They are moving toward riskier products that offer high yield, such as a venture capital opportunity to grab prospective profitable investments.

Moreover, there was a research where it was pointed out that those who are taking control of family offices have a natural inclination and a better understanding of small scale businesses in the technology industry with ground breaking and innovative business models.

 

Changing Perception

It is true that family offices alone cannot bridge the funding gap of Europe as it requires an alliance between city or national level governments, institutional investors, angel investors, and corporate sector alongside the richest families in the world. However, it is not easily possible as it calls for a shift in perception toward venture capital, especially in Europe because it is still far behind the United States in terms of progress.

On the opposite side of the Atlantic, there is a high inclination toward taking huge risks. It is beneficial in the long run, because venture capital generates value much higher than the basic investment. In America, everyone knows that talented entrepreneurs who couldn’t make it in the first attempt are actually winners in the making, who will definitely make it big next time. Unlike America where failure is considered a stepping stone, Europe takes it as a stigma, which eventually influences their decision of capital allocation.

With the rise of technology startups in Europe, risk attitude is gradually changing among private as well as institutional investors. It is highly likely that family offices will be investing in the next wave of European innovation and research and development. This leads to increase in the number of startups that will get to the point of escape velocity and will also thrive at growth stage and beyond.

 

If the tech momentum in the European market does not die down, family offices should make a heavy investment into venture capital or else it will be left behind from other regions as well, such as Asia.

Angel Investors & Friends and Family – The Key Source of Funding

Mar
30

Investing in startups is a challenging task. Some startups make big promises, but end up failing, while others turn out to be quite a success. For example, the early investors of Instagram got more than 300 times return on their initial investment within a period of two years. But these are one of the mega jackpots. On many occasions, investors suffered heavy losses as well. This is the reason why they are wary of investing in startups.

However, it has been observed that the key sources of funding for a startup are either angel investors or their family and friends.

 

Friends and Family as a Key Source of Funding

According to a survey, friends and family invest more than $60 billion every year. Moreover, around 38 percent of the startup owners gather funds from their kith and kin and the average investment value is around $23,000.

There is no better way to raise money than to seek the help of your own family members or friends. They can be an ideal option to give your business a head start. If you have reliable family members who are willing to invest, it can be a valuable resource and a long-term opportunity, especially because their main motivation will be to provide support and show loyalty toward the founder rather than expecting a high return on investment.

It is basically a close circle of those individuals who have a strong affinity with your brand or with you.

However, it is very important that these investments are officially set down in writing. All the documentation should be signed by the investors with their consent to the fact that there is a risk that they might not get their cash back.

 

What is the Risk Involved?

It is crucial to know that business should not be mixed with pleasure. Taking money from friends and family is a huge responsibility and risky at the same time. Make sure you share a strong bond with them so that your goals do not get affected when things go wrong. By accepting the funds provided by the family members or friends to start your business, you risk their money. Therefore, it is of vital importance that all parties come to a consensus before anything is initiated.

To manage and control the risk, every party should sign a promissory note that contains repayment terms. In case, your friends or family members want to partner with you, sign a partnership agreement and keep the official documents with you.

 

Angel Investors as a Key Source of Funding

According to a report, more than 268,000 angel investors are active in the United States. Every year, they make an investment of 20 billion dollars in around 60,000 businesses. The average investment amount is approximately $75,000. As per the Angel Resource Institute database, in 2012, the recorded number of angel groups in the U.S. was 385.

Angel investor is an affluent person who provides funds for startup companies, mostly in exchange for equity ownership or convertible debt instruments. A lot of these individuals are either business professionals, higher-ups in the corporate sector, or renowned entrepreneurs. Similarly, there are angel groups as well that consist of individual angels who come together for a common goal, i.e., to evaluate and fund the startup companies. These groups allow such investors to pool their money and make larger investments.

 

Benefits of Having Angel Investors as a Source of Funding the Business

They are usually the ideal source to fulfill funding requirements, because they are focused on the healthy growth of a startup company. Moreover, they also contribute as a coach or mentor based on their own experiences. For example, angel investors introduce startup founders to prospective investors and potential clients. They also identify the problems, advise solutions, and help these businesses to get recognition and credibility in the market. All in all, angels take a lot more risk as compared to other institutional investors. This is the reason why they are so dedicated and seriously concerned about the profits and losses of their portfolio companies.

 

 

To summarize, there has been a rising trend of getting funds from angel investors or family and friends, as they have not only been beneficial to fuel the startups, but have also contributed toward a better economy around the globe.

Lithuania Government and Venture Capital

Feb
16

The past research shows that the role of governments to activate the VC market is a result of direct or indirect public policy measures. They choose the optimal measures that focus on timely economic issues and also encourage private investors to fund the sector where there is insufficient capital. Different governments around the globe are making efforts to increase the development of innovative SMEs (Small and Medium Enterprises). Although, VC market is normally talked about in the context of developed countries, such as the U.S., UK, Japan, Canada, France, Australia, etc., but in 2007, a joint initiative, called the Joint European Resources for Micro to Medium Enterprises or JEREMIE, happened to take place in Lithuania and other European states.

 

What is JEREMIE and its Purpose?

The JEREMIE initiative was an effort made by the European Commission and European Investment Fund (EIF) in collaboration with the European Investment Bank Group and other financial intermediaries to have a coherence among the EU. It was formed to distribute a portion of the EU Structural Funds through new risk finance initiatives for innovative SMEs.

In 2009, Lithuania experienced a dramatic emergence of VC funds as the agreement was signed with the EIF to implement the JEREMIE initiative in the region. Moreover, VC association was also established in the country. Lithuania is known as one of the leading countries in terms of the JEREMIE holding fund agreement – a fund managed by EIF and includes pre-seed and VC fund, co-investment fund, portfolio guarantees, and credits.

 

Emergence of Financial Intermediaries in Lithuania

In 2010, three financial institutions, a consortium of MES Invest and STRATA, LitCapital, and BaltCap were chosen for equity instruments. The last two have been established to manage VC funds, whereas, the first one is for the management of Business Angels co-investment fund.

 

Launch of Seed and VC Fund

A year after the emergence of financial intermediaries, Seed and Venture Capital Fund was launched in Lithuania under the JEREMIE initiative and a team of professionals titled CEE Capital was appointed by the EIF to manage it. The purpose of this fund was to enable the establishment of seed fund in Lithuania that is supported by the State. According to the newsletter published on the website of Ministry of Economy of Lithuania Republic, the size of this fund was approximately EUR 20.7 million and its aim was to extend financial support to Lithuanian firms that have a high growth potential. It was fueled by the Structural funds that were allocated to the JEREMIE holding fund under the management of EIF. It primarily provides capital to companies that are at seed stage of the development and also help in the further expansion of new enterprises.

Although, implementation of the JEREMIE initiative increased the amount of risk capital for SMEs in the country, yet, only a few investments were made in the innovative enterprises.

 

Baltic Innovation Fund

The Baltic Innovation fund, also known as the fund of fund initiative, was formed in 2012 by the EIF in collaboration with the government of Estonia, Latvia, and Lithuania. It was created to boost the equity investment into Baltic SMEs having a great growth potential. The fund represented the investment of 52 million euros by EIF, along with the 26 million euros from each Baltic government. The aim of this fund was to focus on the Baltic States during the period of four years between 2013 and 2017 through a funds-of-funds process in order to bring more private capital and also to introduce the best market standards for equity investment in enterprises. This opportunity can definitely improve the competitiveness and employment situation in the region.

 

Progress in the VC Sector

  • The number of firms that got VC capital increased from 5 in 2011 to 16 in 2012. In 2014, the number eventually rose to 23.
  • According to Enterprise Lithuania (government agency), 63 startups were funded during the period of eight years with a capital of 101.5 trillion euros.
  • There were about 320 tech startups in the country by 2016 according to the statistics provided by The Lithuanian Private Equity and Venture Capital Association, Startup Lithuania, and Practica Capital.

Last year, Cabinet of Ministers in Lithuania approved legislation that would make the process of permanent residency easier for non EU/EEA citizens who want to do innovative businesses in the country. The VC market in Lithuania is not yet developed and its progress is really slow. However, the public initiatives would give a boost to national VC market in the country.

Israel Government and Venture Capital

Feb
05

The government of Israel has actively participated in the development of Israeli Venture Capital (VC) market through hybrid financing, i.e., a mix of private and public VC funds. This was done to gain the maximum advantage of private funds from foreign investors.

 

Formation of the YOZMA Group – Initiative of the Israeli Government

The government has continually faced the challenge in Israeli VC policies on how they can deal with a small size of their domestic market and limited availability of funds. In order to tackle this issue, the Israeli government created the YOZMA Group in the early 90s. This program followed the U.S. style VC operations. Although, it carried tax breaks and equity guarantees for foreign investors, yet, there were not enough incentives for local investors.

YOZMA group was formed in 1993 with the infusion of 100 million U.S. dollars that was supplied by the Israeli government. It is basically a VC fund that invests in high-tech startups. During the next three years after its formation, the group created a total of ten hybrid funds. The second fund was launched in 1995 with the backing of European, American and Israeli investors. Each of these funds was financed with approximately 20 million U.S dollars.

Alongside these initiatives, YOZMA was also involved in new startups, which gave rise to a professionally managed VC market in Israel. The group turned out to be a catalyst for development and growth of the VC sector in Israel. Companies at any stage of development could receive funds from the group, but its primary focus is to invest in early stage companies that target high potential companies in biotechnology and life science sectors.

 

YOZMA III CEO Club – Initiative of the YOZMA Group

The group also developed professional relations with a number of well-known academic institutions and IT incubators in the country. Some of the companies in the YOZMA portfolio directly arose from these institutions. With the aim to involve executives at a senior position and founders of successful firms in YOZMA’s activities, a group was formed called YOZMA III CEO Club. This group turned out to be a great success and was a valuable source of a number of investment opportunities available at a particular point in time to companies or investors.

 

Privatization of YOZMA and New Challenges Faced by the Government

The late 90s, the government took a decision to privatize the YOZMA group as it believed that the private sector was adequately strong and healthy. The Israeli government auctioned its direct co-investments in 14 organizations. It also sold away its interest in 9 YOZMA funds to its partners. Although, the state still holds a small interest in two YOZMA funds, yet, all the funds are privatized and the direct contribution of YOZMA related VC capital has largely declined.

 

Other Initiatives by the Government to Improve VC Sector

The Israeli government also undertook a number of other initiatives, including the launch of tax incentive schemes for investors, fostering the international research and development, and development of other programs.

  • Tax Incentives for International Business Angels

According to a research paper by Günseli Baygan, a large number of Israeli VC funds are believed to be injected by business angels in Israel and other countries, specifically the U.S. The government offered tax incentives along with other programs to connect small enterprises and VC funds with international institutions and multinational companies.

Many of the VC funds started their offices in the U.S. and Europe to provide assistance to portfolio companies in finding investors and bringing awareness of technological and market developments in the international market. Given the small scale of the local market, it was a great move to flourish VC firms.

  • Fostering International Research and Development (R&D) Agreements

The government also fostered international R&D agreements, including the Israel-US Binational Industrial R&D (BIRD) foundation and the US-Israeli Science and Technology Commission. The BIRD was established in the 70s to fund R&D in startup companies. Moreover, it has also made a contribution by working alongside VC community, making its matchmaking services available for their portfolio companies in order to find out the business angels.

  • Other Programs

Apart from the above mentioned initiatives, different government bodies, including the Export Institute in Israel, MATIMOP – an Israeli Industry Center for R&D, and MESSER – Israeli Idea Promotion Center, made their contributions by offering assistance to small firms and entrepreneurs in assessing local and foreign markets for launching their services and products.

 

The VC industry in Israel grew from an investment of $440 million in 1997 to $1,759 billion in 2007, and almost all the investments in the country focus on high-tech companies, including bio-technology and ICT.

Hong Kong Government and Venture Capital

Jan
26

In the past few years, a growing trend of government involvement to boost entrepreneurship and innovation has been observed around the world. For example, key developments in the IT sector have risen from government funded R&D (Research and Development).

The Hong Kong government has also contributed a lot in this regard, especially via Venture Capital (VC) investments.

The ex-financial secretary of the Hong Kong Special Administrative Region, Antony Leung, said in a speech in 2002 that their strategic position provides outstanding opportunities, and VCs in the country have ideally been placed to take these opportunities.

 

Development of VC in Hong Kong

Venture Capital investments started in the 90s with the change in attitude of the Hong Kong’s government, as various reforms were made to the policies of the country toward IT development and innovation. Today, Hong Kong is considered one of the largest VC centers in Asia.

The government of Hong Kong has always been aware of the opportunities created by VCs. This is why a number of initiatives were taken by the government to further enhance the growth and development in the sector. Some of them have been mentioned below.

 

  • VC Financing System

The financing system was formed by the government of Hong Kong to offer supplementary loans with a low rate of interest to VCs that are non-governmental and to provide guarantees for these loans.

  • Direct Investment by the Government – Innovation and Technology Commission (ITC)

The government formed ITC in 2000 in order to make Hong Kong the knowledgeable and world-class economy. Another reason was to harmonize the creation and implementation of policies related to IT and innovation and to make sure there is synergy among them. ITC formulated different programs over the years, including the Innovation and Technology Fund (ITF), the Applied Research Fund (ARF), and Small Entrepreneur Research Assistance Program (SERAP). Moreover, it also contributed toward the development of IT infrastructure and human capital by introducing programs like the Hong Kong Science and Technology Parks Corporation (HKSTPC), the Hong Kong Productivity Council (HKPC), New Technology Training Scheme, Internship Program and more.

  • Provision of Legal Support

The government extended their efforts for the development of VC in the country by envisioning legislations as guarantees for the VC sector. Hong Kong has its own VC laws and does its best to stay compatible with Chinese laws related to VC. Some of the measures taken include Small and Medium Enterprise (SME) Promotional Law, wherein, the government of China issued a number of opinions to guide and support the economic development of private and entrepreneurial businesses by introducing preferential measures for SME development; and Provisional Measures for the VC Enterprises Administration to make way for fund raising opportunities and to set forth several investors by offering a legal ground for VC firms to raise capital in a private manner.

  • Adoption of Preferential Taxation Treatment

The VC firms in the Hong Kong were weak in raising capital due to their high risk nature coupled with low success rate. This is why the government formed a preferential taxation treatment by providing exemptions and reductions to back the VC development. A number of steps were taken in this regard, including Profits Tax Exemption for Offshore Funds that helped in bringing new offshore capital to the country, and Avoidance of Double Taxation between China and Hong Kong that decreased rate of tax on passive income, such as, royalties, interest payment, capital gains, and dividends for strengthening Hong Kong as the gateway of foreign investment into Mainland China.

Although, the government of Hong Kong took a large number of initiatives in the region, yet, they were criticized by some specialists who believed that the government could do more to support and improve VC industry. They are of the opinion that the government has kept its focus on later stage startups and businesses while ignoring the startups that are in their early stages, which caused lack of governance. Also, a very small proportion of that money was being invested in Hong Kong.

 

Current Status of the VC Industry in Hong Kong

In 2016, the Hong Kong Chief Executive, Leung Chun-Ying, announced HK$2 billion worth of capital in his policy address in order to boost the inflow of money in IT and innovation. It was the Innovation and Technology Venture Fund that aims to encourage increased funding from private VC in IT startups via a matching process. According to the Vice President of the Hong Kong Business Angel Network and managing director of Radiant Venture Capital, Duncan Chiu, the fund was issued to provide backing to early stage companies that struggle to raise capital for their business.

 

To conclude, Hong Kong is known to have the largest population of VC professionals in the region that manage more than 30 percent of the capital, and the government has been making a continuous effort to further strengthen the VC industry for the betterment of the overall Hong Kong economy.