European Startups Seeking Assistance of Family Office Investors

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.

Lithuania Government and Venture Capital

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

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

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.

New Unicorn Wannabe

A number of Venture Capital (VC) investors are predicting 2017 to be the year when a large amount of money will flow into startups, especially if those startups have the opportunity to become “Unicorns”. Although, 2016 was not the best year for the startups as 70 percent reduction was observed in the companies that made it to unicorn status, 2017 seems quite promising.

For example, a number of VC firms, including Founders Fund and Andreessen Horowitz, managed to raise around $40.6 billion – a huge sum of capital needing to be deployed.

Rising Trend of Unicorn Companies

A rising number of unicorns from different industries have made it big.

Uber – Transportation service
Xiaomi – Consumer electronic
Airbnb -Lodging services
Snapchat – Social media
SpaceX – Aerospace

The marketplace for used goods has also picked up the pace during the last ten years as a number of startups have emerged in the market, such as OfferUp, 5miles and OLX.

Boom of the Unicorns in the Used Goods Marketplace

The online market for used goods has dramatically increased over the past decade as more and more e-commerce companies have made their entry. Encouraging the users to get rid of the items they no longer need, these companies have created a multibillion dollar market.

Recently, Letgo, a company that allows users to purchase and sell products secured $175 million in new financing. It has previously grabbed on to $325 million since it was initially launched and is currently approaching one billion dollars in valuation.

Moreover, some of the big unicorn names like Facebook launched a Marketplace Tab on the lower bar of its mobile application that allows quick access to shopping and selling on the basis of location. This goes to show how it is planning to penetrate in the e-commerce industry rather more aggressively.

LatAm Unicorns – Making it Big

On the other hand, in Latin America, some of the talented entrepreneurs are hosting five of the world’s biggest Unicorns ($1 billion in valuation). Although, the list of tech startups founded in Latin America is short, yet, these companies have made it possible for other new entrants to envision themselves as growing on a global scale. Argentina is the only country in Latin America with 4 (soon to be 5 with Letgo) out of 6 Unicorns. Those Unicorns are MercadoLibre, Despegar, OLX and Globant.

MercadoLibre is an online company from Argentina that is involved in online auctions and e-commerce. eBay made a strategic alliance with this company back in 2001. Apart from Argentina, the company currently has its presence in Colombia, Brazil, Costa Rica, Chile, Mexico, Dominican Republic, and a lot of other countries.

B2W is another name in the same sector. It was founded in 2006 and its headquarters are based in Rio de Janerio. B2W is a retail company that came into existence as a result of a merger between Americanas.com (holding a control share of around 53 percent) and Submarino.com (controlling the remaining percentage of share). The market-share of a company in the year it was founded was almost 50 percent of the online sales sector in Brazil.

Similarly, another renowned Argentine unicorn company from the e-commerce sector is OLX, which was founded by Fabrice Grinda and Alec Oxenford in 2006. Its headquarter is based in New York. The company is currently operating in more than 40 countries around the world.

The total number of internet users in Latin America is closer to the users in the U.S., but it has shown rapid growth in the past couple of years with the growth rate that is 8 to 10 times more than the U.S. rate. It means that the potential for new startups to make it big is huge in this region. Besides, there is a strong institutional and government support for entrepreneurial companies, which can further increase the expected number of unicorns in that area.

China Government and Venture Capital

In emerging nations, governments have greater influence over markets than ever due to regulations and political control. The ubiquity of a government can be seen in every economy through indirect or direct ownership of investment vehicles. China is no different.

The Chinese government started relaxing its grip on the economy during 70’s, which resulted in the escalation of investment and private entities. Since 1979, private and foreign investments have contributed a major role in making China one of the fastest growing economy in the world. Despite that, the country struggled to have standard financing mechanisms for businesses, including the availability of debt finance for smaller firms or presence of efficient equity markets. Although, it gave rise to a number of challenges, yet, it created opportunities for Venture Capital (VC) in China.

Rise of VC firms in China

The VC firms started making their way in the Chinese market during the early 80’s, and the impetus for this development was public policies, because the government still plays a dominant role in the country. The National Research Center of Science and Technology for Development suggested in 1984 that China should set up a VC system to encourage high technology market development. A number of local governments in the country supported and sponsored VC funds so that they could be invested in State Owned Enterprises (SOE) so as to level them up at a global standard in terms of quality and productivity. An example of such organization was China New Technology Venture Investment that was formed in 1985. Some of them were established for years, while others were formed only to make an investment in firms, especially the SOEs.

During 80’s, the primary focus of VC firms was to invest in property and infrastructure as there was an increasing popularity in hotel development and tourism sector. However, many of these investments couldn’t perform well and private equity investors lost interest in such investments. By the end of 1980s, interest in the Chinese market started brewing again. Due to steady economic growth and the government’s interest in such investments, VC was encouraged. But it wasn’t without a conflict as the government wanted to invest in high technology market and private investors wanted to keep their focus on low risk investments.

Evolution of VC in the Chinese Market

There was a lot of investment failure in the beginning as tourism and hotel development business couldn’t produce sufficient return. Moreover, a sudden proliferation of VC also turned out to be a failure, because the government officials and entrepreneurs didn’t have that experience.

As a result of such failures, a new body was formed in 2002, called the China Venture Capital Association, to improve the professionalism in this sector. Since then, the VC ecosystem has not only evolved but also shown tremendous growth.

Current Status of VC in China

While the investors in the developed nations are cutting their stakes in startups and golden age of unicorns is reaching the end, the venture capital fund backed by the Chinese government has brought together the biggest pool of startups in the world. It has reached 10 times the amount invested by VC in startups in 2015 ($32.2 billion).

Beijing Initiative

The country recently announced the formation of a $30 billion state-backed VC fund for encouraging the reform of SOEs and bolstering innovation. The fund is backed by the State Council and China Reform Holdings Corps, and it is established to find out the market-friendly ways to combine state assets and easily channel investments toward specific projects. It can turn out to be an effective move by the government in the long run despite the concerns regarding inefficient distribution and governance of assets. With the help of this initiative, if Beijing successfully upgrades its SOEs through effective investment in promoting high-tech companies, it can be helpful in rebalancing the economy of China by taking its reliance away from investments that focused on consumption based growth.

Other Investments Made by the Local Governments

China is struggling with economic difficulties as a result of ever increasing corporate debt, skyrocketing home price and reducing trend in exports. To combat such issues, local governments in China are also entering the VC sector, investing a total of ¥30 trillion. The purpose of this investment is to trigger the development of high-end manufacturing firms, internet and bio-technology so that it replaces the eroded economic growth of stumbling sectors.

Around 780 local government funds are competing to seed the upcoming multibillion dollar startups, including online emporium Alibaba Group Holding Ltd, Xiaomi, and SZ DJI Technologies Co. (Drone maker company), as China is striving to create at least one Silicon Valley in more than 20 provinces.

If China is able to achieve a desired outcome of such investments, it will not only enable the country to avoid the middle income trap, but also scale the entrepreneurship and innovation at a massive level.

UK Government and Venture Capital

New startup have a potential for high growth, and these businesses have been emerging at a fast pace since the recession of 2008. However, the success of these companies is based on a number of factors, one of which is the availability of an appropriate source of business finance. Due to the credit crunch, new businesses suffered a lot in the UK in terms of getting finance. Therefore, it was important to rehabilitate the economy of the United Kingdom by encouraging alternate sources of investments, such as, Private Equity or Venture Capital funds.

The main challenge faced by the government of the UK was not to create high-growth firms, but to take measures in order to ensure continued growth of these companies. Innovative ideas can only thrive if the right investment opportunity is available. The businesses with a potential of high-growth need a substantial amount of funds up-front, which is hard to obtain via traditional sources of finance.

Rise of Business Angels in the UK

Right after the credit crunch, business angel network evolved in the UK and took the form of well-structured and organized groups of professionals. It allowed them to make significant initial investments and undertake subsequent investments in the same professional way as Venture Capital investors do. However, the Venture Capital funding system was not established and focused on investing in innovative ideas, but it began to change.

The UK Government Support for Venture Capital Investment

Inspired by the Venture Capital (VC) backed firms in the United States, economists and authorities in the UK showed rising interest in this alternate investment opportunity for its unique role in distributing resources and expertise to a small percentage of high potential businesses.

Every major economy in the world has implemented initiatives to promote the role of VC, and many governments have formed their own VC funds. Similarly, the UK government has established various hybrid VC funds to achieve the entrepreneurial objectives and bridge the equity gap by strengthening the VC ecosystem. The purpose of these funds is to focus on growth oriented startup firms with innovative ideas that continue to face difficulties in obtaining capital. The UK government has a history of such interventions in a financial market that goes back to 1945 the Industrial and Commercial Finance Corporation (ICFC) was formed for SMEs (Small and Medium Enterprises).

The Government VC Funds (GVCFs)

There are three main GVCFs operating in the UK, namely UK Innovation Investment Fund (UKIIF), Enterprise Capital Funds (ECF), and Angel Co-investment Fund (ACF). All of these are the hybrid co-investment schemes and their aim is to promote public-private sector investment.

UK Innovation Investment Fund (UKIIF) – It was established in 2010 to encourage VC investment in the Research and Development sectors. It supports the formation of viable investment capital and targets the high-potential IT businesses in the UK. The investment is made via two underlying funds, i.e., the UK Future Technology Fund (now ceased) and the Hermes Environmental Impact Fund. These funds invest in those VC funds that are involved in giving capital to strategically crucial sectors of the UK, such as, life sciences, digital technologies, advanced manufacturing, or clean technology.
Enterprise Capital Funds (ECF) – This fund started operating in 2006. It represents a combination of private and public investments in businesses that have a tendency of high-growth. The purpose of establishing this fund was to lower the entry barrier for fund managers to operate in the VC ecosystem as well as to increase the supply of equity in the region where small businesses do not have access to the growth capital. It is rolling a program of 19 funds around £840 million with a planned life-cycle of ten to twelve years.
Angel Co-investment Fund (ACF) – It is the UK government’s £100 million fund that was launched in 2011. The objective of this fund is to provide direct investment to SMEs with high growth potential and to support the UK business angel market. Under this scheme, funds are allocated across the UK with a goal to support companies at every stage of development in different sectors. Furthermore, it operates at an arm’s length from the UK government under the administration of the British Business Bank.

Government interventions have become more important with the rapidly changing business environment and more initiatives are required to be taken by the government to promote the innovative ideas in the country to boost the overall economic environment.

Governments and Venture Capital

Several governments around the world have started equity co-investment programs to bridge the financial gap by injecting Venture Capital (VC) to businesses that do not have sufficient capital but they have high potential. These hybrid (public/private) programs still engage private sector VC firms as a channel through which public support and a large amount of capital is invested.

Hybrid Scheme in the United States

In the U.S., models of the Small Business Investment Companies (SBIC) program, such as, hybrid schemes have been launched. It involves a participation by the state as a public guarantor or a special liability partner (LP) for the large part of the total capital raised for investment. Subsequently, full operational autonomy is entrusted to the general partnership (GP) by the state once the investment eligibility guidelines are agreed upon. This is done to attract investment returns to the investors, i.e., the LPs.

These models have been widely adopted by a large number of governments since the collapse of dot.com bubble that violently shook VC funding raising. Moreover, developing countries have also started showing interest in such models to encourage innovation and new startups.

Hybrid Venture Capital Schemes – The U.K. and Australia

Other developed countries, including the U.K. and Australia, also followed the SBIC models and designed their own Hybrid Venture Capital Schemes (HVCFs). The Enterprise Capital Fund was formed in the U.K., whereas, the Innovation Investment Fund was formed in Australia.

The UK government devised the program to provide growing startups an equity financing of £2 million ceiling. Under the program, the early stage funds, invested in the growing small and medium enterprises (SMEs) and startups, consist of private investment by the private investors with uncapped profit share and loan or equity from the government with capped profit share. A common structure of investment is one where there is an equal distribution of profit between private and public LPs. However, to increase the expected profits of private LPs, HVCF adopts a number of mechanisms where changes are made to the profit distribution, down-side protection, timings of investments, and the payment of operating cost related to the funds.

Although, SBIC wasn’t a complete success, yet, the governments that are in favor of equity enhancement programs followed its design and changed it to match their own requirements and preferences.

Issues Faced by High-Technology Companies

High tech organizations face three major issues when they try to access venture capital. Firstly, they do not have enough information about venture capitalists in the market and there are limited financial channels for technology companies. Secondly, organizations that seek public venture capital causes low demand for other VCs, and thirdly, these organizations need to have creative and dedicated management teams or else they face issues in convincing VCs to provide funds, which further widens the financial gap.

Role of Governments in a Developing Country to Counter the Issues of High-Technology Companies

Governments of different countries have taken measures to address these issues. For example, there is a “triple-helix model” that expresses a relationship between: University – Government – Industry to promote innovation in a society.

Innovation can be brought in industry and university via direct or indirect VC investment, government stock, enactment of laws, formulation of policies, and through the promotion of high-tech SMEs. Government can play its role in different ways, i.e., by having a creative function, through venture investment regulations and tax policies that directly leave an impact on VC market, and by other measures that indirectly affect VC industry, such as regulations and laws that govern the labor market, patent, stock market, pension funds, etc.

For example, there is a city in China called Suzhou where 75 percent of the science parks are backed by municipal public VC. A special institute, which is responsible to the Local Science Committee of the central Chinese government, was developed to administer these parks. The employees of the institute are directly recruited and trained by the government. Therefore, as a developing country progresses in becoming a developed nation, a shift in the role of public VC arises from its direct participation in the market environment to provision of services.

Governments usually provide support to the Venture Capital markets due to perceived market failure or financing gap faced by startups or early stage businesses, and also due to the positive impact it will have to bring innovation and create job opportunities for a prosperous economy.

What do Social Investors Want?

Funding is a lifeblood of any startup. It is a crucial element for the survival of any business.

For social entrepreneurs, it is important to take steps in the right direction if they wish to secure funds. This is the reason why they have to learn what social investors really want and what their expectations are. Having a thorough understanding of your businesses increases the likelihood of attracting the right investor. Therefore, the vision of your business must be clear and well-focused.

Below are four main guiding principles every social entrepreneur must bear in mind in order to secure reasonable funds to keep their businesses running.

Financial and Social Objectives Must Be Well-Integrated

Social entrepreneurs have to be convincing in order to succeed in winning the trust of an investor. They not only should have a persuasive social mission, but also present a strong business case. If both these elements are properly aligned, they create a strong case that can make an appealing financial outcome to widen your impact. A great example of that can be Taxi-Electric that runs the cars on electricity and charge a fair price for providing taxi services. In addition to that, they also provide job opportunities to people who experience long term unemployment or are students. Both of these core elements have enabled them to sell as many taxi rides as possible.

Another well-known example is Tony’s Chocolonely that produce and sell chocolates. Moreover, it opposes child labor and slavery at the same time by partnering up with trade firms in Ghana and Ivory Coast to purchase cocoa beans at a fair price directly from farmers. These organizations are making an effort to spread a positive message while growing their revenues and returns.

Investors usually look for such businesses that offer a combination of both. It is quite likely that angel investors would invest in visionary ideas and would try to improve the business side of these social startups, whereas, investment funds tend to focus on the business side in order to assist them in aligning their social goals. Investors normally expect social entrepreneurs to have a deep understanding of their financial as well as social goals along with having an integrated approach and clear vision. It is important to optimize your plan through discussion with your investor.

A Well-Balanced and Strong Management Team

It is important to have a well-balanced team of professionals.

Investors always stress the importance of having a solid team that has its goals aligned with the goals of a business. Having a group of professionals who are motivated to invest their time and expertise in a social enterprise is considered quite healthy for a business as it is an indicator of good future prospects. Financial institutions and venture capital firms specifically look for companies with strong teams while taking investment decisions. Therefore, it is recommended to add a diverse group of people in your team at an early stage, because having more than one person behind an idea shows its strength and persuasiveness.

Measure Your Impact

It is not easy for social firms to measure their impact or quantify its outcome and they blame the lack of resources for not being able to do so. Investors, however, consider the impact measurement a strong requirement before they invest in a business. Although, they understand that it is difficult to measure the social impact, yet, they emphasize that it can prove to be very helpful for social entrepreneurs to maintain focus on their operations and identify clearly what their goals are.

The question remains how to get it done. The key is to start small, for example, measure the number of people employed by a social enterprise and the positive feedback it receives. There is no doubt that every method comes with its limitations, but one cannot deny that you can, at least, measure your progress with it. Taking the question “why” is it you want to measure the impact can play a vital role in integrating your financial and social goals.

Avoid Deviation from Your Core Mission

It is very important to stick to your key mission. The deviation can cost a business a lot in terms of losing their financial wealth and losing their core values. It usually occurs after two to three years into the business, especially when new employees, leaders or investors start showing interest.

For venture capitalists, the shift from a mission is one of the major issues that arises in social enterprises. It happens when they start deviating from their balanced view of pursuing financial and social goals together, and instead, move toward financial returns at the cost of their social mission. If such deviation occurs, it detracts the social entrepreneurs from the original mission they discussed with investors.

It is to be noted that moving away from the original mission is not a bad thing as long as the expectations of the enterprise and investors are aligned. Keeping the investors on the same page, and having their agreement is crucial for the success of any social enterprise.

Social Venture Capital

Starting a business isn’t easy, and getting funds is even harder. But if your business is involved in social or environmental activities, access to funds is even more difficult. One of the things social enterprises repeatedly talk about is a tough time they face finding people who are interested in giving them funds.

Although, there are different types of investors who are interested in investing in these firms, it is not easy to find capital. However, the trends have started to change in the past few years with the rise of social venture capitals.

Social Enterprises

These are organizations that employ commercial strategies to improve the well-being of a society.

They have a revenue generating business set up with two objectives, i.e., to attain social, environmental, and cultural targets and to make profits. On the face of it, many of these firms operate in the similar fashion as traditional businesses. But it’s only when you look more carefully, do you get to see its distinct characteristics, with the social mission being a center point and income generation playing its role as a support system.

Social Venture Capital

Social Venture Capital isn’t the same as traditional Venture Capital, as investors seek to look past the profits and risk/reward figures. Some of the common causes supported by them are to have a clean environment, elimination of poverty, and social justice. Instead of keeping their focus on investment returns, they tend to look for ventures that show profitable prospects along with the mission to bring positive change through their product or services.

Social VC – Changing the Name of the Game

Normally, traditional VC firms prefer to invest in those emerging businesses that show great potential to grow in monetary terms. So, when the business takes off, it’s a win-win situation for venture capitalists as they retain a portion of profits. Social VC follow the same pattern. They look for startups, assess their product and potential to grow in future. By investing their money, they become entitled to receive an equity share in a business.

According to the Global Impact Investing Network (GIIN), there are more than 300 VC firms that seek double bottom line businesses (companies with both profit and social impact). In a survey conducted by GIIN of 125 funds, it was found out that 25 to 50 percent of them follow the VC model or a private equity model.

So What Triggered the Social Wave?

Brian Griffiths and Kim Tan said that the social venture capital has partly been triggered by a shift in the role of business in developing countries that have a history of misusing the resources and poverty-stricken members of society. Another reason was the failure of massive aid to bring significant change.

This is why well-off venture capitalists expressed their desire to apply high tech style innovation to their altruism. Chairman of the Big Society Capital, Sir Ronald Cohen, said that impact-investing can balance the course of crime, poverty, and homelessness for green energy, education and a lot more.

Traditional VCs Shifting their Focus?

With the emergence of social VCs, a growing interest has been observed in traditional VCs as well. A former Wall Street Journal writer, David Bank, said that institutional funds that have given rise to social VC are looking at markets like sustainable timber, agriculture and green real estate. An eyeglass maker, Warby Parker, donates glasses to these businesses so they can sell it in emerging markets. They managed to secure around $100 million venture capital from Tiger Global Management, Spark Capital, General Catalyst and a lot of other firms.

There are many venture capitalists who are making small investments, for example, an outdoor gear firm, Cotopaxi, attracted $3 million from New Enterprise Associates and several other investors. Overall, it has secured around $9.5 million, showing that Silicon Valley can see the potential to generate returns in these businesses.

Venture capitalists actually get attracted to the fast-paced growth of these businesses, which is gaining popularity with more-than-ever-before socially aware consumers. Social VC is not generating high profits as of now, but it was the same for venture capital funds when they first appeared.