Is Latin America the “NEW CHINA”?

Early this year, SoftBank Innovation Fund was announced as “the largest-ever technology fund focused exclusively on the fast-growing Latin American market”.

This SoftBank decision makes total sense once we realize the economic development of Latin America in the last years. The region is now regarded as “the new China” when it comes to venture investing, business startups, and venture funds because of rapid growth taking place in the economy.

In fact, the Association for Private Capital Investment in Latin America stated that in the first half of 2019, venture funds investments in Latin America summed USD 2.6 Bn. across 160 transactions, which is a big improvement to the USD 2 Bn. raised in 463 transactions for 2018.

Just think about this fact:

Do you know that in 2016, all startups in Latin American just raised USD 500 million combined?

In other words, venture funding in Latin America in the first 6 months of 2019 summed more than 5 times the amount raised in the whole of 2016.

This clearly proves that:

Venture funding is taking over at a fast rate and the stats are there to prove it .
Rounds are getting bigger which shows how the market is maturing quickly.
More money was raised over fewer transactions which means that larger amounts of cash are being invested.

We’re now seeing a noticeable improvement in activities in the early stage from seed all the way to growth capital.

Big deals haven’t been left out of this as more and more investments have been rewarded like:

Colombian on-demand delivery unicorn Rappi raised USD 1 Bn. in April.
Gympass raised USD 300 million in June in Brazil.
Brazilian Real estate unicorn QuintoAndar raised USD 250 million in a Series D.

In recent years, Brazil has had the largest share of venture funding in Latin America but this has come to change because in the first 6 months of 2019, Colombia has surpassed Brazil in terms of venture dollars raised thanks to the recent Rappi’s investment round.

According to the Association for Private Capital Investment in Latin America, Colombian startups raised over USD 1.06 Bn. in venture funding in 13 transactions.

Now, compare this figure to the USD 989 million raised by 88 Brazilian startups over 88 deals and you would clearly see that the difference and margin is really large.

Next in the list is Mexico with USD 310 million invested in 34 deals. Collectively, the three markets made up 91.9 percent of the dollars invested and 84.9 percent of the deals during the first half of 2019.

Also, Kaszek Ventures founded in 2011, has recently closed two funds totaling USD 600 million in August as reported by Techcrunch. This made them one of the primary architects of the rapid boom startup financing and growth in Latin America.

In the words of Nicolas Szekasy, the co-founder and managing partner of Kaszek Ventures: “Every year it’s one step ahead. In the last few years, in particular, we have seen the pace accelerating and an increase in quality of the founding teams”.

Criterios de valuación de Startups (Parte 2)

Valuar una startup en estadio temprano resulta muy difícil. Hay muchas señales para tomar en cuenta y procesar, incluso después de analizar cada una de ellas, termina siendo una tarea más artística que científica.

Es cómo valuar una obra de arte: hay algunos criterios que sirven para tomar una decisión con fundamentos pero no hay forma de saber si tomamos la decisión acertada hasta transcurrido un largo tiempo después de haber invertido.

En el artículo anterior mencionamos algunos elementos que pueden servir como ayuda para valuar una startup. En el presente artículo agregaremos nuevos elementos e intentaremos plasmarlos en ejemplos concretos.

A fin de analizar cómo funcionan algunos de los criterios que deberían regir la decisión, haremos el ejercicio de pensar en situaciones hipotéticas que se nos suelen plantear en la práctica. Cada uno de los criterios será analizado de manera absoluta y totalmente independiente al resto, como si fuera el único elemento a considerar.

Equipo fundador

El análisis del equipo fundador es una parte clave del proceso, ya que puede determinar el éxito o el fracaso de una Startup.

Este grupo de personas no solo tienen que ser capaces y contar con las actitudes y aptitudes necesarias, sino que también los valores, la visión y objetivos del proyecto deberían ser similares a los del inversor para asegurar que la línea de desarrollo y crecimiento van en la misma dirección y no existirá un conflicto en la toma de decisiones.

Quiénes son los fundadores?
Cuál es su experiencia en la industria y el mercado del proyecto?
Es comprobable este expertise?
Tienen experiencia los miembros del equipo emprendiendo? Cómo transitaron ese camino y cuál fue el desenlace?
Cuentan con mentores o advisors de renombre?
Son complementarios los perfiles y/o roles del equipo?
Cuántos de los miembros del equipo están dedicados full time al proyecto?

Estas son las preguntas básicas para conocer el equipo y para poder justificar una valuación superior o inferior.

Ejemplo

Un SaaS tiene desarrollado un Producto Mínimo Viable (MVP), no genera ventas y hay un mercado que parece tener potencial pero aún está sin validar. Dos de los founders tienen más de 10 años de experiencia en la industria, sin haber emprendido previamente. Sumado a esto, la compañía está acompañada activamente por un inversor ángel de renombre que ha invertido en la compañía.

Todo esto podría servir para justificar una valuación ligeramente superior a USD 500,000.-

Tracción e ingresos estimados para el corto plazo

En etapas tempranas, la tracción que puede demostrar el proyecto es otro de los puntos importantes.

Siguiendo con el ejemplo de un SaaS, si el proyecto solo cuenta con 3 clientes que realizan una prueba piloto, sin demostrar chances concretas de que se puedan convertir en clientes pagos, será difícil justificar una valuación superior a USD 500,000.-

Sería un caso muy distinto estar hablando de que cuenta con 50 clientes con prueba piloto, el ticket promedio que se le piensa cobrar a cada uno es de USD 1.000.-, y se estima que el 50% de los clientes se convertirán en clientes pagos, se puede empezar a pensar en una valuación más cercana a USD 1.000.000.-

En todo el análisis que se realiza con la tracción y los ingresos estimados en el corto plazo hay variables importantes a tener en cuenta, como lo son la cantidad de potenciales clientes y el ticket promedio. Si hay solamente un cliente y se estima que el ticket del SaaS será de USD 50.000.- mensuales, la valuación podría oscilar entre USD 500.000.- y USD 1.000.000.-, ya que si bien el ingreso esperado es similar al caso anterior, es mucho más riesgoso depender de un solo cliente.

Crecimiento y compromiso de usuarios

Ejemplificamos ahora con un proyecto de Mobile App.

En este caso, contamos con información y conocimiento previo que tenemos de aplicaciones de similares características, sabemos que un típico valor del tiempo de vida promedio de un cliente (LTV – lifetime value) es de USD 2.-

Si la aplicación ya tiene 10.000 usuarios y la base de usuarios está creciendo a un 15% mensual, suena lógico valuar la compañía entre USD 1.000.000.- y USD 1.500.000.-

Si la aplicación tiene 10.000 usuarios y está creciendo a una tasa de 30% mensual, sería razonable aceptar una valuación de entre USD 1.500.000.- y 2.500.000.-

Si la aplicación tiene 10.000 usuarios y la base se está achicando al ritmo de 10% mensual, una valuación razonable podría ser entre USD 750.000.- y USD 1.000.000.-

Tamaño de mercado

Es necesario entender cuál es el mercado potencial al cual apunta el negocio.

El proyecto puede apuntar a:

Un país
La región
Al continente
Todo el mundo

Conviene analizar ese mercado potencial con el sistema “TAM, SAM, SOM”, el cual analiza 3 aspectos que funcionan como embudo, desde lo más genérico hasta lo más específico:

mercado total direccionable;
mercado al que puede servir el proyecto con su producto o servicio;
mercado que razonablemente puede conseguir el proyecto.

Un aspecto interesante a tener en cuenta es el plazo estimado para atacar el mercado al que se apunta y la hoja de ruta. Es importante saber si los fondos de la actual ronda de financiamiento son suficientes para atacar el mercado potencial y, sino, cuantas más rondas de financiamiento se planean llevar a cabo, y en qué plazos estimados.

También es imprescindible consultar si la actual ronda de financiamiento en la que participamos como inversores, nos da el derecho a participar en la compañía global, o solamente en alguno de los países.

El tamaño de mercado resulta un factor determinante en compañías de etapa temprana, ya que al haber tanta incertidumbre sobre la mayoría de los aspectos del proyecto, funciona como principal indicador del potencial de crecimiento del negocio, el cual debe poder generar ingresos de crecimiento exponencial y retornos significativos para una inversión con este nivel de riesgo asociado.

Cuando el emprendedor hace su pitch, es conveniente analizar si hay una coherencia lógica entre el mercado que él declara como potencial, el segmento de clientes al que apunta, la propuesta de valor orientada a resolver un problema que ese segmento padece, y la estrategia de comunicación y marketing que planea llevar a cabo para aumentar sus ingresos.

Si la respuesta a todos estos puntos suena satisfactoria y atractiva, una valuación de USD 1.000.000.- podría resultar lógica, aun cuando el producto y estadio comercial se encuentren todavía muy incipientes.

Competencia

Este tema está estrechamente vinculado al anterior ya que, si existe competencia directa, la compañía en cuestión tendrá la dura tarea de competir por el mercado existente o diferenciarse para escaparse de su competencia con alguna ventaja competitiva o propuesta de valor superadora.

Un error en el que incurren muchos proyectos es el de subestimar a los jugadores incipientes de la industria y a quienes consideran como competencia indirecta. Estos competidores podrán superar fácilmente con una mera innovación incremental y escalar rápidamente en la curva de madurez del mercado en que nos encontremos.

Asimismo, aunque la compañía que estemos analizando corra con una ventaja competitiva sustancial, debemos consultar el camino a seguir en términos de innovación y los nuevos negocios que puedan llegar a surgir. No es grave si el emprendedor no tiene la respuesta inmediata, pero sí resulta determinante que el equipo transmita un perfil de innovación permanente, esto es lo que forjará una compañía que pueda trascender y sobrevivir.

Tanto este punto como el anterior, nos permiten conocer la cuota de mercado que apunta obtener el proyecto.

Modelo de negocio

En nuestra opinión, este es uno de los aspectos más relevantes para la correcta ejecución del plan de negocios. Si existe una propuesta de valor consistente y un mercado potencial atractivo, entonces debemos analizar si el modelo de negocio es viable, coherente con el segmento de cliente al que se apunta, con el contexto socio económico y, sobre todo, si es escalable para generar el tipo de retornos que esperamos en este tipo de inversiones.

Es fundamental, antes de adentrarse en detalles, distinguir si es un modelo B2B, B2C, B2G, etc. Esto nos permitirá identificar con claridad quiénes son los usuarios y quiénes son los clientes (los que pagan), así como también cuáles son los canales de venta, cómo son los procesos de venta, los obstáculos que se presentaran, y corroborar si la estrategia de comunicación, precio y producto son coherentes.

Además, la distinción entre estas categorías resulta útil como indicio para analizar la potencialidad de que la compañía sea posteriormente invertida por fondos institucionales o eventualmente adquirida por una corporación, lo que seguramente nos dará una clara posibilidad de generar un evento de liquidez en nuestra inversión en los próximos años. Por ejemplo, existen fondos que excluyen de su tesis de inversión a los proyectos con foco B2G y B2C.

Otro aspecto muy útil de conocer el tipo de negocio es que nos puede indicar cuánto capital y que tan intensivo sería el uso del mismo, cuál es su velocidad de gastos y flujo proyectado y, consecuentemente, cómo serán las próximas rondas de financiamiento.

Por ejemplo, cualquier modelo similar a una red social cuyo objetivo es generar trafico masivo para luego monetizarlo con publicidad, seguramente deberá invertir en adquisición de usuarios y fidelización durante un largo periodo de tiempo para lograr empezar a generar ganancias con el producto o servicio. Tardará incluso más años o meses en lograr el punto de equilibrio operativo.

Otros ejemplos pueden ser compañías que necesiten alto nivel de inversión, ya sea para inventarios, almacenamiento, capital de trabajo, o mismo compañías que, por el perfil de sus clientes, deben transitar largos procesos de venta para ver sus primeros ingresos.

Existen innumerables ejemplos, pero lo importante es no dejar este aspecto al azar.

Estructura de capital

Si bien no es sustancial al éxito del negocio, es importante conocer la estructura de capital (cap table) de la compañía, y conocer cuáles son las obligaciones, pasivos y contingencias asumidas por la compañía y/o los emprendedores a nivel individual.

Asimismo, debemos conocer los términos bajo los cuales han invertido inversores anteriores. Todo ello nos dará una idea más clara sobre el tipo de derechos que podemos llegar a adquirir en caso de decidir avanzar con una inversión, y las potenciales trabas o riesgos que podrán surgir en caso de que la compañía resulte exitosa.Dedicaremos un artículo para este aspecto.

Como habrán notado, ninguno de estos criterios o aspectos sirve por sí solo para asignar una valuación a una compañía, pero poco a poco vamos obteniendo parámetros útiles para aproximarnos a una valuación más exacta y acertada a la realidad del proyecto.

A lo largo de los próximos artículos, intentaremos desarrollar un mecanismo lo más estandarizado y acertado posible.

A Useful Funding Tool for Less Segregated and Diverse Communities

Communities with a mixed ethnic background and more diversity are likely to come up with new ideas. According to a study by the Yale School of Management, having people in a community with different backgrounds is beneficial for Venture Capital (VC) firms as it leads to economic development and innovation.

In various countries around the globe, communities, universities, and businesses are pursuing diversification. Apart from the immediate benefit of getting fairness, having multiple points of view and diversity of experience is very useful for the overall performance of these sectors.

Effect of VC on Integrated Communities

The study also revealed that VC investment is more beneficial for ethnically integrated communities as compared to segregated communities. The effect of VC on the integrated communities was 30 percent higher as compared to segregated ones, especially in terms of creating more wealth, jobs, entrepreneurship opportunities, and facilitating innovative activities. The startup businesses create more value and job opportunities that eventually lead to economic growth.

In a diverse community, you get to interact with people having diverse backgrounds, which leads to getting access to more resources and information as compared to segregated communities. In the past, studies have shown that economic vitality is enhanced as a result of social interaction within a community.

Implications of Social Interaction for Venture Capital

The purpose of the study in question was to identify whether a social structure is vital for economic development or not. The VC was the focus of this study, given the fact that it is a useful financial tool for high growth businesses.

It was revealed that such relationships have significant implications when it comes to VC investments. VC investors put their money in new businesses that are in the close vicinity. They tend to rely on professional relationships and friendships for leads and information that cannot be received via cold calls or internet search.

VC investments were compared to aggregate income, employment, new businesses, and a number of patents. It was found that VC performed much better in less segregated and diverse areas, resulting in more patents, more jobs, and created more value.

Social interaction has benefited various communities. One of the many factors that led to high level of innovation in the United States is the increasing number of immigrants that bring diverse culture. When they interact with one another, it creates room for transferring valuable information and ideas, which leads to better economic outcomes. Besides, when people from different ethnic backgrounds live close to one another, it brings about healthy relationships and effective interactions that is favorable for the wider economy.

Diversity Leads to Innovative Thinking

Diversity is also very useful to promote innovative thinking that leads to success in the venture capital market. Any sector that does not have diversity or mixed race is very limited in innovative mindset and thought process. This results in similar thinking with not many innovative ideas. In addition to that, there is gender bias in the VC sector that restricts the overall growth prospects. It is a widely known fact that female founders represent the rapidly growing entrepreneurial group in the United States and their firm’s experience growth 1.5 times faster than the average growth rate in the market.

Providing Solution to Promote Innovative Decision Making

Despite the lack of diversity, it is quite likely that change is taking place gradually. An increasing number of entrepreneurs with diverse background are entering into the market. They are focused on providing a solution to the problem and make a profit in the process.

It has become really important to promote diversity in the communities and in societies at large so as to promote economic development and prosperity. Not only will it be beneficial for the venture capital industry, but it is also going to help the masses in getting equal opportunities in every sector.

The venture capital market has also derived benefits from diverse communities in terms of innovative thinking and plethora of useful information. To continue moving in the right direction, countries around the globe should embrace diversity in order to have successful businesses and create more job opportunities that will eventually bring economic prosperity in the long run.

Women Still Struggling in the World of Technology and Innovation

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.

Rise and Fall of the Venetian Empire

The Rise and Fall of the Venetian Empire should be a must-know Lesson for Innovators

In the fast paced world of technology, innovation is the name of the game. If entrepreneurs do not keep up with the innovative strategies, they would eventually end up losing their market share. A great example can be none other than the rise and fall of the Venetian Empire. To get a better idea of what happened, following is a brief background of the empire along with the lesson learned from it:

Background of the Venetian Republic

Every business would want to last for centuries just like the Venetian Empire did. Between 697 and 1797 AD, the empire flourished the most as a result of its ability to make good decisions in the field of technology along with its unconventional ways and geographic location. However, you should bear in mind that if one has to face a sudden change, it can cause the strengths to turn into weaknesses, leading to a fall of thousand years of success.

The Military Technology

Having a military technology and central position on the main trade routes gave the Venetian Republic a strong edge. The Arsenal, a naval military weapon factory that was considered a production line method of manufacture, was a core of the empire’s naval industry. It fostered creativity and encouraged entrepreneurship and innovation in building its galleys.

Central Geographical Location

The Venetian Republic’s location allowed it to protect itself from sea based as well as land based invaders. Its geography propelled it to develop a money lending and trading economy as there was a limited area that could support agricultural activities. Moreover, it was situated at the top of the Adriatic Sea, which enabled it to become an important trading hub, connecting both the west and east side through the Mediterranean.

Exploitation Over Exploration – A Beginning of the End

Like a number of successful organizations, Venice also hit the level where it started focusing on exploitation instead of exploration. Entrepreneurs decided to follow a traditional route, as established practices gained popularity as compared to exploration. Traders and merchants focused on incremental innovation through efficiency and optimal use of resources. Having a focus to quickly increase their fortune, they deviated away from mapping new directions.

According to Alessandro Barbero, a professor of medieval history at the University of Eastern Piedmont, galleys were favored by the city’s navigators for a very long time. But as seafaring galleons began to surface, it allowed countries, situated at the border of the Atlantic, to create new routes for trading. These routes were not flowing through the Adriatic Sea. Venice lost its competitive edge with the introduction of ships that could survive at sea for a longer period of time i.e., months and years. This was the age of exploration, and this is when the city began to fall. So, with the invasion of Napoleon, the Venetian empire officially collapsed.

Lesson Learned

One of the most important lessons learned from the fall of the city was that stronger you believe that the future will function as the present does, the greater the likelihood of a decline in the state of affairs. If a company does not explore new directions, it will not be able to survive for a very long time. Therefore, it is important to conform to the fact that future will not be the same as present. The future is always uncertain and opened to all sorts of options. A ground breaking move by a competitor or launch of innovative technology is all it takes to cause an empire to fall. Having a sound business with high walls and neat gardens is not enough, because you might come across opportunities or threats beyond those walls.

Innovators’ Approach to Success

Innovators and entrepreneurs avoid the concept of “success as usual”. They rather invest their time and money in new business models along with exploring latest technologies. They keep a bigger perspective in mind and are cautious of being too effective or efficient, which enables them to foster unconventional mindset, problem solving skill, and an art of challenging the status quo. An innovator will not go after a fixed horizon. Instead, his focus will be on how the horizon moves as they take a step in that direction.

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.

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.