How Important is Experience in Venture Capital?

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

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

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

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

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.

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.

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.

Angels going back to heaven

The global market is at its all times high and businesses are getting investments in abundance.

Angel investments have also stepped up their game. In the past few years, a number of deals took place where the investments from angel investors flooded in, for example, Reid Hoffman, who made an investment in Facebook and Flickr, whereas, Chris Sacca invested in Instagram and Twitter. You would find so many names behind the companies who made it big in a short period of time, such as Friendster, Yelp, Twitter, etc.

Business Cycles leading the Angel Cycle

Most of the startups in the tech-industry have been backed by contributions made by angel investors, but the question is:

How long will it last?

This question has been brewing for quite some time, and there is a reason behind it.

If you take a look at past three decades, you will find out that angel cycle followed the same pattern as a business cycle. With the boom and bust experienced by the business cycle, angels took exits and departed to safe haven from time to time. There has been a total of five distinct cycles over a period of the last thirty-one years, depicting the rise and fall of silicon valley’s angel investors.

The sine curve that keeps track of fluctuations in the angel cycle typically follows the sine curve that keeps track of ups and down in a wider business cycle. It shows that as angel investing begins to rise up, the remaining startup investment market would be going through a radical shift.

Rise of Angels in Past 5 Years

For the past six years, the size of an average investment made by angels grew almost sixty percent, and pre-money valuation has shown a growth of around twenty percent.

Angels have invested heavily in the valley, wherein, different groups of angels have infused a lot of cash as the rounds got bigger and bigger each time. For example, two years ago in 2014, an investment of more than $24 billion was made by angel investors.

As they were risky investments, they hardly took into account more than 10 percent of an angel’s portfolio. Most of these investment decisions were discretionary; this is the reason why appetite of these investors and available funds got exhausted due to uncertain market conditions.

If the Cycle is about to Mature?

As predicted by Bill Gurley, a venture capitalist in the Silicon Valley, the cycle is about to reach its maturity growth is given more value as compared to making profits. Regardless of whether it is happening, when it eventually happens, angel investors will become more cautious, wherein, some of them would wait for the market to go back to where it was prior to the fall, while others would simply pack up and leave.

History Repeats Itself

If you look back in the past, angel investors flee from the recession that occurred in the beginning of 1980s, only to enter the market again with the introduction of PCs and record high job opportunities coupled with the surge in the real estate market in San Francisco. Another downfall of angel cycle was observed with the economic recession of the 90s, as they made an even dramatic comeback later on with the growth of the dot – com bubble. Right after the bubble was burst in 2000, not only did they leave the tables once again, the investments turned out to be a failure as well.

They made another comeback after that, but escaped to safe havens when the real recession hit the market in 2007. Since then, the industry has experienced bullish trends, but no one knows when it will come to an end. However, the only certainty on the basis of past events is that it will come to an end.

If Time for Startups is Now?

If you have a startup company or planning to raise capital for funding your idea, it is better to raise capital now. Try to attract as much funds today as you can, while the market is experiencing a boom, because when the business cycle takes a shift, angels will take a step back. In times of good market conditions, business cycles are considered perpetual. What businesses tend to forget is, it is a cycle that goes through a series of surges and plunges. The global economy is not immune to the unavoidable macro events, as their occurrence gradually causes the shift in business cycles.