The Emerging VC Ecosystem

“It’s not a faith in technology. It’s faith in people.” — Steve Jobs

The definition of entrepreneur in a few words implies any person who takes an advantage and constitutes a commercial activity by taking risks, solving problems, and adding value. This includes people who are in informality selling all kinds of products and services. However, most entrepreneurships, mainly informal ones, tend to be of low impact; that is, they do not generate significant economic activity, don’t contribute to the generation of permanent jobs, don’t generate economic development and competitive advantages to the country and therefore don’t last over time.

More than two billion people in the world work informally, most of them in emerging and developing countries. They lack social protection, labor rights and adequate working conditions. In Africa more than 86% are informal, in Asia-Pacific more than 68%, in America 40% and in Europe and Central Asia 25% (International Labor).

This generates an erroneous conception of entrepreneurship, which should be high impact and, if possible, technology based.

For example, Coinbase founded in 2011 by Brian Armstrong. It started as a simple crypto asset trading platform and has transformed into a unicorn that allows others to develop payment solutions and transactions through blockchain from its API. The company’s ultimate vision is to create a new open financial system. Coinbase has raised over USD-$547- million in Venture Capital funding, achieving a valuation of USD-$8- billion in 2018. Coinbase realized its initial public offering (IPO) in April, to date it has a market capitalization value over USD-$60-bn.

Some elements that influence high-impact ventures are the following:

  1. Professionalization of entrepreneurs

Most people think that entrepreneurship is easy, and it is, creating an overnight business is possible. However, creating a high-impact venture costs a lot of work, requires resources and takes time. Usually the best high-impact entrepreneurs are those who have accumulated experience, knowledge and developed business networks. This is not acquired by studying a degree in entrepreneurship or business creation and development. In addition, programs such as Shark Tank in Latin America, a reality show for economic purposes, don’t show the reality in the creation of high-impact ventures and neither in the investment of Venture Capital supporting these projects.

In contrast, in countries such as the United States, Israel or Germany entrepreneurs have solid academic preparation, technological bases and are supported by their business networks to build companies that have an impact beyond their local economies.

2. Professionalization of investors

There are more than 1,328 Venture Capital funds in the United States, more than 200 in Israel and 120 in Brazil. The development of a professional investment community is the basis for identifying, supporting, and financing high-impact ventures. These fund managers have developed expertise over the years, have methodological investment processes and manage vehicles with robust corporate governance.

They are usually professionals who have had experience as entrepreneurs, Venture Capital investors or investment bankers. They have a long-term, dynamic mindset that visualizes opportunities and assumes the inherent risks. Unlike emerging market entrepreneurs, they haven’t passed down the family fortune or married the sons or daughters of great entrepreneurs; on the contrary they are self-made people.

3. Open and fair competition

In contrast to developed countries where there are countless high-impact ventures, in emerging markets, oligopolies, low competition and unfair competition inhibit the creation of new startups with the potential to transcend.

There are sectors such as consumer goods, bakery, snacks, beverages, electricity, telecommunications, mining, banking, etc. that are dominated by big capital. Large entrepreneurs could assume their responsibility for social impact and entrepreneurship generation and not only maximize the return for their investors.

4. Technology and innovation as a driver of entrepreneurship

In emerging markets most ventures are related to lifestyle and are not technology-based ventures. Lifestyle ventures are those that generate an income to make a living, for example a bakery, pharmacy, taqueria without the need for much innovation and technology. The opposite case are high-impact ventures that use innovation and technology as a basis for competition. For example, Nubank, founded in 2013, has managed to create a digital bank in Latin America (valuation of USD-$25-bn) that competes against large banks in the region such as Itaú with more than 75 years of tradition and market cap of USD-$45-bn.

5. High technological penetration and adoption

This factor helps the development of high-impact ventures. India is the country with the cheapest internet service in the world. Jio offers a monthly plan for USD-$5.5- with unlimited data at a speed of 30 MBps, in contrast in Mexico Telcel offers a plan of USD-$10- per month with one gigabyte of internet, the best plan charges USD$-65- per month for 15 gigabytes of internet. In the United States an unlimited data plan costs USD$-35- per month. For a country to move forward it needs adequate, reliable, and affordable telephone and communications services.

6. Flexible education with quantitative and scientific bases

The education of people is an imperative in the development of a country and in the generation of high impact ventures. This education must be of high standards not only in private institutions but also in public institutions. In addition, formal and informal education must develop character, discipline, skills, and values in the formation of future professionals and entrepreneurs. A class on entrepreneurship or new business creation is not enough and may not be beneficial to generate innovation and high impact entrepreneurship.

7. Government at the vanguard and a generator of progress

High-impact ventures wouldn’t be possible without a government that is supportive and willing to face these changes, either by providing the tools in their construction or by adopting these changes within its structure.

For example, the Indian government has generated a major change within the business transaction processes through their payment system (UPI). In addition, they have established a single identity base that runs on the Blockchain protocol, another example is the case of China, which has had an accelerated technological advancement at the cost of data privacy of its population.

Today, the future of every nation is being forged; high-impact entrepreneurs are a fundamental piece in achieving equitable economic development. The entrepreneurial culture and motivation are fundamental for each entrepreneur. However, a whole interconnected and efficient system is required to promote this type of entrepreneurship. The objective is that a good entrepreneur develops a high-impact project to transcend and not just to survive.

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” ― Buckminster Fuller

Note: please refer to the original publication at EL CEO: El ecosistema emergente de venture capital (elceo.com)

Hector Shibata Salazar, adjunct Professor at EGADE Business School and Director of Investments and Portfolio at AC Ventures Fund

Ana Maury Aguilar, VC Investor at AC Ventures

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.