Global Dynamics of Start-ups and Funding
The year was 2010, when I first landed in Tallinn, Estonia. I was the judge on a panel of local and international investors to evaluate Estonian companies who were pitching to us. This was my first visit to Estonia and I had no idea, what to expect.
The first pleasant surprise was that their airport is just 10 minutes from the business district. I also came to know that this country of 1.2 million people was the birthplace of Skype. Over two days we met many great companies, one of the companies later moved to New York and had a $100 million exit. Estonia was known for their pro active e-Government. Intrigued by their hunger to innovate, I continued my visits to Estonia and later joined their e-Resident program a few years after my first visit.
My visit to 13 cities in Europe, Israel and Turkey, enlightened me about the innovations taking place in most parts of the world. Penetration of broadband was increasing in every corner of the world. Apple’s iPhone was just 3 years old in 2010; I could see the massive change coming to the startup ecosystem around the world. Youngsters around the world were exploring and studying the same digital platforms and tools.
Fast forward to 2017, the world is a completely different place; startups are now globally connected and there is a plethora of digital nomad entrepreneurs. Smart phones and high bandwidth changed the way we do business. Suddenly the pace of product development and launch of products started changing at exponential speed. Mobile communication is challenging every human norms of living established over thousands of years. In continuously changing world, start ups and investors face the some unique challenges; especially startups, as they are trying to adapt to the continuously changing environment.
Some of the major issues the startups face are;
- Nothing is local: In this digital age, when the access to the information is not constrained by the geographical boundaries; limiting an innovation or an idea to a country is an unachievable task. Every innovation has the global implications. Examples of such incidences are not difficult to find anywhere in the world.
- Even if you are local, someone from the other part of the world can come and eat your lunch: These are no longer the days, when the early bird used to get the worm. However, being a pioneer in the local sector definitely gives a company an edge over its local competitors. Globalization, coupled with business friendly rules by the most of the governments, has made the world a global canvas. When an international player enters in the local marked backed by the mega VC funding, it changes the fabric of a local market.
- Global hubs are good to start business but it is difficult to get growth capital: San Francisco, New York, Hong Kong, Shanghai, Montreal, Sydney, Bangalore, etc. global hubs for the startup are the prime destinations for all budding entrepreneurs; as they provide seamless opportunities and has an easy accessibility to the investors. However, as every coin has two sides, setting up a business in these hubs doesn’t guarantee an entrepreneur a free ride to success. The ever increasing number of startups in the hubs is diminishing the percentage of success.
- Bridge to Silicon Valley is getting longer and with steep learning curve: Entrepreneurs and companies are involved in a never ending race to reach the star, however, only a few can make it. As the competition is increasing with the each passing day, the road to the Silicon Valley has become narrower than ever. Before planning the route to the valley, every startup must learn and get themselves educated with the business dynamics and the importance of innovation.
- Impact of digital technology has rattled the masses, generating anti global sentiments which in turn affects mobility of digital nomads: The digital technology has impacted the startup ecosystem in a big way. Due to the excess of information, the geographical boundaries have been broken, and this has led to the increase in competition. Digital technology allows people who have means and tech ability to consume more resources and leverage the technology to their benefits compared to people who either cannot pay higher prices or may not have technical ability to get those resources. For example a taxi driver in Mumbai cannot compete with a tech enabled taxi Service Company from San Francisco; this creates discontent at local level. The first group they blame is immigrants and globalization. Political backlash will be reflected in tighter immigration control, restricting digital nomads to move and do global business.
Even the investors are not untouched by the ever changing global dynamics of the start-up ecosystem.
- Angel investment has always been local. However, good deals are anywhere in the world: One of the major issues which the investors face is the lack of global presence. Most of the angel investors limit their investment to their geographical regions or countries. However, there are immense investment opportunities available even beyond the specific geographical region, which needs to be explored.
- International investment in an unknown jurisdiction enhances risk exponentially: Investing the money in an unknown territory has always been a risky business; hence, most of the investors vary from it. This limits the growth of an investor and his/her portfolio. Although, hasty investments are never a solution, an investor should get himself/herself well educated with the funding scenario and future prospects of the funds before investing; and should not keep the international investments off the limits.
- Valuation of deals at global startup hot spots are getting higher: The hot spots are the regions with the most number of successful startups, hence the valuation of most of the deals is generally at the steeper end. However, this trend is reducing the growth in the other regions, as the investors concentrate most of their funds in the hot spots, leaving lesser amount of their funds to the startups located in the other regions.
- Lack of follow on rounds kills good companies: Many good companies have been the victim of the lack of funds, as they fail to raise the funds in the follow-up rounds post a successful round of funding. The lack of trust from the existing investors is the major reason.
- Nomad entrepreneurs need nomad investors: Success cannot be achieved, if a person doesn’t explore new avenues of the business and sector, for which most often an entrepreneur has to explore new geographical regions. However, most of the investors are very cautious about investing in a company from lesser known regions. Need for the hour for an investor is to explore more sectors and avenues as the young entrepreneurs.
In short the dynamic world is setting up a pace which is becoming difficult for whole lot of people to adjust. Start ups, investors and corporate will need to align their interests, which also takes care of interest of community and masses. Without healthy and robust local economy, global economy will suffer with violent business and political cycles.