Startups and VCs — Geography Does Matter, Part 2
This is the second part of a series exploring how geography intersects with entrepreneurship and access to capital. The previous article exposed the issue, this one will propose some practical solutions.
Entrepreneurship is sometimes the way out of a difficult place — bad leadership and employer’s financial distress unsurprisingly spur the creation of new companies. Fairchild Semiconductors famously got created because of a tempestuous boss, which in turn led to the boom of companies that has become Silicon Valley.
But if there is too much turbulence there is also a rush to discount your own geography (“so and so place is crashing!”) and to seek stability. Anyone considering starting their company needs to constantly remind themselves to think long-term and to separate out present from systemic instability.
If you are in that position ask yourself if the opportunity you are seeing is the result of a short-term imbalance or something more fundamental. Easier said than done but there are a plethora of tools available for you to form your own opinion, I especially like Fenwick & West’s free reports on the ecosystem.
VCs do have many tools at their disposal to mitigate their risk.
A common strategy is to split a fund into different vehicles so you can tracks different geographies with different metrics. One obvious advantage is if one of your geographies is performing significantly slower then you don’t hurt the overall fund’s performance. A common counter-argument is that isolating a weak performance can end up hurting more by raising a negative signal to your partnership or to your LPs. So regardless if you report a single number or separate numbers the most important is to create the right set of expectations.
Another common strategy is to become LPs in a local fund or establish a joint venture, sometimes co-investing in select investments. This allows you to participate in the market without needing to understand it as well or to deploy time plus talent to invest directly. Typically LPs receive their investment plus 80% of the returns so you are obviously sacrificing some profits but this is a much softer way of exploring a geography.
3) Policy Makers
Per the invisible hand of capitalism, markets do self correct themselves ie people and capital eventually flow into underserved opportunities. The hand often works too slowly though and policy-makers arguably have the biggest power to help normalize imbalances.
Government-sponsored venture capital has show both fantastic and terrible results. Israel at one point was matching investment dollars 7 to 1 and companies headquartered there routinely hold more IPOs in the Nasdaq than any other country other than US. Yet only two decades ago the country was hardly on the map when it comes to startup innovation.
The data shows that companies funded by both government and private enterprise in places where private capital was abundant underperform. And they outperform if they are supported but not owned outright by governments. In other words, governments stepping in when the market is not robust enough and not dictating the company’s agenda is key. Something to keep in mind whether you are a policy maker yourself or want to be an informed voter.
These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). I would be stoked if they get people interested enough in a topic to explore in further depth. I work for Samsung’s innovation unit called NEXT, focused on early-stage venture investments in software and services in deep tech, all opinions expressed here are my own.