Comparing startup investment stacks around the world

A lot of the “ecosystem building” talk has become nonsensical. There are two fundamental mistakes policy-makers and community leaders make:

  • They look at a mature ecosystem and copy the pieces now, rather than looking at that ecosystem before its inflection point.
  • They assume that every mature startup ecosystem is going to have the same needs and the same type of investment stack.

Study your role models before their take-off, not after

In terms of startup cities, London is the new player at the big table. But it’s only been Europe’s leader in overall investment volume for a year or two.

And only back in 2010, London was barely on the radar. There was talk of how London could copy Silicon Valley. The answer, in retrospect, was: sort of but not exactly.

London had, like most European cities, some of the right ingredients, but Berlin had a cheaper operating environment, and Stockholm had the later-stage investors.

It was actually Eze Vidra who realised that stacking the existing ingredients, rather than trying to copy-paste what wasn’t there, was the key. Google Campus was literally that stack — a layer cake of the existing players. The lesson from Silicon Valley was that density leads to serendipity. But Eze created that environment the London way. (I suspect a similar strategy was in play in Nairobi, with iHub and its peers creating critical mass at the Bishop Magua Centre.)

You can’t reverse-engineer an existing ecosystem by copying it. You can’t deconstruct its current parts and reassemble them somewhere else. You have to look back in time, learn from the people who were there, to understand what created the nuclear reaction and kicked it off.

Different places, different investment tiers

There are good reasons to build a stratified network of investors: they can specialise and feed into each other. But copying existing networks is an oversimplification, because it ignores the difference in local ingredients and local needs.

For example, look at the difference in needs between European and African startups. Obviously, these are big, diverse regions, but we still see some unique behaviours emerge from each of them.

Funding Gaps

We see the key differences more clearly when we zoom in, and analyse the immediate funding gaps.

For the African startups I’ve helped, I’ve noticed a funding gap between grants and debt, roughly between 50k USD on the top end for most grants, and the 250k USD minimum for debt funders.

London had a similar funding gap a few years ago, when seed stage was around 15k GBP and the next investment tier was closer to 500k GBP. (That gap was closed by combination of European investment in accelerators, and UK government tax relief for seed stage investors up to 100K GBP, with a few established international investors like Index providing the later stage tiers.)

These differences reveal completely different needs

Traditional startup investors, in mature ecosystems like London, manage high-growth, high-risk portfolios that move from through 3 to 4 rounds of increasing investment, extending the runway of the startup each time.

African startups tend to get grants early on, and establish revenue which gives them unlimited runway. Growth comes from borrowing to inject working capital.

The two paradigms — tiered venture capital for runway, and debt for working capital — mean that African ecosystems are likely to look very different at maturity.

So how do you “recreate” this?

Like so many other things, what works there won’t work here. The people who will get it right are like Eze Vidra when he created London’s Google Campus. He created a powerful nuclear reaction and an inflection point for London startups, evolving it to the next level.

The original London environment, which gave birth to Google Campus so it could change London, is no longer visible. But if we want to learn something useful from London, that’s what we need to understand.

Then, we need to take a look at what our startups need, and what we have to work with, and work with that.

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