As a U.S. VC with a keen interest in Latin America, I often come across officials and policymakers eager to promote entrepreneurship in their countries. This is for good reason – a successful tech sector can lead to healthy economic growth, job creation, and higher standards of living. In the US, 11% of jobs and 21% of GDP come from venture-backed companies.
Government agencies staffed by highly educated and motivated civil servants such as CORFO (Chile), iNNpulsa (Colombia), and MCTI (Brazil) have devoted their efforts to helping seed-stage startups. In this specific goal, they have had a considerable amount of success. Start-Up Chile alone has provided funding and support to over 750 startups.
However, these initiatives have not yet resulted in any game-changing exits. What should policymakers be doing differently? For answers, we can start with the founding, financing and success of three companies that have helped to spawn their local ecosystems.
Parallels (Russia), Maktoob (Jordan), and MercadoLibre (Argentina) all represent desirable outcomes for their home markets. Their founders have gone on to found three VC firms: Runa Capital, Jabbar Internet Group, and Kaszek Ventures, which are in the process of investing a combined US$300 million back into their ecosystems.
What do these companies all have in common? Of course, they were founded by talented local entrepreneurs and obtained local capital. However, they also received an infusion of value-added capital slightly later in their lifecycle from investors based in the U.S. when they were prepared for access to global best practices and business development assistance (not to mention acquirers).
This continuous value-added capital and support leads to successful outcomes. These outcomes lead to cash-rich and experienced operators who provide the investors, mentors, and leaders for the next generation of startups. It’s a virtuous cycle that leads to massive job creation and is all centered on outlier outcomes.
In fact, the top 1% of early-stage companies lead to 40% of startup job creation, and the top 10% lead to 80%. In Silicon Valley, for example, 400 companies and VC firms can trace their roots back to Fairchild Semiconductor, including Intel, AMD, and Kleiner Perkins. The lesson? Focus, first and foremost, on attracting capital and support for that top 10% as they grow.
But, there’s an intangible factor too: inspiration.
The founders of Google, for example, were encouraged by successful icons of entrepreneurship. Sergey Brin once explained that “from the earliest days of Google, whenever Larry and I sought inspiration for vision and leadership, we needed to look no farther than [Steve Jobs in] Cupertino.” On the opposite end of the spectrum, the low ratio of successful exits to funded companies in Latin America risks demoralizing the next wave of potential entrepreneurs.
So, if the problem is no longer a lack of startups but a lack of successful outcomes, what should policymakers do to empower their ecosystems? There are some things that governments do well, such as protecting property rights and building infrastructure. Directly investing in tech businesses and guiding them towards successful outcomes is usually not one of them. The key then is figuring out how to attract parties who can pick the most promising companies and provide the kind of ongoing support and capital, after seed-stage, that will enable them to scale.
Singapore is a great example of how to solve this problem. In addition to creating an attractive environment for business, the government has successfully encouraged a thriving market for venture capital. Through strong investor protections, tax incentives, and generous capital matching programs, the government has encouraged the creation of over 100 venture funds in Singapore (with a population only slightly larger than Costa Rica). Many of these funds, such as Golden Gate Ventures, offer a valuable bridge to other ecosystems that are leading the world in innovation. Further, Singapore has managed to attract direct investment from some of the top funds in Silicon Valley. And, finally, companies are able to continue raising capital after their seed stage. Thus, in Singapore, the most experienced VCs can pick the most promising companies, support them throughout their lifetime, and provide a bridge of expertise and resources between Singapore and more mature markets.
In turn, Singapore has seen more than a half dozen sizable exits this year alone, including the sale of video streaming site Viki to Rakuten for US$200 million. Of note, Viki was able to raise several significant rounds of funding from value-add investors to get to their exit. Today, Singapore controls 6.2% of the value of global high-tech exports with just 0.1% of the world population. This has all occurred in a country that had the same income level as Jamaica as recently as 1965.
Thus, policymakers need to focus on creating a virtuous cycle of ecosystem development by supporting the most successful emerging tech companies. They can achieve this goal by encouraging value-add investors to provide ongoing capital and expertise to the companies with the greatest potential.
Simon Bolivar once claimed that “the art of victory is learned in defeat.” But successful ecosystems need winners, too.
