tag:theconversation.com,2011:/us/topics/venture-capital-9392/articlesventure capital – The Conversation2023-11-29T17:07:55Ztag:theconversation.com,2011:article/2165922023-11-29T17:07:55Z2023-11-29T17:07:55ZTech startups with diverse founding teams are more likely to seek IPO or acquisition<figure><img src="https://images.theconversation.com/files/561608/original/file-20231124-15-d0f1q9.jpg?ixlib=rb-1.1.0&rect=62%2C35%2C5865%2C3925&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Immigrant entrepreneurship has a substantial positive impact on innovation in the high-tech sector. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/tech-startups-with-diverse-founding-teams-are-more-likely-to-seek-ipo-or-acquisition" width="100%" height="400"></iframe>
<p>The importance of immigrant entrepreneurs and diversity in management has been <a href="https://doi.org/10.1002/smj.2976">widely demonstrated in academic literature</a>. When management teams are diverse, they are able to bring a variety of perspectives to the decision-making process.</p>
<p>Immigrant entrepreneurship has a <a href="https://doi.org/10.1257/mac.2.2.31">substantial positive impact on innovation</a> in the high-tech sector. Immigrant tech founders are known to <a href="https://innovationeconomycouncil.com/reports/relocation-nation/">boost Canadian innovation</a> and, as an <a href="https://www.forbes.com/sites/stuartanderson/2023/09/14/us-immigrant-entrepreneurs-also-lured-to-canada/?sh=1e05345a3fa2">immigration destination</a>, the effects of this should interest Canada.</p>
<p>Immigrants in the United States have similarly become a <a href="https://nfap.com/wp-content/uploads/2022/07/2022-BILLION-DOLLAR-STARTUPS.NFAP-Policy-Brief.2022.pdf">major driving force in the creation</a> of new, fast-growing technology startups. Studies <a href="https://doi.org/10.1111/j.1435-5957.2009.00271.x">in Germany</a> and <a href="https://doi.org/10.1177/0308518X16660085">England</a> have found the same. </p>
<p>While there is a wealth of evidence supporting the contributions of immigrant entrepreneurs, there is a lack of research on how diversity specifically impacts the strategy and performance of founding teams in high-tech startups. </p>
<p>Only one study has been done on this topic; it found that <a href="https://doi.org/10.1016/j.jbusvent.2006.07.004">new technology startups with at least one immigrant founder</a> were more likely to emphasize product innovation and encourage the exploration of new market opportunities. Filling this research gap is important, as it could significantly impact a variety of parties, including entrepreneurs, investors and policymakers.</p>
<h2>Exits in high-tech startups</h2>
<p>New technology startups and their investors often seek exit strategies that outline how investors or founders can cash out or divest their ownership. This can involve startups going public with an initial public offering (IPO) or by having another company acquire the venture.</p>
<p>A crucial factor in this decision is the stage a company is at when considering a potential exit. Is the startup just starting to generate revenues, or is it already in the phase of revenue growth? Founders must decide whether to exit early in the sales phase or stay with the company until it achieves broader market success.</p>
<p>Research shows <a href="https://doi.org/10.1016/j.jbusvent.2006.07.004">immigrant entrepreneurs are more likely</a> than their native-born counterparts to seek new growth options by entering new markets and developing new products. As a result, technology startups with immigrant founders are more likely to pursue an exit strategy for financial gains during the initial revenue stage — as opposed to waiting until the next stage — which is more profitable, but also more risky.</p>
<figure class="align-center ">
<img alt="Three people stand behing a glass wall covered in sticky notes. One of the people is writing on the glass wall with a whiteboard marker." src="https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/561187/original/file-20231122-23-5os4ob.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">New technology startups and their investors often seek exit strategies that outline how investors or founders can cash out or divest their ownership.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
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</figure>
<h2>Immigrants and exit strategies</h2>
<p>To address the previously mentioned research gap, <a href="https://doi.org/10.1177/10422587231211006">I conducted a study alongside fellow researchers</a> Ilanit Gavious and Orit Milo from Ben-Gurion University. We sought to understand how diversity in founder teams affects exit decisions in high-tech startups.</p>
<p>In our analysis, we considered factors like team size, the countries where founders were born, prior business experience, gender, prior experience abroad, prior startup experience, level of education, research and development investment, whether the CEO was a founder or not, the location of the venture and firm size. </p>
<figure class="align-center ">
<img alt="An ethnically diverse group of people have a conversation while looking at a computer screen." src="https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/561185/original/file-20231122-23-ejni3y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">New research could help entrepreneurs make better decisions about the composition of their startup leadership teams.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
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</figure>
<p>We also looked at different ways of measuring national cultural diversity. This included whether there was at least one immigrant founder, the percentage of immigrant founding team members and a diversity index. We defined immigrant founders as those who were born in another country, had a non-native surname and completed at least their undergraduate degree outside of Israel. </p>
<p>We studied 582 cases where Israeli tech startups were sold. We found that 65 of them had team members who were immigrants, while 517 did not. Our results strongly support the idea that having immigrants on the founding team substantially increases the chances of an exit strategy with an IPO or acquisition. This is notable, as it highlights the importance of diversity in founding teams for early investors in order to maximize the return on their investments. </p>
<h2>Insights for financial success</h2>
<p>Our research offers valuable insights for entrepreneurs, investors and policymakers in the startup ecosystem. Entrepreneurs can use our findings to make better decisions about the composition of the founding team in their ventures. Founders aiming for financial success through exit strategies should consider teaming up with founders from diverse cultural backgrounds. </p>
<p>Our study could help entrepreneurs make better decisions about the composition of the founding team in their ventures. Specifically, founders with IPO and acquisition exit strategies should make sure to collaborate with founders who come from different national cultures. </p>
<p>Investors, like angels and venture capitalists, can use our study’s insights to make better decisions about which startups to support and invest in. It can also provide insights into potential returns from investments. </p>
<p>Policymakers could use our findings in two ways. First, they should consider the diversity within founding teams when making decisions about loans and grant programs for startups. Second, they can use our insights when making decisions about accelerators and incubators, considering the impact of immigrants in the founding teams. </p>
<p>By directing resources towards incubators and accelerators that focus on startups with diverse founding teams, policymakers can increase the likelihood of future exits and improve the expected returns on government-supported startup programs.</p><img src="https://counter.theconversation.com/content/216592/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ramy Elitzur does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New research has found that technology startups with immigrant founders are more likely to pursue an exit strategy during the initial revenue stage — which is more profitable, but also more risky.Ramy Elitzur, Professor, Rotman School of Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2037572023-04-14T04:42:42Z2023-04-14T04:42:42ZMilkRun’s demise is another nail in the 10-minute grocery-delivery business model<figure><img src="https://images.theconversation.com/files/520962/original/file-20230414-16-mq60kw.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3500%2C1770&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstoc</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Sydney-based startup MilkRun made a big splash with its promise to deliver groceries within ten minutes, raising <a href="https://www.startupdaily.net/topic/business/holy-cow-grocery-delivery-startup-milkrun-is-dead-86-million-later-aged-19-months/">more than A$85 million</a> from some of the biggest names in Australian venture capital, including Atlassian billionare Mike Cannon-Brookes.</p>
<p>MilkRun’s co-founder and chief executive Dany Milham had already found success with fast-delivering mattress company Koala. Less than a year ago he was confidently predicting MilkRun would be bigger than Coles or Woolworths <a href="https://www.afr.com/technology/how-10-minute-grocery-deliverer-milkrun-became-an-overnight-success-20220406">within ten years</a>. </p>
<p>Today the company is finished, with more than 400 staff made redundant. </p>
<p>It has joined a lengthening list of platform delivery companies that have done their dash in the Australian market. This includes three other local startups promising 10-minute deliveries – <a href="https://www.news.com.au/finance/business/retail/grocery-delivery-company-send-collapses-with-300-staff-at-risk/news-story/3c82addb5a142a53d1cb9c2cc7de0f67">Send</a> in May 2022, <a href="https://www.9news.com.au/national/grocery-delivery-service-voly-announces-its-closure-in-australia/d2381a04-8e2d-4d86-b81c-008d55ac0436">Voly</a> in November 2022, and <a href="https://www.theaustralian.com.au/news/latest-news/shock-as-colab-food-delivery-service-collapses/news-story/ab8ed6e748cbdce23ab406ec8e313271">CoLab</a> which went into voluntary administration last week. British-owned Deliveroo <a href="https://theconversation.com/deliveroos-exit-from-australia-shows-why-gig-workers-need-more-protection-194743">shut down</a> its Australian operations in November 2022, while German-owned Foodora exited in 2018. </p>
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Read more:
<a href="https://theconversation.com/deliveroos-exit-from-australia-shows-why-gig-workers-need-more-protection-194743">Deliveroo's exit from Australia shows why gig workers need more protection</a>
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<p>In an <a href="https://www.abc.net.au/news/2023-04-14/milkrun-delivery-riders-closure-redundancies/102212800">email to staff</a>, Milham attributed MilkRun’s end to the slowing economy: </p>
<blockquote>
<p>Economic and capital market conditions have continued to deteriorate, and while the business has continued to perform well, we feel strongly that this is the right decision in the current environment. </p>
</blockquote>
<p>Certainly the effect of things like inflation increasing operating costs (including debt) as well as curbing discretionary spending can’t have helped. </p>
<p>But even in the best of conditions, MilkRun faced an uphill climb. </p>
<h2>Could Milkrun ever make money?</h2>
<p>Milkrun was, obviously, not profitable. This was not a problem per se. Many startups lose money for years before becoming immensely profitable. For example, Amazon, founded in 1994, didn’t have its first <a href="https://www.computerworld.com/article/2575106/amazon-records-first-profitable-year-in-its-history.html">profitable year until 2003</a>. </p>
<p>Some startups require significant scale to be profitable. Others forego profit to grow market share. Presumably the big name-venture capital firms that poured money into MilkRun – Cannon-Brookes’ private investment company <a href="https://grok.ventures/">Grok Ventures</a>, <a href="https://www.airtree.vc/">Airtree Ventures</a> (which invested in Canva), and New York-based <a href="https://www.tigerglobal.com/">Tiger Global Management</a> – saw such potential. </p>
<p>But what was that potential, exactly? How could MilkRun ever scale to become profitable? Was there really a big enough market for super-quick grocery delivery? Or were they swept along by the mania for delivery ventures that came with the pandemic, lockdowns and the surge in online ordering in 2020 and 2021? </p>
<figure class="align-center ">
<img alt="A food delivery rider in Sydney, October 2021." src="https://images.theconversation.com/files/520963/original/file-20230414-22-iaq1zc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/520963/original/file-20230414-22-iaq1zc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/520963/original/file-20230414-22-iaq1zc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/520963/original/file-20230414-22-iaq1zc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/520963/original/file-20230414-22-iaq1zc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/520963/original/file-20230414-22-iaq1zc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/520963/original/file-20230414-22-iaq1zc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A food delivery rider in Sydney, October 2021.</span>
<span class="attribution"><span class="source">Mark Baker/AP</span></span>
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</figure>
<p>MilkRun commenced during the pandemic – the perfect time for “last mile” deliveries. But by mid-last year, with lockdowns a thing of the past, the numbers didn’t look great.</p>
<p>It was still <a href="https://www.forbes.com.au/news/investing/milkrun-collapses-as-400-staff-made-redundant">losing at least $10 on each delivery</a>. Though that was much better than the $40 loss it had initially been making, Milham’s plan to soon become profitable would involve, in June 2022, <a href="https://www.smh.com.au/business/entrepreneurship/losing-10-an-order-grocery-app-milkrun-drops-rapid-delivery-pledge-to-curb-losses-20220624-p5awg9.html">dropping</a> MilkRun’s 10-minute delivery pledge – undermining its key branding point.</p>
<h2>Costs would have gone up anyway</h2>
<p>Even without the unexpected economic hit of inflation over the past year, MilkRun faced escalating costs. </p>
<p>To grow market share, it would have to expand out from the high-density, affluent inner-city areas. Operating in more suburban areas, with longer distances and more dispersed customers, would compound “last mile” delivery costs. </p>
<p>Any hint of profitability would also inevitably arouse competition from the major <a href="https://www.smartcompany.com.au/startupsmart/analysis/milkrun-woolworths-one-hour-delivery/">supermarkets</a>, whose thousands of suburban stores and supply chains positioned them to compete in the express delivery market any time they chose. </p>
<p>The cost of MilkRun’s “dark store” distribution network, set up when rents were suppressed by closed borders, were also likely to increase. </p>
<h2>Narrow path to profitability</h2>
<p>Perhaps MilkRun’s goal was to grow market share until drone delivery became viable or other business lines (such as alcohol delivery) and profit opportunities arose. But, on present unit economics, even in ideal conditions, this was a tall ask in a post-pandemic world.</p>
<p>Arguably the writing has been on the wall for about year, with MilkRun reportedly unable to persuade any investors <a href="https://www.smartcompany.com.au/startupsmart/news/milkrun-investors-2022-report/">to sink more money</a> into the company.</p>
<p>Venture capitalists know many of the startups they fund will fail. They will back an idea early on, when a path to profitability is unclear. But they will not keep pumping in more money if a path does not materialise.</p>
<p>It is easy to be a “Monday expert”, decrying decisions from a position of perfect hindsight. But MilkRun always had a challenging business model, something ever more apparent as the world emerged from lockdowns, demand subsided, cost of living pressures increased and business costs rose.</p><img src="https://counter.theconversation.com/content/203757/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner is on the Investment Committee of Sydney Angels. He does not have any direct financial interest with any companies mentioned in this article. </span></em></p>Australian startup MilkRun may have attracted more than $85 million in venture capital but it always had a challenging business model.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1924292022-11-01T13:36:27Z2022-11-01T13:36:27ZSerena Williams’ investment shows that Nigeria’s technology sector is attractive – but things can be better<figure><img src="https://images.theconversation.com/files/490045/original/file-20221017-16-z8v3xi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Serena Williams has her eyes on Nigeria in a new venture. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/september-02-serena-williams-of-the-united-states-in-action-news-photo/1420474369?phrase=serena%20williams&adppopup=true">Tim Clayton/Corbis via Getty Images </a></span></figcaption></figure><p>Nigeria is the <a href="https://disrupt-africa.com/wp-content/uploads/2022/09/The-Nigerian-Startup-Ecosystem-Report-2022.pdf">leading African destination</a> for foreign direct investments in technology startup businesses. Between 2015 and 2022, Nigerian technology startups have secured funding <a href="https://disrupt-africa.com/wp-content/uploads/2022/09/The-Nigerian-Startup-Ecosystem-Report-2022.pdf">totalling just over US$2 billion</a>. This is the highest amount of funding recorded by any country in Africa. </p>
<p>The <a href="https://www.weforum.org/agenda/2022/08/africa-start-up-nigeria-egypt-kenya-south-africa/">“big-four”</a> countries of <a href="https://www.businessofbusiness.com/articles/founders-nigeria-africas-hottest-startup/">Nigeria</a>, <a href="https://thenextweb.com/news/egypts-booming-startup-scene-gateway-to-mena">Egypt</a>, <a href="https://disrupt-africa.com/2022/06/08/south-africa-is-a-startup-powerhouse-that-leads-the-continent-for-exits-finds-new-report/">South Africa</a> and <a href="https://techcrunch.com/2022/08/09/in-africa-kenyan-startups-have-so-far-recorded-highest-funding-growth-this-year/">Kenya</a>, are leading Africa’s startup scene. They currently account for about <a href="https://www.afdb.org/en/documents/entrepreneurship-and-free-trade-volume-ii-towards-new-narrative-building-resilience">a third</a> of the continent’s start-up incubators and accelerators, and receive 80% of technology startup FDI into Africa.</p>
<p>What is interesting is that Nigeria remains the top destination for technology investments in Africa despite its <a href="https://www.cfr.org/article/nigerias-all-too-familiar-corruption-ranking-begs-broader-questions-around-normative">endemic</a> <a href="https://www.transparency.org/en/countries/nigeria">corruption</a>, <a href="https://databankfiles.worldbank.org/data/download/poverty/987B9C90-CB9F-4D93-AE8C-750588BF00QA/AM2021/Global_POVEQ_NGA.pdf">high poverty rate</a> and <a href="https://www.worldbank.org/en/country/nigeria/overview">poor economic performance</a>. </p>
<p>This is underscored by the announcement that recently retired tennis legend Serena Williams’s venture capital firm, <a href="https://www.serenaventures.com/">Serena Ventures</a>, is <a href="https://www.bloomberg.com/news/articles/2022-10-10/serena-williams-firm-invests-in-nigerian-data-provider-stears?">backing</a> Nigerian data and insights firm <a href="https://www.stears.co/">Stears</a> in a US$3.3 million seed round led by <a href="https://macventurecapital.com/">MaC Venture Capital</a>. This means Serena Ventures has partnered with institutional investors MaC Venture Capital, <a href="https://www.crunchbase.com/organization/melo7-tech-partners-llc">Melo 7 Tech Partners</a>, <a href="https://www.omidyargroup.com/">Omidyar Group</a> and <a href="https://cascador.org/">Cascador</a> to invest $3.3 million in Stears.</p>
<h2>What is the attraction?</h2>
<p>The <a href="https://www.weforum.org/agenda/2022/08/africa-start-up-nigeria-egypt-kenya-south-africa/">“big-four”</a> countries attract more startup FDI than other African countries because of their large economies and sizeable populations. </p>
<p>Nigeria, for example, with its <a href="https://tradingeconomics.com/nigeria/gdp">GDP of roughly $440bn</a> and <a href="https://data.worldbank.org/indicator/SP.POP.TOTL?locations=NG">population of roughly 211 million</a>, is projected to be the third largest country by population in the <a href="https://population.un.org/wpp/publications/files/wpp2017_keyfindings.pdf">world by 2050</a>. Likewise, <a href="https://tradingeconomics.com/egypt/gdp">Egypt</a>, <a href="https://tradingeconomics.com/kenya/gdp">Kenya</a> and <a href="https://tradingeconomics.com/south-africa/gdp">South Africa</a> boast some of the largest economies in Africa, with GDP’s of $404bn, $110bn and $420bn respectively. </p>
<p>Investors are attracted by the large markets in these countries and the potential of technology firms in them to expand across Africa. </p>
<h2>Why Stears got Serena’s nod</h2>
<p>There are several reasons for Stears’ investment appeal. It has <a href="https://techcrunch.com/2022/10/10/nigerian-data-and-intelligence-company-stears-raises-3-3m-backed-by-mac-vc-and-serena-ventures/">grown</a> at around 6.5% month-on-month since 2017 and has doubled its user numbers over the last year. Enterprise customers, mainly employees working in various finance-related institutions across Nigeria, now provide more than 75% of its <a href="https://www.bloomberg.com/news/articles/2022-10-10/serena-williams-firm-invests-in-nigerian-data-provider-stears?">revenue</a>, up from 45% in 2021.</p>
<p>This makes it a rare paywalled subscription success story in Nigeria, where consumers are generally <a href="https://techcabal.com/2019/10/10/why-is-selling-digital-content-to-nigerians-still-an-uphill-task/">unwilling</a> to pay websites for information.</p>
<p>Stears has also positioned itself as a collector and analyst of African data for international organisations. Its <a href="https://stearsdata.com/">clients</a> include the European Investment Bank, United Nations Development Programme and the UK’s Foreign, Commonwealth & Development Office. </p>
<p>Stears uses its data and analysis skills to produce interactive visualisation and created Nigeria’s <a href="https://edition.cnn.com/2019/02/23/africa/nigeria-election-center/index.html">first</a> real-time election tracker during the 2019 general election cycle. </p>
<p>The company <a href="https://www.stears.co/article/stears-30-the-answer-company-for-africa-raises-33-million/">says</a> it plans to use the new seed funding to expand its coverage geographically by establishing a presence in east and southern Africa and by expanding its product offerings.</p>
<h2>Corruption is still a problem</h2>
<p>Due to corruption, Nigeria, unlike other oil producing countries like <a href="https://www.lemonde.fr/en/economy/article/2022/10/09/energy-norway-along-with-qatar-is-the-great-beneficiary-of-the-war-in-ukraine_5999656_19.html">Norway and Qatar</a>, has been unable to benefit from <a href="https://www.ft.com/content/99cac5d0-bf6e-45ac-8e18-14267dab85f4">surging</a> <a href="https://tradingeconomics.com/commodity/crude-oil">global oil prices</a>. It used to be <a href="https://www.bloomberg.com/news/articles/2022-09-08/angola-tops-nigeria-as-africa-s-biggest-oil-producer-in-august#xj4y7vzkg">Africa’s largest oil producer</a> but lost this position to Angola this year. </p>
<p>The increasing importance of Nigerian technology startups is in keeping with global realities. With <a href="https://www.theguardian.com/environment/2022/feb/16/oil-firms-climate-claims-are-greenwashing-study-concludes">the threat of climate change</a> and <a href="https://www.spglobal.com/en/research-insights/articles/what-is-energy-transition">the potential transition</a> away from fossil fuels, Nigeria’s oil industry is likely to take a hit. </p>
<p>While it is good news that Nigeria continues to attract technology startup investment, urgent action is needed to tackle corruption. This will attract more investment into the country and help to reduce poverty. What is more, technology startups can help to fight corruption, and they can secure investment while doing so.</p>
<p><a href="https://onlinelibrary.wiley.com/doi/full/10.1002/isd2.12167">Our research</a> highlighted the activities of such a case. <a href="https://yourbudgit.com/">BudgIT</a>, is a Nigerian NGO that secured $400,000 from the <a href="https://omidyar.com/news/omidyar-network-supports-fiscal-transparency-in-nigeria-with-grant-to-budgit/">Omidyar Network</a> in 2014. In 2016, it was able to secure a further $1,4 billion from the <a href="https://www.gatesfoundation.org/about/committed-grants/2016/11/opp1151850">Bill & Melinda Gates Foundation</a>. </p>
<p>BudgIT provides technology products that empower citizens by providing access to budget data that is often shrouded in <a href="https://www.researchgate.net/publication/348433271_E-transparency_and_government_budgetary_corruption_A_social_marketing_and_transformation_case_from_Nigeria">secrecy</a>. Like Stears, it pioneered the open and active engagement of citizens to advocate for transparency regarding the budgeting process in Nigeria.</p>
<p>Stears has done something similar with its <a href="https://www.stears.co/article/why-we-built-the-stears-election-centre/">real-time election tracker</a>. This technology product helped to give Stears credibility in the technology industry. It also helped to improve electoral transparency in Nigeria.</p>
<p>Such activities can help foster accountability. This will in turn give foreign investors more confidence to invest in African countries and highlight the value of such companies. </p>
<h2>Things can be better</h2>
<p><a href="https://www.weforum.org/reports/the-future-of-jobs-report-2020/digest/">Technology firms</a> are <a href="https://www.computerworld.com/article/3542681/how-many-jobs-are-available-in-technology.html">sources of employment</a> for millions of people on the planet and their activities are changing the <a href="https://www.mckinsey.com/featured-insights/employment-and-growth/technology-jobs-and-the-future-of-work">nature of work</a>. Nigeria needs this sector to succeed, if only to help with its <a href="https://tradingeconomics.com/nigeria/unemployment-rate">unemployment problem</a>. </p>
<p><a href="https://theconversation.com/how-nigeria-can-attract-and-keep-the-right-kind-of-foreign-direct-investment-107611">To do this</a>, political stability, lower production costs and good infrastructure (particularly power, communication and transport) can help. Liberal foreign direct investment policies that do not restrict investment and the free flow of capital would also be beneficial. </p>
<p>Crucially, Nigerian technology startups will attract more investment if Nigeria is less corrupt. Their activities can help to both secure investment and reduce corruption in the country.</p><img src="https://counter.theconversation.com/content/192429/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tolu Olarewaju does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Serena Williams’s investment in a Nigerian digital company shows why the country’s technology sector is attractive.Tolu Olarewaju, Economist and Lecturer in Management, Keele UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1629682021-06-22T16:41:25Z2021-06-22T16:41:25ZSpacs: why investors fell in love with these stock market vehicles – and how the bubble burst<p>What do Taylor Swift’s record company and Asian “superapp” Grab have in common? They are both part of Wall Street’s recent dealmaking fad: special purpose acquisition companies (Spacs). </p>
<p>Spacs are shell companies that are floated on the stock market with one purpose: to buy another company. This aims to achieve the same as a stock-market listing or initial public offering (IPO), but in reverse. Instead of a traditional company seeking to raise capital from investors through an IPO, with Spacs the empty listed company is set up first. For this reason, they are sometimes known as blank-cheque companies. </p>
<p>Depending on where the Spac is listed, whoever is in control usually has two or three years to find a company to buy. If they fail, the Spac will be wound up and the funds returned to investors. </p>
<h2>The Spac explosion</h2>
<p>Spacs have been around since the 1990s, but they <a href="https://www.forbes.com/sites/greatspeculations/2021/03/22/what-are-spacs-and-why-is-everyone-talking-about-them-right-now/?sh=779f1f933260">exploded in popularity</a> in 2020 and early 2021. This is partly because there has been <a href="https://www.excelsiorgp.com/resources/what-is-a-spac-and-why-are-they-suddenly-so-popular/#:%7E:text=Because%20the%20stock%20exchanges%20make,exits%20has%20seen%20a%20decline">more and more capital</a> looking to make money, since bonds have been paying unattractively low interest rates, and far fewer companies are listing than in previous decades. </p>
<p>Regulations have made traditional flotations slower and more expensive. Flotations are also traditionally underpriced on the day of listing to drum up investor interest. But a crucial advantage of Spac deals is that they are privately negotiated and avoid the risk of money being “left on the table”. </p>
<p>High-profile deals involving Spacs have included <a href="http://www.parabolicarc.com/2021/02/18/why-virgin-galactic-went-spac/">Virgin Galactic</a>, sports betting group <a href="https://hindenburgresearch.com/draftkings/">DraftKings</a>, and a digital manufacturing firm <a href="https://markets.businessinsider.com/news/stocks/serena-williams-spac-take-velo3d-public-16-billion-deal-ipo-2021-3-1030236391">called Velo3D</a> whose Spac has Serena Williams on the board. </p>
<p>More recently <a href="https://www.theguardian.com/business/2021/apr/13/super-app-grab-to-go-public-in-record-40bn-spac-merger">Singapore-based app Grab</a>, which offers everything from ride hailing to online banking, has done a Spac deal which will see it valued at US$40 billion (£29 billion). And star US hedge fund manager Bill Ackman, who created the biggest Spac ever in 2020 with a value of US$4 billion, is using it <a href="https://www.ft.com/content/d77d9883-6b01-4458-9180-8579aa4d346f">to buy 10%</a> of Universal Music, whose roster includes Taylor Swift, Kanye West and Sting. </p>
<p>Yet despite this eye-catching activity, many would say the bubble in Spacs <a href="https://www.barrons.com/articles/the-spac-bubble-has-popped-where-to-find-bargains-now-51621040743">has burst</a> recently. <a href="https://www.ft.com/content/88d7f577-9bfa-4215-b57b-0f8a4da3644a">Only 30</a> Spac flotations took place in April and May compared to 299 in the first three months of the year, while total Wall Street investment-bank revenues derived from these vehicles has fallen from over 20% to under 5% over the same period. </p>
<p>Finally, the two largest US exchange-traded funds focused on Spacs – <a href="https://www.defianceetfs.com/spak/">SPAK</a> and <a href="https://www.spcxetf.com/">SPCX</a> – are down 26% and 12% in value respectively from their February highs. This is probably linked to US regulator the Securities and Exchange Commission (SEC) <a href="https://observer.com/2021/04/spac-deal-ipo-slowdown-april-sec-crackdown/">beginning to</a> rein in the sector to <a href="https://www.cnbc.com/2021/05/27/sec-considers-new-investor-protections-for-spacs.html">protect retail investors</a>.</p>
<p>Though in my view the rate of Spac creation would have slowed down to reach a lower equilibrium anyway, the SEC intervention is reducing some of the benefits to using Spacs as a way of accessing the capital markets. <a href="https://www.ft.com/content/99de2333-e53a-4084-8780-2ba9766c70b7">For instance</a>, the SEC has made it harder for Spacs to reward early investors with shares in a company after an acquisition, and is looking at preventing the management from making statements about future profitability. </p>
<p><strong>SPAK share price, October 2020 to June 2021</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/407098/original/file-20210617-19-14n3okf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="SPAK weekly share price rising, falling and then rising slightly" src="https://images.theconversation.com/files/407098/original/file-20210617-19-14n3okf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/407098/original/file-20210617-19-14n3okf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=343&fit=crop&dpr=1 600w, https://images.theconversation.com/files/407098/original/file-20210617-19-14n3okf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=343&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/407098/original/file-20210617-19-14n3okf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=343&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/407098/original/file-20210617-19-14n3okf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=431&fit=crop&dpr=1 754w, https://images.theconversation.com/files/407098/original/file-20210617-19-14n3okf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=431&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/407098/original/file-20210617-19-14n3okf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=431&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">*SPAK is the ticker symbol for the Defiance Nx Gen SPAC Derived ETF.</span>
<span class="attribution"><a class="source" href="https://uk.tradingview.com">Trading View</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<h2>The bitcoin parallel</h2>
<p>Regulators often resist financial innovation in the hope of reducing the uncertainty in investing. It is not by chance that Gary Gensler, the SEC chair, <a href="https://www.sec.gov/news/testimony/gensler-2021-05-26">recently associated</a> spacs and bitcoin when he spoke of the need for better investor protections. As with Spacs, <a href="https://news.bitcoin.com/ecb-chief-lagarde-cryptocurrencies-money-laundering-no-intrinsic-value-buy-prepared-to-lose-all-money/">regulatory moves</a> to <a href="https://www.reuters.com/technology/chinese-financial-payment-bodies-barred-cryptocurrency-business-2021-05-18/">restrict the use</a> of bitcoin and other cryptocurrencies have probably contributed to prices falling lately (along with other worries such as <a href="https://theconversation.com/bitcoin-what-elon-musks-u-turn-on-tesla-payments-means-for-future-of-crypto-160891">bitcoin’s carbon footprint</a>). </p>
<p>And that’s not all Spacs and bitcoin have in common. Bitcoin is e-money that can circulate anonymously among infinite users without needing banks or a central issuing authority. But these potential benefits depend on enough users accepting it as a store of value. To paraphrase something <a href="http://www.inquiriesjournal.com/articles/241/the-universal-prayer-how-money-became-the-worlds-first-shared-religion#:%7E:text=We%20all%20believe%20in%20money,define%20them%20in%20those%20terms.">said of</a> currencies in general, bitcoin is like a religion, based on faith. </p>
<p>The same is true of Spacs, in that public investors entrust the management to find a suitable takeover target. And both bitcoin and Spacs disrupt the common wisdom around an established financial practice. While bitcoin is a new way of exchanging value, some have described Spacs as the <a href="https://fortune.com/2021/05/22/spacs-ipo-stock-grab-arrival-deliveroo/">second coming of the IPO</a>. </p>
<p>In part due to the severe restrictions that a traditional IPO places on how a company may communicate its story, companies not yet producing revenues had been staying private for longer. Spacs changed this, and in the process became a way for amateur investors to be part of late-stage venture capital funding. Instead of only accredited professionals and insiders providing such funding to new companies, Spacs open them up to anyone – particularly in an era where stock-market investing has been made easier thanks to apps like Robinhood and eToro. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/407646/original/file-20210622-13-5sk99l.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Picture of man holding phone with eToro loading up" src="https://images.theconversation.com/files/407646/original/file-20210622-13-5sk99l.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/407646/original/file-20210622-13-5sk99l.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=800&fit=crop&dpr=1 600w, https://images.theconversation.com/files/407646/original/file-20210622-13-5sk99l.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=800&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/407646/original/file-20210622-13-5sk99l.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=800&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/407646/original/file-20210622-13-5sk99l.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1005&fit=crop&dpr=1 754w, https://images.theconversation.com/files/407646/original/file-20210622-13-5sk99l.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1005&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/407646/original/file-20210622-13-5sk99l.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1005&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The new investing.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/assam-india-february-19-2021-etoro-1927328462">sdx15</a></span>
</figcaption>
</figure>
<p>Again, the <a href="https://dailyhodl.com/2021/04/16/crypto-asset-market-could-surge-500x-investors-dont-realize-magnitude-of-whats-happening-raoul-pal/">same is said</a> of bitcoin and other cryptocurrencies: if amateur investors think a crypto project could eventually go stellar, by buying and holding the relevant coins they can invest far earlier than with equivalent projects in previous decades.</p>
<p>In this way, investors can make bets on whether new kinds of investment like Spacs and crytocurrencies will succeed. Inevitably they need to be regulated, but regulators will need to be careful in how they handle these nascent products if they want them to develop. Vehicles for creating future wealth, be it Spacs or bitcoin or anything else, are underpinned rather than undermined by uncertainty.</p>
<p>They have developed systems for <a href="https://ideas.repec.org/a/pal/jbkreg/v21y2020i2d10.1057_s41261-019-00100-5.html">self-regulating</a> by specialists <a href="https://news.law.fordham.edu/jcfl/2021/03/10/dulcis-in-fundo-a-re-thinking-of-spacs-and-the-spacs-promote/">who often understand</a> the needs of the various players better than the regulators themselves. In the case of Spacs, regulators should focus on ensuring that the financial information published by the companies involved is truthful and consistent – so, for instance, the SEC is right to be <a href="https://www.ft.com/content/99de2333-e53a-4084-8780-2ba9766c70b7">tightening up</a> on to what extent Spac operators disclose conflicts of interest.</p><img src="https://counter.theconversation.com/content/162968/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniele D'Alvia has previously received funding from Birbeck College, University of London to write the first PhD in the law of Spacs. He is the CEO and founder of Spacs Consultancy, which is focused on investment vehicles and Spacs. </span></em></p>Both Spacs and bitcoin went rocketing up in price only to come crashing back down. And that’s not all they have in common.Daniele D'Alvia, Teaching Fellow in Banking and Finance Law, Queen Mary University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1531422021-01-19T12:45:18Z2021-01-19T12:45:18ZWe need hard science, not software, to power our post-pandemic recovery<figure><img src="https://images.theconversation.com/files/379020/original/file-20210115-23-zaumhg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/team-medical-research-scientists-collectively-working-691541065">Gorodenkoff/Shutterstock</a></span></figcaption></figure><p>Ten years ago, PayPal founder Peter Thiel condensed the growing sense of disappointment in new technologies down to just nine words. “We wanted flying cars,” he wrote, “instead we got 140 characters”. </p>
<p>That these words still ring true a decade later shows just how far short of expectations new technologies have fallen. To drive growth in a post-pandemic world, we should remember that real economic progress has in the past been driven by hard science – not flashy consumer gadgetry.</p>
<p>For years, <a href="https://www.weforum.org/agenda/2018/01/fourth-industrial-revolution-massive-productivity-boom-good/">hopes for productivity growth</a> have been pinned on “<a href="https://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/">Fourth Industrial Revolution</a>” (4IR) technologies such as artificial intelligence (AI), the Internet of Things (IoT), and 3D-printing. </p>
<p>But, in contrast to previous industrial revolutions, recent advances in digital technology have not resulted in the expected boost in productivity. <a href="https://www.vox.com/a/new-economy-future/robert-gordon-interview">Labour productivity growth</a> has been stagnating since the 1970s. In the UK, it’s actually at its <a href="https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/the-fall-in-productivity-growth-causes-and-implications">slowest rate in 200 years</a>. </p>
<p>Stagnating productivity has not gone unnoticed. Having banged the drum of the <a href="https://www.weforum.org/about/the-fourth-industrial-revolution-by-klaus-schwab/">Fourth Industrial Revolution</a> since 2016, the World Economic Forum has now changed its narrative to the “<a href="https://www.weforum.org/great-reset/">Great Reset</a>”. No doubt this change reflects new economic realities wrought by the pandemic, but it’s also a silent admission that <a href="https://www.iza.org/publications/dp/13829/industrialization-under-medieval-conditions-global-development-after-covid-19">the 4IR has dramatically under-delivered</a> on its promises of productivity and prosperity.</p>
<p>Why? First, <a href="https://www.nber.org/papers/w25756">dominant firms</a> that possess 4IR technologies are hindering their diffusion by leveraging their technological advantage to further <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3682745">entrench their dominance</a> and reduce competition. </p>
<p>This happens because software technology, which is subject to large fixed costs but low marginal costs, enables larger firms to develop better-quality products and services than their smaller rivals. That leaves <a href="https://www.aeaweb.org/articles?id=10.1257/pandp.20191001">smaller firms</a> facing high obstacles and low benefits when considering the adoption of 4IR technologies. Many elect simply to continue without them.</p>
<p>This means that 4IR technologies are not diffusing fast enough. The gap
between the “<a href="https://www.nytimes.com/2020/02/03/technology/google-earnings-big-tech.html">technology haves and have nots</a>” in the corporate world is widening. A recent <a href="https://pubs.aeaweb.org/doi/pdfplus/10.1257/mac.20150175">study</a> also found that this gap is widening between rich countries and poor countries. When few companies have access to 3D printers, <a href="https://voxeu.org/article/robot-adoption-german-plants">robots</a>, or cutting-edge AI, there are fewer actors to leverage such technologies to the point at which productivity will increase across the board.</p>
<figure class="align-center ">
<img alt="A palm above which the logos of Big Tech companies are arranged on a screen" src="https://images.theconversation.com/files/379023/original/file-20210115-15-18q5mma.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/379023/original/file-20210115-15-18q5mma.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=336&fit=crop&dpr=1 600w, https://images.theconversation.com/files/379023/original/file-20210115-15-18q5mma.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=336&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/379023/original/file-20210115-15-18q5mma.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=336&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/379023/original/file-20210115-15-18q5mma.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=423&fit=crop&dpr=1 754w, https://images.theconversation.com/files/379023/original/file-20210115-15-18q5mma.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=423&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/379023/original/file-20210115-15-18q5mma.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=423&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Some argue that ‘Big Tech’ hold a monopoly over 4IR technologies.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/big-five-companies-tech-company-logos-1643544484">Ascannio/Shutterstock</a></span>
</figcaption>
</figure>
<p>It was general-purpose technologies – such as steam engines and the electric dynamo – that powered change in <a href="https://www.aeaweb.org/articles?id=10.1257/jel.54.1.224">previous</a> industrial revolutions. At present, <a href="https://www.nber.org/papers/w24001">it remains unclear</a> whether 4IR technologies can do the same. </p>
<p>For example, AI has been of little value <a href="https://link.springer.com/article/10.1007/s00146-020-00978-0">against the pandemic</a>, failing to contribute constructively to solving the biggest problem of a generation. 4IR technology is stuck in what research firm Gartner call the “<a href="https://www.gartner.com/en/research/methodologies/gartner-hype-cycle">trough of disillusionment</a>” – a state of disappointment we feel when technologies fail to live up to the hype.</p>
<h2>Shifting investments</h2>
<p>This “<a href="https://press.princeton.edu/books/paperback/9780691175805/the-rise-and-fall-of-american-growth">technology problem</a>” has been well documented. New digital technologies are often found to deliver <a href="https://www.aeaweb.org/articles?id=10.1257/aer.20180338">diminishing returns</a> over time, especially once “<a href="https://www.amazon.com/Great-Stagnation-America-Low-Hanging-Eventually/dp/0525952713">low-hanging fruit</a>” have been plucked, leaving only more ambitious, costly, and risky projects up for grabs.</p>
<p>To avoid a technology problem, we need to invest in science that delivers general-purpose technologies, and technologies that deliver real scientific progress. To get there, we’ll need new strategies in research and investment once the pandemic subsides. </p>
<p>For instance, the vast majority of investment in digital technologies is currently driven by venture capitalists out to <a href="https://www.technologyreview.com/2020/06/17/1003318/why-venture-capital-doesnt-build-the-things-we-really-need/">score quick returns</a> on start-ups that can be scaled fast. As a result, technologies that require more development time – but that are most likely to lead to new breakthroughs – tend to be starved of funds.</p>
<figure class="align-center ">
<img alt="A painting featuring a loom in the industrial era." src="https://images.theconversation.com/files/379019/original/file-20210115-13-sk2j6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/379019/original/file-20210115-13-sk2j6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=376&fit=crop&dpr=1 600w, https://images.theconversation.com/files/379019/original/file-20210115-13-sk2j6g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=376&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/379019/original/file-20210115-13-sk2j6g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=376&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/379019/original/file-20210115-13-sk2j6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=473&fit=crop&dpr=1 754w, https://images.theconversation.com/files/379019/original/file-20210115-13-sk2j6g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=473&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/379019/original/file-20210115-13-sk2j6g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=473&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The technologies that powered previous industrial revolutions were more widespread.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/machines-making-cotton-thread-by-performing-237232108">Everett Collection/Shutterstock</a></span>
</figcaption>
</figure>
<p>This investment trend can leave crucial industries and technologies without the necessary funds to advance and innovate. For instance, venture capital (VC) funding into medical instrument technologies – vital for the continuing fight against pandemics – <a href="https://issues.org/behind-technological-hype/">declined by over 50% between 2003 and 2017</a>. Elsewhere, the VC market for technologies to combat climate change <a href="https://www.brookings.edu/research/cleantech-venture-capital-continued-declines-and-narrow-geography-limit-prospects/">is in a crisis</a>. </p>
<p>With markets allocating insufficient funding to technologies that might help tackle our grand global challenges, <a href="https://financialpost.com/opinion/book-review-matt-ridley-innovation-is-a-bottom-up-phenomenon">controversial</a> arguments are now being made for <a href="https://academic.oup.com/icc/article/27/5/803/5127692">mission-oriented</a> innovation policies, which would entail an “entrepreneurial state” leading the charge towards key technologies.</p>
<h2>Back to the lab</h2>
<p>Many <a href="https://financialpost.com/opinion/book-review-matt-ridley-innovation-is-a-bottom-up-phenomenon">doubt</a> this “creationist” view of innovation whereby the state can lead innovation, and argue instead that innovation is a bottom-up process. Whether innovation is creationist or bottom-up, we need to rethink our institutional frameworks for doing science, and start with the role of universities. </p>
<p>According to <a href="https://nautil.us/blog/the-present-phase-of-stagnation-in-the-foundations-of-physics-is-not-normal">a growing chorus of commentators</a>, fundamental physics, which delivered virtually all of the technologies underpinning earlier industrial revolutions, has been <a href="https://www.edge.org/response-detail/11441">stagnating</a> for years. This stagnation is now accompanied by a rise in <a href="https://journals.plos.org/plosbiology/article?id=10.1371/journal.pbio.3000683">anti-science movements</a> that reject scientific knowledge on <a href="https://www.theguardian.com/commentisfree/2020/jul/30/climate-denier-shill-global-debate">climate change</a>, <a href="https://www.sciencedaily.com/releases/2020/02/200217163004.htm">vaccine safety</a>, and even <a href="https://theconversation.com/flat-earthers-vs-climate-change-sceptics-why-conspiracy-theorists-keep-contradicting-each-other-96060">the shape of the earth</a>. At the same time, <a href="https://theconversation.com/academic-freedom-is-under-threat-around-the-world-heres-how-to-defend-it-118220">academic freedom</a> is under threat.</p>
<p>University science has also become encumbered by unhelpful administrative <a href="https://www.nber.org/papers/w26752">incentives</a>, box-ticking, and “a focus on <a href="https://www.nber.org/papers/w26752">incremental studies</a> rather than more ambitious projects which are likely to fail, but might lead to more exciting breakthroughs”. Overcoming these obstacles should be a leading priority as we develop post-pandemic research and innovation policies.</p>
<h2>How we reset</h2>
<p>The Fourth Industrial Revolution never really got off the ground — largely due to human flaws in distribution, investment and research which restricted the diffusion of its technologies and skewed investment into technologies with less meaningful economic impact. </p>
<p>The Great Reset, like the Fourth Industrial Revolution, reads like a Hollywood script. To move beyond headline-grabbing science fiction and glitzy gadgetry, we need a real “back-to-basics” revolution — in the kind of science-plus-risk-taking that delivered economic prosperity in the past. For a start, this will demand more entrepreneurial university research projects that may well fail, but which might break new ground, too.</p><img src="https://counter.theconversation.com/content/153142/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Wim Naudé does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Fourth Industrial Revolution failed to deliver; it’s time that we put our faith once again in hard science.Wim Naudé, Professor of Economics, University College CorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1492532020-12-01T16:24:41Z2020-12-01T16:24:41ZCanadian startups need to focus on corporate governance to grow and thrive<figure><img src="https://images.theconversation.com/files/372090/original/file-20201130-17-1ytc9ka.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4010%2C2299&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Good governance is critical for growth. But Canadian startups haven't yet got a handle on the importance of governance when seeking investors.</span> <span class="attribution"><span class="source">(Ravi Roshan/Unsplash)</span></span></figcaption></figure><p>To help recover from our current economic crisis, Canada needs to develop the next generation of world-leading technology corporations. </p>
<p>The <a href="https://www.theglobeandmail.com/business/article-venture-capital-industry-lobbies-ottawa-for-new-funds-to-prevent/">venture capital (VC) industry is seeking more government support</a>, including direct funding, for early-stage technology corporations. Unfortunately, any potential increased financing will not help the vast majority of entrepreneurs.</p>
<p>That’s because most entrepreneurs don’t understand how to structure their corporations to attract VC financing. This is partly due to a lack of respect for the needs of investors, and an associated weak understanding about corporate governance matters.</p>
<h2>VC frustrations</h2>
<p>Venture capitalists are specialized intermediaries who raise money from institutions to invest in technology-oriented corporations. <a href="http://www.angelblog.net/Angel_Investors_VCs_and_Entrepreneurs_Gaps_in_Understanding.html">VCs become frustrated</a> when entrepreneurs do not put in the time required to learn about, and implement, effective governance practices before launching their startups. </p>
<p>They complain that entrepreneurs often expect them to spend multiple hours learning about their business before making an investment, even though the entrepreneurs have neglected to take the time to learn about investor needs. Investors in early-stage corporations are active, and want to be heavily involved when key decisions are being made.</p>
<p>VCs, and other startup investors, review hundreds of potential companies a year in order to make a handful of investments. Early-stage investors will spend an average of <a href="https://docsend.com/view/p8jxsqr">under five minutes</a> reviewing an entrepreneur’s pitch deck, and will use that time to see if there are any critical flaws in the startup’s plans.</p>
<figure class="align-center ">
<img alt="A man looks at a tablet as another man sits behind him in an outdoor setting." src="https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Potential investors will pore over a startup’s plans before deciding to invest.</span>
<span class="attribution"><span class="source">(Unsplash)</span></span>
</figcaption>
</figure>
<p><a href="https://www.creativedestructionlab.com/locations/calgary/">In a specialized program at the Haskayne School of Business at the University of Calgary</a>, we’ve noticed that when investors identify a potentially interesting opportunity, the entrepreneur will be asked to provide two sets of detailed corporate information: a list of all shareholders and key governance documents. </p>
<p>If entrepreneurs have been too generous, or too miserly, in the distribution of shares, this will lessen their ability to grow a strong leadership team, will reflect poorly on the entrepreneur’s skills and is a big red flag for investors. </p>
<h2>Complex governance challenges</h2>
<p>Most entrepreneurs don’t appreciate that the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3352203">governance challenges of a startup</a> are in many ways more complex than those of an established corporation. The type of securities used to raise financing, for example, and the arrangements negotiated between entrepreneurs and investors can be quite complicated.</p>
<p>That means specialized governance mechanisms are needed that can be put into place at a relatively low cost during the early years of a startup. Once a corporation has developed past a certain point, any governance deficiencies may be impossible to correct or may require too much time and money, scaring away potential investors. </p>
<p>An investor’s time is valuable and is better spent helping a startup move forward as opposed to helping an entrepreneur clean up past mistakes. Taken together, the failure to attract investors and to build a strong management team have been identified as the <a href="https://www.cbinsights.com/research/startup-failure-reasons-top/">second and third most important reasons for startup failure</a> — and together they add up to a higher value than the first reason: no market need for the startup’s product or service. </p>
<p>There is information available that can help entrepreneurs learn how to work with investors. Canadian sources include the <a href="https://www.nacocanada.com/cpages/entrepreneur-resources">National Angel Capital Organization (NACO)</a> and the <a href="https://www.cvca.ca/research-insight/model-legal-documents/">Canadian Venture Capital Association (CVCA)</a>. </p>
<p>Unfortunately, however, much of the governance information on these types of sites is highly technical and it takes experience to understand which governance practices are reasonable. An entrepreneur is encouraged to seek out experienced practitioners to assist in making this determination. </p>
<p>Since this is such a specialized area, the number of such practitioners is limited. Even seasoned lawyers and directors who have spent their careers working with large publicly traded firms can struggle when dealing with the governance issues faced by startups.</p>
<h2>A solution for the governance gap</h2>
<p>Drawing upon academic research, and insights from leading governance practitioners, researchers at the Haskayne School developed and delivered <a href="https://haskayne.ucalgary.ca/future-students/executive-education/programs-board-directors/enhancing-private-equity-governance">Canada’s first governance course specifically designed to meet the needs of early-stage start-ups</a> this year. </p>
<p>Six months post-program, several entrepreneurs discussed how they had effectively restructured their share ownership to make their corporation more investable, while others indicated that they had been able to attract significant capital after the course. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&rect=0%2C14%2C4603%2C1968&q=45&auto=format&w=1000&fit=clip"><img alt="A collection of Canadian and American bills." src="https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&rect=0%2C14%2C4603%2C1968&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=260&fit=crop&dpr=1 600w, https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=260&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=260&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=326&fit=crop&dpr=1 754w, https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=326&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=326&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Venture capitalists want to invest their money in startups that are well-managed.</span>
<span class="attribution"><span class="source">(John McArthur/Unsplash)</span></span>
</figcaption>
</figure>
<p>One director participant indicated that he was able to provide valuable direction as an angel investor and mentor to a startup that increased the confidence of the startup’s CEO, and its advisory board, in their fund-raising efforts.</p>
<p>Entrepreneurs provided with guidance at critical stages of their corporation’s development have a much higher chance of success. Developing strong governance practices will increase an entrepreneur’s ability to attract this support. </p>
<p>Good business requires good governance, and startups require a particular kind of governance to help them grow and prosper. Ensuring effective governance at Canadian technology startups needs to be part of any solution aimed at accelerating the development of these corporations.</p><img src="https://counter.theconversation.com/content/149253/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Robinson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Good business requires good governance, and startups require a particular kind of governance to help them grow and prosper. That’s why it’s so important for startups to get governance right early on.Michael Robinson, Professor and Chen Fong Fellow in Entrepreneurial Finance, University of CalgaryLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1412522020-06-23T13:21:10Z2020-06-23T13:21:10ZUber, WeWork, Airbnb – how coronavirus is bursting the tech bubble<figure><img src="https://images.theconversation.com/files/343476/original/file-20200623-188886-1katr1v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Coronavirus losers.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/milan-italy-june-10-2016-close-443281492">easy camera / Shutterstock.com</a></span></figcaption></figure><p>A handful of technology companies have benefited from coronavirus. Amazon has profited handsomely, as have streaming and video conferencing platforms <a href="https://theconversation.com/coronavirus-your-guide-to-winners-and-losers-in-the-business-world-134205">like Netflix and Zoom</a>. But the pandemic has laid bare the shaky foundations of a number of other platforms that bill themselves as technology companies and have enjoyed the high valuations that come with this label. </p>
<p>Major losers from the pandemic include the ride hailing apps: <a href="https://www.wired.co.uk/article/uber-coronavirus-chaos">Uber</a>, <a href="https://www.cityam.com/ride-hailing-app-grab-cuts-300-jobs-amid-coronavirus-hit/">Grab</a> (in South East Asia), <a href="https://www.cnbc.com/2020/05/20/softbank-backed-ola-lays-off-1400-employees-due-to-coronavirus-crisis.html">Ola</a> (India) and <a href="https://www.ft.com/content/83a065e2-5ed5-11ea-8033-fa40a0d65a98">Didi Chuxing</a> (China). Quite simply, people are not taking taxis. Office sharing businesses such as WeWork (which was, of course, <a href="https://theconversation.com/wework-ipo-why-investors-are-beginning-to-question-the-office-rental-firms-value-121949">already struggling</a>) are also in trouble with <a href="https://www.theguardian.com/business/2020/apr/14/wework-coronavirus-impact-business-not-as-usual">virtually no occupancy</a>. A similar situation is occurring in the accommodation sector with <a href="https://www.wired.co.uk/article/airbnb-coronavirus-losses">Airbnb</a> and hotel bookings start-up <a href="https://uk.finance.yahoo.com/news/coronavirus-covid-19-oyo-hotels-uk-redundancies-exclusive-155109993.html">Oyo</a>. </p>
<p>As a result, investment in tech businesses is crumbling. But at the same time this is clearing the way for the few winners to buy bigger stakes in those that are struggling.</p>
<h2>Swimming naked</h2>
<p>Two decades on from the dot-com collapse there is the likelihood of another crash in the technology sector. As with the build up to the dot-com bubble, an abundance of venture capital funding <a href="https://www.ft.com/content/52a272dd-6575-4623-9ca4-18889bebad2d">has fuelled speculation</a> and encouraged investors to make bets on the next Google or Amazon. </p>
<p>As Warren Buffett <a href="https://money.com/swimming-naked-when-the-tide-goes-out/">once said</a>: “Only when the tide goes out will we see who has been swimming naked.” In effect, the tide has gone out and lots of start-ups that were billed as revolutionary technology companies are all in significant trouble. </p>
<p>The only redeeming feature at the moment is how much cash many start-ups have to withstand the collapse. How long they have will vary. WeWork will struggle to survive a year <a href="https://www.dailybeatny.com/2020/04/02/weworks-future-bleak/">without further investment</a>. The ride hailing apps meanwhile are <a href="https://www.bloomberg.com/news/articles/2020-03-19/uber-expects-4-billion-in-cash-reserve-in-worst-case-scenario">well funded</a> but may also find this to be a very difficult year. They are under pressure to cut their losses and break even but this goal is even further away now. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">More of a property company than a technology company?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/san-mateo-causa-may-10-2020-1728168679">jejim / Shutterstock.com</a></span>
</figcaption>
</figure>
<p>The secretive Airbnb has recently been <a href="https://www.ft.com/content/bc26db3c-34dd-4ba9-bf0b-2ef422bfd3b6">raising money at high cost</a>. This suggests investors see a significant risk to the business and so cash is limited. The proposed listing this year is now <a href="https://techcrunch.com/2020/04/06/airbnb-turns-to-private-equity-to-raise-1-billion/">highly unlikely</a>. </p>
<p>A major problem with lots of the start-ups that are now struggling is that they look like technology businesses but they have merely used new technology to disrupt existing industries. Uber follows the dynamics of the taxi industry, WeWork the office rental industry, and Airbnb the accommodation booking industry.</p>
<h2>Winner takes all</h2>
<p>Facebook, Amazon and Google differ in that they all started new industries. They created network effects – where the more people that use the platform, the better it becomes – from which they benefited enormously.</p>
<p>Network effects can create a winner takes all situation. The more of your friends and colleagues who are on a particular social network the more likely you are to join and use it. Similarly the more suppliers who compete to sell on Amazon, the more choice and competitive prices is offered to customers. Having more customers attracts more sellers.</p>
<p>It is harder to see the network effects in businesses <a href="https://theconversation.com/wework-ipo-why-investors-are-beginning-to-question-the-office-rental-firms-value-121949">like WeWork</a> – there are few reasons to be loyal and the entry barriers to market for competitors are low. Even with taxi ride hailing apps, in which Uber was a first mover, all taxi firms now have an app and network effects are quite limited once a level of responsiveness has been achieved – it’s easy for customers and drivers to switch to competition apps. </p>
<p>Similarly, accommodation booking sites are all accessed in the same way now via an app, and it is very easy to compare accommodation availability and costs. Airbnb was a first mover in home rental but this sector has been beset by <a href="https://fortune.com/longform/airbnb-deaths-fraud-safety-experiences-ipo-2020/">issues relating to fraud and safety</a>. </p>
<p>Hence all these markets are going to remain very competitive in the longer term and this means low margins and low returns. It is no surprise the share prices of ride hailing businesses have halved. In these industries technology is no longer a competitive advantage as almost all the competitors now have similar technology. The technology is simply infrastructure.</p>
<h2>Cash flow and consolidation</h2>
<p>Stock markets <a href="https://edition.cnn.com/business/markets/coronavirus">are shaky</a> and Airbnb has <a href="https://www.valuethemarkets.com/2020/03/17/airbnb-ipo-could-be-the-biggest-casualty-of-the-2020-stock-market-collapse/">cancelled its initial public offering</a>. The appetite for new listings is weak and is likely to remain this way, suggesting it will be difficult for venture capital investors to exit their investments. If there is no exit route to make money, then why invest? </p>
<p>A consequence is that there is likely to be a reduction in investment in technology start-up businesses. Cash will be in much shorter supply and venture capital investors will have to choose more carefully where to invest. </p>
<p>Meanwhile, we are already seeing the real technology giants move in. Amazon, for example, was the biggest investor in distressed UK takeaway app Deliveroo’s <a href="https://www.bbc.co.uk/news/business-48306172">latest round of fundraising</a>. This month also saw the merger of two other food delivery services, with Europe-based Takeaway.com, fresh from buying Just Eat, now <a href="https://www.theguardian.com/business/2020/jun/11/just-eat-uber-grubhub-takeover-food-delivery-service">buying US-based Grubhub</a>. We can expect more consolidation in the months ahead.</p><img src="https://counter.theconversation.com/content/141252/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Investment in tech businesses is crumbling but the winners are eyeing up the losers.John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1371042020-04-24T12:50:07Z2020-04-24T12:50:07ZChinese start-ups are being starved of venture capital – with worrying omens for the west<p>Through the centuries, China’s entrepreneurs accessed finance from family and friends through social networks known as <em>guanxi</em>. Even after the communist revolution, these networks helped to propagate a thriving small business sector that invested in local services and basic manufactured goods. </p>
<p>In the late 1970s and 1980s, when President Deng Xiaoping <a href="https://qz.com/1498654/the-astonishing-impact-of-chinas-1978-reforms-in-charts/">started to</a> open up the economy, it didn’t take long to rekindle the innate entrepreneurial spirit that saw China’s traders conquer the old Silk Road. Following the ascendance of tech juggernauts Alibaba, Tencent and Baidu, coupled with <a href="https://nationalinterest.org/feature/china%E2%80%99s-political-economy-after-40-years-reform-38377">later market liberalisations</a>, there has been an explosion of both local and western venture capitalists eager to find the next generation of <a href="https://medium.com/startup-grind/unicorns-dragons-and-fairy-dust-demystifying-investors-venture-capital-d0f6e5567f30">Chinese unicorns</a>.</p>
<p>China now <a href="https://link.springer.com/article/10.1007/s11187-017-9972-5">has the</a> largest venture capital market in Asia, second only to the US worldwide. This is all the more extraordinary given that the communist Chinese constitution did not formally recognise the legitimacy of private enterprise until 1988. </p>
<p>In the wake of the COVID-19 pandemic, however, this vitally important source of finance for entrepreneurs was always likely to be under serious threat. Unlike banks, which can make decisions about business lending using automated credit scoring, venture capitalists and angel investors rely on meeting entrepreneurs face to face to judge whether their start-ups are investable. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/330118/original/file-20200423-47788-1geek8w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/330118/original/file-20200423-47788-1geek8w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/330118/original/file-20200423-47788-1geek8w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/330118/original/file-20200423-47788-1geek8w.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/330118/original/file-20200423-47788-1geek8w.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/330118/original/file-20200423-47788-1geek8w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/330118/original/file-20200423-47788-1geek8w.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/330118/original/file-20200423-47788-1geek8w.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">So 2019.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-asian-business-people-shaking-hands-406835593">imtm photo</a></span>
</figcaption>
</figure>
<p>Because China was the first country to be adversely affected by COVID-19, we <a href="https://www.st-andrews.ac.uk/business/rbf/workingpapers/RBF20_008.pdf">decided to examine</a> how this sector has been affected. This, we hoped, would help gauge what is likely to be happening to other economies now in economic meltdown. The results are not pretty.</p>
<h2>What we found</h2>
<p>We discovered that since the outbreak of the coronavirus in China, there has been a dramatic decrease in aggregate levels of investors taking stakes in new businesses. Across the full spectrum of venture capital, from investments in brand new companies to those that are already profitable, we found a 60% decline in the first quarter of 2020 compared to 2019. </p>
<p>To put this into perspective, <a href="https://www.tandfonline.com/doi/pdf/10.1080/13691060903184803?casa_token=cPcByQi7OTcAAAAA:PlP3YCfr3xk1mmU_blpuGP0TWppI5QwF4FDYWOBzP4vRv-MB5colOBooMlZ1SpQGzJ4Tt1nLSlAR">this is three times</a> the size of the decrease during the global financial crisis of 2007-09. Some <a href="https://venturebeat.com/2020/04/01/startup-genome-the-coronavirus-is-hurting-global-startup-investments/?mc_cid=91ef797a9c&mc_eid=ea0e001cad">estimate that</a> if a drop like this were to happen globally, approximately US$28 billion (£23 billion) in start-up funding could be lost. </p>
<p>When we looked at seed-stage investments – those typically dominated by the smallest and youngest start-ups – they almost totally disappeared in China during the first quarter of the year. There were fewer than 20 deals in total, representing an 86% reduction year on year. In other words, start-ups during this crisis have been all but starved of new finance. </p>
<p><strong>China seed-stage funding 2015-20</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/330069/original/file-20200423-47788-fzoqod.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/330069/original/file-20200423-47788-fzoqod.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/330069/original/file-20200423-47788-fzoqod.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=296&fit=crop&dpr=1 600w, https://images.theconversation.com/files/330069/original/file-20200423-47788-fzoqod.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=296&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/330069/original/file-20200423-47788-fzoqod.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=296&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/330069/original/file-20200423-47788-fzoqod.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=371&fit=crop&dpr=1 754w, https://images.theconversation.com/files/330069/original/file-20200423-47788-fzoqod.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=371&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/330069/original/file-20200423-47788-fzoqod.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=371&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.st-andrews.ac.uk/business/rbf/workingpapers/RBF20_008.pdf">Ross Brown and Augusto Rocha</a></span>
</figcaption>
</figure>
<p>The sectors that benefit most from seed funding in China are education, e-commerce, media and entertainment, healthcare and AI/robotics. Most of the money comes from local Chinese investors, and this is probably a good barometer of the areas of the economy worst affected by the crisis – education and entertainment above all. </p>
<p>In contrast, larger later-stage venture capital deals are being less adversely affected. This may be because many deals are funded by investors that are foreign-owned, often from places only hit by the pandemic later in the quarter. Significant foreign-owned investors include <a href="https://www.sequoiacap.com/">Sequoia</a> of the US, Japan’s <a href="https://www.softbank.jp/en/">Softbank</a> and the UK’s <a href="https://www.bailliegifford.com/en/uk/about-us/">Baillie Gifford</a>, as well as sovereign funds like the <a href="https://www.qia.qa/">Qatar Investment Authority</a>. </p>
<p>We also examined which areas in China were most negatively affected. Traditionally, entrepreneurial finance was concentrated in Beijing, Shanghai and Shenzen, though in recent years, investors spread their nets across the country. Now, however, there appears to be a worrying retrenchment. Some provinces seeing the greatest decreases in investment are the same ones worst affected by the virus – Hubei, Zhejian and Hunan. </p>
<p><strong>Worst affected provinces, Q1 2020 vs Q1 2019</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/330096/original/file-20200423-47799-10b1v91.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/330096/original/file-20200423-47799-10b1v91.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/330096/original/file-20200423-47799-10b1v91.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=423&fit=crop&dpr=1 600w, https://images.theconversation.com/files/330096/original/file-20200423-47799-10b1v91.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=423&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/330096/original/file-20200423-47799-10b1v91.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=423&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/330096/original/file-20200423-47799-10b1v91.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=532&fit=crop&dpr=1 754w, https://images.theconversation.com/files/330096/original/file-20200423-47799-10b1v91.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=532&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/330096/original/file-20200423-47799-10b1v91.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=532&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.st-andrews.ac.uk/business/rbf/workingpapers/RBF20_008.pdf">Ross Brown and Augusto Rocha</a></span>
</figcaption>
</figure>
<h2>The UK situation</h2>
<p>The UK <a href="https://www.wired.co.uk/article/brexit-london-venture-capital-startups">relies more on venture capital</a> than most European countries, so our Chinese data begs important questions about what is happening closer to home. From our analysis, we detect a marked drop in entrepreneurial finance in the first quarter of 2020. Like China, the youngest and smallest start-ups are the ones most affected by the crisis, though other stages of the investment process have been hit too. </p>
<p><strong>UK seed funding, 2015-20</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/330072/original/file-20200423-47820-1f3lhnf.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/330072/original/file-20200423-47820-1f3lhnf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/330072/original/file-20200423-47820-1f3lhnf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=248&fit=crop&dpr=1 600w, https://images.theconversation.com/files/330072/original/file-20200423-47820-1f3lhnf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=248&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/330072/original/file-20200423-47820-1f3lhnf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=248&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/330072/original/file-20200423-47820-1f3lhnf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=312&fit=crop&dpr=1 754w, https://images.theconversation.com/files/330072/original/file-20200423-47820-1f3lhnf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=312&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/330072/original/file-20200423-47820-1f3lhnf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=312&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.st-andrews.ac.uk/business/rbf/workingpapers/RBF20_008.pdf">Ross Brown and Augusto Rocha</a></span>
</figcaption>
</figure>
<p>From the chart above, the number of seed-funding transactions in the UK actually halved between the first quarter of 2018 and the first quarter of 2020. It could be that this was initially due to uncertainties caused by Brexit, then accentuated by the pandemic. </p>
<p>We can safely assume that the figures for the second quarter of 2020 will show further dramatic declines. The uncertainty suffocating entrepreneurial activity in the UK has already had a massive impact on the economy. <a href="https://www.enterpriseresearch.ac.uk/uk-companies-facing-covid-19-pincer-movement-data-shows/?mc_cid=f733214c4d&mc_eid=ea0e001cad">Early figures show</a> that the number of firms going bankrupt in March was 70% higher than the same month last year, while registrations of start-ups fell by a quarter. Clearly this crisis is unlike any in modern times. </p>
<p>The UK government has just <a href="https://www.gov.uk/government/news/billion-pound-support-package-for-innovative-firms-hit-by-coronavirus?mc_cid=f733214c4d&mc_eid=ea0e001cad">launched a</a> suite of support packages including the £500 million Future Fund and a £750 million fund to target support for innovative small and medium-sized enterprises (SMEs). Importantly, these schemes depend on co-investments between the private sector and the public sector, which may mitigate the declines in private equity investment. But as long as venture capitalists and business angels are unable to physically meet up with entrepreneurs, this kind of finance is likely to continue to be thin on the ground.</p><img src="https://counter.theconversation.com/content/137104/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>China rose to become the second biggest market for venture capital in the world. Then came COVID-19.Ross Brown, Professor in Entrepreneurship and Small Business Finance, University of St AndrewsAugusto Rocha, Research Fellow in Entrepreneurship and Technology Exploitation, University of St AndrewsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1121192019-02-27T11:41:47Z2019-02-27T11:41:47ZChina is catching up to the US on artificial intelligence research<figure><img src="https://images.theconversation.com/files/260051/original/file-20190220-148520-6uvc8t.jpg?ixlib=rb-1.1.0&rect=278%2C35%2C2465%2C1387&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The U.S. may be ahead for now, but not by much.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/illustration-little-robot-hold-china-flag-1163324068?src=atevuP_ymoILY2cQjccFbA-1-0">onime/Shutterstock.com</a></span></figcaption></figure><p>Researchers, companies and countries around the world are racing to explore – and exploit – the possibilities of artificial intelligence technology. China is working on an extremely aggressive <a href="https://www.nytimes.com/2017/07/20/business/china-artificial-intelligence.html">multi-billion-dollar plan</a> for government investment into AI research and applications. The U.S. government has been slower to act. </p>
<p>The Obama administration issued a <a href="https://obamawhitehouse.archives.gov/blog/2016/10/12/administrations-report-future-artificial-intelligence">report on AI</a> near the end of its term. Since then, little has happened – until a <a href="https://www.whitehouse.gov/presidential-actions/executive-order-maintaining-american-leadership-artificial-intelligence/">Feb. 11 executive order</a> from President Donald Trump encouraging the country to do more with AI.</p>
<p>The executive order has several parts, including directing federal agencies to invest in AI and train workers “in AI-relevant skills,” making federal data and computing resources available to AI researchers and telling the National Institute of Standards and Technology to create standards for AI systems that are reliable and work well together. These are all good ideas, but they lack funding and bureaucratic structure. So after <a href="https://scholar.google.com/citations?user=QUhNN6QAAAAJ&hl=en">researching how large organizations use AI</a> for the past five years, in my view the executive order alone is not likely to <a href="https://www.foxnews.com/opinion/trumps-artificial-intelligence-executive-order-will-ensure-america-doesnt-lose-the-ai-race-to-china">transform the American approach</a> to AI. </p>
<h2>Government spending</h2>
<p>China is doing far more than talking about AI. In 2017, the country’s <a href="http://www.gov.cn/zhengce/content/2017-07/20/content_5211996.htm">national government announced</a> it wanted to make the country and its industries <a href="https://www.nytimes.com/2017/07/20/business/china-artificial-intelligence.html">world leaders in AI technologies</a> by 2030. The government’s latest venture capital fund is expected to invest <a href="https://www.techinasia.com/report-chinas-government-establishes-30-billion-vc-fund">more than US$30 billion</a> in AI and related technologies within state-owned firms, and that fund joins even larger state-funded VC funds.</p>
<p><a href="https://www.nytimes.com/2018/02/12/technology/china-trump-artificial-intelligence.html">One Chinese state alone</a> has said it will devote $5 billion to developing AI technologies and businesses. The city of <a href="https://www.reuters.com/article/us-china-artificial-intelligence/beijing-to-build-2-billion-ai-research-park-xinhua-idUSKBN1ES0B8">Beijing</a> has committed $2 billion to developing an AI-focused industrial park. A major port, Tianjin, plans to <a href="https://www.reuters.com/article/us-china-ai-tianjin/chinas-city-of-tianjin-to-set-up-16-billion-artificial-intelligence-fund-idUSKCN1II0DD">invest $16 billion</a> in its local AI industry.</p>
<p>These government programs will support ambitious major projects, startups and academic research in AI. The national effort also includes using AI in China’s defense and intelligence industries; the country’s leaders are not reluctant to use AI for <a href="http://www.sciencemag.org/news/2018/02/china-s-massive-investment-artificial-intelligence-has-insidious-downside">social and political control</a>. For example, both AI-driven facial recognition, even to <a href="https://www.theverge.com/2018/11/22/18107885/china-facial-recognition-mistaken-jaywalker">catch jaywalkers</a>, and “<a href="https://www.wired.co.uk/article/china-social-credit-system-explained">social credit</a>” – an AI-driven credit score that factors in social behaviors – are already in use.</p>
<p><a href="https://media.defense.gov/2019/Feb/12/2002088963/-1/-1/1/SUMMARY-OF-DOD-AI-STRATEGY.PDF">U.S. investment plans</a>, mostly in the defense industry, are dwarfed by the Chinese effort. DARPA, the Defense Department’s research arm, has sponsored AI research and competitions for many years, and has a $2 billion fund called “<a href="https://www.darpa.mil/news-events/2018-11-16">AI Next</a>” to help develop the next wave of AI technologies in universities and companies. It’s not yet clear how much real progress its efforts have made. </p>
<h2>Private sector contributions</h2>
<p>The U.S. has a strong private sector effort in this technology. There are, for instance, <a href="https://www.linkedin.com/pulse/global-artificial-intelligence-landscape-including-3465-westerheide/">many more AI firms in the U.S.</a> than in China. </p>
<p>American investment appears strong, too. In 2015, for example, the combined research and development spending at the U.S.-headquartered companies Google, Apple, Facebook, IBM, Microsoft and Amazon was <a href="https://www.axios.com/how-ai-is-taking-over-the-global-economy-in-one-chart-1513303050-f4f4f807-5d32-4a2d-bf8c-8d639c41849d.html">$54 billion</a>. Much of that spending <a href="https://www.techworld.com/picture-gallery/data/tech-giants-investing-in-artificial-intelligence-3629737/">went toward AI research</a>, but some of the work <a href="http://fortune.com/2017/12/13/google-china-artificial-intelligence/">actually happened in China</a> and elsewhere outside the U.S. That work has been used to <a href="https://www.businessinsider.com/brands-are-using-artificial-intelligence-to-tailor-personalized-marketing-messages-2018-10">personalize ads</a>, <a href="https://blogs.cornell.edu/info2040/2015/10/18/using-artificial-intelligence-to-improve-search-engine-optimization/">improve search results</a>, <a href="https://www.zdnet.com/article/microsoft-heres-why-we-need-ai-facial-recognition-laws-right-now/">recognize and label faces</a> and generally <a href="https://www.adweek.com/digital/what-to-expect-as-amazon-delves-deeper-into-smart-homes-and-ai/">make products smarter</a>.</p>
<p>In China, the private sector is much more closely tied to government plans than in the U.S. The Chinese government has asked <a href="https://www.scmp.com/tech/china-tech/article/2120913/china-recruits-baidu-alibaba-and-tencent-ai-national-team">four large AI-oriented firms in China</a> – Baidu, Tencent, Alibaba and iFlytek – to develop AI hardware and software systems to handle autonomous driving and language processing, so other companies could build on those skills.</p>
<p>China may have also surpassed the American historic advantage in venture capital investments. In 2018, U.S. AI startups received $9.3 billion in venture funding – a record amount, but the number of deals was down from 2017. However, one report from China suggests that in the first half of 2018, Chinese venture investments – many of which involved AI – were <a href="https://www.ai-cio.com/news/chinese-vc-investments-tops-us-first-time/">higher than in the U.S.</a> Data from 2017 suggest that <a href="https://www.cnbc.com/2018/12/14/china-could-surpass-the-us-in-artificial-intelligence-tech-heres-how.html">Chinese AI firms received more venture funding</a> than U.S. companies, although the American funding went to many more firms.</p>
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<h2>Beyond investment money</h2>
<p>There are other factors than investment that determine a country’s long-term competitiveness on AI. Talent is an important one. The U.S. had an historical edge in this regard, with strong technical universities, many technology sector employers and relatively open immigration policies. </p>
<p>A recent <a href="https://technode.com/2017/08/24/is-china-really-that-far-ahead-in-ai-research-says-no/">analysis of LinkedIn data</a> suggests that the U.S. has far more AI engineers than China does. But China is closing the gap rapidly, with a variety of <a href="https://www.wired.co.uk/article/china-artificial-intelligence-education-superpower">education and training programs</a> beginning as early as elementary school. The Trump administration’s <a href="https://theconversation.com/is-there-a-crisis-at-the-us-mexico-border-6-essential-reads-109547">restrictions on immigration</a> are encouraging some of the world’s best AI researchers to stay home, rather than come to the U.S.</p>
<p>Another element in long-term AI success is how particular regions build mutually reinforcing communities of companies, university ecosystems and government agencies. <a href="https://theconversation.com/silicon-valley-from-hearts-delight-to-toxic-wasteland-86983">Silicon Valley</a> is the world leader in this regard, and China doesn’t have anything to match it yet. Both the U.S. and China could learn from efforts in Canada, such as the work by the Montreal Institute for Learning Algorithms, which has offered companies access to facilities, venture capital and university research partnerships to accelerate AI development in that city.</p>
<p>A final key element in AI progress is data: The more data a country’s companies have, the better able they are to develop capable AI systems. Chinese online firms have massive amounts of consumer data on which to train machine learning algorithms. Because of its very large number of inhabitants, the population’s heavy use of digital services and its <a href="https://www.wired.com/story/health-care-data-lax-rules-help-china-prosper-ai/">lax regulatory environment</a>, China clearly beats the U.S. on data.</p>
<p>I still think the U.S. has the edge over China in AI capabilities at the moment. However, as much as I would like the U.S. to win this race over the long run, if I were a betting man I would bet on China. As I describe in my new book “<a href="https://mitpress.mit.edu/books/ai-advantage">The AI Advantage</a>,” China is executing its strategy for AI, and the U.S. is still wrestling to create one. China is also reaping the benefits of having a determined government, an inexhaustible pot of money, a growing cadre of smart researchers and a large, digital-hungry population. </p>
<p>Perhaps if the leadership of the U.S. government devoted as much attention and investment to AI as it does to its other strong priorities, the U.S. could maintain its lead in the field. That seems unlikely over the next couple of years, however.</p>
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<img src="https://images.theconversation.com/files/248895/original/file-20181204-133100-t34yqm.png?w=128&h=128">
<div>
<header>Thomas H. Davenport is the author of:</header>
<p><a href="https://mitpress.mit.edu/books/ai-advantage">The AI Advantage: How to Put the Artificial Intelligence Revolution to Work</a></p>
<footer>MIT Press provides funding as a member of The Conversation US.</footer>
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</section>
</p><img src="https://counter.theconversation.com/content/112119/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>MIT Press provides funding as a member of The Conversation US.</span></em></p>A recent executive order from President Trump won’t do much to help the US stay ahead of Chinese innovation and investment in AI.Thomas H. Davenport, Professor of Information Technology and Management, Babson CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1094682019-01-11T16:36:43Z2019-01-11T16:36:43ZWhy 2019 could be the year of another tech bubble crash<figure><img src="https://images.theconversation.com/files/253375/original/file-20190111-43532-nouw1u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/hand-pushing-needle-pop-balloon-business-462221455?src=hK7GDW-jlmXaED9mWL20hQ-1-1">Sira Anamwong / Shutterstock</a></span></figcaption></figure><p>When the dot-com bubble burst in 2000 it sent significant numbers of businesses <a href="https://www.investopedia.com/terms/d/dotcom-bubble.aspt">to the wall</a>. Investment banks had been encouraging enormous investment in dot-com ventures by launching Initial Public Offers (IPOs) allowing investors and entrepreneurs to cash in on vast fortunes by selling off shares in their companies. </p>
<p>Most of the dot-coms which listed on stock exchanges had done little more than consume vast amounts of investor cash and showed little prospect of achieving a profit. Traditional metrics of performance were overlooked and big spending was seen as a sign of rapid progress. </p>
<p>The cash burn was to build branding and create network effects – where something gains more value the more people use it. These are the main driver of platform businesses. With Amazon, for example, the more suppliers the greater benefit to potential customers and vice versa. Together, this would build the foundation for future profits on the assumption that the underlying business case was sound. Most were not – and yet almost any idea attracted large amounts of funding. </p>
<p>Fast forward 19 years and, following a similar “app” boom, investment banks are bringing forward IPOs as they foresee volatile market conditions arriving later in the year. Ride-hailing apps Uber and Lyft, respectively valued by investment banks at US$120 billion and US$15 billion, are to be placed in early 2019 to beat the collapse. Both are loss makers – with Uber’s losses <a href="http://fortune.com/2018/03/06/how-much-money-uber-spent/">approaching US$4 billion in 2018</a> after a US$4.5 billion <a href="https://www.theguardian.com/technology/2018/oct/16/uber-targets-120bn-valuation-2019-flotation-report">loss in 2017</a>. Traditional metrics have been ignored and user growth taken as a proxy for future profitability. But this requires an enormous leap of faith. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/253376/original/file-20190111-43517-z76rmd.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/253376/original/file-20190111-43517-z76rmd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/253376/original/file-20190111-43517-z76rmd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=332&fit=crop&dpr=1 600w, https://images.theconversation.com/files/253376/original/file-20190111-43517-z76rmd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=332&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/253376/original/file-20190111-43517-z76rmd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=332&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/253376/original/file-20190111-43517-z76rmd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=418&fit=crop&dpr=1 754w, https://images.theconversation.com/files/253376/original/file-20190111-43517-z76rmd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=418&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/253376/original/file-20190111-43517-z76rmd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=418&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The NASDAQ Composite index from 1994 to 2005, showing the peak in early 2000 that coincides with the dot-com bust.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/w/index.php?curid=3189816">Lalala666 via Wikimedia Commons</a></span>
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<p>Uber, like many, has been able to tap readily available funds and has raised <a href="https://www.investopedia.com/insights/ubers-top-investors/">more than US$22 billion from investors</a> so far. The problem with being able to raise funds so readily is that it discourages focus and efficiency. Uber is not only developing the ride hailing model but also bike sharing, takeaway food delivery and autonomous vehicles. The latter is also being developed by most of the major car manufacturers, as well as Google. </p>
<p>Snap Inc, owner of social media app Snapchat, is also on the rocks, as it is rapidly running out of funds – despite its <a href="https://www.cnbc.com/2017/03/01/snapchat-ipo-pricing.html">US$24 billion listing</a> in 2017. The shareholders are powerless to intervene, as only founder shares have voting rights. LinkedIn is still losing money after its <a href="https://www.theguardian.com/technology/2016/jun/13/linkedin-bought-by-microsoft-for-262bn-in-cash">US$26 billion purchase by Microsoft</a>. Twitter has <a href="https://www.theguardian.com/technology/2018/feb/08/twitter-makes-first-quarterly-profit-history">just made a small profit</a> for the first time, following adoption as US president Donald Trump’s main channel for US policy announcements. </p>
<p>The investment bank belief is that network effects will build scale economies and create “winner-takes-all” markets that emulate Facebook, Google and Amazon. But the reality is far from the truth, as most differ in several important aspects. </p>
<h2>Two types of app</h2>
<p>Most apps fall into two categories. There are those that use content to attract users in anticipation that these users can be monetised – typically by selling advertising or collecting subscriptions. These include the likes of LinkedIn, Twitter, Snapchat, Facebook. Then there are those that provide a service or goods, such as Uber, Lyft, Deliveroo, Amazon. </p>
<p>Apps using content have found that content can be enormously expensive to keep new and that monetising users is difficult in terms of attracting advertising or subscriptions. Investor funds are used to develop content in the hope of creating enough users to pay for it and eventually show a profit. The reality is that users tend to move onto the next fad before they can be monetised. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/253443/original/file-20190111-43544-1w5yyly.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/253443/original/file-20190111-43544-1w5yyly.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/253443/original/file-20190111-43544-1w5yyly.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=221&fit=crop&dpr=1 600w, https://images.theconversation.com/files/253443/original/file-20190111-43544-1w5yyly.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=221&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/253443/original/file-20190111-43544-1w5yyly.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=221&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/253443/original/file-20190111-43544-1w5yyly.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=277&fit=crop&dpr=1 754w, https://images.theconversation.com/files/253443/original/file-20190111-43544-1w5yyly.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=277&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/253443/original/file-20190111-43544-1w5yyly.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=277&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The NASDAQ Composite index from 1992 to today.</span>
<span class="attribution"><a class="source" href="https://www.nasdaq.com/symbol/ixic/stock-chart?intraday=off&timeframe=10y&splits=off&earnings=off&movingaverage=None&lowerstudy=volume&comparison=off&index=&drilldown=off">NASDAQ</a></span>
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<p>Where goods and services are concerned, investor funds are used to prime the market through advertising and subsidising prices to both suppliers and customers. In effect they are trying to create network effects, which are anticipated to persist once the low price incentives are withdrawn. </p>
<p>But this is the equivalent of paying suppliers more than the market rate and then selling to customers at less than the market rate. In markets with low switching costs such as ride hailing apps and food delivery, users will simply revert to the most competitive offering once the incentives are withdrawn. </p>
<p>In the case of Uber, despite an impending IPO, it has been unable to withdraw costly incentives <a href="http://fortune.com/2018/11/14/uber-billion-dollar-loss-slow-growth/">due to user growth collapsing</a>. Scale economies are also rather limited, as Uber is finding when trying to withdraw driver incentives which has <a href="https://www.timeslive.co.za/news/south-africa/2018-07-03-uber-promises-incentives-to-offset-fuel-price-increases-as-drivers-strike/">resulted</a> in <a href="https://tech.economictimes.indiatimes.com/news/internet/ola-uber-strike-in-mumbai-set-to-end-80-of-drivers-demands-met/66419890">strikes</a>. In effect the model only works with incentives, which investors are needed to fund.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/253377/original/file-20190111-43544-p1k9pm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/253377/original/file-20190111-43544-p1k9pm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/253377/original/file-20190111-43544-p1k9pm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/253377/original/file-20190111-43544-p1k9pm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/253377/original/file-20190111-43544-p1k9pm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/253377/original/file-20190111-43544-p1k9pm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/253377/original/file-20190111-43544-p1k9pm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Uber is driven by subsidies to pay drivers and keep rides cheap.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/jyvaskyla-finland-december-7-2017-uber-774391564?src=82QlziyQ71_pFB5YbQu33A-1-1">Tero Vesalainen / Shutterstock.com</a></span>
</figcaption>
</figure>
<p>The big difference with Facebook, Amazon, and Google is that they were among the very first to build network effects. Uber has faced sustained competition and staunch resistance around the world, resulting in enormous battles of attrition funded by investors. Snapchat have found Instagram and WhatsApp (both owned by Facebook) waiting for them, making the competition for users very difficult. </p>
<p>It’s only a matter of time before the app bubble bursts. Big tech companies such as <a href="https://www.marketwatch.com/investing/stock/aapl">Apple</a> and <a href="https://www.marketwatch.com/investing/stock/fb">Facebook</a>’s shares have fallen almost 40% in the past few weeks – which is indicative of markets losing faith in even the established tech businesses to achieve their forecasts. This does not bode well for the apps which have not yet listed. When it comes to investment markets, history does repeat itself again and again and again.</p><img src="https://counter.theconversation.com/content/109468/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are a lot of similarities between the state of tech companies today and when the 2000 dot-com bubble burst.John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1081472018-12-19T17:22:21Z2018-12-19T17:22:21Z#MeToo, workplace equality and the ‘wave of women’: 3 essential reads<p><em>Editor’s note: As we come to the end of the year, Conversation editors take a look back at the stories that – for them – exemplified 2018.</em></p>
<p>The impact of #MeToo was arguably one of the biggest stories of 2018, beginning with the steady drumbeat of <a href="https://theconversation.com/nikes-metoo-moment-shows-how-legal-harassment-can-lead-to-illegal-discrimination-95828">resignations of high-powered men accused of sexual misconduct</a> and ending with a <a href="https://theconversation.com/how-many-women-does-it-take-to-change-a-broken-congress-106595">record number of women entering the U.S. Congress</a>. In between, Americans wrestled with what gender equality really means in the workplace. </p>
<h2>1. Women in tech</h2>
<p>One sector in particular that has struggled to achieve equality is tech, where men get 96 percent of all venture capital funding. <a href="https://scholar.google.com/citations?user=As_YJbUAAAAJ&hl=en&oi=ao">Banu Ozkazanc-Pan</a>, a management professor at the University of Massachusetts Boston, says Americans’ strong belief that their country is a meritocracy is <a href="https://theconversation.com/women-in-tech-suffer-because-of-american-myth-of-meritocracy-94269">one the biggest threats</a> to it actually being so. </p>
<p>“The meritocracy myth … means that women are constantly told that all they have to do to get more of that $22 billion or so in venture capital funding is make better pitches or be more assertive,” she writes. “The assumption is that women aren’t trying hard enough or doing the right things to get ahead, not that the way venture capitalists offer funding is itself unfair.”</p>
<h2>2. Trouble in board land</h2>
<p>Tech isn’t the only space where women have a tough time breaking in. The highest echelons of corporate America – the boardrooms – are still out of reach for most women. </p>
<p>In fact, <a href="https://theconversation.com/very-few-women-oversee-us-companies-heres-how-to-change-that-91302">barely 15 percent of the board seats</a> of companies in the Standard & Poor’s 1500 index were held by women in 2014, up modestly from 9.7 percent in 2003, explain business and entrepreneurship professors Yannick Thams, Bari Bendell and Siri Terjesen. </p>
<p>They looked deeper into the data on a state-by-state level to reveal some startling findings – and also point to some potential solutions that could increase boardroom diversity. Instituting quotas – such as the <a href="https://www.usatoday.com/story/news/2018/09/18/gender-quotas-california-corporate-boards/1339531002/">one California passed in 2018</a> – is one idea. Another is more training. </p>
<p>“Making it into the highest echelons of a corporation is very difficult and typically requires opportunity for training and access to social networks, both of which are jeopardized when, for example, women suffer harassment on the job or incur a ‘motherhood penalty,’” they write. </p>
<h2>3. What the ‘wave of women’ could mean</h2>
<p>The year ended on a more encouraging note as a record number of women – over 100 – were elected to Congress. The question now is whether it’ll make a difference in terms of policy, including those that would address the challenges posed by the #MeToo era. </p>
<p>The past year <a href="https://theconversation.com/how-the-wave-of-women-entering-congress-could-turn-the-metoo-movement-into-concrete-action-106199">doesn’t offer much hope</a>, writes Elizabeth C. Tippett, a law professor at the University of Oregon. After a year of headlines involving sexual misconduct in a variety of industries, Congress has not passed a single bill, nor held a hearing – unless you count the Kavanaugh confirmation process, she writes.</p>
<p>She suggests the new Democratic House treat the issue the same way Congress tackled the financial collapse of 2008. </p>
<p>“Just as brokers peddling subprime loans were enabled by bad business practices and regulatory gaps, employer indifference to harassment was made possible by out-of-date harassment laws that gave companies a free pass,” Tippett explains. </p>
<p>By holding hearings and gathering information, the new Congress could begin to treat the endemic workplace problems highlighted by #MeToo as the serious policy issues they deserve to be, she argues.</p><img src="https://counter.theconversation.com/content/108147/count.gif" alt="The Conversation" width="1" height="1" />
In the last year, workplace culture faced major upheaval for working women. We at The Conversation put together our reporting on that very topic from 2018.Bryan Keogh, Managing EditorNicole Zelniker, Editorial Researcher, The ConversationLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1018592018-08-21T10:35:03Z2018-08-21T10:35:03ZHow sovereign wealth funds are inflating the Silicon Valley bubble<figure><img src="https://images.theconversation.com/files/232860/original/file-20180821-149484-1jawcyy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Elon Musk has spoken to Saudi Arabia's sovereign wealth fund about taking Tesla private.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/nvidia/16660212029">NVIDIA / flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>Elon Musk jolted markets and shareholders when he tweeted his intention to take his electric car company, Tesla, private. Saudi billions, he proposed, could help the company escape the pressures of being publicly listed. In a <a href="https://www.tesla.com/blog/update-taking-tesla-private">blog post</a>, Musk said that “the Saudi Arabian sovereign wealth fund [had] approached [him] multiple times about taking Tesla private”.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1026872652290379776"}"></div></p>
<p>Oil wealth meets futuristic electric cars may sound like an odd mix. But there is growing precedent for this kind of investment from sovereign wealth funds, which are motivated by social as well as financial aims. So much so that they are disrupting how capital markets work.</p>
<p>The result could be calamitous. A look at the history of large inflows into specific asset classes does not bode well for the venture capital industry. When petrodollars were funnelled into the eurodollar market in the 1960s, it drove asset spikes <a href="https://ftalphaville.ft.com/2016/01/25/2151037/petrodollars-are-eurodollars-and-eurodollar-base-money-is-shrinking/">and then resets</a>. Similarly, Japanese investment in American real estate fuelled a spectacular bubble – and then crash – <a href="http://articles.latimes.com/1992-02-21/business/fi-2537_1_japanese-real-estate">in the early 1990s</a>. US investment bank lending in Latin American debt in the 1980s ultimately culminated in a <a href="https://www.federalreservehistory.org/essays/latin_american_debt_crisis">“decade of lost growth”</a>. </p>
<p>A typical refrain is that “this time it’s different”. But it’s never different. We argue that the global rise of sovereign wealth fund investments into venture capital is driving a similar cycle of asset inflation that will end in tears. </p>
<h2>Huge sums of money</h2>
<p>The reason that sovereign wealth fund money could prove destabilising for venture capital (VC) comes from the nature of the way VC works. Traditionally, nimble investment firms, led by experienced partners with technical and operational expertise, would identify potentially disruptive technologies and then work with the fledgling firms on strategy, hiring and product. This “smart money” is said to have catapulted Silicon Valley technology firms <a href="https://americanaffairsjournal.org/2018/08/building-the-venture-capital-state/">into global powerhouses</a>. </p>
<p>But the small scale and scrappy nature of venture capital is a relic of the 20th century. Today, VC funds are backed by some of the world’s largest investors, including funds like Saudi Arabia’s Public Investment Fund (PIF) and Singapore’s GIC. Sovereign wealth funds are investing huge sums of money, both as limited partners in VC funds and as venture capitalists themselves. </p>
<p>The entrance of sovereign wealth funds into the previous cottage industry of venture capital has fuelled <a href="http://docs.preqin.com/quarterly/pe/Preqin-Quarterly-Private-Equity-Update-Q1-2018.pdf">unprecedented levels of “dry powder”</a> (money that the VCs need to invest). With more money at their disposal than ever before, VC managers are investing more money in each deal, and making more deals. Recent quarters have seen a <a href="https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2018/04/kpmg-venture-pulse-q1-2018.pdf">previously unforeseen number and size</a> of “mega deals” (deals worth more than US$1 billion). </p>
<p>This all means that when – as historical precedent shows is likely – the VC bubble bursts, the fallout will be massive. And in the wake of such a bubble burst, there will be scant capital available for the many start-ups that have raised early-stage funding on hefty valuations. Investors, including the sovereign wealth funds, will be burned by the big losses, and so unwilling to invest in risky start-ups, or in venture capital funds, for years.</p>
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<p>The increasing exposure of sovereign wealth funds to venture capital comes with national development strategies and the revival of industrial policy. State-owned investment funds have started to embrace disruptive technology investment from AI to biotech. Countries with big funds, <a href="https://www.reuters.com/article/us-usa-trade-china-policy-factbox/factbox-made-in-china-2025-beijings-big-ambitions-from-robots-to-chips-idUSKBN1HR1DK">such as China</a>, have made clear their determination to move up in the global value chain in order to keep growing.</p>
<p>In a similar fashion, big oil exporters like Saudi Arabia are keen to diversify their economies <a href="https://theconversation.com/saudi-arabias-liberal-crown-prince-is-a-year-into-his-tenure-how-is-he-doing-99743">away from oil</a>. Saudi Arabia’s Vision 2030 strives to position the oil kingdom as a global technology and financial hub.</p>
<p>Leading the charge is Saudi Arabia’s Public Investment Fund. PIF made a US$45 billion investment in SoftBank’s mammoth US$100 billion venture capital <a href="https://www.wsj.com/articles/softbanks-vision-fund-hiring-deutsche-banks-chief-for-saudi-arabia-1533055230">Vision Fund</a> launched in 2017, and in June 2016, directly invested <a href="https://www.ft.com/content/a7e31c58-282c-11e6-8b18-91555f2f4fde">US$3.5 billion in Uber</a>. More recently, in March 2018, it led a late-stage VC investment of <a href="https://www.wsj.com/articles/saudi-arabia-goes-high-tech-in-approach-to-investing-1534325402">nearly US$1 billion</a> in augmented reality startup Magic Leap. Now it is in talks with Musk about <a href="https://www.wsj.com/articles/elon-musk-saudi-fund-asked-about-taking-tesla-private-1534166024">taking Tesla private</a>.</p>
<h2>Beware of the burst</h2>
<p>With the billions of dollars suddenly flowing in from sovereign wealth funds, the size of VC funds is ballooning – and so are the cheques they are writing. Early-stage, seed-round investments, which were typically US$500,000 can now be up to US$5m. </p>
<p>With so much money to invest, there is a sharp drop in the number of deals in which multiple funds participate and less of a need for start-ups to go public. This results in fewer brains being on hand to offer advice. It also means that decisions are made more quickly, with less input from multiple sources. This can be both good (decisions can be made more quickly) and bad (there are fewer checks and balances).</p>
<p>When previous floods of capital proved irresponsible, a diversification of investment opportunities – geographically and in terms of asset class – could have helped reduce the systemic risk. </p>
<p>But measures can be put in place today to neutralise the rollercoaster that sovereign wealth fund investment in venture capital is propelling, so that the global exuberance for supporting start-ups around the world proves sustainable. </p>
<p>Funds should be modest in their VC investment activity, for example, placing small bets in line with the workings of the VC industry, rather than deploying cheques in line with the size of their funds. Their appeal as buy-out partners, as Elon Musk claims, is not simply an easy alternative to the demands of being publicly listed. The long-term health of Silicon Valley and aspiring Silicon Valleys around the world depends on their discretion.</p><img src="https://counter.theconversation.com/content/101859/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Talk of Saudi Arabia helping Elon Musk take Tesla private is the latest example of a long line of sovereign wealth fund investments.Robyn Klingler-Vidra, Lecturer in Political Economy, King's College LondonJuergen Braunstein, Postdoctoral Fellow Harvard Kennedy School, Harvard UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/843302017-10-16T14:54:19Z2017-10-16T14:54:19ZExplainer: what are initial coin offerings (ICOs) and why are investors flocking to them?<figure><img src="https://images.theconversation.com/files/190359/original/file-20171016-30997-bhko9m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>Initial coin offerings – or ICOs – have become enormously popular with investors. They have raised more than US$1.8 billion <a href="https://www.ft.com/content/68c795ca-a680-11e7-ab55-27219df83c97?mhq5j=e6">so far in 2017</a> and one recent ICO raised US$35m <a href="https://techcrunch.com/2017/06/01/brave-ico-35-million-30-seconds-brendan-eich/">in under 30 seconds</a>. </p>
<p>But they are proving unpopular with governments around the world. The Chinese and South Korean governments <a href="https://techcrunch.com/2017/09/28/south-korea-has-banned-icos/">have shut them down</a>, while US regulators have issued a <a href="https://www.sec.gov/news/press-release/2017-131">warning</a> that ICOs may be subject to securities laws.</p>
<p>This is all part and parcel of the <a href="https://theconversation.com/rise-of-cryptocurrencies-like-bitcoin-begs-question-what-is-money-46713">rise in cryptocurrencies</a> in recent years. Bitcoin is the most famous, as the original and still dominant iteration. It was created as a form of digital cash, with a unique property: it is not backed by any bank or government. And it was specifically designed not to be centralised. For this reason it has always had a certain lawless aspect to it and has become the <a href="https://theconversation.com/by-concealing-identities-cryptocurrencies-fuel-cybercrime-82282">currency of online digital crime</a>. But it is also having a real moment – one bitcoin is currently <a href="https://coinmarketcap.com/currencies/bitcoin/#charts">worth more than US$5,000</a>.</p>
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<p>Within the cryptocurrency space ICOs have become the favoured way to raise funds in a manner akin to venture capital funding – but without any of the oversight normally found in that process.</p>
<h2>Avoiding the middle men</h2>
<p>ICOs are typically built on the technology of another cryptocurrency called Ethereum. Created by a programming prodigy, 23-year-old Vitalik Buterin, Ethereum was designed as a “world computer” rather than simply a form of money. </p>
<p>Like Bitcoin, Ethereum is a decentralised payment network with its own cryptocurrency (technically called Ether) that allows anonymous transactions to be sent across the internet without the need for a bank or other middleman. Instead, transactions are stored on the blockchain, a decentralised ledger.</p>
<p>Where it differs from Bitcoin is that, as well as allowing currency to run on its network, Ethereum can run all sorts of things including “smart contracts”, which are a form of digital contract that executes automatically once a certain set of conditions is met. ICOs are built on these contracts. An ICO involves creating a sellable token (or coin) that can be purchased with existing cryptocurrencies (such as Bitcoin or Ether).</p>
<p>The investor effectively purchases digital tokens that can be used within a specified ecosystem. Take this made-up example: an ICO for a new online betting venture, “Conversation Casinos”, might issue coins, “Conversation Coins”, which investors could buy and then use to make bets in Conversation Casinos (which would only accept and pay out Conversation Coins). Investors could also decide to hold onto their coins, speculating that the business will be successful, which will increase the demand for the coins and their market value. </p>
<p>In many ways, these tokens are not unlike the virtual currencies found in computer games like World of Warcraft and Second Life. They have a utility value, in that they are the digital venture’s medium of exchange (the money). But, often what attracts investors is the speculative value of tokens on cryptocurrency exchanges, rather than the originally intended use.</p>
<h2>Dangers inherent</h2>
<p>The ICO model has <a href="https://www.cnbc.com/2017/08/28/sec-warns-on-ico-scams-pump-and-dump-schemes.html">attracted scammers</a> who lure gullible investors into ICOs that are unlikely to ever generate a return. And, since ICOs are completely unregulated, investors have no recourse should the project not deliver or simply disappear. </p>
<p>Some ICOs do not allow citizens from certain countries, specifically the United States, to participate, in order to avoid coming under the radar of law enforcement agencies. They are also subject to the volatility that blights cryptocurrencies in general. All cryptocurrencies and tokens are tethered to the price of Bitcoin, the coin that acts as the <a href="https://www.economist.com/news/finance-and-economics/21722235-bitcoin-far-only-game-town-surge-value-crypto-currencies">crypto-economy’s reserve currency</a>. </p>
<p>While the Chinese regulators did not explain why they banned ICOs, they were probably most concerned about the danger to investors, given the prevalence of ICO scams. And they probably should be banned if they are merely schemes to avoid securities laws that exist for good reason. </p>
<p>Nevertheless, it is clear that ICOs are an interesting innovation. They allow people without access to traditional investment opportunities a chance to invest in companies that appeal to them, without the requirement of a broker (and broker fees). In turn, this allows companies to bypass the traditional venture capital scene and to get their projects in motion quicker.</p><img src="https://counter.theconversation.com/content/84330/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Within the world of cryptocurrencies, ICOs are the way to raise funds – but without any government oversight.Paul Dylan-Ennis, Assistant Professor, University College DublinDonncha Kavanagh, Professor of Information & Organisation, University College DublinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/691412016-11-28T01:00:35Z2016-11-28T01:00:35ZAustralia is discriminating against investors and we’re the poorer for it<figure><img src="https://images.theconversation.com/files/147526/original/image-20161125-15325-xrph2j.jpg?ixlib=rb-1.1.0&rect=10%2C336%2C3619%2C2461&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What does it mean to be sophisticated?</span> <span class="attribution"><span class="source">Shutterstock.com</span></span></figcaption></figure><p><a href="http://nabnews.efront-flare.com.au/wp-content/uploads/2016/07/The-Lure-of-Entrepreneurship-July-2016.pdf">Many Australians</a> dream of starting their own businesses. But they face restrictions on where they can access startup capital. In Australia you must be certified as a <a href="http://asic.gov.au/regulatory-resources/financial-services/financial-product-disclosure/certificates-issued-by-a-qualified-accountant/">“sophisticated investor”</a> to invest in risky, early stage ventures that cannot yet comply with costly disclosure requirements.</p>
<p>A “sophisticated investor” is someone with an income of at least A$250,000 per annum or assets worth A$2.5 million. But this qualification not only discriminates against some investors, it is a very limited view of what it means to be “sophisticated”. It also ignores recent changes in how companies interact with an important group of early investors – their customers. Even more, it robs startups of valuable capital. </p>
<h2>The argument against “sophistication”</h2>
<p>The <a href="http://www.afr.com/personal-finance/how-to-be-a-sophisticated-investor-20150821-gj4has">argument</a> for this restriction is that investing in private companies with unregulated disclosures is risky. They are not subject to the same <a href="http://download.asic.gov.au/media/3578442/rg254-published-17-march-2016.pdf">requirements</a> of a public company and are potentially more difficult for a layman to evaluate. “Unsophisticated investors” should just stick to publicly listed investments because they are less risky and more transparent. </p>
<p>But there’s nothing particular about having money that makes you a good investor and investors get shortchanged in public markets as well. </p>
<p>In particular, it is well documented that, on average, <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1991.tb03743.x/full">shares sold to the public through an IPO significantly underperform other investments in the long-run</a>. Even when a high quality IPO does come to the market, unsophisticated investors will struggle to get a meaningful allocation, while wealthy, well-connected investors end up with most of what they ask for. </p>
<p>The <a href="http://www.ipo-underpricing.com/UP/Underpricing/Modelle/GG/e_Winners%20Curse.html">academic literature</a> refers to this as the “<a href="http://www.investopedia.com/terms/w/winnerscurse.asp">winner’s curse</a>”, whereby unsophisticated investors only receive shares in an IPO when sophisticated investors think it’s a lemon. </p>
<h2>Many startups have a unique relationship with customers</h2>
<p>But companies also have greater intimacy with their customers than ever before. Micro-investing startup Acorns <a href="http://www.afr.com/technology/acorns-is-trying-to-raise-6m-from-users-via-a-highly-speculative-investment-20161117-gss1o9?logout=true">recently sought to raise A$6 million in a private share issue</a>, at least partially from its estimated 160,000 Australian users. Acorns’ users are reported to have already pledged more than A$1 million to help the startup replenish its cash and pursue further growth opportunities.</p>
<p>Acorns may be slightly unusual in being able to raise this money, as it is itself an investing app. It helps its users build wealth by saving “spare change” and investing this money for them. So its client base is at least familiar with the tenets of investing.</p>
<p>But Acorns’ ability to tap its user base as a source of capital also challenges the notion that only “sophisticated” investors are suitably qualified to participate in early stage deals. Acorns’ users are <a href="http://www.businessinsider.com.au/review-i-tried-acorns-the-app-that-turns-your-spare-change-into-investments-2016-3">typically young tech savvy millennials</a> who are unlikely to pass the sophisticated investor test (which is probably why they are using the app). Yet, because of their interaction with the app, these users have unique insights in evaluating Acorns’ prospects. </p>
<p>It raises questions as to whether the distinction between “sophisticated” and “unsophisticated” investors remains relevant in the world of app based tech startups. These startups often have aggressive go-to-market business models that attempt to capture as many users as possible relatively early in their life. Would someone that is cash rich have a better understanding of this business than a customer or user of it?</p>
<p>In making an early stage investment decision a “sophisticated” investor could try to determine whether an app solves a significant problem in its user’s life and thus how deeply a user will engage with it. But predicting the behaviour of app users is inherently difficult. So who better to predict it than the users themselves? </p>
<h2>Discriminating against certain investors costs everyone</h2>
<p>Under the current rules, a lot of “unsophisticated” users are denied access to such investment opportunities because they are simply not wealthy enough. This robs investors of an opportunity and startups of a potential source of capital. Even more, we all could lose as companies that create incredible products struggle or die for lack of funds.</p>
<p>For startups, drawing on customer support, as Acorns has done, would provide a source of capital that does not carry the costs and conditions that are typically attached to angel and venture capital funding. For small investors it gives them direct access to some potentially very lucrative (but very high-risk) investments that otherwise would be impossible or very costly to access.</p>
<p>Democratising the way startups are financed could create an environment whereby entrepreneurs, small investors and the economy as a whole all benefit from financing new and interesting endeavours. But it all starts with re-conceptualising the current arbitrary notion of “sophistication”.</p><img src="https://counter.theconversation.com/content/69141/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jason Zein receives funding from the Australian Research Council. </span></em></p>Ordinary people, startups and even the economy in general are being held back by an arbitrary distinction – what does it mean to be a “sophisticated investor”? It doesn’t need to be this way.Jason Zein, Associate Professor, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/653242016-09-21T20:26:56Z2016-09-21T20:26:56ZIt takes a community to raise a startup<figure><img src="https://images.theconversation.com/files/137894/original/image-20160915-30617-qa63bs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia is getting better at encouraging people to consider a startup.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>There’s an old saying that it takes a whole community to raise a child. Likewise, it takes a whole community to raise a successful startup company that can grow, scale and contribute to a healthy economy.</p>
<p>This was the message from Brad Feld, top global venture capitalist and TechStars co-founder, when he came to the Centre for Business Growth at UniSA to speak with venture capitalists, angel investors, growth entrepreneurs, politicians, community leaders and students.</p>
<p>His message was clear: startup communities can be built in towns that are 50,000 and larger. Although size does not matter, community attitudes and startup density definitely matters.</p>
<p>We talk a lot in Australia about our entrepreneurial ecosystems. We map them and analyse their strengths and weaknesses. Our analyses are clinical and data driven: numbers of companies that are started, numbers of co-location spaces available, amount of venture money invested each year.</p>
<p>After listening to Brad for a week, it’s clear that isn’t enough. Australia is still far too “arms-length” from the process of starting and growing companies. We need more people to be willing to wade in and fully participate in the process. Starting, and more importantly, growing a company is not clean, tidy, or easy. It’s not enough to be able to describe and diagnose. We need to get much more personally engaged with our Australian startups.</p>
<p>Over the last few years, we have gotten better at encouraging people to “give it a go” and start a new business. But we still have a long way to go to provide the support they need to become a high-growth company: knowledge, mentoring, access to money, markets and customers. And we’re totally missing a big part of the picture: showing entrepreneurs how to fail gracefully, then supporting them when they try to do it again.</p>
<p>In short, we need to build startup communities, not just startup ecosystems.</p>
<p>Brad outlined a number of essential elements to a vibrant startup community:</p>
<ul>
<li><p>people willing to start companies, as well as mentor and support the entrepreneurs who try, fail and try again</p></li>
<li><p>community leaders with a 20-year perspective who focus on building a culture where trying, risking, failing and helping CEOs succeed is the norm</p></li>
<li><p>people willing to set aside self-interest and focus on giving (ideas, time, advice, money) without the expectation of an immediate return</p></li>
<li><p>people who welcome outsiders and value diversity – of sex, ethnicity, perspectives, cultures, knowledge and experiences.</p></li>
</ul>
<p>We need to adjust our attitudes and shift our expectations about how many startups actually succeed, what valuations to expect, how quickly they will grow, and how much support they will need. Very few of the world’s great entrepreneurs figured it out on their first “go”; it usually took them several failures and pivots to get it right.</p>
<p>Children do not grow into adults overnight, and not all become rocket scientists. Every investment cannot be a success – and we can’t wait to invest until we are sure it will be. </p>
<p>At one point, Brad had made US$25,000 angel investments in 75 startup companies and he doubled down on several of them. Did he lose money? Yes – he lost money on most of them. But the money he made on the few far surpassed the total amount he had invested in them all. Many of the entrepreneurs who failed the first time started another company, and he invested in them the second time – figuring they were much smarter about the startup process this time than when he made his initial investment. In his words: “you’d be an idiot not to back them” the second time around.</p>
<p>Unfortunately, there is no startup simulator where entrepreneurs can practice and experience all the things that can go wrong. So we all need to support them in their journey. </p>
<p>The stronger the startup community, the more likely it is to have companies that have grown and scaled who can help other companies understand how to grow and scale. We need to ensure our startups have access to tools, knowledge and frameworks to help them understand what is happening. </p>
<p>We must encourage experienced CEOs to “wade in”, mentor, and share their experiences in starting, growing and exiting companies. We need to educate those who invest in venture capital funds, as well as VCs and angel investors to have more realistic expectations about time frames for ROI. And if we build these kinds of supportive communities, then the startup density will increase, the numbers of successful companies will increase, jobs will increase, investors will do well, and Australia will thrive.</p><img src="https://counter.theconversation.com/content/65324/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Professor Jana Matthews , ANZ Chair in Business Growth and Director of the UniSA Centre for Business Growth, has received funding from ANZ and the South Australian government to teach CEOs/MDs and executives how to grow their companies.</span></em></p>Australia is still far too ‘arms-length’ from the process of starting and growing companies.Jana Matthews, ANZ Chair in Business Growth, Director, Centre for Business Growth, University of South AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/618532016-07-01T02:01:51Z2016-07-01T02:01:51ZBrexit harms startups but it may not be fatal<p>As the market turbulence starts to subside after Brexit, startups are worried that the UK’s exit from the European Union might put access to venture capital and private equity at risk. Despite the <a href="http://startups.co.uk/uk-accelerators-lead-europe-for-investment-and-start-up-creation/">UK ranking highly</a> for startup acceleration, startups are already <a href="http://www.wsj.com/articles/europes-startups-reassess-britain-after-brexit-1466950104">reported</a> to looking elsewhere. </p>
<p>The UK does have some advantages for startups, including largely effective regulatory agencies and relatively modern contract and commercial law. The UK also has well-functioning financial markets and access to the EU single market (enabling free movement of labour). </p>
<p>Brexit has jeopardised access to this single market, though it hasn’t undermined many of the attractive legal and financial reasons for startups to operate in the UK. Ultimately, Brexit’s impact on startups will depend largely on how the UK structures future immigration laws, what trade deals it strikes, and how the UK responds to potentially aggressive regulatory competition designed to attract startups. </p>
<h2>Access to funding</h2>
<p>One possibility from Brexit is that venture capital and private equity funds in the
UK will find it more difficult to access capital to give to startups. These funds receive capital from investors, which they then in turn invest in portfolio companies (startups). </p>
<p>The European Investment Fund (EIF) in particular, which provides a lot of funding for venture capital (<a href="http://www.cnbc.com/2016/06/24/brexit-uk-tech-start-ups-mull-uncertain-future.html">between 30 to 50% in Europe</a>), which funnels into startups, may look to scale back its investments in the UK.
The EIF carries out its activities not only in the EU member states but also in the EU candidate and potential candidate countries and in the <a href="http://www.efta.int/about-efta/european-free-trade-association">European Free Trade Association Countries</a>.</p>
<p>So future capital will depend on whether, and to what extent, the UK can seek to become a European Free Trade Association country. At present, the uncertainty surrounding funding would deter venture capitalists from planning future funds in the UK if a viable, and well-funded, alternative exists elsewhere. </p>
<p>In fact, investors of any description tend to dislike uncertainty. Greater uncertainty generally implies greater risk (and a higher cost of capital), which reduces the present value of future cash flows. </p>
<p>Until the UK and EU finalise negotiations, UK funds’ portfolio companies in Europe (or that rely on Europe) will carry greater cash flow risk, in turn reducing funds’ valuations and affecting <a href="http://www.investopedia.com/terms/l/limitedpartnership.asp">limited partnerships’</a> willingness to invest. </p>
<p>Another factor influencing investing in startups is the devaluation of the pound. For US-based investors, a decline in the pound reduces the value of their investment in home-currency terms. This essentially forces down their potential returns. </p>
<p>To some extent, after the pound stabilizes, this issue will moderate. However, following the referendum, predicting currency movements adds an additional layer of uncertainty. </p>
<h2>Startup employees</h2>
<p>Previously, the UK has had the advantage of free movement of workers within the EU. This enables startups to easily attract workers from other EU countries, who in turn would be confident that they could live and work in the UK for as long as they needed. </p>
<p>The <a href="http://ftalphaville.ft.com/2016/06/24/2167482/london-fintech-decelerator-of-the-world/">concern</a> is that difficulty immigrating to the UK might reduce the number of workers startups can access. This is largely premised on the UK imposing onerous immigration rules that would prevent skilled labour moving to the UK. The UK need not do so. Indeed, the UK could allow free immigration from EU countries after Brexit, even if other EU countries do not reciprocate. </p>
<p>Given that the UK has not yet stipulated the precise system (but that it <a href="http://www.migrationobservatory.ox.ac.uk/commentary/what-would-uk-immigration-policy-look-after-brexit">might resemble</a> Australia’s immigration system, which emphasises skilled immigration), it is not clear how much of an issue this will be in reality. </p>
<h2>Regulatory competition from other markets</h2>
<p>One issue is that after losing access to the single market, the UK might be more susceptible to regulatory competition from other markets. Specifically, other EU nations <a href="https://www.cbinsights.com/blog/brexit-winners-losers-venture-capital-tech/">could attempt</a> to attract startups by offering comparatively lower taxes or more favourable corporate regulations.</p>
<p>This option has been available for some time but startups haven’t all fled the UK. This implies that when the UK had access to the single market, it had other advantages over its EU competitors. These could include its legal system, financial sector, and financial markets. </p>
<p>This is because the UK has consistently scored highly in terms of <a href="http://www.doingbusiness.org/data/exploretopics/enforcing-contracts#close">judicial quality</a>, and the <a href="http://worldjusticeproject.org/rule-law-around-world">rule of law</a>. Indeed, compared with the most commonly mentioned rivals, Ireland and Switzerland, the UK also scores highly in relation to <a href="http://www.doingbusiness.org/data/exploretopics/enforcing-contracts#close">contract enforcement</a>. </p>
<p>The UK could also mitigate any such concerns with more research and development, tax, and startup incentives of its own. Indeed, currently, UK startups receive significantly <a href="https://www.theguardian.com/technology/2014/jul/23/angel-investors-government-grants-dominate-british-tech-investment-venture-capital">more funding from the government</a> than do their counterparts in the US. </p>
<p>The UK also has a reasonably well developed set of <a href="https://www.gov.uk/government/collections/venture-capital-schemes">rules and regulations</a> surrounding the establishment, and funding, of venture capital funds and a system of <a href="https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief">research and development tax credits</a>. While the UK could improve incentives for startups, it is incorrect to liken the UK to other generous countries (e.g., Ireland). </p>
<p>Brexit could also mean the regulations for startups become fractured between the EU and UK, adding regulatory hurdles, particularly for financial technology (fintech) startups. However fintech startups comprise a relatively small segment of the startup field in terms of both number of deals and value of deals (see charts below). </p>
<p>According to data on all venture capital deals in the UK between 2010 and 2015, fintech deals are barely 10% the size of all other venture capital-backed deals. The below graphs illustrate this trend using data from Preqin on the number and value of venture capital (VC) deals in the Fintech sector as compared to other sectors (this graph relies on Preqin’s data and Preqin’s classificaiton of the portfolio company’s location and primary industry). Fintech investments are still important, but a reduction in fintech deals will not precipitate a collapse of the UK’s startup industry. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/128904/original/image-20160630-30649-7kt4sm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128904/original/image-20160630-30649-7kt4sm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=437&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128904/original/image-20160630-30649-7kt4sm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=437&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128904/original/image-20160630-30649-7kt4sm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=437&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128904/original/image-20160630-30649-7kt4sm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=549&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128904/original/image-20160630-30649-7kt4sm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=549&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128904/original/image-20160630-30649-7kt4sm.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=549&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Number of VC deals: Fintech deals versus non-fintech deals.</span>
<span class="attribution"><span class="source">Preqin</span></span>
</figcaption>
</figure>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/128905/original/image-20160630-30627-o3utl2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/128905/original/image-20160630-30627-o3utl2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=437&fit=crop&dpr=1 600w, https://images.theconversation.com/files/128905/original/image-20160630-30627-o3utl2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=437&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/128905/original/image-20160630-30627-o3utl2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=437&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/128905/original/image-20160630-30627-o3utl2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=549&fit=crop&dpr=1 754w, https://images.theconversation.com/files/128905/original/image-20160630-30627-o3utl2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=549&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/128905/original/image-20160630-30627-o3utl2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=549&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Value of VC deals: Fintech deals versus Non-Fintech deals.</span>
<span class="attribution"><span class="source">Preqin</span></span>
</figcaption>
</figure>
<h2>Export markets</h2>
<p>Perhaps of significant concern is the <a href="https://theconversation.com/how-would-post-brexit-trade-deals-actually-work-55168">impact of Brexit</a> on the ability of UK companies to export goods and services in the EU. An advantage of the common market has been that UK-based companies could access the EU with minimal trade barriers.</p>
<p>Leaving the EU will jeopardise such trade advantages. According to <a href="http://openeurope.org.uk/today/blog/how-would-key-export-sectors-fare-under-brexit/">Open Europe</a>, the impact would vary across sector, but is likely to most adversely affect financial services. </p>
<p>Trade barriers would affect startups much as they would affect established companies. Brexit could incentivize companies to move to other EU countries if the UK does not conclude an adequate trade deal with the EU and/or with other countries that provide significant market opportunities.</p>
<h2>Are the risks overstated?</h2>
<p>Individually, Brexit presents some issues that are problematic, but not decisively fatal. During an initial period of funding uncertainty owing to currency fluctuations and regulatory uncertainty, a capital outflow is possible. </p>
<p>At present, the main contenders to attract startups from the UK are other EU countries. Non-EU countries could be attractive, but would not have access to the EU’s single market, so might not convey an advantage over operating in the UK. The main EU candidates are countries with attractive regulations and/or low taxes. <a href="http://qz.com/717626/after-brexit-the-race-is-on-to-replace-london-as-europes-startup-capital/">Ireland</a>, for example, is one such contender. </p>
<p>The long term impact of Brexit, and whether startups move to other markets, will depend on several factors: whether the UK can conclude adequate trade deals with the EU and other non-EU countries, how it structures immigration law, and how it responds to regulatory competition from (primarily) EU-based countries. The UK would have been better off staying in the EU than leaving and being vulnerable to these concerns. </p>
<p>In this space, there is no clear benefit to being outside the EU. However, that does not mean the UK will see an exodus of startups and investors.</p>
<p>However, the UK has the opportunity to enhance its immigration and capital laws to encourage, and maintain, a vibrant startup scene: the impact of Brexit on startups will ultimately depend on how the UK reshapes its regulatory landscape.</p><img src="https://counter.theconversation.com/content/61853/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner receives funding from the Australian Research Council Grant DP140103039. </span></em></p>Brexit’s presents some problems for startups in labour, trade and regulation but its not all bad.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/608512016-06-20T20:14:41Z2016-06-20T20:14:41ZSeven ways to tell whether a private equity-backed IPO should be avoided<figure><img src="https://images.theconversation.com/files/127240/original/image-20160620-9559-15bbqnn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Private equity IPOs can over-perform for investors.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Private equity-backed IPOs (Initial Public Offerings) have come under significant scrutiny following several high-profile failures: but are these representative or merely anomalous blights on an otherwise well-performing sector? </p>
<p>Last week, the proposed private-equity backed listing of <a href="http://www.afr.com/brand/chanticleer/asx-blocks-guvera-initial-public-offering-20160617-gpls0i">Guvera music was blocked</a> by the ASX following concerns raised by the Australian Shareholders Association over its business model and valuation based on earnings.</p>
<p>Guvera were looking to raise $100 million in an IPO that valued the business at more than $1.3 billion, despite the fact that it lost $81 million last financial year on revenue of just $1.2 million. The move by the ASX follows Guvera re-issuing its prospectus after scrutiny from the Australian Securities and Investment Commission (ASIC).</p>
<p>Another notorious PE-backed IPO was the 2012 float of Dick Smith, backed by Anchorage Capital. It ended in significant losses for initial investors and was dubbed by Forager Funds Management analyst Matt Ryan as <a href="https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-private-equity-heist-of-all-time/">“one of the great heists of all time”</a>. </p>
<p>The high-profile the IPO of Myer, backed by TPG Capital, also performed poorly: Myer listed at <a href="http://www.theaustralian.com.au/archive/news/myer-initial-public-offering-prices-at-410-a-share/story-e6frg90f-1225792461360">$4.10 per share</a>, fell to <a href="http://www.smh.com.au/business/myer-shares-slump-on-debut-20091102-hset.html">$3.75 per share</a> on the first day of trade, and fell to $1.20 per share by the end of 2015. </p>
<p>However, several other PE-backed IPOs have performed strongly between 2013 and 2015, including <a href="http://www.avcal.com.au/documents/item/1177">Aconex, Ooh! Media and Mantra group</a>. This raises the question of whether the average PE-backed IPO underperformance and what factors might investors look out for. </p>
<h2>Do PE-backed IPOs necessarily underperform?</h2>
<p>So should investors make a rule to avoid PE-backed IPOs in general? In fact, there is little evidence that PE-backed or VC-backed IPOs underperform for investors. In Australia, from 1994 to 2005, the difference between VC/PE backed IPOs and other IPOs is <a href="http://dx.doi.org/10.4337/9781781955376.00030">not statistically significant</a>. </p>
<p>The Australian Venture Capital Association Limited (AVCAL) in conjunction with Rothschild reports that while non-PE backed IPOs did perform better in 2015 than did PE backed ones, PE-backed IPOs <a href="http://www.avcal.com.au/documents/item/1177">outperformed from 2013-2015</a>. AVCAL argues that “PE-backed IPOs strongly outperform non-PE backed IPOs after the first year of listing”, with PE-backed IPOs outperforming non-PE backed IPOs by 23% during that one year after listing. </p>
<p>Similarly, <a href="http://www2.deloitte.com/au/en/pages/finance/articles/deloitte-2016-ipo-report.html">Deloitte</a> argues that “the performance of private equity backed listings suggests results are far more positive than market sentiment reflects” and that $1 invested in each PE-backed IPO since the beginning of 2013 would yield an average return of 48% by the end of 2015.</p>
<p>Using the set of ASX listings for at least A$100 million reported by AVCAL (and their classification of whether a firm is PE-backed), we can look at the average value of $1 invested in each of the PE-backed IPOs versus $1 invested in each of the non-PE backed IPOs. </p>
<p>When doing so, to avoid the possibility of outlying PE-backed firms experiencing super-positive returns and this biasing the results, the daily return is winsorized (limiting of extreme values) and any return over 100% is excluded (this adjustment actually biases in favor of the non-PE backed IPOs). </p>
<p>The below graph, which is consistent with that produced in the AVCAL report, demonstrates that PE-backed IPOs outperform their non-PE backed counterparts. A similar trend appears over longer two-year and three-year time horizons (though, more recent IPOs will not yet have had the opportunity to accrue such a lengthy return history). </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/126882/original/image-20160616-19909-xqz0br.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/126882/original/image-20160616-19909-xqz0br.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=437&fit=crop&dpr=1 600w, https://images.theconversation.com/files/126882/original/image-20160616-19909-xqz0br.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=437&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/126882/original/image-20160616-19909-xqz0br.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=437&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/126882/original/image-20160616-19909-xqz0br.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=549&fit=crop&dpr=1 754w, https://images.theconversation.com/files/126882/original/image-20160616-19909-xqz0br.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=549&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/126882/original/image-20160616-19909-xqz0br.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=549&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Average value of $1 invested after an IPO in PE-backed and non-PE backed companies in the sample.</span>
</figcaption>
</figure>
<p>The findings its wrong to suggest PE-backed IPOs do not underperform on average - while there are some instances of underperformance, the average PE-backed IPO actually performs strongly.</p>
<h2>Seven factors investors should consider</h2>
<p>This suggests that PE-backed IPOs do not necessarily underperform. But clearly, not all PE-backed IPOs will outperform either. So here are seven factors associated with post-IPO performance investors should look for: </p>
<ol>
<li><p><strong>Length of investment.</strong> The length of the PE-fund’s involvement with the company will help to indicate if the PE fund actually contributed to the company. In several poorly performing PE-backed IPOs (such as Myer and Dick Smith) the PE fund had invested for only one to two years. When at least part of that time is also spent preparing the company for listing, this would likely be insufficient time to fully transform the company. Clearly, the time required to improve the company will depend on its complexity, but a typical situation would often call for several years of PE-investment prior to IPO. </p></li>
<li><p><strong>Prior litigations.</strong> Companies backed by VC and PE funds that have been sued recently (or for whom their portfolio companies have been sued) warrant further scrutiny. Funds that have been sued have <a href="http://dx.doi.org/10.1111/j.1540-6261.2012.01785.x">difficulty attracting future funding</a> and if investors are reticent to invest in the fund itself, it could imply beliefs about how the fund might manage companies it lists on the market. </p></li>
<li><p><strong>The backer’s portfolio size.</strong> VC and PE funds that are <a href="http://dx.doi.org/10.1093/rof/rfr011">larger</a> and invest in <a href="http://dx.doi.org/10.1017/S0022109015000113">more portfolio companies</a> tend to perform worse because they spread themselves too thinly across portfolio companies, suggesting that their portfolio companies my perform worse. </p></li>
<li><p><strong>Distance between the company and its backers.</strong> The <a href="http://dx.doi.org/10.1016/j.jbusres.2012.04.016">geographic distance</a> between the PE (or VC) fund and the portfolio company could be a concern. For example, an overseas based fund might face <a href="http://dx.doi.org/10.1016/j.jcorpfin.2013.01.003">greater barriers to a successful outcome</a>. </p></li>
<li><p><strong>Number of backers.</strong> A company with more interested pre-IPO investors is likely to have greater growth prospects and has more scope for the disparate investors to pool their expertise to aid the company. However, there are diminishing returns to having more backers, with each additional supporter likely to have less scope to incrementally benefit the company. </p></li>
<li><p><strong>Geographic diversification of the backers.</strong> To an extent, a backer who has supported more companies in <a href="http://dx.doi.org/10.1017/S0022109013000501">multiple industries and multiple regions</a> can have gained a breadth of experience and connections with which to impart the portfolio company. There are limits, with excess diversification potentially causing the fund to spread its attention too widely. The fund’s record would help to indicate whether such diversification has benefited the fund’s investments previously. </p></li>
<li><p><strong>PE fund’s continued involvement in the company.</strong> It is generally a positive signal if the PE fund that continues involvement in the form of board positions or ownership stakes (exceeding the minimum time, or amount, legally required). </p></li>
</ol>
<p>Essentially, while investors should always examine each IPO on its merits, there is no reason to avoid PE-backed IPOs per se.</p><img src="https://counter.theconversation.com/content/60851/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner receives funding from the Australian Research Council Grant DP140103039</span></em></p>Private equity-backed floats may not deserve the bad reputation they have.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/582152016-06-09T00:34:59Z2016-06-09T00:34:59ZCorporate venture capital can pay, but only if you get the structure right<figure><img src="https://images.theconversation.com/files/120458/original/image-20160428-30976-tpyytq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Large firms are setting up venture capital funds to help silo good ideas.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>Large established firms increasingly rely on external sources for innovation. One way these firms are seeking to foster innovative activity is via corporate venture capital programs. </p>
<p>According to the National Venture Capital Association (NVCA), established firms invested more than US$4 billion in venture businesses in 2014, representing more than 10% of all venture capital investments in the US during the year.</p>
<p>There’s a variety of different corporate venture capital structures and practices, reflecting in part the diverse objectives of corporate investors, which often go beyond financial returns. For instance, companies like IBM and Cisco have used their venture capital programs to scout for possible M&A opportunities. </p>
<p>Established firms also use them to supplement internal R&D departments, exposing them to new technologies and ideas that complement future product development efforts. For others, venture capital programs can be a way to engage with and monitor new, disruptive products or technologies that could potentially pose a threat to their existing businesses.</p>
<p>The dual objectives of corporate venture capital programs – strategic and financial – offer more structuring options than are needed for independent venture firms. If you are thinking about starting a venture capital program at your company, it’s important to choose a structure that will align with your firm’s priorities.</p>
<p>We recently completed a <a href="https://www.researchgate.net/publication/284278650_Creating_Values_through_Corporate_Venture_Capital_Programs_The_Choice_between_Internal_and_External_Fund_Structures">research study</a> exploring the trade-offs between setting up a corporate venture capital program internally vs. externally, as an independent unit outside the firm. We also looked at how different organisational and legal structures impact personnel policies and investment practices, which can ultimately facilitate corporate objectives.</p>
<p>Based on what we learned from our in-depth interviews with investors and investees in the US, Europe and Asia, here are some of the key things firms should think about when establishing a venture capital program.</p>
<h2>Internal vs. external</h2>
<p>In general, internal units, where the corporations invest off their own balance sheets, are more conducive to strategic investments that support the existing core business of the corporate sponsor. However they are often slower in decision making and subject to greater fluctuation in strategic direction and resource endowments, depending on the corporate sponsor’s financial health. </p>
<p>External units can be more agile in decision making and are more nimble and autonomous for exploring investments into new business areas or innovations that are potentially disruptive to the core business. One implication of this difference is that external units may be better suited for early stage investments where relevance to the core is sometimes unclear and there is uncertainty about the strategy and direction of the startup. They also tend to attract experienced investment managers and deliver both strong financial returns and strategic benefits to the corporate sponsor.</p>
<h2>Consider strategic goals</h2>
<p>Internal units are better when near term strategic goals are clear and require strategic investments to further these interests or where the external environment is unfavourable and the need for tight control of investment activity is paramount. In such cases, strategic considerations might override financial ones. </p>
<p>On the other hand, when there is less current strategic overlap between the investor and investee, measuring the outcome of the corporate venture capital program using financial gains might be more appropriate. This is more easily done through an external unit.</p>
<h2>Leveraging synergies</h2>
<p>Focusing solely on financial objectives makes it very difficult for corporate venture capital units to compete against the more experienced internal VC firms that offer their managers greater incentives. The most successful corporate venture capital programs are those that can take advantage of the existing resources of their corporate sponsor as a key differentiator. Looking closely at opportunities for technology transfer between corporate sponsors and investees could possibly create value for both parties.</p>
<h2>Developing an ecosystem</h2>
<p>When used together with other tools (such as in-house R&D,M&As, strategic alliances), corporate venture capital programs can be excellent for developing an ecosystem. This enables the creation of proprietary partner networks or value chains, without the burden of integrating partners into the existing operations of the corporate sponsor. The sponsor can then retain influence through minority equity ownership. For example, Google, Motorola and Apple have used venture capital programs to help establish an ecosystem around their wireless and web activities.</p>
<p>The corporate venture capital model is still developing and less mature than the internal venture capital model. It took internal VC firms decades to establish their reputation and know-how in nurturing startups. </p>
<p>At the same time, an increasing number of corporate venture capital programs have moved from internal to external units in recent years, making it premature to draw definite conclusions on whether external units outperform internal ones. As new entrants typically adopt established industry norms, it will likely take many years for newly established corporate venture capital programs to determine the best organisational structure.</p>
<p><em>This article was co-authored by Paul Asel, Managing Director of Nokia Growth Partners.</em></p><img src="https://counter.theconversation.com/content/58215/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Corporations that set up venture capital funds must choose wisely between internal or external fund structures.S. Ramakrishna Velamuri, Professor of Entrepreneurship, China Europe International Business SchoolHaemin Dennis Park, Assistant Professor of Management, Drexel UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/514912015-12-01T05:46:46Z2015-12-01T05:46:46ZPolitics podcast: Bill Ferris on innovation<p>The newly appointed chair of Innovation Australia, Bill Ferris, talks about his early experiences investing in start-ups in the 1970s, the need for Australia to bring its ideas and inventions to market, and the way to tackle a business culture that fears failure.</p><img src="https://counter.theconversation.com/content/51491/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Bill Ferris talks about the need for Australia to bring its ideas and inventions to market, and the way to tackle a business culture that fears failure.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/487522015-10-14T19:30:24Z2015-10-14T19:30:24ZThere can only be one Silicon Valley, so let’s try something else<figure><img src="https://images.theconversation.com/files/97698/original/image-20151008-9679-d5khy0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We just don't have what they have.</span> <span class="attribution"><span class="source">The DEMO Conference/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>The world only needs one Silicon Valley. The evidence? Firstly, Silicon Valley doesn’t just serve the US, it is a magnet for entrepreneurs and risk capital from all over the world. </p>
<p>Secondly, as American entrepreneur and academic Vivek Wadwha has <a href="http://bit.ly/1Vnl65f">said</a>:</p>
<blockquote>
<p>“Hundreds of regions all over the world collectively spent tens of billions of dollars trying to build their versions of Silicon Valley. I don’t know of a single success.”</p>
</blockquote>
<p>We have never had a sparkling startup tech sector in Australia. At times the sector has shown a little self-promoted promise with the odd eccentric and moderate success, but that is all. Most people with the required expertise recognise this fact. One trip to Silicon Valley convinces them that over there they have something that we do not.</p>
<p>And yet our local media mostly runs tech sector stories that are <a href="http://www.afr.com/it-pro/how-atlassians-scott-farquhar-and-mike-cannonbrookes-became-software-titans-20140724-jy3tq">blazingly upbeat</a>. I think this is because the tech sector stories are run as “feel good” stories.</p>
<p>For example, a two-man startup might be promoted as the next Uber and then it will quietly disappear never to be heard of again. Your local medical researcher doing some exploratory effort into determining the cause of Alzheimer’s will win a Eureka prize and the public may think there is a cure and a large Australian medical corporation on the way. It just about never happens.</p>
<p>The experts that can see past the positive media coverage seem to all have a pet hypothesis as to the root cause of the “problem” that haunts the Australian tech sector. Variably they will say, not enough skilled <a href="http://thenewdaily.com.au/money/2014/01/21/aussies-lack-entrepreneurial-spirit/">entrepreneurs</a>, or <a href="http://www.ausinnovation.org/publications/vision-2020/advancing-australia/the-brutal-truth-about-innovation.html">not enough quality innovation</a>, or not enough <a href="http://www.abc.net.au/news/2015-06-08/australia-losing-start-up-entrepreneurs-to-us-entrepreneur-says/6529656">investment capital</a>, or not enough qualified <a href="https://bluenotes.anz.com/posts/2015/07/australias-venture-capital-drought/">venture capitalists</a>, and the list goes on.</p>
<p>Some of them then start promoting to the government their hypothesised solutions; for example (working through the example list above) creating university courses to up-skill entrepreneurs, or by government investing more into university R&D to create more innovation, or by removing barriers to crowdfunded venture funds, or by giving venture capital at friendly terms to Australian venture capitalists returning from Silicon Valley (and the list goes on).</p>
<p>There is a pattern here.</p>
<p>Firstly the experts announce there is a problem, the lack of a vibrant tech sector in Australia, without ever defining exactly what a vibrant tech sector would look like. It doesn’t make much sense to start looking for a solution to a problem until the problem has been properly defined.</p>
<p>Secondly, the experts hypothesise a solution without ever realising that their idea is just a hypothesis. That is, it could be wrong and it needs to be stress-tested before being implemented. Since different people have different hypotheses you’d think they’d catch on. But no, everyone just thinks that everyone else is wrong.</p>
<p>Thirdly, most of the experts look at the problem in “kinetic” terms. That is, they believe the lack of vibrancy in the Australian tech sector is caused by certain missing or under-performing elements of a tech food-chain (which comprises of innovation, entrepreneurs, skilled tech employees, risk capital, venture capital managers, investment bankers, corporate acquirers and a tech friendly public stock markets). Fix the underperforming element they say, and then magically all would be OK, despite the evidence to the contrary from past efforts.</p>
<p>The problem is actually “thermodynamic” in nature. By this I mean that there is no actual <em>need</em> in our economy for a tech sector to exist.</p>
<p>The commodities sectors do not need one; they have their own R&D channels. The oligarchies in the services sector don’t need one; they buy their technology from overseas vendors. The educational exporters don’t need one; they only innovate to reduce costs and improve their marketing. And the list goes on.</p>
<h2>Identifying a need</h2>
<p>Basically there is no major corporate sector in Australia that requires a steady stream of new platform technologies served up by startups. They are doing just fine as they are. Without this high level driving force no amount of fiddling with the tech startup food chain will do any good.</p>
<p>Until one of the Australian corporate sectors buys into the idea of buying startups and attacking global markets with the so-acquired platform technologies we will never have a thriving tech startup environment.</p>
<p>To make matters worse, any startups that do succeed pretty quickly <a href="http://www.brw.com.au/p/entrepreneurs/atlassian_leads_charge_of_start_1ePmbPnLaVNDftzQjQHn0K">disappear overseas</a> to serve larger markets with cheaper capital, leaving the local environment devoid of their potentially positive influence. This fact underlies the need for local corporate adoption of successful startup technologies.</p>
<p>Silicon Valley was built on defence, semiconductor and computer technology companies in the post-war era. After decades of slow developments the VC sector really took off in the 90s (in terms of capital deployed) when three things occurred. </p>
<p>Firstly, the corporate sector in the USA saw Silicon Valley as a reliable and viable source of new platform technologies. The opportunity they saw was to cut much of their under-performing corporate R&D expenses and use those funds to acquire start-ups or listed tech companies; this turned out to be a more cost-efficient way to innovate. </p>
<p>Secondly, Silicon Valley caught the first internet boom and saw an opportunity to seize a once-in-a-millennium IPO market for new global technology companies. </p>
<p>Finally, the 1978 ERISA amendments allowed US pension funds to “prudently” invest in early stage unlisted companies. Before then the VC industry was much smaller and limited by capital supply; these amendments had fixed this issue by the 90s.</p>
<p>As you might imagine, not much of this story aligns to anything we might conjure up in Australia. If we want to have a vibrant high tech startup sector then we need to come up with our own need to have one rather than attempt to copy and compete with Silicon Valley.</p>
<h2>Identifying a solution</h2>
<p>If we accept this premise then we have two choices:</p>
<ol>
<li><p>Create a new export-orientated corporate sector from scratch that needs the technology platforms served up by local startups, or</p></li>
<li><p>Encourage one of our existing corporate sectors to start buying the new technology platforms and start exporting.</p></li>
</ol>
<p>Which of these has the highest chance of success?</p>
<p>For the former to succeed we would have to miraculously create both a new export-orientated corporate sector and a thriving startup community. In the 90s many in the Australian startup community used to look to Nokia as the template for success. “Create enough startups” they said “and you will eventually get a Nokia”. They argued that Nokia had created a new technology-export sector for Finland and it also supported a local technology startup community. Well after 35 years of trying we haven’t got a Nokia, and neither does Finland for that matter.</p>
<p>My money is on using <a href="http://bit.ly/1WuDNq8">government incentives</a> to encourage our plumpish corporates in the services sector to morph from being domestic oligarchies that use third-party off-the-shelf technology platforms to global vendors of disintermediating technology platforms in their own sector. They have the capital to execute this plan, if not the management or culture. It won’t be easy but it has a higher chance of success than many of the other options commonly proposed.</p><img src="https://counter.theconversation.com/content/48752/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian Maxwell is an investor in high-tech start-ups. Many of these companies have received government financial incentives.</span></em></p>We have never had a sparkling startup tech sector in Australia, but that doesn’t mean we should try and emulate Silicon Valley.Ian Maxwell, Visiting Professor, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/418822015-05-18T23:59:28Z2015-05-18T23:59:28ZSignificant Investor Visa misses the mark on VC and innovation<figure><img src="https://images.theconversation.com/files/81780/original/image-20150515-8743-11iijma.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">With new sources of venture capital funding Australia can boost innovation and its economy.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>The review of the <a href="https://www.immi.gov.au/faqs/Pages/What-is-the-significant-investor-visa.aspx">Significant Investor Visa (SIV)</a> program was pitched by the government as an initiative to spur innovation in Australia. An outline of the revised SIV scheme was released last week, with full details yet to be released. While the review will lead to some welcome improvements, overall the release represents a lost opportunity to significantly impact Australia’s innovative capacity. </p>
<p>After more than a decade of strong economic growth, powered in large part by extraordinary investment from the mining sector, Australia’s national accounts figures continue to disappoint. The case for government commitment to effective stimulus for innovation in Australia has never been more compelling.</p>
<p>While Australia’s innovation ranking has improved in the last decade, it still <a href="https://www.globalinnovationindex.org/content.aspx?page=GII-Home">lags behind</a> many of the world’s more developed economies. Australia’s innovation efficiency ratio, which measures a country’s ability capitalise on research and other innovation inputs places Australia 81st in the world - well below the global median.</p>
<p>Research has shown that small business contributes a disproportionate share of major innovations. Venture capital (VC) funds are an important source of startup funding for small business. Venture capital also <a href="https://www.businessthink.unsw.edu.au/Pages/Come-Together-How-Grants-Venture-Capital-and-Private-Equity-Lift-Innovation.aspx">supports innovation</a> by funding R&D and providing management skills to commercialise latent technologies and grow the businesses in which they invest.</p>
<p>The Canadian and Singapore governments have implemented similar programs to the SIV, aimed at boosting innovation by channelling new funding to innovative enterprises through venture capital.</p>
<p>Investment in venture capital in Australia is low compared to other developed markets. In the 2013 financial year, the <a href="http://www.ey.com/GL/en/Services/Strategic-Growth-Markets/Global-venture-capital-insights-and-trends-2014">amount of capital invested</a> by Australian venture capital firms was at its lowest level in 11 years - A$111.4 million. In the same year, the investment by venture capital firms in the US was US$334 billion, in Israel US$1.7 billion and in China, US$3.5 billion. Startup financing accounts for only 0.009% of GDP compared to 0.055% for the US and 0.3% for Israel, according to the OECD.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/81786/original/image-20150515-8749-8dh9ce.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/81786/original/image-20150515-8749-8dh9ce.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/81786/original/image-20150515-8749-8dh9ce.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/81786/original/image-20150515-8749-8dh9ce.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/81786/original/image-20150515-8749-8dh9ce.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/81786/original/image-20150515-8749-8dh9ce.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/81786/original/image-20150515-8749-8dh9ce.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Pitching to VCs is a big part of US startup culture.</span>
<span class="attribution"><span class="source">Fortune Live Media/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<h2>Visas and innovation</h2>
<p>The Significant Investor Visa program is the path to residency for international investors that commit investment funds to Australia. The concept is simple. Affluent international investors invest a minimum of A$5 million over four years in “approved” investments, after which they receive permanent residency. </p>
<p>The SIV program, introduced by the previous Labor government, has been in place since November 2012. “Approved” investments under the scheme included ultra-safe government bonds, ASIC-regulated managed funds or shares in blue-chip companies. These provide some extra liquidity to traded markets, but are of doubtful value in providing new innovation capital, or adding real value to Australia’s economy. They accounted however, for the vast majority of funds invested under the scheme. </p>
<p>Since the scheme’s introduction, investors, mostly from China, have invested more than A$4 billion. With only 124 investments made by VC funds in the 2013 financial year (AVCAL), the program review had the potential to dramatically increase the pool of venture capital for thousands of young innovative firms. Unfortunately, it has fallen short in a number of key areas.</p>
<h2>Innovation funding through the SIV</h2>
<p>Under the recently outlined changes, up to 60% or $3 million of the $5 million investment can still be invested in “other” investments which include highly liquid blue-chip investments. While government bonds have been removed from the “approved” list, shares and real property are still on the list. Although the revised program now includes a venture capital component, this represents a mere 10% or $0.5m.</p>
<p>A minimum of 30% is required to be invested in “small cap” firms, with market capitalisation up to A$500 million. There is no specific requirement that any of the “small cap” investments be in companies involved in innovative enterprises.</p>
<p>Most firms in the “small cap” category are in mining, energy, financial services or real estate. Some eligible “small caps” would be considered innovative enterprises, most would not. If the government was serious about supporting innovation, further criteria would have been applied to keep the focus on innovation capital. For example, eligible investments could have been assessed based on innovative inputs (R&D spending, employees or numbers of R&D alliances) or innovation outputs (patents, investment in innovative products and processes).</p>
<p>Similar visa schemes in Singapore and Canada do not allow blue chip share and property investments. Although their schemes have a lower total investment requirement, 100% is channelled into areas that stimulate innovation.</p>
<p>International competitiveness of the SIV has been put forward, as a reason for the relatively low venture capital requirement. Perceived competitiveness of the scheme could have been addressed by reducing the total investment required but increasing the percentage allocated to innovation capital. This would have provided a much bigger boost to innovation. </p>
<p>The government’s release contains reference to the possibility of increasing the VC component of the SIV for new applications within two years. It is hard to understand the logic of pitching the scheme so far below other leading schemes, then waiting for two years to raise the VC component to a more meaningful level. </p>
<h2>Time frame is too short</h2>
<p>The minimum investment time frame of four years remains unchanged under the revised scheme. While the review states that VC investments may set longer terms, this is not a requirement. Venture capital funds typically need an 8‐10 year investment time frame to cover: investigation and selection of suitable investments, development and growth of investee firms and execution of successful exit strategies. </p>
<p>Shorter minimum investment periods, such as the five-year minimum under Singapore’s scheme, have tended to drive the funds to provide convertible bond or mezzanine debt financing rather than equity capital. This restricts the types of firms attracting funding (young start‐ups generally don’t have the cash flow to support debt financing) and the activities funded (debt funding is not suitable for riskier, more innovative ventures). </p>
<p>To truly promote VC funding under the scheme, the government should have set the minimum investment period for the VC component to at least eight years to match a typical fund life. The period for permanent residency qualification does not need to match the investment period, so this could have been kept at four years under the SIV. Canada’s Immigrant Investor Venture Capital (IIVC) pilot program requires a 15 year commitment, with permanent residency granted when the applicant is accepted. </p>
<h2>Other design issues</h2>
<p>The recognition of mid-market Private Equity (PE) funds under the revised program is welcome, albeit under the token VC requirement. These funds invest in enterprises in the $150-200m range and their role is often misunderstood in the context of innovative business ventures. They provide growth capital to firms that have progressed beyond the startup stage. They can play a crucial role in the success of innovative firms by commercialising latent technologies and have struggled to attract capital in Australia.</p>
<p>Quality and transparency of information is another area which is lacking, in terms of designing a scheme that is capable of efficient and effective allocation of innovation capital.</p>
<p>The sensitivity of revealing financial and performance information on individual venture capital funds or firms makes it difficult for individual investors to select funds. Fund performance and investment valuations are considered confidential data and only <a href="http://www.avcal.com.au/documents/item/1010">aggregated performance</a> across the sector is publicly available.</p>
<p>The Singapore scheme uses independent third parties to evaluate eligible funds and the results are publicly available. A mechanism for fund evaluation under the SIV would help investors to make informed choices, providing more effective allocation of capital. </p>
<p>A clear framework for ongoing assessment, monitoring, and reporting is also essential to ensure compliance of participating funds and to track the allocation of funding. Such a framework could form a basis for informed revisions to the SIV investment criteria. The review outline, as with the existing scheme, contains little information on effective monitoring.</p>
<h2>Innovation is the key to our economic future</h2>
<p>As long as Australia ranks highly as a desirable place to live and raise a family, programs like the SIV provide an opportunity to attract innovation capital that we can ill afford to miss. The review released by government was another opportunity lost for Australia’s innovative capability. Properly designed, the program could have made a much more meaningful contribution to innovation in Australia.</p><img src="https://counter.theconversation.com/content/41882/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jo-Ann Suchard receives funding from the Australia Research Council and had previously received an ARC Linkage grant in conjunction with AVCAL.</span></em></p>Australia can attract much needed venture capital funding through its Significant Investor Visa system, but only if a proposed new system is designed well.Jim Smith, Associate Professor, Banking and Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/346282014-12-01T05:53:36Z2014-12-01T05:53:36ZThe private equity deals that fail to justify ‘fast buck’ strategies<figure><img src="https://images.theconversation.com/files/65876/original/image-20141130-20585-1nxcogs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Debenhams: one of several quoted companies on the private equity merry-go-round.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/karen_roe/5250619087/in/photolist-6KSz91-912Tj1-912U7Y-912UNA-7kjYGu-95YwHE-66DuKV-7iSjQx-8ZYPjF-8ZYPr8-9F5Vgi-8ZYPhX-8ZYPne-7kjYAU-7kjYZG-7kg5hR-7kg4KP-7iWcVJ-dRdshx-6nibwM-912UyQ-912TRs-8ZYNZZ-912Uj9-912TnL-8ZYN4z-8ZYNbx-912Tcy-912Ury-8ZYNq6-8ZYP9e-8ZYNUc-8ZYN8i-912U43-912Uq3-8ZYNF8-8ZYNnV-8ZYP2n-912Uam-912Uvw-8ZYMRX-912TCL-8ZYNtH-912TTo-912TgW-912TkL-912TW7-912Tw5-912TG7-912TYm">Karen Roe</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>There is an ongoing and very heated debate between the unconditional supporters of private equity and their opponents. It’s not hard to see why. On the surface, these investors can often buy fragile companies, load on debt to fund strategic change and sack workers in a bid for efficiency. It can look ruthless, but the industry claims it simply works.</p>
<p>The <a href="http://www.bvca.co.uk/">British Private Equity & Venture Capital Association</a> (BVCA), preach what they deem to be the undeniable benefits of private equity. For example, the trade lobby group wrote in 2010 that:</p>
<blockquote>
<p>Private equity investment has been demonstrated to contribute significantly to companies’ growth. Private equity backed companies outperform leading UK businesses.</p>
</blockquote>
<p>In contrast, Ed Miliband <a href="http://www.telegraph.co.uk/news/politics/ed-miliband/8791870/Labour-Party-Conference-Ed-Milibands-speech-in-full.html">in his speech</a> at the 2011 annual Labour Party conference accused private equity houses of “stripping assets for a quick buck and … [failing to represent] the values of British business.”</p>
<h2>Horses for courses</h2>
<p>To date, studies of private equity acquisitions of firms listed on the stock exchange disagree as to the effects on employment. A major issue is that the studies typically conflate very different forms of private equity acquisitions which are likely to vary significantly in terms of their impact. At the most extreme, some of this <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8683.2009.00744.x/abstract">research</a> fails to distinguish between private equity and venture capital, which typically provides equity financing to early-stage firms that are not yet listed on the stock market.</p>
<p>Such firms typically face severe difficulty raising cash to fund their growth. Banks are unwilling to lend them money given their high levels of risk and the firms cannot as yet tap into stock-market equity financing (<a href="http://www.smarta.com/blog/2013/8/dragons-den-the-five-most-successful-businesses/">and Dragon’s Den can’t or won’t fill the gap</a>). For such firms, venture capitalists not only provide the much needed money, but also frequently provide strategic and management advice, which can be crucial for the survival of the firm. In short, there is very little doubt about the benefits, including those relating to employment, of venture capital financing. </p>
<p>In contrast, private equity typically targets mature firms that are already listed on the stock market and that offer well-established products or services. In the process of the private equity acquisition, the firm’s existing shareholders are bought out – often with the use of substantial amounts of debt, the firm is taken off the stock market (it is “taken private”) and then undergoes major long-term strategic and organisational changes. Such changes would not normally have been possible had the firm kept its stock market listing given the focus on the short term of most stock market investors. </p>
<h2>Money, money, money</h2>
<p>Is is important to realise that there are three main forms of private equity acquisitions which involve very different stakeholders and which are therefore likely to have very different effects on employment. </p>
<p>The most frequent form of private equity acquisition is a <a href="http://www.director.co.uk/MAGAZINE/2014/04-April-2014/How-to-management-buyout-67_07.html">management buy-out or MBO</a>. These involve management of a company taking the firm private, with the help of private equity houses which provide the cash. However, given that the existing management stays in place and carries on running the firm, the employment effects of MBOs are typically very positive or neutral at worst. </p>
<p>However, the other two main forms of private equity acquisitions – management buy-ins (MBIs) and institutional buy-outs (IBOs) – result in a change in the management. In the case of less-frequent MBIs, a new management team buys out the existing shareholders and takes the firm private and the input of private equity houses is typically limited to the financing. In the case of IBOs, the private equity house not only provides the financing, but also the management team. You can happily make the case for the positive employment effects of MBOs. The evidence on MBIs and IBOs, however, is much more mixed (see <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8683.2011.00853.x/abstract;jsessionid=F1BF3BAEF8CCB4CF86D2CDD1711332D9.f04t02">Goergen et al. 2011</a> for an overview). </p>
<p>A new study that we’ve published in the <a href="http://www.sciencedirect.com/science/article/pii/S0014292114001020">European Economic Review</a>, sheds new light on the employment effects of UK IBOs. The study is based on 106 IBO acquisitions of UK listed firms between 1997 and 2006 (during the same period there were 139 MBOs and six MBIs). The sample included well-known companies such as <a href="http://www.churchillchina.com/">Churchill China</a> (check the bottom of your restaurant crockery), Fox’s biscuits and Goodfella’s Pizza maker <a href="http://www.2sfg.com/#">Northern Foods</a> and the high street <a href="http://www.debenhams.com/">department store Debenhams</a>. </p>
<p>We compared the IBO targets with two control samples of firms which were not acquired. The first sample was matched by size and industry while the second was matched by pre-acquisition financial performance.</p>
<p>The IBO firms were followed for up to six years before and four years after the acquisition. The findings are stark reading. The most important thing is that there is a significant decrease in employment in the year following the acquisition in the target firms of IBOs, but not in two samples of control firms that we also had. And this drop in employment is combined with a drop in wages below the market rates for the target firms. </p>
<p>The IBO companies’ median employment growth was 11% five years before acquisition, falling down to –4.80% the year after the deal (see figure 1). Figures on salary suggest a similar trend with IBO companies seeing a salary reduction from a mean of £29,460 before the IBO to £28,520 following it.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/65859/original/image-20141128-20598-o7sghw.gif?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/65859/original/image-20141128-20598-o7sghw.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/65859/original/image-20141128-20598-o7sghw.gif?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65859/original/image-20141128-20598-o7sghw.gif?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65859/original/image-20141128-20598-o7sghw.gif?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65859/original/image-20141128-20598-o7sghw.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65859/original/image-20141128-20598-o7sghw.gif?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65859/original/image-20141128-20598-o7sghw.gif?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Figure 1.</span>
</figcaption>
</figure>
<h2>Stability pact</h2>
<p>Those cynical about the industry might not be surprised by the above, but there is more. Importantly, despite what could be perceived as a much needed cull of the work force, the target firms do not experience an improvement in their profitability and productivity following the acquisition. The suggestion is clear: the increased insecurity inherent in the shedding of jobs and the downward pressure on wages outweighs any of the potential benefits from a change in management brought about by an institutional buy-out.</p>
<p>While this new study uncovers negative effects on employment of a particular type of private equity acquisitions – so called institutional buy-outs (IBOs) – it does not imply that all private equity acquisitions are bad for employment. What the results do suggest is that the debate on the effects of private equity acquisitions needs to be much more nuanced. </p>
<p>Importantly, it needs to distinguish between those types of private equity acquisitions that have undeniable positive benefits for employment – as well as the survival and competitiveness of UK businesses – and those that are likely to be mostly detrimental.</p><img src="https://counter.theconversation.com/content/34628/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marc Goergen received funding from the Nuffield Foundation to undertake parts of this project.</span></em></p><p class="fine-print"><em><span>Geoffrey Wood received funding from the Nuffield Foundation to undertake parts of this research.</span></em></p><p class="fine-print"><em><span>Noel O'Sullivan received funding from the Nuffield Foundation to undertake parts of this research.</span></em></p>There is an ongoing and very heated debate between the unconditional supporters of private equity and their opponents. It’s not hard to see why. On the surface, these investors can often buy fragile companies…Marc Goergen, Professor of Finance, Cardiff UniversityGeoffrey Wood, Professor of International Business, University of WarwickNoel O'Sullivan, Professor of Accounting, Loughborough UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/291082014-07-11T14:43:39Z2014-07-11T14:43:39ZHow Google venture capital will help Europe’s risk-taking techies<p>The announcement that Google is to set up a European version of <a href="http://www.ft.com/cms/s/0/cb19852a-0783-11e4-b1b0-00144feab7de.html">its venture capital operation</a> is welcome news. Google Ventures’ new US$100m fund for fledgling European tech firms represents a new source of the sort of risk capital which has often been in short supply on this side of the Atlantic. Startups may also be able to access Google’s impressive technology and corporate networks.</p>
<p>But what’s in it for Google? There is certainly money to be made from the right investments, though the online giant is hardly desperate for more revenue. More significant, perhaps, is the opportunity to identify new technologies which may either enhance or threaten Google’s market position. In the past year alone Google has bought DeepMind (artificial intelligence), Nest (smart homes) and Skybox (satellite imaging) among others. Nest was itself a recipient of Google Ventures funding back in 2011.</p>
<h2>What can we expect?</h2>
<p>Google is a late entrant into the European corporate venturing market. Others such as Intel Capital – the corporate venturing arm of the US chip maker – have been operating in this space for some years, combining effective investment with the opportunity to acquire a share or ownership of interesting technologies.</p>
<p>Over the years Intel has put money into a few radical technologies unrelated to its core business (such as video gaming on-demand service Metaboli) while the vast majority of investments have been closer to its current technology needs (such as digital power provider Powervation). Intel’s investments have arisen both from intelligence gathering by Intel Capital staff and on the basis of leads from Intel’s operational divisions. </p>
<p>If Google Ventures follows the same pattern in Europe we are likely to see the majority of future investments in areas closely related to Google’s core business.</p>
<h2>A welcome addition</h2>
<p>Even if there is an obvious element of self-interest behind Google’s investment, it is still good news. Particularly welcome is the statement by Google Ventures head Bill Maris that in the US the company invests in all stages of business development – from the drawing board to the finished product. If this is replicated in Europe, the biggest effects may be for early stage high-tech start-ups where funding is often most difficult. </p>
<p>This is important because the availability of risk capital – or the lack of it – changes the behaviour of young high-tech firms and their subsequent growth prospects. As a general rule, more access to capital means greater leeway to take risks and innovate.</p>
<p>Take the bio-pharmaceutical sector, for instance. Research I recently undertook with Helen Xia of Loughborough University <a href="http://enterpriseresearch.ac.uk/wp-content/uploads/2014/05/RP19-ERC-ResPap-Unpacking-Open-Innov-Xia-Roper.pdf">compared small companies in the US and Europe</a>. In the US, plentiful venture capital allowed these firms to take more risks. Early in the drug development process they were able to evaluate many possible compounds, which increased their chances of identifying new valuable drugs. </p>
<p>In Europe, where risk capital was scarcer, firms had to stick to fewer compounds, which reduced their chances of finding a golden needle in the haystack. European firms also seemed more reluctant to drop particular compounds than their US counterparts, due perhaps to a need to keep investors on board.</p>
<p>European firms were at a disadvantage here because of the lack of venture or risk capital, and what works in bio-pharma will also work in tech. Google’s investment will help by providing early stage ventures with the time and space needed to identify the most appropriate development opportunities.</p>
<h2>It’s not just the money</h2>
<p>However, the value of investments like those from Google Venture go beyond the money because they have two other advantages. First, access to Google’s technology networks and address book may help firms to effectively develop and commercialise their technologies. Second, there is a “signalling” or reputational benefit, with the link to Google acting as a validation for a new business. This can help both with accessing other funding and finding development partners. </p>
<p>Google’s fund is actually relatively small compared to other recent investment announcements. Just last month, for instance, the investment group who backed takeaway website Just Eat and addictive app Candy Crush announced a €400m tech startup fund <a href="http://techcrunch.com/2014/06/10/index-ventures-raises-new-550m-early-stage-fund-for-europe-us-israel-aims-for-the-big-league/">focused on Europe and Israel</a> – five times the size of Google’s. But taken together these investments send a broader signal that Europe’s tech clusters are maturing into centres of global significance. </p>
<p>Whether it is in London or Berlin, Europe may finally have cracked the challenge of promoting high-tech startups. But getting off the ground is one thing; world domination is quite another. Now the continent just needs to develop a business environment which enables those firms to go global.</p><img src="https://counter.theconversation.com/content/29108/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The Enterprise Research Centre is funded by the ESRC, the Department for Business Innovation and Skills, the Technology Strategy Board and the British Bankers Association. </span></em></p>The announcement that Google is to set up a European version of its venture capital operation is welcome news. Google Ventures’ new US$100m fund for fledgling European tech firms represents a new source…Stephen Roper, Professor of Enterprise and Director of the Enterprise Research Centre, Warwick Business School, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/249032014-04-22T20:05:36Z2014-04-22T20:05:36ZFree to fail: why corporates are learning to love venture capital<figure><img src="https://images.theconversation.com/files/46081/original/hv7cx85n-1397104515.jpg?ixlib=rb-1.1.0&rect=10%2C7%2C780%2C567&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Large companies are investing in venture capital in the hope of replicating some of the successes of "garage entrepreneurs" like Steve Jobs.</span> <span class="attribution"><span class="source">Flickr/Blake Patterson</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Opening a venture capital branch seems to be the new “thing” in the corporate world. While <a href="http://www.telstra.com.au/ventures/">Telstra</a> and <a href="http://www.afr.com/p/technology/westpac_makes_venture_capital_play_3lzoHOOzeewxr70xCHNGoM">Westpac</a> are the new big national players, Google is clearly ahead of the curve, with two distinct venture capital firms: the newly launched Google Capital and the five-year-old Google Ventures.</p>
<p>But why are so many companies, across a range of sectors, now running to open their own venture capital funds? And why does a company like Google, which has already delivered tremendous innovations in the past, now need to innovate “on the outside” with not one, but two, venture capital branches?</p>
<h2>How it works</h2>
<p>Venture capital has evolved as a tool to provide financing to firms in situations of extreme asymmetric information: young companies with no history, no assets and no track record, the proverbial “two kids in a garage”. </p>
<p>In this situation bank debt is not viable because the bank has no way to control how the money is spent and no collateral to fall back on. Direct access to the stock market is also out of the question because investors would not be able to judge quality and risk of the project. </p>
<p>The venture capitalist, on the other side, has industry specific know-how and can structure the financing in a way that allows them some control over the firm: in exchange for a capital injection the venture capitalist receives a portion of the equity and, usually, a seat on the board. </p>
<p>Moreover, as a common practice, the investment is usually staggered into multiple tranches, with subsequent infusions conditional on the achievement of predetermined “milestones”, such as the completion of a prototype.</p>
<h2>Incentives for innovators</h2>
<p>While venture capital is a powerful tool, there is another way for companies like Google to innovate: internal development. If the “two kids in the garage” were to work as Google employees, the company would be able to allocate capital with the best possible knowledge of the project.</p>
<p>So why use venture capital and not just develop internally? While this question hasn’t yet been directly addressed by academic research, pulling together different strands of literature can provide some useful insight.</p>
<p>A first problem is the incentive structure for the “innovator”. Disruptive innovation is highly reliant on the talent and ideas of a small number of individuals. In a startup, innovators can reap the entire value of their idea when they sell their shares. For instance, the founders of WhatsApp, Brian Acton and Jan Koum, are now worth a combined US$9.8 billion after <a href="http://newsroom.fb.com/news/2014/02/facebook-to-acquire-whatsapp/">it was acquired by Facebook</a>.</p>
<p>When the innovation is promoted within a larger company the key actors will, at best, receive stock options with a value based on the performance of the entire company, only marginally reflecting the potential value of the innovation. </p>
<p>Consider Paul Buchheit, the Google employee who developed the first Gmail prototype. While the details of his compensation are unknown, it is unlikely that it contained the full value of the <a href="http://venturebeat.com/2012/06/28/gmail-hotmail-yahoo-email-users/">world’s largest email service</a>. Buchheit later <a href="http://www.insidefacebook.com/2010/11/12/buchheit-ycombinator/">left Google</a> to join a startup incubator.</p>
<p>This situation can get even more extreme: the CIA finances the development of strategic technologies via its own venture capital fund – <a href="https://www.iqt.org/">In-Q-Tel</a>. The entrepreneurs the fund financed would know that beyond the government getting the “first bite” of their products, they’d be able to benefit from the commercial applications. This would be impossible for public employees developing the same ideas in a basement at Langley.</p>
<h2>Taking a punt</h2>
<p>Another important factor: investing in disruptive innovation means accepting a high failure rate. While precise estimates are impossible, high levels of risk for venture capital investments have long been <a href="http://faculty.chicagobooth.edu/john.cochrane/research/papers/cochrane_risk_and_return_JFE.pdf">documented</a>. Large public companies may be unwilling to accept this risk, not because of financial constraints, but because of pressure to maintain quarterly profitability. </p>
<p>A <a href="https://faculty.fuqua.duke.edu/%7Echarvey/Research/Published_Papers/P89_The_economic_implications.pdf">recent survey</a> has shown the majority of CFOs are willing to abandon valuable projects in order to meet quarterly profit expectations. Google was <a href="http://googleblog.blogspot.com.au/2011/07/more-wood-behind-fewer-arrows.html">forced to close its in-house development playground</a> Google Labs after it was <a href="http://www.ft.com/intl/cms/s/0/fbb05442-ae68-11e0-844e-00144feabdc0.html?siteedition=intl">criticised for a lack of focus</a>.</p>
<p>Other research <a href="http://www.sciencedirect.com/science/article/pii/S0304405X13001086">has shown</a> that firms whose financial statements are analysed by a large number of financial analysts tend to produce less innovation: they generate fewer patents and patents with lower impact. </p>
<p>The authors of that study concluded that “analysts exert too much pressure on managers to meet short-term goals, impeding firms’ investment in long-term innovative projects”.</p>
<p>Startups and venture capitalists do not suffer the same pressure: they are intrinsically less transparent and thus “protected” from the scrutiny of financial analysts and activist investors. </p>
<p>They are free to experiment, free to take big risks, free to fail miserably, and eventually free to come up with an idea that will shake the market.</p><img src="https://counter.theconversation.com/content/24903/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marco Navone does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Opening a venture capital branch seems to be the new “thing” in the corporate world. While Telstra and Westpac are the new big national players, Google is clearly ahead of the curve, with two distinct…Marco Navone, Senior Lecturer in Finance, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/241702014-03-13T06:18:04Z2014-03-13T06:18:04ZChina’s Nasdaq fails to get off the ground as venture capitalists look to the US<p>China’s equivalent of the Nasdaq stock exchange is failing to attract some of the country’s most innovative companies. <a href="http://www.szse.cn/main/en/ChiNext/aboutchinext/">ChiNext</a> was supposed to anchor local high-tech businesses on home soil with a secure source of funding, but foreign investors have proven to be stuck in their ways.</p>
<p>It has been evident that foreign venture capital investors <a href="http://www.reuters.com/article/2014/02/10/us-china-ipos-usa-idUSBREA191XE20140210">prefer to take their firms public on US exchanges</a>. Chinese internet and technology giants such as Renren (the Facebook of China), Jinko Solar (a major solar product manufacturer), and iSoftStone (a leading IT services provider) are among those that blanked ChiNext and went for an initial public offering (IPO) in the US. </p>
<p>ChiNext was launched with high hopes as a Nasdaq-style board of the Shenzhen Stock Exchange in late 2009. Since then it has been an active market for IPOs, attracting more than 350 Chinese firms. However, it is clear which companies ChiNext is failing to attract. And the impact is clear too: Chinese tech firms which listed on ChiNext in the two and a half years after launch had average total assets of less than USD$50 million. That compares to Chinese tech firms listing in New York during the same period which had average assets of about USD$140 million.</p>
<p><a href="http://dx.doi.org/10.1016/j.irfa.2014.02.010">Our recent study</a> shows that only a tiny proportion of the firms that went public on ChiNext had foreign venture capital backing. By contrast, the vast majority of Chinese technology firms that went public in the US since the launch of ChiNext were backed by foreign venture capital firms.</p>
<p>So why is it then that ChiNext and Chinese stock exchanges in general are not attractive venues of exit for foreign firms?</p>
<h2>Red tape, red lines</h2>
<p>At any time, there is a long queue of firms waiting to go public in China. When the China Securities Regulatory Commission (the main regulator of securities exchanges in China) <a href="http://english.cntv.cn/program/bizasia/20120203/113712.shtml">published the full list of IPO applicants</a> for the first time in early 2012, the list contained more than 500 firms, around 200 of which were waiting for the CSRC’s approval to go public on ChiNext.</p>
<p>The approval system is heavily regulated and is not free from political bias. There is anecdotal evidence that firms backed by domestic venture capitalists are favoured over those backed by their foreign counterparts. <a href="http://www.sciencedirect.com/science/article/pii/S0883902602000794">One study</a> notes that foreign-backed firms, as a result, may have no choice other than finding strategic buyers or conducting “a listing on a foreign exchange such as the Nasdaq”. <a href="http://dx.doi.org/10.1016/j.respol.2005.04.002">Another study</a> mentions that if the government is worried about foreign dominance in the venture capital industry it will continue to act in a way that is “supportive of local venture capital vis-a-vis foreign firms”.</p>
<p>For a long time, entrepreneurial Chinese firms struggled to go public in China due to strict listing requirements imposed by the main boards of Shanghai and Shenzhen Stock Exchanges. This has hindered the development of the venture capital industry as well, since firms who make initial investments struggle to sell out through a public listing in China. The launch of the Small and Medium Enterprise Board of Shenzhen Stock Exchange in 2004 was a step in the right direction, but the board did not fully meet the needs of the venture capital industry. </p>
<p>When ChiNext was launched in late 2009, it offered less stringent listing requirements and promised more as a venue for venture capital firms to cash out their investments. However, there is one crucial listing requirement at ChiNext which helps to dissuade foreign investors: it requires firms to be profitable before they apply for a listing. In the US, this is not the case for many technology firms, and it is understandable that foreign venture capitalists head for the US rather than waiting for their companies to move into the black.</p>
<h2>Liquidity tries</h2>
<p>It is a fairly basic part of venture capital strategy that they want to sell their stakes in a liquid market to make sure they get the full value of those shares. And it has been an equally established fact that US exchanges offer better liquidity than their relatively youthful Chinese peers. It is also fair to say that Chinese exchanges, and especially ChiNext as a new market, are subject to high levels of speculation from traders, leading to unnerving volatility in prices for foreign investors.</p>
<p>Both regulators and exchanges in China are aware that Chinese retail investors are relatively inexperienced in trading and they can easily fall for speculation and exhibit herding behaviour. Many of such investors buy up shares during an IPO, not to become long-term investors, but to earn a quick profit when the shares start trading.</p>
<p>Of course, there are reform efforts ongoing to improve the application process and increase transparency. It is also fair to say that as Chinese stock markets become more mature and liquid, foreign investors will have more confidence in taking their firms public in China. Easing the listing requirement on profitability would be a crucial step.</p>
<p>The fact remains though, that some of the country’s most prestigious high-tech firms prefer to go public outside China, and that is unsettling for the local high-tech industry. Even though these firms begin their life cycles as start ups in China, once they receive foreign capital, the chances are that they will end up going public in the US at which time they will bid farewell to Chinese capital markets. The risk is that this route becomes habit-forming, making it harder for Chinese investors to invest in successful Chinese companies, and harder still to foster a genuinely Chinese high-tech industry with firms born, grown – and listed – in China.</p><img src="https://counter.theconversation.com/content/24170/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ufuk Gucbilmez does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>China’s equivalent of the Nasdaq stock exchange is failing to attract some of the country’s most innovative companies. ChiNext was supposed to anchor local high-tech businesses on home soil with a secure…Ufuk Gucbilmez, Lecturer in Accounting & Finance, The University of EdinburghLicensed as Creative Commons – attribution, no derivatives.