By Bernard Lunn
The VC Fund model has a strange paradox. It breeds scalable global giants while remaining defiantly small and local. There are two reasons for this:
- You need to be local at the early stage. When a company reaches the growth stage it is easier to manage your investment in a portfolio company via an occasional Board Meeting and lots of metrics. In the early days you need to be physically close to the team to a) read body language to see how stressed or energized the team is and b) spot problems where a founder is going off the rails in some way (such as being dishonest, drug problems or depression) and c) be able to give advice informally just in time during learning moments outside the formal constraints of a Board Meeting.
- The Weekly Partners meeting does not scale. The weekly meeting, with all Partners discussing and approving a deal works well. You get lots of experienced eyes on a deal. However that does not scale beyond say 10 partners (when it starts to get political) and it is too hard to manage a Partnership with global conference calls where the global offices feel left out and may have to dial in at strange hours to accommodate the “head office” (and then people start to resent the Head Office and factions emerge).
This is starting to change. This post describes how the Silicon Valley financing model is finally starting to globalize properly.
This is a Good News and Bad News story. It is Good News is for entrepreneurs based outside Silicon Valley who get greater financing choice. It is Bad News for local funds and accelerators who get more competition.
There have been two experiments in VC globalization:
A. Some Accelerators have gone global. For example:
- 500 Startups. You cannot extrapolate much from this example as it depends on the energy and personality of Dave McClure. I get tired just watching his travel schedule from the comfort of my office. They did ramp this up a notch with their recent Nordics Fund. This is the carve out model (see below) applied to an accelerator (which makes sense as accelerators morph into becoming full scale VC Funds).
- Sponsored Accelerators. This is being used within Fintech. For example the Barclays Accelerator powered by Techstars is now in both London and New York. This global viewpoint is not surprising because Techstars originated from Boulder Colorado rather than Silicon Valley and so they had to obey the Steve Jobs instruction to “think different” from the start. Another Sponsored Accelerator (with multiple sponsors) is StartupBootCamp (SBC) which is now in London, Berlin, Amsterdam, Hong Kong, Istanbul. SBC is scaling this model. They are in multiple verticals (Fintech, Insurance, IOT, Health and many more) and I can envisage them in all major and minor innovation hubs.
B. The Carve Out model. This is how the Tier 1 VC Funds have traditionally gone global. They carve out a % of Fund for a country. For example, they raise a $1 billion Fund and carve out 10% ($100m) for Country X. This model has not always worked well because the Weekly Partners Meeting does not scale (for reasons outlined above). When this does not work out there is either a buyout and rebranding (e.g. Benchmark UK becomes Balderton Capital) or the Fund sells a whole country portfolio to another institution (e.g. Canaan Partners selling their India portfolio to JP Morgan).
Sequoia Capital is innovating on the path to globalization. I saw this on a video interview with Sir Michael Moritz (which I did not bookmark and cannot find, so may have got it a bit wrong and happy to correct if necessary) where he said that they have allowed the team in China to make investment decisions without referring those decisions back to Silicon Valley. That decision took courage because it is relinquishing control. I do not know if Sequoia Capital is doing this in any other country. Perhaps China is a special case. Perhaps it is an experiment and if it works well they will apply it to other markets. Sir Michael Moritz has certainly been vocal on how important China is in the global economy. His point is really to point out the obvious and to point out that too many people are in denial about the obvious. China is driving change in so many areas and within Fintech this was the subject of a session I was part of at SIBOS this year.
I think that China is the lead example, but it is broader than that. I refer now to the “countries formerly known as emerging” because there are so many that are innovating and the old labels (third world, developing, emerging, growth, BRIC etc) no longer fit that well. The one market that I know from personal experience is India and I have written about how the movement to mobile wallets in India epitomizes a more general trend that I call “first the Rest then the West” (that innovation now starts in the countries formerly known as emerging and then moves to the old world of America and Europe, which is a reversal of the historical flow of innovation). That means that Silicon Valley has to globalize in order to stay relevant – and it looks like Silicon Valley is finally starting to globalize properly.
Silicon Valley open sourced its core IP. Countless blogs, books and online course now teach how to create and scale a startup. Obviously Silicon Valley has a far greater % of people who understand how to do this, but the manual is available to anybody from anywhere. That means that Silicon Valley has to globalize in order to stay relevant – and it looks like Silicon Valley is finally starting to globalize properly.
Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.