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More help needed for venture capitalism
What do Facebook, Google, Apple and Microsoft all have in common ? Aside from being some of the most successful companies in the world, they are able to lay claim to their dominant positions as a result of sourcing venture capital. But, according to local experts in the field, there seems to be little hope for entrepreneurs here who need venture capital to develop their ideas into the next big billion-dollar company.
At the Caribbean Centre for Money and Finance’s Third Caribbean Business Executive seminar, Central Bank Governor Jwala Rambarran said, “the industry has collapsed” and when expressed as a percentage of GDP, VC fundraising in the Caribbean was “negligible” or at “zero”.
First Citizens Investment Services general manager Jason Julien presented data at the seminar showing that venture capital and private equity funds had sharply declined in T&T from 2008. The data showed that before 2008, there were as many as 15 venture capital and personal equity funds. In an interview with the Sunday BG, Julien said, “Today, you are lucky to even find three.”
For those unfamiliar with venture capital, the local Venture Capital Incentive Programme (VCIP) defines it as “a form of long-term investment, also known as patient or equity capital, that is typically invested in businesses with potential for growth and profitability. In addition to capital, the investor brings hands on managerial expertise to the investee companies.” Established by government in 1994, the VCIP began operating in 1996.
The US is the leading country in terms of venture capital activity. There, venture capitalists invest billions in the ideas of entrepreneurs, seeking high returns on their investment yearly. According to the MoneyTree Report by PricewaterhouseCoopers and the US National Venture Capital Association, in the US, investments by venture capitalists amounted to US$29.4 billion on 3,995 deals in 2013; an increase of 7 per cent in dollar value and 4 per cent in deal numbers from 2012.
Culture part of the decline
Julien referenced a number of factors when talking about the decline of venture capital in T&T. He told the Sunday BG that between 1997 and 2007, venture capital funds faced the challenge of putting the capital to work. He said at the time there was available capital to invest, but not enough projects to invest in. “When people invest their money they want to see returns. No one wants to invest in a fund that is not being used, in that case, the return is zero. There just weren’t sufficient deals for funds make sense.”
Julien also said that people in T&T have to understand how to analyse risk and the different industries that are managed under venture capital funds. Speaking about local investors, he said, “people have to get comfortable with losing money if they take risks.” He said US culture is different in that they understand taking risk for greater returns and are willing to do so. He said it was this kind of thinking that fosters entrepreneurship, whereas, our culture does not.
Continuing the comparison, Julien made reference to the role government grants played in the development of the algorithm that later became commercially known as Google. With the aid of a grant received through the National Science Foundation’s Digital Library Initiative, two Standford University students, Larry Page and Sergey Brin—the founders of Google—were able to create the mathematical process that revolutionised the World Wide Web.
Julien said: “Most university graduates in T&T prefer to work for someone else rather than go into business for themselves. In our society, we are taught to go to school, finish and work.” He also questioned the role of financial institutions in T&T that would have turned away the Google entrepreneurs, in the interest of protecting customer’s money from what they might have deemed a risky investment.
“If the creators of Google had approached a T&T bank for the capital to start, do you think they would have received it for what was only a mathematical calculation?” Julien also said T&T has a culture that discourages failure. Comparing again to the US, the First Citizens Investment Services executive said in such entrepreneurial cultures a person could go bankrupt and still be considered a success. But T&T attaches stigma to failure. Julien said, the perception is, “if you fail in our society, you are more or less damned.”
He thinks, though, the younger generation might be differently motivated on seeing the success of entrepreneurs in the US. “They are seeing the value in brilliant ideas and may be more bold, but how do we feed that boldness and find a way to nurture them to succeed?”
In response to his own question, he suggested that improvement of the venture capital ecosystem was necessary if it was to be an option for entrepreneurs. He thought T&T’s current economic climate was right, but that the country lacked the proper infrastructure to encourage entrepreneurship. He also said there needed to be public and private sector involvement. The Government’s greatest contribution, he said, would be in policy development to support the VC industry.
He also called for more support for entrepreneurs and fund managers who better understood the industries being managed in order to make the best of investments.
Not just about financing
CEO OF CME Consulting and one-time administrator of the VCIP, Judith Mark, concurred with Julien’s assessment of the situation. She said there were not enough deals to keep the industry vibrant between 1997 and 2007. “The decline in venture capital activity in T&T reflects a similar picture to what occurred in the wider Caribbean, particularly Caricom member states. This may be attributed to the performance of a large percentage of funds.”
She continued, “T&T does not create the number of innovative, value-creating projects which mirror the profile of the ideal investment for venture capital activity. Venture capital thrives in an environment where there is an adequate flow of suitable projects and an adequate availability of risk and venture capital. Both are available in limited quantities in T&T.”
Mark said that in the case of the state-initiated VCIP, “the model was not conducive given that the other essential components of the venture capital ecosystem were either non-existent or not sufficiently developed.” The absence of key components of the venture capital ecosystem affected all funds whether state or private sector, created or managed.
In speaking about the number of projects the VCIP helped develop when she was at the helm, Mark said that while many entrepreneurs came forward for assistance, their focus was, more often than not, on getting financial assistance. She told the Sunday BG: “If by develop we mean access to venture capital, it was less than 100. If assistance also included the pre-funding or pre-investment activities required in preparing businesses to access capital, then the number increased.”
She said: “With respect to actual investment made, it was less than 20 for all registered VC companies. The problem is most entrepreneurs within the SME sector believe that financial capital is the solution, be it at start up or expansion stage, but may be reluctant to allow the venture capital or private equity provider or manager the necessary advisory or partnering role required for success.”
Unlike Julien, however, Mark thinks that T&T has a strong entrepreneurial culture, and pointed to evidence on the Global Entrepreneurship Index. She also said one can attest to the number of new ventures through observation. “The issue is sustainability of these ventures so that we see an increase in net starts,” she concluded. On the 2013 Global Entrepreneurship and Development Index (GEDI), T&T ranks 70-74 on a list of 118 countries. The US is ranked number 1 and Chad ranked lowest at 118.
According to the Global Entrepreneurship and Development Institute: “The GEDI captures the contextual feature of entrepreneurship by focusing on entrepreneurial attitudes, entrepreneurial activity and entrepreneurial aspirations.”
She however believes that entrepreneurs should not rely on VC funding as the local industry is near dormant. She said, “even if thriving, not every entrepreneur should use VC even if available. There must be alignment and fit between financial instrument and project profile.” Even though T&T’s economy is experiencing high liquidity, Mark does not see investors moving toward investing in venture capital funds.
She said: “High liquidity is indicative of the absence of suitable options to give higher returns and as such a fund may be welcome. However, the structure, management and oversight of the fund must be acceptable to the targeted investors.” She said she does not think T&T investors will put money into a venture capital fund based on the theory of taking above-average risk and get significant or above-average returns.
“The reality is the prerequisites for a vibrant venture capital market must be there. An investment in a company in which there is limited option to scale-up or access markets beyond TT or the region will not entice investors.” Mark believes that Trinbagonians are brave when coming to traditional risk situations, since these are what were available in abundance.
“There are very few innovative, high-value projects although, in some quarters, some attention is given to this in order to stimulate national growth. There is no or little incentive to invest in innovative projects. If significant profits can be made by low-value ventures that do not create additional wealth, then that is where the funds will flow to.”
Part of the problem here, she believed, was that “bank financing is the first port of call and given that their mandate is to safeguard depositors funds, then projects which fall outside the ‘established safe zone’ will not attract capital from this source.” So what role does government play in developing the VC industry? Like Julien, Mark thinks the Government’s main role is in policy development.
“The Government’s role is to be a facilitator, providing measures for the enabling environment and making it easier for new and existing entrepreneurs to conduct business. This must be reflected in policy initiatives to drive the innovative capacity of citizens and to allow businesses to grow and access their market potential. Legislation and unnecessary reporting requirements are not the answer to entrepreneurial activity.”
With reporting by Kwame Joseph