Venture Capital beyond Silicon Valley

By Beatrice Luison and Stefan Larsen

Venture capital and entrepreneurial hubs like Silicon Valley have been the birthplace of some of the world’s most famous and valuable firms. However, with the access to funding that Silicon Valley startups have, bidding competition and publicity frenzy drive the valuations of these companies higher, putting pressure on the returns of later stage VC investors. There are places beyond Silicon Valley that breed opportunities for Venture Capital firms, and some of the most entrepreneurially teeming areas are in places one wouldn’t first think of, and they may very well become the next chief centers for innovation.

Israel 

One of these places is Israel, which in less than 40 years has become the tech hub of the Middle East. The “Silicon Wadi” with its 1500 startups is second in importance only to Silicon Valley, with foreign venture capital activity taking the lion’s share of money invested and made. Established US based companies such as Google and Microsoft even decided to set research centers in the area to leverage the local human capital. VC forms a pillar of Israeli financial markets, where 68% of capital raised by private firms in 2018 was for funding startups.

Israel’s attractiveness to VC firms was no accident, but rather a concerted effort by the government to support the innovators they knew they had with funding from all possible sources. Initially government grants and partnership programmes with other nations were the main means by which firms acquired capital. Eventually in the 90s, a set of initiatives, Yozma and Inbal, were implemented which risk-subsidised private VC investors, making Israel an exceptionally attractive place to invest and allowing for the development of an established investor base of foreign firms.

Although Israel are also pioneers in stem cell therapeutics and MedTech, startup activity right now is dominated by software companies, specifically those focused on cyber-security. CyberArk is one of the most notable exits, now a $2.5 billion NASDAQ listed company, and it had Erel Margalit, a politician and the founder of Jerusalem Venture Partners, among its backers, as well as OurCrowd, Magma Venture Partners, Pitango Venture Capital and Vertex Ventures Israel.

India

India is another region that has had a burgeoning Venture Capital scene that can be traced back to the 1990s, when Manmohan Singh deregulated the economy and allowed unrestricted investment by foreigners into previously protected industries. Fruits of the deregulation became marked during the dotcom boom, when a lot of VC money flowed into India-based companies that provide the well-known call-center services for foreign companies.

However, the initial conditions for VC were difficult to develop, because even though funding for new businesses was abundant, it was traditionally provided as collateral-backed money on a project-financing basis. This made it difficult for new entrepreneurs spearheading highly uncertain but potentially profitable ventures to raise money to achieve their entrepreneurial dreams. Nonetheless, already by 2006, US based VC firms had committed billions of dollars to investments in India, yielding profitable exits like Warburg Pincus’ from Bharti Televentures at $1.5 billion. Now firms like Sequoia, IDG, Bessemer and Accel all form an established investor base there, with branches specifically dedicated to local investment. Even though VC has become much more prominent, seed investment is still somewhat difficult to come by, since these foreign firms are generally interested in later stage Indian ventures.

The sectors of interest to VC are varied, as growth in local markets for software, healthcare, energy and retail (among many others) are all growing rapidly. The VC success of Ola Cabs which is Uber’s Indian rival valued at $5 billion; Flipkart, which was an ecommerce company valued at $16 billion in an acquisition by Walmart; MakeMyTrip, now NASDAQ listed at $2.5 billion that provides travel planning services and iD Fresh Food all demonstrate how India is a entrepreneurial powerhouse providing ample opportunity for VC returns in many markets.

Texas

Despite traditional Texan businesses being oriented around oil, cities like Dallas and Austin are becoming attractive alternatives to Silicon Valley in the US for both VC firms and entrepreneurs. In Dallas, already home to companies like Texas Instruments and AT&T, non-profits like the Dallas Entrepreneur Center are trying to encourage startup activity by connecting business owners with angel and VC investors, consolidating the micro-business landscape to create firms that can match these old titans. Additionally, favorable state laws that minimize tax, licensing and zoning burdens on businesses create an additional impulse that lowers barriers for entrepreneurial activity. A lot of these firms are focused on technology, creating high-profile exits like Trailblazer Capital’s from Nitero in a sale to chip-maker AMD, and allowing for VC firms like David Sym-Smith’s Mobility Ventures to develop almost exclusively tech portfolios.

Even Peter Thiel, one of the most famous names in entrepreneurship, decided to move his VC firm, Mithril Capital, to Austin sometime next year. Some of the reasons cited were unsurprisingly related to the lower tax and cost burdens, but also reasons relating to more diversity of thought in the pool of entrepreneurs and employees, which calls back to some of the issues raised by James Damore regarding Silicon Valley tech companies.

The Post-Industrial South

One of the most outstanding US communities of entrepreneurs and investors is Greenville, South Carolina. Despite being located in a traditionally textile and tobacco producing area and hit hard by the shift of earning-power from the resource-endowed to city professionals, it has a level of startup activity that is similar to even Boston with 5 young businesses per 1000 people. Some of these businesses even include high-tech healthcare firms like Zylo Therapuetics, Kiyatech and ChartSpan Medical Technologies which have all recently raised many millions of dollars in funding from out-of-state VC firms as well as local bodies such as VentureSouth, a network of hundreds of angel investors.

Other areas in the post-industrial south are also seeing gentrification and business revival, with Raleigh-based Panaceutics Inc. expanding production labs across the area into Danville, VA with the help of grants and other incentives from state government. Even a $20 billion Japan-based company, Kyocera Corp, have opened up facilities in Danville due to access to talented Virginia Tech graduates as well as to critical customers.

The factors that have fostered startup activity in these areas include staples like lax laws and taxes, as well as comprehensive programmes by either non-profit, private or state bodies designed to promote innovation and entrepreneurship. In some cases, these programmes have had state funding dedicated to them for decades, and states have even moved in to subsidize specific ventures originating in the local communities. Gentrification has also been a major factor in improving the business environment by facilitating consumerism and by improving the conditions in local real-estate markets. These areas that have been somewhat neglected in the wake of groundbreaking innovation elsewhere and commoditisation of industrial labor are seeing a resurgence in entrepreneurial activity that is supported by business-oriented cultural and legal institutions.

China

VC firms started operating in China as early as in the 1980s, but it was only in the early 2000s when it became a VC hotbed, with the number of firms growing from one or two to about 600 at the end of 2005. This was due in part to economic reforms like the opening of a public market for SMEs allowing for IPO exits and unrestricting foreign investment in some previously protected industries, and also in part due to a burgeoning and massive middle class previously starved of consumerist luxuries. Much like India, there was lacking supply for consumer goods but its market was so large that becoming a world-class company wouldn’t even require operating abroad.

For these reasons, as well as the high appetite for strategic M&A from firms like Tencent, local VC firms and foreign VC firms like Sequoia and IDG (among many others) operating in China continue to reap good returns from exits. The only remaining impediments to even better results is the government and the looming threat of industry regulation, as seen with the recently implemented licensing requirements for making video games affecting companies like Bilibili and Tencent. However, it seems that generally the government is continuing to be supportive of VC activity, demonstrated by the recent initiative in Shanghai to construct a Venture Capital town, a cluster of ventures that billions of dollars of funds have already been aimed at.

A testament to the level of VC activity in China is the rise in numbers of local VC firms as billionaire entrepreneurs behind firms like Baidu, Alibaba and Tencent, go on to nurture new businesses through their own funds. Ctrip.com’s Neil Shen now runs Sequoia’s China branch with a $6 billion portfolio, and Jack Ma’s Yunfeng Capital were behind the $54 billion IPO of Xiaomi earlier this year. Generally the sectors of interest to VC firms looking at and operating in China have been tech firms, ranging from ecommerce platforms such as Vipshop, now a $3.8 billion NASDAQ listed company, to machine vision technology companies like DeepGlint, which is in the process of raising million in funding.

Conclusion

Although Silicon Valley is justifiably recognised, and these startup environments are still developing, there are clearly ample opportunities for profitable exits in environments beyond Silicon Valley, and the VC firms that have braved into these new, entrepreneurially rich markets have billions of dollars in profits that stand as testament. Perhaps, as more VC firms follow in search of high returns, we will see one of these areas emerge as a new leading hotbed of entrepreneurial activity, spawning companies that will impact our lives as much as the Californian tech giants have.

 

Editor: Stefan Larsen

Authors: Beatrice Luison, Stefan Larsen

Sources: 

https://www.calcalistech.com/ctech/articles/0,7340,L-3724379,00.html

https://www.researchgate.net/publication/326173096_THE_GROWTH_OF_VENTURE_CAPITAL_IN_INDIA

https://pitchbook.com/news/articles/the-top-13-vc-investors-in-israeli-startups

https://www.haaretz.com/israel-news/business/is-this-the-end-of-israeli-venture-capital-as-we-know-it-1.6269254

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https://inc42.com/resources/top-47-active-venture-capital-firms-india-startups/

http://www.dallascitynews.net/entrepreneurs-thrive-in-dallas

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https://www.crunchbase.com/organization/nitero#section-locked-marketplace

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https://www.technologyreview.com/s/543401/chinas-latest-growth-market-venture-capital/

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