Venture Capital Industry Lessons from Scandinavia

Ireland's €1billion venture capital (VC) ecosystem finds itself at a crucial point; large funding resources have slowed down, threatening the flow of seed capital. While the amount of money invested in the first quarter of 2017 is about €240 million, the financial taps could dry up going forward. Start-ups at their infancy stand to be the most affected if this becomes a reality.

For a long time, Ireland's venture capital scene has relied on three significant investors: Enterprise Ireland, the European Investment Fund (EIF), and the Ireland Strategic Investment Fund (ISIF). After these three, the private sector has been a reliable partner, as have banks and a number of pension funds. With a small investor base, the looming prospect of reduced venture capital funds is creating uncertainty among various stakeholders.

Around the world, ensuring the steady flow of capital is vital to the development of venture capital. It's an aspect that individual investors such as Henner Diekmann keep an eye on at all times. Mr. Diekmann works for Diekmann Associates, a law firm that offers guidance on various aspects of company structures and setups.

What to Do?

Ireland's answer to the potential drain on venture capital for its start-ups may lie in looking at the more established VC markets of Scandinavia, particularly in Denmark and Sweden. In the former, a fund of funds was established for investors, where they were offered the option of investing their resources in a bond-type asset. For investors, half the money went into the bond while the other half went into venture capital. Investors reaped about 12 percent returns on their investment in the first round, more than enough incentive to participate in the next round.

Sweden, on the other hand, is one of the most prolific technology hubs in the world, boosted largely by a thriving venture capital industry. The country, which has a population of about 10 million, has adopted a global mindset when it comes to tech and innovation. It is associated with some of the biggest brands in the technology industry, including the likes of Spotify, Minecraft maker Mojang (acquired by Microsoft), Skype (also acquired by Microsoft) and Candy Crush parent company King, among others.

This esteemed list of globally-recognised brands, which also includes others such as IKEA and H&M, didn’t happen by chance. In the 1990s, the Swedish government invested heavily in technology infrastructure, allowing its citizens to enter the digital economy early. Not only did this equip people with the knowledge and tools to become a nation of disruptors, but it also laid the foundation for entrepreneurial collaboration.

The Swedish approach to venture capital funding is to encourage small initial public offers (IPOs) that are aimed at attracting investors at a retail level. The results have made a difference, enough to attract Irish interest. Despite the small population, Sweden has had 51 stock market flotations in 2017, ten times more than what Ireland has accomplished. The equity culture in Sweden has successfully attracted retail markets, allowing more than €1.1 billion to be raised in Swedish IPOs. As an incentive to investors, the authorities have established a tax arrangement that substitutes capital gains tax with an annual fee of 0.25 percent for amounts reaching up to €15,000.

Additional Factors

Other than a slowdown in venture capital funding, two other factors could impact the Irish VC ecosystem in a big way. The first is based on whether the United States chooses to change its tax laws, which would affect Irish investors looking to put their money in companies that have US revenues. The second is Brexit, which could impact the European Investment Fund's decision to keep investing in the United Kingdom.

Leadership Programs Helping Female Leaders Thrive in India's Start-up Scene

While women represent a significant portion of the workforce in India, only a small number of them have progressed to leadership positions in business. According to data from the National Sample Survey Organization, 14 percent of businesses in the country have women at the helm, meaning the breakthrough on women-led businesses has some way to go.

It's not just in business where female representation is an issue, as even the start-up industry is suffering with low numbers – women account for just 9 percent of Indian start-up founders. Gender discrimination and cultural biases are some of the reasons attributed to the low levels of female leadership in the country. To combat this, some in the entrepreneurial community have started leadership initiatives aimed at encouraging the development of female entrepreneurs.

Given that women are a potential source of talent that can help take India's entrepreneurial scene to the next level, such initiatives are vital and welcome. Henner Diekmann, a partner at Diekmann Associates (based in Southern Africa), is among many investors who are encouraged by the growth of leadership development programs aimed at advancing women.

The following are some of the initiatives established to lead this cause.

SAHA Fund

SAHA Fund believes in discovering and developing the untapped potential in women and making them part of the top leadership in economic development. It sets out to invest in companies that employ a majority of women in its workforce or create a product aimed at women, with many of these falling within sectors such as mobile, analytics, healthcare, food technology, social media, and technology.

Raising capital is one of the biggest challenges faced by women, a hurdle that has not been helped by the investor perception that women lack the ambition to lead start-ups. It's a notion that SAHA Fund works hard to dispel, with good results. Fitternity, a fitness aggregator supported by SAHA, has raised millions of dollars in funding rounds, attracted around 300,000 users and reporting annual sales of about $3 million. Founder Neha Motwani credits SAHA Fund for putting the start-up in a position to succeed.

Through its own research, SAHA Fund has found that large companies with more women in leadership positions perform relatively better financially, posting 41 percent higher returns investment (ROI), and 56 percent better operating results. In the technology sector, women-led private Technology companies achieve 35 percent higher ROI and 56 percent higher revenue when the venture is backed.

SonderConnect

SonderConnect is a non-profit trust that's headed by four women who believe in nurturing women-led start-ups in India. Their goal is to grow these ventures into highly successful companies and they've focused on giving this group of women founders the knowledge and tools to succeed. SonderConnect aims to play a significant role in building up female entrepreneurs, with the goal of eventually raising up a generation of successful female entrepreneurs.

One of the areas that SonderConnect is working to improve is getting women to highlight their accomplishments – both personal and professional. Investors tend to be more open to founders who are confident and sincere in their ambitions. SonderConnect facilitates workshops and mentorship programs to help start-ups fine-tune their pitches. Facilitators include legal experts, marketing professionals, and executives from some of the biggest brands in the country.

Anita Borg Institute (ABI)

The Anita Borg Institute (AnitaB.org) is an initiative that seeks to include more women in the growth of India's technology start-up scene. The organisation connects and guides women in technology, supporting them through a number of programs that help them learn and develop their potential. 

Venture Capital Deals in Asia Lead the Way

An increase in venture capital activity in Asia topped a record in the second quarter of 2017, with a total of $47 billion (£35 billion) in deals announced. The record sums spent are representative of what financial experts and investors such as Henner Diekmann have seen in 2017: almost half of global venture capital deal value is in Asia. Mr. Diekmann is a partner at Diekmann Associates, a law firm that offers guidance and advice on company setups, corporate structures and contracts in Southern Africa.

Since 2013, Asia's rise in venture capital dealmaking has been on a consistent rise, with the majority of the deals occurring in Greater China. According to a report by Preqin Private Equity & Venture Capital, transactions in China accounted for $28 billion (£21 billion) of the total deal value, with India coming second ($6 billion/£4.5 billion). Within the southeast region of the continent, a large proportion of deals happened in Singapore, while the largest proportion of deal value happened in Indonesia.

Over the years, Asia has seen a steady rise in the number and value of venture capitals deals. Activity in Greater China has largely spurred this growth, as some companies have become prominent entities on the same level as firms backed by venture capital in the United States. This growth speaks to the rise of several economies in the region, which provides an avenue for investment opportunities by venture capital firms.

As much as the dealmaking is good news for Asia's economic growth, the excitement has not been matched in other areas of the venture capital industry, notably the exit and fundraising sectors. Slow fundraising activity means less capital goes to venture capital managers for acquisitions, while slow movement in exits means these managers are unable to dissociate from their holdings. For Asia's VC industry to thrive, it's going to require robust activity on all fronts.

An Inside Look

Approximately 200 funds are raising capital for investment opportunities in the region, with the China State-Owned Venture Investment Fund among them. The fund has a target of about $29 billion (£21.97 billion), and if successful, could become the largest venture capital fund ever. Activity in Greater China is beginning to rival that of Silicon Valley in the US and could enable the country to become the centre of venture capital activity. The Chinese government's encouragement of entrepreneurship by providing financing is helping reinforce this message.

In early 2017, 183 funds with a focus on Asia had a target of raising $56 billion (£42 billion) in venture capital, nearly triple the amount funds had aimed for at the beginning of 2016.

China's Role

China's prominent role in the growth of venture capital dealmaking in Asia is not by accident. In 2016, investments from venture capital firms reached more than $31 billion (£23 billion) as investors eyed an increasing number of innovative ideas. Venture capitalists located in Beijing invested more than half of the total amount, with the popular sectors being artificial intelligence, big data, and robotics. There was also a continued interest in healthcare, fintech (financial technology) and education.

This strong performance in venture capital investment was driven by a number of big-deals, including Alibaba's affiliate Ant Financial funding round that reached $4.5 billion (£3.39 billion) in April 2016. Additionally, provincial governments got in on the action, with many provinces starting to invest in companies. The Hubei provincial government, for example, armed itself with $81 billion (£60 billion) to invest in venture capital companies such as CBC Capital and Sequoia Capital LLP.

Across the country, local governments are keen to invest as they seek to modernise the economy and spur the development of sectors such as biotechnology, fintech and online solutions, to reduce the dependence on heavy industries for jobs creation and growth.

Projecting the Future of Venture Capital

Predicting the future is a notoriously difficult thing, but in many instances it is well worth the effort. However, if it's venture capital investing you're hoping to get the jump on… be ready for some whiplash. The sheer number of VC investments tops billions of dollars globally, money that's helping entrepreneurs and start-ups gain the financial support they require to make a difference. 

Trying to determine the fate of the venture capital industry is important to both insiders and business leaders outside the VC community. For years, venture capital has been a major force in business and technical innovation. Investment activity by the VC community gives outsiders a glimpse of key trends in various sectors, helping executives track the developments that may eventually disrupt established processes. For example, the flow of venture capital dollars into computing technology in the 1980s made up a big chunk of all venture investments in that decade, indicating the next wave of development was to come through computing advancement. 

The venture capital industry has progressed since then. Henner Diekmann, a partner at Diekmann Associates, specialises in international trade and foreign direct investment in Southern Africa. He's worked on numerous investments in the region, and he has good knowledge of the workings of venture capital. To investors such as him, the future of the VC industry is an important aspect to consider.

It's Going Global

The VC industry looks to become globalised. It is slowly evolving from an industry centred around happenings in Silicon Valley, with more hubs opening up around the world. The growth prospects of emerging markets are helping drive this evolution.

Countries such as India and China are emerging as attractive hubs for venture capital. Together, they are overtaking Europe, with China being home to almost half of all unicorns (start-up companies valued at over one billion dollars). Even though VC activity remains high in the United States, other cities across the globe are starting to emerge as serious contenders, with emerging markets offering the most potential. 

One result of going global on VC firms will be the decentralisation of decision-making activities. More professionals will have the ability to make investment decisions. In the long run, however, these changes are not expected to have a big impact on the hierarchical structures of VC firms.

The globalisation of venture capital has benefits not just for the entrepreneurs, but the communities around them as well. Once entrepreneurs in Africa and India start building global enterprises – in the mould of Alibaba – expect to see the impact of innovation increase, producing positive results to the host communities and the world at large. 

More Specialization

Most venture capital firms will prefer to go the specialist route. Essentially, they'll seek to focus their investments on a particular industry (or set of sectors) such as pharmaceutical, energy, or big data. This specialisation will also trickle down to the stage of investment (early or late state funding), or geographical region. 

Increased Competition

From institutional investors to angel firms and micro-VC investors, traditional venture capital players have more groups to keep an eye out for. Favourable changes in funding regulations may serve to attract new sources of interest. What increased competition does is provide entrepreneurs with more leverage during negotiations, leading to investment deals that favour start-ups.

Competition will also spur more VC firms to consolidate efforts to gain a greater share of capital. The projected trend is that VCs will pool efforts, resulting in fewer, more diverse firms competing for deals. 

Knowledge for the Future

For many investors, the future can only get better if the present is taken care of. The journey towards a successful start-up has its challenges and excitements, but far more important as a venture capital firm is laying a foundation in the present to set up the potential for future gains.

This can happen in the following ways:

• Encourage more ownership. If investors are going to be part of the venture for long, they have to show commitment. This is true especially in hard times, when individual investors need to show confidence in the long-term success of the VC firm.
• Demand more than social proof. Finding the true gems requires being more diligent in learning about ideas and the startups behind them. Media coverage on the "next big thing" can be deceptive.
• Stay patient. It's common to find VC firms concerned with finding the next unicorn, but you have to be patient and invest for the right reasons. Businesses that believe in the idea work out a way to give enough to keep the start-up going, while also keeping an eye on progress.
• Let founders be founders. Too many venture capitalists dabble in the startup's leadership process, extending themselves into matters they have no business in. It leads to wasted hours, and staff trying to please the financiers rather than focusing on building a product that meets customers' needs.

Green Technologies Get Boost from EU’s Venture Capital Funds

There’s good news for green technologies these days. Last year, 2016, marked the largest increase in investments in green technologies by European venture capitalists in 9 years. Venture capital funds from Europe targeting clean energy are reported to have reached $834 million last year. Green technologies of interest include everything from anaerobic digesters to rooftop solar panels. But why has there been a shift in the focus of European venture capital funds towards this industry?

Specialists in venture capital and startups, such as Henner Diekmann of Diekmann Associates, judge that this shift in interest is tied to an opening of the green energy market due to the fact that private equity is seeking the next big boom. Research shows that 2010 was marked by a large funnelling of funds towards green technologies, pioneered mostly by private investors. However, since 2014, venture capitalist funds have started to grow steadily, funding the green technology market after the private equity interest dropped off. 

Now the investments venture capitalists are making are more targeted, seeking to support niche investments that come with smaller scales and bigger risks. Mainstream investment isn’t as attracted to these offers, leaving them open to VC. Basically, venture capitalist firms are filling an investment need that has great potential, but isn’t the right one for private or mainstream investors.

Let’s take a look at some examples of what some main venture capitalist firms are working on:

Terra Firma Capital Partners

This London based company is focusing on big green technologies including wind and solar power. However, the twist is that Terra Firma is looking to markets on continents other than Europe such as Africa, Asia and Latin America. According to a senior advisor, they are no longer looking to invest in Western Europe. The trend of looking abroad is one many others are following.

Oxford Capital Partners

This venture capital firm based in Oxford is focusing its investments on batteries, solar and anaerobic digestion. Specifically, the firm is interested in solar panels that will go on rooftops. One of the unique projects the firm is working on is an anaerobic digestion plant using farm waste to make electricity. 

Octopus Investments

In addition to investing in wind and solar, Octopus is also considering batteries. A part of their interest is linked to the enhanced frequency response tender that the National Grid in the UK is using. 

Zouk Capital

Taking a different approach, this venture capital firm based in London is focusing on investing in projects that address resource efficiency. In their eyes, solar and wind power are now more mainstream. These electricity makers now rely on gaining economies of scale. With resource efficiency, the firm hopes to invest in projects that recover materials that would otherwise be wasted, and use them to create energy.

As you can see, one of the key new areas that firms are interested in is batteries. What does this have to do with renewable or green energy? Solar and wind power are great, but they tend to be relatively unstable or unpredictable. You can’t be sure you’ll get the same amount of solar or wind energy each day; it’s just not constant. So, batteries are the solution for keeping grids steady even on a second to second basis. The National Grid in the UK says that flexibility is a principal concern and need as they move towards using more renewable energy. Batteries appear to be filling this need. 

The staples of wind and solar power also continue to attract investment. It’s only natural that this is the case as by 2040, it’s estimated that wind and solar energy will account for the majority of the UK’s power generating capacity, led by wind. This suggests that the industry is going to grow, a lot. According to the predictions, both solar and wind will at least double what they currently produce.

Anaerobic digesters are another technology that venture capitalists are interested in. Food waste turned into energy is a pretty exciting prospect. In addition to turning waste into energy, using anaerobic digesters is also more economically attractive than getting rid of food waste in landfills and incinerators. 

There are many other smaller technologies and projects that venture capital is supporting, giving green technology an overall boost within the UK and abroad. In this case, venture capital is working for the future of the planet, financing the energy revolution that we desperately need. This trend towards financing green technologies could very well change many aspects of our daily lives, helping eliminate harmful energy production strategies and moving towards a renewable future.

Are you interested in venture capital or green technology? Tell us how you see venture capital shaping the future of renewable energy in the comments below.

XFactor Venture Fund

An exciting new venture capital fund has made its appearance on the start-up scene. XFactor Ventures is the name of the new fund. What’s the unique aspect of XFactor? It’s run by women and aims to support start-ups with at least one female founder.

New start-ups often seek pre-seed and seed-stage funds in order to handle the costs associated with starting a business. Experts such as Henner Diekmann of Diekmann Associates, who help companies get set-up and put corporate structures and contracts in place, are familiar with the struggles companies face when seeking funding. The venture capital industry can be cut-throat, and funding is one of the biggest challenges that new companies face. In fact, 82% of businesses that fail do so as a result of cash flow issues. In addition, 27% of businesses report that they haven’t received the funding they need. 

Women can sometimes face more difficulties than men when it comes to successfully beginning a start-up, making XFactor Ventures a welcome change of pace. Unfortunate displays of sexism in the venture capital world can also result in skewed funding. XFactor Ventures may be able to eliminate some of these hurdles for women entrepreneurs.

Difficulties Women Founders Face

Women make up just 7% of the partner positions of the tech VC world. It’s easy to imagine that it’s harder for women to pitch to male VCs than women. This is highly likely, however there is research that shows that all VCs, men and women, show bias against women founders throughout the interview process. This results in devastating consequences. Women entrepreneurs are able to get only 2% of venture funding even though they own 38% of businesses in the US.

Researchers studied interactions between venture capitalists, both male and female, and entrepreneurs, also male and female, to discover why women consistently receive less funding than men. The results are shocking. Throughout interview processes, the researchers discovered that VCs asked men about potential for gains while they questioned women about potential losses. The bias was present across the board for both male and female VCs.

In numbers, 67% of questions asked of male entrepreneurs were focused on promotion oriented ideas such as hopes, ideals and achievements. On the contrary, 66% of questions asked of women focused on prevention which includes ideas such as safety, vigilance, responsibility, and security. 

The financial repercussions are staggering. Entrepreneurs who faced prevention-based questions only raised $2.3 million dollars throughout 2017 while those who answered promotion-based questions raised an average of $16.8 million.

Women entrepreneurs can buck the trend by answering prevention oriented questions with a promotion based answer. It doesn’t completely make up the difference, but it does help. 

XFactor Venture’s Premise

XFactor Venture is a unique venture capital fund because it’s run by women who have successfully founded their own companies. This follows a trend of many male VCs who start out as entrepreneurs and then move on to investment. 

The XFactor Venture team includes the following entrepreneurs: Jessica Mah (InDinero), Aubrie Pagano (Bow and Drape), Kathryn Minshew (The Muse), Liz Whitman (Manicube), Erica Brescia (Bitnami), Danielle Morrill (Mattermark) and Ooshma Garg (Gobble). The brains behind the team are Anna Palmer of Wondermile and Fashion Project and Chip Hazard of Flybridge. Chip is the lone male partner. 

The team of expert entrepreneurs will distribute $3 million in funding to 30 companies, with the requirement that each company has one female founder. It’s expected that each investment will be for $100,000. 

There’s more to the project than making a place for women in the world of start-ups and venture capital. The fund’s premise is actually based on concrete data about diversity in business. Women founders play vital roles in business success.

Why Women Founders Are Important

There’s evidence that having women play key roles in start-ups can make them more successful. Start-ups with one female founder perform 63% better in returns than all-male start-ups. That’s a significant difference worth investing in.

XFactor Ventures’ partners have all been through the drill of finding funding, meaning that they know exactly what it feels like to be on the other side of the table. This unique model is promising and makes a first step at evening out the access male and female entrepreneurs have to vital funding. Partners of XFactor stress that they will “generate phenomenal returns,” said Hazard. Pagano also made this point, saying that gender diverse teams outperform all-male teams, meaning that seeking mixed and female teams to invest is a promising venture.

Keep your eye on this exciting new venture firm. They’re sure to produce interesting results.