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Entrepreneurship Flowers Far Away from Silicon Valley

Posted on Wednesday, Jul 18th 2012

These days, the media is becoming better at reporting on entrepreneurship outside Silicon Valley. In Silicon Valley, however, people tend to be somewhat cocky about the region’s place in the entrepreneurship landscape. But technology entrepreneurship is happening all around the world, and we have always tried to present an international and non-parochial view of the entrepreneurial universe. In my recent blog post Far Away from the Valley, I presented a list of interviews with successful companies from across the globe.

As you know, I run the 1M/1M global virtual incubator that works with startups around the world, from Estonia to Vancouver to Kerala. As part of our coverage of the international nature of entrepreneurship, we asked our members for their views and experiences in their respective regions. In this piece, I will summarize some of their observations.

Entrepreneurship in Israel

Israel is of course an established country for startups.

Mark Heifets, founder of Inphodrive, has been in Israeli high-tech for the past 15 years and today runs a company focused on developing hands-free driving apps so that drivers can interact with mobile apps through a voice interface only.

Mark says that Israel is located in a geographical spot with a scarcity of natural resources. Until recently, when large sea-shelf deposits of natural gas were found, it suffered from lack of practically all basic natural resources, including water. For this reason Israeli entrepreneurship in the past 25 years has been focused mainly on high-tech as an engine for building national wealth and increasing exports.

A spirit of high-tech innovation became one of the nation’s distinguishing features. The country has the second largest number of startups after the U.S.. But does the national business ecosystem meet the demands of growing high-tech enterprises?

There is an obvious disproportion between number of growing enterprises and the supply of venture capital. Over past 12 years, the local VC industry has shrunk from 80 VC funds to only eight funds that are actively investing. According to recently published statistics, the profitability of even the most successful VC funds is low and does not provide the expected returns to their institutional investors.

In these recent years of global financial crisis, many young local enterprises have been forced to rely on angel investors as the only available source of capital. The scarcity of venture capital in recent years led to change in approach of growing new businesses and led to shift to industries with less capital expenditures required.

Mark explains that there has been explosive growth in enterprises dealing with the Internet, mobile applications, and social networks. Many of them have adopted bootstrapping models and succeeded on the market by acquiring online large customer base and attracting VC capital relatively early or securing a good exit. On the other hand, new enterprises developing technologies that require significant capital resources experience obvious difficulties, and Mark says that their number has decreased.

To a large extent,  Israeli high-tech entrepreneurship has its roots in army technological units and military research institutes. These institutions have access to highly educated, talented engineers, and researchers and are provided with significant state funding. According to Mark, “We owe to these units’ graduates many first-class developments and technological innovations that ignited the first breed of high-tech startups. They proposed and developed solutions based on deep knowledge in fundamental sciences – physics, optics, communications theory, microwave, and so on.”

The first generation of startups created many unique technological solutions. They easily raised funds required for development of high-speed and broadband telecom systems; super-scale chips; sophisticated software algorithms for pattern recognition; and many more. Entrepreneurs who are graduates of these elite technological units or affiliated with their networks have a better chance to get support from the state and raise money for their enterprises from local VCs and private investors.

It is thus possible to make some comparison between Israel and Silicon Valley as elitist clubs. This club model – one that 1M/1M rejects – has become much more noticeable in a period of continuing economic crisis when foreign capital inflow to the country has fallen significantly and national capital resources have been depleted.

Mark reports that the Israeli startup community is passing through painful times as it shifts from an approach of early financing and early exits to one of lengthy bootstrapping and getting into markets early. Through education, the 1M/1M initiative aims to help entrepreneurs in Israel and elsewhere use this approach. It can help young businesses to plan future market success from the very beginning by giving early views of targeted markets; choosing the right segment, product positioning, and business model; and providing the necessary business ties.

Is the Israeli entrepreneurship environment fundamentally different from that in Silicon Valley? I do not think so, but it is surely more difficult to work in the community for the reasons discussed above.

Entrepreneurship in South Florida

Marcos Menendez reports that his mobile marketing company Momares has taken part in various entrepreneurship competitions and been in touch with startups throughout South Florida. “As a member of the local community, we’re happy to report that entrepreneurship is alive and very well in this region. Although small, the startup community has grown radically in the last few years and is fueled by various startup groups, as well as the creativity of local and international entrepreneurs,” Marcos says.

A core of tech entrepreneurs has created organizations to help foster growth and funding of startups. These groups include thelaunchpad.org (at the University of Miami), refreshmiami.com, mobilemonday.net, edc-tech.org, incubatemiami.com, miamiinnovationfund.com and others. They have led to a growing number of mobile app developers, software firms, and SaaS companies.

“While we have turned our focus to sales and business development, most startups in this area are on a quest for investor funding. For this, they are turning to local angel investors and successful entrepreneurs who, if they’re not able to invest, are still generous with advice through local startup groups,” Marcos adds.

One aspect that may also be fueling growth in this region involves collaboration with international talent. There are many talented programmers, developers, engineers, and others in Latin America who have ties to local businesses. It’s not uncommon for these businesses to work closely with partners or colleagues who may have previously lived in Miami but now contribute from other countries. This has allowed local startups to draw from a deeper pool of talent. It has also kept them in touch with potential consumer markets and consumer behavior in other countries.

Entrepreneurship in Pune, India

Shirish Deodhar runs InnovizeTech from Pune, India, which ranks among India’s top three to four entrepreneurship centers. The company’s product Sapience helps outsourcing firms that have large headcounts track and optimize the productivity of their employees.

Indian IT services companies range in size from several hundred to more than 100,000 employees. The larger companies hire more than 10,000 employees each year. With global IT spending slowing and competition from other countries increasing, these companies’ growth rates have slowed from 40 to 50 percent a few years ago to just 10 to 12 percent today. Profitability is under pressure because of fixed billing rates and increasing salaries. Outsourcing contracts are shifting from monthly billing (time & material) to fixed-price, service level agreement (SLA) and output-based pricing. These trends have put the spotlight firmly on “employee productivity.” Yet, when people spend time on computers to deliver the services, it is hard to track effort.

There are employee monitoring tools available, but they don’t work in an enterprise setting because they have a negative impact on culture and morale, and no manager has time to look at a lot of low-level employee time data. U.S. start-ups do not see this space as an opportunity because few companies are growing in headcount as they are in India.

Shirish says, “I believe that our product, Sapience, could only have originated in India because of the huge headcount driven growth of IT services companies here, and recent pressures on growth and profitability. However, our product will have global applicability as we move deeper into big data analytics of ‘enterprise work patterns.’”

Since the early 1990s, Indian software entrepreneurs have largely built outsourcing services firms. The trend is slowly changing, with more product startups emerging in the past three to four years. Many of them are leveraging the rapid proliferation of mobile phones and Internet to IT-enable the delivery of consumer services. Unlike in the U.S., angel funding is limited, but that is changing, with funds being set up by the previous generation of successful IT entrepreneurs. VC firms tend to be much more conservative than in the U.S., and they rarely invest in companies that have yet to deliver a few million dollars in revenue. This means that successful product companies are still relatively rare. Among Indian cities, Pune has generally always had more home-grown entrepreneurial companies. As a result, even in the product space, it is among the top two to three centers of innovation in the country.

Entrepreneurship in Houston, Texas

Sudhendra Seshachala has recently launched the beta product for Xervmon, an integrated cloud console/framework that delivers actionable insights on users’ cloud accounts/SaaS accounts.

Xervmon is based in Houston, Texas, with development centers in Houston, India, and Russia. The product is funded by Hooduku, Sudhi’s professional services business that generates more than $250,000 annually.

Departing from Silicon Valley’s conventional wisdom, we have encouraged Sudhi to bootstrap his product using his services business, which is already flowing nicely.

In fact, many 1M/1M companies are going against the conventional wisdom to “abandon everything else and focus on one product” and adopt the tried and true method of “bootstrapping using services.” In truth, many great Silicon Valley companies (including Oracle) followed this path!

Sudhi of course, misses the meet-ups and incubators that being in Silicon Valley would offer, but he certainly doesn’t miss the Valley’s cost structure.

As you see, while entrepreneurs are learning from the Valley’s traditional methods, in some cases they are also going against it and inventing their own rules of success.

Changing Habits to Foster Success

One complaint you will find, wherever you go, is about the lack of seed capital outside Silicon Valley. A bad habit that entrepreneurs all around the globe are picking up is the mindless quest for capital.

Capital, not customers. And I seriously object to it!

In fact, Vikrant Mathur, right here in the Valley, is going against this trend and focusing on profitability rather than raising capital.

Vikrant’s company ifood.tv is a multi-platform video channel for food- and cooking-related content. It started off as a website in 2007 but has quickly embraced mobile and connected TV platforms to provide content to users through the device of their choice. It currently serves more than 4.5 million unique visitors on its website, and its mobile and connected TV apps have been downloaded close to 500,000 times.

Vikrant observes, “As the cost of starting a tech (mobile/consumer web) company continues to plummet, raising money continues to become difficult. VCs have a lot more options, so they require a company to show a lot more traction.  Also, you don’t need a billion-dollar idea to get funding. Incubators are becoming a very viable option for an entrepreneur to get both financial and strategic help, even if the exit foreseen is just $20 million.”

He adds, “The Valley puts a lot of emphasis on raising venture capital, but we have really stayed away from that philosophy. Our focus has always been to keep our costs low, keep the company profitable, reinvest the profits back in to the business, and grow organically as much as we can.”

Hallelujah!

 

 

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