(Guest post from Memia Associate Consultant Sam Ragnarsson )
Every entrepreneur is faced with the question of how to get the funds to bring their idea to the market and later – hopefully – how to find venture capital to transform a good business into a multimillion dollar business.
Throughout the centuries entrepreneurs have struggled with funding based on geography – hoping for local investors to understand and believe in the startup’s particular market segment to the point of them being ready to part with their money.
The same used to be true about the market; with very few products or services aiming for worldwide markets a century ago, companies built up their local market presence first and then they expanded.
Now we have witnessed the shrinking of the world as communications technology breaks all barriers, and people are no longer surprised by a small startup with world domination goals. Markets spanning tens of countries and over a billion souls are at everyone fingertips, and all you need is the right idea, right?
This in itself is wonderful and gives wings to the entrepreneurial spirit in all of us. What is often forgotten, though, is that almost all ideas will at some point need an influx of capital to drive continued, faster growth. It is the terrifying rollercoaster of keeping up with demand/requirements versus actual income, and will result in sleepless nights among founders as they not only worry about if they can get investment, but also if they should!
Comparing global tech investment scenes
While I was living in Seattle it was interesting for me to see how freely startups would go for angel investment, often only touting a half-baked idea lacking most of the ingredients to make an edible cake. There it is the accepted norm that a good idea needs real cash to become successful. There is a formal process in place, open to all that are willing to get out and actively network, with set guidelines and structures for both entrepreneurs and investors alike. But, ONLY for businesses targeting the domestic US market. To get funded in the US you have to prove yourself in the local market first and non-US-centric startups find it difficult to get traction.
In China, my experience would be similar in the sense of investors only investing in their local market. The investment process there is less structured and often works to the great disadvantage to the founder. Entrepreneurs in China go to their families and borrow money before trying investment, as that is often close to the same as selling your company and just finding a new boss! The interesting thing though is that in my experience Chinese startup businesses and investors look at their own market and have little interest in investing in ideas that are meant for the world market right away.
So, we have startups all over the world with founders that do not think in terms of countries or their local market but look at the world as the opportunity. Their success is however restricted by the size and willingness of their local investment market to invest in big ideas.
This effect is not so apparent in larger countries like USA or China, where your local market is huge anyway, but becomes apparent when your idea does not fit the local market (think “real name” social network in China!). But in small countries this is very clear.
However in smaller countries like Iceland, where I am from originally, this is very clear. For a nation of 300K people it is difficult to market startup ideas and to get funding. The weird thing is that even though everyone realizes that startups have to market to the world, investors are not willing to part with their money based on that. They will invest in energy, fishing industry, buy shares in current companies and even invest in companies abroad, anything but invest in local startups operating outside the known markets. So Icelandic entrepreneurs are forced to look to government grants or simply move away from Iceland to a larger market.
From what I have seen of the New Zealand startup scene so far, the landscape here is very similar to Iceland in the terms of investment landscape. Startups have huge dreams and often world shattering ideas. Founders are energetic, intelligent, with experience often arriving from several cultures, and generally modest dreams and hopes. Operating in the tech industry here they find themselves hamstrung; with a small local market, a relatively small tech industry and few investors, most of which concentrate on known industries like farming and property development.
Two things could happen to change this. Option 1: New Zealand investors need to start understanding that tech startups are a real investment class (think Xero, TradeMe, Diligent, SLI Systems) and one that has a much higher potential return (when successful). Or, option 2: New Zealand Startups have to go global when asking for funds, with a concentrated campaign to bring in American, Chinese, Indian or even Japanese investors at a scale not seen before.
The problem with option 2? The money will leave New Zealand as fast as it comes in!