Wednesday, June 13, 2012

Visas for entrepreneurs

Where creators are welcome

Australia, Canada and even Chile are more open than America

MOST governments say they want to encourage entrepreneurs. Yet when foreigners with ideas come knocking, they slam doors in their faces. America, surprisingly, is one of the worst offenders. It has no specific visa for foreigners who wish to create new companies. It does offer a visa for investors, but the requirements are so stiff—usually an initial investment of $1m, or half that if the firm is in a depressed neighbourhood—that the annual quota of 10,000 visas is seldom filled.

Other countries are more open (see table). Singapore offers visas to people who invest $40,000; for some, the government provides additional investment. Britain gives visas to entrepreneurs who meet certain conditions and attract £50,000 ($77,000) of venture funding. New Zealand has no specific capital requirement but offers residency to entrepreneurs whose firms are deemed to benefit the country. Chile is wildly generous: its government gives selected start-ups $40,000 without taking any equity in return. All these schemes have been introduced or expanded since 2008.

Where an entrepreneurial visa is not available, other routes may be. Australia and Canada use a points system that emphasises youth and skills. Since 2007 Australia has curbed the total number of permanent-residency visas it issues, but expanded the number of visas for skilled workers and their dependents from 103,000 to 126,000 a year. That is nearly as many as America (140,000), though America’s population is 14 times larger.

A similar side door let Mohamed Alborno into Canada. The young Egyptian-born entrepreneur incorporated his company, Crowdsway, in Delaware. He had done well in a contest for budding entrepreneurs. But getting a visa to live in America is slow, confusing and unpredictable.
In the end he went to Canada instead, where setting up a company is just as easy as in America, but the visa process is much more straightforward. He now says he is very happy to have settled in Vancouver. His firm, which connects online video-makers with clients, has just launched a beta service.

America’s scorn for skills is extraordinary. The share of permanent visas granted for economic reasons (as opposed to kinship) fell from 18% to 13% between 1991 and 2011. In Canada it rose from 18% to 67%. The Partnership for a New American Economy, a pro-immigration group, warns that America is “falling behind in the global race for talent.” China, meanwhile, offers some highly skilled returners not only free homes but also cash to buy furniture.

Monday, June 4, 2012

Venture capital in emerging markets: Making money by bringing old ideas to new markets

SOME venture capitalists call it “geo-arbitrage”; others know it as “tropicalisation”. The term refers to the practice of backing start-ups that take an established business model and adapt it to an emerging market. Whatever you call it, it is becoming a bigger part of the venture-capital industry as competition at home forces Silicon Valley investors to look farther afield.

Julio Vasconcellos, one of the founders of Peixe Urbano, a Brazilian site offering users discounted deals, is thrilled by the “huge flood” of American investors he has noticed coming to Brazil, for instance. No wonder. Some of them, including Benchmark Capital and General Atlantic, have invested in his own company alongside Brazilian venture capitalists. The financiers have reason to be upbeat, too. Peixe Urbano is a clone of Groupon, an American start-up that went public last year; its business model is one they know can take off.

The idea of tropicalisation has been around for a while. It has already been lucrative for venture capitalists in India and China. Take Baidu, a Chinese interpretation of Google, which made early venture investors a killing; or, a Chinese version of eBay, an online-auction site. Now venture capitalists are looking at other markets, including Brazil, Indonesia, Russia, South Africa and Turkey. Last year $3.4 billion of venture-capital deals were done in emerging markets, more than double the amount in 2008.

This push into emerging markets has gained momentum because venture capital is experiencing problems in its traditional markets. Silicon Valley was once so inward-looking that venture capitalists used to say they would not back a start-up unless they could cycle to its office. But valuations in North America have risen for both early-stage and later-stage investments (see chart), making it much harder to make great returns.

That is partly because there are too many firms; 369 of them are currently in the market trying to raise $50 billion, according to Preqin, a research firm. There is a lot less competition in emerging markets. The pressure from investors is also rising. A damning new report by the Kauffman Foundation, an outfit which promotes entrepreneurship, analysed its venture-capital portfolio and concluded that 62 out of 100 funds failed to exceed the returns offered by the public market.

Most venture-capital firms do not head abroad with the sole aim of looking for copycats, but plenty of their investments end up that way. Douglas Leone of Sequoia Capital, a big venture-capital firm, reckons that in emerging markets like China around 50% of start-ups backed by foreign venture capitalists in the internet and mobile sectors are copycats, and in markets like Brazil it is closer to 70%.

That is not so surprising. Backing tested concepts mitigates the risk inherent in start-ups and means companies are likely to grow quickly, because the original firm has already worked out the kinks. Often the originator of the business does not have the expertise to enter new countries quickly, so copycats can get there first.

They can also gain an edge by tailoring businesses to local habits. Flipkart, an online-commerce site in India founded by two former Amazon employees, has received funding from Tiger Global, a New York-based hedge fund that specialises in this kind of investing, and Accel Partners, a venture-capital firm. Flipkart has taken off in part because credit cards are less common in India and it offers the option of payment on delivery.

Another example is Trendyol, a Turkish “flash sale” site that mimics and Gilt Groupe, which popularised the idea of time-limited online sales of designer clothing. But Trendyol, whose backers include Kleiner Perkins Caufield & Byers, also sells its own mass-market clothing line, with seasonal designs “crowdsourced” from users in Turkey.

There are different ways to play the copycat game. Rocket Internet, started by the Samwer brothers—Alexander, Marc and Oliver—in Germany, is a cloning “factory” that copies American and European businesses, hiring entrepreneurs to run them and exporting these start-ups to emerging markets as fast as possible so they are the first entrants. More traditional venture capitalists are setting up offices and selectively backing local entrepreneurs. American venture investors often prefer to bring in a local partner to provide more consistent mentorship to these entrepreneurs and give advice on how to navigate the domestic market.

Such advice can be valuable, given the specific risks of setting up in emerging markets. First, companies can take longer to get off their feet, given grinding local bureaucracy. “An eight-year fund might not be sufficient in Brazil,” says José Luiz Osorio of Jardim Botânico, a Brazilian seed investor. Second, there are cultural barriers: it can be hard to recruit employees to work for an unknown company in exchange for equity, for instance. Third, exiting through large initial public offerings is unlikely in countries like Turkey and Brazil, where IPO activity is muted and investors like to buy well-known firms; that means venture firms are reliant on strategic buyers to gobble up their creations.

Tropicalisation piles on an additional set of risks. Copycats can easily lose share when the original company eventually enters the local market. Sonico, once the Facebook of Latin America, got “pummelled” when Facebook arrived, says Nenad Marovac of DN Capital, which was behind Sonico. And even if they can see off competition, the copycats are unlikely to be mega-blockbusters because, by definition, they are not new. “With innovation you have a global upside, but with copycat innovation you have geographical limits,” says Eric Archer of Monashees Capital, a Brazilian venture firm.

It will not be long before emerging markets spawn their own innovations that can be trotted out on a global scale. That would be closer to the spirit of venture capital, which is supposed to ferret out and fund new ideas, not imitations. Until then, however, tropicalisation is set to become an ever more popular strategy. Copy that.