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The following article was written by Devin Miller and posted on the National Venture Capital Association’s website on July 21, 2017. On Monday, the Department of Homeland Security was scheduled to begin receiving applications from foreign-born startup founders under the International Entrepreneur Rule. Unfortunately, the Trump Administration delayed the rule with an eye on eventually rescinding it, shutting down a commonsense policy tool that would have kept job-creators in the U.S. to build their companies here and hire American workers.As a quick refresher, the International Entrepreneur Rule was put in place during the final days of the Obama Administration and would have created a regulatory structure similar to a Startup Visa, which NVCA has supported for over a decade. While the Startup Visa has been caught up in the broader immigration reform efforts that have stalled in Congress, the International Entrepreneur Rule had the potential to accomplish many of the same outcomes. One of the key factors of America’s incredibly successful entrepreneurial ecosystem is the invaluable role immigrant entrepreneurs have had on new company creation and the corresponding economic activity generated by them. The ingenuity and creativity of immigrant entrepreneurs who choose to build and grow their businesses in the United States is invaluable to the American economy. Venture-backed companies with at least one immigrant founder include American icons like eBay, Facebook, Google, Intel, LinkedIn, Zipcar and Tesla Motors. To explore how crucial immigrant entrepreneurs have been to the U.S. startup ecosystem, how important they are to the future of the U.S. economy, and how impactful policies to attract more immigrant founders (like the International Entrepreneur Rule) could be, we reached out to some of our members who invest in U.S. startups that are innovating and creating American jobs.

Immigrants are a key part of American entrepreneurship

Bill Draper, an early pioneer of the venture capital industry, has a unique perspective on the impact immigrants have had on the startup industry and Silicon Valley: “Silicon Valley would not be half as successful without the immigrants that have founded and been involved in so many startups since the beginning of the venture capital industry,” said Draper. “Immigrants are such a key part of the entrepreneurial spirit in America. Immigration has been at the root of this country since the beginning, and we need to hold on to it and encourage it.” “Immigrants are fueling the next generation of high growth companies,” says Maha Ibrahim of Canaan Partners. “Over 50% of the current crop of high growth companies were founded by an immigrant or by a first generation American. Those immigrant founded companies are creating thousands of jobs, not just in Silicon Valley, but across the entire United States.” “The majority of the investments I’ve made have at least one founder from another country, and those companies have created over 10,000 American jobs, and I’m just one VC investor working at one firm,” said Neeraj Agrawal of Battery Ventures. “When you look at the whole industry, there are so many good jobs being created and so much economic activity that immigrant entrepreneurs contribute to. That activity is critical to the U.S. economy and our competitive advantage as a nation.”

America doesn’t own innovation and VC anymore

As important as venture capital and startups have been to the American economy over the past five decades, VC and startups are no longer a uniquely American institution. The rest of the world is catching up to the U.S. by creating successful innovation ecosystems of their own, which means that the U.S. is not the only place for founders to grow successful companies anymore. “Unlike a few years ago when 80% of the world’s venture capital activity was in the U.S., it’s dropped to 54%,” says Jeff Clavier of SoftTech VC. “Much of that decline is because China and Europe are now credible alternatives. There is a competitive market out there, where, arguably, you could build a startup in Paris, Berlin, London or Beijing with the same support and success from the ecosystem there as you would in Silicon Valley or other parts of the U.S. We’re making it harder on ourselves by having a limited immigration policy where we don’t welcome entrepreneurs with open arms, the way other countries are doing, countries that have visas for entrepreneurs.” Rich Wong of Accel Partners echoes Clavier’s sentiment: “There is intense competition across the world to try to get startups. Whether it’s Canada, Australia, or China, there are incentives being created for founders from those countries to stay where they are instead of coming here. R&D credits, tax credits, funding (for) engineering costs, and other incentives are being used to either keep founders there, or at least to grow their employment base in those other countries.” With many other entrepreneurial ecosystems are developing all over the world, the competition to attract talent has become much fiercer. Somesh Dash of IVP notes that, “the entrepreneurial ecosystem in many immigrants’ home countries—like China, India, Taiwan, and Brazil—are more robust than they were ten, fifteen years ago. There is capital, resources, and talent that are available in their home country, and those countries are offering the kitchen sink to welcome entrepreneurs back there.” The reality is the U.S. is no longer the only hub for innovation and venture capital.

We want the best-and-brightest building new companies in the U.S.

In order to stay globally competitive in the field of innovation, we want the best-and-brightest building new companies in the U.S., rather than in other countries. Andy Schwab of 5AM Ventures believes that if we can’t find ways to make it easy for the best and the brightest to stay here in the U.S., then they’ll have no choice but to return to their home country, and build their companies there: “If we can’t give potential entrepreneurs long term clarity on their immigration status, then they’ll decide to go back to Shanghai or Australia or wherever they’re from and start their company there. Many startup founders would like to start a company in the U.S.—but because they couldn’t figure out their immigration status in America and they were able to get capital back in their home country, they decide to go back to where they were from and start a company there instead of in the U.S.” Agrawal agrees, and elaborates further on what could happen to our pipeline of entrepreneurs if we don’t find ways to attract talent: “Really bright, STEM oriented kids are now asking, ‘should I go to the UK?’ ‘should I go to Australia?’ or what’s becoming more common, ‘should I go to Canada?’ I think we could see a lot of market loss to Canadian tech markets. Talented founders will instead go to Vancouver or other cities in Canada where they can get 90% of an American quality of life and not have to deal with the uncertainty. If they’re scared to make that bet on the U.S., then we’ll lose a huge part of our pipeline for entrepreneurs.” “The greatest defense we have against the rise of other economies like China and other nations is our entrepreneurial ecosystem,” said Saar Gur of CRV. “So any effort to bring great entrepreneurs here to build their business in the U.S. instead of in some other country is very important and will help our nation’s economy. We need to make it easier for really talented folks to be here and help our country, especially relative to the alternative of having those people be in other countries and adding to those countries’ economies.”

We need policies that will help keep job creators in America

With so many other countries around the world becoming attractive locations for entrepreneurs to move to and build companies, the U.S. needs policies that attract job-creating entrepreneurs and allow them to stay here to build their companies that create new jobs for Americans. Reforming the H1-B system and allowing foreign-born STEM field graduates from U.S. universities to stay in the country would be positive steps in the right direction. And, of course, a Startup Visa for immigrant entrepreneurs, with the International Entrepreneur Rule being the closest America has gotten to enacting one, would be incredibly helpful for attracting and keeping more job-creating entrepreneurs in the U.S. This is why the move by the Trump Administration to delay and ultimately rescind the rule is such an unfortunate policy move, as the rule had the potential to keep job creators in the U.S. to build their companies here. VCs who are investing in job-creating startups agree: “I think something like the International Entrepreneur Rule could be incredibly helpful,” said Schwab. “There are all of these founders who are coming out of the best universities in the U.S. with great ideas who could be really high-quality entrepreneurs in the U.S. If we were to have a system in place to enable them to stay here that could be incredibly valuable for our economy.” Put frankly by Ibrahim, “if you care about jobs in this country, then you care about whether or not the International Entrepreneur Rule is enacted.” At its core, the International Entrepreneurship Rule is about job creation and boosting the economy, as Wong explains: “The International Entrepreneur Rule actually has little to do with immigration in the traditional sense. This is about job creators, and whether we want job creators to be here, or somewhere else. I would really call this the International Job-Creator Rule. The question is whether we want job creators here in the U.S., or in Beijing, and the rule would help keep them here, build their companies here, and create jobs here. Why wouldn’t we want job creators to be based here in the U.S.?” Wong goes on to say that, “it’s not a secret that if you can attract the next generation of startups and great companies to your country, there are many positive economic effects that will follow.” Clavier warns that investors may look outside of the U.S. if it becomes increasingly difficult for founders to remain in the U.S., stating, “If we don’t have the International Entrepreneur Rule and they clamp down on other forms of immigration, we will absolutely see VCs reducing their investments in the U.S. VCs will have to find alternatives. If that were to happen, investors would set up something in Canada so that those immigrant founders could set up companies in Canada, instead of America, and we’d spend more money in Canada, and U.S. VCs might start looking at investing in Europe.” “The challenge for the U.S. is with the next generation of startups that will become the next Facebook, Google, or Amazon (these very valuable companies employing hundreds of thousands of people) and whether these companies be here, or overseas, whether in other startup economies such as Stockholm, Vancouver, or Beijing,” said Wong. “We would much rather have the next generation of great companies based here in the United States.”
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The following blog article was written by Profitect CEO Guy Yehiav, June 16, 2017, in direct response to the announcement of Amazon’s purchase of Whole Foods.  Thought Leadership I recently wrote a blog about a month ago that spoke to the rumors swirling around Amazon possibly purchasing BJ’s. Amazon was quick to distance themselves from the noise, and today’s announcement is a the perfect indicator as to why. Amazon today announced it is acquiring supermarket giant Whole Foods for $13.7 billion. This is a move that will send shock-waves across the food and grocery industry and will be examined and discussed thoroughly in the weeks to come. I stand by my original statements when the possibility of the BJ’s acquisition was brought. I think this is a brilliant move for Amazon into a brick and mortar strategy. A recognizable and valuable brand like Whole Foods enables Amazon continues to position itself as a true innovator and leader in this space. Read below to see why I had positioned this as a strategic move for Amazon to acquire a brick and mortar network: Amazon is looking to optimize its supply chain. It’s been made clear through these speculations that Amazon is looking to extend its supply chain and ultimately create a comfortable way for consumers to shop in warehouses close to them. In the past two years, Amazon has prioritized fast and convenient delivery. Investing in planes, shipping services, drones and trucks – Amazon has spent $3 billion in transportation shipping alone. The endgame is clear: ‘uberize’ last mile service. There really is no better way to streamline this process than by occupying more warehouses and improving the supply chain. It’s also a smart move because warehouses appeal to customers that live in close proximity. They get the same level of quality they expect from Amazon, while simultaneously reducing the cost of delivery and working with a “local” company. Amazon is moving further into a customer-centric model. Let’s face it – each customer is unique and has different wants and needs when it comes to what they buy and how they buy it. Consider two different groups of products that are most commonly purchased on Amazon – they can both be found in seconds and significantly contribute to the online retailer’s success. The first set of products can be defined as ‘mainstream.’ This means items that are being bought every day and are not difficult to find – TVs, laptops, desk supplies, seltzer water or even holiday decorations. Consumers shop for these products on Amazon because they can be delivered quickly, efficiently and at competitive prices. These are Amazon’s reliably movable products, with consistent sales on a daily or weekly basis. The second group is the ‘long-tail products.’ These could be anything from a rare book, a particular part for a car that isn’t sold at your average automotive store or a certain size shoe that isn’t commonly carried. Amazon recognizes that, by having such a wide assortment of products available in one place (in this case, online), consumers will continuously look to them for their needs because of this “one-stop-shopping” model. In fact, this model has been successful to the point of beating out Google as the first point of search for most products. Opening up warehouses that consumers could physically shop in would add another dynamic of tailoring shopping experiences for consumer benefit. For example, if a newly re-branded Amazon warehouse is located just a mile away, a consumer would be able to pick up the exact product they need and Amazon would ensure that it’s waiting for them upon arrival. This comes with the added benefit of being able to conduct regular shopping of mainstream items while in-store, killing two birds with one stone. This is the next logical step in the quest to optimize convenience for consumers, reducing the 24-48 lead time from purchase to delivery to 10 minutes. Thinking long term, this is how Amazon will create the ideal customer-focused retail experience of the future, where shoppers will have their goods waiting for them, and they can be instantly directed to anything else without having to ask an associate or wander the aisles. Despite having backed away from rumors of purchasing BJs, the fact the rumor mill was churning is telling in itself. Amazon is hoping to combine the Brick & Mortar and online models into one convenient location that sells just about everything, while optimizing its supply chain cost down to the last five miles. It is a pretty powerful concept, and one that showcases how Amazon is thinking ahead and disrupting traditional commerce every day. With bringing back the desire to shop in-store, Amazon also generates an opportunity to analyze consumer behaviors in a more granular fashion. When a product is returned for example, Amazon will not only understand why, they also now have the chance to provide the customer the opportunity to replace that purchase with something they may like better – potentially increasing sales converting real traffic in-store rather than only relying on online conversion. Considering that online conversion rates are at 0.08 percent and increase to eight percent in-store, there is significant opportunity for Amazon here.
Source: http://www.profitect.com/thought-leadership/another-look-amazons-acquisition-whole-foods-another-example-innovation/
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Eric Buatois, General Partner at BGV shares his perspective on the influx of capital from International Limited Partners to Silicon Valley. The early stage venture capital industry has been enjoying some very healthy returns over the past several years. Limited partners were primarily large financial institutions such as endowment, pension funds, insurance companies in the USA Europe and China. Many large technology corporations have also set up corporate venture funds and today corporate venture capital represents 1/3 of all venture capital deployed in Silicon Valley – this trend has been driven by the desire to get access to new technologies and products. . Large corporations in every industry want to have access to innovative start ups to understand and experiment with new business models and or new forms of customer engagement. The strategic intention is to identify the new “Ubers” of their industry before it is too late. We are now entering the phase of the digital transformation of the enterprise after the digitalization of the consumer experience. The creation of Internet consumer leaders has been largely a regional phenomenon. (I.e. Aliabad in China, Amazon,, E bay in USA) Limited partners willing to participate in the build up of these new companies were also investing at a regional level. In contrast, the digital transformation of the enterprise is developing on a global level. Investors willing to participate in the companies building the future of the enterprise have to invest in Silicon Valley. The venture capital funds with an enterprise IT focus such as Benhamou Global Ventures can not only invest in companies born in Silicon Valley but also in companies built in Europe, India and Israel, and help them set up their US operations as well as connect them to the Silicon Valley industry eco-system. Large corporations based outside Silicon Valley, Limited Partners with a limited exposure to venture capital in the enterprise space, large government funds willing to support the set up of bridges between Silicon Valley and their own country are all seeking capital allocation from Silicon Valley based venture capital firms. They are not only aiming for top quartile returns but also for several key strategic benefits such as:
  • Corporations seek to gain privileged access to innovative business models and technologies.
  • Government funds are seeking access to new technologies and innovative companies to either complement their national industry or create more jobs at home
Large inflows of capital are coming from China and Europe for the following reasons: China The past ten years has seen the development of a strong and successful private equity and venture capital market predominantly fueled by the explosion of consumer demand and the creation of e commerce and social networks. The Chinese government is now keen to create a innovative domestic technology industry generating IP instead of relying solely on being the low cost supplier. As a consequence sectors such as semiconductors have seen large government investments but the results are unlikely to become clear before more time passes. Other technology sectors such as robotics and drones are clearly successful and Chinese companies in these sectors are likely to become world leaders. The Chinese automotive market (the largest market in terms of units shipped) is hungry for new technologies and innovation to build the transportation of the future…. The majority of the innovation and entrepreneurial talents required to address the above challenges are in Silicon Valley and are often built by entrepreneurs from Chinese descent and culture, if not from Asian descent and culture. As a result Chinese private equity groups, regional and central government funds, successful entrepreneurs who want to continue to grow their business all want to have access to Silicon Valley B to B company fueled innovation through venture capital firms.  Furthermore the wealth generated by the middle class needs a new generation of financial products, ones that the traditional central and regional banks cannot provide. This coupled with the desire of wealthy individuals to diversify their asset between RMB and Dollar denominated investment is also creating a demand for investments in the US based Venture asset class. Europe Europe and Israel have also created a solid private equity and venture capital industry during the last 30 years, although significantly smaller than China and North America. Traditional European Limited investors have diversified their investment between the USA, Europe and Asia. The lack of a strong public equity market for young companies has compressed the returns and pushed successful companies to list on the Nasal ( i.e. Criteo ). More recently a healthy consumer Internet and media sector has delivered strong returns. While the old continent with 400M plus inhabitants is still an enormous consumer market, the mediocre economical environment pushes young talented entrepreneurs to come to Silicon Valley to build their companies thereby limiting the growth potential for companies serving only the European market. The recent Brexit event has created a shockwave. It is too early to predict the outcome with precision as the separation negotiations have not yet begun. But several large foreign financial institutions have already announced the relocation of some of their UK operations to other European cities. The Fintech industry in London, that was second in size and innovation to North America is already seeing a capital pull back. Fintech entrepreneurs are looking to China or Silicon Valley as their best alternatives. Limited partners from the continent that were investing in UK funds are also pausing. The European Investment Fund (EIF) in particular, which provides funding for 30 to 40% of the venture capital in Europe will not be able to fund venture teams in UK as it will not belong to the EEU any more. Furthermore UK based entrepreneurial talent will face several limitations:
  • Talented UK entrepreneurs will be concerned about their future mobility across Europe. The free movement of workers across the EEU will not be guaranteed. Foreign engineers and entrepreneurs living in UK will be worried about their future work permits and visas.
  • Following the Brexit referendum, the demand of Irish nationality by UK citizens has increased significantly since Ireland being part of EEU can guarantee full mobility across Europe to its citizens.
European Limited partners will have to move their venture capital allocation to funds in North America as there will be fewer opportunities in Europe. Large European corporations building airplanes, automobiles, communication equipment as well as service companies like Insurance, Banks and consumer product companies are looking to Silicon Valley to build their future digital enterprise. Finally the high labor costs in Europe incentivizes them to use leading edge automation and artificial intelligence technologies in order to stay competitive. Conclusion We are entering a new era in the evolution of the enterprise as it engages in a deep digital transformation, perhaps deeper in scope and impact than the 19th century industrial revolution. This is driven by technological trends such as cloud computing, the Internet of things, Robotics as well as a new wave of customer engagement with AI and augmented reality. These shifts are likely to make Silicon Valley even stronger, due to increased startup creation and the influx of international capital. Agile and adaptive venture capital firms with a strong international and cross border experience will be natural choices as long term partners for these international corporations, government funds and limited partner getting their first exposure to the Silicon Valley ecosystem.
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Anik Bose General Partner at BGV shares his perspective on the Innovation challenge for Corporations in this first of a two-part blog. When I was the executive responsible for innovation at 3Com (as SVP Corporate Development) in the late 1990’s my team and I relied on 3Com Ventures as the primary vehicle to source innovation. This was consistent with the innovation practices of many other large corporations such as Intel, Cisco, Qualcomm, Salesforce, GE and Samsung. Over the past ten years there has been a sea change in the sources of innovation with the rise of modern-day accelerators and incubators such as Y-Combinator, Techstars etc. To take advantage of these new vehicles, many corporations have also launched their own accelerators independently or in partnership with other VC firms – the most notable examples being in Israel with IBM, Microsoft, Citi, AOL and many others. The data in the chart below highlights these trends. slide1 Source: BCG Analysis More recently, corporations have also begun to experiment with other tools for sourcing innovation such as hackathons, start-up competitions and university partnerships to source innovation. Furthermore, recognizing the growing importance of innovation in light of the digital transformation of the enterprise, many corporations have also begun to formalize the role of Chief Innovation Officers (CINOs). I first came across the term Chief Innovation Officer in 1998 – coined by Miller and Morris. The European Institute for Creative Strategies and Innovation headed by Marc Giget conducted an extensive survey of 500 CINOs around the world and found that the role is not uniform and still evolving. The book “Innovation Intelligence” defines the roles as exploring new territories by leveraging innovation intelligence, ideation and experimentation. At BGV, we have interacted with a wide variety of innovation functions within large enterprises and can confirm Marc Giget’s observation that the actual CINO role varies widely across companies, sectors and regions. In some firms, the role is to bring new ideas to market; in other firms it is to create a culture of innovation rather than creating innovation. We believe that the role of a CINO has to be company situation specific.   In some cases, it may be appropriate to look inside the company for innovation by incentivizing employees to think about and contribute ideas for innovation. In other cases, it may make more sense to look outside to the start up eco-system to bring in innovation ideas and the value of start-up behaviors by establishing outposts and relationships in Silicon Valley. There is no one right answer. While the number of tools for sourcing innovation have grown significantly beyond corporate venturing, it is easy to get lost in the “hype” of the CINO function, the plethora of tools and best practices being offered today in the form of round table retreats, executive visits to accelerators and/or courses offered by Universities. At BGV, we believe that in order to establish a successful CINO-led innovation program corporations need to go “back to the basics”. What does “going back to the basics” mean in this context ? In part two of my blog next week, I will elaborate on what this entails.
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Theme: “Hallmarks of The Next Tech Unicorn”

  1. Everyone wants to spot the next unicorn, but how do you spot the hallmarks of the next billion dollar company?
  2. With valuations in the venture capital market so high, are we in a bubble?
  3. Why are tech companies staying private for longer in this current environment?
  4. Why have we seen disappointing IPOs recently for some unicorns and companies valued so highly in the private markets? 
  5. What characterizes a robust investment opportunity in tech?
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SpaceX and PayPal IT veteran Branden Spikes thought that when it came to founding his own technology firm in March 2012, developing and mastering the security technology itself would be the biggest challenge. But the CEO and CTO of Spikes Security, which now sells a browser isolation product designed to protect PCs from malware and Internet-borne attacks, was proven wrong. The biggest challenge was securing funding from the venture-capital community. “Initially, I thought building the product was going to be the big challenge I’d face, but it turned out to be fundraising,” he says. “It’s a ‘forcing function’ for building a really excellent, mature business,” he adds, referring to a task that forces you to take action to deliver the required result. Since his Silicon Valley startup obtained its required funding, however, Spikes says he’s been able to resume focusing more closely on the company, including guiding its growth. “I felt so great when we finally closed the fundraising, that I threw an incredible party and really breathed a sigh of relief, because not only did we achieve something nearly impossible – it seemed – but now I’m able to focus on the business and back on the product again, and that continues to be really exciting and a really fun day job.” Behind the Scenes That day job now involves developing security software called “AirGap.” Here’s how it works: Instead of users running a browser on their client, they run the lightweight AirGap client viewer. Behind the scenes, an AirGap Linux appliance – running either as a Spikes Security cloud service, or else as an on-premises rollout inside the enterprise – creates an isolated, virtual machine, with requisite operating system hardening, firewall and so on for each browser session. AirGap then relays any audio, video, text or graphics that are displayed in the browser – via “a much more benign format” than HTTP, Spikes says – to an AirGap client that runs on a user’s PC. That network and hardware isolation approach to running browsers is designed to block drive-by attacks and keep malware off people’s systems. Strategy: Grow, But Not Too Fast The AirGap software was released in beta last year, and this year the company has gone into full production. But Spikes says he’s cautious about his business growing too big, too fast. “We’re controlling the flow, if you will, to allow the company to grow at the proper pace,” he says. Recruitment is one rationale. Another is because “initially the cost of a customer is quite high, and so you really want to make sure that you’re getting the value out of that,” Spikes says, referring to required marketing investments, publishing related case studies, channeling lessons learned to the engineering team, and providing high levels of customer service to an expanding number of users. “Customer support is no easy task,” he says. “Our culture here is to provide a white-glove level of support for all customers, and to make that scale is also kind of a challenge.” In this exclusive Executive Session interview, Spikes discusses: The biggest challenges associated with founding and leading a security software startup; Strategies for making Spikes Security grow at the right pace, and his underlying thinking; Future plans to “hyperscale” the Spikes technology and sell not just to enterprises, but also the consumer world. Prior to founding and serving as CEO and CTO of Spikes Security, Spikes was the fourth employee to be hired at Space Exploration Technologies, or SpaceX, founded by entrepreneur Elon Musk, which is attempting to revolutionize space travel. Before that, Spikes was one of the first employees at PayPal, where he served as the director of IT, and he also worked at such firms as digital content studio Everdream and Web software company Zip2
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Barak Ben Avinoam, BGV Partner in Israel shares his perspective on Israeli entrepreneurs seeking to raise capital from Silicon Valley based VC firms. When I meet with Israeli entrepreneurs I am often asked questions on how best to deal with the US VC community. This blog focuses on identifying the common pitfalls as well as a short list of do’s and don’ts. First, ask yourself “How big is the addressable market for the problem that I am trying to solve?” Some entrepreneurs start a company that is focused on a niche market, offer a one-feature product, or provide incremental improvement to a large problem. This often leads to a relatively small TAM (Total Available Market), and will not be a very interesting value proposition for most investors. Second, try to get early product concept validation from your potential customers well in advance of the development work. Many Israeli entrepreneurs come up with great new technological innovations, but often do not take the time to validate their idea with potential customers due to distance and or cost issues. Remember that having a POC with a Israeli financial customer may be a nice achievement, but may not necessarily represent the mainstream requirements of typical Enterprise customers and CIO’s in the US. Third, having a well-balanced team is another key point that is often overlooked by Israeli entrepreneurs. Teams of two or three brilliant engineers who served together at the same technology military unit is a big advantage, but may not necessarily be an indication of success for building business operations in the US market. It would be prudent to add a person with product management and or business development skills early on in the process, who can communicate with potential customers/partners and help to align the technology team with the market requirements. Fourth, forecasts and projections are a common pitfall for first time entrepreneurs, and it might be an even higher challenge for Israeli teams. Most entrepreneurs are overly optimistic, and that may be a pre-requisite for this challenging task, but remember that every sales performance or R&D milestone will be compared to the original forecasts in due course. It is better to be conservative and exceed expectations, than to explain to your Board why you did not meet your numbers. Remember that you will be confronted with every forward-looking statement that you make, so think through the achievability of plans before you make public presentations and commitments. Another common mistake that entrepreneurs make is not sharing bad news with their investors and Board members quickly enough. Running into an unforeseen obstacle or missing deadlines is common at early-stage companies. It is not the end of the world if you handle it quickly and pro-actively. Remember to deliver good news fast, and bad news faster. Lastly, a few words about valuation during investment negotiations. Many times entrepreneurs try to maximize their company’s pre-money valuation in an attempt to protect their equity stake from dilution during the first round of financing. While this is to be expected, entrepreneurs should also take into account that building a venture backed company often requires multiple rounds of financing and maximizing valuation at the first round can create problems at subsequent financings. Optimizing dilution for the entrepreneur requires a focus on winning the war and not necessarily the battles along the way. Sometimes optimizing the valuation in a lengthy negotiation process might come at a heavy cost of missing short-term business targets due to loss of focus and momentum. Unrealistic high valuation at the current round might lead to a sharp downward correction at the next round of financing, which might be a fatal blow for the company. Note that valuation tends to correct itself overtime based on performance, so it is better to deliver better-than-forecasted results, which will lead to a significant increase of valuation at the next round of financing.    
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Reprinted with the permission of Udayan Gupta and Tom Darling These are heady times for the venture capital industry.  Record exits, record investments and record fundraising. More important, investors – many skeptical of venture capital as a legitimate asset class – are coming back to the industry.   Not the largest ones such as Calpers but many smaller ones – small college endowments, smaller pension funds and, most significant, wealthy individuals and family offices from within the US and abroad. “It’s a more rational market,” says Andrea Auerbach, managing director and global head of private investment research at Cambridge Associates.  “Lessons have been learned. The Internet boom of the 2000s caused a surge of capital that inflated valuations and subsequently lowered returns.  And while the present boom creates the temptation to flood the market with new capital – a reprise of the early 2000s — it hasn’t happened,” she explains. This is not a venture capital renaissance by any means.  But the numbers suggest that the industry is not just all about a few titans that pump up the volume but about a diverse community of venture capitalists that is beginning to find its own niches and strategies and marketing to the appropriate investors.   Still, the numbers are at the heart of the re-emergence. Venture capital funds are making money. Venture capital firms realized $105 billion worth of investments in portfolio companies during the first three quarters of 2014, higher than in any other entire year in the period since 2007, according to Preqin, a UK based provider of alternative assets data. And they’re investing money too, adds Preqin. More capital was invested in companies by venture capital firms in the second quarter than in any other quarter, with $23 billion of funding across the quarter. Alongside, corporate venture funds are investing in record amounts. Corporate venture funds invested $993.6 million in 176 deals to U.S.-based companies during the third quarter of 2014, according to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA).    Indeed, corporate venture accounted for 10.0% of all venture dollars invested and 17.2% of all venture deals in the third quarter, marking the strongest quarter of 2014 as a percentage of total venture investing. One hundred and sixty corporate venture groups invested almost $3.3 billion in 562 deals through the third quarter of 2014, representing 9.3% of total venture dollars invested and 17.7% of all venture deals. The venture economy also benefited from the overall surge in M&As. 127 U.S. based venture-backed companies were acquired for $20 billion, the highest quarterly amount since 2000.  Facebook, Cisco and Google were among the most prolific buyers and continue to be among the most likely suitors for every major deal. Perhaps most important, investors are returning to the venture capital industry.  To date, venture capital funds have raised $38 billion   surpassing the $31billion raised by 274 funds that closed in 2013. And more than half (56%) of venture capital investors surveyed in October 2014 said they would make their next commitment to a venture capital fund by the end of 2015.
“The internationalization of venture capital applies also to investors,” says Tom Darling, a senior advisor to venture capital funds and a former Citicorp fund manager. Chinese and Indian investors with excess capital are diversifying from their native funds into the US market in particular. Firms like WI Harper Group in Beijing have played a “bridge” role since the late 1990s; now they are players in both directions between China and Silicon Valley, says Darling.
Just a year ago, institutional investors, many desperate for cash to meet current obligations, would ask venture funds how quickly they could make distributions.  And in the process they screened out smaller funds and those that were early stage.   But with the stock market at record highs, investors in the industry are more focused – long-term investors who understand the illiquidity of markets and illiquid strategy that drives venture capital, says Auerbach of Cambridge Associates.  Investors are seeking out more focused and specialized funds and are a lot more realistic about investment horizons. Specialist consumer-focused, financial services-focused, health care-focused and technology-focused funds outperformed generalist funds, says Cambridge Associates. In response, venture capitalists are designing smaller specialized funds that display their own strengths and also recognize investor needs for a range of returns, says Darling.  So, Benhamou Global Ventures, a technology fund launched by Eric Benhamou, a former CEO of 3Com and a number of Silicon Valley high-tech businesses, is selling his domain expertise and a shorter-term investment scenario:  “I will invest in A rounds and sell them as C rounds.”
Benhamou says that his fund tries to combine his and his teams’ operating experience and cross border sourcing.  “BGV is designed to take advantage of technology’s globalization, with representation in Silicon Valley, Northern Europe and Israel, all sources of the new IT technologies of cloud, cyber security and Internet of Things,” he adds.
The shorter return duration and the small fund aren’t necessarily for large institutional investors but it is playing well with smaller investors who want a piece of new technology ideas and are quite comfortable with the values they can create in the private space, explains Darling. Some venture funds are adopting a rollout model that traditionally has been the stock-in-trade of small buyout funds.  New York’s Ravi Suria, a former Wall Street analyst and a hedge fund manager, has created Vaishali Capital, an investment fund which invests in small innovative ideas, builds them out and then brings in investors to grow the idea and create scale. The initial deal flow of Vaishali (named after one of India’s legendary ancient Eastern cities)  will come from  a  biosciences based skincare incubator  that will develop and commercialize  medically or scientifically derived patented molecules, delivery systems and devices for overall health, wellness and anti-aging benefits primarily in the non-Rx consumer sector. Suria also is targeting smaller investors and family offices because traditional advisors and consultants still are sticking to brand funds, unwilling even to vet the smaller and usually more innovative funds. All of this experimentation with ideas and investors comes at a time when big investors say they want to scale down. Some of them feel that the bigger funds simply cannot deploy more capital or produce better returns. So large funds such as CALPERS says they will reduce their exposure to venture capital. Over the next ten years it will reduce its venture exposure to 1% of its total private equity portfolio – down from 7% now. “The Achilles Heel for venture capital funds since the turn of the millennium has, of course, been performance. Returns have generally been lagging well behind other private equity strategies, but despite this, many investors have stuck with VC,” writes Chris Elvin, head of private equity products at Preqin. But now that the IPO markets are open, there’s a strong M&A environment and returns are up, the industry may once again be gaining back the relevance it seemed to have lost.
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Anik Bose, General Partner at Benhamou Global Ventures (former SVP Corp Dev @ 3Com and Investor/Board Member of H3C) shares his perspective on building a global technology business in China. Building a successful Joint Venture in China requires one to recognize the opportunity but also to be able to mitigate the inherent risks.  This John F Kennedy quote captures the inherent tension eloquently – “The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger–but recognize the opportunity.” Within 3 years of it’s inception, H3C (http://www.h3c.com/portal/About_H3C/)  a Joint Venture between 3Com and Huawei had captured 31% market share in China and developed a R&D platform of 2,000+ engineers at 1/6th the cost of competitors like Cisco, Foundry and Extreme.   Within 6 years of it’s inception H3C was operating at a revenue run rate of $1Bn+ with 20%+ operating margins and representing $2Bn+ in shareholder value for 3Com.  H3C is one of the most successful technology JV’s of its kind based on most metrics.  Established in late 2003 the JV’s strategic objectives were: a) TAM expansion – Capture a significant market share of the China enterprise switching and routing market; b) Establish a high quality low cost R&D platform for worldwide enterprise switching and routing products. The strategic reasons for building a Joint Venture (JV) in China for technology companies often range from TAM expansion in China, transforming their R&D and supply chain cost structure and or both.   But even with the best intentions the failure rates among cross border JV’s is high.  According to a report on JV’s and Alliances by the Tuck School in 2006 over 50% of JV’s fail. I have often been asked – “What was the secret ingredient behind H3C’s success?”  People often expect a simple answer.  In reality the answer is that the secret ingredients were a combination of : i) A carefully crafted formula that addressed several critical success factors; ii) An exceptional JV leader – Zheng Susheng (then H3C President and now close friend) and; iii) A tremendous amount of hard work by all the parties involved.  If it were easy then successful China JV’s would be the norm not the exception.   In this blog I will outline the key elements of the formula behind H3C’s success – see diagram and details below. 1.  Pre Deal – A big domestic market combined with the presence of local engineering competencies with the required skill set is a pre-requisite condition for success.  Next Partner selection must be based on a clear alignment of longer-term vision and goals, in addition both partners must bring complementary competencies required for the JV’s success.  Deal structure must be carefully crafted to address JV scope, align value expectations, minimize operational overhang of “minority investor protection rights”, establish an appropriate Board structure for governance and managing conflicts while providing a clear mechanism for exit.  All these tasks must be accomplished within the context of understanding the Chinese culture, a few examples: –        Local partners often tend to have global aspirations for the JV, often a source of conflict with multinational partners –        Furthermore legal contracts cannot be a substitute for relationships – strength of relationships are often the basis for conflict resolution not contracts alone –        Local business practices tend to be relatively opaque – limited business and financial transparency –        Board meetings tend to be primarily ceremonial with all the critical work occurring a few days prior to the board meetings. –        Finally the Chinese culture tends to be “operational excellence” and “customer intimacy” oriented NOT innovation – consequently “fast follower” JV product portfolio/roadmap have the best chances for success Once the above ingredients are in place then the next most important element is the selection of a JV leader, one who possesses the relevant industry knowledge/relationships as well as a proven leadership and execution track record.  A strong JV leader is the glue that builds the team, the business and can manage the conflicts between the JV parents – a rare skill set.  Multinational companies often tend to focus on the wrong skill sets when selecting JV leaders such as English language skills because they feel more comfortable with a bi-lingual executive but this should be a secondary criteria not the primary. 2.  Post Deal – An important execution task is to create goal alignment – this requires understanding parent core business cannibalization risks from the JV; investing time in building multi level senior relationships between both parents and aligning interests through the creation of a compelling operating plan, one that is tied to an aggressive JV incentive plan that rewards management and employees for exceptional performance.  A highly variable compensation structure creates an entrepreneurial culture that avoids the Multinational Corporation “salary inflation trap” while rewarding exceptional performance.  Maintaining goal alignment requires creating transparency through process linkages between the JV and the parents, building trusted relationships with JV executives and ensuring commensurate ongoing value contribution from both parents to the JV’s success.  Finally preparing for exit requires navigating through the landmines of valuation expectations, creating a compelling go forward vision and role for the JV team and creating a retention plan for the management team and employees. In summary, the potential for creating value from cross border investments can be significant but realizing the potential requires addressing both pre and post deal critical success factors.  Companies often fail to unlock this potential either because they fail to address critical pre-deal issues or they declare victory after signing the agreement and do not invest time on de-risking the important post deal issues.
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Building a technology business located in Silicon Valley is more of an art than a science. Adding a cross border dimension could create the perception of an impossible task. Eric Buatois, general partner at BGV has built venture-backed cross-border companies for more than a decade between Silicon Valley, Western Europe, Eastern Europe and India. In the early days of venture capital, both the technology innovation and market opportunity were located in Silicon Valley. Since the late 80’s and early 90’s technology innovation has blossomed in Israel and Western Europe. In the late 90’s and early 2000’s, China, Taiwan and India became strong technology development centers. With the Internet bubble crash and the subsequent limitations on immigration visas, many talented engineers and entrepreneurs returned to their home country with the know how to build start ups and raise venture capital funding. Over the past 5 years, many strong technology companies have been created in outside Silicon Valley.  Several strong companies such as Yandex (Russia), Alibaba (China) have developed successful Consumer Internet companies by replicating proven Silicon Valley business models in this space. This fundamental and profound exchange of ideas, experience and people has created “corridors” between Silicon Valley, Israel, China, India and Europe,.   Entrepreneurs from these corridors have few inhibitions to relocate the headquarters of their company to Silicon Valley while maintaining strong R&D teams in non-US countries.  Finally salary and cost of living increases in Silicon Valley combined with the difficulty of recruiting local talent along with the limitation of work visa for skilled professionals are forcing entrepreneurs to distribute their R&D internationally. Technology companies seeded outside the US especially in the Enterprise IT space need to have a presence in Silicon Valley to either address the large US market, set up strategic partnerships with US based technology giants like EMC, VMware, Citrix, Oracle, Google etc, or prepare for their exit (IPO or M&A).  If these trends are well known with several success stories, why are many Silicon Valley Venture Capital firms wary of leading cross border investments ?  It comes down to the perceived complexity/risks associated with cross-border deals combined with the lack of core competencies required to address them.  This includes: 1.  Cross cultural understanding Given the wide diversity of cultures (China, India, Israel, Russia etc), one cannot be an expert in every local culture. But the board members of cross-border companies need to have an awareness of cultural differences.   English may not be the first language learned and spoken by the entrepreneur. Despite using the same words, he or she may imply a different meaning. A widely used phrase such as “commitment” or “schedule” have different meanings in different cultures. In the Scandinavian, Chinese, or Japanese cultures, an executive will never commit to a schedule if he or she is not 99.5% sure and convinced that it can be met. In the Silicon Valley culture, an executive will commit if he or she is 80% confident that the milestone can be met. Compensation conversations often magnify these cultural issues. Silicon valley is well known for its meritocracy driven compensation practices. Sometimes such an approach could have an adverse impact on teamwork, especially in different cultures. Some cultures value teamwork above individual performance. Stock options are perceived differently in different countries either due to local taxations scheme or for local culture reasons. Consequently a tried and true compensation approach in Silicon Valley may not have an equal impact on employee motivation within cross-border technology companies .  Firms in Silicon Valley have developed a soft and diplomatic way of communicating criticism or suggestions for improvement. In the French, Israeli, Chinese or Russian culture, this soft feedback will not be internalized or understood. These cultures tend to demand a strong and straightforward communication. 2.  Investor Syndicate Alignment The investment syndicate in cross-border technology companies will usually consist of board members in Silicon Valley and from the local country as well. The cross cultural differences described above will also apply between different board members. During the first few months and the first year of the investment, face-to-face meetings should be the norm. The board should also pay more attention to define its values and operating principles. Board meetings should rotate between the various key sites. It is a good opportunity for directors to become familiar with the various parts of the organization and to understand the context in which they operate. Networking with investors or independent board members in the home country is a good way to get familiar with different practices and exit expectations. Bottom Line, it demands more international travel and time commitment from the directors. 3.  Recruiting and developing a management team with a global skillset Any young and developing organization tends to use the norms and the values of its founders as the underlying values of the company. The cultural values of the founding teams are usually very strong – for example a company created by an Indian or an Persian founder might tend to recruit Indian or Persian managers. While such an approach may reduce the integration risks it may create a missed opportunity to bring the best in class skillset into the company. A VP of sales or business development coming from a more traditional Silicon Valley culture may be more efficient in establishing partnerships with the large tech companies even if there is a longer integration cycle.  Many Israeli start-ups establish US headquarters at a certain stage in their development, with a US based CEO and VP of Sales. Board members have to be extremely involved and active in assessing the maturity of the organization to integrate best in class executives with different cultural backgrounds. Experienced cross border investors can tap a pool of proven executives with a solid experience of mediating between the Silicon Valley and their home countries cultures. These executives tend to be more open to address the right business opportunity in the right place instead of only pushing the North American market. If Consumer Internet businesses tend to be local by nature, technology intensive B-to-B businesses have to be global since inception.  The enterprise IT market is definitively global and early stage product adoption can take place outside North America.  The necessary investment needed to build a cross-border technology company will pay off with building a more flexible firm.  A firm with an ability to exploit multi-regional market opportunities while leveraging lower cost local talent and credible local investors.  Consequently building successful Enterprise IT companies in the future will increasingly require cross-border investment competencies for success.
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