Entrepreneurs of the World, Unite

With this high tech era paraphrase of an old Soviet rallying cry Victoria Silchenko, founder and CEO of the U.S.-based Metropole Capital Group, joins our Marchmont bloggers and raises an important question: is the start-up success rate of just 5% normal in the world that has an estimated 400 million entrepreneurs? The story was first posted at Huffington Post.

It was a wake-up call for me -- not that I was sleeping. In fact, it is three a.m. as I write this and I've just finished sending out emails as part of pitching and promoting an event that I am organizing here in Los Angeles -- the Global Entrepreneurial and CrowdFunding Forum. I am an entrepreneur helping other entrepreneurs and this forum is my very personal attempt to assemble and create a cross-border exchange of fundraising ideas among entrepreneurs and investors in a tough economy. BTW, the slogan I've arrived with might sound to you a bit "red": Entrepreneurs of the World, Unite, but hey, I am a native Russian and hope you have a sense of humor too.

But back to the "wake-up" -- well, I just read that according to a new study from the know-it-alls at Harvard, 95 percent of start-up businesses fail. That's ... a lot. Further findings come from the Global Entrepreneurship Monitor, which points out that the number of entrepreneurs around the word is growing at an astonishing rate and now numbers nearly 400 million across 54 countries. Fascinatingly, the intent to start businesses is highest in emerging economies and in some middle-stage developing economies like China, Chile and Brazil. Don't they read the Harvard Business Review too?

The fact that the success rate of "making it" is just 5% annoyingly stuck in my head and made me wonder. Are we all delusional for being inspired by the stories of Mark Zuckerberg, the legendary Steve Jobs or my personal hero Richard Branson? How many stories for the past two years do I know where success was a result of someone's dream come true, in other words, someone was able to take their idea to the level of business project and the business project to the stage of product or service which has a price tag on it? Let me think. The guy who was trying to find investors for his travel website idea has just moved to SF, landed a job at Google and seems quite happy (so is his wife). The young woman who was pitching her media company disappeared from my radar once she got married.

Myself? Well, just like any entrepreneur I am my own cheerleader, educator and self-founder. BTW, being a self-founder wasn't really on my business plan but my consulting business has proved that it is not a recession-proof business and the price of this discovery was equal to the price of my beautiful car. I did have a choice -- but would you give away to an "angel" investor 40 percent of your company for just a few thousands bucks? Me neither. And why are people who take away the junk piece of what you built for years called "angels" anyway? The interesting thing is that I wasn't even looking for an investor! So, keep in mind that "if-you-build-it-they-will-come" happens not only in movies.

I suspect that many of us entrepreneurs believe that through being an entrepreneur we can discover WHO we really are and what we HAVE doesn't really mater. Most of our aspirational moves are about the desire for dignity, freedom to make a choice and believe that we can change the word to a better place. We share and we bond together because we know -- we can lose with a high probability, but we can never lose enthusiasm. Yes, we are dreamers and we are artists painting a picture of success without having to pay tribute to the folks who see the world in black and white and don't recognize the colors. It is a struggle -- but we are in it together. There are 400 million of us. Entrepreneurs of the World, Unite!

Part III: The Power of Clones to Startup—Start-up Communities

More from Tom Nastas on Russia's start-up community. Please check out prior postings to read the beginning.

Subjects in this post include:

1.)   Drive Growth and Innovation in the Supply Chain

2.)   Sidestep the Obstacles that Impede Scaling Up—Investor Attitudes to Risk & Failure

3.)   Controversy of Clonentrepreneurship: Cloning the Idea or Hatching a Start-Up?

4.)   The Spread of Clonentrepreneurship

Last time in Part II, Cultures of Risk—Financing the Startup of Start-up Communities, I discussed:

1.)   The Cultural Divide:  What Investors ‘Buy’

2.)   What Investors Fear

3.)   The Culture of Venture Capital:  Friend or Foe?

The take-away from Part II. Local investors in the emerging markets ‘buy’ risk by investing in the known and understandable. This explains why they finance business models of fast moving consumer goods, food and beverage, supermarkets, telecoms, light manufacturing and automotive components as examples. Investors finance such business models even at the seed and early stage of company development.

The reason investors invest as they do; markets and customers are a 100% guarantee in these sectors, even in greenfield projects, with the risks of investment in execution, not the risks of market existence and the uncertainties if the tech will work, will customers come and pay.

Clones copied, localized and pasted into emerging economies impact the DNA of investors to risk since many generate revenue quickly—overcoming the fears that investors have for early stage tech.  But impacting the behavior of investors to risk is not the only contribution of clones to the start-up of start-up communities.

Drive Growth and Innovation in the Supply Chain

Although clones look the same on the surface, one country to the next, there are multiple differences in execution.  Many clones require supply chain partners for them to work, yet many of these companies do not exist in emerging countries.  While outsourcing from delivery to call centers are common services for hire in the US and Europe, clones frequently build them themselves, in what I call ‘self-sourcing.’  In other cases, new supply chain entrepreneurs emerge to offer the services to make clones work.

Let’s examine three such innovations.

Logistics and delivery

Lack of effective and efficient delivery companies forced Ozon, the Russian clone of Amazon, to organize its own logistics operation for door-to-door delivery of goods to their customers in Moscow and St Petersburg plus the delivery to more than 2,000 pick-up points across the Russia Federation.  With this asset in place, Ozon offers delivery services to others as the market for online businesses grows in Russia.  Like Ozon, the discount shopping club KupiVIP delivers product with its self-owned fleet of 100 vans; it leases extra vans when capacity is short. Yes FedEx and DHL exist in Russia, but the cost for local delivery approaches $100, too expensive for a book costing $15 or a $40 pair of shoes.

Getting paid

65% of all transactions in Russia are paid for in cash.  Almost 90% of Ozon revenues ($300 million) are cash.  ATM’s that accept cash for payment are widely used in Russia, made by QIWI, a Russian innovator.  But a new complication develops in a cash economy. In Russia for example, customers regularly inspect the goods to confirm that what was ordered is actually in the box. 25% of all online orders are rejected by the buyer with no money trading hands in cash transactions, or a credit has to be made if payment was made through a QIWI terminal, another snag that required innovation for e-commerce clones to work in Russia (and other emerging market economies based on cash vs. credit or debit card transactions).

Call centers required to reassure online buyers

50% of Ctrip (Chinese online travel company) customers purchase tickets by phone as do large numbers of Russian customers of Ostrovok, a Russian online travel company.  Both Ctrip and Ostrovok operate self-owned call centers staffed with real live persons to reassure customers that their on-line orders are placed, accurate and confirmed.

Clearly what emerging markets lack in the sophistication of online shopping in the United States creates a sea of supply chain opportunities for more start-ups to service clones in the developing world.

Sidestep the Obstacles that Impede Scaling Up—Investor Attitudes to Risk & Failure

It’s great to talk about the need for failure, how great business models evolve from failed attempts and the need to encourage more failure. The question is who pays for this learning, and how recover from it? Investors not only in Russia, but other emerging markets label a failed entrepreneur a loser for life, never to raise money again with failure an embarrassment that frequently spills onto her or his family; such shame creates an environment where entrepreneurship is discouraged as a career path vs. a ‘safe’ job, e.g., working for Government, a state-owned enterprise or a multinational corporation.

Even more troublesome is another deep seated cultural attitude to failure in emerging market countries.

Failure = Fraud: we know this is not true, but that’s the verdict when entrepreneurs fail in emerging markets.

The attitude that failure equals fraud stems from ‘who pays for the cost of failure’ as failure in emerging markets means the promoter, the entrepreneur, and the team did not possess the competencies to overcome the challenges of development, or did not really understand all the requirements needed (or did not do all) for success. Yet we know that experimentation, trial and error, failure and pivoting are necessary to define the requirements for business model creation, making the path to progress unlikely in developing countries.

In the former Soviet republics, East Europe too, entrepreneurs and scientists have financial responsibility to repay money under failure; prosecution and jail-time are real possibilities.  Even more chilling are the threats of investors to entrepreneurs “You lost my money (equity), now you must pay the money back (i.e., the investment is equity if achieve success, debt if the venture fails!).”

The fears of investors, attitudes to failure and who pays for failure create a culture that makes early stage venture capital dicey in the emerging markets.  Such behavior discourages risk taking and incentivizes entrepreneurial commitments to proven business models for proven markets like fast moving consumer goods, retailing, wholesaling, telecoms, and yes, clones from Clonentrepreneurs.

But given the successes of clones to start an entrepreneurial revolution in a country, they are not without their critics.

The Controversy of Clonentrepreneurship: Cloning the Idea or Hatching a Start-Up?

Given the successes of clones to satisfy the appetites of domestic customers and local money, they have their critics when taken to the extreme.  Sarah Lacy wrote an upbeat article in TechCrunch about copy-cat business models in China yet almost three years later levied stinging criticism at the Samwer Brothers with their rip-off of Fab.com called Bamarang.

Their newest clone for the Middle East Lazada is especially bold: I thought I had inadvertently landed on Amazon, that’s how closely Lazada resembles it.

Even Union Square venture capitalist and blogger Fred Wilson jumped into the frying pan with his opt on cloning start-ups.

Condemnation aside, one can’t argue with the quick and profitable financial successes of cloning.



Controversy intensifies when founders clone not just the idea, but every pixel of the start-up to make the clone an almost exact duplicate of the original as the Samwer Brothers did.

In Russia there are multiple groups creating and financing clones.  One of the most aggressive is Fast Lane Ventures which cloned Pinterest (PinMe), Quora (OdinOvet), Eventbrite (Eventmag), Airbnb (RentHome.ru) to name a few; their Zappos clone Sapato was acquired in 1Q2012, 18 months after launch for an approximately 2x return for investors including Fast Lane (plus Intel Capital, eVenture Capital, Kinnevik and Direct Group too).

The Spread of Clonentrepreneurship

Clonentrepreneurship is sweeping not only Russia, but all of Planet Earth.

Cloning has become a trusted way for more entrepreneurs to raise more money from more investors, thereby financing the future of their start-up communities, not only in the emerging world, but developed countries too as the explosion of car sharing clones demonstrates.

Zipcar was one of the first to execute Internet business models for the sharing of cars. Zipcar was not the innovator, but the imitator with Vancouver’s co-op called Modo operating for more than 15 years and the catalyst that helped communities and non-profits get car sharing started in several continents.  While it may not have started in the Internet space, Modo was one of the first to institutionalize collaborative sharing in the community.

So what is really being cloned, who is cloning what and to whom?

Is it car sharing or the collaboratively sharing of underused assets and transforming them into new business opportunities? If the later, clonentrepreneurs are hard at work around the world creating the next set of companies in the sharing space to take advantage of this social movement as these examples demonstrate:

ParkAtMyHouse.com—shared parking spaces
SkillShare.com & TaskRabbit.com—sharing of skills and chores
Murfie.com & Swap.com—collaboratively sharing of DVDs, books & video games
Snapgoods.com & Neighborhoods.net—sharing of ‘stuff’
I-Ella.com & Thredup.com—sharing of clothes & wearables
Sharedearth.com & Yardshare.com—the sharing of land for gardeners & land owners with capacity
Freecycle.com & ILoveFreegle.org—sharing of ‘stuff’ people no longer want/need
Given the contributions of clones to spark the startup of start-up communities, are they a panacea to growth? Do alternatives exist in the quest for growth? And what can actors in the start-up community do to impact investor DNA for more seed and early stage investment?

For Next Time—Part IV: The Quest for Growth

In Part IV, subjects I’ll discuss:

1.)   Clonentrepreneurship or Alternative Paths to the Start-up of Start-up Communities?

2.)   Change the Culture and Amazing Things Happen

You're welcome to send comments, opinions and questions directly to Tom at mailto:Tom@IVIpe.com . We also encourage you to visit his personal website.

A chance for all

Mikhail Treyvish, one of Marchmont's Advisory Board members and an expert in factoring and corporate rating, is suggesting his way of maximizing the creative energy of enthusiasts. 

There’s an old parable. A wayfarer was passing by a construction site. “What are you doing?” he asked one of the builders. “Rolling this goddam cart,” the man replied. “And what are you doing?” the traveler asked another builder. “Earning my daily bread,” was the answer. “And you, why are you here?” the wayfarer turned to a third builder. And the reply was, “I’m here to put up this beautiful building.”

Many have always wanted to put up their beautiful buildings, whether it a bygone age or today. Some have ways and means to do that, some don’t.

Some have not yet found their ‘construction ideas.’ Others have lost their unfinished creations to a crisis, fatal errors or an adverse concourse of circumstances. But some have already laid the foundation for their ‘beautiful buildings’ and seek ways of really putting those up.

New entrepreneurial ideas get conceived across the globe every day, leading to the setting-up of new companies that might one day become international flagships. However, taking part in building such companies is a rare chance available only for the few.

The following statement may look a bit too ‘over-the-top’ for you, but my colleagues and I claim we have found a new grand entrepreneurial idea which, if realized, will give a whole army of enthusiasts from across Russia and beyond access to ‘construction sites’ of what will be new top businesses of the 21st century.

We have decided to start the forming of an expert community willing and ready to use knowledge and advice to help outstanding business visionaries realize their dreams. You may say, “Well, and what’s new here? All you are planning already has a name and works—it’s crowdsourcing!” But what we expect from experts we’re bringing on board is not only one-shot answers to business problems—we look for experts to be always available for advice. Such community members won’t just lay one brick in the foundation of a new ‘beautiful building’ and bow out—they will make sure the topmost floor is built. We have christened this process ‘crowdmentoring.’

In this system, a student or manager from, say, Yekaterinburg will be able to contribute to the creation and development of a Moscow, St. Petersburg, French, British or Australian based company. And an entrepreneur from Samara or Kazan can rely on assistance from a panel of public experts consisting of creative people from all across the planet.

Our program is not exclusively limited to entrepreneurs; charities, educational institutions and municipalities could also benefit from it.

We have called the program OmniVision. The prefix ‘omni-’ stands for ‘all, universally covering’ in Latin; and we have vision that bonds different entrepreneurs for whom developing a business is like putting up a beautiful building.

Part II: The Cultures of Risk—Financing the Startup of Start-up Communities

Tom Nastas continues his reflections on Russia's start-up community. Please check out prior postings to read the beginning.



Subjects in this post:

1.)   The Cultural Divide:  What Investors ‘Buy’

2.)   What Investors Fear

3.)   The Culture of Venture Capital:  Friend or Foe?

Last time in Part I, I discussed:

1.)   First, Three Definitions

2.)   The Russia Tech Scene

3.)   Growth in Russia

4.)   What Changed for Growth to Emerge

5.)   The Spark that Ignited the Start-up of Russia

Summary from Part I:  Beginning about 2006, innovation became a priority of the Russian Government to diversify its economy from oil/gas with its multi-billion dollar investments in the Russian Venture Company and the Russian Corporation of Nanotechnology. Even with these investments, the needle of tech investment crept up ever so slowly in venture stage companies.

But everything changed beginning in the 2nd half of 2010; Russian entrepreneurs cloned US business models in Internet e-commerce, social and mobile with 20+ startups attracting more than $400 million in less than eighteen months through 2011.  For 2012 investment in start-ups and venture stage companies is estimated at between $800 million to $1 billion.

The ‘take-away. Russian entrepreneurs demonstrated that cloning established Western Internet business models and localizing them for the domestic market captures growth.  This was what domestic investors needed to open up their pocketbooks and spark the startup of Russia.

Ok, so, uhm—what’s so revolutionary about entrepreneurs cloning the ideas of others and investors financing start-up clones?

To answer this question, I discuss the culture of risk in the developing countries and how it impacts the behavior of local investors and their willingness to finance seed and early stage tech business models.  Then I contrast how their investment behavior differs from investors in the developed countries.

The Cultural Divide:  What Investors ‘Buy’

American tech and start-up entrepreneurs ‘sell opportunity’ to raise money. This works great in the United States since angel investors and venture capitalists are comfortable with risk, ambiguity and uncertainty, and willingly pay the costs of failure when business models don’t work, founders pivot and start-ups evolve into something different from entrepreneurs’ initial intentions.

Except for the very few, most local investors from Manila to Moscow and from Shanghai to San Paulo approach risk differently. Sure, opportunity is required for the financing of ventures.  But the risks of execution are more importance as the deciding factor since emerging market countries are opaque and with their lack of transparency—invisible risks and obstacles can cause even the most experienced investors to lose their entire investment:  Capital preservation drives financing decisions.

Consequently they buy ‘risk’ by investing in the known and understandable;  businesses and projects with markets and customers a 100% guarantee, where the risks of the investment are in the execution of building a factory or constructing a warehouse, creating a bank, establishing a chain of shops or restaurants as examples. These are the uncertainties they have dealt with as businessmen and investors, and have the experience to help entrepreneurs solve—avoid.

What Investors Fear

The risks of financing innovative firms, i.e., does a market exist, will customers buy, achieve promised performance—often technology based—are uncertainties too great for domestic investors in emerging markets since they add additional layers of risks to those of execution and involve a different sort of risk assessment—skills and experiences they frequently lack.

Clones overcome these fears since many generate revenues immediately, some from day #1, demonstrating that a market exists, the tech works, customers show up and pay.  With these risks behind the venture, the way forward is managing execution—risks that local money in emerging markets ‘buy:’  the tolerance of emerging markets investors for the US model of entrepreneurial experimentation, trial and error and the funding of pivots is zero.

Why is this so?  And how do we use this culture of investor risk-taking as our ally, to make amazing things happen; more entrepreneurship, more innovation and more investment for the start-up of start-up communities not only in Russia but throughout the emerging world from Chile to China, Kazakhstan to Kenya, India to Indonesia?

The Culture of Venture Capital:  Friend or Foe?

To obtain a deeper understanding why entrepreneurs and investors behave as they do in the emerging markets, we must look at an unlikely place to frame this discussion:  Silicon Valley.

“Silicon Valley is the only place on Earth not trying to figure out how to become Silicon Valley.” (Robert Metcalfe, father of Ethernet, founder of 3Com, author, pundit & conference host)

Silicon Valley’s greatest attribute is not its ability to finance the future and failure, but investors’ attitude to risk which shapes their risk taking, their acceptance of ambiguity and uncertainty to early stage tech deals, thereby attracting entrepreneurs with the wildest (and craziest) ideas.

For every ten investments made by investors, two fail with all money lost, six return the original investment + a low to modest rate of return, with the remaining two generating breathtaking profits (Facebook, Google, Apple, Cisco, Oracle, Instagram and Microsoft as examples). These ‘superwinners’ as they are called, produce the superior rates of financial return that compensate for losing investments and slightly profitable ones.

Of course one never knows in advance which investments will be superwinners or also-rans. Since Silicon Valley investors know that statistically they’ll invest in their fair share of superwinners, they have the confidence to finance the wild and crazy, a few which become successes. Superwinners breed or attract others to launch start-ups.  As more entrepreneurs enter the market, the number of new companies financed increases with less time required by investors to make the investment decision. More choice is what investors need since for every one investment, 99 are rejected;  to consummate ten investments an investor needs to see 1000 opportunities.  More choice attracts more capital to the start-up community as other investors jump in to finance the next set of superwinners.  The start-up community prospects and perpetuates to a thriving ecosystem.

Many superwinners did not start on the path to greatness, and they only found it after experimenting with different business models until they hit the bulls-eye;  others started down a path only to change direction—pivot—to find what the market and customers would accept.  Silicon Valley investors willingly finance early failures since they know statistically, many pivot to success as Google, Instagram, Facebook, YouTube, PayPal and others did to achieve superwinning status. While it may seem counterintuitive, investors must finance failure since without them they are not taking enough risk.

It’s this willingness to finance ambiguity and uncertainty that makes Silicon Valley—uhm—Silicon Valley.

The National Venture Capital Association (USA) estimates that in 2010 the US venture industry invested the equivalent of $3,945 per person living in the Silicon Valley area vs. $43 per person in the rest of the US, including other start-up communities like Boston and New York. That’s a 91:1 ratio.

Go to my home state of Michigan and the number falls to $15 per person, a ratio of 263:1. So the likelihood of a Detroit startup raising venture capital in Michigan is more difficult vs. Silicon Valley.

In Russia and other emerging market countries the amount of capital invested/population is even less than Michigan;  these regions lack the quality and quantity of deal flow that typifies the Valley and local investors are unwilling to fund experimentation, pivoting, trial and error in business model creation.  Since domestic investors buy the ‘risks’ of execution by investing in the known and understandable—businesses and projects with markets and customers a 100% guarantee (experimentation/pivoting not necessary)—the chances of superwinners being created and financed is remote:  Yet an increasing flow of future ‘superwinners’ is what’s required for local investors to invest in, and for a start-up community to crystalize.

That is until an event or series of events breaks this cycle to change the trajectory of the market.  In Russia it was the early and fast liquidity from the Groupon clone that demonstrated the merit of cloning Western business models plus the IPO of Mail.ru that minted the money for clone investment.  With the United States as the engine of start-up creation in the world, it was natural for Russians to copy, localize and paste clones into Russia, to capture the eyeballs and wallets of the Russian consumer. And then—the pocketbooks of investors too.

The chasm between the cultures of risk-taking by local investors in Russia and the risk of start-ups was crossed. Foes became friends. The start-up of Russia began.

For Next Time—Part III:  The Power of Clones

In Part III, I discuss the multiplier effect in start-up creation that clones have in local market.  Clones do more than just build a local network of supply chain partners thereby increasing the # of startups for a startup community to emerge.  Their successes impact the DNA culture of investors to risk as they build new experiences in seed and early stage risk.  And they do so without taking the risks of opportunity that is normally associated with early stage companies since clones demonstrate that a market exists, the tech works, customers ‘get it’ and pay.

Subjects in Part III:

1.)   Drive Growth and Innovation in the Supply Chain

2.)   Sidestep the Obstacles that Impede Scaling Up

3.)   Controversy of Clonentrepreneurship: Cloning the Idea or Hatching a Start-Up?

4.)   Spread of Clonentrepreneurship

You're welcome to send comments, opinions and questions directly to Tom at mailto:Tom@IVIpe.com . We also encourage you to visit his personal website.