Entrepreneurial Ecosystems Around the World By Anand R. Kumar B.E. Computer Science & Engineering, APEEJAY College of Engineering, India, 2003 M.B.A., IE Business School, Madrid, 2012 SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULLFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF AR(HIVE MASTER OF SCIENCE IN MANAGEMENT STUDIES OF TECHNOLOGY AT THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY MAY 3 0 2013 JUNE 2013 B R ARIES © 2013 Anand R. Kumar. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Signature of Author: MIT Sloan School of Management May 10, 2013 Certified by: , ,. . " Shari Loessberg Senior Lecturer in Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management Thesis Supervisor Accepted by -U, ) - - Michael A. Cusumano. SMR Distinguished Professor of Management Program Director, M.S. in Management Studies Program MIT Sloan School of Management "page intentionally left blank" Entrepreneurial Ecosystems Around the World By Anand R. Kumar Submitted to MIT Sloan School of Management on May 10, 2013 in partial fullfillment of the requirements for the degree of Master of Science in Management Studies. ABSTRACT Entrepreneurship is a vehicle of growth and job creation. America has understood it and benefitted most from following this philosophy. Governments around the world need to build and grow their entrepreneurial ecosystems to support the economies and foster innovation. Approaches taken to encourage entrepreneurship vary around the world based on cultural norms, market conditions, and economic circumstances. Entrepreneurial ecosystems are generally comprised of the government, which builds rules and regulations to support entrepreneurship, the angel and venture capital industry, which provide necessary startup and growth capital to support entrepreneurship, the financial market, which provides financial incentives and exit routes for startups, and finally the entrepreneurs, who form teams and start companies. This thesis is an attempt to study and analyze the entrepreneurial ecosystems in the U.S, Europe, and Asia. Primarily relying on interviews with industry experts and supported by academic research, it draws qualitative comparisons of entrepreneurship processes among these regions to understand the differences in these environments. Thesis Advisor: Shari Loessberg Title: Senior Lecturer in Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management. "page intentionally left blank" ACKNOWLDGEMENTS First and foremost, I thank my thesis advisor Shari Loessberg, who guided me through the process. Shari's course "Early Stage Capital" sparked my interest in the venture capital industry and provided in-depth knowledge that helped me gather the confidence to conduct conversations at advanced levels with industry experts. She was very helpful during the whole process and kept me motivated towards my goal. She was also instrumental in keeping me on track and providing valuable guidance whenever I needed. In addition, I am thankful to the many entrepreneurs and venture capitals from around the world whom I interviewed and learned a lot from, especially Professor Howard Anderson, Steve Schlenker, Antonny Liem, Aryo Ariotedjo, Tom Hadfield, Christian Sutardi, Thomas Damek, Magnus Ekboom, Andrew Darwis, Jay Hum, Nicolas Wittenborn, Carl Stjernfeldt, Isaac Sukin, Pontus Sonnerstedt, Patrick Schneider-Sikorsky, Yan Ting, Adrian Li, Pratham, and Kay-Mok Ku .I specifically thank the entrepreneurs and venture capitalists from Europe and Asia who could draw upon many differences between the industry practices in these regions and the U.S. and work with me through the entire process despite restricted communication channels and time differences. I would also like to thank Prof. Michael Cusumano, Julia Sargeaunt and the team in charge of the Master of Science in Management Studies program for their unfailing support and commitment to improve my overall experience at MIT Sloan. Finally, I would like to thank to my family and friends for their support and invaluable suggestions. "page intentionally left blank" 7 TABLE OF CONTENTS A BSTRACT ............................................................................................................................................ 3 ACKN OWL D GEM EN TS ....................................................................................................................... 5 TABLE OF C ONTENTS.........................................................................................................................7 INTRO DUCTIO N ................................................................................................................................. 10 ENTREPREN EURSH IP IN USA .......................................................................................................... 13 O VERVIEWW ..................................................................................................................................... 14 STARTUP STAGE ........................................................................................................................... 15 FUND IN G STAG E ........................................................................................................................... 16 GRO WT H STAGE............................................................................................................................ 17 ENTREPRENEURSHIP FUTURE ................................................................................................. 18 VENTURE CAPITAL IN USA ............................................................................................................. 20 CURRENT INDUSTRY OVERVIEW ..................................................................... 21 IN D USTRY STRUCTURE ..... .............................................................................................. 23 IN VESTM EN T PROC ESS ............................................................................................................... 24 IN D USTRY FUTURE E . ................................................................................................................ 26 ENTREPREN EURSH IP IN EUROPE................................................................................................... 29 OVERV IEW ........... EUR ................................................................................................... 30 STARTUPSTAGE............................................................................................................................... 31 FUN D IN G STAGE ........................................................................................................................... 32 G ROW TH STAGE ........................................................................................................................... 33 EN TREPREN EU RSH IP FUTURE.................................................................................................... 33 VEN TURE CAPITAL IN EUROPE .................................................................................................... 35 CURREN T IN D US TRY OVERVIEW. .................................................................................... .... 36 IN D USTRY STRUCTURE ..... .............................................................................................. 37 IN V ESTM EN T PRO CESS ............................................................................................................... 38 IN D USTRY FUTURE ................................................................................................................ 39 ENTREPREN EURSHIP IN ASIA ......................................................................................................... 41 O VERV IEW I ...A................... ........................................................................................... 42 SEED STA GE ................................................................................................................................... 43 FUND IN G STAGE ........................................................................................................................... 44 GRO WT H STA GE ........................................................................................................................... 45 8 ENTREPRENEURSHIP FUTURE.................................................................................................... 46 VENTURE CAPITAL IN ASIA ............................................................................................................ 48 CURRENT INDUSTRY OVERVIEW .......................................................................................... 49 IND USTRY STRUCTURE ............................................................................................................... 50 IN VESTM ENT PROCESS................................................................................................................51 IN D U STR Y FU TU RE ....................................................................................................................... 53 C O N C LU SION ..................................................................................................................................... 54 CREATING A SUCCESSFUL ENTREPRENEURIAL ECOSYSTEM ........................................ 55 EN D CO N SU M ERS ...................................................................................................................... 55 GOVERNMENT AND REGULATORY ENVIRONMENT..................................................... 55 CAPITAL FLOW - DEBT AND EQUITY................................................................................56 MARKET AND CORPORATE ATTITUDE.............................................................................56 CULTURAL PERCEPTIO N ......................................................................................................... 57 EDUCATIONAL INSTITUTIONS ............................................................................................ 57 TALENT AVAILABILITY AND MENTORING OF ENTREPRENEURS ................................ 57 RECOMMENDATIONS TO DEVELOP ASIAN ENTREPRENEURIAL ECOSYSTEMS FURTHER .......................................................................................................................................................... 5 8 GOVERNMENT-LED INITIATIVES........................................................................................58 INVESTORS-LED INITIATIVES............................................................................................. 60 ENTREPRENEUR-LED INITIATIVES.................................................................................... 61 INTERVIEW TRAN SCRIPTS..............................................................................................................61 E X H IB IT S ............................................................................................................................................ 83 VC D EAL S : 2005-2012.....................................................................................................................83 WORLDWIDE VC INVESTMENTS TREND: 2005-2012 .............................. 83 ASIA INDUSTRY VC INVESTMENT: 2005-2012..........................................................................84 EUROPE INDUSTRY INVESTMENTS: 2005-2012.....................................................................85 AFRICA INDUSTRY INVESTMENT: 2005-2012 ....................................................................... 86 LATIN AMERICA AND CARIBBEAN INDUSTRY INVESTMENTS: 2005-2012............87 US & CANADA INVESTMENTS: 2005-2012..............................................................................88 2005 INVESTMENT TRENDS ................................................................................................... 89 2006 INVESTMENTS TRENDS ....................................................................................................... 90 2007 INVESTMENTS TRENDS ....................................................................................................... 92 2008 INVESTMENTS TRENDS............................................................................ 93 9 2009 IN VESTM ENTS TRENDS ....................................................................................................... 95 2010 INVESTM ENTS TRENDS ....................................................................................................... 96 2011 INVESTMENTS TRENDS........... ............................ ... ................ 98 2012 INVESTM ENTS TRENDS ................................................................................................... 99 REFERENCES............................................................................................... 101 10 INTRODUCTION While economic activities in the west have slowed down since the 2008 market crash, Asian markets have weathered the financial crisis reasonably well and are still growing due to increasing consumer demand. The majority of this growth, however, stems from existing large businesses. In India, for example, small businesses account for only about 10% of the Gross Domestic Product (GDP). The market potential of Asia cannot be denied, but it is imperative that the entrepreneurial activities in the region pickup to create more job opportunities for the growing population, especially in China, India and Indonesia. To develop these opportunities it is important for Asian nations to create healthy entrepreneurial ecosystems such as the one in America. Given the amount of activities happening in India and China, one may argue that the entrepreneurial ecosystem is already developed in the region. A question this paper examines is whether the entrepreneurial ecosystem has developed to the tune of its western counterparts. This thesis argues that the Asian entrepreneurial ecosystems are less developed compared to those in the U.S. and Europe due to systemic and cultural challenges. The entrepreneurial support system has not kept pace with the high growth and rising opportunities in the Asian region. This paper aims to identify the principal differences, potential reasons behind this lag, and finally present recommendations to close these gaps. Entrepreneurial ecosystems are comprised of three major actors - government, startup investors (Angels and Venture Capitalists), and entrepreneurs. Examining these players, this paper seeks to identify their impact in creating and improving ecosystems. While the role of governments cannot be denied in developing a healthy ecosystem, it can also not be influenced easily. One can make recommendations to authorities and hope they will be implemented soon. The reality, though, is that government decisions are primarily motivated to either get elected or stay in