The Most Effective Way Governments Should Support Startup Ecosystems

By Fusion by Fresco Capital,

I once met an active angel investor from Europe who was convinced that government subsidies of investors were the most effective way to build startup ecosystems. Of course I asked the obvious question, “what about Silicon Valley?”

“Except Silicon Valley” was his reply.

Huh. Lightbulbs going on everywhere (at least in my mind).

The Best Intentions

Small scale grants to get startups off the ground in place of friends, family and fools money certainly makes sense. After all, most people actually don’t have friends, family and fools with enough money to support them.

What about when governments start subsidising rich angel investors with tax breaks? While this may be the result of genuine intentions to encourage risk taking, if investors are ultimately viewing startup investments as tax deductions, then this is a fundamentally flawed strategy. Instead of being investments, startups are transformed into tax loopholes.

Moving up the investment value chain, it’s certainly admirable for governments to actively support local venture capital because there is a positive knock-on effect of helping the real economy. This leads to a natural question:

How should governments support local venture capital funds in order to scale and build a local ecosystem?

One approach to building a local venture capital ecosystem is to provide rebates and other complex incentives where the government takes on more risk and leaves the private sector with extra return benefits. No matter what the fancy official name of this kind of program, it is effectively a subsidy.

As a venture capital investor, I’m supposed to jump at the chance of getting subsidised returns. Call me old fashioned, but I don’t want to receive subsidies to juice returns because it’s wrong for society (my altruistic side) and I don’t want my returns to be artificially boosted by subsidies (pure ego).

Fortunately, there’s a simpler idea.

Instead of tilting the risk / return in favour of funds via subsidies, government related capital should simply be open to investing in new venture capital funds on market terms. The boring reality is that most government capital is allocated through various intermediaries and by the time it gets to venture capital funds, many decision makers take the view of something like this:

New venture capital funds are too risky, so we prefer teams that have worked together for at least 10 years and are raising fund 5.

If you want to attract venture capital investors to your local ecosystem, it’s a lot easier to do so before fund 5. Rather than throwing around subsidies to attract funds, governments should take a hard look at how their existing capital is being allocated through various intermediaries to make sure that there is an allocation for emerging venture capital funds.

If done correctly, this market driven approach will actually increase returns, as there’s plenty of data to show that new funds are generating outsized returns. Instead of spending money to subsidize venture capital funds, governments can get more money through higher returns.

The Unintended Consequences

Beyond the obvious concern that governments should not be subsidising investors directly, there is also the problem of unintended consequences.

At the company level, since small scale grants for startups to get off the ground usually do make a positive impact, it’s very tempting for governments to scale that up.

Unfortunately, when companies raise institutional capital which was only possible because of subsidies tied to the investment either directly or indirectly, the incentive mechanisms tend to train grantpreneurs.

The reality is that all startup subsidies come attached with complicated forms because governments need to protect themselves from criticism. So there is no such thing as “simple startup subsidies”.

Grantpreneurs are extremely efficient and skilled at filling out the complicated forms and ticking all the right boxes for subsidies but unfortunately are a lot less skilled in building successful businesses.

People improve their skill through repetition. The worst case scenario is creating serial grantpreneurs, who are able to jump from subsidy to subsidy.

One of the goals usually cited by governments to subsidise investors is that this will then lead to more jobs. Of course, there are usually many restrictions on the people who may be hired.

This prescriptive approach to hiring can actually lead to increased inequality because it increases demand for a fixed pool of talent rather than increasing the overall pool of talent. Wages go up for those already with skills. Everyone else, not so much.

Throwing money at jobs is not the same as increasing the overall pool of talent.

A Better Way

Should we just throw our hands up in the air with the view that governments are always wrong and it’s foolish to mess with markets?

Not quite.

Markets are far from perfect and as the impact of technology continues to accelerate, cities and countries that do nothing to build thriving startup ecosystems are at risk of being left behind.

So what should governments focus on when it comes to extra support for startup ecosystems?

Ultimately, every government has limited resources and a key starting question should be “what is the best use of our resources for maximum impact?”

If the goal is to encourage innovation across society and the improvement of overall welfare, better to focus on talent.

What would a program to support talent look like? Rather than giving money to startups, which would empower grantpreneurs to fill out forms more successfully, governments should be subsidising individuals to learn new job skills. To be clear, this does not mean training everyone to become an entrepreneur.

Empowering individuals to make their own job skill education choices at least creates a pathway for them to find new job opportunities. It won’t work for everyone but it has the potential to enhance the overall pool of talent at scale. So rather than funnelling more money to the same number of people, there will be a broader base of talent.

Will there be inefficiency? Of course yes.

Will there be fraud? Probably.

But at least by focusing on individuals, the magnitude of any individual fraud case should be smaller.

Even with inefficiency and fraud, as long as the overall talent pool is improved, then this approach could create massive value for society.

The Unexpected Benefits

Beyond the direct impact of enhancing the talent pool, there is an important secondary benefit: increasing the quality of overall talent should attract more institutional capital.

Why does increasing the pool of talent attract more capital? Because capital follows talent.

Just take a look at the history of Silicon Valley. The talent moved first, led by pioneers like the Traitorous Eight, and the capital followed.

There are two factors behind this dynamic. First, great talent is still scarcer than capital. Second, it’s easier to move capital than talent.

So by focusing on improving the talent base, governments will naturally be building the foundations of attracting capital for the right reasons.

The First Steps

It’s tempting for governments to go big with a fancy launch party and lots of hype around a new program.

But for a talent subsidy program to actually be effective, better to act like a startup and start with a small test. Make it small because then the mistakes will be small and there is only one guarantee with a talent subsidy program: there will be mistakes.

Then this is the most important part: get feedback, learn from the mistakes, and don’t scale up until it’s actually working on a small scale.

This means less publicity in the short-term but ultimately much larger positive impact in the long-term. It’s a marshmallow test for governments who want to support startup ecosystems.

Lightbulbs are a metaphor for new ideas and innovation. If governments truly want to support startup ecosystems, they should be focused on helping people find their unique lightbulb moments.


For anyone else interested in figuring out how governments can help support startup ecosystem talent, please get in touch.

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Behind the Scenes at Nanosatellite Company Spire

By Fusion by Fresco Capital,

I first connected with Peter Platzer in 2012 during the early days of Spire, before any of the company’s nanosatellites were actually in space. We hit it off immediately, and very quickly this led to an investment by us at Fresco Capital. There are many teams with big dreams, but Peter and the Spire team are one of the few teams that consistently execute those big dreams. In addition to launching and managing a constellation of nanosatellites, the satellite-powered data company has built a truly global business with offices across Asia, Europe and North America.

Here’s a recent Q&A I had with Peter.


When most people think of satellites, they think of very large and expensive projects that only governments can afford. What has changed in the past 15 years and why?

Nanosatellites are about the size of a bottle of wine and since 2014, there have been more nanosatellites launches than traditional large ones. With nanosatellite being far more affordable, this has dramatically changed the number of space faring nations, companies, and even individuals!

The two biggest reasons for that is the integration of new technologies from other industries and the creation of the CubeSat standard. Components from smartphones, drones, and robotics have made it possible to build an incredibly powerful satellite in a fraction of the time at a fraction of the price — it is still quite a bit or rocket science, but simply by replacing the need for lots of money with the need for lots of ingenuity and brain, it opened access for innovation from the private sector to space. Secondly, when it comes time to launch, there are now opportunities to share a ride in almost every space-faring country because the standard form factor is now a well-known and accepted by over a dozen launch vehicles.

Image Credit: Spire Global

You are originally from Europe and have lived in both Asia and North America. How does that influence your perspective of which country or countries Spire considers home?

When I was a teenager I came to my father with my passport and said “I’d like it to say ‘Peter Platzer, citizen of earth”. This was the time before the fall of the wall, my home town being just 45’ away from the Iron Curtain. An avid reader of both science and science fiction this separation between me in wealthy Vienna and others just 45’ drive away made no sense. Since then I travelled to over 60 countries and worked extensively in 7 countries on 3 continents. Clearly this has deeply influenced my thinking, curiosity, and appreciation for different cultures, norms, perspectives. And while I don’t think that my background influenced my perspective on Spire’s ‘home country’ it has certainly influenced the type of problem I want to solve and the type of company I would want to start. So from the beginning it was very clear that Spire needed to be a global company, with global customers, global operations, a global talent pool, solving global problems. Its home country is Earth.

Image credit: Spire Global

The transformation of the space industry is likely be a much needed catalyst for job creation in the future. What should governments, schools and parents be doing to make sure that their children are well prepared for these new job opportunities?

The best thing that schools can do is to keep kids engaged with technology. We need people who can code, build electronics, and understand complex systems. Thankfully there are great minds in ed-tech, like Ardusat.com, working on this problem. We put an educational payload into every satellite because investing in children’s passion for science and technology is an investment in our future.

Image Credit: Spire Global

Anything related to space has a huge amount of global and national regulations. Recently, startups in other industries have been hurt by not following regulations. How do you approach the challenge of innovating in a highly regulated industry?

It’s always going to be difficult to deal with a highly regulated industry like aerospace but it is worth reminding yourself that the regulations were created for a reason. When we run into a roadblock, we talk with people. It’s often the case that no one even imagined a world with nanosatellites when they wrote the rules. So far we have found regulators to be very keen on understanding and supporting New Space, even though they often have to work with regulations that are anachronistic to today’s rapid pace of space technology development.

Image Credit: Spire Global

Many technology companies struggle with having diversity in the team. Spire, as a space company, is obviously working on some very advanced technology, so how does the company approach the issue of talent diversity?

Our approach to talent is to hire the best people and to build a heterogeneous team. Research has showed that heterogeneous teams consistently outperform homogeneous teams. Our team now consists of people from 18 countries and counting. It is also worth noting that from our perspective, diversity comes far more in the form of different personalities, approaches to problems, situations, desires, and aspirations, that differences visible on the outside. We measure diversity far more by the “content of the book” rather than “the cover of the book”, something that we think is often forgotten in the diversity debate.

Image Credit: Spire Global

What benefits do you think this new technology will be bringing to companies, government, and people in the next 1–3 years?

Nanosatellites are bringing about a sea-change in how much data is available from space to benefit mankind. Its like switching from a 1950 black and white silent movie to a 2015 4k 3D IMAX movie. Many of those benefits are yet to be discovered, but simply imagine a world were no airplane is ever lost again, global shipping is running on half the emissions because of route optimisation, our oceans are replenished in fish stock thanks to eradicating illegal fishing, and weather forecasts are as accurate as swiss train schedules, allowing you to never be late for a date (or miss a shipping to a customer). And those are just the areas that one company, Spire, is working on. We are certain that many more areas will be positively impacted by the wide-spread use of nanosatellites, similarly as the widespread use of the PC instead of the mainframe brought about the internet.


Thank you for reading!

Our portfolio companies including Spire are always on the lookout for top talent and also partnership opportunities. To learn more, get in touch.

Image credit: Spire Global

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Planes, Trains and Startup Exits

By Tytus Michalski,

During the snowstorm of January 2016, travel basically stopped from airports in places on the East Coast of the US like New York City. People couldn’t get out.

And even when the weather cleared up, the travel problems continued. Imagine your chances of getting out from an airport on time when more than 3,900 flights are canceled in one day. You have as much chance of flying on an airplane as a flying on a snowflake in this kind of situation.

Similarly, there has been a lot of talk about a startup winter during in 2016. The consequences don’t look great for everyone involved. Especially people waiting for startup exits.

The last plane just departed
Did startups and investors miss getting the last seats on the startup exits airplane out of startupland? During 1Q2016, we witnessed the IPO of SecureWorks, which is a tech company though not exactly a classic venture backed startup. This promptly resulted in zero excitement during the aftermarket.

If there are no new tech companies going public for IPOs, what other modes of exits exist? The traditional US tech giants are slowing down their M&A activities. The trend at Google is well known while many others are being distracted by activist investors to pursue more share buybacks. Of course Facebook is always a wild card but that’s a pretty short list.

So it seems like both the IPO and tech M&A exit airplanes really have left the airport and everyone still waiting is stuck. That’s terrible news for startups and investors.

Forget about flying
Would other types of exits be possible? As a very rough proxy of how important tech companies are, the sector breakdown of the S&P500 Index shows that tech is the largest sector at about 20% of the total index.

That still leaves 80%. Traditional non-tech companies are clearly big, but are they interested? They’re not flashy, so think of them as trains. Yes, they are increasingly getting involved in startup ecosystems, including M&A exits. Most of these are smaller deals which work very well for capital efficient startups. So that may not leave much space to cram many unicorns inside. But there are also larger outliers, like Monsanto buying Climate Corp or GM buying Cruise.

There are obviously differences between planes and trains. So before running to catch a train, it’s worth understanding what you’re getting into. But at the very least there’s an alternative way to get an exit. For some startups, the train may actually be the better choice.

There’s no way on earth we’re going to get out of here tonight
Beyond trains, is everyone else simply stuck with no hope? Sticking with the airport analogy, there’s another entire building which most people haven’t noticed.

It’s called the international terminal.

The international terminal is gigantic and has umpteen airplanes, plus high-speed trains too, with heaps of seats looking for passengers. Companies from China are leading in activity and the momentum shows no sign of slowing. Importantly, it’s not just China – cross-border M&A is a global trend.

Why is this happening now? These global companies are just starting to feel the potential opportunities, and more importantly risks, of tech innovation. For people living and working around the Silicon Valley tech sector, the mantra of software eating the world is old news. But for companies on the outside looking in, the impact is just starting to be realized.

So whether it’s late or early depends on your relative position. If you’re trying to catch a domestic airplane for a startup exit, it may be too late. Instead, check out the train schedule. Even better, head over to the international terminal where the planes and trains still have plenty of seats available.

Just in case, make sure to keep an eye on international weather conditions.

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Investing Like Einstein

By Tytus Michalski,

If Einstein were alive today, what would he think of our investment markets? He is vaguely attributed to have said that compound interest is the “most powerful force in the universe” but the evidence supporting this attribution is weak.

However, he would surely find it curious that we now live in a world of negative interest rates, where more than US$2 trillion has been invested in negative bond yields and banks are charging interest rates on deposits. Although the word deflation is constantly used in the media, the reality is still inflation, so whether measured in nominal terms or real terms there is no doubt that we live in a time where a certain group of borrowers are able to get paid to borrow money.

Since the driver of these interest rates is the cost of time, the financial sector has accidentally created a way for money to reverse the effects of time.

Besides being surreal, why is this important?

The obvious answer is that no serious investor should want to invest their assets into negative return assets if there are better alternatives. It is both a pessimistic view of the world and an inefficient use of assets.

Large companies are also taking a cautious view of the world, preferring to spend on share buybacks rather than new investment, with a record US$900 billion spent on buybacks and dividends in the US alone in 2014. In this case, share buybacks create the illusion of growth by shrinking the denominator, the number of shares outstanding. At an individual firm level, this can sometimes be the right strategy but can society overall shrink its way to prosperity?

For context, it helps to look at the size of investment at the opposite end of the investment spectrum, early stage companies focused on growth. Overall venture capital investment in the US was a record US$48 billion in 2014 and a closer inspection of the data shows that early stage deals received US$1.3 billion.

In today’s world, when the opportunities to create value through innovation are more exciting than anytime in history, society is investing the largest amount of money in the most pessimistic assets with the lowest expected returns and investing the least amount of money in the assets with the largest potential to create new innovation and highest potential returns. These are symptoms of a deeper problem: failure of the imagination.

spot_the_bubble (1)

As an early stage venture investment fund, this actually works better for us because it means less competition. Ultimately, however, early stage investment is not a zero sum game and so we would rather have more people invest to create more overall value.

Finally, if the perception is that there are no assets that can generate meaningful returns given the risk, investors are better off giving their money away because there is no shortage of social issues which have not been solved by markets.

Circling back to Einstein, some people may argue that he would be in favour of the current asset allocation by society because it appears to be made by rational decision making in a scientific manner. But his comments suggest otherwise. In Einstein’s own words, “imagination is more important than knowledge.”

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Build an MVP, Not a Beta

By Stephen Forte,

A lot of people misuse the term “MVP” or Minimum Viable Product. To be clear an MVP is not a beta, not a prototype, but rather an experiment designed to test your value proposition’s assumptions by measuring a behavior and learning from the results.

Back in the day, Dropbox did an MVP as just a video and Buffer was just a landing page. Both were experiments to determine if Dropbox or Buffer should even exist. Instead of guessing and building prototypes, they built the simplest of things in order to measure a user’s behavior. Today startups are building functional prototypes and calling them MVPs. They are better off building something they can learn from. Typically the first MVP doesn’t even have to be anything on a device or computer. For example, I once advised a new travel startup that wanted to give you one click access to a daily itinerary based on a map. They assumed that people wanted a map with pin points on it and times to follow. I told them to go to tourist spots and give people real maps with real pin points circled and an analog itinerary to follow. That was an MVP, it was an experiment (map) that measured (how many as a percent of total) a user behavior (did they use the map or not). Let’s take a look at how to build a better MVP.

Getting Started: Customer Segment and Value Proposition

The whole idea of an MVP is to measure an actual result against your expected result to prove or disprove your assumption. In order to do that you need data. The first place to start is to think about is your customer segment; you have to know who your target customers are going to be. Without knowing your exact segment (22–34 year old professional, urban women, single, living alone, earning over $75k), you won’t be able get the correct pool of users to test on.

After you define your customer segment, you define your value proposition. Too many people think that their value proposition is just the solution to the problem they are solving. That is incorrect: your value proposition is the delta between the current solution or workaround to the problem people are currently using and your solution. You measure your value proposition in terms of how much better your solution is compared to the solutions that exist today.

Let’s say you are solving a problem for buying movie tickets. Several solutions already exist; there are lots of web sites, apps, etc. Maybe your solution involves buying the tickets via SMS. Regardless, you have to think about what the alternatives to your solution are and compare them against that. One is simply buying the ticket at the box office. Here your alternative has value, but not tremendous value. Alternatively, let’s say you are developing a life saving cancer drug. The alternative without your solution could be death. In this case your solution would be incredibly valuable.

The Assumptions That Fuel Your Value Proposition

Underpinning your value proposition are your core assumptions. These are the things that would compel someone to buy your product or service. The job of the MVP is to test those underlying assumptions. The only way to successfully test those assumptions is by making a prediction of the result and comparing the behaviors that you measured up against your predictions. Your predictions should be based in fact, facts that would determine if you have a viable business or not. If you don’t make a prediction, then you will not have a way to determine success or failure of the MVP test.

Let’s say you are building a landing page, Buffer style. Your MVP will be to measure how many people give you their email address after your landing page described your product. You will have to drive traffic to your landing page, most likely by taking out some Facebook or Google AdWords ads. You want to measure the conversion rate of people who clicked on the ad (since you pay for click) to providing their email addresses. For example, if 100 people clicked on the ad and came to your page, but only 4 provided their email address, your conversion rate is 4%. (Not bad actually in e-commerce.)

Should 4% be your target? No. You need to determine your prediction based on facts and your business model. Let’s say you estimate spending $100 on Google AdWords to drive traffic to your MVP. If you have a conversion rate of 4%, it will then cost you $25 to acquire each customer. $25 is your CAC or customer acquisition cost. You need to estimate what your Customer Lifetime Value (CLV), or the amount of profit you expect to get out of each customer over the course of their relationship with you, is. At this stage it will be fairly inaccurate, but you need to ground your assumption in reality. (Future MVPs can test pricing.) Let’s say you make the CLV to be $21, based on a lot of factors in your business model. (I talk more about your CLV and CVC here.)

With a a CLV of $21 and a CAC of $25, you will lose $4 on each new customer you acquire. Or CLV ($21) — CAC ($25) = -$4.

For your MVP test, you will need a higher conversion rate/lower CAC rate in order to make a profit. For the first MVP test make a prediction that the conversion rate will be 5%, bringing your CAC down to $20. Or CLV ($21) — CAC ($20) = $1.

Interpreting The Results

Now with your assumptions based in some business reality, it is time to run the test. Typically the results are one of the three following numbers (remember you are aiming for 5% conversion):

  • 0.021%
  • 4.28%
  • 17%

Let’s take 0.021%. This is an absolute failure, you can safely assume that your assumption is invalidated. Safest thing to do is declare the assumption invalid and go back to your value proposition and rethink it. If you have other assumptions associated with your value proposition, you can do some more MVP tests to determine if the entire value proposition is invalid or not. Chances are you will have to iterate your idea and value proposition some more.

What to do if you are at 4.28%? Technically it is invalid since you need 5% conversion rate in order to make any money. Should you just give up and go home? No. You should try some new UX and new design or different language and run the test again. Don’t run the test without changing anything! If your future tests with minor changes are at or over 5%, then you can declare your assumptions valid and move on to test the next one.

Let’s look at 17%. Woo-hoo, your assumptions are more than valid, you blew away your predictions. Verify that your test was fair and then declare your assumption valid and move on to test the next assumption.

Thats all there is to it! Only by clearly defining what success is and basing those numbers in a business reality is an MVP useful. Anything else is just a beta.


Build an MVP, Not a Beta was originally published in Fusion by Fresco Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

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