Tehran(Bazaar): Cyril Demaria Professor and international private markets expert in interview with Bazaar News Agency said: Investors assess their risks and their expected returns. Financing start-ups is one of the riskiest forms of investment.
Cyril Demaria is a renowned international private markets expert combining in-depth practical knowledge, an entrepreneurial background with extensive academic expertise. He was notably Partner and Head of Private Markets at Wellershoff & Partners, Head of Private Markets at the Chief Investment Office of UBS, Founder and Managing Partner of venture capital funds, and Chief Investment Officer of Tiaré Investment Management. He holds a PhD from University St Gallen, a Master in European Business Law, a Master in Geopolitics, a Bachelor in Political Sciences and he is a graduate from HEC Paris. He is the author of multiple books, his best-seller "Introduction to Private Equity, Debt and Real Assets" (Wiley, 3rd edition, 2020) is also available in French (7th edition), Portuguese, Mandarin and Spanish. He is also the author of "Asset Allocation and Private Markets" (Wiley, 2021). He is an Affiliate Professor at EDHEC and collaborates as an expert with the European Commission, Invest Europe, SECA, LPEA and France Invest.
Bazaar: In which countries is this type of investment more prevalent? Why?
Demaria:Venture capital is as old as the notion of the corporation, which first appeared in the Code of Hammourabi. However, modern venture capital, with the use of funds by investors, and the role of professional fund managers emerged after World War II. Modern venture capital emerged in the US, and gained momentum in the decades 1960, 1970 and 1980 with the intensification of the Cold War. Its golden years were probably the 1990s with the industrial revolution related to the Internet and mobile telecommunications.
In that respect, still today, the leading country in terms of venture capital investments remains the US. This is also related to structural factors: US companies have increasingly outsourced some of their R&D to start-ups. Japan does too but is not a venture capital powerhouse because its model is based on the financing of innovation by conglomerates. South Korea's economy follows the same structural pattern as Japan.
Western Europe has also a vibrant venture capital industry. It took time for Europe to adapt the US model to its needs, notably because this investment strategy gained ground at the peak of the boom of the late 1990s. The European venture capital industry has to go through a difficult time after the crisis of 2000-2001, as it invested at inflated valuations and then had to handle the crisis and the resulting bad performances.
In many respects, Western Europe has a "hybrid" model, with innovation financed by venture capital (as in the US) but also directly by corporations (as in Japan and South Korea, although not through conglomerates). The focus is also probably more on business-to-business and incremental innovation than in the US.
Two more countries stand out. One is Israel, which has a large venture capital industry, which capitalizes on military innovation and transfers it in civil applications. This is, in that respect, an illustration that the US model can be adapted and transposed in another country, taking into account its specificities.
The other is China, which effectively has launched a technological race with the US, and in that process has fostered the development of local innovative clusters. Venture capital has been crucial to support this effort, as China does not seem to have adopted the Japanese/South Korean approach, but a model closer to the Western European or American ones.
Bazaar: What are the challenges of investing in startups?
Demaria:There are multiple challenges. First, it is difficult to invest in emerging companies. They are very vulnerable to competition, to market shifts, to economic events (such as the Covid-19 pandemy) and many other factors. Start-ups are vulnerable. They are the equivalent of "children" in the corporate world: they are fragile and cannot rely on themselves. Investors act as "parents" by providing them with resources for a certain amount of time, but after a while, start-ups are expected to evolve into companies and become self-sustainable. A lot can go wrong in that process, notably because the management might not be able to handle the challenge from inception to self-sufficiency.
Second, it is difficult to evaluate the possible success of an innovation. Even if the innovation could be adopted by the clients, it might take a long time - and start-ups cannot usually wait very long (as explained above).
Moreover, it is difficult to identify which start-up will win in a given market. There might be multiple competing start-ups with similar products/services based on the same innovation.
Bazaar: What should governments do in this regard?
Demaria:It could be tempting for governments to play the role of investors. They should refrain from this. The best role for governments is to
i) create the conditions for venture capital to emerge. For example, Europe has set up the European Investment Fund, which invests in venture capital funds along with private investors. The US has set up the SBIC program in the 1960s. This program was investing in venture funds with four federal dollars matching each private dollar coming from investors, and capping the returns of the public money (all excess performance was then attributed to private dollars).
ii) create conditions for start-ups to thrive. Adapted regulations are one aspect of it (setting up "regulatory sandboxes" for example, to test innovation with a light touch regulation). Another is to make sure that start-ups find the advice (through experts), support (through incubators and accelerators), network (through events and matchmaking) and overall the factors which will contribute to their success. This includes possibly access to debt when they grow and start to have clients. This debt could be partially guaranteed by the State so that banks are encouraged to lend and finance inventory or working capital.
iii) create a solid exit environment. Taxation has to be adapted, as well the access to the stock exchange for young companies.
Ultimately, the proof of success for governments is when start-up financing starts to be autonomous and fully functional. The "ecosystem" of financing becomes a full circle of investors > funds > start-ups > exits and distributions to investors reinvesting in funds...
Bazaar: What solution do you suggest to encourage investors?
Demaria:Investors assess their risks and their expected returns. Financing start-ups is one of the riskiest forms of investment. To kickstart start-up financing it can be good to:
i) diversify and build a portfolio of 15-20 start-ups. Even better, investors would invest through a fund-of-funds which would invest in 10-20 funds (each investing in 15-20 start-ups).
ii) use the services of expert fund managers (or start-up investors) with a track record to select the start-ups, negotiate the investments, monitor the investments and sit at the Board, and eventually exit from the investments.
iii) create favorable tax conditions for long-term investments, as start-up investing easily takes five to seven years, on average, to succeed.
Interview by Farahnaz Sepehri
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