Home' Trinidad and Tobago Guardian : December 12th 2013 Contents BG12 | VERBATIM
BUSINESS GUARDIAN www.guardian.co.tt DECEMBER 2013 • WEEK TWO
Venture capital as a source of financing has
played a significant role in the commercial-
isation and growth of many business ventures
globally. Companies, such as Google, Face-
book, Twitter, Apple, eBay, and Skype and
Yahoo, are among the global brands which
have been the beneficiaries of venture capital funding and
which have amassed billions of dollars in wealth for investors
and positively impacted the United States economy.
The view that venture capital is important in the process
of converting entrepreneurial input into economic output,
driving innovation and increasing employment has long been
expressed by government officials, policymakers and researchers
in the field of entrepreneurial financing. However, a review
of the global venture capital industry highlights the disparity
in the contribution of venture capital to economic development,
among geographic regions.
To date the United States leads all countries with respect
to the level of venture capital activity in terms of the value
of investment flows to companies as well as the social and
economic impact emanating from such flows. In a venture
ecosystem that has allowed entrepreneurs to turn innovative
ideas and breakthrough technologies into products that trans-
form the lives of many, the global impact of the US venture
capital industry cannot be overstated.
Over the period 2008-2012, annual venture capital investment
averaged US$27 billion and accounted for 21 per cent of GDP
and a total of 11 per cent of private sector jobs.
Further, venture capital s role in driving innovation and sci-
entific inventions is reflected in economic data for 2010, which
indicates that more than 80 per cent of revenues in sectors,
like biotechnology, came from venture-backed companies.
These statistics may have led to the belief that replication of
the US model can foster innovation, spawn new enterprises,
build competitive capacity and transform countries within the
Search for a suitable VC model
In the last five years or so, there has been a measure of
effervescence with respect to discussions on the need for a
suitable venture capital model to stimulate growth in the
region. It is reasonable to ascribe this renewed focus to the
significant decline in GDP in the Caribbean, where within
Caricom average GDP declined by 14.5 per cent over the period
VC activity in the Caribbean can be traced back to the
1980s. Since then, there has been periods of increased activity,
example during the period 1997--2007 when the number of
funds operating in the Caribbean increased, followed by reduced
activity and fund closures during the period 2008--2012.
At peak there were approximately 15 VC funds in the
Caribbean, 12 within Caricom-member states. This included
funds domiciled in Jamaica, T&T, Barbados and St Lucia. Most
of these funds were established at a time when development
financing was seen as crucial in implementing the transfor-
In fact, more than 50 per cent of the funds were established
by development and state-led institutions with the remainder
being independent private funds.
A 2004 study conducted by the Caribbean and Latin Amer-
ican Venture Capital Association (CLAVCA) indicated signif-
icantly low levels of deal flow activity and minimal economic
impact by VC-backed firms in the Caribbean. As at 2004,
designated VC firms had raised a total of US$238 million and
invested less than 50 per cent of its capital for SME start-up
This suggests that fund managers opted to hold on to a sig-
nificantly large share of their capital rather than invest in the
ventures before them. The situation of disparity between funds
raised and funds invested may be as a consequence of several
factors, including weaknesses in fund management skills, a
measure of risk aversion, fund size being too small to allow
for the flexibility in portfolio diversification, and the unattractive
profile of many potential investee companies. This situation
reiterates that gaps exist in the VC ecosystem.
The issue of venture capital fulfilling its developmental role
is one of supply and demand. But both demand and supply
are functions of prevailing conditions. An environment that
is hospitable to VC includes research and development centres,
skilled human capital, knowledge incubators, entrepreneurial
networks, an institutional framework which safeguards intel-
lectual and legal rights and an appropriate mix of financial
Addressing the gaps
Some regional governments and private sector organisations
are beginning to implement policy and institutional initiatives
aimed at addressing the gaps. Attempts to create a more inno-
vative and technology-oriented environment have been made
in some jurisdictions.
Other issues that ought to be addressed include the bur-
geoning crime rate, which has increased the cost of regional
business and weaknesses in corporate governance, both of
which adversely impact investor confidence.
The focus of modern day venture capitalists, perhaps moreso
than that of the passion-driven and philanthropic-minded
classical venture capitalists of early days, is significant financial
return. Because venture capitalists realise a return upon exit,
the availability of exit options is influential in the decision to
commit capital. It is in this context that VC entry and VC exit
are inextricably linked. This presents a challenge for regional
economies where exit opportunities through sale to third
parties and public exits via initial public offerings (IPOs) are
limited or non-existent due to a relatively small investor class
for private equity as well as a near-dormant secondary stock
market. VC market entry and exit are also adversely affected
by the inability to conduct proper share valuations pre- and
Another ingredient for an active VC market is an adequate
supply of investment capital to qualified investee companies.
Generally, funds in the Caribbean are diverse in terms of size
and focus and by international standards are considered small.
The major source of venture capital in the region has been
capital from governments, state-owned development banks
and international donor agencies, which, in accordance with
the CLAVC 1994 report, accounted for 55 per cent of all funds
raised. This is in contrast to the United States where VC activity
is fuelled primarily with private capital.
Historically, the Caribbean private sector has been largely
risk averse and has demonstrated a measure of reluctance with
respect to investing in start-ups or young companies pursuing
an innovation agenda.
While there is a window to attract capital from international
agencies, the participation of the indigenous private sector is
beneficial in building local capacity, capability and commitment
within the VC industry. Innovative ways to tap into new sources
of indigenous capital must therefore be identified and accessed
to augment the traditional sources.
One area that has remained largely untapped as a source
of investment capital is diaspora funds. A June 2013 report
by the World Bank and InfoDev indicates that the Caribbean
diaspora comprises a number of well-educated and financial-
ly-resourced individuals, many of whom are willing to invest
in business ventures back home.
In fact, 25 per cent of the diaspora community indicated
they had already invested in Caribbean ventures. What makes
diaspora funds even more beneficial is the opportunity to
leverage the relationship with this group to access new markets,
develop strategic global networks and provide startups with
well-needed mentoring and advisory services.
The stated appetite for areas, like agriculture. ICT, music
and entertainment, green energy technology, mobile platform,
Internet services and education, is positive as many of these
areas have been identified as priority areas in efforts aimed
at transforming regional economies.
Other means of providing an adequate supply of funds for
venture capital activity include corporate venturing. Here large
firms provide capital to smaller young firms by providing them
with the capital required to start or sustain businesses that
oftentimes offer strategic benefits to the larger firm in the
form of supplying products or services the larger company
As the Caribbean revisits the role of venture capital, due
consideration must be paid to the interrelatedness of the ele-
ments in the VC ecosystem.
Three main items must be given due attention.
1. Supply or the availability of a sufficiently large pool of
venture capital and complementary financial products. In this
regard the structure of the financial services sector in general
and the capital market in particular are important.
2. Demand. Create demand by spawning new high growth
businesses and by converting existing demand to real demand
through access to new knowledge, centres of innovation, prac-
tical entrepreneurship education programmes to create a new
wave of entrepreneurs and business advisory and support
3. Enabling environment. Government policy as well as the
legal and regulatory framework must support participants in
the VC process. Protection for entrepreneurs via intellectual
property laws, the ability to conduct proper valuations, par-
ticularly in the context of a changing asset class defined by
reduced tangible assets, safety and security and corporate gov-
ernance, are just a few of the areas to be addressed.
A revised and appropriately-tailored VC model is likely to
provide the impetus to implement a solution-focused trans-
formation agenda for the Caribbean. Challenges associated
with food security and rising energy costs, particularly for
OECS member states, can be addressed by a process of research,
ideation and innovation towards spawning new products to
support the agricultural services sector and offering cheaper
sources of alternative energy.
Integrating a VC model in the approach to solving the
region s problems requires out-of-the-box thinking, a will-
ingness to defy the status quo where it is beneficial to so do
and a real desire to explore new areas of opportunity.
Perhaps, just perhaps, VC fund managers may find that
Haiti, the poorest country in the Western Hemisphere, presents
some great investment opportunities.
The preceding article, published in the November 2013
newsletter of the Caribbean Centre for Money and Finance,
was written by Judith M S Mark, managing director of
CME Consulting Ltd and Alliance Partner for Venture High-
way Ltd. Mark lectures in entrepreneurship and innovation
at the Arthur Lok Jack Graduate School of Business, Uni-
versity of the West Indies.
Revisiting venture capital
A case for a Caribbean model
JUDITH M S MARK
Integrating a VC model in the
approach to solving the region's
problems requires out-of-the-box
thinking, a willingness to defy the
status quo where it is beneficial to
so do and a real desire to explore
new areas of opportunity.
Judith MS Mark
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