Golden Horn Ventures

Venture Capital in Emerging Markets Conference, 9 - 10 June 2008, Istanbul, Turkey

Golden Horn ventures is organizing a conference in Istanbul, Venture Capital in Emerging Markets. The goal is to bring together fund investors, venture capitalists from all over the world and entrepreneurs and discuss investment strategies, the right and wrong practices of venture capital in emerging markets. Please check out http://emergetechvc.com for more information on the venue and the agenda.

Introductory Remarks

The dawn of the 21st century will be looked back upon as being a period of enormous emergent change and yet one of unbelievable myopia on the part of contemporaries. A bit like how we tend to look back on the 18th century and ask “how is it that intelligent people could not see what was going on.”

Globalization, irrespective of whether one concentrates on its pro’s or con’s, is challenging the very roots of our established governance systems and the processes that used to legitimize the acquisition and use of power. The roles that corporations used to play, as well those of other social actors such as NGO’s, are getting modified at an accelerating pace. Demographic changes are causing massive structural modifications in the way the (aging) industrial countries operate relative to the (younger) developing ones. Changes in our physical environment are causing a radical rethink of how resources are being used and to what end. The technologies of digitalization and miniaturization, the twin pillars of the information revolution, are playing havoc with known scientific, economic, and social structures. The spatial and temporal nature of work relations are changing dramatically and current technicities are becoming commodities. Industry boundaries have become “fuzzy” and the competitive rules are being redefined even as the game is in play. And the list of “signals” goes on and on…..

Yet many commentators (and most venture funds and investors) look upon all this and insist nothing is really that different than before; that the “dot com” bust “proves” that such a thing as the “new economy” does not exist, that the “business of business is business”, that all that would be required is a bit of financial wizardry, flexibility and speed, and a dash of client relations management. In essence, nothing to worry about, one just has to get the “basics” right, the rest will follow.

At GoldenHorn we believe that this is an extremely shortsighted and erroneous assessment of ongoing events and their implications resulting from a mechanical view of social phenomena. Indeed, under the influence of Newton and the celestial mechanics he enunciated, the image of a “machine” has exerted a seemingly irresistible influence on most areas of the social sciences and in particular the practice of management. This has led to the belief that once the initial state and equations of motion of a system have been determined, its behavior could be predicted and controlled. If there are any deviations from the predicted sequence of causal events (as there seems to be lately), this can only be due to human errors of reasoning or measurement and the cure has to be found in training people to be technically more proficient.

And this is what established views on management, where the “manager-as-technician” paradigm still reigns, seem to insist on doing.

Yet there has been an explosion of research in adjacent fields challenging our understanding of how the brain and neural systems operate, how cognition and emotions interact, how linguistics and semiotics may contribute to our understanding of the world around us, modifying our views on causality and our ability to control complex systems. There is an intellectual cauldron that is bubbling with exciting new developments and mental habits for understanding and “managing” the world around us.

At GoldenHorn all of our activities are infused with this excitement and the prospect of going beyond established norms of thinking in a relevant way.

The role of the VC has become too serious an occupation to be left to people whose major form of action is a knee-jerk, codified, reaction to financial demands. The “hard-nosed” investor of today is the person who can play with ideas as well as bring closure to a debate. A person whose horizon goes far beyond “business” into fields critical to understanding how ideas originate, develop, disseminate. A person who has enormous mental rigor and as such does not get sloppy while meandering through related ideas building on one an other. In short a person who realizes that “the times they are a’changin…”

In a series of commentaries we will share with you our views on these changes, their implications, and what we are doing about them.

Tune in….

Ahmet Aykaç

Companies Defined by Competition

To argue that any place will replace the Silicon Valley as the center of technology universe is just a futile exercise. But I believe that more and more success stories will come out of anywhere in the world, and will disrupt the existing winners, the ones in the Silicon Valley.

One common mistake that companies outside of the Silicon Valley do is letting competition define their products.

This tendency has many reasons naturally. There isn't enough support (financial, business connections, etc.) to back up novel ideas and companies. Companies tend to do what everyone else is doing, or better, the bigger guys in the Silicon Valley are doing, just to guarantee to survive.

For example, after YouTube's success, every country got its share of local YouTubes, the copiers. The same was true for eBay as well. YouTube and eBay are known models. It is easy to create applications and websites that imitate them on the surface. And everybody knows that they hit it big. So local versions of them should too, right? I don't think so! It rarely happens that imitators understand the underlying ingredients for a success behind YouTube or eBay. I don't want to get into the details of why eBay or YouTube was successful in this post. However, as an entrepreneur who targets even a local success of a YouTube imitation, he/she needs to bet more than just an imitation of YouTube. He needs to have an original idea that serves the local needs. He needs to create a product regardless of imitation, regardless of competition! He needs to know how to create an original product and an original company at the end.

Let's take another example, a company that is offering enteprise applications such as CRM. Let's say that this fictitous company is competing with the big guys, the usual suspects; Oracle, Microsoft, SAP, etc. etc. Their proposal to their customers is a check list that combines both Oracle's and Microsoft's offerings all united together. The killer part is not only their long list of checklists Oracle, Mircosoft and SAP combined, but also their price tag, which is 1/10 th of the competitors' offerings!

This is just wrong! It is a waste of resources thrown just to stay one step behind of the current winners. There are so many things to do in the enterprise space. It is a land of opportunity. The difficulty of usage of the enterprise applications, the long and difficult processes to get the systems up and running, the price tags, the long trainings needed for users, the neglections of users and user habits, etc. of the competitor offerings don't ring any bells?

The problem is they don't have the courage or the means or the vision (or a combination of all) to not let the competition rule their product and company. This is just a fatal mistake for a startup.

The winners set their own game. They have their own vision. They want to change the world.

What I want to say is, forget the traditional way of doing things. Get out of your obsessions with the features lists of the big guys. Stop letting competition define your products. You have a chance to change the world. It is your turn now. Don't let the competition define you. You try to define the competition, you create one yourself!

Mae Ozkan

A Brand New World: The Promise of Globalization is Here to Stay

The cover of Economist magazine's Sept 16th issue reads "Surprise! The power of the emerging world". The articles inside are very interesting and supports Golden Horn Ventures belief in the emerging markets and Turkey in particular. There is one survey on the world economy titled, The New Titans.

Here is an excerpt from it:

"Last year the combined output of emerging economies reached an important milestone: it accounted for more than half of total world GDP (measured at purchasing-power parity). This means that the rich countries no longer dominate the global economy. The developing countries also have a far greater influence on the performance of the rich economies than is generally realised. Emerging economies are driving global growth and having a big impact on developed countries' inflation, interest rates, wages and profits. As these newcomers become more integrated into the global economy and their incomes catch up with the rich countries, they will provide the biggest boost to the world economy since the industrial revolution. Indeed, it is likely to be the biggest stimulus in history, because the industrial revolution fully involved only one-third of the world's population. By contrast, this new revolution covers most of the globe, so the economic gains—as well as the adjustment pains—will be far bigger..."

The chart numbered "2" shows that countries that were once strong, became weaker with the industry revolution and they are"re-emerging" again.

The article continues as follows:

"Emerging economies as a group have been growing faster than developed economies for several decades. So why are they now making so much more of a difference to the old rich world? The first reason is that the gap in growth rates between the old and the new world has widened (see chart 3). But more important, emerging economies have become more integrated into the global system of production, with trade and capital flows accelerating relative to GDP in the past ten years...."

"What is also new is that the internet has made it possible radically to reorganise production across borders. Thanks to information technology, many once non-tradable services, such as accounting, can be provided from afar, exposing more sectors in the developed world to competition from India and elsewhere..."

As the Internet and the abundance of information and technology has connected the emerging world to the developed world (to the distribution points, the centers/hubs of economy), there are more changes coming up.
The Internet feeds emerging markets with information and brings different communication and business rituals. The globalization itself has created know-how in the emerging countries. I have partly discussed the very same points in my previous post titled, Innovation, Technology and Emerging Markets.
What I would like to add to the Economist's article is innovation from the emerging countries and the disruption that it creates on the world economy and markets. Technology introduces many new ways of distribution and creation. It also allows the voices of the poor and far audible all over the world. The products and services of the ones in the emerging markets become available in the international markets as the barriers to entry decreases or better to say, the ability to distribute and innovate is democratized. That will result more innovation from the emerging countries, thus creating more disruption in the world economy.
As a result, the catching up to the developed world standards will be faster than we envision it will be. The way that it will happen will be disruptive. Just as startups can rock the monopolies (eg. the entertainment industry), companies from the emerging world can rock the world economy's existing equilibrium and create more prosperity for many in and outside of the emerging markets. Pretty soon the definitions of "emerging" and "developed" will change. The macro stories will be changed by "micro" successes and disruptive company/product/service names.

Wasn't that the hidden promise of globalization anyway? The promises are there for us to grab. It isn't easy, but it is here and it is the future.

What the Brand New World means for IT?
• Countries that have only been used for outsourcing start creating innovative products and services,
⁃More innovation will come out of the emerging countries as the emerging countries have piled up information and ideas and the reach of technology and building a technology company getting cheaper everyday, thus the geography of the innovation is becoming trivial,

• Local will become international more quicker than ever,

• In addition to big companies (such as Microsoft, IBM) being international and harvesting the benefits of being international, startups from the emerging countries will become international if /when there is a value (a new technology, a new business model, a new distribution model, etc.) in them (I specifically say startups, not companies, because I believe that only startups can pursue opportunities and create disruption),

• The markets are getting bigger (the transition from the mainframe to PC has created more than $300 billion wealth, the transition from PC to services will create even more significant wealth). The sharing of this wealth between the developed and emerging markets is starting to shift as innovation comes from any geography,

• New distribution models make it possible for emerging market players to become global for service businesses and digital products as broadband connection becomes prevalent,

• New business development models are rising: (Business 2.0, A VC blog by Fred Wilson) that are more independent of the geography of the company, but are dependent on the technology and usefulness and their disruptive qualities,

• New venture capital models are rising:( Venture Capital 2.0 , Early Stage VC blog by Peter Rip)
⁃"The basis for competition in the Venture 2.0 Crossover model is a focus on markets, independent of stage, geography, and risk capital instrument.",

• The disruption is happening everyday. The strong is weak when it lacks to innovate (eg. The rise of new business models, the struggle of Microsoft with advertising model vs. the software as a package),

• Innovation, disruption and links; The innovators that have a link to the centers of the economy have a global impact and influence. Disruptors that have links to Silicon Valley will effect the equilibrium of the market.

Mae Ozkan