Silicon Valley: Start-ups and Financing

This is an interview of Andrey Kunov, President of Silicon Valley Innovation Center, published by Magazin für Touristik und Business Travel  in the special report about Silicon Valley.

Where It’s Going:

It’s not just employees of established corporations, but those of start-ups, too, who visit the Valley on a rotational basis. It’s common for one of the founders to travel to Silicon Valley or send individual employees to the USA over a longer period. Until recently, MyFavorito founder Schlenzig lived on a boat in Mountain View, not far from Google, to save costs. Now, he pays 4,000 dollars a month to rent an apartment for his firm in a glass-paneled skyscraper at the heart of San Francisco.

Its purpose: to serve as a base for the various employees who regularly come to acquire inspiration, technical know-how, and provide access to Silicon Valley ecosystem. The primary business of the company remains in their home countries – and it’s no surprise since even from a personnel-hiring perspective, Germany is considered a low-wage location. Establishing a company in Europe costs around a third what it would in Silicon Valley. Ultimately, however, decisions as to who stays on the market and who goes are made by investors. At the end, startups receive initial funding from so-called “accelerator funds” which, through coaching and mentoring, help them break into the market and gain access to valuable players and capital investors. In return for this, they get a small share in the company. Once founders are equipped with the capital, know-how technology, and contacts they need to get started, they must pitch to investors in the hopes of persuading them that their idea is internationally scalable and has good prospects of success.

“Anyone in Silicon Valley who’s merely reaching break-even is out of the game,” says Antonio Vega, Founder in “pitch mode”, who already employs ten members of staff in Frankfurt and is continuously investing in new technology. At the end, investors aren’t interested in profits and continuous increases in turnover.” For them, it’s all about investing in growth – and about sustaining losses for as long as possible in pursuit of this aim. The only approach that yields returns is ousting competitors from the market. “If the market is ripe – that is, if competitors have been squeezed out – that’s when the switch is flipped to profit”– so describes Andrey Kunov, President of Silicon Valley Innovation Center,  the Venture Capital system. 
And this is how even the most successful market giants got started. Amazon endured years of losses and squandered billions in unprofitable investments to reach where it is today: with a market capitalization of almost 700 billion US dollars. Uber and Airbnb continue to be financed by venture capital. The motto: growth at whatever cost. Investors cash in when the company is sold or floated on the stock market. In line with this culture of failure, venture capitalists invest cheerfully in any and every vaguely promising concept – out of the fear of not having invested should the company then achieve world domination. The opportunity costs would be too high – and it’s exactly the mindset that benefits all those in Silicon Valley looking to risk big.

 

“A relationship with a venture capital investor is often like a marriage: at the beginning, you have to have trust, and at the end, there is often divorce. But anyone with a genuinely promising technology is required to enter this partnership.”

Andrey Kunov, President of  Silicon Valley Innovation Center

 

 

Financing in Silicon Valley:

Company Foundation: No need for high investments or lots of bureaucracy – companies can be founded in California within a week and with 300 US dollars of capital

Accelerators: In the early stages of company foundation, accelerators help with initial funding, mentoring for business model development and access to contacts and investors. There are around 50 of these funds in Silicon Valley.

Incubators: These provide rooms – so-called “co-working spaces” – in which founders can meet, work and exchange ideas. Accelerators and incubators are increasingly merging into single organizations.

Venture Capital Investors: These come into play once companies are past the initial funding stage and the business model is demonstrating the first signs of success. A venture capital firm will continue to fund a start-up for an average period of five to ten years. They will then push the startup to sell, dispose of their share in it or support its flotation on the stock market.

Source: Magazin für Touristik und Business Travel