I’ve been fascinated by entrepreneurship, startups and venture capital since I was an undergraduate student in Brazil. And as a dual citizen who lived and worked in three countries, cultural understanding is a common topic for me.

As a student at The Lauder Institute, I was requested to conduct a group research on a topic of our choice. Therefore, why not combine venture capital, entrepreneurship, and culture? Luckily I found enough interest to form a research group.

Why this topic?

The VC sector outside the US is large enough.

According to KPMG in 2016, there were 13665 venture capital deals globally, which represented $127B of capital invested. Just to put things into perspective, all the Americas got $72B of that global capital and US alone got $69B. The remaining $3B got divided invested in Canada, Brazil, Mexico and other countries. China got $31B and Europe got $16B. Additionally, there are many top VC firms with offices in China, Israel, United Kingdom and Latin America.

Why culture and venture capital?

I believe that having a clear understanding of local laws and regulations is not enough. Therefore, investors and entrepreneurs could benefit from a better understanding of how local culture influences how they work together.

Research approach

Our research group identified two points on how to unlock the role of culture in VC investing. These points were Management Style and Stage of Investment. Management Style, in a very broad sense, was defined by us as the way in which a VC interacts with their entrepreneurs. More specifically, it consists of the frequency and intensity with which they interact with the company (hands-on vs. hands-off), the structure of their interaction (partner leading investment vs. arbitrary investment team), and their value-add. Stage of Investment was defined as how pre-investment happens, sourcing, due diligence and term sheet structuring, investment lifetime expectation and exit expectations.

The fun part. Which countries were part or the research?

Our research group traveled to Brazil, China, Germany, India, Israel, Mexico, Russia and United Kingdom (mainly because as a group we speak the main languages of these countries). In each country, we talked with investors and entrepreneurs to question them on realities of Management Style and Investment Stages in their countries.

Expectations and reality

Our expectations were to find that the investor-investee relationship would be considerably influenced by cultural norms present in each of the countries investigated. We also expected to find several similarities among those markets in which venture capital is a less mature industry.

The overall conclusion is that the investors and entrepreneurs in the studied countries are doing their best to emulate the Silicon Valley way. But there are a few interesting differences.

Here are some of the most interesting findings

The Israeli VC industry is essentially a copy of Silicon Valley, with very few differences. “Local for Global” is the mentality in place as Israeli market usually can’t provide enough scale for local startups. Government plays a large role on the capital side (up to 50% of total R&D costs) but has very little to no managerial influence. In short, Israel understands well term sheets, due diligence, and exits and embraces the venture capital industry and the entrepreneurial career path.

In Mexico, many VCs require a minimum viable product before investing. Contacts are a big asset and entrepreneurs expect it from their investors, especially entrepreneurs that seek markets outside of Mexico. It is nearly impossible for VCs to get deals without a good local network. Exits are preferably never made public because one case resulted in a kidnapping and subsequent murder of the entrepreneur’s son. Acquisitions are virtually the only exit method possible. Exits are also the biggest source of conflict between investors and entrepreneurs.

In Russia, almost all startups are registered abroad. Exit discussions are avoided as much as possible, as local entrepreneurs hope to have their companies for a long time and prefer slower growth than M&A. Investors are less hands on than expected and some are investing for the opportunity to be part of a large interesting company, not for an exit. Russian VCs are surprisingly eager to collaborate with US or European VC firm as many of their entrepreneurs want to reach markets outside of Russia.

India has an abundance of US VC firms investing, and with that entails a more regulated investment environment. Entrepreneurs usually prefer foreign investors. Particularly those that are seeking customers outside of India. When compared to other emerging markets, India seems to be very receptive to entrepreneurship as a path to success and is well accepted and publicized in the country.

In China, funds and entrepreneurs are unlikely to continue a relationship without a strongly vetted reputation. No VC or founder wants to be associated with failure or, more importantly, political risk, so a proven clean and successful reputation is imperative. Over the lifetime of the investment, both parties seek to avoid conflict during formal interactions, preferring to keep any disagreements “under wraps”. And finally, at the time of the exit, the entrepreneur is likely to be motivated by the potential to improve their reputation by achieving fame and fortune.

In Brazil, the local culture plays a substantial role in the relationships between investors and entrepreneurs. Having a small VC environment enables the creation of circles of trust. Relationships and connections could be more important than contracts as the local law slow. In most cases, entrepreneurs prefer a local strategic buyer. Personal contacts in the sector are also of high importance for deal sourcing as relationships tend to be quite unstructured. VCs usually prefer to approach companies rather than being approached. VC funds are composed mainly by US capital, which sometimes causes complications on due diligence expectations.

Although our expectation was that culture would play a larger role in the venture capital industry, the small cultural differences should not be ignored. Understanding them can be the difference between a successful investment and a write-off.

Thank you!

Would like to say thanks to all my research mates who conducted this research with me.

Chakra Banerjee, Daniel Bouskela, Marcelo Cattani, Akshay Mandan and Sarah Millar.

Thank you to The Lauder Institute, to our advisers and to our research assistants.

If you would like to discuss further or would like to read the full research, please contact me.