China’s ban of initial coin offerings (ICOs) this week has raised questions on whether other jurisdictions will do the same, and on how viable the vehicle is for SMEs to raise finance.
The Chinese government banned ICOs on Monday (September 4), effectively cutting about 40% of the ICO market out, while last month in the US the Securities Exchange Commission (SEC) began moves towards regulating ICOs.
In China 65 ICOs raised closed to $400 million over the year to July, according to Chinese news agency Xinhua.
Statistics by CoinSchedule, a cryptocurrency tracking site, show that to September 7 over $2.1 billion has been raised in 139 ICOs, up from just 46 valued collectively at $96m last year. The biggest ICO last year was $16m raised by a company called Waves.
So far this year four ICOs have each topped $100m, with the highest – Filecoin – having raised $257m. The majority of ICO funds – 44% - have been to raise funding for infrastructure, followed by data storage (13.5%) and trading and investing (10%).
In June, ICO funding hit over $550 million and it was the first month ever that it surpassed angel and seed VC funding.
Meanwhile Russia’s central bank said it won’t allow (for now) the trading of cryptocurrencies on official exchanges, nor the use of their technology for clearing and settlement infrastructure.
Despite this a Russian Blockchain venture fund, FinShi Capital said on Wednesday that it plans to will invest in ICO-related projects worth up to $1bn.
The fund aims that it has already raised $1.3m in a pre-ICO campaign, and aims to generate another $50m in an ICO in October.
'SARB offers no protection'
South Africa’s Reserve Bank also weighed in. It said as cryptocurrencies are not guaranteed by the Reserve Bank, there would be “no recourse or protection to consumers thereof”.
The Reserve Bank’s position on virtual currencies is set out in the Position Paper on Virtual Currencies issued in 2014, the bank recently established a dedicated fintech programme to increase focus and assist the existing working groups to research and analyse technology innovations in the financial services industry.
Part of the review is aimed at assessing the impact on cross border financial flows and stability of the financial system.
'Only temporary setback'
Despite this Bitcoin Foundation executive director Llew Claasen (pictured above) told SA tech publication Ventureburn that he reckons China’s ban is only a temporary setback for startups looking to raise capital through ICOs.
Claasen admitted that while there are people that are “darn right scamming” and those that are listing utility tokens as if they were securities, regulators should not place an outright ban on ICOs.
Where there is a clear expectation that those participating in the ICO will gain a share of the profits and be able to have a say in the governance of the company, the ICO can be described as essentially an initial public offering (IPO), he added.
However he said regulators should allow utility tokens to be raised - those where users can become part of a network by buying tokens but where they don’t necessarily profit from the tokens themselves.
It will however be hard to convince regulators. In the end more jurisdictions are likely to clamp down on what many believe is merely a massive casino game.
The sooner regulators get on top of things and issue clear guidelines - the better for real SMEs looking to raise cash.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Major Russian companies must co-operate more with startups by setting up special venture funds to finance their projects, Russian President Vladimir Putin has said.
“I hope these will not remain empty words. I ask you to make this happen, and as soon as possible,” he is reported by Sputnik News as saying at the St. Petersburg International Economic Forum on Friday (2 June),
Putin also urged the government and Russia's parliament to approve legislation that will define the ways big companies could acquire shares in startups.
“Big business, in its turn, must have a clear legal mechanism of buying small investment companies and acquiring shares in their capital," said Putin.
Russia needs start-ups to diversify its energy-based economy. The country is recovering from a nearly two-year recession in which the economy shrunk. Last month the IMF said it expects the economy to grow 1.4% this year.
There is reason to channel more financing to start-ups. Ernst & Young survey data in a 2014 roundtable discussion reveals that 20% of SMEs in Russia cited access to finance as a key obstacle, with half of these attributing this to the high cost of borrowing.
Figures from the Russian Venture Capital Association's 2016 yearbook reveal that the number of seed and startup investments backed by venture capital (VC) funds fell from 172, or two thirds of all VC and private equity investments in 2014 to 123 (57%) last year.
The amount in funding also fell from $43 million or 4.8% of all investments in 2014, to $16m or two percent of total invested capital.
Worrying is that funding for start-ups has also fallen in those deals in which the state has been involved in largely through a fund-of-funds - the Russian Venture Company - set up in 2006.
It fell from over 40 deals in 2014, to 27 (of the 56 in total it funded) in 2016. The volume of investments also fell in successive years since 2014 – to $8.3m in 2016, almost a third of what it was in 2014.
In addition the value of exits has fallen greatly between 2013 when it was at $4.8bn from 20 deals, to last year when it was $595m from 46 deals
Corporate acceleration programme
The Russian Venture Company is already working with big companies, through its Generation S accelerator initiative.
Last year there were eight such accelerators which are carried out in partnership with major Russian companies which use the accelerator to hunt for new innovation ideas. Russian companies are then pooled together and work with the accelerator and start-ups.
Each accelerator works on a specific “track” or area such as a the creative technology track which includes solutions for education, advertising and gaming. The Generation S programme is now in its fourth year, but it's only in its second year involving corporates.
About 120 startups have been selected this year with each big company taking on between 10 and 15 of these.
Last year a quarter of participants were able to attract funding. Graduates include robotics firm Promobot, medical startup Motorika, NanoServ which offers cleaning services for heating systems.
Part of the idea, says Deputy General Director, Development Director of the Russian Venture Company Gulnara Bikkulova is to provide VC investees with an easier way to exit to big companies.
“Indeed, we know that there is a big problem in the Russian venture market — the one with exits. The venture investors hope that at some point Russian corporations will be so interested in Russian technologies that they will make up a large share of strategic investments in the market. But the pace of it, unfortunately, is very slow,” says Bikkulva.
The percentage Russians involved in starting and running a firm of less than 3.5 years old was at its highest last year since the Global Entrepreneurship Monitor (GEM) began tracking the country in 2002.
But at just 6.3% of working-age adults, according to the 2016/17 GEM report, it’s still among the lowest for any emerging economy in the world, putting it 56 out of 65 countries. The rate may worsen – just 2.1% of adults plan on starting a business in the next three years.
WayRay founder Vitaly Ponomarev, told Reuters last year that he had about 500 meetings before landing venture capital. Ponomarev puts it this way: “There are people who have money in Russia, but they don't want to be involved in anything complicated”.
Timm is a South African who writes on small business. He has not visited Russia before. Click here to sign up for the monthly Small Business Insight newsletter.
Last week saw thousands of people take part in events around the world during Global Entrepreneurship Week (GEW). But a growing positivity towards entrepreneurship doesn't necessarily translate into more start-ups.
Since it started in 2008 GEW has grown to become one of the largest entrepreneurship events with its initiators, the Kauffman Foundation, predicting about 10 million people from 160 countries would take part in this year’s event – which ran from November 16 to 22.
The event aims to promote entrepreneurship, and in so doing make it a more attractive career choice.
The status given to entrepreneurs by the public has also increased, while media attention has improved slightly. This would be encouraging if it had any effect on increasing the number of adults that start and run new businesses. But it seems that unlike in a some countries it has had no real effect at all (see Graph 2).
Is there a trend?
Yet in some countries (like Russia and Brazil) there appears to be a strong link between growing sentiment that entrepreneurship is a good career choice and a rising rate at which people are starting new businesses.
The link also appears to be evident in those countries (like Colombia and India) which have seen a trend of declining numbers of adults opening new businesses, where increasingly fewer of the population view entrepreneurship as a good career choice.
Chile on the other hand presents an odd case.
There in the last six years the rate of Chileans becoming involved in starting a business has almost doubled (from 14.1% of adults in 2008 to 26.8% in 2014). Yet year on year steadily fewer Chileans believe being an entrepreneur is such a good career choice (see Graph 3) - 69% in 2014, versus 80% in 2008. Why is that?
The answer may lie in the country's significantly high business failure rate (Gem data shows the country's business discontinuation rose from an already high 5.8% to 8.3% over the same period). It could be that more are becoming despondent in their beliefs that entrepreneurship is a viable option.
So something else must also be affecting the public’s view of whether entrepreneurship is a good career choice or not.
It seems at least in Chile, South Africa and Malaysia’s that whether people view entrepreneurship has something cool or not, has little effect on getting more people to start their own business.
For South Africa in particular, with its high unemployment rate and low rate of entrepreneurship of 6.97% (see this earlier post) this is very concerning. All the media attention, hype and talk won’t help create more entrepreneurs for the country.
South Africans are already very positive about entrepreneurship. But this alone isn't enough to start their own business. Could it be that better training, finance and support is needed to equip those to start a business? Less red-tape? A more can-do attitude?
These are big questions that need as much action as thought to make things work.
Timm is a South African who writes on small business. Follow Small Business Insight on Twitter at @Smallbinsight.
South Africa is increasingly becoming a less friendly place to do business in when compared with its emerging market peers.
The World Bank's Doing Business 2016 report, released this week, revealed that the country fell four places to 73 in the rankings on ease of doing business.
For probably the first time, it is now easier to run a business in Botswana than in South Africa (ranked 72nd). The island of Mauritius (32nd) tops the continent.
This is worrying, more so when coupled with the country's deteriorating entrepreneurship rate (see this earlier post).
In contrast it's now easier to run a business in Russia than in South Africa. Eight years ago it was nearly as hard to run a business in Russia as in legendary red tape champions India and Brazil.
The World Bank said Russia rose 11 places because of reforms addressing the registration of property, power supply reliability, and the transparency of electricity tariffs, among other measures (The big jump in ratings raised Russia from 62nd place worldwide to 51st place - just shy of President Vladimir Putin's goal of raising Russia ranking to 50 by 2015.)
On the other hand Chile has made significant progress – slashing the time it takes to start a business from 40 days to 5.5 days over the same period. Colombia has cut it from 40 days to 11 days, Georgia from 11 to 2 days, Russia from 29 days to 11 days and Malaysia from 31 days to 7 days.
The only country to perform worse in this regard is Brazil – which has dropped from 122 to 174 (after hitting 90 in 2012). Chile has also slid back. After climbing from 69 in 2008 to 22 in 2014, it has fallen to 62. The best performer continues to be Georgia, ranked sixth.
In contrast Brazil continues to be an outlier, with issues of tax consuming a massive 2,600 hours a year for mid-size businesses.
How fair are they?
But the World Bank has faced a barrage of criticism of recent over the rankings.
The Financial Times noted this week that in many ways they favour authoritarian regimes which have the capacity to pass regulations quickly through rubber-stamp parliaments over democratically elected ones. In May, for example, Putin signed a decree to get the country to number 20 on the rankings.
Yet none the less the South African government seems to be taking action - at least in response to slowdown of growth (the economy is set to grow at just 1.5% this year).
The Presidency is set to establish an investment task team, as part of a nine-point plan mooted by South African president Jacob Zuma earlier this year to tackle low growth. It will look at how to reduce red tape and encourage more investment.
In addition, the Department of Trade and Industry has begun the process of setting up an investment clearing house which will take a more focused approach to attracting and retaining investors in the country.
A more focused approach to trimming red tape and enabling the private sector is what's needed. But will it happen?
Timm is a South African who writes on small business. He is currently based in Cape Town, South Africa. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a