October 07, 2021

Denis Kovalevich: “What way ecosystems became a market for tech startups” / Forbes

Tech startups creators don’t ask themselves whether ecosystems are needed or not. For them, this is a market that affects directly the number and level of technology development in the country. Denis Kovalevich, co-founder of the TechnoSpark group of companies, discusses the phenomenon of start-up studios and their role in the formation of ecosystems.

An increasing number of companies today are engaged in what is commonly called serial technology entrepreneurship. They create startups from scratch, invest capital in them, bring them to growth, and sell them. This is a kind of conveyor belt for the startups’ production. Tens of thousands of entrepreneurs around the world work in this model today, some of them are united in so-called start-up studios.

For serial entrepreneurs, the most important question is the market question: whom to do we sell our startups? 15 years ago each startup sale was a unique transaction. Today the inclusion of companies in the buyer’s business is a routine procedure. Large companies like Google, Amazon, Apple buy dozens of startups a year. This means that some companies buy one startup a week, someone buys 5-10 startups a year. And there are thousands of such buyers in the world. These are companies not only from IT sector. But the banking sector as well. Also deeptech: electronics, robots, biotech, agrotech and so on. And these are not only large corporations.

Denis Kovalevich, co-founder of the TechnoSpark group of companies (photo: TechnoSpark press service)

There are no fewer start-up buyers among medium-sized businesses – I mean a global company with an annual turnover of $ 2‒5‒10 billion. 15 years ago even a talk about ecosystems of such corporations was speculative, but today they have actually formed around any world self-respecting technology company. There is no need anymore to be a super-giant to have an ecosystem The way of permanent integration of new startups into the circuit of your business both through purchase or investment to them is enough now.

Today corporations are constantly creating new opportunities for themselves to enter new markets. If they didn’t buy startups, the development of new industries would be unacceptably slow for them. For example, Sber, the first in our country, managed to form an ecosystem and to do it faster than many world companies.

In general, the purpose of creating ecosystems for corporations is to accelerate in the tempo of development. To make corporation cover the distance of entering new markets in 10-15 years, which previously could be done in 30-40 years.

Instead of building its own laboratories and launching its own R&D, it buys ready-made activity modules and inserts them like puzzles into new business cells. So ecosystem is another name for the market for serial tech entrepreneurs. In this sense, there is no question for us whether ecosystems are needed or not, whether they need to be developed or not. Their presence is one of the key conditions for the growth of investment in technology companies, which means that it affects directly the number and level of technology development in the country.

With no ecosystems, there would be no thousands and tens of thousands of deals a year for the sale of startups. The fact is important that the number of deals with “unicorn” startups, very expensive startups, does not change from year to year. Over the past ten years, their annual number with some slight changes has remained constant. But if we talk about startups which worth up to $50 million, then the number of such deals is growing exponentially. These are no longer classic M&A stories with a long du-dial and multi-level negotiations. These are quick, even drastic decisions that corporate management makes, involving inexpensive but fast and ambitious startups, making them part of their ecosystems.

Again, the function of ecosystems for serial tech entrepreneurs is to be our marketplace.

Ecosystems directly generate growth in the number of new startups that entrepreneurs create. In my opinion, there are at least three different ways to built up ecosystems.

The first, investment is the mildest and most common form of creating an ecosystem. When the corporation, realizing that there is a fairly wide offer of startups in its sphere, invests in them or buys them. This is how many global companies operate in the most developed sectors.

The second way is what is usually called accelerators. This is an attempt to strengthen an already existing startup. It’s almost an educational process aiming to transfer new competencies to a novice entrepreneur, to help with money, to enable him to move on. For example, Sber is now following this model.

There is a third way: many corporations, such as Amazon, Procter & Gamble, Goldman Sachs, create their own startup studios. This means that they make a start-up studio in partnership with entrepreneurs. This studio begins to build new companies almost immediately under the order of the corporation’s ecosystem. That is not the selection and acceleration of startups from the market, but the purposeful creation of the needed companies. This is the most severe form of ecosystem formation – proactive venture capital construction in situations of a strong startups shortage.

I will give just one example. Innohub startup studio operates in Mexico City. It was founded by people from the Santander bank. This studio is 100% focused on fintech and creates 3‒5‒7 startups per year. The bank involves some of these companies in its ecosystem. The founders of this studio know exactly what to do, because they have an industrial insight. They act competently. This is actually the transfer of knowledge accumulated by top managers into entrepreneurship. They create new startups instead of creating new divisions in the bank.

At the same time, those corporations that just start creating ecosystems can create a number of negative effects as well. Often companies that build ecosystems produce overpriced wages among engineers and management. This is the opposite of what an entrepreneur does. In a sense, he always plays to lower prices. He pays the minimum possible for all the factors of production that he involves in his business.

When the ecosystem inside itself does not have an internal system of price regulation, this leads to the fact that an excessive number of expensive people appear on the market. This slows down the growth rate and the emergence of new startups. Entrepreneurs are beginning to move to places where such centers have not yet started to work, that is, they are moving away from the centers of such ecosystems.

In my opinion, if smart ecosystems include a mechanism for retaining the ratchet effect, then they are able to properly gather those entrepreneurs who produce new technological products.

Source: Forbes

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