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Private Sector Avoids Financing Startups

Startup Georgia program was launched by initiative of the Georgian Prime Minister with the aim to develop startup businesses in the country.

Any persons, who have economically profitable and efficient  ideas, are welcome to participate in the project. These ideas must be attractive in terms of investments and profits. In this case, the beneficiary can obtain financial support component from 15 000 to 100 000 GEL.

Moreover, the Authorities assume obligation to draw additional investments if the project is a success and introduce successful projects to Silicon Valley. However, it should be noted that the private sector is not interested in startup ideas, in practice, and the Authorities have to bear the whole burden, while in western countries the Authorities do not interfere in financing startups, in practice. In  the world’s developed economies, startups occupy significant ratio in shaping GDP. Moreover, startups provide good opportunities to create new job places on the market. These countries were developing attractive startup ideas stage by stage before these companies grew into successful companies, before the so-called EXIT.

Western Model of Startups Development

First of all, startupers are grown at vocational schools. These schools prepare startupers very well for doing business. The second phase implies Angel Investors, people, who make first financial injections in startups. Accelerator environment is the next stage. After short presentation in an accelerator, key objective of the company is to attract additional sources for company staff to pay a  certain amount of regular salaries, so as a young company spend more time on working on products. The next stage implies attracting venture capital from a company. Attracting venture investments is one of the last steps before the EXIT. Unlike ordinary investments, venture investments imply high risks. Moreover, in exchange of investments, an investor becomes an owner of a considerable part of company and this is key advantage of venture investments. In this case, if the company is sold successfully or EXIT is carried out successfully, the investor will receive significant benefits. After EXIT or sales of a company, the company is not considered to be a successful startup.

Reasons Private Sector is not Interested in   Startups in Georgia

Today, Georgia lacks for money resources. Commercial banks credit businesses in rare cases and issue business loans with high interest rates. Therefore, businessmen cannot serve so expensive loans and develop business. Naturally, in this reality, no commercial bank will lend money to startupers.

It should be noted that commercial banks avoid assuming similar burden in other countries too and, basically, business sector and venture funds take part in financing startups, but we have alarming situation in this direction.

Today, it is impossible, in practice, to persuade Georgian business to put money in startup business and there are objective reasons. Domestic investors lack for due qualifications to appraise potential of this or that startup idea. At the same time, evaluation of startup business is a special field, because investor puts money in idea only. Consequently, on the domestic market startups are considered as high-risky businesses, destined for failure. Naturally, this is erroneous approach.

The mentioned problem was relevant in developed countries previously and they resolved this problem through venture funds. Venture fund is a certain startup-oriented investment fund, which has its own experts and it is upon these experts to appraise a startup. They comprehensively examine the startup idea and if the idea has real economic perspectives, they invest money in startup. However, besides exploration of business plan, these funds are based on mathematical calculations too. For example, if a venture fund has financed 5 startups and even one of them has justified, this fund will raise money of the remaining 4 failed projects. This is mathematical calculation and it is erroneous opinion as if venture funds play only Lottery.

Conclusion

More than 50 startups were financed as part of Startup Georgia program. Because of the mentioned problems, a major part of these projects were financed by the Government. However, as noted, startup is an ordinary business and we should not have illusions around valuable development of this direction without involvement of private sector.  Penetration of Georgian startups into foreign markets prove this consideration. This process is the result of a lack of ecosystem in Georgia.

In the end, today the Authorities ensure certain opportunities for young talented people to implement their ideas and also assume obligation to introduce these starts to Silicon Valley, but like all economic fields,  it is unimaginable, in practice, that the Authorities continuously replace  the private sector.