Why are official and private funding initiatives failing? Part 1

The sole purpose of this post is to bring a clear view to people who does not understand what it looks like to be a tech entrepreneur in Colombia. These are all rough numbers, which may vary a bit on a case by case basis. 

As a technological entrepreneur in Colombia, one is often advised to apply to a set of programs designed by national government institutions such as Sena, Colciencias and Innpulsa (among others) in order to get funding and grow the company. Who advises you? Presidents of multinationals, presidents of foundations, owners of small and large companies, your aunt, your friends and the government itself.

After some months of reportedly being told the same and a short glance to the investment opportunities offered, our answer to this advice wouldn't be as positive as expected. I know this attitude is not special among technological entrepreneurs in Colombia.


Why?

1. Early Stage programs are not considerate with the entrepreneurs and are not adapted to this century

Please recall Early Stage capitals are given to business ideas with an early market traction. As an example I'll consider one of the Early Stage programs by one of the recognized institutions listed above. The early stage program has the following advantages for the applying company

a. Give feedback and evaluate in the technical, legal and marketing of the business.

b. Adjudicate a maximum of 300 Million Pesos (around 160 000 USD), with the condition that I fund myself at least 30% of this amount.

Ok, doesn't seem bad. What are the conditions?

C1. Having sold more than 400 Million Pesos (around 220 000 USD) in 3 years, if the business isn't older than that.

C2. Having done promising market studies and market plans, with clear business models.

C3. Have at most twice as much debt as patrimony. Otherwise, would have to agree with one large certified software company to partner.

C4. Other conditions that take not less than 4 months to certify.

Let's assume my company fulfils C1. Otherwise, this program is of no use to me.

Ok, please help me out here. If I'm less than 3 years old and I'm very lucky, I'll get 210 Million Pesos. Then there are two cases:

Case 1:  I happen to have at least 90 million Pesos debt (something expected for a very small startup with some traction), I must have at least 45 Million Pesos in startup patrimony.  In this case, I will have more than 450 Million Pesos (Around 240 000 USD) to invest in my startup, before any funding program.

Exactly why should I commit and invest 4 to 6 months of my valuable time, when I have quite a traction, much more than 210 Million Pesos and will probably have more than 500 Million by the time I get the 210 Million funding?  Moreover, at this stage I will surely have more than one private investor after me.


Case 2: I happen to have at least 90 million Pesos debt (something expected for a very small startup with some traction), but I don't have at least 45 Million Pesos in startup patrimony.

Then I should partner with a certified, large software company. The case is even worse.

These guys will hopefully let me keep 50% of my stake, but will definitely take over with all the strategy and concept, completely killing my passion for the startup. Also, I'll have a minor voice in decision making and all the decision making processes will be at their bureaucratic pace. I won't have the people of preference in my company, but even more, I'll marry a company that has not been successful in escalating any tech business with innovation. No colombian company has ever escalated an innovative tech business and in addition to their old fashioned business concepts, they have no bigger chance than what I stand by my own.

Don't forget that Case 2 has for granted I have around 500 Million Pesos to invest in my company. Little motivation, huh?

On the other hand, business plans and market studies are almost completely useless in the tech startup world. I'm not expanding in the topic. In case you haven't, please read our bible, Adam Riesz's Lean Startup. If you haven't read about the lean concepts, how are you up to the task of qualifying startups? Exactly based on what?

Finally, there are other opportunity costs and risks. What if my business is not selected? What if as the great developer I am (what they seek) I'm being offered the same money for a similar period of time to work on a different project?

This is about viability, only viability. We've gotta start with viability for the resources, the entrepreneurial teams.


To be continued...