Investing in Diaspora Founders: A Smart Government Strategy

Addressing the Challenge of Building Local Tech Ecosystems

A novel approach is being considered to tackle a common issue faced by numerous nations: the development of self-sufficient, independent local technology ecosystems. It is proposed that governments should strategically allocate funding to founders within their diaspora, extending support beyond solely local entrepreneurs.

Key Components of a Tech Ecosystem

Any thriving tech ecosystem comprises three essential elements:

• Firstly, there are the founders, individuals driven to establish companies and requiring financial backing. Founders in many regions, outside of established tech centers, often encounter cultural, legal, and reputational obstacles to success. Consequently, a significant number choose to emigrate to the United States. Immigrants demonstrably contribute to the U.S. innovation economy at a rate far exceeding expectations.
• Secondly, VC firms actively seek out promising founders to invest in. While a limited number of geographic locations boast ample VC funding (such as New York, California, Boston, Israel, and Beijing), the majority of cities globally experience a relative scarcity of venture capital resources.
• Finally, governmental organizations, both national and local, are invested in fostering economic expansion and employment opportunities. A flourishing tech ecosystem, generating high-paying jobs, is a particularly desirable outcome for these entities.

Many governments, including those of Canada and France, have established or supported funds aimed at investing in local VC managers. The typical dual objective is to achieve strong financial returns and stimulate job growth. However, these VC funds frequently fall short of meeting one or both of these goals.

Recognizing Past Failures

The challenges inherent in public efforts to bolster entrepreneurship and venture capital are highlighted in the seminal work, “Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do about It,” authored by Josh Lerner, a former professor and current head of the entrepreneurial management unit at Harvard Business School.

A New Proposal: Investing in the Diaspora

It is suggested that governments in countries that are not major tech hubs – essentially, most nations excluding the U.S., China, Israel, and India – should move away from exclusively supporting locally-based VC funds. Instead, they should explore investing in VC funds that focus on their diaspora communities.

Benefits of Supporting Diaspora Entrepreneurs

This strategy offers three key advantages to the home country:

Remittances: Entrepreneurs are likely to remit funds to their families residing in their country of origin.

Brain Gain: Examination of leadership within most countries’ tech ecosystems reveals a disproportionately high number of individuals with prior education and professional experience gained abroad, particularly in the United States. Diaspora entrepreneurs bring valuable knowledge and perspectives acquired internationally, potentially identifying opportunities overlooked by those without such exposure. However, they may also face resistance, skepticism, and bureaucratic hurdles when attempting to transfer resources and expertise back home.

Job Creation: Even when a diaspora entrepreneur launches a business in a location like New York, their expansion plans may logically include establishing a European headquarters in their home country, France for example. Furthermore, as the company expands, functions like engineering, quality assurance, and customer support could be strategically located within the home country.

Existing Private Sector Initiatives

The private sector has already begun to recognize this potential. Numerous VC funds in New York City specifically target investments in certain diaspora communities. Examples include Elevator Fund, Hanaco, Innovation Endeavors, JANVEST Capital Partners, Pereg Ventures, and Team8, among others, as detailed in “The ultimate guide to US investment in Israeli startups.”

For the Canadian diaspora, iNovia Capital and HOF Capital cater to individuals from the MENA region, while ff Venture Capital focuses on Poland.

Learning from Successful Models

Governments can draw inspiration from leading public/private organizations that have successfully supported diaspora entrepreneurs in various ways.

Networking, Mentoring, and Training: Governments can facilitate connections between diaspora and local business leaders, fostering discussions about potential investment and business opportunities within the homeland. These groups often provide essential startup services, including market research, business plan development, executive mentorship, and business registration assistance. Notable examples include the African Diaspora Network (ADN), The Indus Entrepreneurs (TiE) (Southeast Asia), Advance (Australia) based in New York, C100 (focused on Canadian tech leaders), GlobalScot, Irish Executive Mentorship Program, and Red de Talentos Mexicanos.

Investment: Investment typically takes the form of pooled public and private funds or matching grants, often requiring a physical presence in the home country. Organizations such as:

• The African Foundation for Development (AFFORD), founded in 1994, assists Africans in the U.K. in creating wealth and jobs back home through initiatives like the Diaspora Finance Initiative (DFI) and AFFORD Diaspora Grants.
• Moldova’s Pare 1+1 program provides funding and entrepreneurial training to immigrants and returning citizens.
• Chile Global Ventures, part of Fundación Chile, finances startups through a network of over 100 influential Chileans residing in the U.S., Canada, and Europe, investing in both Chilean startups and companies founded by Chileans abroad.
• Ecuador’s Fund El Cucayo offers risk capital through a matching-funding model, ranging from 50-50 to 25-75, to Ecuadorian entrepreneurs returning to the country.

Recruiting New Citizens: Canada’s Startup Visa Program effectively attracts international talent. This presents a significant opportunity for Canada to further capitalize on its historical openness to immigration. From an American perspective, our nation’s welcoming attitude towards immigrants, including my own French father, is a key competitive advantage. We would be remiss not to actively leverage this unique asset.

The Political Hurdle

The central question remains: Which governments are willing to embrace the concept of supporting funding for their diaspora? Initial conversations with senior government officials outside the U.S. have revealed a common concern: “We appreciate the idea, but securing political support for initiatives involving financial transfers abroad would be challenging.”

The challenge now lies in identifying those who can overcome this obstacle.