How to create an efficient IT ecosystem from scratch ?

Helping Georgian and Ukraine officials to visit France and receive foreign VCs delegations to their countries, in order to develop their germinal local IT industry, i had the opportunity to collect a few ideas about the gentle art of creating successfull IT ecosystem. Thanks to all the experts who shared their ideas and experiences.

Preliminary questions

Is it possible to create an IT ecosystem from scratch ?

It’s possible but it’s a long process. Each step must be taken in the right sequence / order.

For example, in France, it’s been 13 years since the IT startup movement took off, and it’s still fragile, facing funding problems. Even if 2000 to 3000 startups are set up every year in France, none of those has yet experienced worldwide success, and only a few have reached a European dimension.

Is it possible for a small country to experience international success on the IT market ?

The example of Israel shows it’s possible. Estonia is also on the right path. Israel startups received a powerful initial booster from the Israeli army’s technological needs and funding capacities. The first IT success stories have allowed business angels to invest in the Israeli IT ecosystem and fund new startups. In France also, the first generation of IT successful businessmen have become the main early investors in IT startups. Many Israeli businessmen who developed IT startups used to work abroad, but following their success, many of them came back to Israel to invest and set up new companies.

What are the 3 major components of an efficient IT ecosystem ?

  1. A business and innovation-friendly regulatory and fiscal system
  2. Adequate human resources through an effective education system
  • Technicians
  • Entrepreneurs
  1. A strong funding chain

Other factors :

  • Entrepreneurship mentality and skills
  • Efficient infrastructures
  • Coaching networks: mentors, business angels, incubators, accelerators…
  • Relevant market strategy
  • Strong support from the State
  • Local IT community
  • International support network

1. A friendly REGULATION

  • A business and innovation friendly environment:
  • Tax efficiency and incentives
  • Legal protection of capital, technologies and patents

An investor wants to make sure that the value of his investment (technology assets) will be protected, and that he’ll be able to get his money out of the country without undergoing complex tax process.

A startup is fragile. It must grow as quickly as possible to experience international success. In this perspective, it needs to maximize its profits in order to recruit, invest in R&D, make mistakes without vital consequences, etc.

A friendly environment is not the only prerequisite. It must also be the best in the region to encourage and attract local and foreign entrepreneurs and investors.

Many countries have adopted a radical strategy that is a zero taxation policy for IT business for the first 10 years of their activity. This is the best way to encourage innovation and its highly risky investments.
The legal protection of technologies and patents will be very important for international investment funds, but it’s not a short term issue.

2. An adequate EDUCATION

Skilled engineers aren’t sufficient to make a startup successful, entrepreneurial skills are also crucial to develop this particular type of business. Indeed, one must not only support the enterprises, but also the individuals, the entrepreneurs and in this perspective, enhancing entrepreneur’s skills is essential.

Improving entrepreneur skills

To succeed, it’s crucial for startup initiators to know how to develop a business plan and a global strategy, how to raise money, how to use it, how to recruit and motivate the right people…

Universities and schools must offer entrepreneurship courses. Successful foreign entrepreneurs should be invited to share their experience, encourage local entrepreneurs, maybe become mentors for local startups etc.

Is “brain drain” a problem ?

Brain drain is not a problem but an opportunity if the young engineers and entrepreneurs who leave the country and are successful abroad are encouraged to come back by a business-friendly environment.

3. Strong FUNDING

Investments in the IT sector are very risky especially in the early stages; therefore IT investors must be strongly encouraged.

Encourage funding

There are two main types of funding which should be encouraged through fiscal advantages for people investing in the early stages of an IT startup: close relatives funding ranging between $10,000 and $50,000 and business angels funding extending from $50,000 to $200,000.

How to fill the seed capital gap ?

Seed capital (investment of $1 to 10 million) must be encouraged by the State, notably through a shared investment scheme which would see the State invest 1$ in different projects for every 1$ invested by private investment funds.

Local wealthy tycoons could be encouraged to create an IT investment fund. This could be done through the development of an international partnership with an experienced IT American fund for example.

Other key elements

  • Create an adequate environment for IT startups

Set up a national body along with local associations dedicated to the IT sector which will provide shared working places, enhancement seminars, international webinars, trips, contacts etc.

Create a Techno-park composed of universities and research centers with effective infrastructure and facilities, a 10 years tax-free zone, business schools with international partnerships, networking associations etc.

But buildings and tax cuts are not enough to create an ecosystem.

  • Initiate the development by creating an example that will inspire young generations to become entrepreneurs

The psychological factor and changes in mentality are essential. A success story may be the sparkle that will initiate an entrepreneurship movement. In this perspective, the success of at least one Georgian IT startup headed by young entrepreneur should be encouraged by all means by the government. If the young population believes it can be successful through entrepreneurship, then the number of startups will automatically increase.

  • Encourage outsourcing companies

IT outsourcing generates revenues for engineers and the local IT community, enabling them to develop high-quality software meeting international standards, and to make contacts with international companies, senior managers, investors etc.

Skype was developed in Estonia by a Finnish entrepreneur. It proved to young Estonians that they’re capable of creating software which could meet the international standards. Skype put Estonia on the IT map.

Tax cuts for outsourcing companies can be limited to the techno-park area if the objective is to reduce the draining of local human resources.

  • Define a relevant market and technical strategy

– Specialization

Internet is a transversal tool which is changing all the dimensions of the economy. To experience international success, a local IT ecosystem must be specialized. The local IT community must achieve a high-level acknowledged specialization on specific issues in which research teams, schools, engineers and successful companies will enhance their knowledge and develop profitable synergies, and attract international investors and projects.

– Become the regional IT hub

Prior to experiencing international success, a startup must first experience national and regional success.

For example, Aukro is a Polish auction portal and professional social network that succeeded in Poland. Then, they entered Ukraine and became N°1 on this market.

The country must become the most attractive place in the region on the key factors (tax and legal regulation, qualified, cheap and abundant human resources…) to attract regional and international investors.

– Encourage international contacts and networking

An international network must be encouraged to trade local skills, companies and startups on the main neighboring markets.

The country and its local IT community must have the opportunity to build relations with and learn from the experience of more advanced IT communities (via expatriation or outsourcing services).

Invite IT delegations to the country, in order to meet local companies, startups, local seed investment funds etc.

Send local delegations to international events in order to build an international network, present local know- how, products, start upd.

Encourage partnerships with foreign IT universities (such as MIT), exchanges of students.

Encourage partnerships between local companies and worldwide IT companies (Google, Facebook, Microsoft, IBM…) in order to turn the country into their regional hub.

Ireland succeeded in attracting the European HQs of Google, Facebook etc. This helped create a strong local IT community, develop business of Irish startups in the US (through contacts with Google, Facebook…), attract foreign IT companies, foreign workers and entrepreneurs (bringing their know-how and knowledge of their markets), etc.

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