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Why Governments Should Invest in Their Diaspora Founders

We are brainstorming a new solution to a widespread challenge in many countries: how to develop a self-sustaining, independent local tech ecosystem. Our proposal: governments systematically support funding for their diaspora founders, not just the local founders.

I co-wrote this essay with Prabhat Gusain, formerly an intern with Versatile VC; and a 2021 MBA from UVA Darden. Prabhat wrote a research paper on this topic at Darden.

There are three main players in any tech ecosystem: 

  • Founders who want to build companies and need funding. In many ecosystems outside of the major tech hubs, founders face cultural, legal, reputational and other hurdles to building a successful tech company. As a result, many of them emigrate to the US (for all of America’s many weaknesses.) Immigrants to the US contribute to the success of the US innovation economy at a vastly disproportionate rate.
  • VC firms looking for fundable founders. In a very small number of geographies, there is no shortage of VC funds (NY, CA, Boston, Israel, Beijing). But, in most cities in the world, there is only a relatively small number of VC funds.
  • National and local governmental organizations who are interested in promoting economic growth and job creation, and particularly want to see a thriving tech ecosystem generating high-paid jobs. 

Many countries’ governments (Canada, France, etc.) have created or supported funds to invest in local VC managers. Usually, governments have a two-part goal in doing so: achieve good returns and generate jobs. However, in many cases, these VC funds have failed on one or both of those objectives. There is a reason that the definitive book on the topic has such a depressing title: Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed–and What to Do about It, by my former professor, Josh Lerner, Head of the Entrepreneurial Management Unit and the Jacob H. Schiff Professor of Investment Banking at Harvard Business School. 

“Silicon Valley, Singapore, Tel Aviv―the global hubs of entrepreneurial activity―all bear the marks of government investment. Yet, for every public intervention that spurs entrepreneurial activity, there are many failed efforts that waste untold billions in taxpayer dollars…. [The book] reveals the common flaws undermining far too many programs―poor design, a lack of understanding for the entrepreneurial process, and implementation problems.”

Our proposal is that many governments which are not themselves major tech hubs (i.e., most countries excluding US, China, Israel, and India) should stop restricting themselves to supporting locally domiciled VC funds. Instead, they should consider investing in VC funds which invest in their diaspora, and more generally, taking other moves to support their diaspora. 

We argue that this benefits the home country in three ways:

  • Remittances. Entrepreneurs will send money home to their families.
  • Brain gain. If you look at the leaders of the tech ecosystem in most countries, you will see a very disproportionate number of people who have education and work experience abroad, especially in the US. Diaspora entrepreneurs bring knowledge and understanding acquired outside the country that may help them see possibilities not apparent to people who have not lived elsewhere. On the other hand, these entrepreneurs often encounter entrenched attitudes, resentment from non-migrants, and administrative barriers in bringing money, materials, and equipment from abroad. 
  • Job creation. Even if a French emigrant starts her business in New York, when she expands, France will be a logical place for European HQ. In addition, as the firm grows there are many functions she may set up in her home country—engineering, QA, customer support, etc.

The private sector has already identified this opportunity. Right here in New York City, there already exist numerous VC funds with particular interest in certain diasporas, e.g., 

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Governments could model these efforts on leading global public/private organizations that have supported diaspora entrepreneurs in many other ways:

  • Networking, mentoring, and training. Offering opportunities for diaspora and local business leaders to meet one another and discuss potential business and investment opportunities in the homeland. Many of these groups also offer  startup services such as market research, business plan advisory, matching with seasoned executives, registering a business, etc. Some examples:
  • Investment (almost entirely in the home country). Investment is typically in the form of pooled private and public funds, or matching grants, and typically requires physical presence in the home country. Examples: 
    • The African Foundation for Development (AFFORD) was founded in 1994 as a non-profit organization by Africans living in the UK to help the African expatriates there create wealth and jobs back home. Its investment activities include the Diaspora Finance Initiative (DFI), AFFORD Diaspora Grants, and the AFFORD Business Club. 
    • The Pare 1+1 program by the Moldovan government offers funding and entrepreneurial training to immigrants (and returnees) into Moldova.
    • Chile Global Ventures (part of Fundación Chile) finances startups through its network of over one hundred influential Chileans living in the US, Canada, and Europe. They invest in Chilean startups or companies abroad founded by Chileans.
    • Ecuador’s Fund El Cucayo provided risk capital in a matching-funding format, 50-50 or 25-75, to the returnee Ecuadorian entrepreneur in Ecuador.
  • Recruiting new citizens
    • The Canadian Startup Visa Program is great for recruiting international talent. I tell my kids “A friend is a stranger you haven’t met yet.” This via means, “A Canadian is just a foreigner who hasn’t immigrated yet.” This is an enormous opportunity for Canada to further leverage its historic openness to immigrants. From my point of view as an American, our history of welcoming immigrants (including my French father) is one of our greatest advantages compared to our geopolitical rivals. We’re fools if we don’t aggressively leverage this unique asset.

So here’s our question: which forward-thinking governments are open to the idea of supporting funding to their diaspora? In our conversations with some senior government officials outside of the US, what we’ve heard is, “We love the idea, but it would be difficult to get political support for anything that involves sending money abroad.”

Who can surmount this challenge?

Further reading:

Thanks to Neelam Brar, Director Tech and Innovation Investing at Roynat Capital and Versatile VC Venture Partner, for thoughtful comments.

Previously posted at Techcrunch.

Published on August 30, 2021, Policy, Internationalization, Venture Capital

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