Wednesday, March 13, 2013

Tropicalisation at Its Best – Copycats Stealing Venture Capital

Tropicalisation at Its Best – Copycats Stealing Venture Capital 

Innovation without innovation 

by Teodora Lang

Copycats are rapidly becoming popular in the eyes of venture capital investors, shifting the whole business towards emerging “tropical” areas. The smell of speedy success is tempting; the question is how fast it will start to stink…

Innovation clusters such as Silicon Valley are facing serious competition when it comes to attracting venture capital: emerging markets created their very own development technique which leads to the phenomenon of “tropicalisation”. According to a recent Economist article, the term refers to the practice of backing start-ups that adapt existing business models to emerging markets by becoming copycats. The concept is quite simple; while the original company may not have the expertise to enter new regions so quickly; copycats have an advantage to access those markets faster.

First of all, they do not have to worry about the success of a new business project, since they are copying ideas that already convinced investors and consumers. There are well-known examples, just think about the Chinese version of eBay called or Sonico which was once the Facebook of Latin-America. Secondly, the original firm lacks the inside knowledge about local habits at fresh markets and copycats can easily profit from their familiarity to the area. Former employees took full advantage of their local knowledge and designed Flipkart (the reproduction of Amazon services) to the Indian demand -- where credit cards are less common -- by offering the option of payment on the date of delivery.

These replica businesses have a significant impact on emerging market economies via drawing the attention of venture capitalists to the region. In the presence of venture capital start-ups are more likely to emerge, boosting growth and attracting other firms to establish in the area. This happened in the case of Silicon Valley, where the advantageous combination of education (Stanford University) and industry resulted in the leading hub of innovation and technology. According to a recent National Venture Capital Association study, approximately 1/3 of the total venture capital investment flows to Silicon Valley, but the area is facing significant competition from India, China and Brazil.

Albeit they seem to be substitutes, emerging markets (in the sense of “innovation” clusters) and Silicon Valley are quite different. While in California research and development are the inputs of innovation, copycats -- by definition -- are not creating anything new or revolutionary. If we follow the economic theory, namely that innovation clusters are centers for growth, some serious concerns arise regarding emerging market hubs. There is no doubt that copycats can easily lose their funding share when the original company (in time) enters the local market. Just as it happened with Sonico when Facebook crossed the Latin-American borders. A representative of a Brazilian venture firm summarized the issue as follows: “With innovation you have a global upside, but with copycat innovation you have geographical limits.” So, what remains for emerging hubs? Are they gonna lose their attractiveness eventually or there is hope in the air? The current trend indicates that copycat-strategy is gaining even more popularity. The main question is whether these regions start to create and implement new ideas or continue to be content with replicas. Changing to the innovative attitude would be closer to the “spirit of venture capital” which is supposed to financially support creativity instead of imitations. In time, markets will decide if the copycat-behavior is creative enough in itself…


Post a Comment

Twitter Delicious Facebook Digg Stumbleupon Favorites More