INTERVIEWS

Vitaly M. Golomb: Eastern Europe Has A Classic Brain Drain Problem

Vitaly Golomb

He travels 20-30 countries a year as a speaker and early stage investor. He started his career as a self-taught teenage graphic designer, today his day job is Partner at HP Tech Ventures, the corporate venture arm of HP – Silicon Valley’s original startup. Now he is coming to Bratislava, and you can meet him at the Startup Awards 2017. Vitaly M. Golomb.

Vitaly, I heard you are European and today you live in California. Why is Europe one of your focus areas?

That’s true, I have been to almost every country in Europe but this is my first time in Bratislava. I was born in Ukraine, my family emigrated to California when I was eight years old. You can say I’m more than ¾ American but still have a strong connection to Eastern Europe.

You started out as a graphic designer, then founded several companies, became a startup mentor at a dozen accelerators, including 500 Startups. You’ve done a lot of different things. What were the key milestones in your journey? What were the most important decisions you had to make?

When I was a teenager, I was a self-taught designer, and I got a job at 15 at Kinko’s which is now FedEx Office in the US with something like 2,500+ locations. At that point, I was the youngest employee ever hired by the company. After that, I joined a startup in the dotcom days and led a design team when I was 18-19. While working full time, I also made sure to complete my college education in design, to make my mom happy.

When the dotcom world ended, I went back to graphic arts, I ran a commercial printing company for a number of years, then I sold it, started a design firm and grew that to three offices. I founded my third company, Keen in 2010. It was a venture-backed e-commerce and ERP SaaS for the graphic arts industry. In the process, I was asked by a good friend to become a mentor in a Polish accelerator, and I turned out to be quite effective. One thing led to another and I ended up mentoring and advising a dozen accelerator programs all over Europe and the US.

When I sold Keen, and with my experience helping nurture several hundred companies, it was somewhat natural for me to transition into the venture world. My original plan was to create a fund to bridge Central and Eastern Europe with Silicon Valley but when HP was working on setting up this new corporate venture arm, I couldn’t let the opportunity to help form this new group for such a legendary company slip away.

What have been the greatest challenges or the key learnings you gained throughout the years in the business?

Running a startup is a very grueling process that can take a personal toll on the founders. I, like many, certainly fell victim to that trap and now I try to make it a bit easier for the next generation. You will get so engrossed in the startup that it becomes part of your identity. Sometimes it is very difficult to distinguish between where you end and the company begins. Startups are much closer to an experiment than a business, and they have very high failure rate because you are supposed to be doing something nobody has ever done before. If you do not have the objectivity to think about it as being apart from you, it will be destructive to your personal life.

“You are conducting an experiment and the most important thing is to figure out what business you are in.”

What is the most common advice you give to startup founders when you mentor them?

My advice always is: try to work at a fast-growing startup for a few years and learn how it’s actually done before you dive in and do it on your own.

Focus on what’s important. You are conducting an experiment and the most important thing is to figure out what business you are in. You have a technology and a hypothesis but it hasn’t been validated until you have a bunch of customers who are willing to pay you for your solution. You have to experiment very quickly to figure out how to sell, to whom, what are they willing to pay for it (with their time or money).

Anything else you are doing does not matter. It does not matter what kind of office you have, it does not matter whether you have nice computers, whether you have nice furniture, whether you have a nice website, none of these things matter if they are not helping you figure out what business you are in. A lot of times founders get into this state of mind that they need to feel like they are busy but they are not productive, they are not solving the most important thing which is how to achieve the most important milestone to be able to scale the business. Think of a startup like a video game – you have to beat the boss to move to the next level.

What is the common misstep you often see in the startup world?

It’s usually not being strategic and optimizing or the long-term of your vision. A lot of times I see, especially in Eastern Europe, a bunch of accelerators which don’t really add value. The people running accelerators don’t have any experience in investing, they don’t have any experience in running companies. But they will gladly give you a small amount of money for 15% of your company.

In Eastern Europe, $50k is a big amount of money which could allow you to live a certain lifestyle with your co-founder for a year or two. And I see a lot of these wantrapreneurs who go from accelerator to accelerator, collecting these $50K investments, going to conferences, handing out their CEO business cards and not making any progress with their actual business. The mistake is they do anything but focus on figuring out what business they are in, getting to revenue, getting to your customers, and then scaling up.

For these fly-by-night accelerators it is also a waste of time and money. They collect chunks of companies that will go nowhere and in a year or two the accelerator runs out of money with no results. Statistically, it takes 8 years to get from accelerator stage to exit. The best programs plan for this long marathon and are very thoughtful about where they invest their money and efforts. The rest put on good parties (maybe) and run out of cash.

Then I need to, of course, ask you what are the good characteristics of a great accelerator?

The number one thing with accelerators is who is involved: the mentor pool. How involved are they? Are they relevant to your business? What kind of help are you going to get? No accelerator gives you a big amount of money so you can’t really think of them as an investor, that’s not their primary value-add. The value is the network they provide, the learnings they provide, and how they will accelerate your business.

You should be interviewing your accelerator as they interview you. After all, you are going to give them a chunk of your company forever. They are going to bet on you, they are going to try to figure out what you are all about and if they want to put money and resources behind you. You have to do the same thing and figure out if that is the right place for you. I write about how to get the most benefit out of an accelerator in my book Accelerated Startup.

“It takes a long time to build a startup ecosystem.”

And what are the right traits of a functioning startup ecosystem in general?

A functioning ecosystem is better thought of as a “cluster of innovation.” I will be talking about that in my keynote at the Startup Awards in more detail. It consists of, obviously, entrepreneurs and venture capitalists but also large companies who are now about 30% of all venture capital dollars. They also are investing heavily into R&D to create technology that eventually serves as the basis for the next wave of startups. And don’t forget, many more startups exit through acquisition than IPO. You need a healthy local market of big companies that will absorb all these little guys.

Besides that, you need universities that can produce world-class engineers and business people. And not too many MBAs because MBAs are taught to think in a certain box. It’s difficult for them to go against their training when encountering new business models, for example, blockchain.

The secret of Silicon Valley is not just the money, it’s more about the 50,000 director-level managers that have gone from an idea to exit. And you do not have that anywhere else. If you are building a world-class technology company you will need experienced mangers to help scale it as quickly as possible. Where do you think you can find the most experienced managers that have done this before? This is why Silicon Valley wins.

You also need professionals like lawyers, accountants and other consultants that know the idiosyncrasies of the startup world. A lawyer in Bratislava that does not know the international law, that does not know how to structure an equity round is going to be very destructive, not productive for a startup. I have seen more than one deal die because of the wrong people being involved.

What about government?

The government has a very important role because it needs to support the ecosystem and create economic conditions for all this to work. In the US, the government was the first and only customer of Silicon Valley for the first twenty years. Then they created certain economic conditions to reduce investment risk. Venture capital is short for “adventure capital.” Adventure means it’s highly risky so the US government did 2:1 matching for any private capital going into these companies in the 60s and 70s. That is how they got Wall Street investors to come over to Silicon Valley and start investing in technology companies alongside other asset classes. Then they opened up the ability for pension funds to invest in venture funds. And all of this happened in the two decades before Microsoft, Apple, and other 70s giants were founded.

It takes a long time to build an ecosystem. Israel has done an amazing job, some of the Scandinavian and Baltic countries have done great. Singapore is a force of nature in Southeast Asian startup world. And China is its own animal entirely now. It’s a big enough internal market now that they don’t need outside help anymore to manufacture unicorns.

Do you think Central and Eastern Europe is on the track? Or are we at least getting on the track? What do we lack? What do we need to work on more and harder?

Eastern Europe has a classic brain drain problem. Very good engineering education and then the best people leave because they don’t feel like they are living up to their true potential in the local market. I am on the supervisor board of the Ukrainian Venture Capital Association (UVCA) and I know the market in Ukraine very well. All the best startups don’t really have a choice, they might leave some engineering there, but they have to move to Silicon Valley, London, or other capital rich ecosystem at some point. This happens throughout Central and Eastern Europe because the infrastructure is not there.

So, politicians contribute to this barrier instead of tearing it down from your experience.

The problem is they do not truly understand innovation. For example, again Ukraine as a country I know best in the region, is the number four software development country in the world, after US, India, and China – with just a fraction of the population. Software outsourcing is the number two export industry in the country after agriculture. But most of that value is lost because only 10% of it is captured in the country. It’s like a modern slave trade, the value is being outsourced. The developers are happy because they make great salaries compared to other professions but there is no value for the country. The end products are not for the domestic market and the revenue and tax are elsewhere. Let alone Silicon Valley-style exits that produce a hundred millionaires that then become angel investors to feed the next generation of founders.

Politicians don’t understand this nuance, they do not understand that this resource exists in the country. They need to focus on the future of the country and figure out where they need to invest now to have the opportunity to create great economic wins 5-10 years down the road.

“Without this focus and with continued neglect of local ecosystems, Asia is going to kick Europe’s ass.”

I digress a little to the original Silicon Valley startup, HP. Today it is a $51B revenue company. How can such big companies innovate?

It is very difficult for enterprises to innovate because large companies have chosen a certain business model at a certain point in time, and they built giant businesses around that business model. It is even more difficult for them to experiment with new business models that are not even proven yet. It is too much risk. Do you think a public company CEO can risk losing any part of such a large business?

There are a few different tools in the corporate innovation toolbox. One is obviously M&A. If you cannot afford to run the experiments entirely, you let startups prove out their business externally, buy them and attach them as a new business unit. And all of sudden, you made a transition to a new business unit that is already proven. Of course you pay a premium for that and most acquisition still fail to integrate.

Then you have investments, which are somewhat halfway there. It’s a small bet on a company that is still developing. You want to support them, help them to be successful in the market, learn through them and get a piece of their success.

There is also this concept of incubating projects that then get spun out into new business units. Cisco is known for doing this successfully. They’ll take a new idea, put together a team, fund it and then it either succeeds or fails. If it succeeds, Cisco will buy it back and make that team rich. But first, they let them sink or swim on their own outside of the company. A controversial approach but one that has worked repeatedly.

Based on your experience in Ukraine and CEE, where do you see the region going in 5, maybe 10 years?

It can be a couple of different things or probably a combination. What I know is that population figures are actually inflated. Officially, Ukraine has something like 42M population. Really, it’s somewhere 36-38M because a lot of people are leaving. I think that’s probably the case for many countries in the region. People go to where they can find personal success. And nobody can blame them. After all, this is how I ended up in California. This is a major crisis for the region.

If you do not have a population, economic stagnation will set in. The local economy will shrink instead of growing as it becomes more difficult to find customers for products and services. It’s a bit of a death spiral. But if this gets fixed and an opportunity is shown, capital will follow to grow the local market. With the right focus, these countries can become hubs for certain new technology areas.

I can give you an example. In Kyiv, there is one university that is considered the best in the world in metallurgy. 3D printing in metal will soon become a very important industry and will change manufacturing. Ukraine has an opportunity to be the leader in that because it has the best specialized talent in that area. And talent is the one thing you cannot replicate.

You just need to add other components such as a little bit of money and some experienced mentors – for the lack of a better term – or other people that can help guide these engineers and scientists in commercializing their breakthroughs and turn them into revenue-producing companies.

Without this focus and with continued neglect of local ecosystems, Asia is going to kick Europe’s ass. Period. I encourage everyone to go to China, Taiwan, Singapore, Vietnam, and Philippines to see with their own eyes how quickly things are developing, how much support startups get, and how hard they are willing to work. Europe is a too proud and a bit lazy right now – risking losing all of its advantages. Don’t let it happen.

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