13 June 2017 10:09:41 IST

‘We are in the era of disruptive entrepreneurs’

Unprecedented innovations are creating new wealth-creation opportunities: Matthew C Le Merle

“The world is transitioning from the Industrial Era that we have grown up in, into the Fifth Era of digital and biotechnology disruption and change. Most people are not sure how to participate,” says Matthew C Le Merle, a Silicon Valley insider, Managing Partner of Keiretsu Capital, an affiliate of the US-headquartered global angel investor network Keiretsu Forum. Matthew and another Silicon Valley insider Alison Davis in their book Build your fortune in the Fifth Era: How to prosper in an age of unprecedented innovation , say the wealth being built in the transition to the Fifth Era is being captured in the early stages of business formation. Entrepreneurs are changing the world and angels perch on their shoulders.

In an email interview, Matthew discusses the recently-released book. Edited excerpts:

How are the wealth-creation opportunities different in the Fifth Era from those in the Industrial Era?

Examining the transitions between the prior four eras, we find that great wealth is always created and it is disruptive innovations that drive the wealth and value creation. Disruptive innovations can fundamentally change the way most people spend their time. New and different wealth-creation opportunities surface as human activity adjusts to the new era and the activities that characterise it. It is possible to see a new era coming and position yourself for the next phase of wealth creation, but this must be a distinct choice: prior wealth creation strategies may not be relevant in the subsequent era.

Why do you say that this transition is passing by most people and that they are not sure how to be part of the new era?

In the US, only about 0.2 per cent of people are each year becoming technology entrepreneurs and perhaps only 2.5 per cent are active investors (VC and angel). This means that 12.5 million accredited investor households, perhaps 97 per cent, are not participating directly in early-stage technology opportunities. For the population at large, the percentage is even lower – most are not accredited investors.

How are entrepreneurs in the Fifth Era any different from those in the previous eras?

The Fifth Era has been ushered in by the digital and biotechnology revolution supported by other emerging disruptive technologies. As a result, this generation of disruptive entrepreneurs tend to be technology literate and well educated in the emerging domains of technology and new business models. The world is more connected than ever before with larger addressable markets in most industries and so successful technology entrepreneurs today are more likely to be people who can imagine and execute global products, services and strategies rather than just local ones. Also, since every industry is being transformed at the same time and their profit pools are shifting, this generation of entrepreneurs tends to be able to conceptualise new ways to meet the needs of customers in both established and emerging industries and sectors.

Entrepreneurs now seem to have more avenues to raise money. How has this changed the nature of entrepreneurs and entrepreneurship?

Most people continue to think, mistakenly, that venture capitalists back most start-ups. Most technology start-ups receive their first funding from angel investors. Jeffrey Sohl at the University of New Hampshire tracks new business formation in the US that is backed by angel investors. According to his annual research in 2016: as many as 71,110 businesses were backed by angel investors (in contrast with 7,750 backed by VCs); in each of the last three years, angels exceeded $24 billion in funding; and, 304,930 angels were active in backing these businesses. It is estimated that 80 per cent of the seed and earlier funding comes from angel investors in the US, 15 per cent from VC firms and around 5 per cent from crowd funding and incubator/accelerator. Most start-ups will never get backed by a venture capital fund.

With failure rates being high in new-generation businesses, are more people losing money or making money?

In the US, studies from the National Venture Capital Association and Angel Capital Association show that failure rates are similar between angels and VCs with 50-70 per cent of deals failing to return the capital that was invested. However, about 10 per cent of the investments return 5-10 times and more. If investors are diversified with at least 24 or more early-stage investments, they have a 90 per cent probability of achieving the asset class return which is in the mid to high 20 per cent annual returns, making it one of the most attractive investment asset classes in the world.

Angel and early-stage investing is still a risky proposition. Is that why more people are staying out of potential wealth-creation opportunities?

Most people don’t understand this enormous wealth creation opportunity or the ways to participate. They simply don’t know how to engage and get started. That is why we wrote the books.

What should angels do to overcome the pitfalls of investing in Fifth Era businesses?

They should group together since there is wisdom in investing with like-minded people who can source more opportunities, share the burden of expert-based due diligence, collectively negotiate for better terms and conditions and then work together to help the companies that do get funded to be successful.

What would be your advice for angel investors in a country like India, where angel investing is fairly recent?

Start off by surrounding yourself by the best investors you can find by joining an angel group. Then take your time and only invest when you are ready to do so. Never be rushed into an investment if you don’t think you are sure – it is much better to say no than have an investment in a company you are not committed to helping succeed.

(The article first appeared in The Hindu BusinessLine.)