Article Feature on The Accountant: Venture Capital & Startups

The article hereunder appeared in the 1st edition of 2022 of the Accountant, a magazine issued by the The Malta Institute of Accountants.

The article is linked to a course in collaboration with the MIA.


M22021: CFO perspective: Venture Capital & Start-ups 7-8 April | 9:15 – 12:30, delivered online

At the time when Malta was opening up as a business hub, and started developing key industries like Asset Management, iGaming, shipping and aviation amongst others, the business world was preparing for disruption like it had never seen before.

Marc Andreessen, legendary American Venture Capitalist, investor in Facebook, Groupon, Skype, Twitter, Zynga and Foursquare, among others, famously said “Software Is Eating the World”. ****He correctly explained that “two decades into the rise of the modern internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale.” The cost of creating a business, a startup, plummeted during this period. Amazon was firing up a software engine for selling virtually everything online, no retail stores necessary.

Steve Jobs, with the Apple iPhone, had placed more computing power in our hands than what NASA had available when they sent man to the moon, and Google made all the information we ever needed available to us in seconds. If you were not in the software business, you were playing a dangerous game with your company’s future. Just ask Nokia, Blockbuster and any traditional news outlet.

Role of Venture Capital (VC)

The paper, The Economic Impact of Venture Capital: Evidence from Public Companies, revised in June 2021, shows that Venture capital-backed companies account for 41% of total US market capitalization and 62% of US public companies’ research and development spending. The international comparison between the US and other members of the G7 club—the world’s most advanced countries—suggests that the US VC industry is the likely causal agent behind the rise to prominence of many of these companies. Many of these top companies are global companies, but a disproportionate share of the value they create accrues to their home countries. Furthermore, one may be forgiven for associating Venture Capital only with software, but the global reach of this funding contributes to advancements in biotechnology, space, pharmaceuticals, green technology, retail, fashion and many other industries.

My thoughts here are that Venture Capital can form a central part of a long term sustainable economic model that can inspire a nation to do better.

Sadly, according to Pitchbook’s 2021 data Southern Europe’s startups raised €4 billion in Venture Capital in 2021, of which Malta attracted reportedly less than 0.5%. In turn, Southern Europe attracts approximately just 4% of the total €100 billion in Venture Capital invested into European startups. Europe is a far cry from the American capitalist model with less than 15% of the global share of VC coming from Europe:

Some say this may be a good thing because although less startups emerge, the ones that do, tend to be more capital efficient and have more robust unit economics. Malta seems to mimic the same lethargic symptoms that the rest of Europe suffers from. What local founders sorely lack is a sense of competitiveness on an international scale. Many business proposals are a copy of innovative ideas witnessed overseas not yet present in Malta. Whereas this may make for a good lifestyle business, it does not have the hallmarks of an international disruptor. Most VC funds or business angels statistically invest in less than 1% of applications they review. We talk a lot about being “startup friendly”. This does not mean spoon feeding startups, but fostering the right conditions, including competitiveness, for these startups to succeed into growing to international scale.

Entrepreneurship culture and mindset

The Maltese tech scene, as it currently operates, does not support and prepare startups for the type of growth required by Venture Capital investors. The few Maltese success stories we can boast of, Hotjar and Altaro, happen despite the system and did not benefit from any venture capital funding. The problem is compounded because startups in Malta have to deal with the ever-increasing banking requirements, a lack of access to finance (symptomatic of Europe at large), and the lack of talent and human resources to find product market fit and eventually scaling to international relevance.

The local funding environment for startups currently only delivers investors that are simply in it for the money: they want to see financial returns in a reasonable period of time, and push their founders to run their startups as an income-earning investment, like real estate.

Startups are a bet that the future will be radically different from the present, and they are valuable on the way up because they are, effectively, setting out to discover whether a project, deliberately fraught with uncertainty, may one day become a scalable and repeatable business. The only goal for any given startup right now is to grow, explore and earn the right to keep growing and exploring. It does not happen according to a business plan, within a timeframe of milestones. It happens because of talent, grit and as part of a community of growth-mindset individuals willing it onward. To do this in a systematic way will take time and only the right type of investors can contribute positively to this.

How do we cultivate a growth and infinite mindset?

Malta’s new startup guard is already finding success internationally. Names such as Weavr, eCabs, EBO and Peaq are the most prominent. Still, Malta startup success stories are too few and far between for traditional investors to have a measurable benchmark to view startups as a real opportunity. They are a riskier alternative to more traditional investment opportunities, most significantly real estate investing. Yet investors fail to see the opportunity cost of this sort of systemic thinking. Consider the following 10-year historical benchmarks 2012-2022:

  • MSE index 10 year gain – 23%
  • Malta Immovable property index 10Yr gain – 78%
  • EU50 index 10 year gain – 59%
  • US Stock Market 10Yr index gain – 166%
  • NASDAQ 10Yr index – 367%

It is true that immovable property is a relatively safe bet that generated a lot of wealth for a lot of people. It is a brick-and-mortar investment that people easily understand the utility of. My argument for this discussion is that Malta’s dependence on this asset class has now inherited a 10-year generation workforce who know little but immoveable property speculation as a profession and as an investment. We probably missed out on 10 years of investment in technology and innovation, and are now trying to artificially make up for the lost time. Maybe the success of the few will encourage a renewed interest in tech entrepreneurship.

New market dynamics are at play for Malta. The FATF’s greylisting lead to a radical re-think of what it means to be “open to business”.

Covid19 has brought with it “future of work” cultural shifts with the work from anywhere movement gaining pace. Malta has done well to attract new talent via a startup visa and digital nomad initiative. This will bring inwards a nucleus of talent able to build world class startups from within Malta.

A particular opportunity is the rate of adoption of technology in the MENA region. The Emirate states are investing heavily in technology. The Saudi sovereign wealth fund signaled its intention to the world recently with a $1 billion acquisition of ESL, an e-sports company, yet the region still needs significant talent and infrastructure development in technology. Growth opportunities exist for Malta as a gateway between Europe, Africa and the Middle East.

Tech-based entrepreneurship seems to have all the hallmarks of the strategic direction Malta needs to take to usher in a new modern business culture.


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