Issue 6, 2013. December-January

   

GEORGIAN ENTREPRENEURS: AN INTERVIEW WITH LADO GURGENIDZE

Investor.ge is launching a new series of interviews exploring the biggest trends in Georgian business innovation and entrepreneurialism.

In each issue, the best and brightest minds in Georgian business will discuss their ideas, market trends, and the obstacles that face Georgian entrepreneurs today. In the second conversation, Investor.ge's Maia Edilashvili spoke with Lado Gurgenidze, a former Prime Minister of Georgia and the Executive Chairman of the Supervisory Board at Liberty Bank.


The Smartest Startup

Lado Gurgenidze is a big name in the small world of Georgian financiers.

But after making a name for himself in international finance circles, Gurgenidze is now banking on unknown start ups as the next frontier for business.

Gurgenidze, a major shareholder in Smartex, is using the Tbilisi-based investment vehicle to seed and invest in startups both in Georgia and beyond since 2011.

Georgia, he said, is and will remain "a very, very small market," but with the growing influence of smartphones and tablets, consumer-focused online startups could become a viable and profitable form of business.

The three main focus areas of Smartex are digital wallets and payments, local deals and search engines, and VoIP communications.

"Being early into this rather small niche makes sense," Gurgenidze told Investor.ge.

"Smartex has been profitable for the past two years, which is rare so early in the game for startup incubators, and its annual profit is roughly 50% of the aggregate amount we have invested in our startups, so, as long as we maintain the profitability and sustain some growth in our core companies, we expect to make some good money in the medium term."

Small, peripheral markets with a shallow talent pool for software engineers and developers like Georgia are unlikely to produce a universal innovation that changes the world, Gurgenidze noted.

But, he said, Smartex is focused on finding talented local entrepreneurs who are capably adapting some well-established business models to Georgian realities.

"I would not bet on globally disruptive innovators arising out of the Georgian startup scene; it is important to set realistic expectations," Gurgenidze noted.

He stressed Smartex practices a hybrid approach: while acquiring majority stakes in local Georgian startups and then helping them develop and grow, they also make "angel investments" -that is, they participate in very early investment rounds of some international companies that could become global sensations.

For now, that means Smartex focuses abroad as much as it seeks out local talent. For instance, Smartex has invested in TransferWise (UK), started by two Estonian founders, which Gurgenidze describes as "probably the highest-profile online financial services startup of the year."

In addition, Smartex has invested in Saving Global; weltsparen.de, a German-based online platform for placing bank deposits in banks in peripheral/emerging economies; and Coinbase (US).

They are also looking regionally: for instance they have invested in FriendlyMe (befriendly.me) for its potential to "become a leading social gifting player in Ukraine, Russia and the rest of the FSU region," Gurgenidze said.

"None of these companies have any problem accessing capital, and we have been invited to co-invest with some very smart VC money with very deep pockets," he said. "Where possible we try to bring to Georgia the service or know-how these companies have, so it is a two-way street."

The Georgian lari is already one of the currencies in which TransferWise operates through its partnership with Liberty Bank, and Swoop, Smartex's local deals and search service, will be launching the FriendlyMe service soon in Georgia, with plans to expand it to Armenia and Azerbaijan.

To inspire Georgian startups, Gurgenidze's Liberty Bank and Smartex brought to Tbilisi Startup Weekend, a globally acclaimed weekend-long event in November, to brainstorm new startup ideas. The goal was to help young, talented people "to have a fair shot" at creating the business of their dreams.

Gurgenidze also hopes the event will raise the general awareness of startups and "angel investing" in Georgia.

Being innovative in Georgia is not always easy. The World Bank's Fostering Entrepreneurship in Georgia 2013 report, a study of 300 micro-, small- and medium-sized companies registered in Georgia between 2002 and 2012, found that the product innovation rate in Georgia is lower than in the South Caucasus as a whole and in European and Central Asian countries.

The report also stressed that most Georgian firms are non-innovators and have low productivity. As a rule, innovation spells success for companies and the economy: innovative firms create 30 percent more jobs and are much more competitive in the domestic small and medium enterprise global markets than the non-innovative firms.

Gurgenidze noted that obstacles facing innovative development in Georgia include "a pretty standard list" typical of any small, low-middle income economy: a small market; limited broadband, smartphone and tablet penetration; a shallow talent pool of software engineers and few universities that have modern IT curricula.

But he stressed the best course of action for the government to help is to stay "out of the way." He believes that "the surest way to kill what little tech entrepreneurial activity there is in this country is to start piling on unneeded regulations."

The key to inspiring innovation, he said, is for business startups to succeed. Others will follow.

"The more entrepreneurs realize that those Georgian startups that meet certain criteria actually have gotten funding -and we have so far invested in about 15 local startups - the more incentivized they will be to try their hand at building viable online businesses," he told Investor.ge.