In the past years, some US-based VCs are rotating their telescopes and starting to invest in emerging startup ecosystems. Now venturing in emerging markets is not a piece of cake. It takes the same risk-taking entrepreneurial spirit to start a new business to start investing in other markets.
The race has already started. The competition for North American and Western European funds is getting more competitive by the second. However with the growing demographics and market sizes of emerging startup ecosystems, there are still plenty of more room for more VCs and Angel funds. Investing in entrepreneurial ecosystems in emerging markets has its own pros & cons and unique risks, but with every unique risk comes that glorious home runs.
Good market demographics and growth rate
Unlike all developed countries where the population is expected to decrease in decades to come. Emerging markets still enjoy that vast amount of youth population which many of them still have. This also translates into an increase in the market size. For many B2C startups, the youths are usually the majority market segment target as they are more connected to technology, gadgets and internet. Smartphone penetration also has a 2 digit growth rate in most developing countries, and the internet infrastructures are surpassing many developed countries already.
It’s quite hard to find a startup ecosystem older than 4-5 years outside the US. This also means lower local startup competition. The basic proven startup business models existing in every country such as e-commerce are typically the first target of investment for investors in emerging markets before more complex startup models emerge. The low competition in the market means lower competition challenges which could mean a higher chance of success and market share. There is also a low competition for local and international VCs funding in that market. Investors can enjoy that early bird ticket when investing in emerging startup ecosystems.
In most cases, startups are lower valued than their counterparts in the western markets. However in some cases, you’re investing with a higher ticket, when comparing the market opportunity & size ratio to the startup’s valuation. But overall the lower valuation gives you more incentive and risking guts to venture in. This also gives an opportunity to invest in a couple os startups and share your risks among more.
Lower operation costs (usually)
In the majority of the emerging startup ecosystems, the monthly cost for a startup to operate is much less comparing to developed startup ecosystems especially Silicon Valley. Lower salaries of talents and Tech developers along with a lower valuation makes a small investment to big reward situation. Unlike a decade ago where the geographical location played a big role in a startup’s success, some business models do not depend on that which makes it smart to invest in a startup in a low priced economy.
If you’re a VC, your investments usually don’t only consist of financial aid. It also comes with expertise and experience as well as the transfer of technology. This will give the startup that you invest in a technological superiority to its [potential] competitors which alters the chances of success and faster money return.
Though investing in emerging markets is trickier than it seems, the reward could be worth the effort. There are also many challenges in investing in emerging markets but that’s a topic worth discussing at another time.