Successful Emerging Markets Startups Solve Emerging Markets Problems
Successful venture capital in fragmented, emerging markets differs from the developed world.
Since WOMENA’s launch a year and a half ago I have seen over eight hundred pitch decks, listened to over a hundred live pitches, conducted due diligence on about thirty startups, and finally overseen investment in four startups. My investment thesis has changed and the startups I do due diligence on are different. For one, I now outright reject startups that solve first world problems but target emerging market customers.
When I first arrived, I evaluated “first world startups” with the same framework as I evaluated them with back home. If a startup solves a real problem and it is in a large, untapped, and growing market, why wouldn’t it be of interest to me? Let’s say said startup provides a similar solution that has already been successfully implemented, scaled, and acquired in the US. Of course I would want to take a closer look. Right?
No. It is a real problem in my eyes — eyes shaped through years of values and behaviors inculcated by the culture I was in — but consumers in the region don’t respond to the solution at scale. Not because they can’t afford it, not because they can’t access it, and not because it wouldn’t be useful for them, but because they just don’t care to solve the problem.
I define first world startups as those which make a first world process more efficient, more accessible, and/or cheaper. The emerging market consumer would have to adopt first world processes before he or she would be interested in a technology to make these processes cheaper and more efficient. These startups’ solutions are for consumer behaviors too far in the future.
First world startups in emerging markets can experience deceptively impressive growth for the first 100k or so users or first 100k or so in revenue. There is always the cohort ahead of the curve, but growth eventually hits a ceiling where the customer acquisition cost skyrockets or margins dive negative. The startup founders may change strategy to try to educate the market, but broad market education is not a cost a startup can afford.
Oftentimes, the founders of these startups and their investors can visualize the undefined day when the market will recognize their solution’s value and adopt it. Sadly, more often than not these startups end up zombies, never quite a success and never quite a failure. A close look at consumer behavior in due diligence and post-pitch follow up with founders told me this story time and time again.
Fortunately, I wouldn’t categorize any of our portfolio companies as facing this destiny, but I’ve learned thorough due diligence on the intricacies of consumer behavior is crucial in an emerging market.
It is exceedingly easy for founders and investors to only consult their networks and take their feedback as proof of concept for a startup investment. Naturally, we surround ourselves with people like us. This method is flawed and leads to flawed investment decisions.
If you want to invest in early stage companies in emerging markets:
- Get the data where you can. I know this isn’t always easy to do in opaque, emerging markets, but it’s crucial to collect as much as possible and extrapolate where necessary.
- Compare to benchmarks you already have in mind (so not to be misled by the deceptive early adopter growth I mentioned earlier).
- Consult with a broad swath of consumers, not just those who think or live like you.
There are fantastic investment opportunities in the region and value can be captured if the investor reframes their view of the market and its challenges properly, and approaches due diligence correctly. If you ever want to discuss more, I’m always open to chat, so don’t hesitate to reach out.