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The impact of innovation from the technology sector permeates our everyday lives. No sooner has one technology gone mainstream, but speculation begins on where the next big thing will come from, or what it will be.
Speculation about where naturally falls on developed markets. Less common are predictions about emerging market (EM) technology companies’ contributions. Yet, entrepreneurs from these emerging markets – and the innovative platforms they have developed – are solving real problems with models that have cross-border and global potential.
However, EM tech companies face unique circumstances compared to Silicon Valley and European peers. Their circumstances require a bespoke investor methodology, especially for the MEA region, and a tailored approach to value creation
Value creation is a ubiquitous term in the venture capital space, without being tailored to EM startups. A new, more customized approach is possible, which we call global capital. Global capital is growth stage financing, paired with structured support, to help portfolio companies create value in local markets – whilst building capacity to scale across borders.
The first stage is selecting the startup and focusing on backing companies with particular attributes: revenue-generating, industry leaders, capital-efficient, immensely scalable, and with a clear path to exit. The approach can easily be sector-agnostic if these attributes are present.
The impetus to provide these startups with a global capital solution depends on operating realities. Many challenges faced in the MEA region are the very reasons such innovative companies are poised to create global technology solutions – as EM founders are often best positioned to solve EM challenges. However, without the right access to capital, talent, and a structured approach to strategy and execution, it can be a struggle to succeed.
Startups in the region are strategically positioned to leapfrog sticky legacy systems, bypass substantial infrastructure replacement costs, and shift to new and innovative digital models.
This is particularly true in the healthTech, edTech, agriTech, and finTech sectors. Once these ventures create platforms to offer products and services in these sectors, they hold a demographic advantage over startups in developed markets – by being better positioned to connect with more of the world.
Emerging and developing economies comprise 86% of the world’s population – six-billion people.
They are the mass digital-consumer markets of the future. But, before innovative growth companies can reach these consumers, they face unique hurdles. Many EM countries, particularly in Africa, still have lower internet and device penetration than much of the world, although numbers are rapidly improving. Often, the very problems these startups are solving for – be it in FinTech, healthcare, or mobility – are also their own immediate operational and financial headwinds.
EM startups are also underserved in the venture capital arena. Founders either lack access to capital itself or even when it is available, it is not accompanied with tailored support. Superimposing a Silicon Valley investment model on an EM startup is not the optimal method for value creation, revenue generation, or scaling. Neither is just providing a term sheet, writing a cheque, and simply asking for periodic reporting from afar.
Putting in the hours, operationally, with good old fashioned elbow grease, is a more tangible and effective strategy in emerging markets. This can include helping companies devise structured and tested merchant acquisition strategies, a go-to-market playbook, or even pivoting the business model to super-charge (3x) growth in less than 12 months – all recent, real-life case studies.
Founders of MEA growth-stage businesses require tailored investment models, a meaningful approach to value creation, and significant resources to accompany venture funding. Our so-called partner framework has seven pillars: process, ambition, reputation, talent & recruitment, network, expansion, and raising.
VC investors should provide best practice guidance on corporate finance, governance, control processes, and regulatory compliance. Growth companies need assistance in identifying strategic objectives, their mission, and purpose. Reputation, and a brand image’s contribution to value, has also never been more important.
Talent and recruitment are key elements; VCs should help their portfolio companies identify/recruit top management, including creating systems for hiring and retaining talent. They need assistance generating revenue via client acquisition and access to trusted partners. They need both local and global growth plans. Finally, like any fast-growing firm, access to capital and having the right capital structure is imperative.
As the world continues to adapt to Covid-19 realities, and EM startups export their platforms to the US and Europe, more VCs will see the potential in backing founders in these markets.
Increasingly, EM tech solutions will become solutions for the whole world. A global capital approach to value creation will help more growth-stage startups scale their products and solutions abroad – and fulfil their exciting potential.
Featured image: Austin Distel via Unsplash
This article was written by Said Murad, Partner at Global Ventures.