When it comes to investing, many venture capital firms take pride in being among the first to back a particular technology or enter into a particular vertical. This sense of pride is important: Investors can indeed break new ground. Even if an entrepreneur has a great innovation, after all, he will get nowhere without the capital and know-how of savvy investors. From this perspective, investors are as important to innovation as the entrepreneurs themselves.
But investors can help pioneer more than just technologies or verticals - they can also pioneer new markets. They can invest, in other words, in countries where there is little investment. This idea is in keeping with a common adage in the business world: While talent may be evenly distributed, opportunity is not. Investing in overlooked markets evens the playing field, so that entrepreneurs there also get a chance to also build innovative startups.
Some venture capital firms do announce that they invest in their region’s emerging markets. But when you examine their portfolio composition, often this will seem like a token initiative. The firm may indeed have one or two investments in emerging markets, but the rest will be concentrated in the usual business hubs, like Singapore or Hong Kong.
For venture capital firms to really tread new ground, they need to invest aggressively in new markets as they do in their other key markets. At Accelerating Asia, we try to live by this principle first-hand. We were one of the first investors to back startups in Bangladesh, and we have since invested into eighteen startups in the country since then. These Bangladeshi startups have had a major impact on their communities and have inspired more investors to come into the country.
Here’s why more investors should consider investing more into newer markets.
Take the example of a med-tech company in Singapore, such as one focused on diagnostic services. This hypothetical company would have to invest significant resources in acquiring customers through incentives and rebates, because the market already has stiff competition. They would fight for customers, in other words, to grab land away from competitors. This kind of competition is of course capital-intensive and takes away on what matters the most: product development.
In newer markets, startups do not have to contend with these issues, as we can see with Amarlab, a diagnostic services company in Bangladesh that has already administered 50,000 tests and counting, owing in large part to a more open competitive landscape. They can focus less on a race-to-the-bottom competition and more on building a product that addresses the needs of their end users. This scenario provides enormous value for investors, whose capital will fund product and business growth rather than tit-for-tat price wars.
Assuming a business has found product-market fit, startups in these newer markets face a blue ocean, a space for unprecedented growth. There are, as mentioned, fewer competing innovations. As a result, the startup can focus on what it will take to achieve scale, such as product development, user acquisition and retention, talent development, and business operations.
The startup is in a better position to achieve market leadership, after which it can build a defensive moat. Shuttle, for example, was the first mass transit company in Bangladesh to address shuttles, which enabled it to focus on gaining users in mass. Now that it has become the de facto leader in its category, Shuttle is in a position to use its data and knowledge base to offer products and services it knows would be in demand. Startups in newer markets, in other words, are in a better position to not only grow fast, but secure their place once they get to the top.
In Zero to One, venture capitalist Peter Thiel explained how the best startups provide exponential rather than incremental value over incumbent solutions, inspiring consumers or businesses to switch over.
In established markets, this exponential value is difficult to achieve. The latest ed-tech platform in Hong Kong will not be markedly different from the one founded last year, as an example. But this is not true of emerging markets, as we can see in Sohopathi, a Bangladeshi ed-tech startup that has already provided education to over 200,000 learners. Because the incumbent solution is typically a traditional business and not another startup, startups that arise here have a greater chance of providing exponential value.
A new lifestyle services platform in an emerging market, for example, is an exponentially better solution than manually canvassing for the right provider on a neighborhood bulletin board. Such accounts for the success of Romoni, which is a Bangladeshi startup that enables women to easily find the lifestyle services and products they need.
The ease with which a startup can provide exponential value in its home market means the solution will be stickier. This is a win for not only the startups themselves but the investors who back them: The growth prospects of their investment is safer, since product usage and retention will be high.
For these reasons, investors can think more along geographic lines when choosing which startups to back. Cross-border investing into newer markets will benefit the entrepreneurs and the customers they serve, and also provide strategic value to the investors bold enough to tread new ground that others still find too risky to explore.
If you share in this belief, do consider investing alongside us, or one of our individual startups.
Accelerating Asia invests in startups with scalable technology solutions and revenue generating business models that combine purpose with profit.
In making an investment decision, investors must rely on their own examination of startups and the terms of the investment including the merits and risks involved. Prospective investors should not construe this content as legal, tax, investment, financial or accounting advice.