Tips for Investing in Emerging Market Start-Ups
While parts of the process mirror conventional venture capitalist (VC) funding, others look quite different. Young companies in these regions have the potential to gain a global advantage in scaling technology solutions, but also face unique circumstances compared to Silicon Valley and European peers.
The Middle East and Africa (MEA) region includes 71 countries and over 1.5 billion people. The region is home to a thriving entrepreneurial ecosystem with brilliant founders and highly scalable and promising ideas. However, the flow of capital has been relatively scant, with founders typically lacking access to capital or tailored support.
The region comes with unique challenges and operating conditions, differing from one country to the next. However, a commonality is they benefit from solid macroeconomic fundamentals which create opportunities with far-reaching potential.
Countries such as the UAE and Saudi Arabia have the highest rates of internet and mobile device penetration in the world, approaching 100 percent. In Africa, while internet access and device ownership is lower than global averages, the continent has consistently posted the highest annual increases in both.
Across the MEA region, these strong digital and mobile trends have been accompanied by rapid economic growth and reform, and favorable demographics for scaling digital platforms. Both the Middle East and Africa have the world’s fastest growing youth populations. The pandemic has led to even greater digital adoption in both regions, from mobile money and healthcare to education and enterprise platforms.
With these factors considered, three areas should be prioritised when sourcing and partnering with high growth start-ups in MEA markets.
Firstly, identify dynamic founding teams. This is an obvious criterion in any VC selection process but is more critical in emerging markets. Given the additional and distinctive challenges MEA startups face, it is even more important to select founders with extraordinary drive, tenacity, and strong track records. These qualities are required for entrepreneurs to persevere in locations such as Riyadh and Cairo, which present very different kinds of hurdles to those faced by founders in London or San Francisco.
A second vital gauge for emerging market companies with high revenue prospects is international scalability. It is important to look for entrepreneurs with innovative platforms solving real problems, with cross-border commercial potential. To achieve this broader reach, it is still critical for start-ups to build a solid product or market fit locally.
There is strong logic for tech solutions achieving traction in one emerging market, to be successfully adapted to others, as opposed to directly importing and applying solutions from advanced economies, to regional emerging markets. This philosophy was reflected in Stripe’s recent $200 million acquisition of a Nigerian fintech startup (Paystack) to expand its payments reach into Africa.
Stripe’s CEO publicly commented on the rationale behind the acquisition and said: “There is enormous opportunity... Africa may be smaller right now than other regions, but online commerce will grow about 30 percent every year. We are thinking of what the world will look like in 2040-2050. A lot of companies have been, let's say, heavily influenced by Stripe, but with Paystack, clearly they've put a lot of original thinking into how to do things better.”
The acquisition highlights a third facet of the bespoke and tailored approach to identifying high growth start-ups in the MEA region: locating the largest market gaps and the companies building the tech solutions to bridge them.
Several gaps have been identified across the region and more entrepreneurs are perceiving these gaps as opportunities. They are eager and ready to bridge them with brilliant HealthTech, FinTech, AgriTech and EdTech solutions.
Exceptional founders with solid product/market fit are the best bet to generate strong returns and secure profitable future exits for investors. Inevitably, the high operating friction in the MEA region does mean these ventures will require additional support from VC partners.
While it takes a more measured approach for investors to find and cultivate winning startups in emerging markets, those extra efforts can bring further dividends via simple demographics. Emerging and developing economies are home to six billion people or 86 percent of the world’s population. These citizens represent the mass digital-consumer markets of the future.
When start-ups achieve product/market fit in emerging markets, they hold a demographic advantage over startups in advanced economies by being better positioned to connect with more of the world.
Following these three markers in emerging markets: dynamic founding teams, international scalability, and gaps in the market fulfilled by tech solutions can unearth hidden gems for investors.