Alex Lykken March 07, 2014
VC firms looking for scalable opportunities in developing economies have more targets to work with than the usual software and healthcare spaces. In the United States, consumers have most of their consumption needs already taken care of. Small surprise that VC investors have minimized their exposure to the U.S. B2C industry, where significant scaling opportunities are harder to come by. According to PitchBook data, only 12% of all capital invested since 2005 has occurred in the B2C space. In the U.S. (and the developed world in general), IT and healthcare investments reign supreme.
The scene is reversed in the developing world. Investors, even U.S.-based firms trekking abroad, have found far more opportunities in B2C companies in the developing world, given the larger scaling opportunities for developing countries that are growing rapidly in population and Internet usage. B2C investment, in fact, accounts for more than half (53%) of all VC financings in Asia since 2005, when a number of U.S.-based firms began forming overseas offices. The percentages aren’t much different in other parts of the world—62% in Africa, 59% in South America, 78% in Central America and 78% in the Middle East (excluding Israel).
Emerging markets like China, India, Brazil, Mexico, Indonesia and dozens of others all have a couple things going for them. Population growth, obviously, is one, but perhaps more mouth-watering to venture firms is their explosive growth in Internet users. Particularly mobile Internet users. According to the International Telecommunication Union, the number of mobile users in developing countries likely overtook the developed world in 2013. Moreover, the population of smartphone-toting consumers in emerging markets has grown 27-fold since 2007.
VC firms have been trying to get ahead of the herd for some time. Going back again to 2005, investors have paid outsized attention to the Internet retail industry in the developing world. In Asia, for instance, almost 35% of all VC investment has gone to Internet retail companies. The percentages stand out elsewhere, too—63% in the Middle East (excluding Israel), 55% in Africa, 41% in South America and 27% in Central America. For context, the U.S. Internet retail industry commands only 2% of VC capital invested. Europe is only slightly better at 3%.
A significant number of investments in emerging-market Internet retailers are in “copycat” companies, sometimes dubbed “fast follow” startups. Instead of reinventing the wheel market by market, entrepreneurs in developing economies are taking proven business models from the developed world and customizing them for their own regional markets.
Part of the issue is, even if entrepreneurs in emerging markets wanted to create something different, there wouldn’t be much local media coverage that could broadcast their ideas to the rest of the VC world. “Pick up a Brazilian business magazine,” notes Fast Company, “and you’ll see lots of coverage of American innovation, but little about domestic companies.” There are few “hometown success stories” of original innovation to be inspired by—but the chances of getting funded go up significantly when entrepreneurs can “tropicalize” successful business ideas from abroad and incorporate them into the local landscape.
“In Brazil, there are two types of startups: copycats, and the ones that don’t get funded.” Well, not quite—only half of all VC capital invested in Brazil goes to Internet retail startups. But point taken.
Featured image courtesy of Wikimedia Commons user Nevit.