Hernan Fernandez
Managing Partner
Angel Ventures
Expert Contributor

The Next Hotbed of Venture Capital is Not Where You Think

By Hernan Fernandez | Thu, 11/12/2020 - 09:21

Silicon Valley, without a doubt, represents the pinnacle of where a Startup Founder aspires to be. The concentration of talent, ideas and capital make it a place of pilgrimage for any tech entrepreneur that wants to build the next Facebook or Google. During the late 1990’s, every country in the world was trying to replicate their own version of Silicon Valley, giving rise to Silicon Mountain, Silicon Oasis, Silicon Beach, and many other “Silicony” landmarks that looked to compete with the powerhouse in Northern California (In the case of Mexico, we proudly have our Tequila Valley near Guadalajara, or Chilicon Valley in Mexico City). A few years into that effort, the hard truth of the factors that were able to help create this epicenter of innovation had sunk in, and perhaps with the exception of Israel, most government efforts failed on creating a Silicon Valley version locally. But was all this a failure?

Entrepreneurial ecosystems today have matured enough to understand that the conditions found in Silicon Valley are hard to replicate and are now looking for their own ethos. In this sense, it is a clear step forward that each country, city and community embraces its own conditions to thrive in the global startup scene. If this were just about the wealth of a country, and the percentage of GDP invested in Science and Technology (both very strong indicators of a more robust ecosystem), then developed economies would have emerging markets beat by a landslide. But is that the case today?

Entrepreneurial Hubs in the US, Israel, Europe, Japan, Korea and China today sizzle with innovation coming from deep tech capabilities. They are certainly better positioned in a race to find the what’s next in terms of tech trends, but more and more we are seeing countries that were not traditionally thought about as VC hotspots in the world, and so we now present a case for the rise of Venture Capital in the Global South.

Having a significant part of the world’s population and playing its role in the economic growth of the world, emerging markets in Southeast Asia, Latin America, Middle East and Africa are raising their hand as nascent Startup Ecosystems, and it feels as something very different for Venture Capital Funds and their business model if we compare this to what we can find in developed economies. While a few places might rival the fast pace of their wealthier counterparts -namely India which is on a league of its own- the rise of Brazil, Kenya, Indonesia, UAE, Egypt, Vietnam, Mexico, Colombia, among others, is undeniable.

What we have identified are significant similarities and comparable ecosystems between our regions (speaking from a Latin American perspective). Entrepreneurs and VCs in our parts of the world are trying to solve the same type of problems and founders face the same type of challenges, while we as VCs are targeting similar sectors and business models in our respective geographies. The size (and relative youth) of our populations, the rise of middle classes and easier access to technology represents a gargantuan opportunity for a new wave of Venture Capitalists.

Think about CoD (Cash on Delivery). It might seem archaic to Ecommerce companies in developed economies, but reality is that launching an ecommerce company in our markets still requires pieces of the old economy serving a purpose to the new economy, and many times this is serviced by other entrepreneurs. Another clear example is Mobility. Public transport systems are heavily subsidized, therefore cheap, yet the service many times can be unsafe or unreliable. For these price-sensitive users, the next option is an Uberpool/Taxi or similar (Brazil and Mexico have the 3 top cities in terms of passengers for Uber by the way), and from there options start to be limited for a vast majority. In contrast, users in San Francisco can complain as much as they want about the BART, but in most instances it will be a pleasant journey once inside. In Cairo, Jakarta or Mexico City, a good ride is one that has no criminal incident and that doesn’t take more than double than what would take someone driving by car. Business models like Shuttl, SWVL, Urbvan, Viapool, Volt Lines, Mi Aguila might resemble the now defunct Chariot in the US, but there are clear reasons while these emerging market mobility companies are thriving: The need is real in our markets.

A few years ago, there was an intense competition by two On-demand Valet Parking companies: Zirx and Luxe. The use case on my mind was that you were getting late to work and finding a parking spot was complicated, so you would call a guy (who arrived in a scooter) to take your car and parked it while you made it barely on time to your 9:00 a.m. meeting. These companies raised hundreds of millions of dollars. If you tell this story to someone in emerging markets, the idea of “spoiled” will not escape the conversation, and the questions on if that was even a good idea/painpoint are abundant. Our entrepreneurs are solving problems for the millions, not for the lucky few Tesla Drivers drinking Blue Bottle coffee, if I may exaggerate.

So what is Venture Capital like in our Emerging Markets? I still do not have a clear answer, but I know it is different from what you will see in Silicon Valley and most companies will not have a clean fit with the traditional model of impact investing (more on that in a future article). Most Startups are not necessarily tech companies, but tech enabled business models. Exits are harder as there are fewer local players, and many times it is not in the DNA for local incumbents to pay the premiums that the VC business model requires. Talent is scarcer, and failure is still frowned upon (Unsuccessful Serial entrepreneurs are just seen as lazy or untalented). But at the same time, you have the smartest locals and talented expats flocking to these markets to try a new approach to solving problems for a huge majority. We are seeing record amounts of capital flow to these ideas. We are seeing unicorns happen in markets as small as Uruguay or Guatemala. The future has not been brighter and today feels like the best moment to believe Emerging markets will create their own companies to dominate our markets, and eventually compete in other similar latitudes. We are now seeing Nigerian companies expanding to Brazil, Saudi Companies setting foot in Thailand, and Filipino companies exploring Mexico. The time for the Global South and its Venture Capital Model is only beginning…

Photo by:   Hernan Fernandez