Investment in emerging market startups continues to grow
Startups in developing economies witness growing investment as evidence supporting the value of SMEs emerges.
The lifecycle of startups can be cut short in the early stages due to limited access to funds. This is a problem that many budding businesses in emerging markets have encountered. However, this capital chasm is being bridged by a number of accelerators and seed funds who have recognised the potential that emerging market startups hold.
According to the World Bank’s recent International Finance Corporation and Small and Medium Enterprises report, SMEs are a key engine of economic growth and job creation in developing countries, and became increasingly more so in the years following the financial crisis.
However, the report identifies that more than 17 million SMEs in emerging markets have unmet credit needs. The gap is estimated to be between $900 billion and $1.1 trillion for SMEs in those markets.
With this in mind, we run through some of the more notable flows of capital that have sprung up in emerging markets.
Big fish sense the opportunity
Tech companies are beginning to see the allure that emerging markets hold, especially as online connectivity becomes more common in developing countries. However, while these nations are still catching up, the innovation of some of the more successful tech startups has caught the eye of a few tech giants.
Twitter was one of the most recent big names to add another company to its list of growing acquisitions, following its purchase of Indian-based startup ZipDial back in February.
Facebook and Yahoo! Have also added Indian startups to their name, highlighting how these untapped markets are ideal for companies looking to expand.
Obi Ventures is one of the latest to be announced: a venture capitalist firm launched by former Apple CEO, John Sculley, which aims to invest in early-stage African startups.
There are a number of benefits to investing in emerging market startups, not least the ability to gain the intellectual property of the smaller companies. Perhaps more excitingly is the opportunity to create the recognised leading brand in these growing markets, which could cement these businesses in the economy for the foreseeable future.
The notorious US startup investor and accelerator, 500 Startups, is looking to extend its reach into emerging markets in India and Mexico, as well as a number of countries in Asia.
500 Startups was founded by Dave McClure, who has a long legacy of working high-tech companies. The accelerator has already invested in a large number of international startups, which make up around one fifth of its portfolio, but the creation of several region specific micro funds has driven home 500 Startups’ intention to invest in emerging markets.
The accelerator started off with the quick announcement of two ventures, 500 StartupWallah in India, and 500 Luchadores in Mexico, both founded back in 2012.
Hot on the heels of their success came the $10 million 500 Durians fund in Southeast Asia, followed by a similar $10 million fund in Thailand, 500 TukTuks, and most recently came the $15 million fund 500 Kimchi of South Korea.
It seems that a number of other country-specific funds are set to arrive over the next couple of years, so there’s plenty more in the pipeline from 500 Startups. The drive to invest in SMEs that have the potential to grow in both emerging and international markets has been a boon to local firms, who have previously found it difficult to gain access to funding.
However, it’s no mistake that the venture capitalists are cherry picking the cream of these businesses by bringing investment from the West to developing economies.
Investment will grow
The high potential for growth in emerging markets has seen investment ramp up in recent years and the trend will likely prove unstoppable. This is especially true in China, where the nation’s technology hub is pumping out 49 new startups everyday. However, Indian startup investments are not far behind.
According to data compiled by YourStory, Indian startups raised 300 per cent more from investors in the first quarter of 2015 when compared with the same period of 2014.
The amount of funding will continue to increase and will be offered from a variety of sources, which means the future can only hold more opportunities for startups in emerging markets.