INVESTORS ON WHY TO TURN TO EMERGING MARKETS

Although new opportunities are appearing in other geographies, the US is still the largest and most mature VC market in terms of the number of deals and exits. However, more and more US investors are looking at new markets, setting local scouting programs, and collaborating with local decision-makers. In this context, the Southeast Asian and MENA markets are proving with actions and numbers to be attractive places to switch startups’ attention, believes Dina Karakash, Portfolio Manager at The Internet Initiatives Development Fund (IIDF), who oversees this geographical track.

Total VC investments in MENA count around CEE (both are somewhat around $1 billion) while SEA is around 8х ahead – more than $8B in deals closed as of 2020. Leading countries in MENA are UAE, Egypt, Saudi Arabia.

In SEA they are Indonesia, Singapore, Malaysia, Thailand, and Vietnam, with Indonesia accounting for 2/3 of total capital invested, and Singapore generating almost 50% of EXITs proceeds in the region. Interestingly, Mega-deals ($100M+) are accountable for 57% of investment proceeds in SEA in 2020.

At EMERGE 2021 during a clubtable hosted by Dina Karakash from IIDF, an investment fund that is working within the named markets, we asked experts with a major background in developing products and investing strategies there what specifics these markets have got and what to pay attention to when entering them. There are many differences between them, but the common point that all of the speakers of the roundtable supported was that the US and the EU markets are not the only options to grow your business. For some industries, emerging markets may even be the main focus, such as building a hardware startup is definitely about Shenzhen, EMERGE 2021 speakers noted.

Elena Vatutina, who is based in UAE and is the CEO at Pharma Global, that partners with corporations like Bayer, believes that founders with European background have got great potential in Dubai, as the most founders that move there are from Arabic countries. She observes that the local government encourages foreign entrepreneurs to come to the region, which also means supporting talents with visas and even citizenship, providing them with grants.

Before entering MENA, Elena Vatutina recalls, she explored the market and realized it had a favorable environment for investments into technology and healthcare and many opportunities for development in B2B. But you have to have local expertise, she said: local investors are ready to make high-risk investments, but you have to prove your traction on the local market. Also, the business culture in the region is based on reputational matters, so you need to be present there and work hard on it to gain trust and to be dealt with it.

The whole market is mostly ok with the English language, but if you want to go deeper into MENA, you have to have someone who speaks Arabic on board, especially if you plan to work in Algeria or Morocco. Also, she highlighted it was not a good idea to set up a business if you want to do it remotely: MENA players prefer face-to-face meetings over Zoom.

Vladimir Bataev, Managing Partner at Zaz Ventures, believes that the fact that countries within the MENA region speak the same language helps businesses expand and develop there, while cultural (at least lingual) diversity within the SEA market might be a challenge. On the other hand, in MENA you’ll face a slow pace of closing deals, old banking infrastructure, tricky laws and Muslim traditions, pointed out Elena Vatutina. You’ll have to be able to operate a much more stratified society (compared to SEA) to get success in MENA.

Though, for example, Dubai is trying to catch up with its main startup ecosystem opponent – Singapore – quite aggressively, noted Vladimir Bataev.

Among emerging markets, SEA has shown the most resilience during the pandemic. Many of the fundamental internet economy sectors in SEA received a positive boost. Payment, logistics, and local services doubled their 2019 financing. Retail grew slightly at 21%. Multi-vertical companies, which operate across many of these sectors, see minimal changes. What is good about the region is also that, having low financial literacy and a rural economy there, you can build completely new infrastructure, pointed out Vladimir Bataev.

In SEA, corporations now look into what their consumers need in their entire lifecycle. They start from localization and hence look at the startups in their own country first, focusing on the cross-border activity only after that, noted Ee Ling Lim, Head of APAC Business Development at 500 Startups. Also, consumers are becoming more mindful about their health and wealth, but in SEA the majority of the population is still uninsured and unbanked. At the same time, more and more people enter the middle class there.

If you decide to enter Southeast Asia, going to all its countries’ markets is not a must, warns Ilya Kravtsov, CEO Pouchnation, who is based in Jakarta, launched and operates business in SEA. You’d better concentrate on the quality of your solution as China is the biggest and an extremely strong competitor and your product needs to be of the state of the art to have a competitive advantage there, added Vladimir Bataev: “If a company is not taking this region seriously now, it’s not a successful long-term strategy, to be honest”.

You also need to bear in mind that things won’t be easy and fast: it took five years for Ilya Kravtsov to build his business there, flying over there almost every two days. A lot of implementations of deep tech in B2B are happening in connection to governmental agencies, and it’s quite difficult to navigate it in SEA, especially speaking about trials.

As Ilya observes, investors in SEA are looking for experienced founders: the ecosystem is becoming more mature, and they look for someone who can execute. Though, for those who originate from Russia, their mentality should help conduct business in SEA: “I realised how much of an Asian I was when I started working in SEA”, admitted Vladimir Bataev.

We hope you found some inspiration about relocating or starting your business in emerging markets while reading this article. More blogposts are coming soon. Stay tuned!