I’ve been traveling in and writing about emerging and frontier markets for much of the past decade. And in that time I’ve found some incredible deals…I’ll tell you about a few of them here.
So most of my attention these days is spent looking for opportunities in private equity, often times in these same emerging markets.
You might think that the two make for strange bedfellows, and you might be correct. However, if you seek out the right contacts, learn the local landscape (laws and culture), and keep your expectations realistic, there is an incredible amount of value that can be realised from looking outside of the developed world.
So today I’m going to focus on three countries who have made a commitment to building and funding their startup ecosystems. I’ll tell you why I like them, why I’m investing in them…and I’ll tell you how you can get started investing the same way I do.
First: Why Look Outside the US?
When most people hear the words technology and innovation, they inevitably think of Silicon Valley. It was, after all, the birthplace of tech; two guys in a Palo Alto garage, William Redington Hewlett and David Packard, literally started it all way back in 1939.
Fast-forward almost 80 years and, although it is still the leader, the US no longer has a monopoly on innovation. It still has some of the best academic institutions, incubators, accelerators and mentors, and also has the most mature angel and venture funding communities. However, it also has the highest paid tech workers, and the richest startup valuations of any other country.
Let’s look at some of the reasons we may want to look outside of the Silicon Valley bubble for opportunity.
In countries with dynamic, literate and youthful populations (like the three countries we’ll discuss), where the majority have not grown up with the trappings of wealth, or even what most would consider basic luxuries, you often find a much different drive and work ethic. The young people do not feel entitled, but rather hungry to build a better life for themselves and their families.
With the current strength of the US dollar, something that is likely to continue for the next few years, there is an opportunity to arbitrage the talents and drive of educated young people in low-cost, low-wage countries and export their work product overseas, receiving dollars in exchange.
Far from exploitation, it’s a two-way street that benefits both parties.
Average wages for a Silicon Valley tech employee with minimal experience average around $100k. If you want to hire a mid-level engineer you’ll be paying closer to $150k. Looking for a senior person? Well, that’s likely going to cost you over $250k, if you can find one that hasn’t been snapped up by one of the FANG’s (Facebook, Amazon, Netflix, Google).
Compare this to any of the countries listed below and the salaries drop by 2x-5x. However, those wages are still a multiple greater than the average in these countries, providing upward mobility and a much better quality of life for an educated and growing middle-class.
According to Fortune, California, and Silicon Valley in particular boasted nine of the 20 highest value start-ups in 2016, including Uber, Airbnb and Pinterest.
An easy way to explain why valuations of Silicon Valley startups are the highest in the world, is to use the example of real estate.
Think of apartments in Manhattan, San Francisco, Miami… Why do people want to live in those places? We won’t list the reasons, as it’s pretty obvious. Now, compare that to an apartment in Boise, Little Rock, or Green Bay. All are nice places, but…
In startup terms, the location matters because talent congregates where it’s treated best. It’s a self-fulfilling prophecy. The biggest and best tech firms base in Silicon Valley/San Francisco. The big firms can pay top dollar, so the best talent goes there looking for work. This ends up attracting the best startups, who feed like sucker fish off the remnants from the giant, swarming sharks.
It also doesn’t hurt that you have institutions like Stanford, the alma mater of Hewlett and Packard, literally on the doorstep, graduating the best and brightest year after year.
So, like real estate, location matters and Silicon Valley is THE location of choice to build the next FANG.
What’s an intrepid early-stage investor to do? Look abroad!
Valuations of startups in the three countries below are far less than what you’ll find in Silicon Valley, or most of the US in general. What sells for $10M in a seed round in the Valley might fetch $1-$2 million in these places.
Because the valuations are often so much lower, the phrase “you get what you pay for” may ring true in some cases. Investors need to be very, very careful. Often times cheap is cheap for a reason, but value is out there if you know how to find it.
SE Asia and Latin America are both vibrant and growing economic regions. As you’ll see below, all three of the countries I’ve highlighted have significant domestic opportunities, as wall as massive regional ones.
It’s no longer necessary to simply look to the US markets to develop a company. Startups in these three countries can all make an impact in their home market, AND still access the US and even European markets, which gives them additional swings at the ball, so to speak.
The beauty of technology, and in particular software is that it’s easily transferable, and what works in one country is likely to work in others, albeit perhaps in a slightly modified form.
Now let’s look at where investors might be able to find decent value for money outside the US.
Brazil has faced some tough times recently. The decline of the commodity boom, myriad political scandals, which have rocked the faith of the international investment community, and a currency that has depreciated markedly, have combined to put the hurt on the country’s economy.
While it’s not a “developing” country, with a population of 200 + million people, Brazil is a huge market and is still a growth story. It’s the largest country in South America by land mass and population, and it is second only to the US in numbers of users on Facebook and Twitter. It’s citizens are very “tech literate.”
Despite the economic challenges of the last several years, the young and innovative population has kept plugging along, and Brazilian investors have continued to support startups. Startup ecosystems are thriving.
Like the other two countries on this list, Brazil’s government also supports its startup ecosystem and has been doing so for the last 34 years. In 1983 the Brazilian government launched the Associação Brasileira de Private Equity & Venture Capital (ABVCAP). It is still operating today.
Private venture capital came onto the scene in 2000, with Inseed Investments, Inventta consultancy, Tropos Lab and Ecovec partnering to create the Instituto Inovação Group to support innovation and entrepreneurship.
There have been some fits and starts over the last decade and a half. The launch and subsequent failure of Start Up Brazil in 2014, which looked to mimic the success of it’s neighbour, Chile, with their Start Up Chile program, was the highest profile flop in the country’s startup history. Over $78 million was invested by the Brazilian government in the failed experiment.
Outside venture capital first found it’s way into the country in 2011, when Silicon Valley VC firms made their first investments in Brazil. That began a cycle of venture capital activity across the continent. In the first half of 2015, Brazil’s early-stage investment community backed almost 200 startups between them.
According to the LAVCA – Latin America Five-Year Investment Trends report, “Since 2011 Brazil-specific funds have included US$100m+ vehicles by Redpoint e.Ventures, Monashees Capital, and e.Bricks; 15 US$20m-US$100m funds; and 13 sub-US$20m funds. São Paulo-based VC firms lead the region with the most capital raised from 2011-2015, with 21 closings representing US$747m, or one-third of total fundraising for the region.”
The main cities of Sao Paolo and Rio de Janeiro are of course home to the majority of large multi-nationals, and therefore act as a magnet for talent and money. However, other cities are also flourishing.
My favorite is Florianopolis, situated in the south east of the country.
Referred to by my Brazilian friends as THE best place in all of Brazil, Florianopolis boasts over 40 beaches, incredible nightlife and safety and cleanliness rivalling that of any American or European city.
Government figures cite an average 15% YOY growth rate in the startup sector. Over 600 companies contribute $350 million in annual GDP to Florianopolis.
100 Open Startups recently named 10 companies from Florianópolis in its top-100 list. Many observers say that the Florianópolis startup ecosystem is already more mature than the much larger city of Rio de Janeiro.
Later this year the members-only investment syndicate that I run, Obris by Crown Private, will be convening in Florianopolis for a Meet Up we are co-hosting with Exosphere Labs (www.exosphe.re). But first we’re heading to Vietnam – I’ll tell you more about that in just a minute.
The principal architect of Exosphere is an American expat named Skinner Layne. Exosphere was formerly headquartered in Vina Del Mar, Chile, but recently the operation moved to Florianopolis to take advantage of what Skinner believes is a new upturn in the Brazilian economy. Conversely he believes that Chile may no longer be a place investors should be placing capital.
Brazil still has a way to go, and challenges still exist, but this may be a great time for investors to put some capital to work in a country that may have already begun an upturn.
Colombia is one of my favorite countries…
It’s beautiful, it’s cheap and it’s people are some of the friendliest and most inspiring I’ve met anywhere.
Once a country torn apart internally by guerrilla fighting, high-profile political and business assassinations, drug cartels and kidnappings, Colombia has turned the corner and entered a new era of peace and prosperity.
With a population of almost 50 million, it is one of four countries that make up the Pacific Alliance (Chile, Mexico and Peru are the others). The Alliance is an economic block in Latin America with a total population of 218 million people. Together the Alliance countries are larger than Brazil in population, and rival it in GDP.
I visited the country two years ago when Obris by Crown Private hosted an event in Medellin. Once the epicentre of the Escobar drug cartel, the city is now a peaceful and prosperous city, vibrant and full of hope.
While there, we were introduced to government run programs, privately funded facilities, and an incubator and accelerator called SocialAtom Ventures. One of the guys leading that firm is another expat American named Erik Stettler.
Erik, a Harvard MBA, who formerly worked with author and intellectual, Nassim Taleb, fell in love with the country and is now helping to run an investment firm with SocialAtom Ventures founder Andres Barreto, called Firstrock Capital. In full disclosure, Obris by Crown Private is now a limited partner in Firstrock’s start up fund.
There are some advantages to investing in Colombian start ups, which include the talent arbitrage and valuation discounts mentioned earlier, as well as access to the growing Latin American consumer base
According to the OECD’s Start-Up Latin America 2016 report (https://www.oecd.org/dev/americas/Startups2016-Assessment-and-Recommendations.pdf):
“In 2012 the government set up iNNpulsa Colombia to promote entrepreneurship. Today, Colombia is reforming the programme by introducing a voucher scheme to give new businesses access to financing and services managed by accredited intermediary organisations. Colombia is seeking to encourage financial institutions to invest in start-ups at all stages of their development and is promoting the strengthening of the business culture in the country. A distinctive feature in Colombia is the development of start-ups in cities; Bogotá and Medellín have seen rapid growth in start-up numbers and they are aiming to become start-up hubs by promoting the founding of start-ups through public-private partnerships.”
In addition, a fund like Firstrock is able to take advantage of government programs that exist to encourage private investment into Colombian start ups.
I can’t go into that in this article, but it’s worth exploring, as these advantages can significantly boost an investors overall return. I’ll speak about this privately to attendees of our upcoming Vietnam investor Meet-Up.
Obviously I was so impressed with the country and with the city of Medellin in particular, and the people we met, that our syndicate ended up investing into a fund based there. We plan to make additional investments in the country as well. Colombia has a bright future!
3. Vietnam: A country with immediate (and enormous) potential!
By now you know this is the country I’m most excited about today…
Vietnam’s history is not unlike Colombia’s in some senses. Both have been torn apart by war in the past, yet both are also blessed with a growing, young and literate population of young IT professionals, entrepreneurs, and students taking part in the economic and technological growth of the countries.
Like Colombia, Vietnam has a young, literate and dynamic population. Many Vietnamese kids study abroad and choose to return to the country, bringing back valuable entrepreneurial knowledge and understanding of Western culture and markets. As a result, many Vietnamese start-ups are founded by English-speaking, foreign educated founders.
Vietnam has enormous potential. The country is still communist, and that reality poses challenges, yet the Vietnamese people have been able to operate within that environment and create some incredible successes.
To paraphrase my friend Doug Casey, “risk equals opportunity…”
According to the Boston Consulting Group, Vietnam is now the fastest growing middle class in Southeast Asia. Since 2000 nearly 14,000 IT businesses have been created in the country. In 2010 Vietnam gained the status of a lower middle-income country, and plans to achieve full middle-income status by 2020.
A resilient and proud people, its 90+ million residents are extremely tech literate. Internet penetration is still only 30%, but mobile phone accounts are 145% of the population, indicating widespread multiple device usage.
The biggest challenges facing Vietnamese start-ups is the ability to form and operate a business. According to the World Bank, Vietnam ranks somewhere around 90 on the ease of doing business index (I’ve seen multiple numbers reported, of between 78-90).
Despite improvements in the ease of doing business in the country, it’s super-low cost of living and the young and literate population, the lack of transparency and an ambiguous legal environment continue to concern investors.
For example, recently there was a lot of noise surrounding Article 292 of the penal code, which requires Vietnamese businesses to register, and that an online business is only lawful once it is officially registered.
That seems like a non-event… just register the business.
The problem is that, like many highly-bureaucratic countries, Vietnam requires onerous, confusing and often times non-sensical paperwork to form a business. Startups need to move fast, it’s really part of their DNA. Over regulation stifles innovation.
Despite the bureaucracy, the government HAS been promoting privatization and foreign investment for many years. According to the CIA World Factbook the government now controls only 40% of the local economy. This is good news for local and foreign investors, as it means that a lot of growth is still possible, and in fact estimates are that economic growth should continue at about 6% per annum.
Venture funding began in 2000 with IDG Ventures. IDG was the first major venture fund in Vietnam, putting $100 million USD into startups. The fund has invested in over 40 companies in tech, media, telecoms and consumer sectors across the country. It’s the best-known of Vietnam’s VCs.
Then, in 2008 Cyberagent Ventures made some large investments in Vietnam.
All of this activity has resulted in start-up ecosystems are now flourishing in Ho Chi Minh City and Hanoi. Some estimates now put the number of start-ups in the country as high as 3,000, making it the largest ecosystem in SE Asia.
According to local incubator, Topica Founder Institute, In 2015 there were 67 investments made into early-stage companies, which was an increase of more than 130% from 2014’s number of only 28. Investment was made primarily from foreign investors and VCs. It’s important to note that many funding rounds go undisclosed, which is another challenge. That means this number could be much larger.
The Vietnamese government used to have a laissez faire attitude towards local and foreign startup investment, they are now taking a more active role to encourage funding and provide tax breaks and other incentives for investments.
Led by the Ministry of Science and Technology, they have created several agencies and funds, including: the National Agency for Technology, Entrepreneurship, and Commercialisation Development (NATECD), to provide training, mentorship, incubation and acceleration to start-ups; the National Technology Innovation Fund (NATIF), with $47 million USD in capital; the FInland-Vietnam Innovation Partnership Programm (IPP), which is a venture co-funded by the Vietnamese and Finnish governments. The goal of this program is to develop an innovation ecosystem.
The government and private sector are also working together.
In 2012 mLab East Asia was launched in Ho Chi Minh City. It is funded by the Finnish government, Nokia and the World Bank. It provides mentoring, technical and financial assistance to start-ups. It is located in the Saigon Hi-Tech Park.
Then there’s the Vietnam Silicon Valley ecosystem project. Launched in 2013 it offers incubation and mentoring, and also grants funds to start-ups, placing $10-$20k USD for small stakes.
Because of Vietnam’s challenges and risks it provides potential for asymmetric investment returns. Valuations are low, cost structures are low, talent is high, the market is large and the country is reforming. It’s likely a binary setup, but with the right contacts and game plan the payoff could be fantastic.
To find those opportunities, Obris by Crown Private, in conjunction with Asia Frontier Capital is hosting an investor Meet Up in Ho Chi Minh City, March 29-31st. We’ll get a firsthand look at Vietnam’s start-up ecosystem, and meet the founders and entrepreneurs building the future for Vietnam. And, most importantly, if you choose to join us you’ll get access to a few private deals on the spot. I’ll tell you more about that here.
Conclusion: Opportunity is everywhere, we just need to open our eyes to it…
Investing outside of one’s home country may feel unfamiliar, but it can pay dividends in many ways.
And, let’s not forget the other advantage to investing overseas. The travel!
You get to visit your investments, meet wonderful new people and experience the value your capital is creating in a place where it’s much appreciated.
Investing into early-stage companies is risky enough when doing it in your local market. When looking abroad there are additional considerations.
Hopefully I’ve shown you that when you are armed with the right information, have the best partners and focus your investment on the countries with the biggest tailwinds, great things can happen!
If you’re at all curious how this could work for you…I have something to offer you.
Until February 10th 2017 I’m offering an “early bird” discount… taking $1,000 off the price of attendance for the Vietnam Meet Up event.
Oh, and I’m offering a host of bonuses as well.So if you have any interest in becoming the sort of globe-trotting adventure capitalist who isn’t afraid to get on a plane to find an incredible opportunity…then I invite you to at least read this and, if you choose, I hope you’ll take me up on this offer to share what I find in Vietnam with you.