The Entrepreneurial Case for Tech Investing in Emerging Markets
Young, rapidly growing populations and internet reach make a number of nations solid bets for savvy investors looking to find the next big thing.
“Genius is evenly distributed; opportunity is not.”
These seven words are the driving principle behind Andela, an African startup seeking to train 100,000 software developers across its continent in the next decade. Since opening its doors in Lagos, Nigeria, in 2014, the company has matched candidates with companies such as IBM and Microsoft. Its Series C offering also raised a total of $41 million from notable investors including the Omidyar Network, Spark Capital and the Chan Zuckerberg Initiative. Zuckerberg himself visited Andela’s office in 2016.
Then there are Jumia -- Africa’s first unicorn -- and Interswitch, a fintech company strongly positioned to be a billion-dollar company. Mobile-payment service M-Pesa started in Kenya but has gone pan-African, helping resolve payment issues across the continent. These and numerous other tech companies are tackling local challenges with innovative technology.
A global surge.
Africa’s tech ecosystem is huge, yet it barely scratches the surface when compared with those of China, India, Brazil and other emerging markets. In 2006, India and China accounted for only 2 percent of global-deal value. More than a decade later, the two biggest emerging markets now account for nearly 25 percent, with India and China firmly on the list of the top 20 startup ecosystems in the world.
Furthermore, Southeast Asia has continued to boom. The region has a growing population of greater than 600 million, and 260 million of them are using the internet right now. By 2020, roughly 480 million people are slated to be online in Southeast Asia. This makes it the world’s fastest growing internet market, expected to reach $200 billion by 2025.
Considering those figures, it makes sense that the region is home to a number of huge investor funds, including Alibaba’s billion-dollar investment in ecommerce firm Lazada. Venture investments in Latin America also are increasing, with transactions up 46 percent year-over-year -- the equivalent of $218 million deployed across 104 transactions in the first half of 2016.
Strengths of emerging markets.
It's a lot to digest, so here's the takeaway: Each of these countries has a large, mostly youthful population, a fast-growing gross domestic product (GDP), a massive consumer base, rapid urbanization and increasingly stable political and business climates. It all adds up to a very favorable environment for tech and venture capital.
While startup ecosystems in United States and Europe remain attractive, the market is beginning to see a downward trend in investment funds. In addition, sticking to a U.S.- or Euro-centric investment portfolio means investors won’t be able to take advantage of growing tech ecosystems in emerging markets where future growth, consumption and corporate earnings will emanate over the next decade.
Investing in these emerging tech ecosystems comes with uncertainties, but they're far outweighed by strengths. All in all, emerging markets show a very positive long-term outlook. Here are a few reasons why.
Large, young entrepreneurial populations.
The emerging markets have a combined population of more than 4 billion -- representing 60 percent of the world’s population -- and a large percentage of these people are younger than 40. That last point will be particularly relevant in future markets. As an example, the Indian economy currently is worth over $2 trillion. It continues to grow rapidly, driven by its young, tech-savvy population, vibrant entrepreneurial culture and an enabling regulatory environment.
Internet reach is a major driver of growth in tech ecosystems. In 1996, when internet penetration reached 20 percent in the United States, companies including Amazon, eBay and Yahoo were born. That pattern holds today in emerging markets. Since China crossed the 20 percent milestone in 2008, the nation has witnessed the creation of billion-dollar corporations such as Tencent, Taobao, Baidu, Alibaba, Xiaomi and Huawei.
More potential customers will come online as these emerging markets continue to experience accelerated internet penetration. Only one-third of India’s 1.3 billion population is connected to the internet, but the country already is the world’s fastest growing smartphone market.
Even challenges bring opportunities.
More often than not, the challenges facing developed economies aren’t the same as those present in emerging markets. As the governments and people of emerging markets embrace technological innovations, opportunities arise. Those with the necessary expertise (in tech, entrepreneurialism or investing) can export their knowledge to help solve international problems.
For example, tech startups in Africa are chipping away at the continent's payment problems by taking advantage of Africa's mobile and internet penetration. While around 40 percent of payments are conducted on mobile devices in the developed world, the rate skyrockets to as much as 60 percent in certain emerging markets -- Kenya and the Philippines among them.
Relatively stable political and business environment.
Many of the countries in the emerging-markets category have become more politically stable and business-friendly. In India, the government’s strong focus on entrepreneurship and innovation is boosting economic growth. The government-backed Startup India program provides a supporting structure to help businesses grow. This includes funding entrepreneurs' ventures through the SIDBI Startup Mitra. India continues to experience an increase in new startups partly because of the country’s favorable tax reforms, funding and policy support.
According to a new McKinsey report, Fintech services could open up $2.1 trillion in credit to individuals and MSMEs -- micro, small, and medium enterprises. That same report provides estimates of the “GDP boost” potential of digital finance to each economy: China ($1.1 trillion), India ($700 billion), Brazil ($152 billion), Mexico ($90 billion), Nigeria ($88 billion) and Ethiopia ($15 billion).
Furthermore, the report highlights the gains of fintech adoption across Africa, Asia, Latin America and the Middle East:
A $3.7 trillion boost to GDP by 2025.
Creation of 95 million new jobs.
Inclusion of 1.6 billion more people in the financial system.
New deposits of $4.2 trillion.
Value for money.
According to USA Today, emerging markets are seeing strong returns. The iShares MSCI Emerging Markets Index ETF (EEM) invests in places such as China, South Korea and South Africa. It was up more than 22 percent this year (greater than double the return on the U.S. stock market), reaching its highest level since May 2015.
iShares had this to say: “... a rebound in the global economy; a sense that years of better U.S. stock performance will give way to stronger gains from abroad; cheaper valuations in developing markets, and continued hints from the U.S. central bank that it won’t too hastily pull back on stimulus that is beneficial to emerging markets. Barring a global crisis, emerging markets are likely to fare well.”
Today's emerging markets no longer rely on semi-skilled or unskilled talent. They have plenty of human capital from which to draw. Some are local students who have benefited from better education at home, while others have studied at top-notch institutions overseas and then returned home.
People in emerging markets are acquiring the skills to compete on a global level, learning in traditional classrooms or via Massive Open Online Courses (MOOCs). Many of these individuals train in the U.S and go back to their countries to work for both local and multinational companies. The vast majority of China's students return home after studying abroad: though 500,000 students studied internationally in 2015, some 400,000 came back in 2016. It's a result of the stronger job market and economic prospects.
Dr. Ping Jiang is one of the world’s foremost macro traders, due to his successful track record of investing in emerging markets and undervalued investment vehicles. Dr. Jiang currently serves as cofounder and Chief Executive Officer of Ping Capital Management, Ltd., an investment management firm focused on investing in undervalued macro asset classes, including local and external bonds, currencies, equities, commodities, and derivatives. Connect with him on LinkedIn, or follow him on Twitter.