Ecosystem Notes: Three Ways To Spur More Entrepreneurial Success Stories In Emerging Markets
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If asked how you could score a unicorn and a tech IPO in the first month of 2018, and your bet is that it takes “a lot of cash,” then you’re probably right.
And if you’re more inclined to answer that it’d take “a lot of other variables beyond cash,” then you are definitely right.
Brazil had an amazing start to this year: not only did 99Taxis, Uber’s equivalent in the country, become the country’s first unicorn after getting acquired by Didi Chuxing, PagSeguro, the online payment services company, launched an IPO in NYSE in the same month. But it was not just another IPO. It was one of the best debuts for a billion-dollar IPO in the last decade, ranking fifth in a list of 46, just after Twitter, Yandex, Snap and Alibaba.
I naturally tend to observe emerging markets’ progress on this front, due to my involvement in the tech ecosystem in different countries and regions, including Brazil, and for the past seven years, the Middle East.
We know that such stories are not built overnight. I constantly hear several opinions to justify accomplishments of growth businesses when I share these stories. People forget that it is less about what happened in 10 or 30 days, and more about what’s been happening in the past 10 years or so.
The parallel with the Middle East is quite interesting though. Entities and companies here are constantly developing their own entrepreneurial ecosystems, awards, and fintech hubs. Usually they make great buzz at launch, but after the hype, many of them fall stagnant, and their respective portfolio companies are mostly flat lining if not out of business, which makes them part of the 90% failure rate and other statistics that haven’t changed since the year 2000.
So here I am, a strong believer that the world is not small; it is just getting closer. And that’s why I believe that investors, in different stages, should consider diversifying their portfolio amongst markets, besides industries and stages. This may be the case for limited partners and sovereign funds, although there’s still some bias on industries and geographies. Regardless, co-investments in different stages of capital raise are worth exploring.
For instance, if any investor from the Middle East or elsewhere had a stake in the Brazil’s tech businesses via local venture capitalists, who are at this stage the next “Sequoias" and “Tigers" of the country, then they would have had a good start of the year as well. And by cashing out, there would be more opportunities to invest more in the region- opportunities only made by investing in other geographies.
Also, there would be more happy investors in the Arab world, eventually leading to a smoother process of closing future VC rounds, because even popular backed businesses in the region have the challenge of showing scalability and solid exits. At this juncture, someone might say: “But Careem, the ride-sharing company in the Middle East, is valued at around $1 billion!” Yes, that is so, and there are also rumors of its profitability in 2018 and IPO in 2019. And I’d love to see more cases like this one. The reality is that better times have only just begun, with the Middle East having 16 IPO offerings in 2016 versus only 4 in 2016. None in tech, though- but these figures do show where the economy is heading.
Markets like Brazil, which in this case is recovering from recession, and restructuring itself economically and politically, is the cherry on the cake (or due to its size, the cake with the cherry) when it comes to opportunities, growth and exits. Food security solutions due to our agricultural knowledge and potential, as well as technology applied into financial services serving a highly unbanked market, makes Brazil one of the top fintech hubs in the world.
I have three main takeaways regarding these cross-bordering thoughts that made me think about deeper lessons learned as, sooner or later, markets will follow similar paths to mature their ecosystems. Hence, here’s my point of view to more successful stories across the region, as well as tech global unicorns, IPOs, and other exciting exits:
1. Trust the management team more than the market potential This is a tricky one. PagSeguro is one example of business that has been leading Brazil’s SME sector despite economical changes. It definitely benefits from the growth in online and mobile payments that keeps on the rise (130+% last quarter). However, good management practices to report clean numbers, good margins and high performance is what made them successful. Which also led to happy investors throughout the journey.
2. Cheering for role models like in a soccer match I know Arabs love soccer. They celebrate it as energetically as Brazilians. In fact, Brazilians celebrate almost everything. And that includes businesses. We share the energy with the team, with the media, with all stakeholders. It is just a great environment to be involved. And a happy team of stakeholders is the biggest fan base an entrepreneur or business could need in such trajectory. The Middle East may be geographically fragmented, but it has all that it takes to be a unified voice cheering for successful stories.
3. Trust the gut and accept blindness Entrepreneurs and investors in Brazil are very open to learn. That’s how the ecosystem was initiated many years ago. I remember them going to Silicon Valley and admitting that “exit” was a topic they still needed to master. Based on many talks with Middle Eastern entrepreneurs and investors, I always get impressed with their determination in decision making. When they decide on something, they really go for it. On the other hand, I also sense that people in the Middle East are still getting comfortable in admitting blind areas. It is definitely easier said than done, but learning to identify and act on blind areas will avoid bumping on the wall a few times over the course of the business.
Overall, the success factor for more IPOs and other successful exits –besides what is already done from a technical point of view, like knowledge exchanges and ecosystem improvements- is people. People need to be at the core when it comes to mindset, team, management, culture. I reckon it is scalable; in fact, it has a multiplier effect. And risk capital investors, across the world, love multiples.