A recent Financial Times article celebrates the flexible thinking of Indian businesses in the COVID-19 pandemic, as those companies have reacted in real time to the latest challenges and calibrated those reactions according to the local context. This type of agility and rapid sense-checking is a distinct characteristic of the emerging market grind.
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Too often, we assume that large injections of capital are the golden ticket for entrepreneurial ecosystems, when really, talent is the main source of ecosystem success.
Large sums of capital come with a plan to disrupt existing industries, to make a location a leader in a particular vertical, and to grow as rapidly as possible. In the process, however, both investors and startups are more likely to tolerate high risks as they rush toward market domination.
This “foie gras effect,” as an article in The New York Times put it, sees startups force-fed capital only to collapse under the weight of hypergrowth, according to a Harvard Business Review article. Big funding compels early-stage businesses to scale prematurely, making runway, burn rate and valuation the biggest priorities. Meanwhile, companies lose focus on user testing, product iterations and self-sustaining revenue, inadvertently setting themselves up for a short-term lifecycle.
Ironically, the dwindling funding flows in emerging markets mean frontier startups take a more balanced approach to their growth, honing in on building resilience into their models, and taking a longer-term business outlook.
In fact, research reveals that entrepreneurs in emerging markets have a better survival rate than those in the United States. Surprised? Don’t be — here’s why startups that want to become profitable and enduring, fast, should consider starting up in emerging markets.
Escape the fast and loose of traditional investment
Investors typically want early traction and quick scaling, but for any company, regardless of size, this mentality puts quantity ahead of quality.
In emerging markets, startups know they aren’t getting dizzying sums of capital injections. Instead, they work with smaller investments from the likes of accelerators, angel investors or by exploring alternative funding routes such as crowdfunding. Despite the smaller amounts, these startups are generally expected to use their funding to develop a market-viable product and become profitable sooner.
Why? Entrepreneurs who don’t have the financial flexibility to take high risks lean toward more efficient (or traditional) business models. They can’t sustain the same losses as entrepreneurs with sizable funding, so they place greater emphasis on getting things right rather than growing exponentially.
Unlike startups that concentrate on growth via freemium models to acquire more customers, startups in emerging markets tend to require a fee from the very start instead of waiting to reach scale.
These startups demonstrate that they’re worth paying for from the get-go.
Zambian startup Zoona is a great example — by offering trustworthy financial services to a majority unbanked and low-income population, its customers are willing to pay to make the transfers.
Demand for innovation comes out of necessity, not luxury
Innovation has become a Silicon Valley buzzword associated with tech companies producing sexy solutions that serve only a small percentage of the world. But considering that 86 percent of global consumers live in developing countries, innovation in these regions is driven by the biggest impact for the most people. This focus on need — rather than “nice-to-have” — is why emerging market entrepreneurs mostly concentrate on building skills and refining their product before securing investors.
Silicon Valley takes a long view — it sets its sights on breaking frontiers, requiring millions of dollars in R&D to build solutions that may not be usable for years to come, but emerging markets are using big data and AI to tackle real problems happening now.
For example, in Nigeria, where there are 4,000 patients to every doctor, Aajoh has developed an app using AI in which users can list their symptoms and submit them via audio, text or photos, and get their condition diagnosed remotely.
At the same time, the demand for digital transformation has enabled emerging market startups to bring their innovation and tech expertise to the table. Brazilian startup Descomplica has launched an online learning platform that users can access from their cellphones.
In Puerto Rico, roughly 85 percent of all food is imported. During natural disasters when transport routes into the island have been blocked, millions of people have been left hungry. Local startups have been quick to respond, such as Amasar, a nutrition platform selling pesticide-free products produced by Puerto Rican farmers; and PRoduce, a subscription-based startup that delivers biweekly selections of seasonal and local products in eco-friendly packaging.
The Puerto Rico Science Technology and Research Trust, a nonprofit organization on the island and parent organization of local accelerator parallel18, additionally has a Re-Grow program that provides grants and technical assistance to entities and farmers.
Reap a hotbed of talent and ideas
Compared to established startup hubs, emerging market ecosystems are smaller and more concentrated, and therefore are more easily able to foster connections. The localized activity allows entrepreneurs to find the right partnerships and resources, not just the ones that speak loudest or throw out the biggest figures.
Emerging locations like Shenzhen and Bangladore already feature on the World Economic Forum‘s list of most innovative cities, and there are many more spots that haven’t yet been recognized for their startup potential.
In Latin America, 140 million people work in the informal economy — a huge pool that startups can offer secure employment to and leverage for on-the-ground knowledge. Some startups are already tapping into this group, like Mexico-based Heru, which supplies package software products for local delivery drivers, giving them insurance, credit and tax preparation support.
In many ways, the startup grind in emerging markets is ahead of that of Silicon Valley-esque hubs. Startups in less-mature markets tend to have shorter sprints to validate their products and services, and more regular check-ins with mentors, communities and accelerator programs that reaffirm they’re on the correct path.
Entrepreneurs in these regions therefore aren’t just creating more with less, they’re creating the blueprint for the startups of tomorrow. What’s more, this mentality can be mimicked by entrepreneurs from any market, giving them the grit to lead efficient and innovative bootstrapped ventures.
Sebastián Vidal is the chief innovation officer at Puerto Rico Science, Technology and Research Trust and a former executive director at parallel18.
Illustration: Dom Guzman
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