Emerging economies are believed to possess a great development potential and are proved to have much higher rates of economic growth in comparison with the developed world of the USA and Western Europe for example, where most of the major economic achievements were made years before. Those promising ecosystems, which are being built almost from scratch, attract more and more investors from abroad, who see there an alternative business space in terms of tough competition with venture funds, angels and other capitalists in the saturated markets of West. CEE region is one of those new presumably perspective spots for foreign investors. And here are some peculiarities of emerging entrepreneurship ecosystems worth to assume while thinking of doing business outside traditional markets.
Let us start from benefits. The first and obvious one is the absence or extremely low rate of competition between venture capitalists and investment funds. It means that a new investor has a chance to find an amazing startup team on their first business stages and this way start a perspective partnership. Unlike the strong capital community of the Silicon Valley, emerging ecosystems are relatively open to new investments. Thus according to Igor Ryabenkiy, the managing partner of the AltaIR VC fund, it was easy for them to settle in Ukraine and Russia, but took a lot more effort to become competitive enough in the US and Israel.
Another advantage of emerging markets deals with a great number of really talented developers and startuppers, bringing innovative ideas to the ground. This is particularly true about Eastern Europe and India. However, here comes the first problem: usually there is no strong entrepreneurship community that would be able to scale up the startups. Unfortunately, there are not so many experienced managers in emerging ecosystems like Russia or Ukraine, who can build a real business out of one brilliant idea. Education is what still needs to be done better and very often those desperate investors from abroad take the roles of teachers.
For example, very often startup companies in emerging markets claim a too high valuation for their project, looking at the similar ventures in the Silicon Valley. But their small market is still too far from the successful US market. According to Igor Ryabenkiy, some of his investments in Ukrainian startups turned out to be exaggerated. So it often becomes investors’ mission to explain some important things to the local entrepreneurs or just keep them realistic about project valuations. Those first international investors on emerging markets have to literally participate in building the ecosystem and educate its members, where most of the local investors still have a vague idea about venture business and often ask for more than 50 percent of the company.
You might also think about some possible culture differences in emerging ecosystems. But actually those people are not very different from entrepreneurs in the Silicon Valley. Marta Everson, VP at Scaale Group, recently worked as a mentor in Kazakhstan and was happy to hear lots of questions from the local entrepreneurs. She thinks that entrepreneurship communities all over the world build the same culture looking at the one of the Silicon Valley but often have several small nuances, which is fine. Marvin Liao from 500 Startups admits people’s cultural differences but claims to treat all the markets in a similar way. For him, it doesn’t matter where an interesting startup comes from – let it be Russia, Ukraine, Brazil or the US – he looks for talented entrepreneurs and creative teams.
The last important issue to consider about emerging markets is the role of the local government and their relationship with the entrepreneurship community. Opposite to developed markets, government involvement in building startup ecosystem of the emerging markets is really essential. Whether the government supports the investment climate, whether the local legislation protects innovations – all this should be taken into account.
In many countries, governments encourage business by providing tax breaks to the early-stage investors or funding some startup-related activities. This has already become a kind of common trend in Estonia, Poland, Hungary and Bulgaria for example. Other CEE countries are also moving forward. Thus, Kazakhstani government recently sponsored Technation accelerator program, which we mentioned in one of our previous articles. They also participated in the organization of TechConnect conference, while some private investors gave $25 000 to be awarded to the winner of the startup competition. Such cooperation between private sector and government majorly contributes to the ecosystem development.
As you see, there are both pros and cons in investing in emerging ecosystems. Of course, there are lots of problems to be solved, but at the same time a lot has already been done. On the whole, the future of emerging ecosystems seems to be very promising.
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