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Emerging Market Challenges

This article is written by Mohammad Eslim, a Contributor Author at Startup Istanbul. It is part of a series from Dave McClure’s session at Startup Istanbul.

Dave McClure is an entrepreneur and angel investor based in the San Francisco Bay Area, who founded the business accelerator 500 Startups, serving as CEO until his resignation in 2017. He was present at Startup Istanbul where he talked about investors and entrepreneurs.

Imagine yourself living in a small town, then imagine your parents and everyone you know in and out of this town going only to this particular tailor on the other side of the town your whole life. Even knowing that there is a tailor shop that just opened in the next street, you will find yourself reluctant to go try it and this is particularly the case with emerging markets.

Emerging markets are not really attractive to investors nor for entrepreneurs, as for investors it’s more of lack of competition and therefore a lack of urgency to invest in it, and so investors prefer to wait until the companies succeed. In these emerging markets appears a kind of investors that lays crappy terms and give low valuation to entrepreneurs, which causes a lot of them to head out to markets like Silicon Valley, London or Berlin in order to find investors with reasonable terms who can appreciate a great business with a great deal to benefit both sides as the business grow.

Fortunately, as entrepreneurs grow in business they might be able to find an exits for the deals to reconstruct them into a win-win deals and that takes time for sure. In Silicon Valley, these kind of terms are nonexistent because if any investors laid them he will eventually never get a deal with any of the companies in the valley and that is because it is not tolerated or acceptable for any of those companies in there so they warn each other of this investor and voila, no deal.

Another challenge that used to face emerging markets but not anymore is the not so many customers and what little number of customers they have don’t pay. There used to be a belief that the only markets with huge number of customers are the U.S.A and Europe, which is not true since there is now a huge audience in the emerging markets; mobile phones or smart phones are growing like crazy while also India and china are very large markets.

But to be realistic, even the markets that have 50 to 100 million customers are also considered large. There is increasing internet penetration, rising GDP, improvements in payments and logistics, as mentioned before local market can bridge to regional and then hopefully global markets. So really the markets are getting bigger, both local markets and regional markets have access to global markets so most of the customers now have some method of payment or at least they will have in the next three to five years.

What is also problematic about emerging markets is not having many exits, usually that’s a function of having not many acquirers and most of them are small. We again bring up the issue of supply and demand that leads investors to question the reason they shall invest in the market where there is no unicorns emerging from said market. The good thing is that now there are acquirers that are starting to require to cross borders, you have European companies acquiring companies in the Middle East like in Turkey.

Regarding the developing happening to the emerging markets there are some non-tech that are looking to see if they need to acquire startups, moreover there are many global companies that are looking for emerging markets footprints and figure out strategies where you, entrepreneurs, can grow from local markets to regional markets and hopefully to the global market.

We can’t change the past necessarily as there were not many exits in the history of emerging markets but the future looks bright. The numbers of smartphones is growing into four to five billions which will drive the interest in those emerging markets and acquirers will start paying attention.

14 July 2019

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