Investing Beyond your Backyard
In an increasingly globalized world, investors can no longer afford to only pay attention to opportunities in their own backyards. This is particularly true given the COVID-19 pandemic, which has accelerated the trend toward globally distributed companies in addition to lowering the barriers to investing across geographies. As a result, it will be increasingly important to dig up opportunities wherever they may lie.
This post’s authors, Gregorio Concha-Toro and Tim Spencer, met as undergraduates in NYU’s Business and Political Economy program and have always been fascinated by differences across countries and cultures. Over the course of four years across five continents and dozens of countries, we studied how government and the private sector interact, leading to a wide dispersion of outcomes and opportunities across regions. Now we’re combining this knowledge with our interest in early-stage investing to better understand venture capital opportunities across the world.
To that end, we’ve developed a series of articles to explore the venture capital industry across various regions and identify potential opportunities for global arbitrage. In this post, we will provide an overview of the global venture capital market and explain our hypothesis. In subsequent posts, we will dive deep into specific regions, highlighting interesting industries, investment and operational challenges, and the funds that are leading the way.
Trends
Currently, the majority of venture capital investment is directed toward the US and China. Europe and to a lesser extent South and Southeast Asia have also seen their ecosystems grow. Other regions, however — including Latin America, Africa and MENA — are only beginning to attract significant venture capital investment.
Even within these regions, the entrepreneurial ecosystems and availability of venture capital funding differ widely. For example, here in the US more than half of all venture capital dollars invested in small businesses and startups during the first three months of 2018 went straight into the state of California. Furthermore, California, Massachusetts, New York and Texas, attracted more than 82% of all venture capital investment made during the first quarter in 2018.[1]
Asia and Europe are broadly similar, with Bangalore, Beijing and London playing an outsized role in their respective regions.
This left us wondering about the reasons behind these differences. Surely there are talented entrepreneurs on every corner of the planet, not just in Silicon Valley or Beijing. Might companies coming out of certain regions be under- or over-valued? Geographic concentration is expected in the nascent stage as industries emerge (e.g., steel in Pittsburgh, automobiles in Detroit). However, at a certain point there may actually be more value in breaking from the pack. This is particularly the case for technology companies, many of which have no need for physical inputs, and whose labor forces are already frequently globally distributed (a trend only accelerated by the COVID-19 pandemic).
Hypothesis
We believe that a significant number of global arbitrage opportunities continue to exist in venture capital, and that many firms are not doing enough to take advantage of them. In recent years, regions as disparate as Europe and Southeast Asia have seen the emergence of massive unicorns, and yet investor interest and funding seem not to have kept pace. As we will explore, this may be due to a variety of factors, some rational and some less so. However, the ever-advancing tide of globalization has made it so that these potential obstacles are ever more surmountable.
Relative to other industries, venture capital does not necessarily scale well across borders. Networks are typically highly region-specific, and legal or cultural nuances across geographies can make or break early-stage companies. However, a few prominent funds have taken concrete steps to embody an international perspective (Sequoia, Accel and Lightspeed come to mind — each has offices across three continents or more). These firms have succeeded in taking a global approach by recognizing the need for boots on the ground offering regional expertise. We expect more and more firms to realize they are leaving opportunities on the table and follow in their footsteps.
Of course, many more firms have chosen to remain focused on the opportunities closest to them. There are strong reasons for doing so. In highly developed economies with abundant entrepreneurial talent, teams can usually focus on the business rather than worrying about the operational, legal and political challenges that often come with building a company in more challenging markets. Such challenges can be prominent even very early on in a venture’s life — for example, Strive Masiyiwa, the founder of Econet Wireless, had to sue the Zimbabwean government to win the right to even start Econet as a competitor to the state-owned telecom company. This process took five years.
While stories like this make some investors nervous, our hypothesis is that investors who are willing to take on such challenges stand to be rewarded as the opportunity in developing markets often outweighs these risks. We believe that significant opportunity lies beyond the more traditional bastions of venture capital, and hope that, as a result of this series, some will choose to take the leap and look for opportunities outside their current spheres.
Plan / Methodology
To get to the bottom of this, we’re planning to conduct a series of deep dives into the major regions of the world — North America, Latin America, Europe, East Asia, South & Southeast Asia, and Africa & the Middle East.
In each post, we will speak with investors and operators across these geographies to learn what they feel makes their markets particularly interesting or challenging. In addition, we’ll create a set of criteria, both macro- and venture-relevant data, across which we can compare these regions — and sub-regions within them — to identify interesting opportunities for arbitrage. We also dive deep into the entrepreneurial ecosystem, highlighting leading and upcoming startups and VCs.
Fin
In conclusion, our hypothesis is that there are significant arbitrage opportunities to be had by looking beyond the walls of traditional VC hubs. By investing in these overlooked markets, venture capitalists can find undervalued companies and talent and be positioned to back some of the most innovative and game-changing companies of tomorrow.
Stay tuned for our region-by-region overviews!
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