By: Annie Agle
As more and more NGOs and NPOs adopt for-profit and social innovation components into their business models, those operating in emerging market areas such as India, South America, etc…should be aware of larger trends monitored by venture capital firms. The mercurial landscape of growing micro-economies is best interpreted by experts. So, we reached out to emerging market expert Rupam Shrivastava, founder of Euthenia Investing, for his thoughts on emerging markets, social entrepreneurship, and for profit responsibility.
Rupam, with a background in venture capital, global markets, and stock projection, give us a basic overview. Are emerging markets still drawing venture capital interest? What regions and countries are currently viewed as being good bets?
RS: Emerging markets are drawing record amounts of venture capital. In 2014, India had $4.8BN of investment; in 2015, we crossed that figure in the first 8 months. In China last year, there was an recorded influx of around$16.8BN in VC investments, and that figure was crossed in the first 7 months of 2015. Riskier second tier emerging regions like Latin America, Central and Eastern Europe, and Africa are also starting to garner serious interest from venture firms.
It interesting to see the sorts of investments being made in the areas as they tend to give evidence of the country’s development. For example, we’re seeing an unprecedented number of tech investments in China and India in accordance with the expanding number of communication and internet companies in those countries. In Africa, on the other hand, we’re seeing more investment in manufacturing and telecom companies based on a growing need for web infrastructure.
What are the sorts of companies that are garnering the most investments?
RS: Hands down technology companies. India and China are attracting hundreds of millions of dollars in investments tagged for e-commerce-related companies. Really, all of the tech company types that were considered interesting by Silicon Valley types in the US 2-3 years ago are now the objects of interest in emerging countries. Mobile, Internet of Things, security, virtualization companies in India and China are poised to take advantage of VC interest. Note that this intense period of investment interest will inevitably lead to a “shake down” in emerging market e-commerce companies where small players will go bankrupt or get acquired by the larger ones.
Where are the risks?
RS: Risks most common to emerging market investors are – bureaucracy, corruption, red tape. Regulatory risks are also higher in emerging markets. Founder experience is low and it is tough to find strong senior level talent. Recently, things are getting better in all above areas.
However, investors also face inherent risk – that is the risk of investing at higher and higher valuations as they chase few number of “good deals”. Similar is the risk of over investing, as the emerging market investment euphoria continues.
Do you see more for-profit companies operating in emerging regions supporting social change? Do you see the influx of more tech companies in emerging companies as a positive influence on those communities?
RS: That will happen but the time horizon may be longer. For-profit companies in the US and Western Europe are now embracing CSR with a serious focus and not just as a charitable arm. Socially responsible business practices have a positive impact on the brand and large companies are recognizing that. Thus, this trend will continue in the US and Western Europe and will percolate to the emerging markets.
Today, CSR in emerging markets is different from the for-profit companies. There are charitable foundations which depend solely on donated funds and thus are not self-sustaining. Some of the larger corporate entities (e.g. Reliance in India), are doing charitable work, but it is not integrated with their core business.
Are you seeing more VC’s engaging in social investments? Are any clients asking to allocate portions of their portfolio to “feel good” opportunities?
RS: Yes but currently the trend is slow and only limited to a handful of VCs. I believe adoption will continue to grow but will take time as a shift in strategy requires a firm to convince a majority its Limited Partners (LPs) which can number in the hundreds in order to include social investments. However, there are many new firms created with the sole purpose of handling socially conscious investments. Since they have been formed with a social aim in mind, it is easier to target only those LPs who share this mindset.
What’s your take on the microfinance model?
RS: I am a big supporter of it. It fills an important funding gap where other financing sources (banks, VCs, friends and family) don’t work. Microfinance has a positive impact on the local community and the general economy in the long run. Just as VCs are enablers of the startup ecosystem, microfinance enables entrepreneurs at the ground level. Grameen Bank is a successful role model for similar institutions.
However, there are microfinance firms which charge a high interest rate, which defeats the whole purpose. Microfinance is best practiced as a non-profit or zero profit. There may be a place for for-profit microfinance models as well but these firms will need to develop VC type models to make it work.
If you had advice to organizations and startups in emerging countries, what would it be?
RS: My main advice would be to start your company for the right reasons. As I am close to the startup ecosystems in India and China, I can say that the majority of the founders start companies for all the wrong reasons – they think (a) they can make easy money, (b) it is cool to have your own company, (c) it’s a no brainer because funding is available etc etc.
As the shake down happens, only startups with strong leaderships motivated by the right reasons will succeed in capitalizing in this free for all environment.