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Is this the emerging markets century?

Ska band backgroundReprinted from Emerging Markets Blog. Original article here.

By David Gates, a senior strategy consultant with 10 years of experience in defining strategy for leading companies in the telecom, media, payments, and insurance industries.

Book Review: Emerging Markets Century, by Antoine van Agtmael (2007).

The world’s largest corporations are no longer just American, western European, or Japanese. A new breed of multinationals from developing countries is rapidly achieving global presence and prestige. They are also attracting more media attention. For example, this week’s Economist looks at emerging-market corporations in one of itsleaders.

One of the best recent analyses of emerging market corporations is a book written by investment manager (and originator of the term “emerging markets”) Antoine van Agtmael. In Emerging Markets Century, van Agtmael seeks to explain the why and thehow behind the success of the world’s top emerging market corporations.

The author describes three distinct waves of commercial development in emerging markets since the end of World War II. First, Western corporations made foreign direct investments in plants in developing economies. After a while, local entrepreneurs began to set up their own plants, typically to provide outsourced production to the Western multinationals. Over time, these local businesses acquired more skills and capabilities, gradually moving up the value chain and into ever more competitive markets. Eventually, the best of these firms achieved recognition as top global corporations.

Agtmael profiles 25 emerging market companies in different industries, including:

• Fourteen high-tech or capital-intensive companies: Samsung (Korea), Hyundai Motor (Korea), Hyundai Heavy (Korea), POSCO (Korea), TSMC (Taiwan) Hon Hai (Taiwan), HTC (Taiwan), Lenovo (China), Infosys (India), Ranbaxy (India), Embraer (Brazil), Tenaris (Argentina), Sasol (South Africa), MISC (Malaysia)

• Five basic commodity producers: CEMEX (Mexico), CVRD (Brazil), Aracruz (Brazil), Petrobras (Brazil), Reliance (India)

• Six consumer companies: Yue Yen (Taiwan), Haier (China), Modelo (Mexico), Concha y Toro (Chile), Televisa (Mexico), Telmex/America Movil (Mexico)

The 25 profiles are interesting and informative. Collectively, they yield several valuable insights on the factors behind the success of emerging market corporations:

• Among the most important success factors were an early commitment to export markets and a relentless focus on superior execution and quality. These two go together: focusing on exports requires producing internationally competitive products, which in turn requires the highest quality. Hyundai Motor’s rise has tracked its determination to succeed in the US market. Hyundai seriously blundered when it first entered the market because its cars were perceived as low-quality. The company rebounded by targeting Toyota as the quality benchmark to beat (while also appealing to consumers by offering the best warranties in the US market).

• Some companies have become world-class by moving up the value chain. Taiwanese electronics manufacturer Hon Hai began life as a low-value added components manufacturer, but is now a “one-stop-shop” to US clients such as Dell and Apple.

• Other suppliers became world-class by innovating on supply chains. Mexico’s CEMEX and Argentina’s Tenaris used information technology to offer highly customized order fulfillment and rapid delivery to their customers. Brazilian regional jet manufacturer Embraer turned traditional outsourcing models upside-down by recruiting US, European, and Japanese “partners” to build its planes.

• Many emerging market players defied prevailing industry perceptions and created new business models. Steel manufacturers were supposed to be located near resource mines, but South Korea’s POSCO set up shop far away from any mines, believing that increased transportation costs would be more than offset by other efficiencies.

• The world’s leading emerging market companies increasingly recognize the value of branding. Samsung is already a premier global brand. Other companies, such as Lenovo and Haier focused on acquiring trusted Western brands (IBM and Maytag).

These are just some of the most compelling of many insights described in the book. The 25 case studies make Emerging Markets Century a treasure trove of information and a valuable read for international business executives, academics, and investors.

I have a few minor gripes with the book. Eight of the case studies are from South Korea and Taiwan, which are among the most industrialized and well-educated of the emerging markets. It is questionable how well their experiences apply to other countries.

Meanwhile, there are no Eastern European or Turkish case studies. Nor are there any banks or retailers. This is not for a lack of compelling sources. Brazilian bank Itau, Turkey’s Koc Group, Chilean department store Falabella, Russian foods company Wimm-Bill-Dann, and South African mobile phone group MTN are top-notch companies.

I would also like to have read more on the theme of frugal innovation (which was wonderfully profiled in the Economist in a survey of articles last year). The idea behind frugal innovation is that emerging markets companies will find ways to offer compelling products at the low price points their markets require. The best example is the Tata Nano, a $2,000 automobile that surely would have never been developed in the West.

These are small issues. This is a great book that is well worth your time. I believe many of the themes it identifies will influence the 21st century global corporate landscape.

Revenue vs. margin

Reprinted from Chris Dixon. Original post here.

Three years ago, Fred Wilson wrote a great blog post called When Talking About Business Models, Remember that Profits Equal Revenues Minus Costs. The point he made was both simple and profound. The simple part is summed up in the post’s title[1]. The profound part is that high growth, early-stage tech companies often have a choice about how to become exceptionally valuable businesses: they can focus on growing revenues at the expense of margins, or margins at the expense of revenues.

Most recent successful tech companies seem to have chosen the former: growing revenues at the expense of margins. Again and again, we see S-1 filings with revenues growing rapidly but profit margins that are low to negative. The same is true for the rumored financials of private companies. I think I understand why they made this choice, but wonder if it was a mistake.

To understand why these companies made this choice, you need to look at their formative stages. Many of them raised money from VC’s at multi-hundred-million to multi-billion dollar valuations, often before the companies were profitable or had even settled on a business model. In most cases, the companies and investors were acting reasonably[2]. But the end results might have been to unwittingly commit themselves to revenue over margin growth.

Why? Money has its own inertia and somehow always seems to get spent. Some of this spending is reasonable and even necessary (infrastructure, defensive expansion to international markets). But then there are harder choices. For example, do you invest heavily in sales and marketing to grow your revenue faster? Do you stay open and try to become a platform and therefore force yourself to experiment with new business models? Or do you become closed to “own the user” and therefore benefit from existing business models like advertising? Fast revenue growth seems to be the best way to justify your valuation. But the next thing you know you have a high cost structure that requires you to raise even more money and grow revenue even faster.

The root cause here is a deeply held belief throughout the business world that exceptional revenue growth is more likely than exceptional margins. For example, if you talk to professional public market investors and analysts you’ll often hear statements like “that’s a low margin industry” – implying that every industry has “natural” profit margins which companies can only defy for short periods of time. This belief is also reflected in public market valuations for recent tech IPOs: companies like Groupon that put revenue over margins command very healthy valuations.

The problem is that this deeply held belief in “revenue exceptionalism” over “margin exceptionalism” is a hangover from the industrial era. Unlike industrial era companies, information businesses tend to be deflationary, shrinking the overall revenue of an industry. They also tend to have network effects (and complementary network effects), making them more defensible and therefore higher margin than non tech businesses. Given this, why do companies continue seeking revenue at the expense of margins? Fred made this same point in his original post, but people didn’t seem to listen.

 

[1] Companies (like all cash generating assets) are ultimately valued at a multiple of present and projected future profits. The historical average P/E ratio of the DJIA is about 15, meaning that (on average) if a company is generating $100M in profit, it is valued at $1.5B (Fred prefers to use a 10 multiple, perhaps to be conservative?). One way to understand this is to imagine that companies dividend out all their profits every year. If you bought something for $1.5B and it dividended out $100M every year, that would be a 6.6% annual return.

[2] Why are these high-priced financings reasonable? From the company’s perspective: your traffic is growing so fast you need to invest millions of dollars in infrastructure. Meanwhile copycats are popping up in other countries. You don’t know if the financial markets will suddenly dry up. Someone offers you, say, $50M for minimal dilution. Seems like a reasonable hedge. From the investor’s perspective: the history of venture capital shows that almost all the returns are generated from big hits like Amazon, eBay, Facebook and Google. (As Paul Graham once put it: “The difference between a bad VC fund and a great VC fund is one big hit”).

Endeavor’s Allen Taylor talks Latin American entrepreneurship (Venture Equity Latin America)

Lookin' gooooooood Published in Thomson Reuter’s Venture Equity Latin America on July 31, 2012, Volume XI, No. 13. Interview conducted by Dan Weil.

Entrepreneurship is growing by leaps and bounds in Latin America, and the trend is only going to intensify.

So says Allen Taylor, Director of Global Markets for Endeavor, a non-profit group that assists entrepreneurs in Latin America and other emerging markets. (See VELA’s June 15 issue for a story about Endeavor’s investment fund.)

Of the approximately 700 entrepreneurs Endeavor has supported since its 1998 inception, about two-thirds are in Latin America. The organization has offices in Brazil, Mexico, Argentina, Uruguay, Chile and Colombia.

VELA recently spoke with Taylor about entrepreneurship in the region. (more…)

Four building blocks for the new “second industrial revolution”

good skills for internsReprinted from NextView Ventures. Original article here.

There is a dark cloud over the internet sector due to the weak performance of the Facebook IPO.  It’s not horribly dramatic by any means – Facebook is clearly an important company (even if it’s not worth $90B+).  But a lot of entrepreneurs and investors were hoping for a really strong showing to drive more liquidity in the market and continue the surge in hype around internet companies (both start-ups and later stage companies).

The interesting thing is that while many entrepreneurs, tech executives, and investors are short-term nervous about the fate of internet-enabled startups, most are incredibly long-term bullish.  Personally, I’m more bullish about the prospects of internet-enabled innovation than I have been my entire career.

The reason is that I’m convinced that we are on the ground floor of a new innovation wave that is going to be at least as disruptive as the first wave of the internet.  It feels like we are in the early/mid 1990’s again, or, more appropriately, like we are on the cusp on the second industrial revolution where we saw massive developments centered around the foundational innovations of steel, the internal combustion engine, and electricity. Arguably, the second industrial revolution was more impactful to humanity than the first, and I feel the same about what is ahead compared to the first internet innovation wave.

I’m not enough of a tech pundit to create a cohesive theory about the current state of things like Roger McNamee and Mike Maples, nor am I going to rehash the excellent collection of data that Mary Meekerhas graciously assembled (both required reading IMHO), but here are four foundational pieces of infrastructure that is getting me most excited about where the tech industry is today and where it is headed.

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Some untraditional advice: We are all gnats

Reprinted from The Entrepreneurial Mind. Original article here

By Dr. Jeff Cornwall, the Jack C. Massey Chair in Entrepreneurship at Belmont University.

“You are gnats! You are like annoying little gnats flying around in the face of consumers.”

This is a message that I consistently tell aspiring first-time entrepreneurs.

Why the harsh words? Most first-time entrepreneurs have so much enthusiasm that they can become blinded to the reality of the challenges that every new business faces.

I tell them to think about the last few hours. How many small businesses did you go past without even really noticing them? What about all of the products in the convenience store where you got gas this morning?

How many of the service businesses that had logos and advertisements on the sides of their trucks did you actually pay attention to?

Many of those products on the shelves are the result of someone’s entrepreneurial dreams. A small-business owner spent hours agonizing over the business name and a logo, and yet most passersby barely notice it.

New business owners need to adjust their expectations. While starting a new venture is one of the most important and exciting things you’ve ever done, to the market your product is just one more in an already overcrowded sea.

So, new business owners need to get a sense of urgency. They need to develop a plan to become more than just another annoying little gnat!

To successfully launch a new business the entrepreneur needs a clear entry strategy, which is a plan for how the business is going to gain the attention of the market and start attracting customers.

If your business is going to take existing market share away from established businesses, you are going to have to do something better, faster or cheaper than the competition. Give people a compelling reason to change their buying habits.

Start small: Consider a niche strategy. This simply means the entrepreneur finds a small part of a market that’s not being served or that has been significantly under-served. It gives the entrepreneur a safer market to conquer a bit hidden away from established businesses.

But establishing a niche requires that you find ways to let the customers in that niche market know that your new business is now open and is ready to fill their specific unmet need.

Getting the market’s attention for a completely new product that has the potential to impress the mass market is the most difficult and expensive market entry. It requires extensive investment in advertising and other forms of promotion to build awareness for your new product and to educate the public about the benefits it offers.

No matter which type of entry strategy you pursue — and as excited as you may be about your new business — remember this: If you build it they may, or they may not, come.

You will need to work hard to find the most effective means to attract those initial customers.

How to pick a startup funding strategy (infographic)

Reprinted from Angel Investment Network. Original post here.

What’s your startup funding strategy? Bootstrapped? True Angel? Super Angel? Venture Capital? There are a lot things to consider before deciding what funding strategy is right for you and your startup.
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Some notable college dropouts (infographic)

Reprinted from Angel Investment Network. Original post here.

This graphic that highlights a few notable college dropouts…
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Entrepreneurs: Here’s how to manage your time (infographic)

Reprinted from Angel Investment Network. Original post here.

Five reasons to anticipate more BRIC brands

they'll make you feel brand new, inspire youuuuReprinted from Emerging Markets Blog. Original article here.

By David Gates, a senior strategy consultant with 10 years of experience in defining strategy for leading companies in the telecom, media, payments, and insurance industries.

Emerging-market multinationals have become more prominent in the last few years. Last week I reviewed a book that documented the rise of some of these new firms. Business publications, consulting firms, and others also have published reports on the topic.

A lot of this attention is based on anticipation for the future. Currently, only a small percentage of the world’s leading firms are based in emerging markets.

Consider the share of Fortune magazine’s Top-500 global corporations (by revenue) in the four BRICs (Brazil, Russia, India, China): China has 46 (of the Top 500) firms. India has eight. Brazil has seven. Russia has six. Many of these firms are commodity producers, operating on the traditional comparative advantages of their home countries.

The BRICs (as well as other emerging markets) have a long way to go. Developed countries are home to the vast majority of the world’s largest corporations. Spain (40 million people) has 10 of the Top 500 corporations. Switzerland (8 million people) has 15.

Even more glaring is the near-complete absence of emerging market countries from the world’s top brands. They are home to only three brands in Interbrand’s ranking of the Top 100 Global Brands: Samsung (Korea), Hyundai (Korea), and Corona (Mexico).

I believe emerging-market brands will become more common in future lists. They may follow the example of some foreign-based brands that expanded in the US market in recent years. As recently as the 1990s, US-based companies dominated US clothes and furniture sales. Today, H&M, Zara, and IKEA are well-known brands in the US.

Several factors will drive the rise of global emerging-market brands:

1. The rapid growth of emerging-market consumer classes will translate into more clout for local consumer brands. Twenty-plus years of strong economic growth in Chile is contributing to the emergence of an increasingly active consumer class. This transformation has fueled the rise of several Chilean retailers, which are now expanding in several other South American countries. Chile’s example will be repeated on a vastly larger scale in other countries, such as China, India, Brazil, and Turkey.

2. People are younger in emerging markets. Median ages in the West trend above 35 years, compared to under 30 years (and sometimes 25 years) in emerging markets. The West will be home to an ever smaller share of people in their economic prime (ages 25-49). New brands will rise to serve this demographic shift.

3. Access to capital for emerging-market firms is easier than ever before.Many developing countries have built functioning capital markets in the last 20 years. Governments are enabling lower interest rates by keeping inflation in check.  Western investors are increasing their capital allocation to emerging markets.

4. Regional demand patterns exist. The developing world’s regions (East and Southeast Asia, South Asia, Latin America, the Middle East, Sub-Saharan Africa) tend to share some broad commonalities in taste that are not well-addressed by Western multinationals. Korean pop music, Mexican telenovelas, and Nigerian “Nollywood”films have regional appeal. It stands to reason that we will see home-region multinationals emerge in other “taste” industries, including fashion and food products.

5. Competitive pressures and scarcity of capital will cause some Western multinationals to retrench. If forced to choose between bolstering home operations or expanding in emerging markets, many Western multinationals will opt for the former. US and European telcos bought up most of Latin America’s wireless licenses in the 1990s and early 2000s. By 2007, however, Verizon, BellSouth (now part of AT&T), and Telecom Italia had sold most or all of their Latin American wireless operations, which included Top 3 players in most key markets.

These and perhaps other factors will fuel the rise of new emerging-market brands in the coming years. It’s probably sooner than later that you’ll find yourself standing next to your (Chinese) car, filling up the fuel tank at the local (Russian) gas station, while en route to the mall to buy that new jacket from your favorite (Brazilian) apparel store.

The different types of angel investors

straight outta the 16th centuraryReprinted from NextView Ventures. Original article here.

By David Beisel, Cofounder and Partner at NextView Ventures, a dedicated seed-stage venture capital firm making investments in internet-enabled startups.

We at NextView Ventures often invest in a startup’s first round alongside other funds; either seed stage focused ones like ourselves or larger traditional firms.  Just as often, however, we’re investing alongside individual angel investors who are participating in the round as well.  Angel investors come in many shapes and sizes, however.  And it’s not always easy to recognize the pros and cons of taking money from individual investors, or how to even seek them out in the first place.  Addressing both of those issues can stem from the motivations as to why someone would want to put their hard-earned cash into a risky early-stage startup in the first place.   Along those lines, the world of individual angel investors is easier for entrepreneurs to navigate when you can recognize the category which he falls into based on their incentives and actions.  The choir of angel investors out there is comprised of a number of players which sing different parts:

The Super Angel.  Much has been written about this category, so I won’t belabor the description beyond that the defining characteristic is the large number of investments that he makes.  PROs of taking his angel money are the feeder system to venture financing of the next round and the vast network of portfolio CEOs which can be tapped into for connections and help.  CONS of an investment from a Super Angel include potential lack of “value add” because his time is spread so thin amongst many portfolio companies.

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