This article, “Why Silicon Valley Can be Bad for Emerging Market Startups,” is reprinted from Memeburn.com, a site on web insights and analysis. The author, Keet Van Zyl, co-founded PoweredbyVC with the goal of building the VC industry in South Africa.
Launching a startup anywhere in the world is challenging, but launching one in an emerging market territory where there is often limited access to funding and a fragmented entrepreneurial ecosystem it is so much harder. One sure way to fail is to try and duplicate first world solutions for emerging market problems without tweaking them for the unique local conditions.
The Silicon Valley story is inspirational.
Its ability to launch globally competitive, world-changing internet startups is unsurpassed. It continues to be the leading hub for high-tech innovation and development and accounts for one-third of all of the venture capital investment in the United States. And yes – world-changing startups can launch from emerging markets as we are well aware of the much-publicised handful of success stories in our own countries.
The difference is that instead of building and supporting startups, we often measure emerging market startup success by their ability to sell technologies to Silicon Valley headquartered companies. In the last 10 years, more and more money has been flowing from Silicon Valley to the emerging world.
Building sustainable local businesses
There’s clearly good news and bad news for emerging market entrepreneurs in this new world order. In the one corner is the think-global-act-local view that gives an emerging market startup the incredible opportunity of forming an international strategic partnership to accelerate growth. In the opposite corner is the entrepreneurial outlook of building a long-term sustainable multinational business that is locally owned. It is sometimes difficult to pursue both these strategies simultaneously from an emerging market perspective.
In my experience analysing early-stage businesses, too often entrepreneurs only present a five-year business model as Plan B, in case the 18-month Plan A (selling their intellectual property to Google) fails. Building a world leading business that can make a sustainable impact on innovation, job creation and growth in the region is sometimes notably missing in the strategic thinking. The irony is that the best way to unlock value in the IP is to drive the vision and build a high-growth business around it. Traction is never a bad thing. And if someone wants to make you a staggering offer for the business 18 months down the track then so be it, but better yet: reject the offer and continue along the path of building a global business with headquarters on local soil.
Efficiency- vs. Innovation-driven Entrepreneurs
The latest Global Entrepreneurship Monitor (GEM) report highlights that emerging market economies are dominated by efficiency-driven entrepreneurs, where further development is accompanied by industrialisation, capital-intensive organizations and an increased reliance on economies of scale. These businesses are not easily fundable through traditional venture capital. But it does not mean they don’t try and access it…
Somewhere in the entrepreneurial subconscious the Silicon Valley myth is ingrained that if you are starting a new venture, you are per definition a startup, and therefore need to approach a venture capitalist. Often these entrepreneurs actually don’t know whether they even need the funding, or what it is needed for. Traditional VC tools, techniques and funding mechanisms are only geared for high-growth innovation-driven ventures.
As entrepreneurial activity advances into the innovation-driven phase, businesses are more knowledge intensive with expanding services that are scalable. The entrepreneurial landscape in the US, Western Europe and some Asian Pacific countries fall in this economic category, where the environment for launching a high-growth startup is clearly more favourable.
There is a view among certain emerging market entrepreneurs that raising VC funding in Silicon Valley is all about having a good idea and a polished elevator pitch. It also helps to be a college dropout and if there is an empty garage somewhere that you can use as office space you are just about there. Once seed funding is raised, follow-on funding rounds are guaranteed and the VCs are lining up to introduce you to their networks to help you succeed. Movies like The Social Network do little to dispel this myth, but as with most things in life, the great stories get told (and only the good parts) while the less exciting stuff fall through the cracks. “Startup almost break even after 5yrs of bootstrapping and hard work while founders will earn market-related salaries soon” just does not make for a retweetable tweet.
Emerging markets need to focus on their own distinctive competencies to exploit the unique strengths of related-industry startup clusters and assist these ventures to achieve a competitive advantage. In short, focus on niches. If emerging markets want to be globally relevant in the startup world they need to create an environment where large sustainable businesses can be built up to create economic benefit to all stakeholders. Silicon Valley success stories should be used as inspiration, but emerging market entrepreneurs need to appreciate that reality is embedded in hard work behind a vision of building sustainable long-term businesses. A vision supported in Silicon Valley by a multifaceted network of interconnected stakeholders in the high-tech value chain. And this does not exist in emerging markets on that scale (yet).