For startups in developing economies, the path from idea to success is a difficult path. Entrepreneurs must simultaneously juggle priorities that their counterparts in mature markets address sequentially - product, talent, legal, finance. By skillfully orchestrating these facets in parallel, not sequence, startups can harmonize technology, regulation and culture to unlock massive potential. The symphonic startup journey in emerging markets may demand greater ingenuity, but with higher risk comes higher reward.
In the US, companies are built in three clear phases.
The first phase is an inquiry process. Founders test different hypotheses as they build a product to find a value proposition. In this phase, entrepreneurs are mostly focused on the client and the problem they're trying to solve for them. It also allows them to test different pricing strategies and go-to-market schemes. The culmination of this phase is called product-market fit, which is clear evidence that your product has found a market.
The second phase is building an organization that can support a larger scale. They create a Human Resources function and start formalizing the organization. They also start building stronger partnerships. Entrepreneurs focus on the intellectual property they're building and how to scale the technology that supports their products. That's the second phase.
Once the company has gone through the first two phases and becomes a relevant and more visible market participant, the third phase is for the team to focus on the bigger picture challenges. That's when founders consider the industry dynamics, their interaction with the government, and the regulations relevant to their business. In this third phase, companies need to consider all their stakeholders and the non-government participants such as unions and public opinion.
It's not surprising that Venture Capital, the industry dedicated to financing startups, is built around these phases.
In developing economies, startups cannot be built sequentially.
You need to build everything in parallel. While you are focusing on the product, you need to understand where and who the talent is and how to finance the company in the next stages. You must consider building an infrastructure that is not productized, such as a payment gateway. You can collaborate with a company or build internally.
In the US, a founding team establishes a corporation. However, in developing economies, founders need to consider several legal structures, possible countries for incorporation, and taxes to understand how the investors think about your legal setup. You have to think about all those elements before you have your product.
Given that regulations sometimes aren't clear or they're non-existent, you have to make sure you engage the regulators very early on. If the regulation is taking shape, you have to be a part of the dialogue. You have to use a regulatory framework that is not designed for startups as a starting point.
A company such as Bitso, a Latin American crypto exchange based in Mexico, has to sit at the table with regulators before raising the seed round. In fact, part of their success comes from their relationship with regulators, which was started before the first line of code was ever written.
Starting tech companies in developing economies can be challenging due to the need to build everything simultaneously. However, this challenge is also what makes it fascinating and highly rewarding. It's important to note that starting a tech company in developing economies is usually harder than in the US, where 50% of the global Venture Capital (VC) capital is concentrated, leaving other economies with only half of that. Despite these challenges, there are key opportunities that can be applied to ideas in developing economies.
It's worth remembering that entrepreneurial ecosystems in the rest of the world are not as developed, lacking the networks of mentors, angel investors, and cultural support with strong role models.
Financing is often difficult to find due to the lack of successful cases and the perceived risk.
There are only a few active local venture capital investors. They are generally more risk-averse, slower, and demand strict terms. Although global investors are active, their threshold for investment is higher and they expect lower valuations.
Moreover, the business environment is more uncertain with fewer established laws and many unwritten ways of conducting business. The macroeconomic environment and political landscape can be unstable. Entrepreneurs are often burdened with red tape, economic informality, and even corruption.
In addition, industries are dominated by a few major players and controlled by the wealthiest families who are often strongly connected to the government. When a challenger starts gaining traction, the incumbent's reaction can be formidable.
Despite the challenging environment, there are opportunities that may not be present in more advanced economies.
As mentioned in an earlier lecture, one such opportunity is to replicate successful business models from more developed ecosystems.
More advanced economies tend to feature mature industries and sophisticated clients. In some cases, looking at the latest trends in the US, Europe, or China can help entrepreneurs anticipate what will happen in developing economies within the next few years.
The fastest-growing new companies in a developed economy can be analyzed to reproduce their value proposition in untapped markets. We call this information arbitrage. Entrepreneurs can exploit the time it would take the original innovator to launch in new markets, given its focus on its home market. In some cases, expanding internationally leads to facing natural barriers such as regulation, geographical distance, language, and other cultural aspects.
Some of the largest tech companies in the world were built using this logic. Mercado Libre, Latin America's largest e-commerce and Fintech platform, started as a regional eBay. It is now a much larger company and has expanded its business well beyond the original. Rocket Internet, the German juggernaut, created a multi-billion dollar public company by copying business models such as Groupon and Zappos in Africa, Asia, and Latin America.
Information arbitrage has been leveraged by founders all over the world.
Uber's innovative business model kickstarted the creation of similar startups such as Careem in the Middle East, Didi in China, Ola in India, or Cabify in Latin America.
So, what makes these businesses so successful? To understand their success, we have to start with their teams. You may know that a great team makes a significant difference. After all, they are the ones doing the work.
In my experience, this approach works very well for teams that haven't found a problem they feel passionate about but still want to start a tech company. It allows for a focused exploration of ideas that can help you start working on a project quickly. This research can be the first project future co-founders work on together, helping them evaluate their chemistry and work ethic.
Once a market and business model are chosen, attracting a team to start a project with a famously successful reference is often easier than for something unproven.
The first hired engineers will clearly understand the possible product roadmap and may feel attracted to a clear challenge. The potential go-to-market of a proven value proposition will resonate with marketers eager to join a startup. Moreover, the potential financial upside is easy to extrapolate from the original innovator's valuation.
Another key consideration when replicating a business model is ensuring you nail what is often called founder-market fit.
How can you determine if you have achieved founder-market fit?
First, it's important to make sure that the problem your startup will try to solve resonates personally with all the founders. Startups are hard. A genuine passion for a project will sometimes explain the difference between those who persevere in the space and everyone else. When selling your vision to potential clients or investors, that passion for the problem will energize them.
Secondly, some of the team members should have relevant experience in the industry you're trying to transform. Maybe you worked for a company that used a particular software or the legacy incumbent that will be disrupted by your startup. Replicating the business model of an original innovator after having worked there is the ultimate founder-market fit.
Finally, the team must intimately understand the market you're going to focus on. You don't need to be born in the country you're focused on, but since the main hypothesis of this approach requires replicating a product-market fit in a totally different environment, understanding a market in all its local network, cultural nuances, and specific features will be key.
Federico Antoni is the managing partner of Mexico City-based venture capital fund ALLVP and the author of Developing Economies Startup Guide.