When American investors think startups, they think Stanford and Silicon Valley. Google, Apple and Facebook share one area code with direct access to some of the brightest entrepreneurial minds right here in Mountain View.
It’s true that Silicon Valley has long been on the bleeding edge of tech startup innovation, but some investors erroneously see proximity to the valley as a shortcut to success, thinking they will outperform the market by mere virtue of setting up shop in the 650 area code.
On more than one occasion, a fellow VC has said to me point-blank: “If I can’t drive to where the company is based, then I won’t invest.”
This statement goes beyond laziness or hubris and becomes willful ignorance. Never mind the fact that other cities in the US (many on the East Coast) now have vibrant, up-and-coming tech ecosystems of their own.
Based on my research and findings over the last six years, as I seek to map the global startup and venture capital ecosystem, I’ve found that in many verticals, the best deals are not coming out of the US. This shouldn’t be a controversial thing to say, but many investors in the valley need to hear it.
Limiting oneself geographically, when nearly all tech investments are made on a global scalability basis, is foolish and bizarre. If US VCs want to stay at the top of their game and maximise returns amidst tougher competition, they need to broaden their competence and take a global view.
A variety of foreign markets are primed and ready
Post-World War II, large American multinationals expanded to Asia and South America to take advantage of cheaper manufacturing bases in developing economies. These giants weathered a hodge-podge of government regulations, cultural and language barriers, as well as basic infrastructure obstacles.
As pioneers of the industry, they paved the way for the second wave of investors in the ’80s and ’90s, as the manufacturing boom swelled. Regulations were in place, local workforces and SMEs were familiar with foreign investors, and key infrastructure had been set up.
Also Read: Why we are far from being the Silicon Valley of Asia
Today, we’re seeing this pattern play out again with American tech investors. Just 10 years ago, countries such as Indonesia barely saw venture investments beyond government-supported grant programmes. Since then, big guns such as KKR, 500 Startups, Tencent, SoftBank, and PayPal have set up local offices and participated in fundraising rounds passing the billion-dollar mark.
Indonesia now has six unicorns, and one ‘decacorn’ in ridesharing-turned-super app GoJek. With valuations at home skyrocketing and competition among an array of corporate VC firms, independent VCs, PE and accelerator models saturating the local startup investment scheme, markets such as Indonesia are primed and ready for the second wave of American money to come in.
In 2019, Indonesia-based VCs raised US$582 million, a whopping 79 per cent up from US$325 million the year prior. These numbers show that there is much more room for growth compared to Singapore’s US$2 billion hauls.
In 2018, the Indonesian government announced income tax incentives for VCs that put money into local tech startups. The aim was to further boost the archipelago nation’s digital economy and e-commerce aspirations.
For a country that is home to 267 million people, of which at least 50 million are in the growing middle-class with rising discretionary incomes, the hunt for the next Indonesian unicorn is on. American VCs can bring their expertise and best practices to play. In Europe, Africa, South Asia, South America and Asia Pacific, Indonesia’s story is repeated, with slight variations.
Paving a specialist path
Of course, not every VC has the heft of Sequoia or Accel to carve out a major footprint in the Asia Pacific or South America. So rather than throwing a dart at a map, smart VCs are playing to their strengths and conserving their gunpowder for investments in certain sectors only.
The first wave of American VCs has affected how governments and markets respond to fundraising, and as a result, we are seeing certain regions and economies acting as sectoral hubs.
Take Europe, for example. Even prior to Brexit, economies such as Luxembourg and Germany were already viewed as bona fide financial hubs. Post-Brexit, countries such as Belgium and Lithuania are taking on monikers as fintech hubs in their own right, and choosing collaborative approaches to draw investors in.
While the European Union is virtually borderless for talent and travel, financial regulations are still very much the privy of individual countries’ central banks. Fintech firms thus have space to disrupt traditional banking while gaining access to highly-educated tech talent.
Also Read: Mulling over the future of investing with Paul Meyers and Jussi Salovaara
Even when entering countries where language or cultural barriers still exist, American VCs can lend their firepower to local VCs in fundraising rounds without reinventing the wheel of market research and KYC. With more US investments in European startups, Americans are increasingly willing to participate in earlier rounds.
Broadly, VCs taking the sectoral approach can take note of regional trends such as:
| Sector |
Hub |
Why? |
| Fintech |
Europe |
Disrupt traditional banking, strong finance, and tech talent base. |
| Healthtech |
China, North Asia |
The aging population as a result of the one-child policy (China), cultural focus on health and elderly wellbeing. |
| Agritech |
South Asia, South America |
Building on agriculture backbone to improve farm efficiency and aid farmer financing. Rising middle-class with more conscientious food spending. |
| Cybersecurity |
Israel |
Many startup founders come from intelligence services or defense force backgrounds. |
| Logistics |
South Asia, Southeast Asia |
Archipelago nations and those with disparate geographic features have unique connectivity challenges that need to be solved. |
| Gaming |
Asia Pacific |
Diversity in offerings including mobile games, e-sports, game development studios, and gaming infrastructure. |
Finding footing in a pandemic
Prior to the pandemic, a 2019 report projected that Asia would overtake North America as the global centre for VC funding by this year. Although COVID-19’s impact on Asia’s much younger population has been less devastating than it has been in the US, VCs are keeping their powder dry and staying risk-averse in the hopes that the virus will see its end soon.
However, smart VCs will take this opportunity to forge partnerships with overseas funds, start exploring foreign due diligence, and invest in startups that will either: thrive in this new normal (gaming, edutech, e-payments, etc) or come out of the other side stronger (moving startups toward profitability instead of growth at all costs).
The good news? Those who do invest globally will be facing less competition, as many VCs are now focusing on their existing portfolio of startups. Valuations (namely in Asia) that have been skyrocketing over the last four or five years are now starting to normalise — offering American VCs a very attractive entry point into companies that can scale regionally or even globally.
If there was ever a time for savvy American VCs to deploy their financial firepower abroad, it is now. Those who refuse to look beyond the valley in 2020 will soon be in serious trouble.
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