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Venture Capital and Angel Investing in Developing Countries – Challenges and Opportunities


This is the first post in a series of articles that discuss the challenges and opportunities for venture capital and angel investing primarily in technology companies based in developing countries like Pakistan.

There is absolutely no doubt that the internet has leveled the playing field when it comes to reaching out and marketing a consumer internet service to a worldwide audience. The pervasive use of smart phones and handheld devices has further broadened the reach of these online services. Even business internet service providers like my friend Girish Mathrubootham’s India-based FreshDesk are thriving thanks to the internet’s equalizing power.

To a person who is consuming an internet service like Facebook through a 17 inch window at home (read monitor) connected to the computer, the only thing that matters is good value packaged in a great user experience. Consumers of online services usually don’t care whether the company providing the service is based in Palo Alto, California or Cheechon Ki Maliaan in Pakistan.

Locality of a business near the consumer doesn’t matter in most cases now. Even Fortune 500 companies nowadays are using customer care call centers in remote parts of the world to service their customers.

Technology Adoption Lifecycle

Technology Adoption Lifecycle. Source: Chasm Institute Website

Entrepreneurs in the developing countries who appreciate the huge opportunity all this presents are founding startups left and right. Some are able to come up with good ideas for a product or service for a large enough market, put together a great team and get the value proposition validated. As they begin to get traction and want to scale the business, the need for capital arises. This is where most come to the realization that the playing field is not level any more. Access to venture capital or angel investments in developing countries is a huge problem regardless of the growth stage a tech business is in.

Technology companies in this part of the world, already standing at the brink of Geoffrey Moore’s Technology Adoption lifecycle ‘chasm’ often find that the chasm is wider and deeper due to lack of access to funds.

There are several reasons for this and I try to pen some below based on discussions with several local and international investors and my personal experience of working in both Silicon Valley as well as in Pakistan.

Inadequate Deal flow for Venture Capital and Angel Investments

Venture Capital or angel investing is a numbers game at the end of the day. Regardless of the savvy, experience and past track record of the investors, every new investment, despite the due diligence that goes into it, is basically a high risk move because there are just too many variables at play that determine the success or failure of a start-up.

In order to hedge their bets, investors typically look for a market where there is a large pool of good companies to select from so they can make investments in several companies, ideally across industries if it’s not a tech focused fund. Pakistan and other developing markets lack this deal liquidity and hence fail to attract local investors. International funds with a wide regional focus can diversify their investments by tapping the deal liquidity across country boundaries, but they need awareness of the local deals and some show of support from local investors – topics I cover separately below.

India based Global Superangels Forum Fund and Accelerator is a great example of a local effort getting support from world renowned 500 Startups and Europe’s Seedcamp.

Shrinking Risk Appetite of Investors and Fund Managers

Most VCs will tell you that less than a third of their investments have had a decent exit. Up until a couple years ago, 10 year returns of VC funds averaged -4.6% (yes that’s negative 4.6%) which barely recovered to a low IRR of 5.3% by middle of 2012.

venture capital returns 2010

Source: Cambridge Associates via CNN Money

There has been mounting pressure from LPs (Limited Partners that actually put money in Venture Capital funds) on GPs (General Partners that manage the fund) to increase the returns on their investments. Private angel investors are wary of these historical returns as well and know that tech investments are even higher risk.

All this has resulted in VCs and angel investors flocking to ‘safer’ markets and invest with a herd mentality along with other investors. The country, security and geo-political risks (some real and most perceived) associated with developing countries like Pakistan tend to ward off investors who do try to break away from the herd.

But that herd-based, seemingly safe bets approach, comes at a price. First of all, as investors converge to fewer markets, the deals become more expensive naturally due to increased demand.

Secondly, the investments become subject to macroeconomic conditions of the ‘safe’ markets like the United States and United Kingdom. Besides, investors will soon realize that it goes against the spirit of venture capital which is to make high risk, high return early investments while fostering innovation and diversity.

A few investors like the Samwer brothers’ with their 150 Million Euros Global Founders Fund are sure to break away from the herd and realize the potential that lies in budding entrepreneurs in the developing countries who are second to none in innovation, drive, passion and resourcefulness, and are diligently working to grow their companies despite the odds stacked against them.

Lack of Global Awareness about Local Startups

Even though good global investors and funds actively seek out deals in the countries that comprise their focus region, countries like India and China often trump the startups in the Middle East and Pakistan when it comes to making their presence known. Traditional press and online media rarely cover the upcoming, promising businesses and it’s worse when the companies are tech focused. Specialized, regional and entrepreneurship focused blogs like Wamda are doing their part, but the entrepreneurs themselves need to write more about themselves and their companies and invest some of the friends and family seed money in promoting their businesses through websites and online blogs. I hardly see local founders attend any conferences or converge at regional meet-ups and mix-ins.

I generally attribute this to the introvert nature of most promising entrepreneurs I run into here in Pakistan and their subscription to something I call the ‘Stealth mode startup” mantra which I will talk about later and then in a subsequent post on this blog. Gradual exposure to experienced mentors and access to international conferences via tools like Google Hangout are slowly bringing about the change necessary to address this issue. Mainstream media is catching up as well and highlighting local efforts to promote entrepreneurship.

Startup Founders’ Mindset

This one is a real mindboggler for me, but understandably a consequence of doing business in an environment where there is a general lack of trust and perception of inadequate legislation for protection of intellectual property or at least lack of sufficient case precedence.

Source: VentureBurn.com

Source: VentureBurn.com

Founders, young and old, novice and experienced alike, generally subscribe to the ‘stealth mode startup’ mantra. They don’t like to talk about their businesses, sometimes not even with their mentors or potential investors (yes I have run into a few schmucks who will withhold critical information about the business model even from prospective investors).

This might be because there is fear of someone else stealing the idea and executing better than them. I need a separate blog post on why such thinking is so ridiculous but for now it suffices to say that true competitive differentiation of a company is not in the novelty of the idea or product, but in how fast it can continue to execute, evolve and remain innovative.

The second, and more plausible reason, is an ingrained fear of failure. The education system and culture in developing nations like Pakistan generally doesn’t encourage failure. It’s looked down upon instead of as a stepping stone to success.

The single best feature of Silicon Valley, in my opinion, is the culture of not punishing failure and in fact even encouraging it. In order to replicate that else where, it will take time and perseverance on part of investors to stick it out with promising teams over their several reincarnations.

Rich versus King Tradeoff

Source: Mason Myers Blog

An interesting side effect of this pervasive mindset (which thank God is changing slowly) is that the founders hold equity too dear to engage in meaningful negotiations with equity investors. The preferred mode of capital acquisition by founders is debt, which, needless to say, is not attractive for VCs and angel investors.

This also results in founders usually looking to seek free advice from industry veterans instead of formalizing the relationship either as an adviser or an independent board member. Having someone to answer to is looked down upon and an unnecessary constraint.

This is something that the entrepreneurs need to address themselves. Experience will teach them eventually but I already see young enterprising businessmen embracing good advice, investors and mentors and choosing to be rich rather than kings.

Concluding Part 1

I will continue to elaborate on more challenges and opportunities for venture capital and angel investing in developing countries, especially in Pakistan, in a series of follow-on posts that will cover:

  • Lack of Local Expertise to Value Technology Ventures
  • Bureaucratic Barriers to Entry for Foreign Investment
  • Lack of Trust in Local Judicial Processes for Dispute Resolution
  • Inadequate Structure/Precedence for Structuring Venture Investments
  • Dearth of Product Focused Startups and Heavy Emphasis on Services Based Companies
  • Lack of Local Success Stories and Big Hits
  • Lack of Support from Government to Encourage Venture Capital and Angel Investing

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Khurram Zafar (19 Posts)

Executive Director, LUMS Center for Entrepreneurship | ex-CIO at Lahore Stock Exchange | Senior Policy Adviser, Government of Punjab | Visiting Faculty, Entrepreneurship, Graduate School of Computer Science, Information Technology University of Punjab | Board Member, Plan9 Technology Incubator | Entrepreneur | Tech & Agri Investor | Poker Player | Poet | Magician | Dad of three | Follow me on Twitter by clicking here!


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  1. […] article is a follow-on installment of one of my previous posts: Venture Capital and Angel Investing in Developing Countries – Challenges and Opportunities. If you haven’t read that one yet, please do so for additional context and […]

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