Venture Capital in the Emerging Markets

I attended a conference called Venture Capital in the Emerging Markets today in Istanbul, hosted by a local VC named Golden Horn Ventures. I was really looking forward to hearing what everyone had to say about the state of VC/innovation in emerging markets outside the BRIC countries. The panels were arranged such that they addressed three viewpoints- Funds of VC Funds, VC funds and entrepreneurs. These were my key takeaways:

• Plenty of opportunity to grow/capture the market for goods and services as emerging economies develop and household incomes rise.
• Legal barriers are still a pressing concern for investors and entrepreneurs. I had no idea how long the list of grievances was before today. VCs were concerned with matters like enforceability of contracts (the IFC rep noted that they had a whole portfolio in Russia because of this) and the infrastructure in place to facilitate investing/exiting. Entrepreneurs complained about the inability to create different classes of stock and create stock options within some emerging markets’ legal systems.
• Exits are difficult. The normal exits come through either IPO or M&A, yet these are much more difficult in emerging markets. In fact, a Turkish PE fund manager noted that a preferred exit for their company was to sell the shares back to the entrepreneurs! However, the possibility of exit through M&A is increasing as a result of multinational firms seeking to expand into emerging markets.
• Private Equity will need to become established before Venture Capital. A panelist noted that the lucrative deals being sourced by Private Equity funds have roughly the same IRR as those of VC deals in some emerging markets. Hence PE is a much more preferable option for investors.
• There is a lack of relevant VC/Entrepreneur experience. One of the panelists referred to this as a ‘chicken and egg’ problem. Nobody wants to invest in regions where VCs/entrepreneurs don’t have prior experience, and yet these regions have a lot of first time entrepreneurs who can’t gain experience without acquiring funding.

• It may take time for a new generation of entrepreneurs to out of these markets. Many attendants noted that cultural norms make it very difficult for entrepreneurs to come out of emerging economies. For example, not all cultures are as accepting of failure as much as the Americans and there is a huge amount of social pressure to stay away from high-risk business ventures.

Overall I was very surprised to see how new the concept of early stage investing was to the local VCs. It was very easy to tell who had worked previously in Europe and America and some investors openly admitted that they were unable to fund the kinds of companies that American companies did since they did not know what risks to take… which makes me wonder what the BRIC countries are doing right, that is facilitating so much VC/PE activity. I’ll give an update here when I find the answer.