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The Rise of Emerging Market Startups

Startups are playing a larger role in almost every major company’s innovation strategy.

According to the 2014 GE Global Innovation Barometer, which surveyed 3,200 innovation executives in businesses of various sizes and industries across the globe, 85 percent said their companies were working on strategies to create partnerships with startups and entrepreneurs.

These strategies can frequently include investment in, acquisition of, or some type of strategic alliance with startups. But where do these startups come from? Firms may want to consider looking abroad, particularly at emerging markets for their next new idea.

A quick scroll through the Global Fortune 500 reveals that the number of emerging market multinationals—firms either originating or headquartered in emerging markets—are increasing. China’s Dongfeng Motor Group, Brazil’s Embraer, and South Korea’s Samsung are all well-known examples. A second look at the list reveals a nearly 240 percent rise in these sorts of multinationals between 2005 and 2013.

But what about emerging market startups? Just as emerging market multinationals require innovation to grow and keep pace with market needs, so, too, do emerging markets themselves—and that’s where startups come in.

It’s likely that we’ll see an increase in startups in emerging markets in the near future for three reasons: The ease with which one can create a business, strong support from the state, and pre-existing competition in emerging markets.

Entrepreneur Philip Nyamwaya (2nd R) presents an electronic payment system during the DEMO Africa technology fair at the Kenyatta International Conference Center in Nairobi, where some 40 startup firms are seeking to raise $60 million by showcasing their products or prototypes. Nairobi over
the past decade has earned the nickname “Silicon Sahara” for its entrepreneurial prowess and growing culture of innovation and research. Photo: SIMON MAINA/AFP/Getty Images

As The Economist noted in its January report on tech startups, the digital building blocks necessary to create a new startup are now more affordable and accessible. These building blocks include affordable cloud storage like Amazon Web Services; easy-to-learn programming languages like Python, Ruby and JavaScript; and outsourcing web sites like Fiverr or CrowdFlower.

But in emerging markets, rising income and education—as well as the doubling of Internet use in developing countries from 2007 to 2011—change the game. Entrepreneurs who couldn’t dream of having such resources just a few years ago now can learn how to code with just the click of a mouse. And for those who don’t know how to use these building blocks, accelerators in emerging markets such as Jordan’s Oasis 500 and Rio de Janeiro’s Pipa are teaching entrepreneurs how to start and run their businesses.

Yet private accelerators aren’t the only organizations trying to support new businesses: Many emerging market governments are taking an active role in creating and cultivating new businesses. Why? It’s partly thanks to a recent rise in living standards, which many governments want to maintain. These governments encourage economic growth through the creation of specific programs and policies aimed at local startups.

For example, the Kenyan government invested $10 billion in the creation of a new tech hub called the Konza Techno City outside of Nairobi, which has been dubbed the Silicon or Digital Savannah due to its tech scene, fueled by a robust mobile payment system. Another prominent case is Startup Chile, which allocates $40,000 in seed capital and a one-year visa to foreigners in an effort to “convert Chile into the definitive innovation and entrepreneurial hub of Latin America.” Other examples include Malaysia, where the government started a $100 million fund four years ago to develop high tech industries in the country, Vietnam’s Silicon Valley Project and Rwanda’s klab.

Lastly, the very nature of emerging economies favors lean organizations. The 1997 Asian financial crisis forced many firms from emerging markets to adapt or die. Firms needed to restructure and shed costs, creating new versions of themselves that were leaner and more resilient than their counterparts in developed markets.

In addition, companies from developed markets, which typically have greater resources at their disposal, have increasingly focused on emerging markets as a source of revenue due to stagnant growth in the West as a result of the 2008 subprime mortgage crisis. As a result, most emerging markets are hypercompetitive. This environment favors a lean organizational structure, which can be typical of many startups.

Some emerging-market startups may still migrate to Silicon Valley in hopes of accessing capital or mentorship. Others may receive a large investment, or be acquired by a Silicon-Valley goliath: Google’s nearly $1 billion acquisition of Waze, an Israeli startup founded in 2008, when the country was still considered an emerging market, is a prominent example. Another is Facebook’s pending acquisition of the Finnish Pryte, whose technology supports its strategy of expanding into emerging markets as part of the internet.org initiative.

Conditions are ripe for the rise of startups from emerging markets and it’s likely that, in the near future, the next big thing with a catchy name won’t come from Silicon Valley but from an emerging market. Investors, entrepreneurs, and organizations who wish to incorporate startups into their innovation portfolio should take note.

Ryan Kaiser is a project manager on the Innovation Strategy team within Booz Allen Hamilton’s Strategic Innovation Group. A previous version of this article appeared on 1776’s blog.

The Rise of Emerging Market Startups was originally published on Ideas Lab

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