Carts without horses

Investing in emerging markets such as India, Kenya, and Nigeria isn’t quite what I naively thought it would be. Before I started, I thought that finding a good company in an emerging market would just mean copying models that worked in developed markets. All I’d have to do is figure out how the business would need to be tweaked for a lower price point, identify the best founders working on the problem in the new market, and invest in them. Any structural difference in the new market would just serve as a barrier to other companies from moving in. In the last few years, though, I’ve learned that while this is one way to invest, it’s unlikely to identify the largest companies that have yet to be built. I now think that the better way to invest in startups in the developing world is to ask “How would you solve a problem if you started fresh with today’s technology?”

This probably seems like an obvious question, and one that founders and investors should be asking themselves with any opportunity. But, one of the more surprising things that I've learned is the degree to which the sequence of technological adoption changes the opportunity set available to startups and how we think about them. This isn't something you can actually see when looking at a single market, it's similar to comparative literature where each pair of markets that you examine in tandem illustrate the differences and gaps.

Credit cards and payments are a good way to illustrate this dynamic. We'll use the US as the base case. The US has an extensive and well established financial system, from trustworthy savings banks to a wide array of credit options to standardized and reasonably secure systems for transferring money. When M-PESA, Kenya's mobile money transfer system launched in 2007, Kenya did not have many of these pieces of infrastructure. What they did have was an unmet need to quickly and safely transfer money over long distances. They also had Safaricom, the largest cellular operator in the country. Not only did Safaricom provide the phones and coverage needed to make transfers possible, their network reached more of the population than the branches of any bank. On top of that, the banks lacked the lobbying power to kill off an upstart that was actually being run by a powerful company.[1]

Contrast this situation with the one faced by companies like Venmo on launching in the US. The foundation of the market is different here, with huge amounts of regulation governing money transfer alongside a fairly sophisticated (if not perfect) system to send money. Mobile money is just a convenience in the US and also faces barriers to widespread adoption from entrenched technologies, user behaviors, and regulations. In contrast, mobile money is a solution to a deep and unmet need in Kenya with a relatively green field from competition, regulation, and behavioral norms.

M-PESA wasn’t a startup that investors had access to, but let’s pretend it was. If those investors had focused on how a payments company would ever make significant revenue given the small size of the average transfer, they would have missed the opportunity to invest in a system that was handling 25% of Kenya’s GNP in 2013!

Something similar is currently playing out in India. Imagine if the first credit cards had been created today, with ubiquitous smartphones, rather than in the late 40s. Instead of serial numbers printed on paper[2], you’d probably have an app tied to your phone and some uniquely verifiable identity token. It would be easier and more efficient to create a vertically integrated system that combined the features of multiple players within the payments stack. This is the situation in India, where there are around 20 million credit cards and 220 million smartphones. Credit and debit cards aren’t a big thing there, which is why payment is so often handled in cash. In fact, they have a Cash on Delivery (COD) rate of close to 80% for goods purchased online[3]. That means that there are opportunities to build startups in India that look like credit card processors in the developed world, but there’s an even bigger opportunity to invent a new way for people to pay, and to own all the pieces.

It probably makes sense to always try to identify the optimal solution to a problem no matter where you are investing. However, finding ideal solutions is harder to do in developed markets because there are layers and layers of infrastructure, technology, and regulation that have gradually built up around most big problems. No matter what approach you take to a problem, those factors will influence how you think about it.[4]

It seems to me that the best investors are those that can most clearly articulate this thought process and hold onto it while accommodating the particulars of a given market. This is the underlying logic for investors who talk about the importance of identifying new platforms, or of catching the next wave. The companies that fit these criteria rewrite the rules of how their markets work by building entirely new foundations of infrastructure and user expectations. By doing so, they unlock the types of huge opportunities that you'd otherwise only expect in a developing world market with a clean slate.

While some great founders may think this way, many of the best simply have a vision of the world as it should exist that’s only possible with what they are making. Rather than trying to work around barriers, these founders either ignore them or are naive about their existence. Either way, they end up building things that others would have deemed too hard or pointless because of all the things other people had done. I think that's why so many great companies start as projects without much attention to commercial relevance.[5] When you start thinking about all the million different things that an existing market imposes on a new idea, it can be enough to stop you in your tracks. That's not to say that great founders ignore the market. What they actually do is react rapidly to what their companies encounter on first contact and move quickly to adjust and get better.

Developing markets are a kind of mirror of the future, or maybe of the present if things had happened differently. As such, they're hugely instructive in understanding the types of companies that can be built, and of the founders who can build them. I think it’s clear that there will be huge startups built in the developing world. More importantly, though, thinking about how and where those startups will occur forces us to think about solving problems from first principles. Starting with a clean slate lets founders and investors think about how to change the world as quickly as possible, rather than incrementing their way forward.

[1] The Economist has a great analysis of M-PESA’s success here: Sorry about the paywall.
[2] I was recently in the office of a Final (, where Aaron Frank showed me a bunch of the early charge and credit cards. They have them in lucite boxes, like really valuable baseball cards, which I thought was really cool.
[3] As crazy as it might seem to hand cash to the UPS driver when he delivers your latest Amazon order, that’s exactly what happens in India (minus UPS and probably Amazon).
[4] There’s an echo here of George Oppen’s belief that it is impossible to actually be objective when writing because of the degree to which bias is ingrained into the subconscious and influences everything we do.
[5] There are, of course, founders who started with full knowledge of the challenges of their market and built huge companies designed to capitalize on existing inefficiencies.

Thanks to Scott Bell, Garry Tan, Geoff Ralston, and Nitya Sharma for your help thinking this through.