April 28, 2014

The Challenges And Opportunities Of Investing In Emerging Markets

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Nokia’s name carries weight in emerging markets. Sure, its smartphone business might have struggled in recent years here in the West, but its low-cost mobiles continue to curry favour across markets like India and Latin America. The firm’s VC arm, Nokia Growth Partners (NGP), is approaching its 10th birthday. It is a USD600m global fund that targets late-stage mobile startups, racking up more than 40 portfolio companies along the way.

The firm recently expanded its team across China and India, and managing partner Paul Asel heads up NGP’s efforts in these emerging markets. He tells StrategyEye that the definition of the outfit’s mobile strategy has significantly altered over the years.

“Today, mobile encompasses everything,” he says. “When I say everything, pretty much any investment in the technology space needs to have a mobile angle. We continue to be mobile investors, but the definition of mobile has expanded significantly over time, from the cell phone to tablets, wearables and connected cars – it’s a much broader view.”

China Is Now An Innovation Hotbed

As well as being the world’s largest internet market by some distance, China’s internet economy is now coming into its own. China is now fast-becoming an innovation hotbed and that is something that is tantalising investors. It’s not always been this way. Such are the government restrictions, many Western companies have failed to crack the world’s most lucrative market, with local offerings instead rising to prominence. Google? No, Baidu is the dominant search engine. Facebook? Wrong, it’s all about Weibo. NGP realised this trend, backing mobile internet browser firm UCWeb early on. The firm’s flagpship product, the UC Browser, has racked up more than 300m downloads and is now looking to crack the US. Chinese startups used to refer to themselves as the Chinese equivalents of Western startups, says Asel, but he says that’s now changing.

“If we look at innovation five to 10 years ago, it was in the US and then replicated in China,” he says. “We’re now starting to see China innovate on its own and some of those innovations being mirrored in Western markets. An example is Tencent with its QQ messaging system before it developed WeChat on top. It’s then used those to aggregate a loyal and active user community, before adding new layers like gaming on top of that. We look at WhatsApp and how that has developed in Western and emerging markets and in fact a lot of that success was presaged by Tencent.”

The Year Of The Bumper Round

There is certainly huge interest in China from investors. NGP itself has a number of Chinese companies in its portfolio, including food ordering site Meican and online classifieds platform Ganji, with the firm investing in the latter after it gained traction as a result of Craigslist’s success in the US, according to Asel.

Overall, digital media investment in China is sky high, with investors ploughing no less than USD2.2bn into 41 deals throughout 2013, according to StrategyEye deal data. That figure was bolstered by bumper rounds for startups like fashion e-commerce firm Vancl and Online retailer ShopRunner, throughout the year. This year, 21 Chinese startups have raised a combined total of USD955m in Q1 alone as capital continues to flow into the region.

E-Commerce Rules In India

Though not quite at the same level as China, there’s no shortage of investment trickling into India. But what are investors most interested in? E-commerce. It accounts for an average of three-quarters of overall digital media investment across the last five quarters, with huge rounds for the likes of SnapDeal and Flipkart, though that percentage was 58% during Q1 as the wider ecosystem looks to evolve.

NGP has backed retail portal Fashion and You to the tune of USD40m in 2011 and counts media conglomerate Network18 among its portfolio, a division of which, e-commerce platform Homeshop18, has filed for an IPO.

“We were very early investors in the e-commerce opportunity in India,” says Asel. “We invested in Network18 in 2009 with the thesis that the internet was rapidly growing in India and that we would see independent internet companies develop.”

Talent Is Key To Success

Uncovering a potentially disruptive product or service is one thing, but a startup is only as successful as the team that mans it. Asel says that while India is producing globally successful companies like Vizury and InMobi, with the country proving itself a “leader in developing best-in-breed technologies”. It also provides some of the best tech talent available.

We’re seeing a fertile cross-pollination between Silicon Valley and India,” says Asel. “We have presences in both markets and are able to access talent in both markets. There’s a very fertile, non-resident Indian population in Silicon Valley that takes more than 10% of the venture capital. The talent that is being developed in India and we are seeing companies spin out and then start to use that to develop leadership in their own right, either in India or across emerging markets.

The Future

So what does the future hold for the Chinese and Indian digital media markets? Both look prosperous, says Asel, but for different reasons.

The positive reception from US investors to a number of IPOs in the country from Chinese companies in 2013 like Qunar and 58.com, has opened the market and laid the foundations for the largest of them all – Alibaba.

“The receptivity and performance of Chinese companies that went public last year has paved the way for Alibaba to go public,” says Asel. “If it does, it will really highlight the level of innovation that’s happening in emerging markets and the size of the opportunity, not just in China, but across the markets.”

It is the giants of the Chinese digital landscape, like Alibaba, that will continue to drive the overall market – and ultimately provide VC firms with returns on their investments.

“We’re seeing the internet giants are now becoming acquisitive,” says Asel. “The markets are starting to mature and we’re seeing consolidation. We’ve seen several acquisitions made that would be significant in any market on a global scale and that creates more balance for investors. As little as three years ago, there was the idea that in order to get a successful exit from Chinese investments, you had to do it through a NASDAQ listing. Now there’s proven path to exits through alternative means.”

As for India, Asel expects the market to continue proving resilient despite difficult economic conditions, driven by thriving markets like e-commerce and its key players including Flipkart, Myntra and SnapDeal. Overall, there’s a positive feeling around the opportunities in the region.

“We’ve seen significant depreciation of the rupee that reflects some of the challenges in India. And yet we’re seeing companies developing there and performing very well. JustDial had a very successful IPO, the e-commerce market is growing well. We often see that some of the best investment opportunities are those that come from the most challenging circumstances. From a macro point of view it’s challenging, but we’re seeing good companies developing.”

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