Strategic Evaluation of Start-ups in Emerging Markets: A Comprehensive Guide for Venture Capitalists

From Insight to Investment: A Guide for Venture Capitalists in Emerging Markets

Summary

When evaluating opportunities to invest in emerging markets:
1. The effective way to evaluate emerging markets is through qualitative research (understanding consumer behavior)
2. Invest in founders who prioritize their product roadmap by leveraging qualitative research and demonstrating a systematic approach to learning and adapting their business model and product roadmap over time
3. Invest in founders who possess robust product experience and skills
4. Emphasize Business model over technology
5. Competitive advantage for startups in emerging markets does not necessarily need to be technology

Defining Emerging Markets

Traditionally, developing countries are defined as ‘emerging markets’. However, for this article, I have defined emerging markets as creating new markets through a change in consumer behavior. I have also defined emerging markets as adopting new products or services due to changes in consumer behavior in a specific geography. Hence, in the context of this article, emerging markets are geography agnostic. For instance, micro-mobility services have long been established in urban areas of India & other Southeast Asian countries. Yet, micro-mobility services have just started to penetrate most of the urban landscape in the US in the past decade.

“Emerging markets represent fertile ground for disruptive innovations to either address underserved customer segments or create uncontested market spaces by offering unique value propositions and challenging existing industry norms.”

Examples of Emerging Markets:

1. Micro-Mobility Services (US & EU): Addressing last-mile transportation needs in urban areas
2. Telemedicine in Developing Countries (South East Asia, Sub-Saharan Africa): Providing remote healthcare access and consultations
3. Agriculture Marketplace (South East Asia, Latin America): Connecting farmers and buyers to streamline the agricultural supply chain
4. Decentralized Off-Grid Renewable Energy (South East Asia, Sub-Saharan Africa): Offering sustainable energy solutions in off-grid and underserved regions

Why do investors care about making smarter bets in Emerging Markets?

Because they have the potential of the next billion-dollar businesses and multi-billion-dollar markets. Clayton Christensen defines this as disruptive innovation.

“Disruptive innovation refers to a groundbreaking innovation that creates a new market or significantly disrupts an existing market by introducing a product, service, or technology that is more affordable, convenient, or accessible, displacing established market leaders or fundamentally altering how business is conducted within that industry. This type of innovation often starts by serving less-demanding customers or niche markets and eventually evolves to challenge and potentially dominate traditional incumbents in the industry.”

How to think about making bets in emerging markets?

1. Key to Success in Emerging Markets: Understanding Consumer Behavior or Groundbreaking Technology?

Leveraging Untapped Customer Values: In evaluating start-ups in emerging markets, the key lies NOT in groundbreaking technology but in understanding consumer behavior. The genesis of emerging markets often lies in creating products that effectively address the unmet needs of a specific customer segment, particularly those underserved by traditional market offerings. Hence, the diligence should emphasize comprehending target customer segments’ underlying needs, desires, and daily progress in the problem space you are evaluating.

The primary question for investors is whether the startup has identified opportunities to offer products/ services that provide value to customers in ways the competition has yet to consider, exploring new dimensions of customer needs and desires. These solutions are typically characterized by their simplicity, affordability, and convenience, catering to the unique constraints and preferences of the target market. The secondary question for investors is why mainstream players might NOT offer a similar value proposition.

“Innovation is less about producing something new and more about enabling something new and important for customers.”

“Even Ford’s revolutionary assembly line can be traced to the meatpacking industry in America. Like those within the auto industry, the blue oceans within the computer industry did not come about through technology innovations alone but by linking technology to what buyers valued.”

“Deeply understanding a customer’s real Job to Be Done can be challenging in practice. Customers are often unable to articulate what they want; even when they do describe what they want, their actions often tell a completely different story. Seemingly objective data about customer behavior is often misleading, as it focuses exclusively on the Big Hire (when the customer actually buys a product) and neglects the Little Hire (when the customer actually uses it). The Big Hire might suggest that a product has solved a customer’s job, but only a consistent series of Little Hires can confirm it.”

~All the above quotes from ‘Competing against Luck’ by Clayton Christensen

2. What insights drive product vision and roadmap?

Qualitative research as the focus: When assessing startups in emerging markets, I recommend evaluating the founders’ product sense and product experience. Firstly, investors should understand what research the founding product team (usually the founders) had done as part of their customer discovery (their gut feeling? Surveys? Customer interviews? Ethnographic studies?). Additionally, investors should inquire about how startups prioritize their product roadmap. Successful startups in emerging markets often employ a systematic approach to qualitative research, as highlighted in Competing against Luck, Innovators Dilemma, and Blue Ocean Strategy. This involves more than surveys and interviews; it includes observing how consumers engage with the product in their problem space, known as ‘ethnographic research.’ The key takeaway: founders who prioritize their product roadmap based on gathered insights tend to thrive in emerging markets.

“Jobs Theory(JTBD) is not primarily focused on “who” did
something, or “what” they did — but on “why.” Understanding jobs is about clustering insights into a coherent picture, rather than segmenting down to finer and finer slices.”

“The key to getting hired(meaning winning business from consumers to solve a problem/ offer experience/ address their need) is to understand the narrative of the customer’s life in such rich detail that you can design a solution that far exceeds anything the customer could have found words to request. In hindsight, breakthrough insights might seem obvious, but they rarely are. They’re fundamentally contrarian: you see something that others have missed.”

~All the above quotes from ‘Competing against Luck’ by Clayton Christensen

3. Do founders prioritize customer experiences over products?

Beyond Products to Experiences: In emerging markets, it’s not just about a great product; it’s about creating exceptional experiences by understanding the entire customer journey, from initial touchpoints to product purchase decisions to post-sales customer support. As investors, probe into how founders think about pricing strategy, marketing and sales channels, & strategic partnerships, and managing their customer relationships. Each of these offers an opportunity for the startup to differentiate and give additional value to their customers. Bottom line: Do not over-index on technology rather business model and competitive position of the startup.

A “job” is not a description of what the customer is doing, the solution they are using, or the steps they are taking to get a job done. Rather, the “job” statement embodies what the customer is ultimately trying to accomplish. (Source)

“It’s important to emphasize that a well-defined job is multilayered and complex. And that is a good thing. Why? Because it means that perfectly satisfying someone’s job likely requires not just creating a product, but engineering and delivering a whole set of experiences that address the many dimensions of
the job and then integrating those experiences into the company’s processes. When you’ve done that well, it’s almost impossible for competitors to copy.” ~‘Competing against Luck’ by Clayton Christensen

4. Will the business achieve economies of scale through strategic alignment?

Differentiation and Low Cost: One of the challenges in assessing opportunities in emerging markets is that initially, the Market size (SOM) for the startup you are evaluating would appear small. Why is this a challenge? Because VCs are accustomed to making bets in opportunities with bigger market sizes (what VCs call 10B+ TAM markets). The inherent challenge with assessing emerging markets is that startups that have historically succeeded are by catering to a niche market and being the best at it and, over the years, evolving their business model and product to cater to the mainstream markets. Consider how Amazon started as an e-commerce for books in its early days, a very niche target market (people who read books and buy them online). But what is the validation that people buying books online would also buy shoes and clothes? What if the product gets caught in the chasm(i.e. the great product that appeals to an initial niche segment couldn’t appeal to the mainstream market)? In my opinion, the way to think about this is
1. Estimate the TAM (Market size).

2. Understand market segmentation (understand value proposition & customer buying behavior of the niche Vs. mainstream segment)

Going back to Amazon’s example, people buy books online because it was simpler, cheaper, and convenient. Then, it would be a fair hypothesis to make that there will always be a segment of people buying toys, shoes, clothes, & mobile phones if it is simpler, cheaper, and more convenient. As investors, I recommend focusing your analysis on how well the startup you are evaluating differentiates itself from the mainstream market and whether it is price competitive. Understanding consumer buying behavior would aid you in seeing the potential for adoption into mainstream markets.

“There are four primary characteristics of disruptive technology. Disruptive technology is simpler, cheaper, convenient and has better attributes than the established product. Two, it is technologically straightforward. Three, disruptive technology is presented to the marketplace by new entrants in the industry, following a strategy the book Blue Ocean Strategy describes as opening up new market space and creating new demand. Fourth, disruptive technology cannot serve mainstream customers but can create new markets.”

In essence, success in emerging markets hinges on a profound understanding of consumer behavior, strategic alignment with customer values, and the agility to adapt and learn as markets evolve. By focusing on holistic experiences, disruptive potential, and economic fundamentals, venture capitalists can navigate the complex landscape of emerging markets with resilience and insight.

Key questions Investors should be asking the founders:

1. What specific research methods have you used to uncover the unmet needs of your target customer segment? (Eg. Interviews, ethnographic research, surveys)
2. How have you gathered insights into customer needs that still need to be met by existing solutions in the market? (Follow-up) How have these insights informed your product development?
3. What factors do your customers consider when making purchasing decisions? (Follow-up) What role does your product play in their decision-making process?
4. Can you describe your target customer segment in detail? What are their demographics, psychographics, and pain points?
5. How do you differentiate from the competition? What unique value proposition does your solution offer? (Follow-up) Why wouldn’t mainstream companies and prominent players would not offer a similar value proposition?
6. How do you prioritize your product roadmap? (another version of this question: What is your approach to problem-solving in a manufacturing setting, during product development, or when dealing with end users and customers? )

Strategy toolkits for evaluating Emerging markets:

1. Jobs to be Done Framework
2. Strategy Canvas
3. Market Segmentation

Other relevant design methods/frameworks/ toolkit:

1. Value Proposition Canvas
2. Porter’s 6 Forces Analysis
3. Customer Journey Mapping
4.Experience Mapping
5.Customer Buying process. Understanding the buying hierarchy (Christensen’s hierarchy is functionality, reliability, convenience and price)
6. Customer Persona

References:

1. Book — Competing against Luck : The Story of Innovation and Customer Choice by Clayton Christensen
2. Book — Innovators Dilemma by Clayton Christensen
3. Book — Blue Ocean Strategy, Expanded Edition: How to Create Uncontested Market Space and Make the Competition Irrelevant by W. Chan Kim and Renée Mauborgne
4. Article — Innovator’s Dilemma book summaries (Link 1), (Link 2), (Link 3)
5. Article — Blue Ocean Strategy book summaries (Link 1), (Link 2), (Link 3)

Notes:

• In “The Innovator’s Dilemma,” emerging markets refer to new and underserved customer segments or markets where disruptive innovations can gain a foothold, often by initially serving low-end customers and scaling up to challenge established incumbents
• In “Blue Ocean Strategy,” emerging markets signify untapped market spaces devoid of competition, enabling companies to create uncontested market spaces by offering innovative value propositions that attract non-customers and redefine industry boundaries
• In venture capital, the key to success in emerging markets transcends groundbreaking technology; it hinges on a profound comprehension of consumer behavior within a given problem space
• The recommended approach to gather insights that drive product decisions is through qualitative research. These insights for crucial product decisions come from talking with non-customers, refusing in their target market segment. Beyond just customer interviews, observing how consumers interact and use the product might reveal better insights. In emerging markets, what’s more important is not a fully functional product but instead testing their target customer segments’ willingness to pay for their product vision. The crux lies in aligning technology with what customers genuinely value.
• This entails addressing the functional, social, and emotional dimensions of the job, acknowledging that establishing a presence in emerging markets hinges on aligning your product or service offering with what consumers genuinely value.