Emerging Markets Outlook | A New Generation of Unicorns

Online marketplaces are becoming increasingly relevant within our everyday lives. As a matter of fact, marketplaces intersect both our private and business spheres, not only facilitating personal and social needs, but also unlocking fundamental layers of our business value chains.

As marketplaces increasingly move online and grow interconnected with our society, inherent inequalities have left some areas of the world behind and - arguably the largest - portions of the global population strongly underserved. We believe that empowering the flow of capital towards network effects-focused businesses in such regions can deliver outstanding returns in terms of infrastructural, economical and social benefits.

While screening the tech landscape in emerging markets around the world, we noticed that aspiring marketplace and platform entrepreneurs usually have no VC fund to turn to that has a team or practice specialized in network effects-driven business models. This is a gap we are actively looking to close.

Why do we invest in marketplaces?

As many people in the European startup ecosystem know, we’ve always been big fans of marketplaces and platform business models. Why? On a private level, we love how products such as AirBnB, Uber, Spotify, Wolt, or Doctolib are simplifying and enriching our lives. What gets us especially excited as investors is the fact that network effects-driven businesses yield superior returns. As a matter of fact, companies relying on network effects at their core reach unicorn status on average 2 years faster than those who don’t, and they also represent about 70% of the overall value of all tech companies that reached unicorn status from 1994 to the present day (according to recent NFX research).

Given our keen interest in marketplaces, in 2017 we became the first European VC fund to set up a dedicated team to solely pursue and invest in network effects-driven business models. Since then, we’ve backed over 50 that we are proud to support, including unicorn companies, such as GoStudent (edtech), Bitpanda (investment platform), Wefox (insurtech platform), TIER Mobility (micro-mobility), as well as a significant number of soonicorns.

With our domain experience, we aim to be trusted counterparts for our marketplace founders in Europe and increasingly in emerging markets around the world. In these markets, even more so than in Europe, marketplaces are disrupting entire industries at a fascinating pace. They are touching the lives of millions, providing better access to essential goods and services, such as food, education, healthcare, mobility, housing, and financing. With this in mind, we are excited to share with you our thesis for emerging market investments. 

Which emerging markets are we covering?

IIn our geographic coverage, we do not have strict limitations. That said, we mainly concentrate on four major geographic sub-regions, each with individual characteristics and market dynamics: our core markets of activity are the MENA region and Sub-Saharan Africa, while we are also present in Latin America and South Asia.

Whilst emerging markets represent, jointly, a huge and exciting investment opportunity, we acknowledge the existence of strong regional differences in terms of market dynamics and technological development. Below are some of the countries that have been able to rapidly establish themselves as tech-hubs capable of attracting significant amounts of VC investments within our regions of activity:

• Middle East: UAE, Saudi Arabia
• Africa: Nigeria, Egypt, and Kenya
• Latin America: Brazil, Mexico, Colombia
• South Asia: Pakistan and India
  

What investments have we made already?‍

In the chart above, you can see Speedinvest’s entire portfolio of emerging markets. It includes network effects-driven businesses from Indonesia to Mexico. You can also spot a significant number of fintech companies thanks to our fintech team. They’ve already been venturing out of Europe for several years and have backed great companies, such as Open, Iyzico, Fairmoney or Moove.

Because the two worlds of marketplaces and fintech frequently blend, we often collaborate with our fintech colleagues. Many of Speedinvest’s investments in emerging markets to date can be considered fintech-enabled marketplace/platform businesses or fintechs with strong network effects. You can find a selection of our portfolio companies below:

‍Middle East:

PalmHR is a SaaS-enabled HR platform in the Middle East, automating human resource management to transform employee experiences.

Africa:

• Oze is a financial and commercial operating system with a digital storefront for merchants in West Africa.
• Julaya targets traders and SMEs in francophone Africa to transfer or accept payments from mobile money operators to banks (and vice versa), thus creating a financial ecosystem that connects SMEs with their suppliers, customers, and employees.
• Jumba is a construction technology platform that simplifies and digitizes the purchase and supply of construction materials and offers procurement-related short term financing in East Africa.

South Asia & South East Asia:

• ShopUp is Bangladesh's leading full-stack B2B commerce platform for small businesses. Their goal is to use technology to supercharge businesses with easy access to B2B sourcing and last-mile logistics.
• Lummo is a Shopify-like app based out of Indonesia that offers merchants a digital storefront to connect with their customers online.
• Maqsad is an after-school learning platform for STEM subjects (and soon more) aimed at improving access to education for students in Pakistan.

LatAm:

• Morgana is a white-label solution that allows brokers and iBuyers to digitally assess and pre-approve mortgages. The company also offers direct-to-consumer embedded finance and remortgaging.‍
• Cobee, the Spain, Portugal and now LatAm-based employee benefits management system, connects white collar workers to benefits providers (childcare, coupons) in an easy and accessible way.

Looking Ahead: Marketplace and platform opportunities in emerging markets

A good starting point to get a feeling for marketplace investment opportunities in emerging markets is to get an overview of the existing marketplace success cases across different verticals and countries. As human needs are the same across different markets and geographies, in many cases similar or even replicable business models will address those needs across different markets.

If we look at the global distribution of marketplace unicorns, we can observe that, not surprisingly, the vast majority of unicorns have been produced in well-developed startup ecosystems, predominantly in North America, followed by Europe and East Asia (particularly represented by China), with South Asia also constituting a notable share. Continuing the analysis, we can see that Southeast Asia and Latin America are still behind with respect to other ecosystems, representing a middle ground for unicorn representation in absolute numbers. 

Finally, the most underrepresented regions in terms of unicorn presence are the Middle East, with eight companies, Oceania with seven, and finally, Africa with only one (Jumia). Here, increasing GDP per capita combined with growing demand for infrastructure, innovative products, and services clearly opens opportunities to back a new generation of unicorns. 

While leaders in other geographies are not actively looking to expand in these regions, mainly due to the high complexity of these markets - especially for foreign players - and an already high degree of competition in their home markets, many would have interest in acquiring a local player once they reached a significant market share, in order to expand their global footprint more organically and in a less operational-intensive way. This defines a clear exit strategy for local winners across emerging markets.

If we zoom into emerging markets and look at the distribution of marketplace unicorns across different verticals, we can see which verticals have already produced big success cases––and which are still ripe for disruption. First, we could notice verticals, such as eCommerce, Food, Beauty, and Automotive have produced the highest number of success cases across several regions. We can see a similar pattern here as in more developed markets where digital adoption also happened first across these segments, with examples such as Amazon and eBay in the 90s, or later on Zalando, Groupon and various delivery services in the 2000s.

Models within Logistics, Real Estate, Travel, and Education witnessed mid-level growth. While this might partially be linked to the lack of existing infrastructure (in the case of Logistics and Real Estate), the growth of the middle class is significantly driving demand for better services and infrastructure across these verticals, fostering the emergence of digital models. In addition, the increasing level of digitization of the population is empowering usage and acceptance of services such as ride hailing and online education.

Finally, Health, Manufacturing and HR are as of today the verticals with the smallest amount of marketplace success cases. Yet, these verticals are highly relevant for economic development and general wellbeing. We believe in the opportunity to back the next generation of disruptors, especially in these impact-creating segments. Those marketplaces will enable wider access to health services and employment possibilities, and boost better and more localized industrial ecosystems.

‍Emerging markets marketplace unicorns: a heat map

Finally, when combining the geographical and vertical view on marketplace unicorns, there are a couple of further interesting take-aways:

• As expected, the Asian market already looks rather crowded, especially within South Asia, across several verticals.
• On the contrary, there’s still a lot of “unicorn-whitespace” in Africa and the Middle East. Africa still has only one marketplace unicorn, Jumia, whilst MENA has two, Getir and Jahez, both in the food and grocery vertical. 
• eCommerce is the most populated vertical across all different regions, with aggregate valuations being strongly augmented by the presence of players, such as MercadoLibre, Tokopedia and Lazada.

Looking at aggregate valuations per vertical, there is an immense opportunity for value creation in several segments. From a geographical perspective, there is strong potential to back first-movers, especially in the Middle East and Africa, in specific verticals with a strong societal impact, such as Health, Education, Real Estate, and HR.

Taking this high-level analysis as a starting point, it’s clear that there are plenty of opportunities to build vertical-defining marketplaces in emerging markets around the world. We have clear hypotheses on models that are particularly promising. At the same time, we’re constantly on the lookout for the latest and most disruptive network effects-driven businesses, as we believe the true success of a business idea lies in a combination of the timing the market right, fully understanding of the different nuances that separate geographies entail, and having the right team (which is for us the most important factor!).

We would be delighted to leverage our findings and bring them to the next level, connecting with founders and investors across emerging markets and together empowering better and faster access to technological innovation and development around the globe. Having seen and worked together with many successful business models in Europe, we are confident to be able to help entrepreneurs across emerging markets navigate the rough waters and avoid making the same mistakes as their European counterparts, bringing these models to success across new geographies.

If you’re interested in an exchange or want to share your business idea with us, feel free to reach out to us at philip.specht@speedinvest.com and irene.gentili@speedinvest.com.