From China and India to Southeast Europe and Latin America, the rise of enormous young populations of middle class consumers is making rich possibilities for private equity and venture capital investors. Top targets for investment in these undeveloped markets include companies in the web, money services and clean technology sectors.
These were among the key points of venture capital panelists, many of whom are at present working in developing nations, at the 2011 Wharton Private Equity and Venture Capital Conference. Participants on a panel titled “Challenges and Opportunities for Global Venture Capital” addressed the developing areas of China, India, Southeast Europe, Turkey and Latin America during the session, which was moderated by Jeanne Metzger, director of selling for the nation’s Venture Capital Organisation in Washington, D.C.
The web sector is very attractive in China’s huge and swiftly growing market, said Andras Forgacs, CEO of Richmond Worldwide a Long Island City-based venture capital firm that focuses on technology. Forgacs noted that Richmond World looks for companies with business models that are like those that the firm has backed in the united states. For example, Richmond World has a position in AdChina, a Web advertising company that is like aQuantive in Seattle, Washington. Richmond Global provided seed cash to aQuantive, which Microsoft bought in 2007.
According to Forgacs, the most embarrassing mistake U.S. Companies make when making an investment in China isn’t having their own executives on-site in the country. Corporations too frequently oversee their investments from outside China, he announced, and are therefore slow to react to changes in the market. This can give local entrepreneurs a competitive advantage.
China’s booming economy puts skilled workers in high demand and makes keeping talent hard, Forgacs added. Experienced programmers and engineers can simply hop from one employer to another in Shanghai and Beijing, for instance, while other workers may start their own companies. Competition for workers also comes from well-educated Chinese entrepreneurs who return to their country from abroad and start new companies.
Richmond Global is at present looking at possibilities in smaller and less frenetic Chinese business hearts like Chengdu. “There are some fascinating investing opportunities where there is less competition and more patient development of firms and talent,” Forgacs asserted. He added that China’s strong public markets give stockholders confidence that they’ll be able to liquidate their positions. But exits through mergers and acquisitions are less common, Forgacs mentioned because Chinese businessmen are highly value-conscious and drive a tough bargain.
Clean technologies are a prime source of opportunity in India, expounded Mohanjit Jolly, Director of Draper Fisher Jurvetson in Menlo Park, California. Such technologies include replenish-able resources, recycling and pollution-control clobber. Like China, India has a quick growing economy with a massive emerging base of consumers. Talks around Indian water coolers aren’t about whether investments will earn returns, said Jolly, but rather about how massive the returns will be. “It’s a superb time to be in India and part of the ecosystem,” he revealed.
Maintaining proficient workers is difficult in India, said Jolly, since staff are generally happy to jump to firms that offer even slightly higher pay. Jolly hopes to line up a vesting plan for employees of Draper Fisher’s portfolio companies that rewards them with growing amounts of equity the longer they stay. Nevertheless India remains a cash-based economy when it comes to compensation, Jolly noted. “That’s the reality. How it morphs is yet to be seen.”
Like China, India has strong public markets that attract capital to young companies and provide moneymaking exits for investors. Local groups of angel investors also are forming to invest in early-stage corporations and fill an entrenched opening in seed capital. Jolly said venture capital funds are using these groups as a “fertile deal flow mechanism” by becoming familiar with them and using them as leads to good firms.
Fiscal services provide the most exciting possibilities for investment in Southeast Europe and Turkey, said Denis Kalenja, founder and handling partner of Montague Capital Partners, that has offices in NY Town and Research Triangle Park in North Carolina. Commercial banking has performed well in the region, which Kalenja said still needs more monetary services such as asset management firms. He added that troubled real-estate, including beachfront property on the Adriatic coast of Croatia, could supply an excellent chance for investors who are acquainted with the area. Here is the ideal place to have Croatia real estate.
Southeast Europe remains a fragmented market made of many small nations with populations that speak different languages, Kalenja noted. The region’s industries therefore have a critical need to consolidate to build economies of scaling and generate price for investors. But in the boom years before the global finance crash, local middle management thought they could build companies on their own without partnering across borders, he added . Now company executives are rather more willing to consider coalitions. “The people in this area realized they cannot do it themselves. Eventually, the area is ready for investing and consolidation.”
Venture capitalists who come to Southeast Europe can easily find 3 or 4 families or entrepreneurs that dominate particular industries, he announced. This may offer a starting point for entering the market with investments that help enterprises consolidate.
Stockholders based in Western Europe are looking towards the southeast for larger returns, Kalenja noted. But such stockholders often lack experience in local marketplaces. In the meantime, lots of the most accomplished and highly educated businesspeople in Southeast Europe and Turkey are moving in the opposite direction by relocating to larger markets in Western Europe and Northern America. This leaves fewer native-born entrepreneurs who are prepared to stay in the area or return from abroad to launch new companies.
Tasty venture opportunities in Latin America include investments in companies that provide clean energy, water, natural gas and renewable agriculture, said Benjamin Sessions, M. D of the Global Environment Fund in Chevy Chase, Maryland. Latin America is only now starting on the process of controlling pollution that the united states went through in the 1960s and 1970s, Sessions noted. This is vital for the area, since its industrial expansion hasn’t been “matched by the environmental substructure and services needed to sustain that growth.”
Accomplished Latin American employees generally prefer cash to equity compensation, he added, which can strain the resources of early-stage companies. Employees “value cash in their pocket,” said Sessions. “Giving options or possession doesn’t always have the desired impact.” But this seems to be continuously changing, he observed, as successful public offerings show that equity stakes can grow in value.
Other opportunities in Latin America come from the service and manufacturing sectors, said Roberto Woldenberg, managing partner of Indigo Capital in N. Y Town. “We are terribly excited about the area,” announced Woldenberg, who concentrates on Mexico, Central America and Bolivia. “There are some challenges in social, commercial and political issues, but in the main we see plenty of bright spots.”
Latin American economies might not be growing at the same impressive rate as China and India, Woldenberg mentioned but the economies nevertheless “have their act together in basic ways.” Nations in the region are identified by youthful labor forces and low levels of debt, he said. “Compared to the West, they have the aptitude for growth…. The venture capital industry in this part of the planet is in an exceedingly incipient stage”, as reported tagza.com.