Sectors, Markets, and VC Landscape Across North America, Africa, Europe, and Asia

Alex Lazarow, Investment Director @ Cathay Innovation; Lylan Masterman, General Partner @ White Star Capital; Banafsheh Fathieh, Principal @ Naspers; Rebecca Szkutak, Reporter @ Venture Capital Journal

Ascent Conference 2019

Rebecca Szkutak [00:00:07] My name is Rebecca Szkutak and I am a reporter with the Venture Capital Journal for those who don’t know us. We are a trade finance publication focused on the VC market, sort of at the nexus of our LPs and GPS Me. Today, we’re going to be talking a little bit about sectors, markets in the VC landscape across many different regions such as Europe, Asia, Africa. I know from my personal background this is a really interesting topic for me because I actually used to cover hyper local markets within the US and going from a market like Boston to a market like Colorado. The differences there were vast. So thinking about blowing that up to the global scale, this is definitely an interesting topic and definitely there’s a lot of information here to go off of. So I thought it would be best for the panels to introduce themselves, so be if you want to get started.

Banafsheh Fathieh [00:01:01] Sure. Hi, my name is B Fathieh . I lead early stage investments for Process Ventures formerly known as Naspers Ventures. We are one of the largest tech investors in the world, a public company listed on the Euronext with roughly about one hundred thirty five dollars billion of market cap. I am responsible for checks between about a million dollars all the way up to about seventy five million dollars, which I realize is not early stage for, I guess by other definitions. So things square at least series A through but serious D companies. My mandate is global, so I cover, um, every bit of the globe, with the exception of India where we have a dedicated team.

Alex Lazarow [00:01:43] Good afternoon, I’m Alex Lazarow, I work with a fund called Cathay Innovation. Cathay’s the name of China and Markopoulos. It’s his idea of East meets West where 500 million euro fine Paris based. We’ve asked a third of it in Asia, out of Shanghai, Beijing. And we’re launching a Singapore office, a third party, Europe, out of Paris and Munich. And a third is this notion, Restoril, mostly North America, which we did out of San Francisco. We’re affiliated with private equity fund called Cathay Capital, which is about 300 management and eight offices around the world. About 40 percent of our capital comes from global corporates. So companies like Total Michelin, BNP Paribas, among others. We’re not a corporate fund, but we really think that value alignment is helpful as we look for companies and help scale them across geographies. And a big part of our of our model is this idea of looking for global category leaders and helping them scale across geographies. So excited about the discussion today.

Lylan Masterman [00:02:34] My name is Lylan Masterman, I’m with White Star Capital, I’m here in the New York office and we’re one of the most international firms at the relatively early stage. We lead and co-lead series, a series biz with offices in New York, Toronto, Montreal, London, Paris, Tokyo, Hong Kong. And so we invest internationally. We help our companies when it’s time, when it’s the correct time to scale internationally, to access capital internationally and to sometimes get acquired internationally.

Rebecca Szkutak [00:03:06] Well, I think it would be good to get started. I know, Lylan, you and I previously talked about how, despite some of these markets being vastly different, when you look at things such as currency, legal structure or just general business practices, that there are some areas of innovation that really do sort of catch on everywhere, almost like the home run idea. It works here. It kind of works everywhere. Everyone sees it as a potential opportunity. So sort of what industries and sectors have you seen that happen in or do you think that may happen in the future?

Lylan Masterman [00:03:38] Just yesterday, our company tIere out of Germany announced a 60 million dollar loan and it’s in the scooter space. Scooter is it’s one of those industries that has really succeeded internationally, not in Manhattan. And I think many of us are thankful that there aren’t scooters, the sidewalks here, but ultimately in many, many cities across the world, it is a helpful solution. And it’s a beautiful example, be it consumer, be it enterprise. First, you can have a product succeed across the world, either with one company or with multiple companies per geography.

Alex Lazarow [00:04:12] I might just add one additional thought to that, and I think Souters a great example around around the mobility spaces. I think one of the things that’s changed over the last decade is more and more ideas in two ways are one originating increasingly outside the valley and around the world, and two, I think are getting modified and improved over time. And so in the mobility space, I think ride sharing is an interesting example. You say, look, there’s a couple of the early companies that started in the US. Those models actually got adapted elsewhere in the world, I think of what Grabbe and Kojak are doing in Southeast Asia, which is a model that isn’t just about ride ride sharing. It’s also about it started off with food delivery, but also like massages and things like that. That model also borrowed from what was happening in China with with the super apps and the wallets. And we’re actually seeing that come back to the US. Uber actually just recently announced that they want to become a super app and have copied many of the features that are happening elsewhere. And so we’re seeing more and more of these ideas that are emanating from elsewhere and also improving as they get replicated and adapted in different ecosystems.

Rebecca Szkutak [00:05:21] Definitely and sort of following up on that, there are definitely some sectors that maybe really attractive in certain regions, but maybe not in others. What are those kind of industries and sectors you’re finding are particularly notable as far as opportunities go in one region and maybe some that are not as attractive when you go to a different region?

Banafsheh Fathieh [00:05:42] Sure. I’ll I’ll chime in here. So I think it’s one of the really interesting things that’s happened, especially in the emerging markets, which is sort of our bread and butter. Um, yeah. You’ve had this consolidation of consumer demand because it’s it’s becoming increasingly digitized with mobile phones. But the infrastructure layer is in a lot of these countries missing. So if you go to, say, Southeast Asia or if you go to India, there are some really novel ways that people are coming up with sort of e-commerce worlds or they’re coming up with really different logistic layers or different ways of effectively replicating what the West has taken two to three decades to lay down so decentralized logistics and decentralized or peer-to-peer forms of drop shipping or again, the rails for which you satisfy a lot of the consumer demand is vastly different. So in the emerging markets, again, you’re not going to have very sort of you’re not going to have a lot of income at risk rates. So you’re not going to have a FedEx or UPS that you’re competing with. You’re going to have a really interesting new models that, again, on the on the surface, the consumer demand, I think is fairly homogenous for some services like food delivery, persay or ecommerce. These things are fairly universal in their demand. But again, the rails look fantastically different in some of these shows versus, say, the US or the West.

Alex Lazarow [00:06:59] Yeah, I echo that a lot, we see the same thing, so as a firm, we look at themes globally, but we look very locally into how it’s adapted to one of our investments here in the US Bank of China Bank, which is a bank for the bank that works well, is kind of a digital on the app. We’ve in Africa, where we have a separate fund to be able to do a digital banking platform. You actually need the cash in, cash out network. So the solutions that work there and the same is true in Southeast Asia look very, very different. So it’s this combination of understanding what can work, what are the big trends, but also how how do they actually get put into place locally, given the given the reality, the ecosystem?

Lylan Masterman [00:07:38] Two answers to the first answer is, I don’t believe in rules against investing in companies of a certain geography. And so to use two large companies today as examples, Shopify and Spotify, Shopify, you wouldn’t have thought of Canada as a country to create a company that’s a backbone of commerce. Spotify. You wouldn’t have thought of the Nordics as a country to produce a great music platform. So I don’t believe in any rules against certain verticals. Answer no to five or six or seven years ago. I would answer that question, talking a lot about scalability and in how men in many geographies those cities did not have engineers who had previously worked out of Facebook, Google, Microsoft, et cetera, who knew how to scale software platforms. That’s not so much of an issue today, largely because the platforms allow for scalability much in a much easier way.

Rebecca Szkutak [00:08:31] Definitely, and that kind of leads into another question we are going to talk about regarding scaling and how scaling in these different markets is both different, but also the same. So if you guys want to talk a little bit about how you’re seeing these different trends and scaling across different markets.

Banafsheh Fathieh [00:08:51] It’s tough to answer that because it’s going to sound very handwaving, because it is very sort of Giovinco, I think in Asia where you’ll generally find is uh, uh, especially if you’re going after a platforms there, there is a dynamic of there are there are a handful of funders that get into a bit of a user acquisition war. So sometimes the stakes can be very high. It can be very capital intensive to acquire customers. So you’ll have your two or three category leaders that, um, you know, we saw this in food delivery. We’ve seen it time and time again and e-commerce. So, you know, it becomes a little bit costly to acquire customers because, again, it becomes a bit of a spending war as the scaling issues when it comes to customer customer acquisition in Asia are very different than what you’re going to find a lot of them or what you’re going to find in China, where you’re going to find in India. So it’s very tough to answer that without being very handwaving, because, again, there are massive nuances. I will layer on on top of that, that these geos don’t don’t share regulatory. Right. So there’s a lot of risk there in terms of how you scale a business on the consumer side, a little less so on the B2B side, a lot more so. So some of the regimes are not consistent. So you have to kind of layer that on as you’re thinking about sort of operate operationally, expanding. The last thing I will say is that the mistake a lot of people make is they simplify the world, right? So they’ll say Southeast Asia, Southeast Asia is not a country and each of them are very, very different. So do you go to Indonesia? You’re going to have a very, you know, diametrically different on the consumer side demand then you are going to have in Malaysia and Vietnam. And so, you know, each of these geos requires a very specific strategy. It’s just I would say there are certain areas where the parallels are a little bit more in sync with a lot. And there are a few markets where you can look at and say, OK, the strategy is going to be roughly the same. But, you know, India is very, very different than Indonesia. It’s very different than Malaysia. And, you know, these are countries that, you know, know, sets of populations actually share even a common language. Right. So localization becomes a huge issue. So lots and lots of challenges. I don’t know how to answer that question in a genuine way without going into the massive details of each year.

Alex Lazarow [00:11:12] I think the question is fascinating, and I agree with you, I think has a lot of nuances to it outside of work, I’ve been working on a book called Out Innovate How Global Entrepreneurs from Detroit are Reinventing the Rules of Silicon Valley. And it treats a little bit this question around. Look, everything we know about startup best practice is centered in a time and place, Silicon Valley and today. And I think increasingly we’re seeing entrepreneurs around the world reinventing startup best practices and meaningful ways. And one of these one of these is how do you actually build scalable companies and what are what are the approaches? I’ll mention two ideas that I think are interesting that are being demonstrated in a meaningful way around the world. One is in the U.S., companies typically build locally for the US market, start in one place, have one office. What we’re seeing around the world is actually companies are born global from the beginning and they’re building business models that can be replicated across different markets and geographies. They build that into the culture of their organization. They build into the product and they built it in the way they structure everything across the business. And I think that’s one. And I think the related point is actually, how do you scale teams? And one of the things that we’re seeing a lot of is the rise of distributed teams and it’s becoming in vogue in the valley. And certainly the conversation around Amazon and their headquarter to last year was a big discussion. But I think that misses the point that for a long time, startups outside the valley and around the world were by necessity tapping talent from everywhere and building it. And now and that’s ranges from just having multiple headquarters all the way to remote. But the best practice of that, I think, is actually already being built in places around the world that have had to do this for a long time.

Lylan Masterman [00:12:54] When you look at the need to internationalize, uh, for startups in various countries, there is a very strong correlation with the population or the GDP of the country. Right. So, uh, take a smaller countries like Canada, 10 percent the size of the US. They don’t have many startups that only focus on Canada. Move up a little bit in population France, it’s still hard to have a product only for France. It’s a good place to start. Then you move up higher up and you’re like Japan. A Japanese startup can really build a product for the Japanese market and scale it quite a bit before they need to go elsewhere, and the US is much bigger than that. So there’s a very strong correlation there. Then you have the companies that really choose the hyperscale. Uh, I slack right now, I believe, on one third of their revenues comes from outside the US. One of our companies from Paris, Miro’s the name of the company. They just recently raised the largest VC round in the history of France, 230 million all around. It’s a company that has over 150 employees in New York City as a Parisian company. So if a company’s not American or Chinese or one or two other countries and they want the hyperscale, then international scale is really the only way to go about it.

Rebecca Szkutak [00:14:09] Definitely, and I know, Alex, you bring up a good point regarding how entrepreneurship just looks different across the world, and I know you talked about it a little bit already, but maybe if you want to dove a little more into that as well as if any of you have any thoughts on that.

Banafsheh Fathieh [00:14:24] Yeah, sure looks very different. I am often. So we have portfolio companies all around the world. But I’ll share one one example. We backed a company recently, Lithuania, based in Eastern Europe. And I think one of the things that you find with places in the world where capital is scarce is just the amount, the sheer amount that that an entrepreneur can achieve with very little money. So I think that there is a level of creativity and capital scar’s environments with regards to bootstrapping that. I think it constantly surprises me. So, you know, you’ll have teams that are extremely capital efficient. You will have teams that have managed to find talent in places where you would argue that probably that talent is scarce as well. So I think, again, it’s a level of creativity that’s sometimes in a place where capital is very abundant. You don’t see as much because it’s need based. Right. They have to kind of be creative with what how they how they penetrate a market. They have to be creative with their hiring. They have to be creative with the way that they incentivize their teams. So I think that always sort of catches me by surprise. And it’s very as an investor, there’s a great surprise or you love to find those types of teams that have been able to bootstrap and and build a pretty incredible business. But again, this is another where the character characteristics are pretty different. But if I were to go by Geo, I think you in Southeast Asia, that scrappiness is still there, even though you’re starting to see a little bit more capital flow into the ecosystem. India recently has had sort of a lot of repeat entrepreneurs because of some early successes in the last decade. So you find a lot of sort of serial entrepreneurs are starting. Either they’re coming out of, let’s say, a Flipkart or some other success story. And they’re going on to start really great businesses, lots of capital in that ecosystem currently. So it remains to be seen what what they end up doing with that. LatAm has its struggles, and I think most of that is around sort of political and economic economic activity in the region. It’s tough to be a profitable business when your currency is devaluing two thirds over the course of a year or two. So you have a lot of teams that actually have achieved pretty great growth and success. But if when you currency adjusted, it’s tough to get over the hump. So you have entrepreneurs, again, that are getting creative actually with the way that they manage money. Right. So instead of, let’s say, keeping your money in the Argentine peso, you find creative ways to either do it in cryptocurrency or you start to build different kinds of businesses. So there is a lot of creativity around how to get around this economic issue that seems to be kind of plaguing the region a little bit. Um, that sort of again, I would say if I were to put geos and again be handwaving with the characteristics I see, but overarching, I would say, statement that I made, because I personally find that international teams tend to be, um, they tend to be able to build a lot more with the amount of money that you end up giving them vis a vis, let’s say, some places in the world where, again, capital tends to be pretty abundant.

Alex Lazarow [00:17:20] Yeah, I totally echo the perspective around the sustainability point. We we had a company in my my previous firm that was had a big chunk of their operations in Zambia. And, uh, because of a decrease in demand of copper, the Zambian kwacha actually plummeted by 70, 80 percent. So a profitable company, though, scaling really rapidly all of a sudden was a massive cash crunch. And so I think the dynamics of operating in markets are can’t be understated in a in a very generalized way with with a lot of nuance locally. That’s important. But actually, the dynamic you talked around, um, the bootstrapping piece, I think is really interesting. I think in the Valley we have the luxury of talking about things like scaling, which I think make a lot of sense for a very particular type of business and market when there’s a lot of capital. And I think the default that’s happening in a lot of other places is a different reality. And it’s one where there isn’t as much capital and people think about sustainability and they think about resiliency and survival much earlier in the journey than they might otherwise in the valley. And I actually think that’s something that that’s actually really important. Reminder, uh, is important lessons around the world. But I think it’s really important reminder for us now. We’re at a particular moment in the cycle where things are happening. But I remember the good times conversation and I actually think some of these lessons are really valuable. And I think this idea of like being very sustainable and resilient, um, can actually be a really important lesson for all of us.

Lylan Masterman [00:18:51] The number of countries that have a scarcity of capital is decreasing largely because of government intervention. So if you look at the government of South Korea, they’ve injected a lot of capital into VC firms to invest into more South Korean startups. The Canadian government has been doing the same for around a decade. The BP and France European Investment Fund across all of Europe. And there are many, many other jurisdictions that have similar programs. And so that changes the dynamic. Now, where it’s really beautiful is when you still have these scrappy entrepreneurs who are accustomed to doing things without much capital, but then they’re able to scale because capital is there when they prove things. Those are the companies that can really flourish from unexpected geographies.

Banafsheh Fathieh [00:19:33] And to just just, I guess, add on to that, something that’s very beautiful for for us is, you know, we’re seeing a widening of the base. So one of the issues we historically have seen in venture globally is that, you know, there just weren’t honestly that the deal count was very low. Right. So you would go to a guy and say, I’m going to go into Southeast Asia and great, your universe is 50 companies. And that that that wasn’t a very exciting funnel for most venture capitalists. But the dynamic that you just spoke about, government, whether it’s governments, whether it’s, you know, more people being sort of invested in B.C. generally because of some of the yield history, it’s creating a wider base. And so what’s happening is you’re having a few more companies be able to actually graduate past that, a series a series B hump and for, you know, growth investors like us, that that’s really exciting because for the first time you’re having, you know, at least a deal count that it can be exciting and the number of companies start to kind of warrant some real attention.

Rebecca Szkutak [00:20:34] And also, just as a note for the audience, I do have a couple of questions prepared, but if anyone in the audience does have a question, feel free to flag me down. Definitely always great to get up here, right here.

Audience [00:20:46] So you can share internationally from your perspective a combination of innovation, opportunity, market size. Where do you see maybe perhaps top three geographic.

Banafsheh Fathieh [00:21:02] Yes, I can tell you, we are very long India, that’s probably the first. And again, it’s not a big secret. We’ve invested quite a bit of money in the last I think we’re now around sort of the two to three billion dollar mark in the last couple of years. So the reasons we like India, you know, we view it as sort of China 10 years ago. And so if you kind of look at the demographics, you have a billion people in India, but you really have 50 million consumers. Right. So it’s a you know, the the the willingness to buy or the ability to buy is is limited, but it’s changing. And we’re finally kind of at an inflection point where we can see a real digitization of of the entire economy. And there’s like I said, one of the issues that historically was kind of present in some of these emerging markets was that there were just not enough entrepreneurs who had gone through scaling businesses. So there was a dearth of talent. And so what you’re seeing with India is you had sort of a first wave of platforms that emerged, let’s say, about five to 10 years ago. And those entrepreneurs are going on to build really exciting businesses. So, you know, we’ve invested very heavily in education in India. One of the I guess one of the wonderful stats, I guess, about India is that, you know, it has a massive access to education problem. And we think that that’s something that tech can solve. We have invested really heavily and social commerce platforms like Michaux, which enable women to be able to earn money through e-commerce platforms. So there’s there’s lots of really exciting things that are happening in India that make us very long on the go. Second for us to Southeast Asia, I think I’ve talked about this are really, really interesting things happening, whether it’s trends that are bleeding over from India or China. You’re seeing a lot of some of the same types of companies or themes be replicated by local entrepreneurs. So we broadly see a lot of sort of social e-commerce. This is not something that happens in the West very much. But there is lots of models like India and China that are really popularizing this concept of social commerce. So you have a lot of really interesting things happening in Southeast Asia as well. We’re really excited about, you know, some of the demo changes there, again, against Southeast Asia as a region. It is not a country. So there are there are some countries that we are more excited about versus others. So I would say those are probably the top two geos in terms of things that are front and center for us. Having said that, you know, process formerly known as Naspers, where in 90 countries so we’ve you know, our long term thesis has always been that we back local entrepreneurs and we think a lot of the things that we see around the world are things that can translate to other markets. And so we’re always looking for entrepreneurs are who are looking to solve local problems. And so we look at the macro, but it’s also about sort of finding the talent that ultimately is solving a real problem for their community.

Alex Lazarow [00:24:01] I echo, by the way, some of the geographic is a great example, by the way, of a company we were talking about earlier emanating in China is now actually the last couple of wiki classes, had replicators in Latin America and Africa, et cetera. And so this really interesting model of a company that scaled that really fast, Southeast Asia, for me personally, is also an area. I think that’s interesting because we’re seeing in a little bit of a it’s a little bit of a region where we’re seeing the models that have scaled in China intersecting with the models they’re scaling in the West and the biggest Chinese companies, investors investing in many of them, as well as a bunch of Western born entrepreneurs, et cetera. And so it’s kind of for me as an area of a really strong interest to see how how these models are colliding and how totally different business ideas are getting created and inspiring. So for me, that’s one region of interest.

Lylan Masterman [00:24:51] While I completely agree with those areas, there’s also a lot of capital from China and elsewhere getting infused. And sometimes we like to appreciate the countries where there is less competition, but still really great companies. Six years ago, we made Canada one of our three offices because we believed that there was great potential in Canada. Now in twenty nineteen, everyone says, of course, most VC firms out in New York do a trip a month up to Toronto. Waterloo, exactly. For that reason. A couple of years ago, we opened an office in France, in Paris, for the exact same reason, because we’re seeing extreme growth, will France be as big of a startup ecosystem as India just by population alone? I don’t think the arithmetic computes there, but it still creates an incredible opportunity for the entrepreneurs and for the investors to find truly global change in companies.

Rebecca Szkutak [00:25:41] OK, so I think that’s it for us on time, if anyone has any other questions, I’m sure the panelists would be happy to answer after we wrap up here. But if you guys want to join me and thanking the panelists for their time.