Startup Accelerators Have Become More Popular in Emerging Markets — and They’re Working10 October, 2017 / Articles
For decades, we have heard that emerging markets are poised for huge growth that will yield even greater prosperity. But a long list of obstacles always seems to be getting in the way of realizing this potential. Startup accelerator programs have been touted as one path to faster progress. Much like their famed Silicon Valley counterparts, emerging market accelerators aim to boost startups’ potential for raising growth capital. We wanted to examine whether the boost that accelerators give in emerging market contexts is different from similar programs in North America or Europe. Our research shows that the effects of acceleration are remarkably similar for entrepreneurs across countries and even continents. Unfortunately, mismatched goals between investors and entrepreneurs as well as a potential cultural bias may both prove to limit the positive effect that accelerators have in emerging market contexts. Regardless, accelerators still have an important role to play that can help position entrepreneurs for success.
When we began collecting data in 2013 to explore differences between startup acceleration in emerging markets and in high-income countries, we expected stark differences. Business environments in most emerging markets are complex and can be difficult for even the most experienced entrepreneur to navigate. So while running any startup is tough, we assumed that launching a new business in Mombasa would be much more difficult than running one in Menlo Park. However, we were surprised to find far fewer differences in the effects of acceleration than we had expected.
Our most recent report with data on over 2,000 ventures from 42 accelerator programs, shows that across country settings, accelerated ventures grow at significantly higher rates compared to ventures that applied but were not accepted into the accelerator program. Surprisingly (to us anyway), the average effects of acceleration on equity and debt raised were nearly identical in emerging market and high-income country contexts.
We were also surprised to find that emerging market ventures are typically older than startups applying to accelerator programs in high-income countries, are earning more revenue, and have hired more employees. Despite this, ventures in high-income countries attract roughly twice as much early stage investment as these promising emerging market ventures. Without acceleration, emerging market ventures are simply not able to attract the investment that is consistent with their underlying promise. And while emerging market accelerators programs are similarly effective at pushing capital into their ventures, acceleration alone is not closing this investment gap.
In interviews, investors in both emerging market and high-income country settings consistently report having more difficulty sourcing quality deals in emerging markets. Nearly all pointed to both the quality of the founding teams and HR risk as important factors — regardless of where the venture is based. However, at least on paper, emerging-market entrepreneurs are just as experienced and committed as high-income country entrepreneurs. In fact, entrepreneurs from emerging-market country contexts typically have the same or higher levels of education, work experience, and prior entrepreneurial experience as their high-income peers at the time of application. Yet, investors still report a lack of commitment and entrepreneurial experience in these entrepreneurs, which they say makes it difficult to invest in some markets compared to others.
Based on these findings, we believe that a main challenge when it comes to spurring early-stage investment in emerging markets may not be the actual quality of entrepreneurs, but perceptions about their quality and potential. Here are some suggestions that might help accelerator programs in those countries to better support these entrepreneurs.
It’s not all about venture funding. Accelerator programs are most successful when they provide the right help to the right people. Our research indicates that many emerging market entrepreneurs prioritize building their skill set or refining their product and marketing strategy over connecting with potential investors. In addition, while they are seeking to grow their businesses (and are investing as much of their own money on average as U.S. entrepreneurs, just over $50,000) they typically seek more modest amounts of outside investment and are not typically working towards an acquisition or IPO.
Accelerators should take the time to understand and align with these entrepreneurs’ needs and recognize that not all startups require venture capital funding right away. The most successful accelerators identify the respective entrepreneur’s specific financing needs rather than assuming that there is one path to success and scale.
When it is about venture funding, hone in on the best matches. When entrepreneurs are ready for investment, accelerators should do the work to make sure the right investors are in the room. They should also ensure that this investor access is more than a cursory pitch. As one entrepreneurship expert suggests, “Pitch sessions might be fun, but curated matchmaking may be more useful.” Accelerators need to understand exactly what investors are looking for and actively match pipeline for them, not just arrange for pitch sessions en masse.
Finding talent is critical. Beyond thoughtful investor introductions, helping entrepreneurs handle hiring and HR is an area where accelerators can be extremely helpful. Accelerators should help start-ups develop a talent strategy alongside their financial strategy. Whether it’s attracting founders or focusing on first hires, it’s important that entrepreneurs have a clear plan to attract and retain the best talent. Organizations like Open Capital Advisors, the Amani Institute, Shortlist, Creative Metier, and Village Capital are all developing tools to address talent issues in emerging markets, and many of those tools are free or open source.