Feb 18, 2022
VC in Developing Countries: Supporting the 'Game Changers'
Venture capital may be a valuable instrument for clever Silicon Valley investors to commercialize technology advancements, but can it aid in the battle against poverty or promote social and environmental well-being in developing nations and emerging markets? Investment in early-stage, high-risk firms is a clear example of venture capital's (VC) beneficial effects in advanced economies. The proof is all around us; venture-backed companies formerly produced Skype calls, Google maps, Facebook profiles, iPhones, FedEx deliveries, and Intel chips, among other things.
In the developing world, VC impacts business performance and overall economic, social, and environmental well-being. However, small and medium-sized businesses (SMEs) may not always have access to venture capital financing in these nations. They are too huge for microfinance organizations and too tiny for domestic, commercial banks. They are caught in a significant financial "missing middle." It is widely anticipated that venture capital would help to solve this well-known issue, and data indicated that VCs do indeed contribute to bridging the funding gap. In addition, many entrepreneurs claimed that venture capital backing increased the credibility of their businesses with potential clients, suppliers, workers, lenders, and investors. They claimed that receiving VC support in numerous instances gave them access to commercial loans that were previously out of their reach, which was a significant advantage.
Market Dynamics in Emerging Markets
Many small and medium enterprises (SMEs) operate in developing nations, also known as emerging markets. But the overall risk and growth finance market available to these types of enterprises is still tiny and fragmented. SME firms cover a wide range of industries and companies, from those that are reasonably stable and looking to grow to those that use innovation to disrupt an established industry. Given how difficult these enterprises can obtain outside funding, even debt, the continuance of an "equity financing gap" is not surprising. However, unlike in developed countries, where new and creative businesses are more likely to be impacted by the equity-financing gap, this issue also affects larger and more established businesses in developing nations.
In many developing nations, the market for SMEs, PEs, and VCs only accounts for a small portion of total fund investment. Beyond merely limiting enterprises' access to financing, the absence of Private Equity (PE) and VC for SMEs in developing economies have other consequences. Investors contribute knowledge and expertise to the businesses in which they invest in addition to finance. They actively manage their investments by instituting strict management procedures and improved governance frameworks. These measures give businesses the skills to improve vital components of business performance like governance, financial accounting, market access, and other operational areas through active engagement on the board of directors or in conjunction with management. The great majority of PE businesses in these countries focus on larger or more established enterprises, even though increasing PE investment flows could contribute to the creation, acceleration, and expansion of SME growth in developing economies. There are numerous causes for this occurrence. In many emerging nations, PE is a relatively new form of finance, and investors have plenty of options to invest in big, established businesses with reduced risk profiles.
Second, due to higher execution risk, transaction costs, and information barriers, investing in SMEs is more difficult than investing in established businesses. Finally, even if these markets have a rising skill pool for investment management, only a limited number of people are qualified to run PEFs. Considering the potential magnitude of these markets, this indicates that the entire pool of PE firms is still rather small. In other words, the fund management sector in emerging market countries is still in its infancy, even though the number of funds and fund managers is growing.
VC Firms: Important Driver of Economy
The venture capital industry has experienced substantial growth in the last few years. The financial market's most active sector right now is venture capital. Professional investors known as venture capitalists specialize in providing financing to startups and developing creative, young companies that strategically assist corporate growth. To create excellent businesses with the potential to become important economic contributors,venture capitalists India are long-term investors who actively work with entrepreneurial management teams and take a hands-on approach to all their investments. To optimize their profit and return, venture capitalists enter and depart the market every 5-7 years. For new businesses, venture money is a crucial source of equity. To engage in high-risk, high-return ventures that cannot obtain funding through conventional channels like banks and capital markets, venture capitalists gather financial resources from high-net-worth individuals, pension funds, corporate insurance firms, etc. The venture capital market has boomed, playing an incredible role in the country's economy. In addition to providing financial resources, venture capitalists offer the entrepreneur advice on formalizing his ideas into a workable company endeavor that can use current resources or import new technologies.
Inevitably, venture capital organizations contribute to the economy's growth in developing countries, including China, India, and others, by encouraging innovation and funding the creation of new goods and technology. They enhance the capacity for taking in information, boosting the amount of knowledge, abilities, and business savvy earned through the process of creating new companies and solutions. They also offer a variety of employment alternatives and empower entrepreneurs may create jobs. This leads to achieving financial success evaluated by market performance, sales growth, profitability, survival, and return on investment.
Most of the world's most significant businesses and those seen as "game changers" are supported by venture capital (VC). By putting them on the map, a short glance can show the regional cluster of these businesses and provide an idea of the GDP and overall economic standing of those areas. However, it was shown in a research article that was released a decade ago that venture capital firms typically have a regional concentration for a variety of factors, including capital capacity and laws. It is for this reason that the economic impact is primarily focused on a few industries and geographical areas. Considering the world today, which is evolving, the worldwide trend of digital transformation and the 2030 Vision shows that numerous venture capitalists have grown and formed, especially in developing regions.In addition to their ability to make investments, venture capitalists are distinguished by their ability to build networks and trustworthy relationships across geographical boundaries. Venture capital firms would be a lot more like other investors without the emergence of synergy. These synergies aid in regional expansion and boost venture capital's positioning. We may now respond to the final query, "Would the role of venture capitalists still be crucial in the new normal period? The answer is affirmative. Actually, investment-backed startups and companies are more fortunate because they have their VCs' direct and indirect help during crises like the Covid-19 outbreak. And those who maintain healthy ties with their VCs would act as 'game changers in the future also.