How Alumni Ventures Will Build Our Emerging Markets Fund
May 21, 2021 | Scott Murphy
Our Emerging Markets Fund will provide individuals with a portfolio of ~20-30 promising venture-backed companies diversified by stage, sector, geography, and lead investor. The fund will allow investors to further diversify their venture allocation by geography and add startups from emerging venture ecosystems to their portfolio. Below is an edited conversation from a recent roundtable hosted by members of our investing teams. They discuss the opportunities Alumni Ventures sees in emerging markets.
Larry Warnock is Managing Partner of Ring Ventures, for the Texas A&M community. Larry has been in and around the VC industry since 1984. His career has taken him to Silicon Valley, Colorado, and now Texas. He is based in Alumni Ventures’ Austin, Texas, office.
What can an investor expect from the Emerging Market Fund portfolio?
Larry: When you make an investment in most Alumni Ventures funds, we’ll build a portfolio targeting ~20-30 venture-backed companies diversified across sector, stage, and geography. Our Emerging Market Fund is targeting investments based in international and U.S. emerging markets. The focus of this fund is to look for great opportunities outside of Silicon Valley and the New York-Boston corridor. Some of those will be in markets like the central U.S., Florida, and Seattle, and some will be based in overseas markets. The minimum to invest is $25,000, and we expect to build the portfolio over the next 12 to 18 months, with ~20% of capital reserved for follow-on opportunities.
Why did Alumni Ventures establish this fund?
Larry: We believe the next 50 years will be the story of venture capital diffusion. Our thesis for this fund is to give investors specific opportunities outside of traditional venture hubs. I read an article not too long ago that said, “Silicon Valley is now everywhere.” We’re looking at investment opportunities in growing ecosystems, with companies that are leapfrogging current technology and infrastructure trends. We also believe that by investing in emerging markets, we can get a discount. The pricing of these rounds is typically more attractive than opportunities in Silicon Valley and in the East Coast Corridor.
What opportunities are in emerging markets?
Larry: A majority of the world’s top startup ecosystems are outside of North America. This was not the case even 10 years ago. Venture capital and entrepreneurialism has truly become global. The COVID pandemic, tragic as it is, created an opportunity in a wide geographically dispersed market. Among the top 10 global startup ecosystems, Beijing is fourth, Tel Aviv-Jerusalem is sixth, Shanghai is eighth, and Stockholm, Sweden is tenth.
Some researchers predict that less than 20% of VC opportunities over the next several years will come from the Bay Area. That’s why Alumni Ventures has already opened an office in Chicago and in Austin, where I’m located. We’ve seen this trend coming, and we’re prepared for it.
Isaac Schlecht is a Principal at Castor Ventures, for the MIT community. His background is primarily in finance but also includes political campaigns and community organizing. Originally from Delaware, Isaac has developed an appreciation for emerging markets across the U.S.
Beyond geography, what are the key ingredients that make an emerging market?
Isaac: I and my colleague Krithika Kumar wrote white papers that explore international and domestic emerging markets, respectively, which I encourage our community to read for more details. There are three key interconnected ingredients that we see across deal flow and industry.
- Human capital is the most important factor in determining which companies have the potential to grow and which markets are able to fuel those companies. Human capital doesn’t just mean founders, employees, CEOs, and board members, but also the stakeholders and communities that are supporting the business.
- Financial capital is essential for companies in emerging markets, particularly at early stages. That often means support from local institutions and individuals coming together to form a network.
- Institutional capital across political, social, and intellectual forums. It’s very important to have supportive local governments that enact policies promoting innovation, inclusivity, and immigration to foster high-growth businesses. The social element is also crucial for startups. Informal networks with fellow entrepreneurs, potential mentors, and customers can help startups transmute their ideas into a practical reality. The last ingredient is intellectual capital, specifically major research universities. Connecting academic and entrepreneurial ecosystems is incredibly important to Alumni Ventures.
Erik Hammer is a Senior Principal at Purple Arch Ventures, for the Northwestern community. At Alumni Ventures, Erik has led investments in a variety of emerging markets, including Chicago, Texas, Wisconsin, Europe, Israel, and Seattle. He is based in Alumni Ventures’ Chicago office.
How does Alumni Ventures source emerging market opportunities?
Erik: Emerging markets are unique, and venture is still a local business in some respects. It comes down to relationships with the right people and building trust in a lot of these markets. Having people on the ground in the Midwest and Texas is essential. At the same time, we can spend time in key markets virtually. That can be virtual pitch days or building relationships with accelerators in markets like Columbus or Atlanta or Seattle, where founders have an opportunity to connect with investors.
How is Alumni Ventures a value-add investor for emerging market companies?
Erik: Our brand carries a lot of value. Having one of the most active U.S. venture firms on their cap table is helpful for companies as they hire and scale. Additionally, we can leverage our worldwide network of over 550,000 community members and subscribers to assist them. A lot of the overseas companies are trying to come to the U.S. in some way or another and we’re able to help. For example, we invested in an Israel-based company in the video game space that’s opening a major business development office in New York. We helped them source candidates to hire and facilitated intros with a variety of potential U.S. partners.
Krithika Kumar is a Principal at Strawberry Creek Ventures, for the UC Berkeley community. She began her career as a scientist before transitioning to venture capital. Krithika grew up in India, which she believes helps her bring a personal perspective to her investments in emerging markets.
Why is this emerging market trend happening?
Krithika: Over the last several years, there have been advances in technology that have become accessible to countries in emerging markets. That accessibility has led to two key trends. One is this huge digital consumer market. Second, innovation can now take root anywhere. Silicon Valley and other established markets have sent this message that startups can really change the world. So when you move to these emerging markets, there’s a very palpable motivation to apply this message locally and make meaningful and systemic changes within those local communities. Combine all of this, and you have a great new dynamic.
What does the future hold for emerging markets?
Krithika: Almost every country in the world now has some sort of startup scene. But each ecosystem is in different stages of development, with different cultural values. In some countries like India, Brazil, or China, these are well-established markets, and there’s already been this virtuous cycle that’s been set up so they can become real powerhouses of innovation. On the other hand, we’re just beginning to scratch the surface of some smaller ecosystems.
Two decades ago, India and China were only a blip on our radar. We weren’t thinking of them as these massive, exponentially growing markets. Today, some countries in Southeast Asia or Africa may not seem like the biggest markets out there, but they are growing. I think the future is in emerging markets.
Why invest in emerging markets now?
Krithika: Three reasons.
- Roughly 85% of the world’s population lives in countries that are considered emerging markets. They represent nearly 60% of the global GDP.
- And as Larry noted, COVID has had an impact, accelerating digitalization, showing that many services can actually be delivered digitally.
- Then, as I said before, the success of Silicon Valley startups has become so public. There’s a framework that’s already been set up to be able to build it for one’s local community.
With all of this combined, there’s a legitimate reason for governments and individuals to believe that startups can drive economies, innovation, and employment. That’s why for us as venture capitalists — and as the world really — it’s a great time to invest in emerging markets.