Globalizing Venture Capital

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Globalizing Venture Capital

Venture-capital-backed companies valued at $1 billion or more—often called unicorns -- have changed the fabric of our lives and transformed the way we do business. These firms, concentrated in a few capital-rich and talent-rich cities including Palo Alto, Seattle, London, and Tel Aviv, are a source of inspiration for entrepreneurs and corporate managers around the world. Most of them follow the same playbook: Begin

 with a plan to “disrupt” an existing industry, use injections of capital to grow as rapidly as possible, and tolerate high risk in a rush for market domination.

But that is not the only way to launch a game-changing start-up. Some of the so-called “frontier innovators” are located in developed economies, but many are in emerging economy cities such as Jakarta, Lagos, Nairobi, Guadalajara, and São Paulo. And these entrepreneurs outside tech hubs take a different approach from the one favored in Silicon Valley in order to achieve outsized success.

Start-ups operating amid conditions of relative scarcity, where capital and talent are hard to come by and economic shocks are more likely to occur, face unique pressures. Yet many have become superstars in their own right. Their formula involves a more balanced approach to growth, a focus on solutions to real problems, and investment in their workforce for the long term. These “frontier innovators” offer important lessons for companies of all sizes and in all locations—including Silicon Valley itself.

In Silicon Valley, the quest for growth all too often trumps sustainable unit economics and profitability. It is not unusual for these start-ups to burn through millions of VC dollars each month as they chase ambitious growth targets, often subsidizing user costs to drive acquisition numbers. The hope is that in highly competitive winner-take-all markets, a firm’s revenue will increase exponentially as it dominates its market, and profitability will eventually sneak past zero and then grow rapidly. This strategy works well for start-ups that successfully make it through to the other side: If the number of users takes off, start-ups can indeed become very large, very fast.

But while it is acceptable in Silicon Valley to burn through capital, innovators on the frontier are less likely to tolerate losing money on each customer. It’s not that they aren’t trying to scale—many of these businesses benefit from the same network effects that make Silicon Valley titans so wildly successful. But they tend to avoid the high-risk grow-or-die approach: They focus on growth and profitability, they build resilience into their models, they charge for the value they create from the get-go, and they take a long-term outlook...

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