The Future Is Frontier Startups

Alex Lazarow's book 'Out-Innovate: How Global Entrepreneurs from Delhi to Detroit Are Rewriting the Rules of Silicon Valley' was the perfect followup after reading 'The Prosperity Paradox.' The latter helped me better understand how innovation and entrepreneurship positively impacts economies and how needed it is in emerging and frontier markets. The former showed me practical examples of what that actually looks like and the different "playbook" that entrepreneurs and startups in frontier markets are following. The way you build a startup in an emerging or frontier market is different than the way you would do so in Silicon Valley of course. This sounds obvious, but yet much of the conventional wisdom and touted best practice does pertain specifically to the unique circumstances that SV has created for itself. The same approaches just don't work in many other markets. This has definitely been true with our recruitment work in Nepal and Kenya at CloudFactory. You can't just poach from other tech startups using stock options and bigger salaries.

I expected to learn more about entrepreneurship and innovation in emerging markets from this book. What I didn't expect was the shift in admiration and respect that I would personally experience. For the past 5+ years like many of us, I've admired the fast-scaling tech startups of Silicon Valley. Facebook, Paypal, Instagram, Dropbox, etc. They and their founders seemed cool and awe-inspiring. Zuckerberg, Musk, Thiel, etc. Over the past couple of years though, I've become more disillusioned by the plethora of Valley-based companies going to "disrupt" X market or build a world-changing to-do list app. Many of the startups seem like they're trying to solve problems that don't genuinely exist or are only problems for the wealthy 1%.

The more I've learned about people building startups that are solving real problems and doing so in challenging markets the more impressed I've become. I'm now far more impressed by entrepreneurs in LATAM, EMEA, and Asia than most in Silicon Valley. I'm not saying there aren't great entrepreneurs and meaningful startups in the Bay Area. There are. It's just a bit of a bubble that isn't like the rest of the world where most of us live. I'm now more impressed and interested in founders like: Fadi Ghandour (Aramex / Wamda Capital), Timbo Drayson (OkHi), Xavier Helgesen (Zola Electric), Deepak Garg & Gazal Kalra (Rivigo), David Vélez (Nubank), Sacha Poignonnec (Jumia), Inanc Balci (Lazada), Nadiem Makarim (Gojek), Ben Gleason & Thiago Alvarez (Guiabolso), Idriss Al Rifai & Joy Ajlouny (fetchr), Mudassir Sheikha & Karl Magnus Olsson (Careem), and so many others.

Most of the below content is directly from the book. I've only made a few additional comments. My goal is to give you a taste of how important and transformative this book is so that you buy it and read it yourself.

The Future Is at the Frontier

1. Innovation Is Global
2. A New Model for Innovation Has Emerged
3. It's a Playbook, Not a Rule Book
4. Don't Copy Silicon Valley
5. Silicon Valley Needs a Refresh.

Principles for Entrepreneurship in Frontier Markets

Create: Create Rather Than Disrupt

3 Things Creators Do Simultaneously

1. Offer a product or service that solves an unserved, acute pain point in the formal economy. Where there are existing informal, unlicensed, or unofficial alternatives, creators bring legitimacy and formality.
2. Offer a solution for the mass market.
3. Focus on game-changing innovations that fundamentally rethink a market or sector. Technology is often an enabler, but it is accompanied by new ways of structuring the business, working with customers, or operating.

The reality is that building a startup, any startup, is extremely hard and takes a long time. If you're going to work that hard, for a large portion of your life you might as well build something meaningful. Or at least try to.

Foster the Full Stack: Don't Just Rely Only on Software

Frontier Innovators often need to construct the "vertical" full stack themselves--developing both the ultimate product or services and the enabling infrastructure that underpins it. Full stack isn't always vertical. Often startups build the "horizontal" full stack--offering a wider range of products and services than their Silicon Valley equivalents in order to create an ecosystem.

Raise a Camel: Build for Sustainability and Resilience

Frontier Innovators manage costs and charge for the value they create from the get go.

I am building a business, not a hobby. Businesses make revenues, hobbies don't. -Mike Evans (Grubhub)

They also ingest less capital and only on their own terms. They diversify with geo or product mix. They focus on sustainability over growth-at-all-costs. #1 strategy for survival.

Cross-Pollinate: Connect Ideas and Networks from around the World

Cross-pollinators access the innovation supply chain. Cross-pollinators tap scarce resources. Immigrants are the ultimate cross-pollinators.

Be Born Global: Target the World from Day One

Born global startups can often outcompete single-market-only players. They can rely on profits from some markets to concentrate resources to fight in the most-competitive markets. It doesn't work for everything though.

3 Drivers to Dominate Markets Globally

1. Nature of the Network Effects (Global vs Local/Regional)
2. Resource Intensity (Global: Resource Intensive vs Local: Asset Light)
3. Local Complexities

If the decision is to be born global, then a few strategies are essential for success. This includes prioritising and then staging expansion, developing a product that localises easily, and building an organisation that functions across markets.

Establish a Distributed Team: Tap Talent from across the Globe

Being distributed is a key strategy.

Advantages of Distributed Structures

• Drawing on a Diverse Talent Pool
• Managing Labor Cost
• Being More Integrated, Not Less
• Training to Expand Markets

Effectively Building a Distributed Organisation

• Hire for Distributed Teams
• Incentivise Distribution
• Reinvent Processes & Culture
• Structure Integration
• Invest in Technology

Build A-Teams: Don't Hire Just A-Players

Availability of trained and experienced talent is a near-universal pain point for Frontier Innovators.

Strategies to Build and Scale Top Teams

• Test Candidates for Behaviour and Capabilities
• Build the Candidate Pipeline
• Leverage Global Distributed Options
• Take a Growth Mindset to Retention and Training
• Think Critically about Compensation and Perks

Train to Be a Multi-Mission Athlete: Combine Impact and Profit-Based Goals

Entrepreneurs in emerging markets are more likely to operate in sectors that include agriculture, energy, education, and financial services.

These are problems to solve that really matter. As much as possible these entrepreneurs tie impact to a business model, not as an add-on. It's core to who they are and how they operate. They focus on measuring impact and align impact and profitability. They don't see a forced choose between the two.

Manage Risk: Foster Trust - Don't Just "Move Fast and Break Things"

Frontier Innovators create different products for different customers. They choose acceptable risks and build a culture of risk management. They consider negative externalities and usually choose to help make the law rather than break the law. So much good is at stake for their markets, so they have to manage risk effectively.

Reinvent Finances: Develop New Venture Models for Tougher Ecosystems

Estimates suggest that after fees, half of all venture capital (VC) firms don't return their capital, and only 5% return more than 3X the capital (equivalent of 12% annualised return over 10 years).

Frontier VCs have a lower likelihood of outsized unicorn-level success, but also a lower likelihood of failure, since they are building profitable and sustainable businesses.

A few strategies being used to finance frontier ventures are syndication (reduces risk) and evergreen funds. An evergreen fund has no fixed timeline to return capital to limited partners (LPs) and continues to reinvest as profits come back. Naspers is an example of this. They're publicly traded.

There are also corporate investors getting involved. Facebook recently setup a fund. HubSpot has one. Quite a few large tech companies have venture funds. Impact investing is another strategy that is and will continue to help get more capital to Frontier Innovators. Impact investing is investment that looks for more than only financial returns. Impact investors usually seek a financial return and some type of additional impact (social, environmental, etc). Some non-traditional investment structures at the frontier that are being employed is revenue share agreements (no equity taken) and crowdfunding.

Lay the Foundation: Support the Next Generation of Entrepreneurs

To help build their respective entrepreneurial ecosystems, many Frontier Innovators are teaching entrepreneurship through Entrepreneur-In-Residence (EIR) Programs that incubate and spinout startups. Another key strategy is to create a physical space to build culture and partnerships. A great example of this is iHub in Nairobi started by Erik Hersman. Entrepreneur First is another example started by Matt Clifford and operating in multiple emerging markets. Mentorship is another huge piece of the puzzle. Endeavor started by Linda Rottenberg and Peter Kellner is making a large contribution in this area.

The first wave of successful entrepreneurs or "older siblings" can also help with setting standards and creating regulation through industry associations and working with government officials.

Success enables exponential success.

The most impressive example of this I've heard is Fadi Ghandour. He founded Aramex and has advised and invested in many other Middle East success stories: Maktoob, Souq, Careem.

3-5 older siblings bring companies to exit, depending on the size of the market. One critical success can easily be explained away as an exception. A few successes from the ecosystem demonstrates repeatability and thus increases the relevance and power of the role models. The power of capital and people lies in networks. It is lower risk to relocate somewhere if there are many successful tech companies.

Next Steps

If you don't have time to read the full book, at the very least read this summary article from Alex Lazarow called: 'Beyond Silicon Valley'. It's worth your time. The future of purposeful startups and meaningful innovation that creates prosperity for millions truly is at the frontier. This is definitely where I've shifted my focus to. Please let me know if there's anyone in this space I should connect with.