Overcoming Cross-Border Investment Complexities: Strategies for Emerging Managers in Global Venture Capital

As the world becomes more interconnected, the globalization of venture capital has emerged as a prominent trend in the investment landscape. Emerging managers like R3I Capital are now tapping the arbitrages and exploiting the potential of geography.

Venture capital has traditionally been associated with the technology hubs of Silicon Valley and other major cities in the United States. However, over the last decade, the rise of startup ecosystems in other regions of the world has attracted the attention of venture capitalists. Emerging markets such as Asia, Africa, and Latin America are now home to some of the fastest-growing economies and entrepreneurial ecosystems in the world.

As an emerging manager, globalization presents both opportunities and challenges. On one hand, access to capital and expertise from global investors can help fuel the growth of startups in emerging markets. On the other hand, competition for funding has intensified as more emerging managers have entered the space.

One of the most significant advantages of the globalization of venture capital is access to a broader range of investment opportunities and the cross border arbitrage. Emerging markets offer unique opportunities for investors to invest in innovative startups that are solving local problems. These startups may not be on the radar of traditional venture capitalists, making them an attractive option for emerging managers who are willing to take on more risk.

Small to large market arbitrage

The arbitrage of small markets to large markets in venture capital refers to the opportunity for investors to find undervalued startups in smaller, emerging markets and then sell them to larger, more established markets for a higher price. This process is similar to arbitrage in other financial markets, where investors take advantage of price differences in different markets.

Venture capital investors typically look for startups with the potential for high growth and strong returns. In established markets like Silicon Valley, competition for these startups is intense, driving up valuations and making it difficult to find undervalued opportunities. However, in smaller, emerging markets, there may be less competition and lower valuations for startups with similar growth potential.

Investors can take advantage of this price difference by investing in these startups in smaller markets and then selling them to larger markets for a higher price. For example, a venture capitalist might invest in a promising cybersecurity or healthcare startup in a small market like Australia and then sell the company to a larger market like Silicon Valley, where the company's potential for growth and returns is more widely recognized.

This arbitrage opportunity is driven by several factors. First, emerging markets may have lower valuations due to the lack of established startup ecosystems, investor networks, and regulatory environments. Second, these markets may have a lower level of competition, which can lead to more attractive investment opportunities. Finally, the potential for growth in these markets can be significant, leading to higher returns for investors.

However, there are also risks associated with this strategy. Emerging markets can be more volatile and less predictable than established markets, making it harder to assess risk and make informed investment decisions. Additionally, cultural and language barriers may make it more challenging to build relationships with entrepreneurs and local investors.

Diversification to Impact Investment

Globalization has also led to a diversification of investment strategies. Emerging managers can now explore new investment models such as impact investing, which prioritizes social and environmental impact alongside financial returns. This aligns well with the growing demand for socially responsible investments and helps emerging managers differentiate themselves from more established firms.

Increased Competition

However, the globalization of venture capital also presents challenges for emerging managers. The influx of global investors into emerging markets has led to increased competition for deals, making it harder for emerging managers to stand out.

This competition can also drive up valuations, making it more challenging to find investments that meet the fund's investment criteria.

As venture capital firms have become more global, the competition for funding has also become more intense, making it more difficult for emerging managers to raise capital.

More Regulatory Hurdles

Another challenge is the need to navigate different regulatory environments in each market. As emerging managers expand into new regions, they may face regulatory complexity in terms of compliance with local laws and regulations, which can be time-consuming and expensive.

Emerging managers must be well-versed in local regulations, tax laws, and cultural differences to successfully invest in these markets. Failure to do so can lead to costly mistakes and regulatory issues.

Cross-Border Investment Complexities

The globalization of venture capital has created new opportunities for emerging managers, but it has also presented a number of challenges.

1. Increased competition: As venture capital firms have become more global, the competition for funding has become more intense, making it more difficult for emerging managers to raise capital.
2. Cultural differences: Emerging managers may face challenges in navigating cultural differences when doing business in different regions, including differences in business practices, legal systems, and communication styles.
3. Limited network: Emerging managers may have limited networks in new regions, making it more difficult to identify potential investments, partners, or customers.
4. Currency risk: Emerging managers may face currency risk when investing in companies in different regions, which can impact their returns.
5. Limited track record: As emerging managers expand into new regions, they may have a limited track record in those markets, which can make it more difficult to attract investors.
6. Limited resources: Expanding into new regions can be resource-intensive, and emerging managers may have limited resources to invest in marketing, hiring, or other activities.
7. Different market dynamics: Different regions may have different market dynamics, including differences in valuations, exit opportunities, and industry trends, which can impact investment decisions.
8. Lack of local expertise: Emerging managers may lack local expertise in new regions, which can impact their ability to identify and evaluate potential investments.

Hardening for Performance

To overcome these challenges and deliver the desired outperformance, emerging managers can consider investing in building their networks, develop local expertise, and find partners who can help them navigate new markets. They may also need to be flexible and adaptable in their approach to investing, taking into account the unique characteristics of different regions and markets.

Cross-border investment complexities can be challenging for any venture firm, but there are several ways these be overcome for competitive advantage.

R3i deploy the following approaches:

1. Establish a local presence: One of the most effective ways to overcome cross-border investment complexities is to establish a local presence in the target region. This can involve hiring local talent as venture partners or community managers, partnering with local firms as strategic partners, or opening a new office in the region. R3i Group operate from 3 regional centres of presence: Singapore, Luxembourg and Texas, helping to overcome the information assymetries and deliver with regional relevance.
2. Build a network: Building a strong network of contacts in the target region is essential for identifying potential investments, partners, or customers. Venture firms can attend industry events, join local industry, PE and VC associations, or work with local accelerators to build their network. At R3i we have partnered with industry leaders to expand our networks for coinvestment and dealflow. Selected partnerships include: 英伟达 VC Alliance, Global Women in VC , Coolwater Capital Plug and Play Tech Center , Tech Tour , Beyond The Billion? (launched as The Billion Dollar Fund for Women?) , She Loves Tech , Startup.Network and 500 Global .
3. Leverage local expertise: Partnering with local experts can help venture firms navigate cultural differences, local market dynamics, and regulatory complexities. At R3i this includes working with local venture partners, lawyers, accountants, and consultants. A firm's local presence and services bench can be the make or break in effective venture firm management, co-investments, and deal making competitive dynamics.
4. Conduct thorough due diligence: Cross-border investments require thorough due diligence to identify potential risks and ensure compliance with local laws and regulations. Venture firms should work with local partners to conduct due diligence on potential investments. At R3i Ventures we have turned that on its head and operate our House of DeepTech and House of MedTech accelerators to ensure thorough due diligence for R3I CAPITAL investment selection using our own proprietary R3i QuickScore.
5. Use technology to bridge the gap: Technology can help venture firms overcome time zone differences and communication barriers. This can include using video conferencing, project management tools, and other collaboration platforms to stay connected with local partners and entrepreneurs. At R3i we use an array of inclusive platforms to stay connected with our partners, including Slack , Instant messaging tools like Signal and WhatsApp , Zoom , our own 7 floor R3i Metaverse, Fireflies.ai , Trello , and proprietary deal platforms.
6. Mitigate currency risk: Venture firms can mitigate currency risk by hedging their investments or using financial instruments such as forward contracts or options to manage exposure to foreign exchange fluctuations. A fractional CFO can make a huge difference in the delivery of strong portfolio net IRR.

Wrap up

In conclusion, the globalization of venture capital has transformed the investment landscape, providing emerging managers with unique opportunities and challenges.

By taking a strategic and proactive approach to cross-border investment complexities, venture firms can successfully identify and invest in promising companies in new regions, and help support their growth and success.

The arbitrage of small markets to large markets presents an opportunity for investors to find undervalued startups in emerging markets and sell them to larger, established markets for a higher price. While this strategy can be lucrative, it also carries risks associated with investing in less predictable and less established markets.

Meanwhile, the diversification of investment strategies with the adoption of impact investing aligns well with the growing demand for socially responsible investments.

However, with increased competition, regulatory overheads and cultural and regulatory complexities in cross-border investments, emerging managers must be well-equipped to navigate these challenges while building a competitive edge that sets them apart from other players in the space.

Overall, the globalization of venture capital offers great potential, but it also requires a solid bench of service providers, a cohesive global in-market team, value adding partnerships, careful strategic planning, and solid team and investment management execution from emerging managers to capitalize on the opportunities presented.

For only together can we accelerate impact.

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About the Author

Leesa Soulodre ?is the General Partner of R3i Capital,?a global sustainable development venture capital fund ?investing in climate change adaptation and the transition to value-based healthcare. Reach out if you would like to learn more about our mission in the?R3i Future Fund.

What’s in our name?

R3i stands for returns, resilience and reliability — three characteristics that are often used to describe or evaluate investments, businesses, or other assets.

Together, these three characteristics can be important factors to consider when evaluating the potential risks and rewards of an investment or asset.

3 i’s — “Intelligence, Innovation, and Insight” are the three characteristics that are often used to describe a venture firm’s edge. R3i synthesises these into its collective and inclusive “impact”.

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