The Key to Investing in Emerging Markets

The best practices and talents that lead to victory in mature markets are rarely transferrable to emerging markets. Success in emerging markets requires a different type of genius to identify barriers and build scalable, game-changing startups.

Founders in emerging markets face challenges that entrepreneurs in mature markets are privileged to never consider, but these pioneering entrepreneurs view challenges not as problems, but as opportunities. They find success in emerging markets because they’ve cultivated a deep understanding of the local market, its pain points, and, most importantly, know how to solve them in a local market way.

In her final week as guest host of the Kauffman Fellows Podcast, Pinn Lawjindakul (Class 25), Investor at Lightspeed, welcomes James Mi, Founding Partner of Lightspeed China, and Bejul Somaia, Managing Partner at Lightspeed Ventures India. Together they explore the hidden lessons, best practices, challenges, and cultural nuances of investing and operating in fast-growing emerging markets.

Catch each episode below or on iTunes, Spotify, and Anchor.fm or read some of our favorite soundbites below!

This season of the Kauffman Fellows Podcast is produced in partnership with Mighty Capital. Together, we unravel what truly makes a great VC investor.

James Mi of Lightspeed China On Learning from Mistakes

In the penultimate episode of Pinn’s miniseries, she is joined by James Mi, Founding Partner of Lightspeed China, a leading China-focused venture investment firm with over $2 billion under management. Their conversation explores the importance of a growth mindset, how James’s uncommon skill set has propelled him forward, and his expert advice for young investors.

https://open.spotify.com/episode/2ZFIYHBagfGWqPAK3eN13z

On the growth mindset for teams in emerging markets

James looks for founders with a strong growth mindset, because they’ll be able to learn, grow, and improve alongside the many iterations of the startup.

“The founder could be very different. It could be very much an introvert because the person has such a deep need to express themselves. But in most cases, I would say the founders we like have high integrity and very strong capabilities in areas they’re pursuing. If they have some matching experience and can help their endeavor in the startup that will be helpful.

Another thing we look at very critically is the growth mindset, whether they can learn and be open-minded, but still make their own decision. And so that leads to what they are today could be very different, where they will be in two, three years. If they have a strong growth mindset, they can grow, they can iterate, and they can improve on a much faster feedback loop. Very promising.

Sometimes we look at the person, and see that this person is much more mature and capable than his current age; that usually is the indication he has learned a lot and improved quite a bit. And whether the person has the willingness and capability to build a team and have that leadership skill. It takes more than just a person, it takes a village.”

On what successful U.S. companies did poorly in earlier efforts

It’s common for successful US companies to think they can transfer their model to other countries with equal success, but it is rarely that simple.

“It’s very difficult to fork the coding system and create a very different product; you want to leverage what you have successfully. So the time zone difference and communication and getting the support from the headquarters and getting down to the point that the engineering team supports you to build these very, very different systems.

Part of the problem, James said, is having decision-makers in another country and not in the country they’re trying to invest in.

“I think, initially, a lot of the successful US companies felt that their US success actually duplicated very, very well in Europe, in other English speaking or Western language countries, but China and other Asian markets, India, Southeast Asia, are very, very different culturally. Demographics and income were very different. But sitting in Silicon Valley or New York, they don’t have that kind of field. So my suggestion was to get the founders to come over to Asia; it’s difficult to have it but that’s what I did. I brought Larry and Sergey to China back in 2004. We had an entourage of all the executives. Once they saw China firsthand, they knew it was totally different.”

On his superpower in helping emerging-market founders

James’s uncommon skill and educational background is a benefit to the startups he supports.

“I studied physics undergrad, and I studied electrical engineering at Princeton, and then chip design at Intel, so I’m kind of a rare breed, building the internet business at Google but also can invest in these deep tech companies.”

On his advice to young investors

Successful venture capital investing requires a long-term focus, so building a broad and unique skill set will pay off.

“It’s a marathon, and so the more you build a different skillset actually will help. If you have invested, the company actually is doing very well. Spend some time with the company, take some time off. It doesn’t have to be a full-time take off, but just go into the company, be the assistant with this CEO and go to every meeting. He’s going to think through all these strategic decisions and operational decisions. And so you really get more experience in the startups. And you have a much better perspective. Instead of sitting across the table, in the trenches, it is very, very different.”

On what makes a great VC investor

There’s no perfect education or career path in VC, but as with many other successful investors, James believes in lifelong learning.

“I think strong curiosity and willingness to be lifelong learners will be very helpful. The areas we invest in, the opportunity set changes, and you never are the expert on every subject, but being able to learn very, very fast. And also, I think it’s maintaining your independent thinking, that’s critical. And very important is keeping a growth mindset. That applies to both investors and founders and investors that can really benefit from that.”

Listen to the full episode above on Spotify or over on iTunes.

Lightspeed Ventures India, Managing Partner, Bejul Somaia, On Transitioning from Operator to Investor

Bejul Somaia, Managing Partner at Lightspeed Ventures India, joins Pinn for a remarkable final episode. Starting his career as an operator just before the dotcom boom and later transitioning to an investor, Bejul’s unique dual perspective makes him a founder’s dream partner. During his conversation with Pinn, Bejul shares the mindset shifts he made between operator and investor and how they impact the fundamental way he does business.

https://open.spotify.com/episode/4SPCgMimS9YEfQ6e1wsd6r

On his mindset shift as an investor

In his previous work, Bejul was accustomed to constant feedback that worked as a compass to determine his track. As an investor, he’s given very little feedback, if any, most of the time.

“It’s up to you to initiate whatever there is to do and as you know, you don’t get feedback very quickly, if at all on how companies are doing and how good you are as an investor. That may take 7–10 years to come. And that’s incredibly unsettling.

For a long time, at least, I just wondered if I was any good at this. Sometimes I still do wonder if I’m any good at this. And so that comfort with ambiguity was something that took me a while to get comfortable with, trusting myself, in the absence of having these feedback loops, and trusting the work that I was doing.

One of the things that I’ve learned to do is to focus on the end state and the size of the prize and to appreciate what can come in the way, but not to get overly dragged down by what can come in the way. And that I think took me some time. It’s again to do with comfort, taking risks.

On the unlearning side, I think the biggest thing I had to unlearn was this desire and instinct to put my stamp on the solution, to be prescriptive. Or to really think that my answer was the only answer or the best answer, and instead to approach every situation, really pretty first principles on the basis of what was happening there. And, and ultimately, then to help the founder get to his or her best answer, and right answer, rather than again, trying to be overly prescriptive.”

On dealing with founders that make him uncomfortable

As a crucial component of venture capital investing is meeting and working with all types of people.

“I’ve learned from the mistakes that I’ve made that that wasn’t the right thing to do. And typically, it’s the people that are most different from me, that, in a sense, provoke me the most. And I think it’s true for most of us human beings, we don’t like to be provoked. We don’t like to be challenged. We were comfortable with our worldviews and when someone shows up that can be very aggressive in contradicting or pointing out why those worldviews may not be right and perhaps presenting conflicting ones of their own.

I find that tough initially to engage with, especially when it’s combined with a very salesy, heavy on narrative type of delivery. Over time I’ve learned to realize that those people are special in their own way. I don’t want to impose my value system on other people. That’s not my job, my job is to really understand whether the person in front of me can potentially build something really big, whether they have the vision, the ambition, the aspiration, to build something really big and the understanding of a market. And now I actually try and tune into my discomfort. And I use that as a signal to engage even more deeply and pay even more attention to what’s in front of me, and in a sense to work twice as hard to stay engaged in and really understand whether this is one of those kinds of founders.”

On what investors often overlook when investing in emerging markets

Many investors have “drunk their own kool-aid” as they say, and believe that their previous success easily translates to other efforts. That makes it seem much easier than it actually is.

“This is gonna sound really simple. I think they overlooked the fact that these markets are very different from other markets, and that presents both challenges and opportunities. I find that people that are investors that are not as tuned in to some of the nuances, what we’ll tend to see is, is more copycat type investing that assumes that the same underlying conditions exist in India for a company to get created that exist in another market, which may be true, but often it will not be true.

And I think it presents an opportunity because there’s the ability for companies to innovate and write their own playbooks that are very, very unique for that particular emerging market. And a lot of our successes have come from those kinds of companies. Indian energy exchange, which operated or operates an electronic market for power, is now a public company. We lead the series A there in 2010. You would never have thought that you could trade power electricity electronically in India, in 2010, right? But there’s a very specific set of reasons why India needed that, why the market structure supported it.”

On the “secret sauce” of building for emerging markets

It’s human nature to look for the shortcut, and complex endeavors can usually be optimized over time, but Bejul sees businesses as requiring the same fundamentals no matter where they’re located.

“I’m not sure that there’s any secret sauce to building specifically for emerging markets. Founders here have to do the same things that they need to do in other markets to build successful or outlier companies. You’ve got to identify a real need in an unmet need, and in a large market. You’ve got to be very tuned into that need, into that customer, and have a really good ability to translate what needs to be built into product and serve that customer really well. You’ve got to hire and attract great talent. You’ve got to really navigate the market strategically, and bring clarity in what otherwise is currently an environment of ambiguity. And I think the best founders do that very well. And then you’ve got to be able to sell and attract capital.”

Listen to the full episode above on Spotify or over on iTunes.