Venture capital has become a more global industry as the technology sector has become more decentralized. According to data provided by the National Science Foundation (NSF), more than 50% of VCs deployed globally in 2022 will be invested in startups outside the United States. This is a stark contrast to 20 years ago, when about 80% of venture capital worldwide was invested in U.S. companies.
Countries like China, India, Israel and the UK are leading this shift, but smaller ecosystems in Europe, Latin America, Southeast Asia, the Middle East and Africa are also contributing.
According to a report by Endeavor Global, approximately 26% of the world’s unicorns today are in these markets. Endeavor Global is an organization that partners with founders to create companies that have an economic or social impact on a global scale. Endeavor has worked with more than 1,500 companies in over 40 countries to date.
Endeavor Global’s co-investment fund, Endeavor Catalyst, is home to over 50 unicorns (investments in over 300 companies across 30 countries), including Spanish talent marketplace Jobandtalent, Mexican digital freight forwarder Kavak, Indonesian aquaculture startup eFishery, Nigerian fintech Flutterwave, UAE-based buy now, pay later startup Tabby, and Turkish gaming company Peak Games.
During the hype period of 2020/21, investment was largely made in the US, accelerating the creation of unicorns in this market. However, global venture capital investment activity has since slowed, down 38% year-on-year, resulting in fewer unicorns, slower deal processes, and a retreat of global investors from emerging ecosystems.
These setbacks and the re-evaluation of valuations over the past few years have made several stakeholders across the ecosystem nervous. According to Endeavor CEO Linda Rottenberg, not only are there not enough local investors to write large checks, but most are starting to approach deals timidly, and sometimes selfishly. For example, according to a Partech report, the African ecosystem has seen a massive pullback from investors in 2023, with a 50% drop in unique participating investors.
Rottenberg recently spoke with TechCrunch to discuss how regional investors can increase competition, why emerging ecosystems need to prioritize patient, long-term capital, and the role Endeavor and its co-investment arm play in that regard.
This conversation has been edited for length and clarity.
Venture capital has become a global industry, as evidenced by Endeavor’s 300+ investments, most of which are outside the U.S., and one in six companies in its portfolio is a unicorn. How did Endeavor achieve this?
So I think it's true that we prioritize entrepreneurs. We want to support them, and even if not all of our investments are successful for some founders, we see the next generation of C-suites building the next company and the next ecosystem. That's the secret of Silicon Valley.
I was with a CEO of a closed African company and he told me how 10 people started their own startup. I asked another CEO who just left and he told me how 30 people did the same thing. That's the seed of the ecosystem. And we're not afraid. The naira or the riyal is devalued, but we're on the entrepreneur's side. We have 600 people on the ground, and we mix that with pattern recognition and global understanding. That's why we have 58 unicorns and 24 exits.
Our last fund was $300 million. We're going to raise Fund V next year, and we still want to invest $2 million to $3 million in our startups, so we're going to set a cap. We close 96% of our deals on the network because entrepreneurs, investors, and the ecosystem trust us. Because we take a long-term view. So I think that's number one.
How does the process of co-investing with the global community work?
You become an Endeavor Entrepreneur and you go through a selection process where you have to be unanimously chosen by venture capitalists, entrepreneurs, or people who have scaled up companies like Amazon and Netflix, so you become part of that peer-to-peer network.
We help you expand internationally into any market and solve any kind of business challenge you have. But also, if you raise more than $5 million (we've invested in $5 million rounds and $200 million rounds), Endeavor Catalyst will take 10% of the round from qualified institutional leads, up to a maximum of about $2 million.
Finding qualified institutional investors for Series A, B, C is one of the biggest challenges we face in Africa. So part of what we're trying to do is build a local ecosystem. Right now, we have a really strong seed stage investor base, and we need to guide them to get to the growth stage backers. We also want to encourage global investors from the US, London, Singapore, Dubai or Saudi Arabia to look at founders in Nigeria, so we can build a list of qualified leads that Endeavor Catalyst can follow. So it's kind of a mix. What I'm saying is that we're trying to be patient and build an ecosystem locally, and also attract global people who might be more nervous about emerging markets.
What efforts will you make to build a local ecosystem and attract global investors?
We were there early in Brazil and Indonesia. You could say the same thing in other markets like Saudi Arabia, Spain, and Greece. Of the 40 markets we are in now, the most promising ones for the next 5-10 years are Nigeria, Egypt, and Vietnam. Here's the next one.
We are trying to convince global investors that they have missed out on Brazil and Indonesia, that these markets are next. We believe that these are big, important markets with impressive size, scale and talent.
So what we're trying to do is to make investors feel FOMO, and not wait until there's a big exit from this country, which will take three to five years. So we're trying to work with local investors to get stronger, more entrepreneur-friendly conditions, which hasn't been the case in African markets recently.
I think investors here haven't been through a downturn, so we've seen a lot more stringent terms in terms of liquidation priorities. Everyone is re-evaluating companies around the world. Investors in other markets are doing that where there's still an incentive for entrepreneurs and teams to grow. But here, it seems like investors are just grabbing whatever they want, which is not a good strategy in the long run. Because then the company goes under.
In Latin America, Southeast Asia, and the Middle East, there's also the fact that local capital has developed over time, and local founders have become funders. From Careem and Checkout.com to Mercardo Libre and Loft. So you're seeing founders become full-time funders. So it seems like it's maturing somewhat globally, but Africa is still really early days.
I agree that it's not a different market size, but I would say there are a few African founders who are now part-time and full-time funders. But speaking of global investors, you mentioned how Endeavor is trying to get them to come back. How has their retreat affected Endeavor's deal making process?
So it's good to have a hybrid model, right? We have a fund with $500 million in assets, and qualified institutional investors should come and invest. We have five investments in Nigerian companies. We want to double that in the next few years, so that would be good.
But within the nonprofit ecosystem, Endeavor is there no matter what. So the answer is that the fund can only invest when there is a qualified investment. So we do our best to convince investors that there is talent, that it is a good time, that it is a good price, and that it is on the path to profitability.
The Brazilian market is coming back. By the way, Brazil has about eight companies preparing for an IPO after Nubank. Nubank is a 10-year story and Brazil has been ready for 10 years. So it will really happen in Nigeria and Egypt. On the other hand, we are doubling down on helping entrepreneurs, helping them explore options to get to profitability, raise debt, and figure out capital solutions if necessary. As I said, the more Series AC investors we can talk to about how to restructure the deal, the happier we will be. We are doing it in Latin America and to some extent in the Middle East. It has been more difficult here, so we are very excited about these new seed, Series A investors, but it will take two or three funds before they start to move in the market.
Could the problem be that there is a dearth of viable growth-stage startups in Africa? At present, some growth-stage funds focused on the continent are coming in quite early.
I don't think Tiger and SoftBank did anyone any favors with their (very high) 2021 valuations. So we've seen people around the world regress, which is normal and fine as long as they do it in a way that incentivizes founders in the next phase. I think growth stage startups are willing to take a haircut on valuation, but it has to be reasonable.
In good times, American investors will come in, but they will always withdraw. There will always be tourist capitals, so enjoy them while they are there. However, emerging ecosystems need to have a strong local investor base, especially in the growth phase, so that even when tourists withdraw, investment can still happen.
What do you think local investors in Africa can learn from those in Latin America, Southeast Asia and the Middle East?
They need to understand that now is the best time to invest. It goes back to Warren Buffett. “Be fearful when others are greedy, and greedy when others are fearful.” Basically, everyone is fearful right now, so now is the best time. Trust the talent, trust the markets, especially in Nigeria. And realize the extended time horizon. It takes 10 years for a US company to grow. In emerging markets, it takes 10 to 15 years.
There's a company in Mexico called Clip that's about 15 years old and they're going public and people are really excited about that happening in Mexico. It takes time. And when that happens, as we've seen in Brazil, Indonesia, and the big markets, it starts. If you invest now, you don't have FOMO later. You go to A and B. You can still make money. And VCs in big funds shouldn't be making a lot of seed investments, they should be putting money to work. That's my opinion.
On the flip side, what can African entrepreneurs learn from other emerging markets?
They have to learn that it's always harder for pioneers. The first generation always has it the hardest, and they have to be proud of what they do, even if not all their businesses are doing well now because they don't have capital or they got into the market early.
Every idea we support is seeding the ecosystem. We're building this multiplier effect. And I think investors need to be generous to founders and give each other a break.
