Fabrice Grinda is a well-known emerging markets super angel investor and entrepreneur. He’s crazy about the internet in the BRIC countries, especially Brazil and Russia. He is also the co-founder and current co-CEO of popular free online classifieds service OLX, a direct competitor of Craigslist.
Memeburn caught up with the French entrepreneur to gain some insights into where the money is going in emerging markets. According to Grinda, Brazil and Russia are exciting markets for potential online and mobile investments. He also believes that South Africa, Kenya and Nigeria are growing rapidly economically and present a great opportunity for investment in Africa, although investors have to gauge “opportunity costs and what the potential realities are”.
He spoke about the practice of bringing “copies” of successful internet ideas from the Western world to emerging markets, but stressed that these needed “a lot of innovation in the execution of the idea” to make them work in other countries. He also talked about why online advertising does not work in many cases.
Memeburn: Why invest in emerging market startups?
Fabrice Grinda: I’ll give you a slightly different perspective, which is maybe why I am investing in emerging market startups, as opposed to US or Western Europe. Throughout history, people have always said that there are things specific to certain geographies and cultures and therefore the ideas that work in one country, rarely work in other countries. The reality is, that has been proven wrong time and time again. That is because humans are quintessentially the same all around the world. They want to be entertained, they want to communicate and they want to have meaning in their lives. So to the extent that an idea appeals to these fundamental or underlying needs, the idea will work pretty much anywhere.
As an entrepreneur, not being a very creative guy, looking for places to create companies and places to invest, and not having brilliant new ideas, I realised that there is a unique opportunity for idea arbitrage. In other words, bringing ideas from the US or Western Europe to emerging markets, which increases the ability for us to create fantastic companies. And as I started looking in emerging markets, clearly there were a few that were very attractive given size of the populations, the dynamics of its economics on a per capita basis and internet penetration. Brazil, India, Russia, China were poised as places to create companies and opportunities to invest.
There was very little competition at the early stages for investment capital in emerging markets because, frankly, only 20% of venture capital is employed internationally. It’s not as though there was a strategy that said not to invest in emerging markets, it was ‘Let’s look at options globally in the consideration of that space, whether it be in ecommerce, travel or other market places and let’s see where there are the right deals, the right investment and return ratio of the place and if the size of the market makes sense.’
It just so happened, that after the last five or six years, Brazil and Russia have been the places where most of my deals take place and most of my execution in these markets has proven to be very effective.
MB: You say that you bring copies of successful internet ideas from the US and Western world. But what does it say about innovation in emerging markets if essentially we’re bringing copies over?
FG: It is innovative in the sense that it is not a pure copy, you obviously need to adapt for the local market place. Most of the products — even in ecommerce — have local sourcing, local logistics — so a concept might be copied, but you need a lot of innovation in the execution of the idea, because it’s fundamentally different. In Russia, you need to deliver the goods and get paid in cash on delivery, and that appealed to a whole bunch of other conclusions and consequences in terms of how to run these businesses. Even though the idea is the same, they actually look very different in terms of execution. If you look at eBay in France, wine is always a big category, where in the US it was practically non-existent. There are cultural differences.
The reality is that there is still a lot of innovation going on in emerging markets — it’s just that I choose not to invest in innovation on principle. In the US if you have a new idea, and your idea ends up being smaller or failing, the market is so big that you may still do okay with your investment. Whereas if you invest in a new idea where the concept is not proven, then in emerging markets, you’re probably going to be wiped out. So in the US I’m willing to take idea-risk, but I will not take market-risk, because the market is very big. So I’ll do innovative stuff in the US — in fact all my US investments are innovative — but in the emerging world, I intentionally avoid innovation because I don’t want to take idea-risk and market-risk. So in the emerging world I’ll take market-risk but then I won’t take the idea-risk.
This isn’t a universal philosophy — not to say there isn’t innovation in the emerging world — there is innovation — it’s just that over the years I’ve learned that it’s better to take market-risk but not idea-risk when investing in emerging markets, that’s all. It’s not a reflection of the lack of innovation in emerging markets.
MB: In your experience, are there any ideas which don’t work when you import them to emerging markets?
FG: Very few actually because, as I was saying earlier, we humans are quintessentially the same everywhere. We have three fundamental needs, (beyond the basic needs — we all need to be fed, etc.) but beyond this. People want to be entertained, they want to communicate and they want a semblance of meaning in their lives. So to the extent an idea enters one of these three (ideally more than one), it’s gonna work pretty much anywhere.
When I brought auctions to Europe in 98, people told me ‘aah, crazy Americans’, they’ve lost their culture. The way they treat collectibles… it’ll never work in France. And of course a few years later everyone went to auctions in France. When I brought ringtones to the US, people were telling me ‘ah these crazy Europeans — ringtones, they want to personalise their cellphones, we don’t care, we would never pay for ringtones.’ But of course a few years later, everyone was downloading ringtones. So I’ve never seen an example of these arbitrages not working.
The nuances matter, if you don’t copy wholesale. You can copy the concept, but you need to adapt it. You need to adapt it to suit global preferences. And local regulatory changes and local constraints remain — infrastructure, delivery, whatever considerations there might be. It’s not just you copy and then you’re done. There is a lot of adaptation to the local country.
MB: Where will the next Silicon Valley come from and if so, which emerging market in particular?
FG: I wouldn’t say Silicon Valley per se, but is there a source of innovative startups that are coming? It’s actually happening all over the world now because it’s never been cheaper than it is today to create a startup. The tools are becoming very cheap and mostly free with the emergence of things like Linux and Apache and MySQL, so with the open source revolution, the tools are mostly free. It’s reasonably easy to find development talent in the emerging world. Today, almost anyone can begin a startup for US$10 000 and as a result we are starting to see a proliferation of new ideas and they are coming from all around the world. That said, in terms of companies that end up growing and being successful, you’re more likely to do that when you’re going after large markets in large countries.
We’re seeing pools of very interesting startups emerging out of the major cities around the world; London or New Delhi and Mumbai, Sao Paolo, Moscow and to a lesser extent St Petersburg in Russia. I’m not sure there is a Silicon Valley that is emerging, but it is cheap to create startups and at the same time the financial crisis has decreased the opportunity costs for an entrepreneur. Going into a startup makes a lot more sense. It’s a more useful alternative than it used to be. Startups are cheaper and easier to create than ever before, and the fact that the opportunity costs have decreased, makes it more attractive.
In the US, there are a huge number of startups now that are emerging, not just from Silicon Valley, but from New York as it has become a very active spec hub. Groupon is from Chicago, we’ve seen a whole lot from Boston and LA has seen a lot of startups in the last few years. It is becoming much more democratic. It’s no longer ‘you need to be ten minutes from the Valley’ to build a startup now, almost anyone anywhere can build a startup.
MB: Has the financial crisis made emerging markets a more attractive investment destination?
FG: I’m not so sure, because one of the consequences of the financial crisis is that people are looking for safe havens. And with the Euro-crisis, people are shying away from Europe, so it’s making the US more attractive in the short-term as people are now afraid of risk. So, if you look at the stock market industry in emerging worlds, they should have performed much better than they have in the last few years. The reason they haven’t is because people are shying away from risk. The financial crisis may then have the opposite effect. It is making companies more conservative and American companies and Western companies are more likely to shy away from emerging markets.
It’s actually the opposite of what they should be doing — they should be investing in the future growth. But you are seeing the Western banks shed their international assets; you are seeing a lot of these companies selling their emerging market properties because of the financial crisis. They are probably doing the opposite of what they should be doing in terms of preparing for the long run.
MB: Tell us about internet audiences in Brazil, Russia and India and why they excite you as an investor?
FG: Brazil has a population of 196-million. There are about 70-million people connected online in Brazil and they are spending 10-billion a year in ecommerce, making it the largest ecommerce market in Latin America. It’s growing 30-40% a year and broadband is growing rapidly. It’s a large population, a large existing market, with a number of publicly traded companies on the back of it.
Russia has a population of 146-million with 68-million internet users. The ecommerce market is also worth about US$10-billion, and it is growing 28% a year. Again, there are a number of publicly traded companies from Russia. The market is also very large and it is growing rapidly and this is what makes it so very attractive.
India is a little bit of a different animal, because the penetration is much lower, they claim to have 60-million internet users, on a population of a billion, but the reality is the broadband connectivity numbers are much lower. But it is growing really fast and smartphone penetration will reach about 100-million in about two years via 3G connections. That will give 100 million people internet access on their mobiles, so it’s going to be amazing. There are also a number of publicly traded companies in India but the market is much smaller.
India is smaller today by far in terms of ecommerce and online advertising than Russia and Brazil so it’s more of a longer term bet. But Brazil and Russia are the places where I play the most, because they have an existing market, but India is growing faster.
MB: Out of the BRIC countries, which is the easiest market to crack?
FG: The ultimate answer! My answer is not going to be one you like: it depends on the idea. The countries have different challenges. Brazil is extraordinarily paperwork-intensive and has very high tariffs on goods you’re trying to bring in, so it’s harder to do a number of ecommerce plays because it’s hard to get the goods for cheap. Everything is expensive and the legal work is a pain in the neck. Russia does not have a good delivery infrastructure or a good infrastructure so it increases your shipping costs and might decrease your margin and it’s much harder to do things outside of Moscow and St Petersburg. But these are somewhat different problems. Most ideas are good for both but it also depends which niches are already taken and which are not, where are the different opportunities. I find both markets to be very attractive.
MB: Is Africa even on the radar as an emerging market?
FG: It’s hard. Obviously there are three markets in Africa that are growing rapidly: South Africa, Nigeria and Kenya — and especially Nigeria, given that it is English-speaking and growing really fast, so there are a number of opportunities there. The issue is when you look at the opportunity costs and what the potential realities are. I’m sure there are a lot of people who will be successful in Nigeria for instance, it’s just that the market is still really small, the exits are still really unclear, the capital markets are not well developed in terms of getting funding.
Angels like me thrive only if the rest of the value chain is there. After we invest, there are the venture capitalists and private equity companies and then the public market and obviously if the company is to grow, you need an underlying consumer demand. All these things are somewhat lacking in every market in Africa, except South Africa. But South Africa is a much smaller market than Brazil or Russia let’s say. That’s why from my personal perspective, I would not be focusing on Africa anytime soon.
This does not mean that there is not going to be a lot of great startups in South Africa, Nigeria, Kenya and the rest of Africa. There are going to be many of them and many of them are going to do very well. It’s just that it’s harder if you are looking for the type of big plays that I am looking to do. It’s not going to be where we are going to be focusing our time and effort.
MB: Is that because Africa is limited to mobile because this is the easiest way to connect and most of the innovation in Africa is mobile-centric?
FG: I don’t invest in mobile, so that plays a role, but obviously if you look at the number of internet users and ecommerce penetration in Africa, it’s still very low. So the market sizes today are extraordinarily low, and the internet connections really suck. The definition of broadband in Africa is probably below what other countries — by a factor of ten or 100 — would consider to be broadband. It has led to innovation in terms of mobile, but the innovations in mobile by far and large have come from the operators and the banks and bank-like institutions, rather than the startups.
It’s hard to imagine a startup succeeding unless you have good broadband and a robust ecommerce market. All these things are still lacking in Africa, even in the more successful richer countries, except possibly for South Africa.
MB: What do you typically look for in a startup?
FG: Four things: do I like the team? Do I like the product? Do I like the pitch — do I think their idea meets my personal criteria? And do I like the deal terms? If the answer is yes to all four, then they can literally leave with a cheque in one hour, one meeting. If I like the pitch, the product, the deal terms, the team? Done.
MB: What puts you off when looking at a startup for investment?
FG: A lot of things of things. Obviously, if they haven’t been able to build a product with their money and they need the money to build the site… that’s a very bad sign, in terms of their ability to execute and the ability to run a lean start-up. If they haven’t thought through what their business model is going to be, if they don’t understand their gross or net margin, that’s a really bad sign. If it’s a one man show, as opposed to having the various components of the team already identified, even if not everyone works fulltime, that’s a very bad sign. So there’s a lot of signals as to whether these guys are going to make it or not.
MB: Do you believe the technological revolution and the internet is creating jobs or destroying jobs?
FG: It’s creating jobs. Throughout history, the Luddites have always been proven wrong. Technology always creates more jobs than it destroys. There was a McKinsey analysis recently which showed that for every job is destroyed, the internet created at least 2.4 jobs. The issue for society is that the jobs that it destroys and the jobs it creates are for a different skills set. If you’re shopping for real estate online without an agent, then yes it destroys the jobs for agents, but it creates jobs for the programmers and the people who are creating the site, the companies that host the site, etc. The issue is that you can’t train a real estate agent to be a programmer. It is creating jobs, but for different types of people.
The US has 30 million underemployed people, but it also has 20 million vacant positions. The issue is that the underemployed people are high school drop-outs who are construction workers or real estate brokers, and the 20 million open positions are for designers and computer programmers etc. You can’t transform one into the other. It creates interesting societal challenges in terms of how you address this to make sure that more of your kids go into engineering and computer science. So it’s changing the school system, it’s changing the university system — it’s something that you fix over 20 years, it’s not something that you fix overnight.
But primarily the internet has been creating jobs. At the end of the day, GDP per capita growth is driven by productivity growth, and productivity growth is driven by entrepreneurship. If you look at underlying components of GDP, most of the productivity growth has been coming from technology and technology and innovation were brought about by startups.
The standardisation of technology unleashes massive growth. I hope that in the near future, the technology revolution will come to some of the areas where productivity has not yet been touched by improved by technology. In the US for instance, that would be health care or education, where there is a massive opportunity to unleash growth by employing technologies we already have.
No doubt about it, the internet creates more jobs than it destroys.
MB: Do you think advertising is a dying business model?
FG: The advertising model works very effectively within bounds, so for advertising to work online you need two things. Number one: intent. So if you are looking for something — let’s say you go to Google — then you are looking for something, so the probability that you will click on that ad is very high. We have a click-through rate of over 2% on our ads on OLX, which is huge. And then you need that ad to be related to something of value.
There are nine categories that have all the value online: travel, jobs, real estate, cars, finance, legal and medical services and merchandise sales. These are the categories which account for all of the values. To the extent that you have a website that has intent (people are looking for something) and that is in one of these nine categories, advertising is a fantastic business model.
The problem is, if you’re a newspaper, the people are not there to look for anything specific — they’re just checking out the news. They’re not looking for cars, they’re not looking for plane tickets. So the ads that you’re going to show aren’t going to be very relevant to the mood they’re in right then, and the categories that show are not going to go over well with them either. Online advertising works as long as you have intent and the correct categories.
Let’s say I have a website that does reviews of digital cameras. That website will absolutely be able to live off online advertising, because people are going to come looking for digital cameras and it’s a category where CPCs (cost per click) are high enough, so you can make money.
MB: Do you think social networks are a bit overdone?
FG: I’m not sure what overdone means, but I think social networks are amazingly powerful and I think they’re useful. We are in a society where we are becoming more mobile. My mother loves looking at me on Facebook — she will see what my latest trips are, what I am up to. Social networks have allowed new categories to emerge — like social gaming for instance, which went from zero to creating ten billion dollar type companies like Zynga. I actually think it’s the opposite. I think we are at the very beginning of the social revolution. I think we haven’t begun to see how social networks are going to be able to link towards commerce, for instance.
The reality is that in terms of where we are going with the integration of social with the rest of the web, we are just scratching the surface. This entire internet revolution is at its infancy. Even though it’s like 15 years in the making, if you look at the top 50 sites on the internet today versus five years ago, most of them are new. I suspect that this innovation is going to continue to happen and we are going to see massive changes and innovations which will lead to new sites emerging.
In general, I think we are still in the early stages of the internet and the very early stages of the social revolution.