Great frontier markets technology companies:
Are a source of efficiency in high friction sectors:
We look for digital businesses which fundamentally transform the way offline industries operate. An example would be the ascendance of online B2B marketplaces which streamline complex workflows in sectors where >90% of transactions still take place manually via phone, fax, or in-person. We invest in platforms which facilitate digital transactions to reduce the time, effort, and cost spent while sourcing and acquiring inventory for retailers, allowing management to focus on growing the business instead. For distributors and suppliers, it can increase turnover with existing clients, open up access to new markets, and reduce costs.
Have a capital-light business model:
Asset-light models can help companies achieve scale without the need for high sunk fixed costs. An example within e-commerce is that we look for marketplace models instead of traditional e-commerce models with associated capital investment and inventory cost. Here, marketplaces can use digital solutions to optimise existing logistics infrastructure, payments, and product selection, which fundamentally alters the risk of the business when compared to the tangible CAPEX a company would have to deploy if building their own infrastructure.
Are fuelled by powerful network effects:
Network effects are among the most potent competitive moats where increasing numbers of participants improves the value of a good or service. Demonstratable network effects are critical for both our platform investments and have the effect of reinforcing other moats, such as brand and scalability. For marketplaces, the key is for supply and demand to increase in tandem as they remain engaged in the ecosystem and expand the addressable market over time.
Are led by domain experts:
All our portfolio companies are led by founders and management teams who have often worked for decades in a given sector and understand the nuances that are driving the sector they operate in. In many cases, these are second- or third-time founders with a track record we can scrutinise and, in all cases, an operating history to analyse.
Can overlay financial services:
In frontier markets, incumbent offline financial institutions are fragmented and lack expertise in effective customer acquisition. Our portfolio companies by their very nature are embedded in their users’ lives, providing the data and captive customer-base required to offer financial service as an extension of their core offering. One example is our B2B platform business, which operates across Kazakhstan, Russia, and Ukraine and is using client data to offer clients working capital finance in partnership with local financial institutions. Access to even a small overdraft facility can allow retailers to increase their turnover and reduce working capital concerns dramatically. Distributors and suppliers benefit from the higher AOV and order frequency and a more formalised relationship with their clients. For the banks, it opens up a new distribution channel for loans to small businesses, which they can effectively manage the risk based on the data that the marketplace has on their clients. In this way, each member of the ecosystem benefits, and the marketplace can embed itself as the nerve centre for all transactions.
Operate in highly fragmented markets:
Frontier countries are dominated by fragmented industries where many companies compete, and there is no single or small group of companies which dominate the industry. This competitive structure presents an opportunity for a single technology-driven business to provide solutions, and, in turn, efficiency gains across the whole value chain of an industry. One example is our investment in a B2C2B pharmaceutical marketplace that built a solution that has digitalized the national pharmaceutical industry into a single online platform. Historically, the market was extremely fragmented with hundreds of distributors and thousands of procurement teams disabling price discovery, resulting in inefficiency and corruption. Our platform has revolutionised the industry, reducing prices across the market for pharmacies and consumers and wrapping up the entire industry in the process.
Have a clear path to positive unit economics:
We never take risks on the means to monetisation for business models; we look for companies employing a business model with a clear understanding of the path to positive unit economics that may be taken for granted in the developed world.
Frontier markets insights
Having completed our investment in B2b marketplace Smart Satu, this Sturgeon Insights report explores the B2B model and the opportunity in frontier markets.
In this edition of Sturgeon Insights, the team draws on their 15 years of experience investing in frontier markets to summarise six components of their successful investment approach
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