Why Are VCs Investing in Emerging Markets? Mobile Innovation

While Silicon Valley is still the epicenter of entrepreneurship and the destination for college grads who want to build a company, the venture capital that fueled the startup economy the past few decades is starting to flow elsewhere.

New York and London still get the lion's share of what doesn't flow to Silicon Valley; and India and China have made substantial gains. But in the emerging markets of Malaysia, Vietnam, Indonesia and Philippines, investors are finding more and more reasons to invest.

Rebecca Hwang, co-founder and CEO of YouNoodle, a startup that helps corporations and governments identify high-performing entrepreneurs and talent, says one reason these secondary emerging markets appeal to investors is that they are ideal testing grounds for new products, where the young population is connected to social media. “Countries like Malaysia, Vietnam, Philippines and Indonesia have great technical and entrepreneurial talent,” notes Hwang.

Hwang helped to organize Startup Malaysia, held in Kuala Lumpur in October, and has assisted the Malaysian government in investing in tech entrepreneurs. She says she has been receiving an increase in queries from government leaders in Asia and South America to find companies and entrepreneurs who are based in secondary emerging markets.

While venture capitalists are by nature risk-takers, why would they want to up the risk factor by entering markets where the infrastructure can be less than reliable? “Investors have the chance to enter underpenetrated markets that are not swarming with VC money—that way they can get the first look at some of the hottest companies,” says Hwang.

Paul Bragiel, a partner at start-up incubator i/o Ventures, said, “I’m bullish about any economy that is growing, especially one that [is transitioning from] a pure outsourcing play to one fostering innovation.”

The payoff for investors: the opportunity to work closely with a company from the beginning, helping to build it from the ground up. “More than getting a reasonable valuation, venture capital firms are truly interested in grooming their relationship with the entrepreneur and building a team that can scale up quickly by using the entrepreneur's local knowledge and the investors' business mechanics background,” notes Hwang.

Startup Malaysia was driven by a strong partnership between the Malaysian government and the private sector to motivate Malaysian startups to create global brands and boost the economy. At the event, the country’s prime minister, Dato’ Seri Najib Tun Razak, told entrepreneurs that it’s important that young people in Malaysia, “find that energy…that has made places like Silicon Valley great.” By bringing together startups in the social media, mobile, and consumer web products space, this showcase supported the prime minister’s Digital Malaysia master plan, which is aimed at spurring the economy by accelerating innovation.

One start-up that received a lot of recognition was SecQ.me, founded by James Khoo. Khoo was selected by Hoffman to present his business model and is currently in further discussions with the ColorJar team. SecQ.me is developing a preventive personal safety app for Android and iPhone users. SecQ.me’s mobile app has received a number of international awards.

It is companies like SecQ.me that Malaysia hopes will lure Silicon Valley investors.

India has seen great success in getting Silicon Valley venture capital. According to Dow Jones Venture Source, startups based in India raised $337 million in financing from venture investors in the second quarter of 2011, compared with $190 million during the same period last year.

India-based start-up Exclusively.In, a member-only shopping site for fashion, jewelry, home décor from Indian artisans, received nearly $20 million in capital from Tiger Global Management and Accel Partners, according to co-founder Sunjay Guleria.

Guleria told CNBC the reason investors were interested in his business was simple: “Internet penetration is still under 10 percent so there's tremendous headroom, and, it's growing 25 percent annually. Mobile is another key growth area that investors are looking to penetrate within growth markets like India.”

As emerging markets, whether primary or secondary, grow at faster rates, they attract investors, corporations, and driven entrepreneurs who are looking for good opportunities and ways to beat competition. Kulveer Taggar, the founder of San Francisco-based Tagstand.com, a startup that uses near-field communication technology, said that in order to be more competitive in the mobile market, says he travels around Asia to learn about startups and ensure his company is staying ahead of the game. "A lot of mobile innovation happens in Asia. It's critical that we understand this innovation and see what the early adopters are doing.”

Naval Ravikant, CEO of San Francisco-based Angelist, a forum used to match angel investors with specific start-ups, told CNBC that the “growth and modernization rates [in secondary emerging markets] are astounding, and it's easier for entrepreneurs to serve growing markets.” And while he’s interested in meeting U.S.-based entrepreneurs targeting customers in growth markets, he prefers to venture out and find entrepreneurs within each country looking to serve their local audience.