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May 20, 2014

Going global: fast-rising entrepreneurial ecosystems of the Middle East highlight the micro-multinational blueprint

In a fascinating new post, venture investor and author Christopher Schroeder reflects on his recent trip to Iran and the burgeoning start-up ecosystem that is slowly, but inevitably, changing the face of the Iranian economy.

Schroeder begins the post with a few essential (and perhaps surprising) facts about the situation in Iran:

“[The] country has two-thirds of its population under the age of 35, with one of the largest Internet reaches in its region. Mobile penetration is over 120% — meaning many people have more than one device — and 3G or better coverage will be rolled out everywhere over the next two years. Among its neighbors, the country has one of the highest per capita GDP, and its graduates are among the highest share of software engineers. eCommerce is in its infancy and little travel is booked online, though it has one of the worlds largest consuming populations and has some of the greatest, under-visited tourist destinations on Earth. It’s geographic location puts it at the center of global trade between North and South, East and West.”

 

Schroeder goes on to document how the under-reported and quieter tech-enabled revolution in Iran is giving rise to a plethora of exciting start-ups:

“We met young entrepreneurs who were converting waste to fertilizer, doubling crop yields while requiring half the water. We met another team building a platform to put all children’s books online for schools, allowing collaboration tools for teachers and parents to create the best learning plans. The GPS location software startup used for the buses and sanitation trucks in Isfahan, Iran’s second largest metropolitan area, was created by an entrepreneurial team of women…”

 

In the end, Schroeder makes a pretty compelling case that the nascent but fast-rising entrepreneurial ecosystems of the Middle East have been wrongfully overlooked by the investment community.

But the same logic suggests to me that entrepreneurs in the West should be equally attuned to the opportunities that such emerging markets provide for their products and services.

As McKinsey points out, the spending power of middle-class consumers in emerging markets is forecast to rise by US$20 trillion over the next decade. When coupled with double and triple digit growth rates in spending on health care, education, infrastructure and the burgeoning need for business services to support a growing cohort of commercial enterprises, it is clear that emerging markets will be the most significant, long-term drivers of growth for small and large firms alike.

Of course, many entrepreneurs prioritize success in the domestic U.S. market before casting a glance at more remote markets in Africa, Asia, the Middle East and Latin America. But why wait to go global when today’s technology allows you to do both at once?

For a small-scale provider of architectural services or business consulting, for example, emerging markets such as India, China and Nigeria may seem remote and unfamiliar, both geographically and culturally. But modern technologies and platforms are collapsing these distances and making overseas markets easier and less costly to reach.

True, such advantages are greatest with knowledge-intensive services that don’t require costly manufacturing, warehousing, or transport. Services can be readily adapted and customized for different needs, languages and cultural sensibilities. And thanks to the Internet, a wide variety of services can be digitally enhanced and/or delivered using digital platforms and mobile phones, which creates new opportunities for service innovation and new possibilities to export such services to consumers, regardless of their geographic location.

Google and Facebook may have set the benchmark for modern businesses that leverage technology to scale globally. Yet, in many ways, these Internet giants are outliers in a broader population of high-growth micro-multinationals that are changing the rules of competition in numerous sectors. Swedish telco Sonetel, for example, provides a fascinating example of how such firms evolve. It offers global telecommunications services and virtual offices to nearly 250,000 small and medium-sized businesses in 235 localities. Remarkably, the company started just five years ago with one person in Sweden and a small team in India that bootstrapped the core telecommunications platform using open source components. Today, the company has 30 executives and engineers, some based on Sweden and some in India. In 2013, the company nearly tripled its revenues, exceeding its 2012 revenue figures by 184 percent. According to Sonetel founder Henrik Thome, the company is set for even stronger revenue growth in 2014 and plans to double its workforce.

Then there’s the health sector where digitalization is rendering medical knowledge truly borderless and making consumer health services and technologies an exciting and largely untapped arena for international growth. In December 2012, for example, the FDA approved AliveCor’s smartphone-enabled heart monitor, a single-lead electrocardiogram (EKG) reader that attaches to the back of a smartphone and displays heart rate info via an app. The US$100 device enables an EKG to be done anywhere a smartphone goes, which in turn allows for rapid assessments of cardiac problems and real-time consultations with cardiologists using AliverCor’s analytical services. This relatively low-cost device could also enable mass screening in developing countries, where cardiologists are comparatively scarce. The creator, Dr. David Albert, an Oklahoma-based cardiologist who likes to be called an “inventor,” recently received significant funding Qualcomm (a major player in the wireless industry) to help scale up his new business.

Two main implications follow from the growth of micro-multinational firms like AliveCor and Sonetel. The first is that economic might and company headcount are no longer tightly correlated. In the twentieth century, most firms needed to get big to attain the scale necessary to develop global distribution networks, to tap into international talent pools and to bring in the large revenues that drove profits and created jobs. Today, you no longer need to be a large organization with thousands of people on your payroll to design, develop and market excellent products and services on a global basis, especially when you can replace those large investments in overseas staff and facilities with Internet-based business platforms and marketing.

The corollary is that being small is no longer a liability; rather, it’s an asset, especially when you consider the fact that large companies are typically weighed down by bureaucracy, legacy costs, and dysfunctional hierarchies. Put simply, modern communications technologies and the cutting-edge business practices they engender are reshaping the economic landscape and enabling a new breed of “micro-multinationals” that are leaner, more agile and more capable of exporting their products and services across borders.

Ultimately, micro-multinationals should serve as an inspiration for the SMEs in Canada and the United States that unsure how to go global. Even today, perceived limitations in financing and infrastructure oblige most SMEs to focus on serving geographically defined niche markets. But in limiting their international ambitions, entrepreneurs limit their company’s growth prospects. Micro-multinationals, by contrast, use online platforms for marketing and collaboration to access international markets with a minimum of bureaucracy, financing and overhead. These internationalizing firms are better positioned to capitalize on the growth of middle-class consumers in emerging markets and are therefore much more likely to have a more substantial impact on economic growth and job creation.

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