As the technology sector becomes increasingly decentralized, venture capital has become a more global industry: in 2022, more than 50% of venture capital deployed worldwide was invested in startups outside the United States, according to data from the National Science Foundation (NSF). This is in stark contrast to 20 years ago, when roughly 80% of global venture capital went to U.S. companies.
Countries such as China, India, Israel and the UK have led this transformation, but smaller ecosystems in Europe, Latin America, Southeast Asia, the Middle East and Africa are also contributing.
About 26% of the world's unicorns currently exist in these markets, according to a report by Endeavor Global, an organization that works with founders to launch companies with economic or social impact around the world. Endeavor has worked with more than 1,500 companies in over 40 countries to date.
Endeavour Global's co-investment fund, Endeavour Catalyst, has over 50 unicorns under its belt (it has invested 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 buy now, pay later startup Tabby and Turkish gaming company Peak Games.
The boom year of 2020-2021 saw investments, primarily from the United States, fuelling the creation of unicorns in these markets. However, global venture capital investment activity has since slowed, falling 38% year-on-year, resulting in fewer unicorns, a slower deal process and a withdrawal of global investors from the startup ecosystem.
This setback and the reset of valuations from the past few years has spooked some actors across these ecosystems. Not only are there not enough local investors willing to write big checks, but most investors are beginning to approach deals timidly and sometimes selfishly, according to Endeavor CEO Linda Rottenberg. For example, a Partech report found that the African ecosystem saw a massive investor exodus in 2023, with the number of unique participating investors dropping by 50%.
In a recent conversation with TechCrunch, Rottenberg discussed how local investors can step up their game, why patient, long-term capital needs to be prioritized in the startup ecosystem, and the role of Endeavor and its co-investment arm in the midst of all this.
This conversation has been edited for length and clarity.
Venture capital has become a global industry. This is evident from Endeavor's 300+ investments, most of which are outside the US. One in six companies in the portfolio is a unicorn. How did Endeavor achieve this?
So I think it's true that we are entrepreneur-first. We want to support entrepreneurs, and even if all of our investments in some founders don't work out, we're still going to watch the next generation of executives start the next companies and ecosystems. That's the secret of Silicon Valley.
I was with the CEO of a company in Africa that went out of business, and he told me the story of how 10 people started their own company. [startups]I asked another CEO who just left his position and he told me 30 others have done the same thing. This is what seeds the ecosystem. And we are not scared. If the naira or riyal goes down, we are on the side of the entrepreneurs. We have 600 people on the ground who combine this capability with pattern recognition and global understanding. That is why we have 58 unicorns and 24 exits.
Our last fund was $300 million. We're raising fund V next year, and we're going to cap it because we want to invest $2-3 million in startups. We're in 96% of the deals in our network with a long-term view because entrepreneurs, investors, and the ecosystem trust us. I think that's the biggest reason.
How does the co-investment process with the international community work?
When you become an Endeavor Entrepreneur and go through a unanimous selection process of venture capitalists, entrepreneurs, or people who have scaled companies like Amazon or Netflix, you become an Endeavor Entrepreneur, which means you become part of that peer-to-peer network.
We help our clients expand their market internationally and solve any business challenge, and if they raise more than about $5M (we've invested in $5M and $200M rounds), Endeavor Catalyst will match 10% of the round, led by qualified institutional investors, up to a maximum of about $2M.
Finding enough qualified institutional investors for Series A, B, C is one of our biggest challenges in Africa. So one of the things we're working on is seeding the local ecosystem. We have very strong seed stage investors right now, but we need to convince them to get growth stage backers. We're also trying to encourage investors around the world — the US, London, Singapore, Dubai, Saudi Arabia — to look at founders in, say, Nigeria, and then build a list of qualified leads that Endeavor Catalyst can follow. So it's a combination of that. So it means we're patient and we try to build the ecosystem locally, and also attract people around the world who might be more apprehensive about emerging markets.
What efforts are you making to build an ecosystem in the region and attract investors from around the world?
We were early players in Brazil and Indonesia, as well as other markets like Saudi Arabia, Spain, Greece, and of the 40 markets we're currently in, the ones we're most excited about over the next five to 10 years are Nigeria, Egypt, and Vietnam, which are our next markets.
We are trying to convince investors around the world who feel they missed out on investing in Brazil and Indonesia that these markets are next. We believe these are big, important markets with impressive size, scale and talent.
So what we are trying to do is make investors feel FOMO instead of waiting until there is a massive exodus from these countries, which will take the next 3-5 years. That's why we want to work with local investors to get stronger, more entrepreneur-friendly terms, which hasn't been the case recently in African markets.
I don't think investors here have experienced a downturn, so the liquidation preference terms are much tougher. Everybody in the world is buying companies. Investors in other markets are doing it where the entrepreneurs and teams still have the incentive to grow. But investors here seem to be doing it to get what they want. That's not a good strategy in the long term, because it will destroy the company.
And then there's the fact that in Latin America, Southeast Asia, the Middle East, you're seeing local founders becoming funders and local capital developing over time, from Careem and Checkout.com to Mercardo Libre and Loft, you're seeing founders becoming full-time funders, so it feels like we're starting to see maturity around the world, but Africa is still really early days.
I think there are a few African founders who are now part-time or full-time funders, although I acknowledge it's not on the same scale as other markets. But speaking of global investors, you mentioned that Endeavour is trying to bring them back. How has their exit impacted Endeavour's deal process?
That's why it's great that we have a hybrid model. We have a $500 million fund and we need qualified institutional investors to help us invest. We've invested in five Nigerian companies. We want to double that number in the next few years. That would be great.
But at Endeavor, in the nonprofit ecosystem that we're building, we're there no matter what. So the answer is that the fund can only invest if there is a qualifying investment. So we're working really hard to convince investors that we have great people, it's a good time, the prices are reasonable, and we're on our way to profitability.
The Brazilian market is recovering. Incidentally, there are about eight companies in Brazil that are preparing to IPO after Nubank. Nubank is 10 years old, and in Brazil it was already 10 years old. So that will actually happen in Nigeria and Egypt. Meanwhile, we are focusing on supporting entrepreneurs, helping them explore their options: improving profitability, raising debt, looking at equity solutions if necessary. As I said, we would be much happier to have more Series AC investors with whom we can talk about how to restructure the deal. We do that in Latin America and to some extent in the Middle East. It is more challenging 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 up in the market.
Could the problem also be a lack of promising growth-stage startups in Africa? Now, growth-stage funds focused on the continent are starting to jump in at a much earlier stage.
Tiger and SoftBank [very high] Valuations for 2021. We've seen people revaluing all over the world, and that's normal and fine, as long as they do it in a way that gives some incentives to the next stage founders. I think growth stage startups are willing to accept a valuation cut, but it has to make sense.
When times are good, U.S. investors come in, but they always leave. There will always be tourist hubs, so enjoy them while they're there. But emerging ecosystems, especially in the growth phase, must have a strong local investor base so that investment can continue even when the tourists leave.
What do you think local investors in Africa can learn from their counterparts in Latin America, Southeast Asia and the Middle East?
You should learn that now is the best time to invest. Going back to Warren Buffett's words, “Be fearful when others are greedy, be greedy when others are fearful.” Basically, now is the best time because everyone is afraid. Believe in the talent, believe in the market, especially Nigeria, and take a long-term view. It takes 10 years for American companies to grow, but it will take 10 to 15 years in emerging markets.
There is a company in Mexico called Clip, which is going to go public after 15 years of existence. There is a lot of expectation for IPOs in Mexico. It takes time. And once it happens, it gains momentum, as we have seen in Brazil, Indonesia, big markets, etc. Invest now and don't suffer from FOMO later. Invest in companies A and B. There is still room to make money. And VCs with large funds need to do less seed investments and put their money to good use. That's my opinion.
Conversely, what can African founders learn from other emerging markets?
They should learn that it's always hard for the pioneers. The first generation is always the hardest, and they should be proud of what they're doing, even if all their businesses aren't working right now because they don't have capital or they're just entering the market.
Every idea that we back becomes the seed of an ecosystem and creates this multiplier effect. I think investors need to be generous to founders and give each other a break.