Entrepreneurship in Emerging Economies: Boom and Bust and Business Models

A New Haven for Western Capital

Ever since the opening up of the global economy in the 1990s, several hitherto Third World countries in Asia and Africa began to liberalize and integrate themselves into the global economic system. This meant that there were more chances for entrepreneurs in these countries and from abroad to flourish because of the business friendly policies pursued by the governments in these countries.

This also had the effect of spurring investment and incubating new ventures either due to venture capital investments from the West or due to internally generated or sourced avenues for investment.

While the former was helped by the opening up of the financial markets of countries such as India to foreign capital, the latter was helped by the accelerating economic growth in these countries which freed up capital of the business houses that can then spare some money for funding new startups and new ventures.

Barriers and Crony Capitalism

Having said that, it must also be noted that despite the liberalization and the laissez faire approach taken by these countries, several obstacles remained in the way of entrepreneurs when they ventured into the business world.

For instance, though India witnessed a startup boom in the last decade, until recently, entrepreneurs had to contend with dealing with red tape and bureaucracy which meant that more often than not, they had to face delays in securing approvals and licenses to start their ventures.

Moreover, in the initial rush to open new ventures, many entrepreneurs in the emerging economies in Asia such as Indonesia, Thailand, and India resorted to “crony capitalism” which meant that they succeeded not because they had a game changing idea or because their business models were superior, but because they had the right contacts and the right connections which made it easier for them to secure licenses, funding, and other aspects.

The Collapsing Startups

Therefore, these ventures often started with a bang and ended with a whimper once the projected revenues did not materialize due to the deficiency in their business model or due to the fact that most of the stratospheric projections that they made to secure funding were based on flimsy and unrealistic growth and revenue expectations.

Matters were also not helped by the global economic crisis of 2008 which saw many such ventures collapsing because of the funding that dried up as well as due to the fact that many of these ventures were based on dubious business practices.

In addition, the regulators who by now were aware of these shenanigans quickly started to look deeper into these ventures which meant that they could not rely on their connections alone to sustain themselves.

Further, the civil society and the activists fighting such practices became more aware and more conscious of these practices which resulted in greater scrutiny.

Success Stories

Of course, this does not mean that all new ventures launched during the economic boom were necessarily based on flawed and corrupt practices.

For instance, there are many Asian companies who not only became leaders in their chosen business area but also took their brands global and succeeded in winning in the global marketplace.

Indeed, the fact that Asian brands were now recognized for their worth and inherent value generating capabilities is exemplified in the success of the Indian IT Industry, the success of the Chinese companies such as Alibaba, and the spectacular growth of Latin American and African companies.

However, the fact remains that in the aftermath of the bust of 2008, many Western venture capitalists were wary of funding emerging market startups without due diligence and started to insist on “showing them the money” or to have robust business models.

A New Boom ?

Finally, the situation as it stands now is that eCommerce companies such as Flipkart, Snapdeal, and Myntra in India have attracted Billions of Dollars in funding in recent years.

While one cannot paint them with the same brush and conclude that their business models are suspect, the fact remains that most of these eCommerce companies including Uber base their revenue growth projections and estimates on future business as well as gross sales which after discounting cannot be said to yield much in profits.

Indeed, the fact that several questions are being raised about the sustainability of these companies must surely caution investors and industry analysts as to whether these companies would not meet the fate of the Dotcom ones that collapsed during the bursting of the tech bubble and other startups that collapsed in the aftermath of the 2008 crisis.