The Realistic Optimist is a newsletter publishing exclusive opinion pieces from VCs and founders around the world.
Author biography
Robin Butler is a partner at Sturgeon Capital, a London-based VC investing in frontier and emerging market startups.
He is also on the board of several companies, including Trukkr (Pakistan) and Billz (Uzbekistan).
The emerging markets conundrum
Emerging markets (EMs) have struggled to gain investors’ sustained trust. Even for the shrewd operators navigating political risk, inadequate infrastructure and low buying power, one stubborn issue remains: currency depreciation.
Many EMs, including the most promising ones, suffer from a common ailment: their currencies tend to lose value over time. And generally faster than in developed markets.
In 2014, one USD was worth 8.5 Argentinian pesos. In 2023, it was worth over 800 pesos.
In 2014, one USD was worth 101 Pakistani Rupees. In 2023, it was worth over 200 Rupee.
In 2014, one USD was worth 168 Nigerian Naira. In 2023, it was worth over 800 Naira.
This poses a serious issue for investors in these markets. Their return on investment has to beat the depreciation rate. If it doesn’t, they will have lost money. If it does but only by a bit, they might wonder if the trouble was worth it.
Yet, these markets keep galvanizing investors. The macro tailwinds are promising: vigorous economic growth, young populations and a hunger for technology. So far however, the investment vehicle that can ride those tailwinds while delivering compelling returns has remained elusive.
Most investment options in these markets remain institutional. Over the past 10 years, the MSCI Emerging Markets Index (which captures large and mid cap representation across 24 emerging markets) achieved net annualized returns of 3.01%. The S&P 500, which measures the performance of 500 large US companies, returned 12.39% annually over roughly the same period.
The savvy investor might ask: why take a risk on emerging markets in the first place?
The EM conundrum is the following: macro tailwinds are definitely exciting, yet available investment options seem to deliver mediocre returns once adjusted for currency depreciation. Enter venture capital (VC).
VC as a way to beat depreciation
VC takes its roots in the whaling industry, a risky but potentially lucrative business. Investing in whaling meant betting on 10 whaling expeditions with the understanding that 9 would come back empty handed (or not come back), while one would bring back enough riches to net a return.