'Slow Down and Create Things': The Overlooked Entrepreneurship Opportunity in Developing Markets

With so much media attention constantly flowing to Silicon Valley technology companies, today's entrepreneurs may assume that competing in tech is the only avenue for creating a worthwhile new venture or getting the capital necessary to do so. Contrary, however, to the Silicon Valley maxim of “move fast and break things,” there continues to be, as an alternative, a large, often-overlooked opportunity for entrepreneurs and their investors to build businesses in “traditional” industries that, over time, progress their way to dominant market positions, particularly in developing markets. 

Using Latin America as an example of the entrepreneurial opportunity, the lack of innovation, structural undevelopment, and non-adherence to developed world processes in many sectors presents a vast opportunity for enterprising individuals. By introducing fresh perspectives, efficient systems, new capital and best practices from more advanced economies, entrepreneurs can revolutionize outdated industries in the developing world and build outstanding scale. Entrepreneurs who can overcome these key challenges stand to prosper in the business opportunities that the developing world offers:

1. Overcome a scarcity of capital in the developing world; 
2. Find a new way to compete in forgotten industries; 
3. Recruit outstanding international and domestic human capital; 
4. Adopt a profit-first mentality to building profitable enterprises; and
5. Have the perseverance to withstand the inevitable challenges or, “kicks to the teeth” as we more informally call them, that you will face when taking on the challenge of business-building in a developing market.

In a world captivated by tech startup stories and billion dollar pre-revenue valuations, it can be easy to ignore the option to build businesses in more traditional industries where the existing competition is lacking as is so often the case in emerging markets. Why not think differently? Entrepreneurs can form competitive strategies to go after forgotten industries with complacent incumbents in emerging markets and hit them head-on with capital, talent and profitable business models. Emerging market entrepreneurs have a chance to build market leaders that can become big opportunities for themselves and the investors that they will need to bring along for the ride.

Speaking from Experience

Together, we share 15 years working in Colombia where the challenges we cite above (such as access to capital and outdated industry practices) certainly still exist. Six years ago, we picked our battle in the Colombian coffee industry. Coffee is Colombia's national product. Colombian coffee is known all over the world. But, for a half century, minimal investment has come into the industry and the technology used to harvest coffee, until us, has largely remained constant over that 50-year period. Since 2017, we have brought over $65 million of investment to Colombia and built what is now Colombia's largest coffee producer. We offer this story to show you that what we preach about the ability to disrupt traditional industries in developing markets is possible. As this is the market where our experience comes from, we will use Colombia to shape much of the following discussion. Colombia should be representative of the hurdles that entrepreneurs will find in most, if not all, developing markets.

Overcoming the Capital Gap

Access to capital in developing markets, simply, is tough to come by. When examining the availability of institutional equity and debt capital in developing markets, it becomes evident that the majority of investments are channeled towards the tech sector or government sectors such as infrastructure and energy. This concentration of investment dollars keeps many aspiring entrepreneurs out of the market but at the same time creates an opening for business builders in traditional industries if they have access to capital. 

By way of example, we opted to fund our business with investment from high-net-worth international investors. If your business has a chance to generate returns that can substantially outperform “less risky” investments in developing markets, we can testify that there are an increasing number of wealthy investors who want to diversify some of their capital into developing markets. You will, however, need a compelling case. 

The honest truth is that, in developing countries, the banks, in many cases, do not function as effectively as in developed markets. Well, certainly not in the manner you might be used to in a market like the U.S., for example. Here in Colombia, this banking inefficiency has obligated us to build assets, buy land and equipment and develop our business almost exclusively using equity capital. At that point, maybe, once you have paid for all your assets upfront and put them into operation, will banks lend to you. Expect delays, bureaucracy and low debt to equity ratios. If you can work through this process in local markets or tap into international debt, you can create a massive competitive advantage in developing countries against those who lack such capital. It is not easy, but deep moats can be built. 

Going After Forgotten Industries

We focus on solvable, profitable verticals. We spend our time on disruptable, traditional industries in developing markets. We thrive in the industrial, rugged capitalism that defined the early economic development in the U.S. Other entrepreneurs can do the same. In developing markets, there are many historical industries where bloat and inefficiency have created opportunities for disruption. 

Example industries span the full spectrum: banking, construction, real estate management & development, consumer products and beyond. Time on the ground in the market where you want to build will be critical. The inefficiencies in that market, if it is anything like our experience, will almost hit you right in the face.

Access to International and “Home-Grown” Human Capital is Key 

One key aspect of bringing traditional industries in developing markets to the next level lies in harnessing highly-skilled “international” human capital. Entrepreneurs can tap into a global talent pool by attracting skilled professionals from around the world to bring their expertise to developing markets. This injection of diverse knowledge and experience can drive innovation, enhance operational efficiency, and help bridge the gap between local practices and global standards. The ability to tap skilled labor pools from outside of developing countries has been key to us in developing our own portfolio companies in LATAM.

Additionally, “home-grown” human capital can play a pivotal role in industry development. Initiatives like those adopted by our own portfolio company at the Polygonus Academy, which focuses on training and nurturing local talent to achieve an international level of sophistication, showcase the potential for cultivating a skilled workforce within developing markets. By investing in education, vocational training and professional development, these markets can create a sustainable pipeline of capable professionals who can contribute to the growth and evolution of traditional businesses that can go on to become market leaders, often at much reduced labor costs.

Traditional Businesses Have to be Profitable to Survive

In contrast to many tech companies, who seemingly indefinitely prioritize growth over profitability, businesses competing in traditional industries in developing markets will most likely need to be profitable to receive ongoing investor support. Our first-hand experience in Colombia proves this point. Colombia recently released its list of the country's 1,000 largest companies. Of those 1,000, only 139 companies were break-even or unprofitable in 2022, meaning the overall majority, 86%, were profitable. 

Investors and institutions willing to place capital into developing markets, we have seen, have much less tolerance for funding loss-making businesses than one may see in the U.S. For example, as of the start of 2023, of the 2000 companies listed on the Russell 2000 Index, 800 of them, or a large 40%, had negative earnings. Early profits are critical for the entrepreneurs who see the same opportunity as us to build in developing markets.

It is worth pointing out for entrepreneurs who are thinking that it may be more attractive to buy a business in a developing market than start from scratch, that valuations tend to be much more reasonable and realistic than the enormous valuations we often see in more developed markets. Unlike ventures heavily dependent on venture capital or speculative valuations, traditional businesses in these developing markets, in our experience, offer more reasonably priced enterprise values, often measured at 5-7 times EBITDA. Compared to more developed markets where companies often trade at much higher EBITDA multiples or, rather, on the basis of revenue multiples, developing market acquisitions can present an attractive opportunity for entrepreneurs who want to acquire existing platforms rather than greenfielding a new enterprise.

A Test of Your Fortitude

Despite the insights we’ve shared here, building a business in a developing market is not formulaic. Success will come down to making smart, methodical decisions, day after day for an extended period of time. If you have that persistence, very few competitors will be able, or even have the willingness, to compete against you. For many entrepreneurs, this challenge will come with a language and cultural learning curve. 

It will require you to adapt to new ways of doing business. In many instances, like we continue to face, you will have to overcome the suspicions of being a newcomer and outsider. Entrepreneurship in all cases is challenging. Developing markets, however, come with their own unique gut punches. The entrepreneurs who will win – and the upside can be large – will have to be willing to go all twelve rounds. 

Cole Shephard is the founding partner of the alternative asset manager, Legacy Group, and the founder and a board member at the Green Coffee Company. As a former PwC alum working in accounting, advisory and consulting solutions across the United States, Bermuda, Hong Kong and Beijing, Cole is an expert in emerging markets and understanding the capital movements of high-net-worth investors.

Adam Jason is a partner at Legacy Group and a board member at the Green Coffee Company. He is an attorney specialized in corporate finance, governance, securities regulation and international business transactions. He has advised Fortune 500 companies and investment banks, including JP Morgan, Morgan Stanley, Citibank and Goldman Sachs, through initial public offerings (IPOs) and offerings of debt and equity securities exceeding an aggregate of $10 billion.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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