The original article can be found here: https://www.linkedin.com/pulse/does-venture-capital-work-emerging-markets-basil-moftah-hprxc/.

Outsized returns are possible, but risk needs to be controlled

The article rightly points out that while emerging markets offer the potential for high returns, as evidenced by Alibaba and Tencent, they are not a guaranteed path to success. Factors like political instability and regulatory hurdles can significantly impact returns. As a secondary market investor, this reinforces the need for discipline at both the macro level (addressing instability risk) and the micro level (thorough due diligence). As a secondary market investor, it is important to bake in an additional margin of safety through discounts and portfolio diversification. 

Liquidity is a major concern

The lack of robust exit options, particularly IPOs, in many emerging markets is a significant concern. This article highlights the reliance on acquisitions, which may not always offer the desired returns. Grab, a ride-hailing giant in the region has grown substantially but has primarily pursued private funding rounds and strategic acquisitions rather than an IPO, reflecting the challenges in finding liquidity through public markets. Nodem generally underwrites exits through acquisitions at more modest multiples. It is important to prioritise companies with a clear path to liquidity.

Early profitability is a double-edged sword

While many emerging markets startups prize profitability early on due to the limited follow-on funding available, it's crucial to assess whether this comes at the cost of long-term growth potential. Ultimately, investing in a profitable but stagnant company isn't appealing. 

Discipline and due diligence are paramount

Investors must go beyond traditional financial analysis and delve into factors like the regulatory landscape, political stability, competitive landscape, and the company's social impact. 

Emerging markets represent over 50% of global GDP and +60% of expected global GDP growth over the next decade. Many valuable companies have been created and exited, and many more will come. However, the dispersion of financial outcomes for financial emerging markets tech investors is maybe the widest of any asset class. Nodem invests in mature VC-backed companies and funds with a rigorous underwriting process. We look to generate alpha by identifying strong companies and offering a win-win liquidity solution to those who need it. Whilst we are not faced with the same fundamental early-stage risk, we still face many of the same environmental challenges and must remain extremely rigorous and disciplined in our approach in pursuit of outsized returns.