Navigating risk for investing in high-growth emerging markets
With William Bao Bean, Managing General Partner, Orbit Startups
Emerging markets are rapidly outpacing their developed counterparts in terms of growth, offering significant opportunities for investors. According to projections from the International Monetary Fund, emerging markets are expected to grow by more than 4.2% in 2025 annually, compared to 1.8% for developed economies(1). Despite this, the majority of capital remains concentrated in developed economies. However, as global investors recognize the potential of emerging markets, capital flows are rebalancing post-pandemic toward these high-growth regions, returning to their highest level since 2018(2). For investors and allocators to continue to perform, they will need to follow this trend and re-balance their exposure to emerging markets to capture the next wave of global growth.
Emerging markets require a different investment strategy
It is essential for investors looking to tap into the high-growth potential of emerging markets to understand that investing in these regions requires a different approach than investing in major economies like the US, China or Europe. Emerging markets are not a single market; it's a collection of fragmented and often volatile economies so a successful investment strategy must avoid both concentrating capital too much in one market and treating emerging markets together as a monolithic entity.
Localized risks such as political instability, regulatory challenges, or currency volatility can have outsized impacts on investments in any single country. Investors seeking exposure to these markets must think beyond the idea of “investing in an emerging market” and instead focus on “investing across emerging markets.” This broad exposure helps mitigate the risks inherent to any one country, while still allowing investors to capture growth.
Positive unit economics equals resilience and attracts global capital
We believe that the best way for investors to tap emerging markets growth while managing risk is to look at businesses that can operate across multiple markets.This strategy reduces country specific risk while enabling the portfolio companies to capitalize on cross-border opportunities. While many VC funds have encouraged companies to hyper-grow at the expense of profitability, known as blitzscaling, we believe that emerging market companies should focus on scaling without becoming over-reliant on external capital. Achieving positive unit economics helps startups weather market downturns and reduces risk for investors. These companies are then better equipped to attract follow-on investments from global capital markets and likely to survive when access to capital is constrained.
A de-risked ecosystem approach to emerging market investment
Orbit’s approach has been to invest across regions and apply lessons learned in one market to other similar markets. While we don’t believe businesses can simply be cloned from one emerging market to another, we see that these markets are often similarly resource constrained i.e. low connectivity, financial trust, infrastructure or political stability. Companies should take learnings from more mature emerging markets that have already benefited from a technology driven economic transformation such as China and India to understand what did work and as important what didn’t work and apply it in their local market. Solutions to these common problems in low resource environments should be local, but companies who can learn from other markets will have a competitive advantage.
Emerging market problems require emerging market solutions
Developed markets have the advantage of access to huge amounts of capital to put towards technology driven transformations such as the move from fossil fuel to electric transportation. Billions of dollars have been invested up front into charging infrastructure in North America. Countries such as India do not have a similar capital intensive path to adoption and so an emerging market solution must be brought to an emerging market challenge. In India, the startup ecosystem works together to drive EV adoption. One startup launched a business to business (B2B) last mile delivery service for ecommerce and food delivery with 2-3-4 wheelers and charging stations. These vehicles and stations were then turned into an asset backed financial product by another startup where small and large investors pool capital and are paid for each charge and delivery. After breaking even the investors receive an attractive return. Startups are creating a national electric vehicle charging infrastructure, enabling not just B2B delivery but also supporting consumer adoption of EVs in a staged manner requiring zero up front capital. We are now migrating this same model to Africa. using what we call “cross-border innovation arbitrage”.
Investors need to take notice of emerging markets
Emerging markets are the fastest growing economies in the world and investors and allocators need to take notice or be left behind. As capital rapidly flows towards these high-growth regions, investors wanting to capture this opportunity need a different approach, as emerging market problems require emerging market solutions.
Emerging markets are not just a place to invest; they require a mindset shift—view them as a mosaic of opportunities, each with its own unique risks and rewards.
