Episode Transcript
Connie Chan: Chris and I share a common theme: we love studying other parts of the world and learning from founders in places outside of the U.S. Innovation really can come from everywhere. Before we jump in, Chris, can you share some of what you’ve done in the past?
Chris Schroeder: I came to emerging markets in particular as an operator, not as an investor. I was something of a globalist all my life, and had certainly traveled as a tourist. But it was really when I was running tech media companies [that I became interested in investing in emerging markets]. I was an entrepreneur—I ran WashingtonPost.com, then I went out and made my own company—and I outsourced technology to pretty much every corner in the world. And unlike a lot of our gringo sisters and brothers, I actually went to visit the partners that I had in these parts of the world.
The fact is, when you get on the ground and meet these people, you realize it’s not just the obvious statement—which is, talent is everywhere—but it is that everyone has a supercomputer in their pockets and they want to start building things for their market on their terms. And that was really an eye-opener for me.
Connie: You cover so many different regions of the world. Which regions have you spent time studying or spent significant time in?
Chris: At one level, it sounds like I’m spread too thin. But I think one of the big theses that I have learned in traveling is: that which is happening among emerging markets is more shared, in many cases, than their compatriots in Silicon Valley or even Beijing. And so you just have this pattern recognition across emerging markets that I picked up very early. So I spent a lot of time and have invested in the Middle East, Southeast Asia, Latin America, a little bit in Africa, and I have two investments in Pakistan. And I see the same phenomenon repeat itself over and over again.
Chris: Well, I think you have women and men who sit in a room and discuss the nature of the challenges they have as much as anything else. So last-mile logistics is a tremendously difficult thing in most of the markets that we’re talking about right now, as it has been in China. Navigating environments that are in flux and unpredictable—that’s a big thing. Another big thing is, frankly, just educating consumers in the markets. I mean, the fact is that you’ve got massively unbanked populations who, for the first time, can get credit quite easily on their phone and have never actually really had that experience to leverage. So many of the best entrepreneurs I meet are spending a fair amount of their time literally educating a consumer base that moves very quickly and rapidly. That is still an element of something that happens there that doesn’t happen in many of the companies that you see.
Connie: Maybe we can talk a little bit about how go-to-market strategies are so different from country to country.
Chris: We have this conventional wisdom that if you even use social media in this form, you want to have influencers on Instagram that have a million or 2 million followers. And certainly, that works in certain circumstances. But one of the things that you see in emerging markets—and I see this in Africa, in particular—is trust is the most important thing. To be able to light up people who are the trusted community leaders has become something which is really quite unique to these areas and very, very effective.
Connie: What are some specific anecdotes of go-to-market strategies that have been really effective in the developing world?
Chris: In a way, this goes back to our conversation about the American playbook. In many respects, Uber should have been the ultimate case study of the American playbook. They had all the technology, all the capital, all the experience to go into any market and win it all.
I can remember a few years ago when Uber was doing quite well in the Middle East, these upstarts—some McKinsey veterans—started a company called Careem. And everyone thought they were crazy. Like, how can they possibly take on Uber? And there were a whole host of reasons around local understanding that worked for them, but one of the biggest and most obvious was that they began to offer cash payments when you finished your ride in a Careem car. They knew that most people in the Middle East were not comfortable yet in the safety and protection of a digital transaction. And you watched the numbers: slowly, all of a sudden, Careem started taking off because they were adapting to the specific needs of the market overall, while Uber sat back and said it wasn’t going to happen. Needless to say, within a year Uber was offering cash acceptance. But it’s an example of these little things that don’t seem like big things actually are game changers.
Connie: So when you study a new region, you get on a plane—which, I totally agree, the best way to learn is to just show up and observe how people are behaving. How much time do you try to spend in a place before you start to form a view and say, yes, this is a place I want to double-click on, spend more time on? Or: this place is interesting, but has some attributes that make it much more difficult than, say, another part of the region where I already have a lot of connections.
Chris: Someone made a funny remark to me the other day when I was Southeast Asia. They said, “The good news about doing what you do in emerging markets is if you go to the five right weddings, you can actually get to most of the people who are running the ecosystems overall.” It’s a cute statement, through it’s not really true.
But what is true is that I don’t rely merely on my observations, I rely on my reporting. I think you can tell very, very quickly whether an ecosystem is beginning to move in the directions you want or what the constraints are, often regulatorily or elsewhere.
Connie: So you’re looking for momentum.
Chris: There are two things. One is something you and I have talked about a lot: momentum is key. Are the dynamics right? But the other one, which you’ve often pushed me on, I think quite rightly—and, of course, China was a great beneficiary of this—is scale. Because at the end of the day, there’s 100% smartphone penetration in Singapore, but if you are a Singapore startup alone, there’s only so much you could do. So it begins to beg the question, what are the markets where you can expand? What are the services that allow you to take what you’re doing and still have some edge as you, yourself go to other countries? And I think that even the big juggernauts in some of these regions have learned that they are as much an aggregation of local companies as they are just a one-stop shop, in terms of what they offer.
Connie: Yeah, I agree. Market size is so important in investing in general, especially at the early stages that you and I invest in. And that was a really big reason why I was so bullish on China, not just sheer market size, but also sheer amount of capital that was also pursuing those opportunities. So I knew lots of startups were going to get funded over the last 10 years, which spurred more innovation and made more founders want to jump into the mix. It kind of de-risks this idea of jumping into entrepreneurship. Because we also forget, in a lot of these emerging countries, if you’re picking between a job at say, Microsoft, or going to do your own startup, it’s still a very big personal risk that you’re taking on for you and your family. But when there’s so much capital that floods into an ecosystem, that does de-risk it to some extent.
Chris: I see this in some of the markets I’m in. The good news is there’s more capital than ever, but it is a problem if there’s more capital than there is opportunity, or opportunity at certain stages.
Connie: Right.
Chris: Did you find in your early China experience that that was just part of the arc? At some point, you actually have too much capital and then it works itself out? What did you experience there?
Connie: Well, in China, as you know, the market size is so huge. We have over a billion people. So it was still a green-field opportunity, I think. But to your point, a lot more competitors get funded. But if you peel it back, there’s also logic to the madness: Because the market’s so big, the pie is so large, that it does actually warrant that crazy risk-taking. Even if a company is already doing well, I might give a ton of money to another competitor because if they win, the pie is so much bigger.
Chris: I had a Chinese venture capitalist who I once asked, “So what are you thinking about emerging markets?” Because they were beginning to travel around as far as Latin America, but certainly in Southeast Asia. Yeah. And they said, “It’s a very simple calculus: I have to decide, do I want to go into third- and fourth-tier cities in China, or do I want to go into one of these markets?” Because there are more people in the third- and fourth-tier cities of China than in an entire market that’s available now. And it came home to me, the point you were just making.
Connie: You know, that’s another really interesting thing about some of these developing, emerging markets. There is such a difference between a first-, second-, third-, fourth-, and fifth-tier city in China—a much bigger difference than in the U.S., from state to state. I can take a state in the Midwest, compare it to New York or California, and that difference is far less than the difference of, say, Beijing and a fourth-tier city. I would imagine that the same thing is true in a lot of the developing emerging markets that you study.
Chris: Oh, inarguably, but it’s nowhere near the scale. I mean, the fact is when you look at the population in a lot of even the larger countries—places like Egypt and Indonesia—a large swath of the population is still in a Cairo or in a Jakarta. The second- or third-tier cities are large, for sure, but not in the same order of magnitude. The drop off becomes different than what you’ve experienced in China.
Connie: That’s true. When you talk to different founders in all of these different regions, do you find that there are certain traits that are more necessary for developing markets that you now have a newfound appreciation for?
Chris: There is a certain patience. There is a certain navigation and adjustment, particularly in what happens top-down, with governments and regulation, that I look for—almost a sangfroid in entrepreneurs.
I remember talking to a fantastic entrepreneur from Pakistan. And this was earlier in the summer, when things were getting pretty dicey there. So I said to him, “Look, you’ve been having these political problems. It’s unclear what’s happening with the financial situation. And you just had this terrible flooding. How are you thinking about all this?” And he looked at me for a second and said, “You mean another July in Pakistan?” And I’m like, good answer. You know, he wasn’t ruffled by it. He just understood that there are dynamics that not only are problems that they have to work around, but in some respects there could be unique solutions to those problems by being calm in the way that you look at them.
Connie: The companies that you’ve spent time with in these emerging markets, when they conquer that market and look for international expansion, how do they generally approach figuring out where to go next?
Chris: This has become a very big question. In some respects, the blow-off of the last year to 18 months has taught some humbleness. There are some companies that I looked at that frankly, in my view, their existing market was large enough and those problems were thorny enough that they probably could focus on [tackling that market first], before they should start figuring out where to roll out. I saw companies from Africa, from the Middle East, and from Southeast Asia that started going to London and different parts of the world on Day 1. I was skeptical of it at the time and in hindsight I’ve been proven right, because most of those companies are not doing very well right now.
Connie: Do you see more of a tendency towards a super-app type of business model? I wrote about super-apps recently. WeChat is the best example of it, in my mind. But it’s really being able to go to one company as a one-stop shop, like you mentioned. It is not single-product, single-problem focused, but [the company] knows a ton about their customer and can guess what other needs and services that they can provide. Sometimes it’s things that they’re building in-house. Sometimes they’re working with third-party companies and just sharing that distribution and traffic. Do you see that model much more often in these developing countries?
Chris: What I’ve seen outside of those examples is really, in a way, definitional of what you mean by super-app. Super app means almost all things to all people, including video and entertainment. That’s one definition. But I think the other definition, which is interesting to me, is the penumbras around the core service. You don’t necessarily have to offer 20 things, but if you can offer four of the right things, you’ve got a hell of a business, and maybe another day you can fight to do it.
So Mercado Libre, which is the ecommerce juggernaut of Latin America, is a great example of this because there are lots of [services that they could have offered] with the number of people they reached. They were regionwide, after years of fighting that battle. They were an example that everyone used about building a cross-border company in a place like Latin America elsewhere in the tech world.
But where did they go? They went to payments. So the first thing they did was say: We have a lot of data. We’ve got the ability to facilitate people’s ability to pay. They wanna pay more. Covid has accelerated their desire to pay more. By the way, if we can do payments, it ain’t gonna be long until we can do credit.
And then all of a sudden you start saying to yourself, these are big, big areas. And, you know, maybe they’ll go to other things and become more “super” in the macro sense. But if I were a betting man, I bet you they’ll be pretty focused for a while because it’s really the essence of what the customer needs.
Connie: Are the founders that you see doing well in these emerging markets generally ones that have done some form of education or spent part of their careers in the West where they got exposed to how big tech companies roll out products? Do you look for that?
Chris: You look for pattern recognition that comes from different ways now than it ever did before. So, absolutely, positively, as you all have experienced: Fantastic entrepreneurs from Silicon Valley, tried and true, with great companies overall who have either “gone home” or just gone—like, they may not even be from the area—have done it. That’s a huge “buy” signal, as you think about that talent having had that experience.
But you know, you have the new version of what we would’ve called the “PayPal effect” some years ago in Silicon Valley. And we all know that PayPal kicked out literally hundreds of entrepreneurs and great names and all that. Well, in the Middle East and South Asia even, I would argue, you’ve got many effects. You have a “Careem effect” from Careem. There have been a hundred unicorns in India, they’re now kicking off a new generation. I see a lot of entrepreneurs in Southeast Asia from Grab. I see a lot of people, even now, coming from Nubank in Latin America. So that’s another kind of training.
And then the third is—because these ecosystems now are probably about 10 years old in almost any of the places we’ve been talking about—a lot of these young people have already done a company. And it’s either done OK, or done very well, or failed, but at least they have a different level of pattern recognition from its infancy.
Connie: Yeah. We saw the same thing I think in China. You know, a lot of people had spent many years perfecting their work at Tencent or Alibaba and then they left to go do something else. But the other big part of that was not just the PayPal effect in terms of the founders, but also the effect in terms of: once you have a couple companies that achieve great liquidity outcomes, you also get a bunch of angel investors.
Chris: Absolutely true. Absolutely.
Connie: And those angel investors are there working side by side with the founders, helping them with hiring, with strategy, with getting more companies and experiments funded before they’re ready to go talk to that institutional VC. So I also think that once more companies in these developing countries are able to go public or have a huge M&A event, then the angels play a huge role, too.
Chris: And the right kind of angel. Because one of the things that I’ve seen in the last 18 months to two years, maybe, is a tremendous amount of new wealth. And they’re not necessarily value-add wealth. They can be, but they’re not necessarily.
So I’m thinking about one person now who literally decided they were going to invest in 14 companies in Pakistan. They didn’t really know Pakistan at all and had never been there. They just assumed one of the companies would hit. And that didn’t help the ecosystem at all. I mean, it just helped jack up valuations and it was messy. But the kind that you’re talking about: not only is it wealth, but it’s experienced wealth that could be helpful in multiple ways.
Connie: Pakistan was a part of the world that you opened my eyes to. I was embarrassed when I had to look up the population and realized: oh my gosh, this country is so much bigger than I expected. What are some other places that often surprise folks?
Chris: Well, I think depending who you’re talking with, Connie, almost anywhere can surprise anyone. I mean, there are lots of people who don’t know that Indonesia’s as large as Pakistan and they might not be able to put it on a map, overall. And sometimes we who get enthusiastic about this are so excited about the bottom-up because these kids are so talented and doing so many amazing things—and the opportunities are so large. The largest ecommerce player in a market of 220 million in Pakistan right now maybe has $200 or 300 million GMV. And even if you look at web2 companies, there’s an opportunity, not to mention the new stuff. But the fact is the top-down matters, and there’s stuff happening that has to make people take it very, very seriously.
Connie: So how do you get smart about things like that: the top-down effect and what risks you might be blind to when you’re looking at a certain population and TAM?
Chris: Well, there are two answers. Understanding with perfect clarity that you are a fly-in and fly-out gringo. I mean, the beauty of what I do is I have this breadth of pattern recognition. The crisis of my existence is that I’ll never, ever possibly really understand what needs to be understood in a market. And the answer, which you folks have done very well in Latin America and elsewhere, is you find partners on the ground that you can trust who live these things day in and day out.
And if you have the right partners doing it, you can rely on their judgment to navigate risk. So you have to be very humble and you have to be with the people who are helping to influence those discussions and do the best you can.
Connie: Okay, so that brings me to another topic, which is: you are fly-in, fly-out. And you are in so many regions that even if you are on a plane regularly, you’re still only in each region for a short period of time every year. How do you stay up to date, besides reading global publications? How do you stay up to date in all of these regions so you can figure out how to prioritize?
Chris: Even before Zoom and Covid, I spent a lot of time on my day-to-day reading—I’d read profound amounts of things—but I also interview people every day. Every day, like you, I see a whole bunch of entrepreneurs that are either pitching me or ones who we are already invested in and we want to help. If there are three people I ought to talk to in this market who really have insight and will talk honestly and openly, who are the women and men you admire? And it becomes very easy to fill those very efficiently.
Connie: Yeah. Similar to you, when I go to China or Asia, I try to talk to people who are very local, who don’t necessarily work in the tech world. And you just observe: what kind of apps are they using? How are they spending their time? There are actually stories about VCs who were able to catch some really fantastic companies in China that were targeting more like second-, third-, or fourth-tier cities by literally just talking to waiters and waitresses. And asking them—those who were working in Beijing, but their family was elsewhere—what kind of apps and services are they using? And that would result in fantastic investments.
Chris: Were you ever surprised? Is there a moment that you had when you were on the ground that you had a pretty clear belief that you understood what was going on and you came out of those engagements and said, I gotta rethink this one?
Connie: Of course. For example, if I stayed in a hotel regularly, I would befriend the person who works at opening the door. And in talking to that person, because I formed a relationship over spending so much time at that hotel, I would get to know: What is she focused on? What hometown is she from? How long has she been in Beijing? What is her living situation set-up? What are her goals after she takes this job? And education background. So you just learn a lot about different types of people. How about you?
Chris: Very similarly. I mean, most of the people I met with were very local on this trip and the other ones that I’ve done. Before Covid, I flew a quarter of a million miles a year. It was that kind of spread.
Connie: Are there interesting business models that you saw on this past trip to Southeast Asia that inspired you that you hadn’t seen elsewhere?
Chris: There was a lot of excitement and enthusiasm, but the tone overall was sober. Not somber, but sober. There was kind of a sense that we’ve been through a lot. There have been a lot of valuation upticks that have caused problems within the ecosystem and a lot of dynamics, of course, in the world that are weighing on them in that region. And so, even they themselves would say, “I’m not sure what the next thesis is.” Like, I don’t know what the next restaurant delivery [trend] is. We’re thinking about what it might be.
And so what I double-clicked on were the kind of businesses that I like in emerging markets that, bluntly, Silicon Valley often doesn’t like. And these are hands dirty businesses where you need to get the ground right and then you can layer in data science and technology to scale. But in retail, in many emerging markets, to this day 90%, 85%—pick the market—is mom-and-pop shops. These are very small markets that have not changed in a hundred years. They probably won’t change in a hundred years. To the degree they’re ever able to get credit to expand, they either borrow from family or they’re stuck with a loan shark or what have you. They have no buying power in supply. They usually can buy things once a day, so they can’t even manage their incentive.
And then, all of a sudden, there are people around the world in these emerging markets—and in fact, I have a portfolio of them in different places—who are saying: That’s ridiculous. We can absolutely give these folks software tools they’ve never had before. There’s no reason why they should still be doing things on paper. We can get all sorts of data that can help us see how they’re doing in actuality. We can help them manage their logistics. We can help them be able to expand their ability to have access to credit. And they’re revolutionizing, bottom-up, these very, very hands dirty systems with a lot of middlemen in them to create efficiency.
And then they all have phones, and so they all have data that’s available. No one’s ever tried to either give them tools for their phones or to harness that data in a way that’s useful to them.
Connie: What you’re saying reminds me of just how integral fintech is to any developing country, before they can have that huge outburst of lots of consumer startups.
Chris: It’s almost everything. It’s almost like the rails.
Connie: Exactly.
Chris: I’d be curious to hear your reaction to this, because I thought a lot about this in Southeast Asia: Fintech is everything, as you say, but it seems to be playing out extraordinarily country-by-country. In part, not just because the regulations are unique, but the regulators or the politicians actually don’t want Nubank to own the fintech lending platform in Argentina.
Connie: I’m pretty sure my fintech partners would agree with you, and that’s why they’re probably the most internationally focused of all the team at the firm. Precisely to your point: just because you win in one country doesn’t mean you understand the other country. It’s very country-by-country.
Chris: Very interesting.
Connie: Would you ever make an investment in a country that you have not been to?
Chris: I think that if you and I had this conversation three years ago, I would’ve told you no, point blank. Covid has taught me the thing we talked about earlier, which is: If you find the right partners, it opens up capabilities to manage that.
Plus, if it’s in an area where I feel like I’ve got pattern recognition—I’ve got a bunch of investments in other parts of the world in that area—that combination would allow me to make a bet. And so, the two companies I invested in in Pakistan were companies whose space I know well from global relationships, but I knew I had fantastic partners on the ground. And I was willing to make a bet. They weren’t big bets, but they were bets, even having not actually been there.
Connie: And you haven’t been there.
Chris: Not when I made those investments. But that’s unusual, there are not many of those.
Connie: Wow. Let’s talk about AI, because AI is the thing that everyone in Silicon Valley is talking about now. When you went to Southeast Asia recently, for example, or when you talk to founders in other parts of the world, are they as excited about the transformative nature of AI as what you’re hearing in the U.S.?
Chris: There was not a meeting that I went where two things didn’t come up almost within the first five minutes. First was China, and the second was GPT-3. Every venture capitalist I met has already had a multi-day offsite to stop and reflect about what its ramifications can mean in the medium-term and what it may mean not only for their portfolios, but for their theses. Every single entrepreneur I met is using it already in some operational force in the business. You know, people who were migrating their technology from whatever they were using to Python and did it all with GPT-3; people who were reducing their email loads using GPT-3. All the stuff that we’re hearing in American startups is happening in parallel, at the exact same speed, among the best entrepreneurs that I’ve been meeting in emerging markets.
Look, I think an interesting question for a whole other conversation is: Is AI going to be a game that China and America win and the rest of the world plays by whatever rules those are? Once it’s out there, does anybody win? Does the fact that Indonesia doesn’t have enough machine learning engineers matter five years from now? Or does it matter at all? How many of these businesses we see being created that made perfect sense three years ago don’t make sense amid the ubiquity of AI tools? This is quite a moment, as you know very well. But it’s a moment that’s equally appreciated in the places I’m dealing with.
Connie: Last thing I want to really dive into is, what is the personal drive behind going after all of these emerging markets? I mean, you could be a fantastic angel investor just focusing on the U.S. What was it about going to all these different regions, meeting these fresh, energetic founders who are embracing entrepreneurship for the first time that really attracted you to make this your mission?
Chris: You know, I’m at a stage in my career—after having run a couple of companies—that helping individuals knock down barriers to create something that was never there before, I just love, as a macro.
I think the more direct answer, though, is that I am fascinated by what’s happening in the world, and I think this is far and away the most hopeful scenario of change globally, at scale. And I have prided myself in being a global citizen, but have shocked myself at how often I get stuck in the same American narrative bias about the way the world works. I think that for all the machinations—particularly those I see in Washington D.C., which is where I’m based right now—where people are still engaging with each other in these top-down, 20th century, Cold War outlooks… I’m seeing hundreds of thousands of young people saying, none of that matters to me. None of it makes sense. In fact, I even question centralization. And all I know is I’ve got problems in my backyard that I can fix with technology. You can’t build enough schools to fix the situation. You can’t build enough stores to have logistics done in a better and different way. The big players normally don’t have the incentive to do it. And so I think that I can do something that is going to change the game of my society as much as make a really successful business.
And I think at the end of the day, when people are at peace with themselves, you tend to have more peace, which creates all sorts of flourishing and opportunities. I’ve just felt very strongly in this journey that it’s one of the most exciting problem-solving phenomenon that we never could have talked about a decade ago. And in a small, small way—because the young people are doing it themselves—I can be an added resource to it.
Connie: Okay. Last question, two part question. What are you most concerned about, having seen all these different parts of the region? (And also understanding that the top-down really affects the ecosystem’s ability to flourish.) And then, what are you most excited or hopeful about?
Chris: You know, first of all, they’re concerns that neither you nor I can control. So I don’t worry too much about what we can’t control. I will say that what you said parenthetically, and we talked about earlier, is true. These ecosystems will thrive if the top-down institutions lean in and help them. And to the degree that they slow them down, the good news is that talent is more mobile than ever before. They will go elsewhere. There will be brain drain. But I worry greatly about the missed opportunity that comes with that.
And the thing that is most helpful to me is that we can just ask questions and look at problem solving in ways that we couldn’t have just a few years ago. I mean, I’m not one of these blanket people who say, like, “the youth is the hope of everything,” because I’ve met some unbelievably uncurious, corrupt young people—as I have old people.
Humans are humans at different generations. But having said that, if you’ve come to the planet and have never known a world without a smart device, you just look at the world differently. You just look at it as a different problem set than other people. And that is, no question, incredibly hopeful.
Connie: Awesome. Thanks so much, Chris.
Chris: What a treat to be with you.
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More About This Podcast
Field Notes is a video podcast series by CFI general partner Connie Chan on the business models and emerging behaviors driving consumer technology. In a series of candid interviews, Connie talks to the builders, creators, and investors behind the tech that shapes our daily lives.