A tale of two tech startup cities

Akos Stiller/BLOOMBERG - A Samsung Electronics Co. Ltd. smartphone is seen illuminated during use near the River Danube in this arranged photograph in Budapest, Hungary, on Monday, April 23, 2012.

Umar Saif is a co-founder of SMSall.pk, Pakistan’s largest SMS social network. He holds a PhD in computer science from the University of Cambridge and, in 2010, was named a Young Global Leader by the World Economic Forum.

The world of tech startups is starting to look a lot like Charles Dickens’s “A Tale of Two Cities.”

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There is an entrepreneurial divide between “the best of times” – the glamorous, VC-funded Silicon Valley startups catering to those equipped with the latest smartphones — and “the worst of times” — the unglamorous, underfunded, never-heard-of ventures slugging it out for those in the developing world.

The sheer difference in size between these two potential markets makes this contrast intriguing. Has the market in the developing world been left untapped simply because the traditional Silicon Valley VC cannot “ride a bicycle to your headquarters,” as Michael Moritz mentioned during his early days as an investor. Perhaps it’s because the enticement of achieving overnight success with a mobile game is too great to bother with out-of-the-box solutions for those who spend less than $3 per year on their cellphone calls. Then again, it may be because there is a dearth of technical skill in the developing world to start and grow such ventures. Or is this population underserved due to the lack of homerun exits for startups that cater to them?

In an increasingly flat world, where programmers sitting at a desk are often fully integrated into development teams and business processes are regularly outsourced, one cannot miss the irony in this disparity. A lack of product development and management skill does not adequately explain this entrepreneurial divide, nor does a lack of access to foreign markets. A web-based social network or a viral mobile game can be run just as well out of Pakistan as out of the United States. Mobile application stores and techniques like search engine optimization have leveled the playing field for, at least, consumer tech products. However, given the size of the market in the developing world, entrepreneurs no longer need to look to the minority of well-off users. There is plenty of opportunity to develop products catering to consumers in the developing world and still hit a homerun. But why don’t startup founders do it?

In my experience, the problem lies on both sides of the fence. On one side is a lack of innovative products for consumers in the developing world, and on the other, traditional VCs’ lack of imagination. Products for the developing world rarely advance beyond a donor-funded pilot project or a social enterprise, while VCs keep doing what they do best: momentum investing. Some VCs who actually invest in emerging economies make little effort to mask this fact. Take, for example, e-Planet Capital, which has invested in, among other companies, Skype and Baidu. The company describes itself as “one of the leaders in catalyzing migration of business models and technological innovation from developed markets to emerging markets.”

In theory, replicating proven business models appears to be a safe investment strategy. In reality, proven business models from a world with pervasive broadband connectivity, smartphones and laptops, mean very little in a world where SMS and “ring cutting” (calling and hanging up quickly to signal that the caller expects a call back to talk) are de facto modes of communication.

In this world, social networks that use SMS can gain greater market traction compared to Facebook; low-literacy, text-free interfaces have much wider appeal compared to traditional text-centric interfaces, and platforms for writing applications on so-called “dumb” phones are more relevant than iPhone software development kits. The markets for mobile payments, micro power-grids, water management solutions, health care and distance education present many opportunities for billion-dollar startups.

There is no denying that the markets in the developing world are fraught with challenges: government censorship, overbearing regulations, lack of protection for intellectual property, and affordability — to name a few. However, as an April 2010 piece in The Economist outlined, “the combination of challenges and opportunities [in emerging economies] is producing a fizzing cocktail of creativity.” Drawing a parallel with Japan in the 1980s is not out of place: “Toyota and Honda took to just-in-time inventories and quality management because land and raw materials were expensive. In the same way, emerging-market companies are turning problems into advantages,” the piece continued.

But this hasn’t happened in the tech world. Instead of building innovative products, vying for user traction, creating defensible intellectual property, and inventing new monetization models, tech startups in the developing world focus simply on labor arbitrage. Facebook debuts on the public market with a valuation of over $100 billion, while tech growth in developing countries is condemned to unimaginative outsourcing sweatshops.

Take the example of the most successful of the success stories in this part of the world: India. IT and computer software exports: $102 Billion. Talent: Over a dozen IITs that fuel some of the best engineering teams worldwide. Workforce: 4.4 million skilled workers. When was the last time you heard of an Instagram-style, Sandhill-backed startup from India rising up to become a billion-dollar company due to an innovative product? I rest my case.

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