investor stories

3 Reasons investors might be nervous about a new market

Last week I shared an article about why Hustle Fund invested into a pharma-tech company based in Nigeria called Famasi.

(BTW a bunch of people wrote in asking if the founder is fundraising, and the answer is: not yet but she may selectively accept checks. Holler at me if you want an intro.)

The thing that struck me about our fund's investment into Famasi is that it was one of the first investments we made into an African startup. This led to a conversation about top concerns investors have about diving into a new geography.

Here are 3 reasons an investor might be cautious.... and another way to think about them.

#1: You don't know anything about the country

Investing in a startup that's based in (and doing business in) a country that you don't know anything about seems like a huge risk... right?

Here's the thing: it's not that much more of a risk than investing into an industry you don't know anything about.

As a team of generalist investors, we know a little bit about a lot of different subjects. Or in other words... we're not an expert on anything.

Think about it: we invest in a company in the health case space, but we ourselves are not experts in health care. Same goes for the fin-tech space (hi, not a finance expert here) or the edu-tech space.

The key is to get conviction that the founders we're backing are experts in these industries. As generalist investors, we look for proof points that tell us a founder has unique insights into their field, and also try to understand where they got those insights.

Similarly, we want to ensure that the founders we're backing in new geographies have a level of expertise on what it takes to run a business in their municipality.

Someone who has lived in this area, worked in this area, and perhaps even started businesses in this area should have the insights needed to navigate building a startup in the region. YOU do not need to have that experience.

#2: Regulations

Every country, state, and even city is bound to have local regulations that businesses will adhere to. Isn't it likely that those regulations could impact the way a startup operates?

Here's the thing: most VCs will only back a startup that is incorporated in the U.S. And this regulatory issue is one of the reasons for this stipulation. Companies that are incorporated in the U.S. often don't have to deal with regulatory hoop-jumping that comes with being incorporated in an emerging market.

That said, some countries' regulations in certain industries may fluctuate more than others.

For example, the regulations around crypto have changed recently in Nigeria. That's something web3 companies are dealing with there, regardless of where they're incorporated. That said, even countries with established startup ecosystems can have regulatory volatility – the United States' healthcare system comes to mind.

All this to say, regulatory concerns shouldn't stop an investor from exploring deals in emerging markets.

#3: Local currencies

Yes, local currencies are a thing. But as long as the startup is incorporated in the U.S., they shouldn't be a big thing.

Let's say you invest in a company that's based in a region that suddenly sees high rates of inflation. That means the value of the company's revenue will drop significantly.

However, if the company is incorporated in the United States, then they probably also have a U.S. bank account. And their revenue should be housed primarily in that bank account. Having their funds in a U.S. bank account should protect the company from local currency fluctuations.

What'd we miss?

I'm sure some of you have other concerns about investing in new geos and/or emerging markets. Give us a shout and tell us what they are.