Robin Butler (Sturgeon Capital) investing at the frontier from Pakistan to Uzbekistan, ecosystem maturity, liquidity and creating momentum
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On this episode Pat sits down with Robin Butler, Partner and Head of Impact at frontier investment firm, Sturgeon Capital.
Robin eloquently unpacks the $300bn opportunity in frontier markets in Central Asia, Bangladesh, Pakistan and Egypt and how combining profit and impact has a lasting effect on growth and innovation in these markets.
You will learn about:
Sturgeon's thesis and why these markets
How Robin thinks about the challenges in frontier ecosystems in terms of dealflow depth and breadth as well as capital pools
The impact of the Airlift story going south and what is means for the Pakistani ecosystem going forward
How to align impact and profit in a venture firm
You can follow Robin on LinkedIn here, make sure to check out the piece on Sturgeon Capital in the Generalist and their very own Substack Terra Incognita
Dive into the full episode on:
👉 Spotify
Tl, dr
Filling the gap: Sturgeon Capital invests in adjacent markets which are characterised by early stage tech ecosystems that lack capital to catalyse the development of digital solutions
Fragmented founders market: The different stages of ecosystem maturity translates into a gap of experiences between founders - from unicorn alumni to inexperienced first timers - that investors need to account for
A hybrid local and international model: Seeing global trends and having a local understanding is crucial for the due diligence on the business model, the ecosystem, the opportunity, and the founders
Monetizing later in the cycle: The divergence in the founders’ experience, as well as structural and regulatory challenges result in a longer investment horizon
Blitzscaling needs depth of capital: To succeed, business models as well as capital requirements need to be harmonized to the dealflow and types of investors in the market
From historian linguist to VC investor
Robin’s background is the proof, that there are many (unconventional) ways that can lead into the world of venture. After studying Arabic and Middle Eastern History at Exeter, he lived in Iran driven by a combination of intellectual interest and opportunity seeking after the sanctions on the country had been lifted.
“I thought I could maybe be sort of the English and Farsi speaking guy somewhere in the middle east. However, two months after I arrived Trump was elected what killed these ideas and opportunities.”
Sharing the same interest in frontier ecosystems, he was introduced to Sturgeon, whose team was managing a small fund and making a few investments in Iran at the time.
Investing in adjacent markets
Sturgeon Capital’s core geographical focus lies in Bangladesh, Central Asia, Egypt and Pakistan, as well as neighbouring emerging markets. These markets are defined by the early stage character of their ecosystem and a lack of venture capital to catalyse the development of digital solutions. All of those countries are following the digital transition playbook that has already been playing out across Asia and Latam.
All of the markets Sturgeon Capital invests in have hit that critical mass that Robin describes, but lack the VC funding that unleashes its full potential.
“If you look at the VC funding per capita, across the markets we invest in, it ranges from 10 cents in Pakistan to around $1.5 in Bangladesh, up to a maximum of $4 in Egypt”
This is very little, compared to markets such as Indonesia, where VC funding already reaches $35 per capita. This is exactly the gap that Sturgeon aims to fill, as the provision of capital is the catalyst to build digital businesses which are enabled thanks to smartphone and internet penetrations.
Identifying local talent
There are half a billion people that produce half a trillion dollars in GDP in their target markets - but the digital penetration on the B2B and B2B side is still incredibly low.
Entrepreneurs are therefore crucial for driving technological change - however, there are different dynamics in the entrepreneurial ecosystem in each of the countries. In Egypt and Pakistan there are many founders that are part of the “Careem Mafia”, former employees from the Dubai-based superapp Careem, that are very much experienced in working in a dynamic startup environment and that Robin refers to as “second generation founders''. In countries such as Bangladesh that are still missing a sizeable success case, the market is traditionally dominated by inexperienced first-time founders.
“There are thousands of potential high-quality founders.”
Another dynamic that Robin has observed, are entrepreneurs that have worked or studied abroad, picked up experience and learnings there and bring them back home to build local businesses. “We tend to be a bit hesitant when seeing a company with purely internationally experienced founders. You've got to ask that question: Do they really understand the local dynamics?”
In the end, having both - a locally and an internationally experienced founder on the team - is the most powerful combination according to Robin.
Every quarter, Robin spends up to six weeks on the ground in these countries to spend time with the founders to really understand how they operate and think about their business.
“Many of them want to be part of the startup hype or believe that founding a startup is something that is simply a cool thing to do. But do they think about the systems and processes that they’ll need?”
Pakistan, where is that?
To support their companies along their scale-up journey and get dealflow, Sturgeon has part of their team based in Uzbekistan and Pakistan. However, the three partners of Sturgeon Capital are based out of London, together with an operating team that keeps in contact with investors and other relevant parties.
“This is where I think the hybrid of a local and international model works: we can see the trends globally, but have the local understanding as well to really effectively do the due diligence on the business models, the ecosystem and the founders. In the end 95% of the reasons why a business succeeds or fails is down to the founders and their ability, understanding and execution.”
Sturgeon capital invests initial cheques at (post-revenue) Seed up to Series-A, and follow-ons up to Series-B to bridge the funding gap that companies still face in these markets. Then, a big part of what they are doing on a firm and a company level is normalizing and contextualizing the opportunity for international investors.
“In the US you often sell the market first, before you sell the thesis and the startups you are investing in. Most people we speak to, they ask: Pakistan, where is that?”
This is why Robin is working hard to change those dynamics and build a better understanding of frontier markets. By being located in London, the firm is automatically closer to international capital.
A long-term play
For Robin, one of their biggest challenges that comes with their investment thesis is not the access to dealflow, but the actual nature of the dealflow. Today access to deals is all but ensured by spending time on the ground at conferences, working with local VCs or speaking to founders. But really doing the due diligence and identifying which businesses are just copycats of existing models - that is the tricky part.
“We're not a spray and pray approach that acts as an index on these markets. Our approach is to target the top 10% of founders, to be there by their side with the capital just being the first step into the relationship, to support them with fundraising, hiring and particularly with new market entry given the similarities and the dynamics of the markets that we operate and seeing where we can support them.”
As the market setting is so very different in comparison to more developed ecosystems, where experienced founders are dominant, Sturgeon’s investment strategy is also tailored to the situation. Adding to the differences in the founders’ experiences, there are also structural and regulatory realities and challenges that need to be overcome. But that’s exactly which makes these markets so attractive in the long run.
“That’s really why these markets are a 10 to 20 year play. I think it's not somewhere where we're going to see people getting rich in the next two to three years.”
Unlike the US, in Sturgeon’s target markets, there is not an existing infrastructure to plug into and be ready to make money from day one.
“You might have to build your own payment rails. You also have to deal with the fact that it's still cash on delivery, not digital payments, that e-commerce adoption is still very low, that the logistics infrastructure, both digital and physical, doesn't really exist. That’s the reality when building a consumer facing business.”
All of this is an inherent dread on the growth rate. Business models, which require a 40 to 50% month on month growth to be able to raise the amount of money necessary to sustain the business is a high risk strategy anywhere in the world, but even more so in these markets.
This explains why Sturgeon focuses on startups, that at the core of their business have a profitable product or service that captures long-term value and is characterised by high retention rates, such as FinTech, B2B software and marketplace startups that build their user base through a revenue generating product rather than marketing spent or having very high CAC.
The Airlift case
In September, Pakistan’s Airlift technologies - a three-year-old instant grocery delivery startup, went bust - just one year after raising $85 million in the largest funding round Pakistan had ever seen, at a record valuation of $275 million.
According to Robin, there are a couple of angles that this failure needs to be looked at.
“People were raising large amounts and they were opportunistic in markets like Pakistan seeing deals in hot sectors. Quick commerce was raising stupendous amounts of money across the globe - Airlift fitted into that narrative, with Pakistan being home to 200 million people and having a huge consumer economy.”
However - in Robin’s opinion, the Blitzscaling approach necessary for that business model does not yet work in Pakistan, as the country lacks depth of capital and diversity of investors at all stages to underwrite and understand that opportunity. In markets like Pakistan, pre-seed up to Series-A needs to be handled locally - before looking for later stage investors abroad.
“I think it hopefully helps people to better understand the ecosystem and the realities of operating in it. If you just want to dip your toe in and out - that is probably not going to work out well.”
Dive into the full episode on:
👉 Spotify
Other episodes you might enjoy:
[Operator Stories] Noureddine Tayebi (Yassir) on closing a $150M Series-B in the Maghreb region, paying it forward and the multiplier effect
[Investor Journey] Allen Taylor (Endeavor Catalyst) on scaling the fund to US$500M AUM doubling down on Endeavor’s mission & current macro-environment and implications for emerging markets
[Investor Journey] Unlocking VC in Pakistan - Rabeel Warraich (Sarmayacar) on starting the first institutional fund in the country, false perceptions and getting the flywheel going
[Investor Journey] Alex Lazarow (Cathay) on innovation through cross-pollination, the last frontier & entrepreneurs as creators
If you haven’t yet subscribed, join the 1,225 Enthusiasts via Substack, Medium, or LinkedIn and follow the show wherever you are getting your podcasts. If you enjoy the work we are doing, drop us a review or rating on your preferred podcast app.