Outliers #003

Outliers #003 is out! 

We break down GDP to help us discover the most promising emerging market economies by asking whether they mine or manufacture? 

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Dealmakers

The biggest global Seed to Series A deals from outside the US this week:
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1. Edamama - US$20m - Benguet, Philippines
   Powered by same-day delivery, Edamama is an e-commerce store focussing on products for parents. Delivering 1.5m products to Manila and surrounding cities last year, it’s a logistics company as much as it is an e-comm store.
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2. Merkle Science - US$19m - Singapore There’s still plenty going on in the crypto-sphere. Merkle Sciences monitors and predicts security risks for crypto transactions. For example, their tech can flag addresses with suspicious activity even if they don’t exist on the regular blacklists.
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3. Klavi - US$15m - São Paulo, Brazil Klavi leverages open banking data to produce insights for business. Brazil is a pioneer of sorts in the neo-banking revolution, famous for the Buffett-backed US$20b NuBank.
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4. Hoopo - US$10m - Tel Aviv, Israel In the logistics space, Hoopo gives businesses full, real-time visibility on the inventory and whereabouts of their fleets. Their latest round will help their development of tracking tech in the maritime space, turning regular shipping containers into smarter fleets.
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5. DataProphet - US$4.5m - Cape Town, South Africa
   DataProphet’s AI-as-a-Service tech reduces their costs of non-quality by 40%. Essentially, their tech helps avoid the scrapping of parts due to early identification of machinery defects or failure.

A VC's Insight

Mines over machines?

Taking you back to the fundamental economics, we break down GDP.In this Insights piece, Alex Barrat looks into why a manufacturing economy has shown to aid development more than one that relies on drilling and digging.

Everyone has their own prediction on which country will become “the next China”, the next emerging economy to bring millions out of poverty as its GDP increases tenfold over a couple of decades. India, Brazil, Nigeria… you’ve heard them all. Arguments generally revolve around a young working-age population, a growing middle class, or a link to internet or education.

Getting academic momentarily, what factors actually contribute to economic growth? Obviously growth is a very complex equation, but which correlates more with success: manufacture or mining?

I went and looked at GDP growth of two sets of countries. Firstly, the biggest oil exporting emerging economies countries on earth. Secondly, the economies most reliant on manufacturing. The results speak for themselves.

Top manufacturing economies

Top oil-exporting emerging economies

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Countries that rely on manufacturing have out-performed those that rely on oil in terms of GDP growth. Now, I must input the usual disclaimers around correlation and causation; an acknowledgement that this is by no means a sound economic study. But still, let’s try and explain some of the reasons why this correlation exists.

Firstly, resource economies are subject to the ebbs and flows of resource prices. Oil, gas and metals are volatile. They are massively driven by uncontrollable macro-factors. Manufacturing economies produce more stable goods like washing machines or X-ray machines (that OPEC doesn’t meddle with).

Going further. Economist Joe Stubwell breaks down the power of a manufacturing economy to two reasons. Firstly, education is not a significant barrier to entry for workers meaning more of a population can take part. Secondly, manufactured goods are easily traded. Naturally, the same arguments apply to resource economies but resources aren’t differentiated. It’s hard to gain an edge outside of pricing in oil. Moreover, there is little innovation in resources. Manufacturing economies are forced to compete locally and abroad. Competition is largely good for growth. On a very basic level, these factors propel economies forward over decades as the charts above show.

For those interested, this idea is explored further by one of my favourite Twitter economists, Noah Smith. Knowns as @Noahpinion, he has a great series on the reasons certain countries have succeeded in development through manufacturing (like Bangladesh and Indonesia) while others are still trying to solve the problem (like Jamaica).

What does this mean for how I see the world and VC investing? It revealed a number of geographies I should be paying more attention to. Very quietly, Bangladesh has become a South Asian sleeping giant to watch. India and Pakistan are emerging markets darlings but Bangladesh has a higher GDPpc and higher literacy rates than both…all with a 165m person population.

On top of that, it also revealed how to better evaluate economies. GDP growth is not the be-all and end-all. Nigeria has one of the fastest-growing tech ecosystems globally yet also has a flatlining GDP. It has produced multiple unicorns in the last few years. Running through this exercise provided more of a framework to understand how likely a country is to grow, to develop a consumer economy over the years. A young population or increasing education rates are encouraging, but it’s also important to understand how a country makes money now.

A really interesting map to finish. Click here for an expanded view.

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Macro lens

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“Semiconductors are the new oil”. While it may be a throwaway one-liner, for now, the tech revolution is just as reliant on chips as the past century has been on crude. The chart above breaks down the manufacturers of the most advanced chips and Asia is leading the world.

Taiwan Semiconductor Manufacturing Company, a US$450bn mega-cap stock, is responsible for more than half the world’s supply. How did this 23m large population become the modern Middle East? It’s a fascinating story that starts with a US electronics company setting up an office in Taiwan instead of the States. How different things could have been. You can read more about it here.

Manufacturing as the key to development, anyone?

Retweet

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Speak to any HR department and you’ll find that software engineers are the rarest resource on earth. Recently, India has been adding 22 million graduatesannually to the STEM talent pool; almost half of whom are women. This is a great sign for India’s development; STEM degrees lead to the highest graduate salaries in all of the country.

Your author this week

Alex Barrat - New to the VC world, joining the TEN13 deal team, Alex spent his early career at VC-funded scale up Stake. As one of the first ten hires, he left the team of 130 almost 5 years later. All pitches welcome. Submit your deck here.

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