Outliers #005

Maslow's hierarchy of economic innovation.

Our resident economist, Alexandra Grigg, looks into how we can apply psychology to VC investing. A look into e-commerce as an economic enabler and crypto's increasing utility in developing nations.

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The most interesting global Seed to Series A deals from outside the US this week:

  1. DeepWay - US$67.0m - Beijing, China
    Chinese autonomous driving startup backed by Baidu, DeepWay brands itself as China’s first electric vehicle startup that designs autonomous trucks from scratch for freight delivery.
  2. Lumachain - US$19.5m - Sydney, Australia
    Lumachain uses computer vision-based artificial intelligence to transform meat plant operations. They're active in eight countries today and their technology is capturing just under 50% of the meat supply in the U.S.
  3. DhiWise - US$7m - Gujarat, India
    This programming automation platform has scaled to 30,000 users by automating 60% of the mundane tasks conducted by devs.
  4. Latú Seguros - US$6.7m - São Paulo, Brazil
    Raising the largest Pre-seed round in LatAm history, the Brazilian insurtech startup offers customers up to $10m of coverage within minutes.
  5. Metalbook - US$5m - Delhi, India
    Steel and concrete; the foundations of construction are still largely managed though notepads and excel sheets. Metalbook is building a SaaS-enabled marketplace to digitise steel and iron trade across 12 geographies.

A VC's Insight

Psychology meets VC

Introducing today’s author…Alexandra Grigg.

A former economist, she understands human behaviour, incentive and motivation better than most. While Maslow’s hierarchy of needs may be a very common way of seeing the world, it also provides Alexandra with a framework to understand the needs of an economy (and therefore the need for innovation).

When applied to VC and emerging markets, we can better understand which ideas best suit economies at different stages of progress.

Timing is so crucial in investing. There are many great ideas out there, but markets may not quite be ready for them to see mass adoption. Take VR for instance. While these are modern examples that apply to developed markets, the idea of matching innovation to the maturity of a market or economy remains.

When analysing investments, especially in emerging markets, we need further framework to judge where opportunity lies within a market. We want to understand the most important problems to be solved in an economy and how they will change over time. One way I like to look at this is through well-known Maslow’s Hierarchy of Needs.

As a reminder, the hierarchy explains human needs and desires on a tiered basis. Once the most basic physiological needs (food, water, shelter) are fulfilled, then we can progress through the pyramid to new sets of needs like security, love, reputation and self-development. We can apply this idea to VC investing.

Afridigest has published an excellent article on the application of the hierarchy of needs in the context of venture opportunities in emerging markets. The article explains how founders and investors in emerging markets are more likely to be successful if they concentrate on opportunities that: (1) build basic or alternative infrastructure; (2) organise and integrate fragmented markets; (3) minimise transaction costs and friction; (4) enable entrepreneurship and economic empowerment; or (5) create entirely new markets. As economies develop, the opportunity in each layer of the pyramid increases.

Let’s apply this. In short, the unmet needs of an economy should be where investors should look for innovation. This may sound obvious but the framework helps prioritise the biggest needs. Building an online sneaker store may be an opportunity but is not closest to the needs of an emerging market. Only once economies have strong infrastructure (financial, transport, health) can the next steps of progress be taken.

Our African portfolio, for instance, includes Chipper Cash, Imalipay, Payhippoand Kippa; all operating in the fintech space to build infrastructure for businesses and consumers to transact at greater speed and lower cost. They operate within the first 3 layers of the pyramid above. From there, economies can truly develop as commerce takes off.

The final state allows for the creation of new markets, where innovation flourishes. Take social media almost 2 decades ago. Or Uber and Airbnb more recently. We can only book a trip online within minutes because all 4 tiers below have been developed.

CB Insights takes a more granular level look at how startups are applying Maslow’s hierarchy to meet our every need. While a basic view, we can see how many technology companies target tiers of the pyramid. Facebook and other social platforms cater to the need for esteem and reputation. Tinder solves the love and beginning problem. It’s a little tongue in cheek as they admit but an entertaining view nevertheless.

Macro lens

Related closely to the piece above, the development of a strong e-commerce sector is a derivative of strong financial infrastructure and a developed logistics industry. Once shoppers can pay easily online and the last mile logistics problem is solved, e-commerce is set to boom. Naturally, the fastest-growing e-commerce sectors are in developing regions worldwide. What was a COVID-induced spike is materialising into a long-term boom for e-commerce worldwide. On a high level, e-commerce is an economic enabler. Merchants can expand their customer base by a large factor and build their own business with greater ease. While they’re US focussed example, there are already 3 listed US companies that were founded on Shopify: FIGS, Allbirds and Oatly. Shopify themselves calculated US$5.8b in revenue generated for businesses in developing nations.


Unpopular opinion:
Crypto may be a solution waiting for a problem in a lot of the western world, where coins are treated as speculative assets rather than being used for particular utility. Shift focus to more emerging markets and crypto is playing a crucial role in the financial lives of owners. According to major exchange Gemini, Indonesia and Brazil feature the largest percentage of populations holding crypto. Emerging countries like Nigeria, South Africa, and Mexico also dominate the list. In short, crypto is used so widely for two reasons. Firstly, to hedge against fluctuations in the local currency. And secondly, to transact and send money more easily at speed, a solution for underdeveloped fiat financial infrastructure and stringent FX controls.

Reading list

Forbes has come out with the 100 most innovative startups to watch in Asia. Singapore, South Korea, Hong Kong and China dominate the list with 63% of the startups between them.

EntryLevel, one of our portfolio companies, features on the list. EntryLevel is on a mission to help 1 billion re-educate with the skills of the future, particularly focussed on emerging markets.

Check out the full list here.

Your author this week

Alexandra Grigg - Griggsie has been recognised as a 2020 Young Leader of the Year at the Women in Finance Awards and a Forbes 30 under 30 Asia in 2021 for Finance and Venture Capital.

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.