The Funding Gap in Emerging Markets: Bridging with Blockchain

Never underestimate the power of connecting.  

Take the story of Alibaba founder Jack Ma as an example. Without picking up English from foreign tourists visiting Hangzhou, Ma might have drifted along after failing his college entrance exams twice, instead of gaining the language skills to navigate the early Internet and eventually go on to found Alibaba.

As Jack Ma’s story shows, forging meaningful connections is incredibly powerful. Today, a torrent of people, ideas and capital are pouring into a growing number of innovation clusters from Silicon Valley to Singapore and Berlin.  

At the same time, the Internet continues to extend its digital footptint around the world, connecting half a million new users every single day.  

The growth of these networks is impressive. But is it enough? For many innovators in the developing world, the obstacles are daunting indeed.

Rise of the developing world

About 85% of the world’s population lives in developing countries. Although these emerging marketsaccount for 59% of the global GDP, they receive just a tiny fraction of the attention and funding that goes to people in the developed world.  

This gap is so wide that if entrepreneurs in the developing world had the same access to funding as their peers in the developed world, it would trigger an influx of US$5 trillion. This gap is particularly compelling when we consider the digital economy.

Startups in the developed world continue to receive the bulk of support and funding even though the most growth and potential exist in emerging markets.  

For example, in Indonesia and the Philippines, an expansion of ecommerce helped Southeast Asiadouble its spending on online shopping between 2020 and 2021. It is expected to more than double again by 2025.

You see the same story throughout the digital economy, from mobile banking and social commerce to gaming and online shopping, with consumers in emerging markets significantly more excited about embracing digital solutions than consumers in the US and Europe.

The funding gap explained

While this growth in emerging markets is finally attracting investors who have helped create several remarkable startups like Grab, Flash Express, VNPay, GoTo and other unicorns, the wide disparity in funding persists.

• Just 1.2% of money raised by crowdfunding goes to developing markets.
• Over 40% of small and medium-sized businesses in emerging markets have unmet financing needs.
• Although Southeast Asia’s green sector is expected to be worth US$1 trillion by 2030, only US$15 billion has been invested since 2020.

Then there are the disparities that exist within the developing world. In Southeast Asia, for example,female-founded startups accounted for just 17.2% of all private capital raised in 2021. In Africa, the funding gap for female entrepreneurs adds up to about US$42 billion.

Against this backdrop of lack of funding in emerging markets, there is another problem: the investment shortfall may be getting worse. Angel and seed funding in Asia has been declining every year since 2018, reaching an all-time low of < 900 closed deals in 2021.

Given that emerging markets are home to the bulk of the world’s consumers, with a good proportion of them eagerly embracing the digital economy, why are they still failing to attract investors?

Why are emerging markets failing to attract investors?

There are three main answers to this question.

1. Information asymmetry
   
   Developing countries are called ‘developing’ for a reason. They are still building the wealth that people in developed markets enjoy. But this also means they are still building the infrastructure that underpins this wealth, and a core component of this infrastructure is information.
   
   Every investment decision depends on trusted, transparent, and widely available information. But the reality is that this usually does not exist in emerging markets.  
   
   Developing world entrepreneurs may lack the academic and employment pedigrees often seen in Silicon Valley. Resumes can be thin or uncorroborated, and collateral may depend on murky laws and regulations.
   
   
2. Lack of connections
   
   About 40% of early-stage entrepreneurs raise their initial funding through friends and family rather than accredited investors. This is workable in mature markets with established networks of wealthy individuals, but obviously lacking in places where wealth creation is just beginning.
   
   These early investments are crucial to getting new businesses off the ground, providing founders with experience while establishing a track record that other investors can assess. This essential early stepping stone is absent in emerging markets.
   
   
3. Subconscious selection
   
   Investors work hard to make objective analyses that produce results, but they are not immune to the subconscious distractions that guide human behaviour. Studies show we tend to trust people who share our interests, culture, language, and academic backgrounds.
   
   This often leaves many entrepreneurs in emerging markets without both the physical and subconscious connections that can help build trust or simply start a conversation with prospective investors.
   
   While the investment potential for emerging markets is high, the barriers to this investment can be even higher.

Using blockchain to close the funding gap

At Seedefy, we believe that the blockchain is the solution to the funding gap. Instead of the centralised system of funding we have today – which focuses investment on a tight circle of friends, family, and people with shared backgrounds – blockchain is a decentralised network that can provide transparency and trust wherever it is deployed.

Emerging market entrepreneurs would undergo a decentralised voting process before joining the network, connecting directly with like-minded investors without having to navigate a centralised gatekeeper.  

Local communities of self-governing experts in law, technology and finance would rigorously vet entrepreneurs and investors to ensure the integrity of the network, much like how the blockchain is used to manage assets.

Smart contracts would prevent abuse and mismanagement while setting milestones and ensuring they are reached. Other features of the blockchain like tokenization would use cryptocurrency to adjust the time and money involved in every investment. At the same time, the lack of intermediaries in this peer-to-peer marketplace would drive down costs and hasten decision-making.

Bridging the funding gap, one block at a time

We have come a long way in connecting the developing and developed worlds. Yet it is still not enough. Funding for emerging market startups remains tepid. The lack of information and infrastructure creates uncertainty that makes many investments too risky.

Blockchain technology can fix these problems and more. With the blockchain on hand, we can realistically bridge the gap between the developing and emerging markets and ensure investing is less about who someone knows and more about what they can do.

About Seedefy

Seedefy is a decentralised ecosystem, where self-governing communities serve as the backbone of our funding process. Co-creation and trust are our core principles, offering equal, fair, and transparent opportunities for every fundraiser and investor.

Want to join our ecosystem and be part of a fair and equitable funding system? We are delighted to help you get started – talk to us today!

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