In April 2019, I picked up the phone and called Roman Foeckl, the founder of CoSoSys, a data security company in Romania. I wanted to talk about investing in his bootstrapped startup, which I had recently learned was attracting business from some of the world’s biggest corporations. “We don’t need money,” Foeckl told me. “For 15 years, we’ve used our own cash flows to grow, and we’re not looking to chase unprofitable growth like these Silicon Valley companies. What makes you interested in talking to us?”
I’m used to this initial skepticism. After a few conversations, including a trip to CoSoSys’ Transylvania office, we won them over for an investment. Of the more than 195,000 software companies listed on Crunchbase, less than 15% have taken any external funding, and over 97% are based outside of Silicon Valley. Yet most tech stories focus on venture capital–backed companies and unicorns said to be worth billions of dollars.
From 2014 to 2017, I was a venture capitalist at Cowboy Ventures in Silicon Valley, the same firm that coined the term “unicorn.” I left to build the investment team at Turn/River Capital, a software growth and private equity firm. Though Turn/River is based in San Francisco and our operations team has helped American companies like PayPal, VMware, LinkedIn, and Twitter, we make 40% of our investments in non-U.S. software companies. After experiencing both markets, I’ve come to realize that investing outside of the Western bubble requires looking at the world through the opposite lens of a typical Silicon Valley venture capitalist.
Silicon Valley is awash in capital. In the first quarter of 2021, $69 billion was invested in startups by U.S. venture capitalists, over $25 billion of which went to companies in Silicon Valley: greater than the next three cities — New York, Boston, and Los Angeles — combined, according to data from PitchBook. Here, investors emphasize big narratives and growth at all costs. Because early stage startups are risky, a VC fund needs to see how a company could grow into a billion-dollar unicorn to make their portfolio pay off. Since there is plentiful capital and competition, venture-backed startups often feel pressure to spend cash faster, in order to chase market dominance.
But most rest of world software companies were started in an environment that provides very little access to capital, and that may present additional money hurdles for founders. There are few local VCs to fund ideas that will not be profitable for years. There are rarely bank loans available for technology businesses, which have few hard assets to guarantee that debt. Last year, CoSoSys researched the Romanian government’s pandemic relief program and found out that receiving funds required personal loan guarantees that were out of reach for most companies. An Argentine founder recently confided in me about his delicate juggle to renegotiate salaries multiple times a year, to adjust for inflation while also forecasting external currency revenues.
As a result, many rest of world founders must rely on funding they raise themselves, whether from their own savings or from friends and family. Companies may sell services to earn cash that then can be used to support software product development. They may hire remote contractors in foreign geographies in lieu of opening up an office. Each new hire is made only when there is enough profit. This makes it tougher for companies to take risks, whether it’s investing in big product ideas or expanding their sales and marketing operations. Everything takes longer to scale.
The survivors of this capital desert evolved into the opposite of Silicon Valley software startups: capital efficient, practical, and resourceful. They may not yet be growing 200% year over year, but their profitability helps them survive situations that a venture-backed company couldn’t without more external funding. Rest of world companies don’t have a well-trodden path to follow like their Silicon Valley peers. They rely more on their own abilities, rather than a network of VCs flush with cash and expertise.
When I invest at Turn/River, I look for businesses that have thrived in spite of these challenges. Before we invested in CoSoSys, the company had self-funded multiple products and sales channels before finding the right fit for its enterprise customers. In 2018, we acquired Acunetix, a Maltese cybersecurity company that figured out how to distribute software to a number of countries through resellers who spoke the local language. We learned from the CTO at our collaboration software portfolio company Huddle how to hire talented development teams in lower-cost geographies like South Africa, to generate profits.
These companies can grow without splashy Silicon Valley narratives and capital, which shows how much potential there is in giving rest of world startups access to more resources and experience. The good news is that, over the past decade, the world has shifted in favor of software companies based outside of the West, a trend that was only accelerated by the pandemic. Customers anywhere can now find, test out, and buy products online. In the business software world, even six-figure contracts can sell without both parties ever meeting face to face. With the right support, the best products win, not the company that has the biggest headquarters in the most developed market.
Traditional Silicon Valley VCs are still unicorn hunting, but in the rest of the world, a perfectly packaged unicorn, complete with a grand pitch, hypergrowth hiring plan, and pedigreed founders will rarely exist. Instead, investors must realize — through touching its horn, measuring its legs, and observing its tail — that there are plenty of unicorns hidden in plain sight.