Investing in startups in high-risk economies

The country Afghanistan often conjures images of suffering, war and drugs, but that's only part of the story, says Afghan startup founder Jamshid Sultanzada. In 2015, he founded PomTech ICT Solutions, an outsourcing company which provide services like website creation and mobile app development from Afghanistan.

While a lot of young people have left Afghanistan, Sultanzada believes it is best for entrepreneurs like him to stay in the country.

"Creating jobs reduces violence," he says. "We are tired of fighting, we don't want war anymore." 

Sultanzada's business is already active in the US market, and he now plans to one day sell his services in Europe. With plans to target Europe's largest market, he has been learning German. With his basic language skills, he was somewhat able to impress Germany's Economy Minister, Brigitte Zypries, while sharing the story about his business in Berlin.

A German initiative called Westerwelle Young Founders Program aims to bring together entrepreneurs from challenging business environments, such as Afghanistan, Myanmar, Bolivia and Uganda, and link them with mentors in Germany. The program bears the name of Guido Westerwelle, a former German foreign minister and former head of the country's pro-business Free Democratic Party (FDP).

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But while the program may provide a good networking opportunity, most of the young founders would like to gain access that would enable their businesses to expand.

Opportunity versus risk

Raising money from investors in Germany or other western markets is a tall task for startups operating in volatile economies.

"The thing is the risk is as high as the opportunity," says Coffee Circle founder Martin Elwert. "This is the Wild Wild West for investing right now."

Ethiopia is one of the fastest growing markets in the world and you have a growing middle class, so there's a lot more money, he adds.

However, while he sees the potential in a market like Ethiopia, Elwert admits it is not the case for many company owners or investors.

Changing mentalities

Germans are generally more risk averse. In a 2016 survey of 212 institutional investors in eight European countries, 82 percent of German respondents cited avoiding losses as a key concern.

Young people would rather take up a regular job than set up their own company, German Economy Minister Brigitte Zypries said. "It is a question of security versus risks. We want to encourage people to start up a company by supporting them financially and therefore lower risks, she added.

Integrating startups in economic policy

Startups are increasingly playing a role in Germany’s economic and development policy. For example, the government-funded German Accelerator helps startups set up shop in the US by linking them with local peers in that market.

Matthias Koehler, head of the economy ministry's subdivision Financing for SMEs and business start-ups, domestic guarantee facilities, noted while that program may have worked for the US market, it may be harder to replicate it in difficult business environments. "Taking a German startup to a market that is less secure brings up other issues," he said

With startups having to answer to investors, the additional risk of a volatile market in a country like Afghanistan, Myanmar or Uganda is potentially something that could potentially ward off additional funds from venture capitalists.

What remains to be seen is whether initiatives like the Westerwelle Young Founders Program will help change mindsets and foster entrepreneurships in different kinds of economies.