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What do you think about ‘business model arbitrage’ (i.e. taking existing business models from somewhere like Silicon Valley and implementing them in other markets like emerging markets before the original company expands there)?

One example I can think of is Grab in Southeast Asia taking Uber’s business model, implementing it in Southeast Asia before Uber established itself there, and winning that market.

According to [this Quora thread](https://www.quora.com/Are-there-any-Venture-Capital-or-Private-Equity-firms-specializing-in-Globalization-Arbitrage-taking-existing-technologies-from-developed-economies-and-applying-them-to-emerging-markets?q=emerging%20market%20venture%20cap), the German VC firm Rocket Internet uses this process along with the global ePlanet Capital and numerous Latin American families.

Do you know any other examples of this process? What do you think about it?

Although it might sound shady, the end result is people often in developing countries having access to goods and services at fair prices that they would not otherwise be able to obtain.



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16 replies on “What do you think about ‘business model arbitrage’ (i.e. taking existing business models from somewhere like Silicon Valley and implementing them in other markets like emerging markets before the original company expands there)?”

I met the Samwer brothers when they came to my business school to recruit. One of my friends went on to work for them building out a Zappos clone in SEA. There’s a few things to know about the success of their process:

– It’s all out aggression. They ruthlessly acquire competitive advantage in the local market by locking up supply chains and flooding marketing channels. In Oliver’s hiring pitch to me he used the word ‘blitzkrieg’ which I think is an apt way to describe the style.

– It’s a ‘business first’ approach. The initial idea and tech have been proven elsewhere. It’s about localizing the idea and executing on the logistics behind it. The Samwer brothers were recruiting heavily for MBAs at top business schools to lure away people who would otherwise be going to McKinsey or Bain.

– It’s capital intensive. Their advantage comes from moving faster at a scale that local or global competitors can’t match. Local startups often don’t have access to as much capital without going through typical startup rounds of validation. Global competitors likely won’t have the resources to focus so intensely on the local area.

I think the success rate for founders replicating ideas in other geographies is similar to those with ‘novel’ ideas. The strategies and tactics can differ, but many of the same fundamentals, timing, execution, and luck for example, still apply.

This process only works on two conditions.

Number 1 you actually understand a business you are doing this with

Number 2 (a) you have to be capable of running a business without the constant injection of capital

Number 2 (b) if you can’t do number two you have to convince someone else to buy you just before reaching critical mass.

The rocket group is notorious for starting up shady businesses that copy a different business but in a different market by pumping waaay to much capital into the business then trying to force a buyout by the original company that started the idea. They usually do this about the time the original company raises a series c round of at least $100 million. They try to quickly capture a market then force the company that started the industry to buy them for market share.

It’s all a sham though. The business they have almost never stays once they stop bleeding money because it was never built right to begin with. The overhead from the companies they start are insane and completely unsustainable.

Two recent examples of this are hello fresh and the knock off of air bnb they did.

The air bnb one, Brian Chesky ended up turning them down after a lot of internal conflict about the purchase. It would have completely burned through all of the money they had recently raised (which explains the price point to buy it) and the overhead numbers didn’t make sense. After they were turned down the air bnb knock off was able to run for a year or so while they searched for a buy but it failed to do rockets management.

The second case in recent times I can think of is hello fresh. They ended up going public because they couldn’t convince blue apron to buy them out but they are still growing fast. The problem is they run a massive loss every quarter. I don’t think the rocket group knows how to keep a company running sustainably after is is started. We will see though.

Interesting concept but many SF based businesses are not profitable (Uber is a perfect example).

I do think that exporting successful business models is a great way to accelerate success. Starbucks is a great example, taking European coffee culture and exporting that cafe business model to the states.

My friend from SF said there’s a crazy number of companies and services that people out there use, that are huge, multi million dollar companies, that you just don’t see in the rest of the country (especially where we live in the South).

It’s really interesting, I’ve never done it but I like the concept.

This is pretty common in non-english speaking countries. There are many examples since 2000 of tech companies that got started in this fashion and were later acquired by the original US company as it expanded.

The concept is great, but describing it as “business model arbitrage” is inaccurate.

For one, “arbitrage” refers to exploiting differences in costs when buying and selling (i.e but a commodity at a lower price in one market and sell it at a higher price in another market). There is nothing like that going on here (no differences in prices). Instead, what you’re describing is taking ideas that are used in one context and applying them in a different context, which is a common and widespread thing that is done in many fields. Writers, artists, musicians, scientists, academics (etc) all do this. To quote Picasso, “good artists borrow, great artists steal”. So I don’t see the point in describing this practice as “arbitrage”, since that’s not really what it is — i.e. you can’t put a price on business models and trade them like commodities.

Btw, here’s a great video on how ideas and concepts are reused and reapplied in different contexts: [Everything is a a Remix](https://youtu.be/nJPERZDfyWc)

Edit: Also, here’s an outstanding, classic book on this subject and what you’re asking about with a number of extremely valuable examples and case studies (highly recommended): [Blue Ocean Strategy](https://www.amazon.com/Blue-Ocean-Strategy-Uncontested-Competition/dp/1591396190/ref=nodl_)

I’ve had this idea for quite some time now. I think the primary issue is recognizing the key elements that make a succesful business model and transfering them to the desired environment, along with all the other elements specific to this new location.

First of all I don’t think you can term it as arbitrage. I think arbitrage is more like flipping, buying for less selling for slightly more, and hoping that the small profit margin would accumulate enough to be a good profit. Many people using native ads use this system

On to my point. I think it is less about these companies like grab taking the silicon valley model and making it suitable for their country. With all Ubers money and control they often miss the small needs of a country. In the end the country adopts to Uber instead of Uber adopting to the country. Leaving the natives really frustrated. Frustration leads to another company filling that void. Take Kenya for example, where I am from. Uber has been the biggest ride sharing company for years. But not because we wanted but because we did not have a choice. I work of s ride hailing company called Caby in the country. What we did is address the problems the locals face, and so far there has been a huge embrace from the locals because we tried to address the problem of the locals. The biggest problem Uber had with grab in India and Didi in China is exactly this. Trying to use the same app features,pricing, and set up that worked in US for these markets. But with India and China who also have heavy “silicon valleys” creating a company that works like Uber but adopts to their countries needs is really easy. For many other countries, they just had to adopt to Uber.

I am an entrepreneur-wannabe, beginner into business and have no earlier experience in it, so I still 99% blind to how everything works.

I believe the only plausible way to learn about a company’s business model is to join and inspect it from inside about how it works. Or, is there another way to learn a company’s business model?

I guess I’d quibble with the phrasing a bit, in that it’s quite possible to spin up a SaaS or freemium business model in many different contexts. What more often happens is that a region wants to import Silicon Valley’s (let’s just concede that this is example everyone wants to ape) ecosystem to their backyard, and that’s where they get into problems.

SV’s ecosystem is defined by rapid scalability to wipe out massive loss, and everything works to support that: capital structure, problem identification, founder training, workforce, risk profile, etc. Very few places in the world have the infrastructure and culture to support that (and SV took decades to build it themselves). This isn’t that different from the many regions around the world that wanted to be the new Detroit in the 1960s.

I wished ecosystem planners would more realistically assess their assets instead of trying to achieve the same end results as the Bay. It would be better for all involved.

If we take the example from other industries, what could also happen is companies from other countries / regions taking a concept currently delivered by a Silicon Valley giant, and beating said giants by offering lower prices, better ergonomics, better customer service, better privacy, more attention to details than the current incumbent. This is, for example, the story of Japanese cars (improving on ideas having originated mostly in the US, and partly in Europe).

Depending on the type of products, this is more or less easy (network effect, cost of switching, investment needed to launch said product). However, looking at the story of the mainframe disruption 40 years ago (an industry where IBM was seen as the absolute master for ever, stronger than any IT giant is now), I would argue that it could / will happen for almost any of today’s giants.

I see two reasons why this will happen:

* It is very hard for companies to remain efficient and nimble when they age and go big, no matter how remarkable they seemed at the beginning. The more successful, the more money around, the biggest risk of becoming complacent
* The skills and also regional cultures that are good at innovation are typically not the same as the skills and cultures which are good at optimization.

Living in a country that is not attractive to fancy startups at all, but that is DYING to have new services and businesses, I can’t blame the copycats. Hell, Ive thought of replicating business models myself, mind you, not logos, code or such, but the business models.

I, along with many others, would consider those inferior businesses. No one in the business is an “inventor” in the same way new concepts are. The book Zero to One is a perfect description of this. You aren’t a visionary if you are taking others’ ideas and copying them. That being said, I’d never hate on anyone for grinding and making their money in whatever way they can, so no animosity there. I just think if you want to be a visionary and do something new and impactful, that’s not really the right approach.

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