(Here is the spreadsheet I used for the graphing process - I gave access to will@contrarycap.com and web@willrobbins.org )

The venture-capital industry – originating in the US – is envied mainly throughout the world as a rear engine of innovation and economic growth. However, people with a distorted sense of globalization tend to underestimate the need for adapting to different markets while operating VC funds. On one side, popular media portrays the resurgence of protectionism and nationalism through an emphasis on deteriorating trade agreements, the US-China trade war, placement and removal of tariffs, and political backlash in countries with austerity programs. Meanwhile, the rapid rise of online connectivity – especially social media, has overshadowed reality to give an inflated view of a flattened world. The combination of both phenomena, thus, gives rise to a skewed understanding – “the world is very connected but decelerating due to socioeconomic and political tensions.”

The authors of the global connectedness index aim at correcting the distorted view by proving that globalization isn’t a one-time phenomenon but a process of change through time. They reframe globalization as a process using four metrics – trade, capital, information, and people – at different levels of analysis. The intensity of the relationships and variety of those relationships among countries.

Depth of the metrics in how much the country engages in each activity shows the intensity in international business compared to localized movements. Although, as VC money circulates through international boundaries, it’s affected by cyclical and structural economic determinants. Visible economic growth could be attributed to the structural factors – indicating increasing connectedness. However, volatility in cyclical economic factors and macroeconomic situations could cloud results from being completely attributed to globalization.

While the breadth of the metrics implies the range of regional relationships by the VC, breadth is profoundly affected by “The Law of Distance”, indicating interactions are dampened by distance along the sociocultural and geographic reach. In addition to “cultural affinities, political agreements, and infrastructure links,” as the startup ecosystem of a country develops along with viable market size, the prospect for investment increases. However, due to (1) the considerable investment risk that goes along with VC funding, and (2) slow growth curve for new investment hubs to develop; the breadth is limited as VCs become risk-averse towards new regions. Breadth remains relatively stable with slow growth.

Thus, the author’s usage of a cumulation between depth and breadth to indicate globalization indexes apply to VCs. The weight of the average might weigh more towards depth, as breadth might be significantly harder for VCs to penetrate. Even in an ideally connected world, in-depth insider knowledge of the economy and sectors within a country is needed to enable investing and expanding to newer hubs.

The four metrics are used to functionalize globalization by embodying critical indicators of a truly global market. The metrics provide cohesive rhetoric in defining globalization. Although each of the pillars affects and is affected by global expansion, some are more relevant depending on the industry. For venture capital and private equity firms, the movement of people, though significant, is of least relevance. Trade and information flow accompany VCs in the process of globalization. Unsurprisingly, the capital pillar has more sway in functionalizing VC globalization.

As markets become attractive, there are multiple ways to infuse money to high-growth, high-yield startups, and companies alike. Money gets injected through trade deals like bilateral treaties that favor taxation avoidance, where shares are exempted from taxation. Secondly, through FDI, given that legislative barriers permit such activity for VC and PE funds through a structure usually known as a Financial Foreign Direct Investment(FFDI). Third, through joint ventures in regions with lesser expertise and more legal hurdles.

The circulation of more capital reduces the tangible and intangible trade costs, creating trust, and thus generating a competitive advantage for local, innovative companies to flourish. This economic development must be distributed in emerging countries as well to boost globalization. Foreign funds face hurdles when investing in emerging markets. One hindrance is the lack of appropriate exit strategies that give sizable returns to angel and seed-stage investors. IPO stock markets or acquisition strategies are underdeveloped or non-existent. Even with the growth and expansion of local firms, a phenomenon of “semi-globalization” remains in developed countries.

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Per the argument above, I used the cumulative Global Connectedness Score to analyze countries on the steepest growth and decile. Using the SLOPE function to indicate the steepness of points, Mozambique and Iran showed extreme values of the rise and drop respectively

Iran, a country with the 4th biggest oil reserve, occupies a critical geographical area in the middle east. The reform process that started in 2005 radicalized the Shia Muslim country to adopt a strict Sharia Law. Funding Hezbollah - a terrorist group against Israel and enrichment of Uranium caused regional tensions to rise and culminate in UN sanctions imposed in 2006 that resulted in economic blockade from the rest of the world. After sanctions, prices of goods dramatically rose and the startup scene got affected.

As the UN put sanctions on the country, outside investment and trade that was incoming shut off. Due to the rising living conditions within the state, startups, and independent businesses - that are premier targets for VCs - weaned off and growth declined. Second, the venture capitals that were highly concentrated around western powers, and China feared the political instability.

Classifying for general failures of venture capital investment in Iran, it could be due to formal and informal barriers. Significant formal deficiencies are similar to emerging markets. They include a lack of financial regulations, inefficacy in tax, labor, financial disclosure, investment protection laws, and capital market underdevelopment. Iran’s informal barriers widened the formal institutional voids. Strains include a culture that heavily disapproves of capitalism and an infiltrated culture of secrecy.

Although local firms operationalize and are making moves, they are usually government sponsored. This hamper and disturbs private VC funds into making biased and manipulated investment decisions. The displacement of funds from private investors leads to a lack of mature VCs that create a self-sustained venture capital market, that can’t even develop in Iran – let alone expand internationally.

Mozambique’s story is of rising from demise with the right reforms.6 The country had been underdeveloped due to the two-decade-long civil war. However, after 1994, the economy had been in recovery mode and reviving. Coincidentally, the natural resources of the country shot it into the global playing field as aluminum exports proliferated, followed by the discovery of vast reserves of natural gas and coal in the early 2000s.

International economic support with newly discovered resources diversified the country’s economy supporting old industries of agriculture and tourism. Throughout these years, the government of Mozambique set attractive legislative and policy practices that made the right balance of national development and attraction of foreign investment for building a long-term, inclusive, and sustainable ecosystem.7 Plus, the government introduced privatization of formerly state-owned entities, especially in agriculture and natural resource exploitation.

FDI, in the form of venture capital and private equity in Mozambique, is incentivized by the integration of the country to the Southern African Development Community (SADC) that opens access to member countries. Even with substantial constraints of administrative, infrastructural, and bureaucratic difficulties seen in Iran, the government’s reforms have significantly moved the country in the right direction. Given the reform-minded government, the attractiveness of the market remains with significant rewards that keep pushing Mozambique as a good investment location in Africa.

Fickle Pickle Bar is a neighborhood bar next to the residence hall that I lived in Seoul for 4 months. Tuesday nights, the rooftops right sit was reserved for my roommates and I.

I looked at this spot in HBC, Seoul, that I liked and thought of as an excellent investment to explore further. Fickle Pickle is a multipurpose complex located in the trendy and “hip” neighborhood of Seoul. Due to the massive influx of youth in the area, the owners – 2 Korean ex-NYU students – decided to found a space that could attain the ever more so “fickly” youth of Seoul. Space tries to incorporate a café, bar, rooftop, and art studio in one space. The studio features new, independent, up and coming artists to be featured every month. Due to the alternative, grunge, and industrial feel of the place, plus the artist featured, Fickle Pickle, is growing within this international district.

Post discussions with one of the managers, Jen, I constructed financial statements with justified assumptions set in place. The café, located on the ground floor, is open every day. While the studio, bar, and rooftop are open 4 days from Thursday-Sunday. Sales from the café, drinks from the bar and rooftop, entrance fee for the studio, and Fickle merchandise (including T-Shirts, pouches, stickers, key chains, and caps) are the primary sources of revenue for the complex. An hour-long observation suggested close to KRW 819,570,000,000 to be made in sales per year.1 Exhibit 1 below shows how that revenue is stripped to result in an 11.8% profit margin.

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                   Exhibit 1: Income Statement for Fickle Pickle ‘19

COGS included fixed and variable costs, of which higher percentages were salaries and cost of the product/service offered. As Fickle Pickle’s customers are mostly people within the HBC community and featured artists get the utility of exposure from the venue, SG&A costs are relatively minimal. Overall profit margin is 11.83% which is quite high in relation to the concentration and margins of coffee shops and similar service businesses in South Korea.

Marketing, R&D, and Human Capital used here are expensed, which might not necessarily be the sole truth. As Fickle Pickle has additional intangible assets on the “vibe,” they create and the brand image they maintain that creates a feedback loop of attracting more customers and increasing the value of the business. So be aware of the distortion this might induce in underestimating the intangible assets.

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                    Exhibit 2: Cash Flow Statement for Fickle Pickle ’19.

The positive cash flow in 2019 entails that the business owns easily liquidated cash for operations and fulfilling short-term obligations and shows working capital’s health. This cash shows of sustaining cases of emergency expenses, demand for higher inventory, and ability to stabilize supplier power. Fickle Pickle is gradually trying to cut down on inventory at hand for better turnover rates. Having positive cash flow shows they have the necessary funds to get inventory in case of a higher demand to negotiate with supplier power to keep up with demands while minimizing surplus. As there is no debt financing cash flow and new equity isn’t issued, the total for financial activities is 0. Capital Expenditure increases as the complex get new material like a new beer tap and renovation expenses for the bathrooms.

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                     Exhibit 3: Balance Sheet for Fickle Pickle for ’18, ‘19

Considering Fickle Pickle is a well-established venue in the community with strong customer relationships, I used a moderate/high discount rate of 10 %. When using the DCF model and estimating the current value, I omitted the terminal value, heavily due to the fact Korean businesses have a short time lived and get replaced quite remarkable. Otherwise, buyouts by bigger conglomerates or the intense market competition cause business to dissolve. Note that when taking this approach, I undervalued a key input to the DCF model and have a smaller NPV, and you should not want that if you intend to keep your money there for a longer time, it generates profits. The NPV of the business ended up being approximately KRW 516,000,000, with the book value at 2019 being KRW 603,543,150.

During this evaluation, I assumed the lack of terminal value as businesses within Seoul are usually short lived and easily regenerated. Although the business might have enduring value, its not going to give value tremendous value long down the line big enough to need terminal value considerations. The NPV of the business ended up being approximately KRW 516,000,000 with the book value at 2019 being KRW 603,543,150.

As Fickle Pickle was a small business, raising debt would have imposed unnecessary financial burdens. However, now that it has its core audience base of loyal customers, raising additional debt wouldn’t leave a constraint as they have a consistent cash flow. Loss of company control isn’t required to raise additional capital as well. So. on the next phases of growth and expansion like opening another branch or significant capital expenditures, Fickle Pickle should borrow money as its revenues and margins show stabilization over the years.

Being placed in a competitive environment with premium pricing needs Fickle Pickle to be efficient and offer a distinctive utility and experience to its consumers. As seen in the assumptions, we demand a higher price from consumers, and boosting prices, might have damaging impacts leaving pricing as a sensitive lever we can’t pull. The service offered, however, has significant room for improvement. From increasing the number of days open (after customer maturation) when the cost of production and service for the new days(Mon-Wed) are exceeded by the net profit to be made.

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One of the most significant growths is SG&A expenses to leverage the incoming traffic at Seoul’s “hottest” district, increasing the visibility of their presence and value proposition in the market. Plus, maintaining the service quality, number of customers/hours is going to increase with improved SG&A expenses. There is a peak number on the number of consumers/hours, as the current location isn’t big enough. The reach of optimal instore numbers is an indicator of expansion to new locations to capitalize on demands.

Looking at these prospects for Fickle Pickle, and understanding the intricacy of the investment process, I advocate for investing in the company as it will provide return in coming years.