Startups in smaller emerging markets are increasingly relocating to larger economies due to investor preferences, warns the International Finance Corporation (IFC), the World Bank Group’s private sector investment arm. The shift, the IFC says, risks stifling the development of local startup ecosystems and undercutting the potential for grassroots innovation to drive job creation and economic growth.
The observation follows a week-long gathering of over 40 early-stage fund managers from around the globe, hosted by IFC Startup Catalyst and the Saïd Business School at the University of Oxford as part of the IFC Venture Finance Program. The meeting served as a peer-led forum for dissecting trends in venture capital across emerging economies.
Investors Chase Scale Over Local Impact
One of the starkest trends discussed was the persistent concentration of investor attention on larger regional markets. In Central America, local and international capital alike tends to gravitate toward Mexico and Brazil. The same dynamic plays out in Africa, where investors are more likely to fund startups expanding into Nigeria, Kenya, or South Africa than those based in smaller, less-established ecosystems.
As a result, founders operating in less mature markets are increasingly relocating to better-funded ecosystems to access capital. This trend, the IFC says, disrupts the development of homegrown innovation pipelines and weakens the long-term prospects for local venture ecosystems.
“Investor preference for scale and quick returns is understandable but has systemic consequences,” one fund manager who attended event told Launch Base Africa. “It incentivizes startups to leave their markets before their ecosystems can mature, which in turn makes those ecosystems less attractive to future investors — a self-perpetuating cycle.”
To counter this trend, IFC and the World Bank are advising governments on regulatory and structural reforms that can improve the local operating environment for startups. These reforms include streamlining business incorporation processes, creating tax incentives, and removing bottlenecks to technology adoption.
Additionally, the IFC is deploying capital through blended finance instruments and co-investment schemes designed to catalyze early-stage investment. One current initiative involves supporting the Moroccan government in establishing a new seed-stage fund and accelerator that will be jointly backed by IFC and public capital, targeting startups across Africa.
Beyond Capital: The Rise of Value Creation
Apart from regional funding disparities, the program highlighted new trends reshaping early-stage venture investing. One growing area of focus is “value creation” — structured efforts by fund managers to improve the operational performance of startups post-investment.
From pooled health insurance benefits to shared service platforms that allow startups to outsource finance and legal functions, these strategies are becoming a competitive differentiator. Managers are even using Net Promoter Scores (NPS) to evaluate how well they are supporting founders, borrowing a tool typically used to measure customer satisfaction.
Another key theme was the rising integration of artificial intelligence into the investment process. Several fund managers now use AI tools to support market mapping, due diligence, and portfolio monitoring. Some are even exploring the use of AI as an “independent” investment committee voice — essentially a non-human participant in deal deliberations.
These technologies are also being applied to retrospective analyses of missed deals — so-called anti-portfolios — to help investors refine future decisions.
A Shift Toward Leaner Investment Committees
Participants also shared lessons about investment committee (IC) design, which can affect the speed and quality of capital deployment. While some funds favor large, inclusive ICs, a growing number of managers are shifting toward smaller, nimbler committees, often bringing in independent experts to inject fresh perspectives and reduce internal groupthink.
While AI tools and fund governance are increasingly central to operational excellence, the core challenge remains structural: how to support startup ecosystems in countries that don’t yet offer the scale or visibility that most investors seek.
IFC Startup Catalyst, launched in 2016, is IFC’s flagship initiative to support early-stage venture ecosystems in emerging markets through investments in seed funds and accelerators. It currently backs over 20 fund managers and startup programs in more than 50 countries.
As venture funding tightens globally, especially for early-stage startups, the organization is doubling down on knowledge sharing and ecosystem coordination to keep emerging markets on the innovation map.
Editor’s Note: The IFC Venture Finance Program is part of the broader IFC Disruptive Technologies and Venture Capital strategy, which seeks to harness innovation to solve development challenges in low- and middle-income countries.