Mongolia start-ups: Steppe forward

There was no word for “start-up” in Mongolian before 2011. That’s when Oko Davaasuren, now a senior director at US-based accelerator business Techstars, returned to his native Mongolia to help set up Start, an entrepreneur services group that organizes meet-ups and hackathons, while laying plans for the country’s first venture capital firm.

By the time Davaasuren decided to host a radio talk show about entrepreneurs, he realized there was not even a common expression to discuss the topic at hand. He hashed together the Mongolian word for starting with a Russian-rooted term for business to coin the idiom “Гарааны Бизнес,” which is now effectively Mongolia’s dictionary-standard translation.

Vocabulary is not the only thing Гарааны Бизнес created. The show set the stage for a cultural movement around entrepreneurialism, perhaps best illustrated in the popularity of the SharkTank Mongolia franchise. There are now six different co-working space operators in the capital city of Ulaanbaatar, which has a population of only around 1.4 million.

Start estimates there are about 400 start-ups in Mongolia now, of which 10% are seen as ready for seed or other early-stage funding – a similar ratio to many developed markets. A handful of these have raised capital, mostly from high net worth individuals. But how long before international institutional investors begin to regularly target this pool of talent?

“I know probably about 10 of these companies that have ended up registering a holding company in Hong Kong or Singapore,” Davaasuren says. “As somebody who gets to compare them quality-wise, I can say they’re very much up there in what you could expect from the rest of the region. More investors are learning about them, so hopefully, it will be less than five years.” 

Fintech first

This forecast suggests a significant acceleration for the local economy, which has traditionally revolved around primary industries and foreign support. Since the end of the Soviet era circa 1990, Mongolia has received technical assistance from the International Monetary Fund to navigate various economic crises. This close attention, however, has precipitated a robust, forward-thinking banking sector.

As a consequence, the country’s nascent start-up scene leans understandably toward financial technology. The first start-up IPO on the local stock exchange was IT services provider iTools in 2017. It was quickly followed by micro-lending platform LendMN, which has gone on to become the ecosystem poster child. LendMN is currently the fifth-largest member of the Mongolia Stock Exchange’s top-20 index.

The company’s success has fueled significant momentum in terms of rising interest from the traditional business sector. Zolboo Bayarsaikhan offered a case in point in 2018, when he ended a 12-year career at Golomt Bank – having risen to head of treasury – to become CEO and now chairman of Start. He concedes that fintech remains the hottest attraction for the moment but notes that a broader shift awaits.

“In almost all industries, all companies have gotten the idea of digital transformation, but they don’t know how to do it. So there’s a lot of opportunity for foreign VC and PE investors, and we’re just seeing the tip of it,” Bayarsaikhan says. “We don’t have a lot of domestic investors but that doesn’t mean we don’t have funds. It’s just that there’s not as much knowledge and experience.”

Bayarsaikhan set out to solve this problem last year by establishing the Mongolian Angel Investors Association. The idea is to professionalize the investment approach of individual industrialists, who write checks mostly of $50,000 to $500,000 based on personal relationships. Ultimately, it is hoped this creates enough buzz to attract the attention of foreign institutional VCs.

There have already been some stirrings on this front, especially from North Asian players like Mirae Asset Financial Group and Rhinos Asset Management. But a lack of sophistication at the entrepreneur level has kept traction in check. The most ambitious solution proposed to date has been the National Information Technology Park (NITP), a government incubator that takes on 5-8 start-ups a year. 

However, Puresuren Byambasuren, a mentor at NITP, says that most of the start-ups he sees are insufficiently developed to attract investment. He flags attempts by NITP to connect with international organizations such as Singaporean start-up services provider ACE and the Massachusetts Institute of Technology as early signs of a much-needed effort to improve the skills base through international outreach.

“We don’t have a very effective network in Mongolia. Some people are trying to be venture capitalists but they don’t have enough knowledge of entrepreneurship,” Byambasuren says. “We need more effective programs, accelerators, and training. We need more connections to other countries and other start-up centers. If [entrepreneurs] can get that, then they can innovate products and ideas, and maybe meet investors.” 

Intra-regional angst

While growth might be achieved through regional cooperation, the process is unlikely to be as intuitive as it has been for frontier markets in Southeast Asia. Mongolia has historically directed national policy based on icy relations and cultural friction with its neighbors, especially China. This is evident even at the street level; anti-China graffiti is common in Ulaanbaatar, which remains the only capital in Asia Pacific with no Chinatown.

Perhaps antagonism is less of an issue for the digital generation but there has been little progress to prove it – some recent advances by Alibaba Group notwithstanding. Instead, early movers have tended to look further afield, with the most notable traction including a merger last year between Start and its Malaysian counterpart StartupJohor. The goal is to establish a bridge between Southeast and Central Asia.

Mongolia cannot boast the large consumer markets of these regions, however, and will therefore have to market itself more as a Hong Kong or Singapore-style hub for talent and a prototyping laboratory that is relatively well climatized to global ways of doing business. The key selling point here is that half the population is concentrated into a single young city with high mobile and internet penetration and strong levels of English among founders.  

“New tech companies have sprung up quickly, acquired a decent number of users, and built hype around brands, products, and services,” says Techstars’ Davaasuren. “This could be systematized, and we could create a model where new tech companies are using our local market to test ideas, learn, educate, and iterate their business models until they can scale them in other markets.”

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• Topics
• North Asia
• Technology
• Early-stage
• Mongolia
• TMT
• seed