We’ve all seen the increasing flurry of activity around AI, initiated by ChatGPT’s debut some 14 months ago, and most recently fueled by the incredible 2-year ascendency of ElevenLabs to unicorn status just last week. I’ve used their product and it’s good; I wish them and their investors well, but truly can’t comprehend the logic of this valuation.
The ElevenLabs deal shows the AI bubble is alive and well, with profit potential unclear due to the over-saturation of competing undifferentiated AI products and the assumption that incumbent tech giants are going to let startups have free reign in whatever segments they carve out. As seen in the August 30, 2023, WSJ article, savvy investors are increasingly concerned that young businesses have yet to prove they can retain users and develop products that existing tech companies and major infrastructure players couldn’t easily mimic. In contrast, service-based companies in the Global South, including Southeast Asia, India, Africa, and Latin America, have started to capitalize on the opportunities that new AI technologies present. This is where Capria invests, passing over the eye-watering bubble valuations of the AI tools and infrastructure companies. We are seeing GenAI technologies advancing vital sectors including agriculture, healthcare, education, and fintech, all of which have been historically good businesses that now can grow faster and more profitably due to the application of the latest AI technologies.
Ignoring the “Skynet” naysayers for the moment, we are confident that AI will have a near-term positive impact on economic growth. Goldman Sachs Research estimates that widespread adoption of AI could contribute 1.5% to annual productivity growth over a ten-year period, lifting global GDP by nearly $7 trillion. The Global South’s young population and higher overall growth rates will disproportionately benefit from this prediction.
Recently, McKinsey & Company evaluated 63 GenAI use cases to solve specific problems across 16 business functions. The output was that generative AI could add $2.6 trillion to $4.4 trillion in economic benefits annually. Of that, 3.75% of the total annual value from GenAI use cases will be driven by customer relations, marketing and sales, software engineering, and R&D across all industry sectors. In combination with the increase in productivity that is expected to grow alongside the technology, the total economic benefit would amount to an annual return of $6.1 to $7.9 trillion.
In India, productivity is expected to boost by 0.5% with countries including Mexico benefiting from a 0.6% productivity boost from 2022 to 2040. Productivity, which measures output relative to the input, or the value of goods and services produced divided by the amount of labor, capital, and other resources required to produce them, was the main engine of economic growth in the three decades from 1992 to 2022. This can be seen as illustrated above by a recent McKinsey report. With that, let’s take a closer look at how regions in the Global South are expected to perform in relation to their GDP growth and expected rise in productivity through the application of GenAI.
According to a recent EY report, India has the potential to add $359 to $438 billion to its GDP as a result of GenAI adoption. From 2023 to 2030, this would represent an additional 5.9% to 7.2% of GDP and an additional CAGR of .9% to 1.1%. What aspect of GenAI drives this growth? Given that productivity growth makes up roughly 72% of GDP growth, the application of GenAI to spearhead India’s GDP is closely related to its impact on the country’s overall productivity. Of the many reasons for investors to be optimistic about the application of GenAI in developing countries, the largest is its impact on fostering intellectual growth alongside that of productivity rather than elimination of jobs.
In developing countries, the shortage of skilled workers is large, and the application of GenAI can reduce this gap by contributing more to productivity which increases the level of overall health and education that many of these struggle to obtain. Furthermore, the IMF predicts that labor markets in poorer countries will be less disrupted than those in wealthier ones. As a result of less employment disruption and an increase in productivity, we can expect the market in developing countries to significantly benefit from an upgrade in operating models and an increase in new products, while also revolutionizing economically dependent value chains.
Along with Southeast Asia, LatAm is also well-positioned for substantial economic growth as a result of advances in AI. In a recent report by the Economist, countries including Argentina, Brazil, Chile, Colombia, and Mexico are thriving due to their private sectors leading AI development initiatives. Each of the region’s largest sectors has developed its own AI startup hubs, with initial regional success to back them up. The largest sectors benefitting in the region are healthcare, Agtech, and Fintech. We see this firsthand with Kueski, the leading BNPL and digital payments player in Mexico and one of our portfolio companies, sees the use of GenAI to bring the education of financial products to a large market of first-time borrowers.
LatAm’s gold mine may well be agriculture which provides the region’s largest volume of global exports. As seen in a report by the Economist, the sector provides fertile ground for growth, driven by large local markets and deep expertise. The Economist also highlights that the number of Agtech startups has increased by more than 600% between 2008 to 2015. The addition of GenAI can make large impacts in areas such as customer care and product development for the rising Agtech startup sector. Our portfolio company, Agrofy, has become the leading marketplace in Latin America for agriculture by simplifying transactions for merchants and farmers through the entire procurement process. For Agrofy, using GenAI will improve Q&A interactions with its customers, increasing efficiency while also improving its quality of listings and developing better product recommendations.
Compared to Western economies, those in the Global South are also able to take advantage of additional benefits of applied GenAI to tap into an expansive amount of market potential which has been previously hindered due to a lack of resources. Examples of this can be seen through the language “equalizer” which GenAI can provide. GenAI provides local and global startups the opportunity to open up the vast markets of non-English speakers. The latest GenAI tech, such as Google’s Gemini, can already fluently translate between over 100 languages with its conversational model. Low-cost high-quality translation into even lesser-spoken dialects will grow markets and decrease costs at the same time, including:
Last year was the year of awakening and experimentation. Some startups have already adopted and are benefiting from GenAI via reduced costs and faster execution. But most are still in their early innings, learning what works and what doesn’t, evaluating the fast-moving new offers from providers big and small, and getting ready to go to scaled deployments in 2024.
Last year we advised our startups to ensure they don’t get locked into any one tech and to ensure they maintained their teams’ ability to devote the time needed to be conversant on the latest tech which is moving even faster than anyone expected. 2023 didn’t disappoint on the innovation front, and early signals are that 2024 will be even more exciting.
My colleagues and I feel privileged to be investing and supporting startups through these incredibly exciting times. If you’d like to invest alongside or with us, please drop me a note.
Will Poole
Managing Partner
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Unitus Ventures, a leading venture capital firm in India, is joining forces with its US affiliate Capria Ventures, a Global South specialist, to operate with a unified global strategy under a single brand, Capria Ventures.
