Geo-arbitrage, or tropicalization, describes how venture capitalists export start-up models to new regions and markets, making sure to adjust the model to suit local culture and infrastructure.

Q. So, this trend actually has two names, right? Geo-arbitrage, and, my favorite, Tropicalization. Makes it sound like going to the beach!
A. Yep, and they all mean the same thing: the way VCs are exporting successful startup models to other jurisdictions, making the necessary changes to suit the local culture and infrastructure.

Q. But, VCs didn’t exactly invent this model, right? After all, Baidu copied Google all by itself!
A. True enough. But some VCs are really taking a programmatic approach to this idea. Partly, that’s because the game has become so much harder here at home, both in terms of competition among VC firms for dollars and for investible idea. And partly, it just makes a lot of sense to invest in local variations of a proven idea.

Q. Can you give us an example?
A. Peixe Urbano is a good one, the Groupon of Brazil. Benchmark and General Atlantic Capital said: hey, we know that model can work, so let’s invest. Or, take a look at FlipKart, which was started by two ex-Amazon guys. From that you can pretty much guess the basic idea. But the critical trick is to put in the twist that the local culture requires. In this case, India, credit cards aren’t so popular (as they also aren’t in, say, Latin America). So Flipkart offers a COD option… back to the future for the US, but just right for India.

Q. And of course that kind of local knowledge will often be the critical element.
A. Local customs, local laws, local infrastructure, local recruiting. Lots depends on people on the ground who get the idea, but also see how it will have to be changed to work. In many ways, it’s just common sense. But that doesn’t keep it from being a profitable and trendy VC model.

Q. It makes so much sense that I have to ask: what are the downsides?
A. Well, the biggest one is that, by definition, the size of the market is limited… after all, you’re basically taking a “big idea” and making it smaller, not something VCs usually like. Personally, I think that’s compensated for by the higher odds of success. And the second one is: if the original company comes to town in a big way, their presumably larger network of users might well be a meaningful competitive advantage.