In September this year, Life.SREDA VC had announced that it had entered into a strategic partnership with Leonie Hill Capital, in a move that sees the firms establishing BAASIS, a pan-Asian banking as a service (BaaS) platform.
Headquartered in Singapore, BAASIS is technically backed by a German digitlal financial services firm that was formerly a portfolio firm of Life.SREDA and is intended to provide a core banking infrastructure for fintech startups and other non-banking financial corporations in Asia, acting as middleware between traditional banks and entrepreneurial fintech ventures.
In an interaction with DEALSTREETASIA, Igor Pesin, a partner and investment director of Life.SREDA VC, said the firm would soon announce the first close of its blockchain fund at at 25 million euros, even as he added that its second fintech fund, where it was targeting to raise $100 million, would soon have its second close, with Leonie Hill Capital as the lead LP.
Do you find that being an investor of Russian origins can bring certain difficulties with it?
It’s not specifically for Russians, but its quite difficult for any VC investor to effectively be integrated into the local investment space. A market ecosystem like that consists of different parts and Asian culture, especially for VC’s, is based on personal relationships. We tried to invest into several fintech ventures in Asia when we were based in Russia.
So when we came to Singapore and asked why there was no response, they said because they don’t know us. You have to physically be based in Asia and personally meet in Asia to present yourself and explain what you’re doing and your own values, so it’s very relationship-driven
Being from Russia is no difficulty, just like being from Germany or other European countries; it’s more in general about integration into community. But once you are based here, you become part of the community.
Can you provide any updates regarding Life.SREDA’s blockchain fund?
We are making the first close with several partners and have created a pipeline with several companies, but it took more time than we expected, as we targeted the fund to work with more professional institutional investors. Our expectation was that it’d be faster, so now our target to start is from January 2017.
Our current commitments are 20 million euros and we are targeting to make our first close at 25 million euros. The next target is 50 million euros and we aim to raise a 100 million euros as our hard cap at the end of 2017.
We don’t need so much in terms of funds as blockchain is still a very emergent industry, so we’ll be doing mostly seed stage and Series A investments. Right now, it’s a global pipeline and it’s about where the innovation is coming from, rather than the geographic locations of the startups.
The global blockchain market is concentrated in the US, London and several European countries. So we’re looking for promising tech firms but the limitation is not where they are based. Were seeing mainly US and European deals from our pipeline. Our blockchain partners for the fund are based in London, that is why they know the blockchain ecosystem there intimately. But they do regularly visit Asia.
What are the plans for the second fund? How much of Life.SREDA’s funds have been committed since last year?
We have first fund with US$40 million which was deployed at the end of 2014. In 2015 we started second fund with target of US$100 million with a first close of $20 million – this is the fintech fund – and we’ve invested in 7 companies from this fund. Now we are getting to the second close of the fund and Leonie Hill will be the lead LP in this fund, which is currently waiting for approval from the MAS.
Has the investment thesis or theme changed since establishing yourselves in Singapore?
It has changed a fair bit. When we came to Asia, our idea was to invest into Series B rounds, with the main investment thesis being that Asia does not need innovations. Most important for the fintech ventures in Asia is not how technically advanced they are but how they can execute and build their market distribution (i.e. acquire and retain loyal customers).
Look at Paytm in India – its’ very generic and lacked functionality at first – it’s only payments and not that advanced but they knew the market needs and that people needed the cheapest and easiest solutions. They understood their customers and knew how to reach out to them and engage them.
Let’s look at the taxi marketplace; you couldn’t link your card to GrabTaxi for payment when I first arrived here and you could only pay by cash. The design was also much worse and you couldn’t compare it with Uber. But they knew how to engage the local market demands and from my view they are more successful than Uber in Singapore
The initial investment idea was to identify the successful companies in terms of successful execution and product functionality. Right now, there are maybe 10 big fintech companies successful in Southeast Asia.
Series B investments are aimed at those which have built a sustainable business model and we decided that our investment strategy will be to invest into early-stage fintech but with some possibility to scale faster.
We’re doing an ecosystem play where we invest into complementary companies in different countries. We target those that are serving the same market but have different products, with the idea of making partnerships to drive their growth.
If you rely on organic growth, then the runway is too long – Series A companies cannot scale so rapidly in fintech – so we aim for partnership and mergers to build synergies and establish leaders in APAC markets. That’s been what’s happened in shifting from Moscow to Singapore.
Fintech competes with traditional banking and financial industry, not with each other. Simple Bank and Moven – two digital banks in US – they compete with banks and not each other. You can invest into similar products in similar countries but the market can be large enough for both of them.
Can you explain banking as a service (BaaS) to the layperson? What are its implications for the industry?
BaaS is a software platform with an API layer connecting banks and startups that helps to unify and transfer information from banks to fintech in a standardised manner, functioning of middleware and consists of a standardised suite of APIs that enables an effective flow of information.
Fintech ventures and their systems do not need to communicate directly with the core banking. It solves this problem of fintech by providing a common, unified infrastructure layer that will enable its launch in different countries to be simpler and faster.
Life.SREDA is developing a pan-Asian BaaS platform for Asia; we’re aiming to connect up to 15 countries and right now we see the main demand coming from Malaysia, Thailand, Pphilippines, Vietnam, Indonesia, Singapore, and India, which is a particularly difficult market ecosystem. We’re starting in Philippines, Vietnam and Thailand due to the demand there.
We’re also looking at working with JB Financial Group in South Korea who approached us to take part in the BaaS project. With this, you’ll be able to choose country, select APIs and get bank requirements based on the regulations.
Most fintech in Asia targets customers who are unbanked, which represents new customers and revenue stream for banks. The benefits for banks lies in the cost reduction, new services and products, needing only one bank in each country. For the fintech firms it leads to reduced go-to-market time and accelerated market entry, as well as reduced engineering costs.
You have more than 20 verticals in fintech (i.e. payments, remittances, insurance, corporate finance, etc.) , so having a BaaS platform would enable them to select the appropriate partner and solves the problem of selecting partners. It also allows the banks to write off infrastructure investments and use them as new revenue streams.
BaaS is for banks as Amazon Web Services (AWS was for e-commerce; people were questioning why Amazon was investing in the infrastructure that became AWS back in the day but 67% of all Amazons’ profit come from AWS now.
What’s your view on the emergence of digital banks? Is there space for a cryptocurrency bank?
As a fund, I do not believe a lot in cryptocurrencies being successful within the next several years. Maybe it will happen, maybe not. But while some innovations will be supported by governments, cryptocurrency is an exception and this will limit its success. I understand why central banks limit this. If you talk about blockchain, we need to separate the blockchain tech from the bitcoin and other cryptocurrencies.
Blockchain has real value for the banking industry in terms of making the flow of data cheaper, faster and more secure. Cryptocurrency as a product based on blockchain has some weaknesses (e.g. fluctuations and speculation on the currency).
I believe in digital banks and their potential – there’s a lot of advantages to them – but I don’t see much value in a cryptocurrency-based digital bank. For instance, when using digital banks – purely digital in terms of KYC – I can open an account sitting in front of my computer and doing it all from there.
I don’t understand why I should go to a bank branch to get a statement or make any transactions. The second thing is Big Data within these digital banks as they know a lot of information about me and see all my transactions. As a result, they can provide value-added services based on this. And with my smartphone and an Internet connection, this sort of bank is nearly always with me.
Cryptocurrency has no geographic link, while fiat currencies have a unique value proposition for their countries and the value they offer to people – hence my understanding of why it may lack government support – but I don’t think cryptocurrencies will be viable within the next 10 years.
Let’s talk Bitcoin, Ethereum and virtual currencies – your colleague Vladislav Solodkiy had discussed how a unitary digital currency would be a game changer. What would the impact of a regional digital currency – using the Euro as an example – operating in parallel to fiat currencies in Southeast Asia have?
I don’t think it will happen. Europe has an economic environment in Western Europe, where the Euro operates, that has markets with comparable development and context.
If you look Southeast asia, Malaysia and Singapore are completely different to Vietnam. You have different interest rates and a different economic context; conservative regulations
Philippines is a crazy market – in terms of it being a developing economy with higher growth rate but significant macreconomic fluctuations – and I believe that it could be good for Southeast Asia but I don’t think that it will happen. But the benefit is there obviously
Do you see a role for cryptocurrency in crowdfunding? What’s your take on companies like Bitbond?
For these companies, cryptocurrencies are a tool that covers not one country but many countries like Bitbond. When you connect different parts of the world on a crowdfunding platform, it’s much better to have a unified currency.
For instance, whether you invest into Filipino’ businesses or Singapore businesses, you want to have a single currency so you can control your portfolio. And one way to do that is to standardise cashflow in this platform; it can be bitcoin or any other cryptocurrency.
And when you are doing international business, it’s always good to have a unified payment method and currency not dependent on macreconomics across different markets or political pressures.