Asia can be a disruptive hub for emerging technologies, and companies born and bred here – from Indonesia and China – have become global, Matthew Koertge, Mark Sherman, managing directors at Telstra Ventures, the corporate venture arm of Australia’s largest mobile phone company, said in an interaction. Telstra Ventures plans to ride that wave as it looks to future proof its investment strategy, that had so far been focussed on the United States and Israel, in addition to its home market.
Matthew Koertge, who was joined by the VC’s other managing director Mark Sherman, in a wide-ranging interaction with DEALSTREETASIA, shared the firm’s outlook for the region, in addition, to its investment strategy.
The duo explained that the Silicon Valley headquartered firm has taken major strides towards expanding its reach into Asia, pointing to its recently announced JV with Indonesia’s Telkom to invest in tech startups in South East Asia. But, deepening its relationship with Telkom is not the only step that the firm, started by former chief executive in David Thodey in 2011, has taken. Earlier this year, it invested in Singapore-based venture capital firm Monk’s Hill Ventures, and in July this year, it committed an undisclosed amount in Cloopen, a Beijing-based application programming interface provider.
Mark Sherman said, the firm was betting on the prospects that Indonesia offered: “We see a lot of opportunity in Indonesia primarily because of the growth in mobile phone connections, the increasing number of smartphones and also the increase in internet usage overall. I think that we see a lot of consumer opportunities in particular. The market places, consumer apps, mobile apps – all look to be very interesting opportunities in Indonesia.”
Globally, Sherman said the firm had looked at 1,284 companies in the (12 month period) ending June 30 2016, and only 11 of these translated to investments. “We look at a wide number of companies and then we filter them down to the ones that we think are the highest quality and where Telstra can make the biggest impact. So the math works out to be somewhere between a 100 and 150 companies per investment professionally in Telstra ventures,” he added.
Let us start with two recent deals – Telstra Ventures announced it had tied with Telkom Indonesia to jointly explore opportunities to invest in tech startups in Southeast Asia. Why Indonesia? Is it because you already have a JV with Telkom, or is it that the startup scene in that country is exciting? Will the startups that you invest in get to leverage the networks of both Telstra and Telkom?
Matthew Koertge: Talks (with Telkom) have been going on for about four and a half years. We’ve invested in 34 companies across the globe, and our focus really within the group initially was Australia and US. But over the last few years, Telstra’s strategy is also to grow in Asia – Telstra Ventures has become far more active in Asia for the last couple of years. I’ve personally spent the last three weeks in Asia – this region is certainly a significant focus for us.
The Telkom relationship is actually much larger than Telstra Ventures. Telstra and Telekom Indonesia actually have a joint venture which has been going for a few years – that has been a success story. Our latest deal is an extension of that – we will specifically look at investment opportunities that are interesting to both Telstra and Telkom Indonesia.
So basically, the opportunities that we are going to look at together would be predominantly focused around Indonesia, if not exclusively in Indonesia, because they are obviously our JV partner there. I think there’s a lot of opportunity for us to work together – a great scenario might be where they have an interesting deal and then they show that to us, and then we invest jointly. Similarly, we show them our ideas, and maybe there’s an opportunity that they are are pretty excited, and we do it jointly.
And Telstra together with Telkom can obviously bring a lot of things. We can provide Indonesian companies access to the Australian market, and similarly for an Australian company that wants to expand into Indonesia, maybe Telkom will have an opportunity to help them in that geography.
How do you see the startup scene in Indonesia?
Mark Sherman: We see a lot of opportunity in Indonesia primarily because of the growth in mobile phone connections, the increasing number of smartphones and also the increase in internet usage overall. I think that we see a lot of consumer opportunities in particular. The market places, consumer apps, mobile apps – all look to be very interesting opportunities in Indonesia. And then we also see an opportunity to bring some of the best global technology opportunities to Indonesia through our joint venture with Telkom Indonesia. So things around security, cloud, enterprise applications are the areas we will either partner with, co-sell or work with Telkom Indonesia’s relationships.
Matthew Koertge: Telstra Ventures is generally looking to invest in slightly later stage investment opportunities, so we’re not typically looking at seed or even so much as Series A funding, although we have done a couple of such deals. But, our preferred area is where we can basically invest in a company that has already established a business plan, has customers, revenue, or some commercial traction. Our preference is to invest in companies that have already achieved a little bit of scale, and then provide capital for that company to continue to grow to be a lot larger. It’s really also using Telstra and Telkom Indonesia to leverage the scale of that opportunity. So we would probably not do a $100,000 type of investment – a typical sort of investment will be in the $5-$10 million dollar range. And I think that in Indonesia, there are certainly a bunch of exciting opportunities which will allow us to execute our best strategy.
Indonesia apart, how do you look at other regions in Asia? What about China?
Mark Sherman: The first thing is to start with the best products and the best teams in the world – so we are constantly scanning the world for the best products and the best deals because our philosophy is, ultimately if we can connect those things to our customers, then good things will happen in Telstra commercially, and then good things will happen to us on the venture side from an investment perspective. And I think we’ve demonstrated that by backing Box, DocuSign, Elastica, Elemental… all of which are monetised or look like they’re going to monetise in very significant ways – multi hundred million or billion dollar outcome.
On China specifically, we have a man on the ground there named Chris Pu, who runs the Shanghai office for us. He worked for Intel Capital for a number of years. The best way to find the best product and the best teams are to have the best relationships with people. Chris has got a neat network of relationships in China.
In Singapore, we often visit the country – Matthew has been there a number of times, I’ve gone there a number of times. And through some of our other global relationships, such as Sequoia India, we found ‘Near’, a mobile data platform that we found very interesting. Due to our work around financial services, we found a very distinct company called Enepath, which is also based in Singapore and it provides software defined trading platforms that traders use to communicate with one another.
And maybe more specifically, we have now 11 investment professionals that are constantly looking for new opportunities. And we’ve looked at 3500 businesses since we’ve been in existence. But we’ve looked at 1284 companies in the (12 month period) ending June 30 2016. And out of that we made 11 investments – so basically what we do is we look at a wide number of companies and then we filter them down to the ones that we think are the highest quality and where Telstra can make the biggest impact. So the math works out to be somewhere between a 100 and 150 companies per investment professionally in Telstra ventures.
How do you see China? Is it overheated?
Matthew Koertge: I think there are some parts that are definitely very fully priced, especially the consumer space. Therefore, the kind of investments that we are looking for are probably not in that sort of real mainstream, and the valuation certainly over the last 12 months in China has cooled off a little bit. So I think, rather than deals getting done very, very quickly at whatever the asking price is, I think investors are actually spending a lot more time doing due diligence, really questioning the details and there is a lot more scope around negotiations and on valuations. The two investments that we have made in China in the last year are both very exciting companies – but they are not the sort where valuations are at the highest. We’re trying to find businesses which are really strategically relevant and interesting to Telstra. As a large telecom company, we are trying to find businesses that can ultimately connect with some of our core businesses and where Telstra can actually work with our portfolio companies.
Mark Sherman: I think that we see some very interesting technologies in China and that’s why we want to be there. WeChat is defining how payments are being delivered through a messaging platform, Xiaomi is really innovating quite nicely in the low end of the mobile phone market, and we just see constantly interesting innovations coming out of China. Being a global player, Telstra wants to understand and learn from where the emerging technology trends are coming from. Moreover, we understand the global trend, and having invested in Nexmo which is a very interesting communication VPI platform company that got sold to Vonage Holdings Corp recently for a nice outcome. We also invested in a company called TeleSign a mobile identity platform – that company is doing very nicely and that led up to the investment that Chris just did for us in China called, Cloopen which is the largest communications API platform in China – this is a company that we are very excited about – we have very high hopes for.
How do valuations in China compare to that in the Valley?
Mark Sherman: I think it is very difficult to talk about valuations in a venture context at an aggregate level, and, the reason being, innovation is changing very rapidly in some markets, and less rapidly in others. And as such, it’s very difficult to do an apple-to-apple comparison between the two – I think ultimately the most important thing is to find the innovation, the people and the products and that price that specifically relates to that specific market. It is very difficult to make a macro call about valuation in China vs US because I think that the devil is in the details – what is the quality of the team, what is the quality of the product, what is the magnitude of the innovation? How disruptable are incoming vendors is probably the biggest question as opposed to making macro bets on China ventures vs US ventures.
Matthew Koertge: The demand aspect for investment – are there many venture capital groups chasing the company very aggressively? That often can result obviously in a higher valuation – valuation is always related to a particular deal. Not just China – there are also some deals in Silicon Valley, where the valuations are high.
Is Telstra Ventures looking at Fintech and Blockchain in a big way?
Mark Sherman: Yeah – I think we’ve worked with a number of Fintech related investments and we’re quite excited about the business to business and infrastructure side of the Fintech world. Almost all of our investments delve into financial services. In fact, I would say it’s probably the most – it’s the largest vertical that we fell into. And we love selling to financial services because, they’re probably the most efficient and aggressive consumers in new technology out there….But then cloud, security, next generation communication services are all areas that we are actively involved in. So you’ll see us doing a lot in Fintech, particularly in the business to business side.
We’ve been looking at Blockchain from a number of perspectives. It’s pretty early from a business to business side, and so I think we’ll continue to monitor it, and then when our customers become more aggressive around Blockchain, I think we will look to invest. We’ve definitely talked to probably a dozen if not you know 20 companies that relate to Blockchain in the financial services phase.
We’ve also been looking at Blockchain security related companies and think that that’s a very interesting place to play. And I think that people that haven’t invested in that space are likely to invest specifically. And we have very high hopes that Blockchain can be used to secure documents in particular from end to end as well as data, from end to end and network architectures.
When you look at say Australia or say South East Asia, most startups in these countries have to expand abroad. The domestic markets may not be large enough. But, when you look at startups in the US, China or even India, often their domestic markets are large enough to sustain operations for a considerable long period of time. Do you take this factor into consideration when you invest in startups?
Matthew Koertge: There’s a number of different models and investment features around that point, and I think I very much agree. I mean China is such a ginormous market opportunity. I think a lot of companies in China are focused on the domestic opportunity. We are increasingly seeing a lot of Chinese entrepreneurs actually thinking more broadly. So one of the things that is quite attractive about some of the entrepreneurs that we’ve met is the ability to actually expand more broadly in Southeast Asia and potentially also Australia. Obviously, the sort of cost or revenue opportunity for a customer in some countries is higher than others. So I think a lot of companies are actually interesting in grabbing value not necessarily from a larger number of people, but also from people who are willing to pay more on a third customer basis. And I certainly think there is a lot of really innovative technology in China which is world class – there’s going to be more and more opportunities for some these companies and entrepreneurs to actually target global markets, in addition to the domestic market.
You have also done several investment in Israel – you want to Israel before most other VCs did. We are seeing a lot of VCs rush to Israel now, but what made you bet on that country so early?
Mark Sherman: I think in a word, yes. Israel has been very forward looking in key markets that are very important to us. One is security and the second is next generation networks. And if you’re looking for a high concentration of high quality ideas, it’s one of the domain stops in the world for technology specifically – we’ve gotten to know a lot of the companies there. One we invested specifically in a company called Zimperium, which is a mobile security space and it has a number of people from cyber security unit of the Israeli defence forces.
Can the Israel model – where initially there was a lot of government intervention in providing capital to both new companies that were being set up, and also supporting VCs – which then kicked off the startup ecosystem – be replicated in Southeast Asia? Or was Israel a unique case?
Mark Sherman: I think there’s a couple of things. You know in the end the most important word is ‘ecosystem’. And I think what the Israeli government did well early is that they provided capital to venture funds, to help evaluate and nurture a venture ecosystem. I don’t know if I’ve seen government direct investment you know working well…..But one of the reasons why the Israeli system worked well is because they provided funding for venture firms. Interestingly I think it was modelled after the Small Business Investment Company (SBIC) model in the US, which facilitated the flow of long-term capital to America’s small businesses, and also provided very favourable terms to startups – that was sort of the catalyst to get the flywheel of an innovation ecosystem going.
Big picture: Be it Singapore, and lately Malaysia and even Thailand, this region is witnessing significant government intervention in terms of startup grants, easier access to venture-backed capital for local statups, and public funded tech hubs. Governments across the region are creating funds to invest in local startups – but when they do that, what are the risks?
Matthew Koertge: In an attempt to get startups going, many countries are trying some form of the Israel model. Israel too had a very small domestic market – so by definition, all the entrepreneurs there were really required pretty much to be internationally focussed from day one. Australia has seen a lot of those sort of attributes. I mean we obviously have a larger population than Israel but it’s still a relatively small market. So I think a lot of Australian entrepreneurs are also sort of internationally focused from day one as well.
So,on the whole, I guess, the functioning of the ecosystem and in the creation of the ecosystem, the Israeli model is a really interesting question. Israel apart, I think many people also look at Silicon Valley, and governments also look at other ecosystems which have been successful, and they are trying to take the attributes which are necessary to create such an ecosystem from these different models. And obviously, availability of capital, and other factors such as education system, lots of abilities to commercialise the legal framework of the country, these are all factors that countries are trying to benchmark, and are trying to replicate.
But from Telstra Venture’s point of view, we are looking at each of those markets, and typically when we look at it in an investment opportunity, we look at what is the world’s best solution to a problem. We built up the companies that were most interesting to the Telstra business, as well as those companies that we found most interesting, from an investment point of view. And we are not sort of biased around a particular market. I mean we’re trying to find the solution or the best solution for a particular investment opportunity that we’re trying to solve. And the investment that we made so far, probably about half of them being the US – but there are more and more interesting opportunities in other markets including in Asia and as I’ve mentioned before, we’re very excited about the opportunities here (in Asia).