Despite the southeast Asian region being awash with venture capital dollars, there is a glaring funding gap in the Series C and D stages, amounting to almost $1 billion per year, according to a report by Singapore-based PE firm Asia Partners.
The Series C and D rounds, also known as the $20-100 million expansion rounds, are the crucial funding stages that separate promising businesses struggling to scale and companies that quickly rise to unicorn status, per the Asia Partners Internet report titled Southeast Asia’s Golden Age.
Asia Partners, launched by former Sea Ltd president Nick Nash and former Naspers B2C e-commerce CEO Oliver Rippel, made a first close of $78 million for its debut fund earlier this month. It has identified the paucity of funding availability in the post-Series B rounds and will look to cut cheques above $20 million across its SE Asian tech bets.
Southeast Asia has the potential to create over $400 billion of new technology sector equity value over the next decade, the report notes. And, some of the region’s hot sectors with strong investor appetite and growth potential driving this trend include e-commerce, payments, mobile apps and other tech and internet startups.
The glaring Series C-D funding gap
The Series C-D funding gap is quite apparent when depicted visually, comparing China and Southeast Asia. Much more if the region is compared with the US, the report noted.
“Between $20 million and $100 million check sizes, Southeast Asia has a $930-million Series C-D gap in funding each year relative to China. Few investors focus on this gap,” Asia Partners said.
The funding gap widens further to $3.72 billion each year relative to the US, the firm said.
The funding bottleneck means about 511 companies in Southeast Asia that raised $1-20 million in investments from 2014 to October 2019 will find it hard to graduate to a possible unicorn status because there are not enough investors offering late-stage financing in the region.
The Asia Partners report corroborated the most recent report jointly launched by Google, Singapore’s state investment firm Temasek, and Bain & Co, which noted that while the Series B and C financing gap in 2018 had been bridged, late-stage financing opportunities are getting scarce.
And, how SE Asia is ready for $20m+ deals
Based on China’s funding history, the Asia Partners report expressed optimism that Southeast Asia is now ready for Series C-D funding. China’s $20-million+ checks emerged in scale from 2005 to 2012 when the incomes crossed $3,500 per capita. Southeast Asia is now well into that zone as the region’s GDP per capita hit $4,600 in 2018.
“[Southeast Asia] is following exactly the same journey that China has been following and that we are ready now to have slightly larger checks in the ecosystem,” Nick Nash, co-founder and managing partner of Asia Partners, said during DealStreetAsia’s PE-VC Summit in September.
The strong pipeline of Series A-B companies in Southeast Asia, however, presents a strong opportunity for investors ready to provide $20-100 million checks. Aside from Asia Partners, major venture capital and private equity players are raising larger funds to address the funding gap.
Asia Partners joins the likes of Vertex Ventures, Vickers Ventures, Golden Gate Ventures and Openspace Ventures – all of which have raised growth funds in recent months to capture the perceived Series B to C gap in the market. Private equity giants Northstar, KKR, and Warburg Pincus are also investing in this space.
“We don’t go below $20 million in cheque size – that’s a well-established segment with some terrific firms already there, helping to find early-stage companies. And we don’t go above $100 million, because that’s well established as well. We focus in the middle which helps bridge that journey from startup to a unicorn,” said Nash in a statement in June.
In an interview in April, Michael Lints, a partner at Golden Gate Ventures, told DealStreetAsia that the growth fund does not change the firm’s investment strategy in the region but as its existing portfolio continues to perform well, it is important for the firm to continue investing at later stages.
Rise of the Rhinos
The Asia Partners report also predicted the rise of a new generation of tech companies, which it labels as rhino companies, qualified as those that reach the $1 billion valuation on a P/E multiple. Predicting the next unicorn bubble in 2035-40, the Asia Partners report is meanwhile batting for companies with rhino attributes – humble, thick-skinned, systematic, focused with a non-ceremonial horn.