India has had a very well developed venture ecosystem for a number of years, but lately, even Southeast Asia (SEA) has started to emerge as a go-to destination for global startups and investors.
Both markets are, in many ways, in similar stages of evolution. But, when it comes to founder talent and capital availability, India is a cycle or a cycle and a half ahead of SEA.
“It comes down to the raw material in our business, which is talent. SEA is still developing in terms of founder and engineering talent whereas India has a lot of founder talent who have built companies of a certain scale, exited in some cases, and some even started new companies. We have started to see that happening in SEA as well. If you have enough entrepreneurs starting companies across every vertical, a certain percentage of them will give birth to high-value companies,” Akshay Bhushan, Partner, Lightspeed (India and SEA) said at the panel titled ‘India-SE Asia: Cross-border venture investing on the rise?” at DealStreetAsia’s Asia PE-VC Summit 2020.
Panellists also noted that India’s move to amend foreign investment regulations for neighbouring countries including China will open avenues for more Southeast Asian VC firms to look at India deals.
Kee Lock Chua, CEO, Vertex Holdings said, “Chinese funds had been quite reliable, steady later-stage investors in the Indian startup ecosystem. We now have lesser competitors as we don’t have that big Chinese pocket money to pay five times the valuation. We can get deals at more reasonable prices.”
On the valuation difference, the Vertex CEO said, “Investors are always looking for the best return for their funds. Between SEA and India, India could be the next China of the global world. Of late, investors have been rushing in and out of investments in India. So, valuation in India has accelerated faster than SEA. Because of cultural differences across markets of SEA, investors may find it a bit challenging and will not overpay. So, as a result of this, you always see this discrepancy in valuation.”
While traditionally it’s been easier for VCs and companies in SEA to invest in India owing to cultural similarities, the same has not been true for SEA companies eyeing India due to the presence of incumbents and well-funded competitors across sectors in India.
Asked if VCs in SEA have encouraged the founders in their portfolio companies to look at India, or maybe a company in India or vice-versa, David Gowdey, Managing Partner, Jungle Ventures said, “Historically, about 30% of our capital has been invested in the Indian market. And, most of our Indian investments have some geographic expansion into Southeast Asia as part of the thesis. In India, there’s more capital that’s available but there’s a lot more competition. It has typically taken them a period of years to solidify their position before they’re ready to expand into this part of the world. I think that that time lag has shortened over time.”
Challenges to cross-border investing
The panelists were of the view that both India and SEA markets are emerging in terms of technology investments and applications. A lot of the infrastructural bottlenecks, which entrepreneurs need to navigate are actually very similar, and a lot of that stems from similarities in market structure.
On the differences, Bhushan said, “India is one market. There are obviously regional differences but for the most part [in India] it’s relatively straightforward to expand across the country. Southeast Asian entrepreneurs obviously have a more mammoth task when they think about going regional or beyond country and have a lot more to deal with as the region comprises several smaller markets.”
At the same time, panellists agreed that when it comes to matrices like internet penetration, broadband speeds and affordability, many SEA cities/markets are actually on a higher scale than India. The founders in SEA, however, don’t have as much access to capital as their peers in India.
On the challenges that companies in SEA are experiencing to expand into India, Gowdey said. “From a consumer perspective, there is more homogeneity between consumers across these markets. From an execution perspective, there’s a tremendous amount of complexity. Most founders in Southeast Asia are facing greater challenges as they build regional businesses. They have to manage these operational complexities across multiple countries, versus their Indian counterparts, which are operating in a market that they don’t necessarily need to expand out of. They can build a substantial business just focused on the domestic Indian market.”
A lot of VCs in fact do both these regions together. Asked if that’s a growing trend, Gowdey said, “Different buyers that may be interested in your business if you’re regional versus being a single market only. You could potentially get enough scale where an IPO, you know, in another jurisdiction may become more achievable.”
VCs, which are investing in both regions, are not only infusing capital but also helping companies set up the backend, bring in talent or lend tech support and help in other areas to expand in multiple geographies. Most unicorns in SEA have their R&D centres in India.
Gowdey said: “The benefit of being a regional business is that you can deploy personnel and labor in markets where you can get the best talent at the best cost. Considering there’s a lot of complexity whether regulatory or cultural, you just need to bring a lot of that experience to the founders to equip them to be able to build and execute.”
Serial entrepreneurs add vibrancy to ecosystem
Another trend that has been prevailing over the past few years is that a lot of Chinese and Indian entrepreneurs who got an exit are coming to markets like Singapore and Indonesia to set up new businesses. Chua feels that this is going to help the ecosystem to accelerate over the next 10 to 20 years.
“For a venture capital ecosystem to work you always need to recycle entrepreneur(s). If an entrepreneur retires in the Bahamas and never comes back to the system, the ecosystem fails. You look at China, the US or Europe, the ecosystem there is so vibrant because a lot of successful entrepreneurs came back to start a company or become mentors or VCs,” he added.
India has unicorns across edtech, trucking and logistics, vertical retail, SaaS, budget hotels and healthtech. Asked if SEA also has the potential to produce unicorns across these sectors, Gowdey said, “It is just about market evolution. And I think we’re at a point in time where those companies are there and they’re just in the building phase. In the 2015-16 cohort of companies, a lot of them are getting up to the $400-600-million valuation So it is easy to see in the next cycle as they continue to raise capital, they will continue to get closer to the unicorn status.”
“It isn’t healthy to think about achieving some valuation milestones for the sake of achieving it. It’s imperative to see if we have very strong market-leading companies regionally in a lot of the same sectors? The answer to that is yes. Their valuations aren’t equivalent to some of their Indian peers. But I think that’s just a matter of time,” he added.