“We have launched a new $200 million fund this year for Southeast Asia and India, and are currently making investments from it. Valuations in Southeast Asia are reasonable, and we don’t have that frenzy of India yet, where investors are rushing in, and chasing startups,” says Chua Kee Lock, group president and chief executive at Vertex Venture Holdings, the venture capital (VC) arm of Singapore’s state-run investment firm Temasek Holdings Pte. Ltd.
Edited excerpts of a free-wheeling interaction, where Chua Kee Lock talks about the different funds that are run by Vertex, including the status of its China, US and Israel vehicles, and also shares his views on Singapore.
Take us through your investment plans for South-East Asia and India? Vertex recently got $600 million from Temasek—how much of this goes to India and South-East Asia.
For South-East Asia and India, we have a new fund that is focused on this region. Here, 100 per cent of the money came from Temasek. Yes, Vertex got $600 million from Temasek recently, and this goes to our different funds—the captive ones, where 100 per cent is our money, and also into others like the third China Fund, fourth Israel Fund and the US Fund, where there are external investors, too. If you include the money our China, US and Israel funds have raised from external investors, too, then Vertex has about $850 million in hand now to put into companies. We don’t name the external investors in Vertex’s China, US and Israel funds, but these are well-known pension funds, international corporations and endowments. We are owned by a very strong shareholder (Temasek)—so we can be selective on the type of investors we can pick for our funds.
Singapore did not have strong VC players, and so Temasek at the group level had taken the initiative to invest in local VC firms—they put money into Jungle Ventures, Golden Gate, Monk’s Hill and NSI Ventures—we are trying to help these VCs. Singapore has a lot of incubators and so the cost of starting up is quite low—it can be between $50,000 and $200,000; but once your idea is finalised, you need to start building the real product and you need to raise serious money. We hope that these Temasek-supported VCs will be able to support companies coming out from these incubators. For South-East Asia and India, we have a new $200 million captive fund. We are starting the investment period now. We launched this fund this year.
When do you see the first Unicorn emerging from Singapore?
GrabTaxi on paper is more than $1 billion—there is no exit value yet. But people can look up to them. The other one is luxury e-commerce portal Reebonz that is growing very well. Reebonz may go for in IPO (initial public offering) in the next 12-18 months. Singapore has Razer in the gaming space that is worth over $1 billion, and they have done well globally. The advantage for us in South-East Asia is that you don’t have the frenzy of India yet, and valuations are realistic.
We are present in Europe, Israel, India, South East Asia and China, and one of our strengths is we can take companies global. We invested in an Israeli company and took them to Taiwan for manufacturing. We’ve also helped some of the companies we’ve invested in here go to the Chinese market.
Where do you see South-East Asia in the startups space?
In terms of quality of entrepreneurs, be it Singapore, Indonesia or other parts of this region, they are at par with India. The difference is that we don’t have that frenzy of India, as investors are not rushing in, and chasing them. When investors look at South-East Asia, they say, ‘this is not a uniform market’. They are afraid to invest here. If you invest in Singapore, it is a country with five million population. Investors don’t understand that companies that launch in Singapore target the region. Investors are looking for big markets and they are all going to India and China, chasing returns. That is also good for us. In terms of capital structure and funding, startups in South-East Asia are five-to-six years behind India. If you compare it with China, we are even farther behind. Once we see a few good exits in this region, investors will chase companies here. But we may be three-to-four years away from that period.
According to India’s software lobby group Nasscom, India’s start-up ecosystem is set to see funding worth $5 billion by this year-end, a 125% jump when compared with $2.2 billion last year. Nasscom recently said that in 2015, 1,200 tech start-up were born in the country, making India the third largest tech start-up ecosystem behind the US and the UK. Vertex, as one of the largest funds in this region, has shied away from investing in India during this period. Why is that?
We have just appointed Ben Mathias as managing director and India head for Vertex Ventures, and we will, therefore, look at the country a lot more actively from now. I think India is going through the same cycle that the US, China and Israel have been through. A lot of people are rushing in because it is a market of 1.3 billion people. They have seen what has happened with the early investors in China, in companies like Baidu—they made tonnes of money. They’ve also seen the success stories of early investors in Silicon Valley and Israel. So, investors are now very excited about India, which I think is good. But the key question is, can five companies in the same category survive—the answer is no. In any market, be it the US and China, it is not possible. China’s two largest taxi apps—Hangzhou Kuaidi Technology Co. (Kuaidi Dache) and Didi Dache merged as they were killing each other. You also saw that recently, two large (Chinese) Internet companies—Meituan.com and Dianping Holdings—have agreed to merge. So, even in a large market like China, you cannot afford to have so many players and, ultimately, you are seeing that there are only two players, or sometimes only one is left.
Too much competition will create a lot of inefficiency and India is going through that cycle now. So, in many segments, you are seeing five-to-seven players who have been funded—but I don’t think that will last.
This is what led to the last dot-com bubble—the fear of missing out saw a lot of people doing crazy deals and, ultimately, the market came back to sanity. At some stage, people will realize there is no point investing in No.5, 6, or 7 as these won’t survive. The problem is that right now the No. 5, 6 and 7 companies are also getting money—but eventually they will all lose money, and maybe only the first two will survive. But even the No.1 and 2 companies in most sectors, it all depends on the amount of capital that they have raised—most of these companies are in the negative. Today, you can raise money because the market is hot, but the music will stop soon, and you don’t want to be one caught without a chair when that happens. Now you can see that companies are merging in China, while some companies are not able to raise any more money. This will come to India, too, at some time.
But you were among the early investors in Indian start-ups—you know the market well and you are one of the largest VCs in Asia. Yet, in this period, Vertex was largely absent from India.
No, it is not that we are staying out of India. Valuations have gone crazy—we don’t see how a company with no revenues can raise $100 million in Series A or B. India is still in its early stage of development for start-ups. India will be a good market for an investor over a 10- or 20-year horizon. However good a market is, you cannot still be overpaying. Ultimately, it is all about returns—if you overpay, you cannot get your returns even in a reasonable period of 10 years. We calculated all this and concluded that in the past 18 months, in certain sectors in India, the valuations have gone crazy and we are not coming in. When it does not make sense, there is no point in chasing these companies. Our focus is on building companies. We are not chasing companies that are suddenly quoting $2 billion valuations. Look at the initial valuations of some of the most successful companies today, including Facebook and LinkedIn—they were reasonable. Twitter is having its own problems today, but its initial valuations were reasonable. Even in China and Israel, the good companies are steadily seeing their valuations grow as they move from Series A to B to C. There is a common standard model across these companies.
Even in this part of the world, take the case of GrabTaxi—we were among the initial investors and the valuation was not high. It is only now that their valuation is much higher, as the company is doing much better now across South-East Asia. Of course, all taxi apps are burning cash. Today, in this part of the world, we don’t have crazy wars between taxi apps. When Easy Taxi was around, they were paying something like $10 for every ride—when they did that, GrabTaxi’s traffic dropped a bit but, eventually, Easy Taxi had to shut down. Other competitors who come into this market now have to burn cash to compete with GrabTaxi, or surrender and leave like Easy Taxi. If GrabTaxi can dominate South-East Asia and provide good services, in the long-term, we can generate good revenues and profits.
Now that you have a new India head, will your strategy change?
No. We will always focus on doing early-stage investments. Yes, with a new India head, we will get more active there. Ben will build a team in India over time and strengthen our presence so that we can find the right deals. We chose Bengaluru for our new India office because it is still very much the IT (information technology) centre. We will then go to Delhi. It is like, if you are a start-up in the US, the first place you will be is the Valley. At the next stage, you will be in New York.
You had launched a $200 million China fund earlier this year—have you reached the first close? What about your Israel and US-specific funds?
Yes, we are going to close that fund soon as we have exceeded our target of $200 million already. There are a few LPs (limited partners) still looking at it, and we have to let them finish—you can’t close it abruptly. I think we can go over $200 million here. Historically, 100 per cent of Vertex money came from Temasek; but for this fund, we raised about 50 per cent of it from outside investors. We have two types of funds—the captive ones, where 100 per cent of the money comes from Temasek, like our South-East Asia and India fund. But for our current China fund—this is our third China fund—as well as for our Israel and US funds, we raised money from external investors, too. This is the fourth Israel Fund, and we are nearing the $120 million-mark, and it should be closed soon. In Israel, we had invested in Waze, which was acquired by Google, and we made about 20 times the money we had put in that company. We had also invested in another Israeli company called Cyberark, that is now listed on Nasdaq—here, we made something like 30 times the money we put in. We recently closed our first US-specific fund at slightly less than $150 million. For our first two China funds, 100 per cent of the money came from Temasek. But for this third fund, it was only 50 per cent.
You are present in Israel and are investing in companies there. Israel is considered to be among leading startup nations globally. Singapore has the same population numbers compared to Israel. So what are the learnings for Singapore?
I believe that when it comes VC and the technology industry, Israel has always done well, because they were focussed on their strengths. For many years, software was their strength, and they built upon it and created a lot of companies in this space. Over the last few years, a lot of companies have come in cyber security and security-related space –most of these were started by guys who came out from the military. That has been their capability. But a country like Singapore, or even the South East Asia region, one of the problems we face is that we do not want to choose. We are afraid that if we choose the wrong sector, we will end up missing the next sector. So we are doing internet of things, cyber security, fintech, mobile – we have all these sectors here, but that cannot last. For a country our population, we have to choose one or two ecosystems that are our strength and build on that. This is something that we have not done well. Israel by its very nature, due to their association with the military, the entrepreneurs there have chosen to focus on just a few structures.
One of the issues that Singapore is quite good at is fintech. But our MAS (Monetary Authority of Singapore) has been quite strict on this issue. Actually, we are one of the key financial centres in the world, but we face a problem in having very strict regulators here, unlike London or China. Everyone is quite surprised that China is quite relaxed about fintech. In Singapore, you know your boundaries and you cannot get out of it – so you try to stay within it. That is a pity. In other countries, you can be in the grey area a bit.
I think that in fintech, Singapore should try to be successful, as we have very big national banks here, and we also have a lot of international banks. So we should be able to create a lot more. But a lot of people are afraid to try anything in fintech as they feel that the regulator won’t allow them, or because they cannot start something until the regulator approves it. I am reminded about something I read that offers a comparison between the U.S. and Singapore – in the U.S., unless there is a signboard that says ‘no’, you can take a u-turn anywhere on the road. But Singapore is the reverse – unless there is a sign saying you can take a u-turn, only then can you take it. It is a very interesting comparison. I think we still have time – fintech is a sector where a lot of innovation is going on. If we can be more progressive, we can create a few interesting companies in this space.