Venture capital (VC) deal flow has declined globally and inhibited startup formation and growth in ecosystems worldwide following the economic slowdown in China late last year. The decline in VC funding in Asia has been significant, according to data in CB Insights’ Venture Pulse Report – Q2 2016. While the global startup ecosystem faces economic uncertainty driven by Brexit and the Chinese slowdown, this may, in the long term, actually result in a “rationalisation of the market” says CB Insights founder and CEO Anand Sanwal. Edited Excerpts.
What led you to start CB Insights?
I was previously working in venture capital and M&A (functions) at AMEX and was never really satisfied with the data providers I had to use. Coupled with a desire to do my own thing led me to CB Insights
How has your professional background as a chemical engineer, strategy/operations consultant and stint with American Express shaped your views on analytics and venture capital?
My stint at AMEX really taught me a lot about how to sell within large organisations. I also worked at an Internet startup that failed, which showed me a lot about what not to do. All of that was quite useful for starting CB Insights.
I was never a practising engineer. It’s the particular methodical, evidence-based way of thinking that you learn in engineering which is useful.
How much influence do you think Silicon Valley trends have at an international level? What can Silicon Valley teach the world, and what can other ecosystems teach Silicon Valley?
From a tech perspective, Silicon Valley is where the global technology heartbeat is. But the issue is that so many countries get fixated on being Silicon Valley – its special and unique.
Other markets trying to be it are just wasting time; it’s got a certain uniqueness that’s hard to replicate, and I think that in terms of cultural things – such as the comfort with failure – which is prevalent in the US but difficult elsewhere from what I’ve heard and seen, that contribute to that.
Other markets should play to their strengths, given that many of them lack the same university infrastructure and the general culture that contribute to what Silicon Valley is.
A recent tweet storm you did shared alluded to corporate culture as a core part of management and business success. How crucial is it for entrepreneurs to understand organisational psychology and the human capital management?
Dealing with the human capital side of things as a founder is always important, especially as you become bigger. When you’re a small team, there’s not a whole lot of need to focus on culture. But right now, when you get to a 100-people like we have now, you need to focus on culture; not everyone has seen the terrible offices early on.
At the end of the day, its all about people and helping them understand the operating system of the organisation, so that as the company grows, people know what is expected of them and what to expect in turn from the company.
Asia’s funding environment has seen a slump in recent times. How long do you see this continuing before a recovery?
It’s a slump that’s coming off of a very significant high. This is going back to more rational levels of funding. Q3 2015 was sort of irrational – with 30+ unicorns being formed was excessive. What I’m seeing in Asia is a healthy reset, as there are not many opportunities that are that big.
We’re in a part of the cycle that was founder friendly and now its investor-friendly. Now, the focus is more on the economics and sustianability of a company, rather than just burning cash to fuel growth.
Getting back to the old levels is not necessarily a good thing, and this applies for both Asia and North America. The US and Asian markets got a little bit ahead of themselves and a little bit of rationality in the market is a good thing.
In Asia, what specific industry verticals and sectors do you see attracting the most venture capital funding?
According to the data we’ve compiled, it’s been the areas of e-commerce and on-demand services – consumer technology – that has been a focus. There’s been a lot of investment in building infrastructure around e-commerce in Asian markets, especially China.
And now, China is one of those places that investors are asking harder questions, especially when you have companies like Didi Chuxing. India is similar to China – not to the same level – but you have companies like Snapdeal, Flipkart and Ola. In terms of where the big money is going, it all focused on the on-demand services segment.
What’s your take on hedge funds investing in startup ventures – a boon or a bane to entrepreneurs, given they contribute little beyond capital?
You need big money to scale, so when you need those types of ticket sizes, then that’s where entrepreneurs need them. VCs don’t generally have access to that sort of fund size, and both the VCs and startups need them when scaling up.
When they do investments, its generally in later-stage companies that have figured it out, so them being passive investors is not a big net negative. What they do want are greater provisions and protections – in terms of investment – as anyone putting in that level of money would demand that anyway.
Among the startup ecosystems of Asia, which regions and/or country seems to be the most promising, based on your available data?
Well, for sheer size its China, but there’s also a lot of interesting activity in Southeast Asia. Singapore is a really interesting market in and off itself, for being a relatively small market.
It has influence and punches above its weight, given that it seems to have developed a smart kind of public-private approach to venture capital and is a great gateway to Asia. Given its size, has an influence beyond what its population suggests what it might be.
Indonesia is also a pretty large market unto itself. The interest is there but it is still early days yet, so folks are still trying to figure out the demographics and kind of characteristics that make it interesting. I think it will be very similar to the China/India story, but at a smaller scale. Whether the market properties will keep investors there is to be determined.
For many Asian corporates – particularly those in India, Southeast Asia and Japan – that may be new to corporate venture capital, what should executives be aware of when dealing with venture capital as an asset class? How well does this gel with corporate intraprenuership?
People going into corporate venture capital looking to make a tonne of money on VC investments is a foolish expectation. And those looking at it to make meaningful contributions to financial results are going to see failure.
Corporates need to look at it as a way to access innovation. A lot of corporate VCs get third-tier deal flow and entrepreneurs due to not building their brand sufficiently, so the challenge is to build their brand and focus on developing strategic returns. The traditional VCs have a hard enough time, so doing it as a corporate VC is even harder.
As for intrapreneurship? It’s a nice phrase but it’s pretty hard to do at big companies. Part of being an entrepreneur is doing something that may not work and its hard to do that at most companies – especially with a big team of a 100 – and not how it works most of the time.
Your take on the startup and venture capital spaces in Russia and Central Asia? There seems to be a large gap in terms of data and knowledge regarding these particular regions.
Getting the data is hard there and is a bit more difficult, as the investments are not as public. Russia presents its own unique challenges.
You have Russian, Asian, Australian, US and European investors investing in Asia, but less so in Russia as the market generally doesn’t attract that for various political, economic and regulatory reasons. Russia has never had that kind of direct foreign investment into startups.
There’s always been interest in Eastern Europe from US startups interested in doing R&D there, due to the great talent there, but not so much in Central Asia and Russia. The market has to be invested in by the local investors, as most investors aren’t looking there.
Do you see CB Insights expanding into Asia in the near future?
We cover a lot of data there. We don’t have that many customers there at present; Singapore, China, South Korea and Japan have been good markets to us though, so there’s a good chance for a presence in Asia. In the next 18 months or so, we’ll be looking at opening an office in Asia and potentially doing an event. It’s a big market and more interesting and attractive there for us than Europe.