Europe-based fintech-focused venture capital firm Finch Capital is eyeing a new fund of around $75 million targeted at early-stage startups in Southeast Asia, according to the firm’s managing director Hans De Back.
The fund, which will count as the firm’s third, will be raised in parallel with a separate Europe-focused fund, which will target a corpus of $200 million.
The new Southeast Asia fund is targeted to be closed in the third quarter of next year. Finch is looking to add to the seven investments it has made in the region from its $125-million second fund, which dedicated only a quarter of its overall corpus to Southeast Asia.
Its Southeast Asia portfolio includes bill payments platform Ayopop, reimbursement platform Jojonomic and regional super-app Grab. Finch also has an exit under its belt in the region; it sold its stake in financial marketplace Cermati to a local conglomerate.
“The reason we are establishing a separate fund for Southeast Asia is that we see a great deal flow and new sectors. The market is becoming more mature, particularly in Singapore, Indonesia and Malaysia, and more importantly, we also want to raise money from more strategic local investors because one of our investment strategies is to leverage our network of financial institutions and LP base for the companies we invest in,” said De Back.
Having previously focused its investments on traditional verticals such as payment, lending and financial marketplace, De Back said Finch will now start to explore opportunities brought about by the ‘second wave’ of fintech led by verticals such as insurance and wealth management. The firm will also look to invest beyond pure fintech and into ‘fintech enablers’ or verticals with strong synergies with financial technologies, such as education and logistics.
The new fund will also see Finch, which has largely been backing companies in the Series A stage, investing earlier into startups in order to better help startups with their go-to-market strategy through partnerships with financial institutions.
Edited excerpts of the interview:
How did you begin investing in Southeast Asia?
We started investing in Southeast Asia for a couple of reasons. One, I have been here on the ground since 2011. So prior to Finch, I was based here in Southeast Asia and been involved in the development of the fintech ecosystem.
Second, when we started our fund, one of our LPs was from Indonesia – a large financial institution that decided to invest in our first fund in order to get exposure since the state of fintech in Europe, back in 2014, was more advanced than SEA. Because of our relationship with this LP, we started looking at Southeast Asia and more specifically, Indonesia.
Working with financial institutions also relates to our investment thesis; we invest in what we call B2B2C types of business models; we like to invest in fintech companies who are relevant for financial institutions.
Across our two funds, we have made 42 investments, with four exits so far. In Southeast Asia, there have been seven investments and one exit. To name a few, we have invested in Cermati, Ayopop, Pintek, Jojonomic, Grab and we will announce another shortly.
How does your investment approach differ when you are investing in SEA versus Europe?
If you look at fintech, there are mostly two business models: the ‘competitive’ business model where fintech companies try to replace products of financial institutions to provide better user experience and cost efficiency. Then you have the ‘collaborative’ business model where fintech companies and financial institutions partner and develop a B2B2C market approach. In the end, I think the latter is the most sustainable business model for a couple of reasons.
First, banks provide a customer distribution network, the brand, trust factor and the licence, all of which fintech companies can benefit from.
On the other hand, financial institutions, in general, have difficulties in innovating themselves. Within financial institutions, a lot of innovation is taking place but they are hardly commercialized. Some financial institutions have incubator and accelerator programs and some even invest in fintech but most of them have not been successful, so in the end, they decide to partner with fintech companies.
That’s actually what we try to bridge here — the needs of fintech companies and those of the financial institutions. That collaborative business model approach is what we are applying in Southeast Asia.
It is interesting that financial institutions in Indonesia, Singapore and Malaysia are very collaborative unlike in Europe back in 2014 where the banks are more or less ignoring those fintech companies and try to figure it out themselves.
The similarity is fragmentation. The European market is highly fragmented and it’s the same in Southeast Asia. In that respect, a learning we bring is how to scale up in a very fragmented market. Of course, if you look at the development of fintech in Southeast Asia, compared to Europe, it is still behind, so we expect certain trends, which we have seen in Europe, to emerge in Southeast Asia. However, there are very [Southeast Asia] specific problems such as financial inclusion, the unbanked population and limited access to credit. We do not see those issues in Europe.
Our aim is to leverage the learnings from the developed fintech markets and support teams with a localized approach relevant to Southeast Asia.
Your main markets are Indonesia and Singapore. Which other emerging markets are of interest to Finch?
For Singapore, we believe there is still innovation taking place, which has to do with the fact that most financial institutions have their local HQ based there. Second, Singapore is a strong fintech hub that started back in 2013.
Indonesia, with a population of close to 300 million, is the biggest consumer market and is really catching up as a fintech hub. In Jakarta, you will find a concentration of capital, high-quality teams, and supportive government programs. Regulators are also becoming more supportive.
Other markets that we are looking at are Malaysia and Vietnam. Vietnam is for the same reasons as Indonesia – large unbanked population, a large millennial base and very tech-savvy. We also see increasing support from the government. Furthermore, we are very surprised about the quality of teams and I’m talking mostly about the engineers, which has to do with the large gaming industry in Vietnam. We are seeing more of those teams now focusing on fintech. So those are the four markets we look at. Going forward, at the end of our next fund, we will probably have investments in Thailand as well.
Do you strictly stick to pure fintech investments?
In Indonesia, we have made several investments in traditional fintech such as lending and payments with Ayopop, and also invested in a financial marketplace Cermati. These are what we call the first wave of fintech. We believe we are now at the second wave, which consists of two things: one is the diversification of the traditional fintech themes. In lending, for example, there are many traditional fintech companies providing credit for SMEs as well as consumer loans such as Modalku, Investree, Koinworks and UangTeman. We see diversification in a sector-specific context such as lending for education. We invested in Pintek which provides lending in the educational sector. Second, we expect companies to emerge from wealth solutions, insurtech and property technology verticals in the second wave.
In other words, we see fintech as an investment scope is also expanding and we expect to see a convergence of traditional fintech companies in non-financial services sector going forward through fintech enablers.
What is the status of your current fund?
Our current fund is our second fund. We invest about 25-30 per cent of it in Southeast Asia. The second fund is almost fully deployed, so the investment period will end soon and the rest of the lifetime of the fund will be spent on portfolio management.
We are now ready to raise our third fund and it will be probably around $75 million, but it will be an exclusive Southeast Asia fund. We are also going to raise a European fund, so there will be two separate funds.
The reason we are establishing a separate fund for Southeast Asia is that we see a great deal flow and new sectors. The market is becoming more mature, particularly in Singapore, Indonesia and Malaysia, and more importantly, we also want to raise money from more strategic local investors because one of our investment strategies is to leverage our network of financial institutions and LP base for the companies we invest in.
Since we invest in B2B2C business models, a large portion of our LPs is financial institutions. In our previous fund, about 50 per cent of our LPs were financial institutions, and we will target the same proportion for our Southeast Asia fund too.
From a market perspective, the main focus will be Indonesia, Singapore, Vietnam and Malaysia, in that order.
When do you target to close this fund?
We expect to hit the first close early next year – so the beginning of Q1 2020 — and the final close will probably be early Q3 next year. We have started fundraising and there is strong interest as a result of our fintech focus, geographical approach and our track record.
For us to invest in a company, it is important that Indonesia be the main focus. If Indonesia is not part of the go-to-market strategy, then we will not be interested because Indonesia is the largest market. We invested in Grab because Indonesia is a big focus for it even though it is not an Indonesian company and has operations in multiple markets.
With this new fund, will there be anything different you will be doing? Will you be looking at stages beyond Series A or looking at sectors beyond fintech?
What will be different in terms of strategy is that we are going to invest in anything from post-seed to Series A, so we are going in a bit earlier than before. We see a great deal flow in the early stage. As a fintech investor, we can also be more helpful for early-stage [startups] than late stage; early-stage fintech companies are looking for partnerships with financial institutions to accelerate their growth. Helping them with their go-to-market strategy is where we can make the most impact as an investor.
We have the capacity to do follow-on rounds, so we invest in Series B and C rounds but merely on a pro-rata basis.
We normally are the lead investor when we invest in post-seed to Series A. However, we are very collaborative and work with local and regional VCs like East Ventures, Golden Gate from Singapore and corporate VCs such as Mandiri Capital and CCV [Central Capital Venturra].
In terms of themes, the second fund had mainly focused on traditional fintech such as payments, lending and marketplaces. For the next fund, we will focus on the so-called second wave, which is more around insurtech and wealth. Will we invest in other sectors outside of the fintech vertical? The answer is yes, but those will be fintech enablers. The company Pintek I was referring to earlier is a fintech solution applied in the education vertical. It can be the other way round too. For example, a highly advanced artificial intelligence solution applied by an insurance company to support or improve its KYC [know your customer] process. Another example is an artificial intelligence solution applied by lending platforms to collect and qualify credit scoring data.
Furthermore, we see opportunities around synergies between fintech and other verticals such as education, logistics and so on.
How do you see the opportunities for exits in the region?
We have made one exit in Indonesia, which is to a financial institution. So for us, the financial institutions are a great exit market.
Financial institutions and large tech unicorns are probably going to acquire more fintech companies. We have seen that over the years with Kudo and most recently, Moka. There will be consolidation, so foreign companies who want to get quick access to the Indonesia market may buy a local market leader. It could also be the other way round; an Indonesian player wanting to expand to a market outside could partner a local champion in Singapore, Malaysia or Vietnam.
We also see a scenario where larger VCs or private equity firms would come in and buy us out. In that respect, the market is also becoming significant as we see more and more foreign capital coming into Indonesia and Southeast Asia. This can be European or US money from VC and PE firms. The exit market is growing.
What about unicorns? Are they increasingly becoming a viable exit avenue for companies and VCs?
Definitely. I think we have seen great examples of the super apps, the Gojeks and the Grabs, almost becoming financial institutions themselves. It’s not only about transportation and food but also the financial services they offer. That is also one of the reasons we invested in Grab because financial services were at the core of their growth strategy.
These companies are likely going to grow via buy and build, M&A, so yes, they are also definitely an exit partner for us. Some of our portfolio companies are in talks with Go-Ventures and Grab Ventures for potential partnerships. Could they be acquirers of those businesses? Absolutely. That’s what we have seen with financial institutions – they start off with commercial partnerships and in the end, they acquire the business.