For Qualgro Venture Capital, finding money is not a big challenge in Southeast Asia but finding companies with great ideas is. Even so, this has hardly dampened Qualgro’s outlook for the market. Last month, this portal had reported that the firm was on the road to raise $100 million for its second vehicle.
“The pain point right now is about finding great companies. Finding the money is not an issue. Great companies in SE Asia tend to be the same ones that receive a lot of investment, so they are usually oversubscribed rather than the other way round, Heang Chhor, founder, Qualgro, said in an interaction.
Chhor also outlined why he was optimistic about SE Asian startups, and Qualgro’s plans to double down on B2B tech companies in the region.
“We will continue to focus on the B2B space. We may expand outside of Southeast Asia, potentially in Japan and Europe for a small portion of our fund. We will still target two main sectors – data and software. We have three sub-segments under data – data analytics, data security and AI. Under software, we are quite broad – enterprise software, software for large companies or SME software. We also do HR software, CRM software, processors, redesign software,” Chhor said.
You raised about $50 million for your first fund. How much of that has been invested?
Our first fund was $52 million. We have six large listed Asian corporate investors. Three Japanese and three non-Japanese. One of our investors from Japan is a large financial institution, another is a large internet company. From Southeast Asia (SEA), our LPs include one of the top 10 banks in the region, as well as one of the largest Asian conglomerates in agribusiness, retail, telco and finance.
The original intent was to bridge corporates with startup technology companies. We wanted to leverage corporate support to help technology startups, and, at the same time, build on the network and knowledge I had accumulated while I was in McKinsey.
I had an understanding of what large corporate clients wanted from technology companies, and I felt that by getting these corporates on as clients, we could nurture startups to become more strategic players. Most of our portfolio companies are in the B2B space.
What ticket sizes are you targeting for your fund?
We targeted $2 million to $3 million for our first fund and also made some smaller investments. For our next fund, we are targeting more Series B funding but still in Series A, with a ticket size of $5 to 8 million.
Your portfolio tends to focus on B2B companies in SEA. Why?
Yes, 70 to 80 per cent of our portfolio are B2B companies, and that will remain our main focus. We like B2B startups because these companies target corporates as clients.
B2B startups also have business models that are not constrained by country boundaries. If you are focused on one country, you will need the whole value chain of your business locally adapted from consumer delivery network, to business partners to payment. Unlike B2C companies, B2Bs just need a portion of their business to be adapted when moving into a new market.
Lastly, B2B companies are also less expensive to invest in. They are also less expensive to operate compared to B2C firms these days.
But some B2B companies today are saying they would rather focus on developed markets like the United States, Japan, and Australia. Is this what the startups in your network are saying as well?
It depends on product categories. If you are a very advanced artificial intelligence platform, there might be more needs in Japan, Europe and the US, than in SEA. This is even more so for SaaS.
At Qualgro, we only invest in companies that have the potential to be a regional if not, a global player. The reason for that is quite simple. We believe that regional players will be a much more attractive acquisition target for investors from the US, China or Japan, than if they were just one or two country players.
Speaking of exits, what kind of exits do you foresee in this region?
We foresee three types of exits in SE Asia. The first will be large B2C companies dominating a large market like Indonesia. There are very few examples of B2B companies that have a strong presence across SEA. Lazada was one.
The second type of exit will be B2B companies with a multi-country presence in SEA. This would be the profile of companies that will be considered attractive by Chinese, Japanese or European players.
The third type of exit will be one of those very few companies originating from SEA that are able to operate globally.
I am very optimistic about the exit for SEA tech companies, but it has to be over the next 5 to 10 years. The SEA tech ecosystem as you know, only really took off 7 or 8 years ago. There have been some visible exits already like Lazada, and I believe there will be more coming up. I am absolutely convinced about that. But it will take time. Those companies need to achieve a certain scale, otherwise they will not be compelling exits.
Which are the portfolio companies that excite you most?
We have a number of companies in our portfolio that we like. For instance, Wavecell, which is a platform for iMessage and video. Mobikon, which also operates in India. In the B2B and B2C space, we have ShopBack. Shopback is one of the very few online commerce related businesses that has a multi country presence. Patsnap is one of the few in our portfolio that operates in China, in addition to Southeast Asia, Europe, and the US. We have Appier which also operates in China, Taiwan, Japan and Australia, beyond Southeast Asia. We have also Eyeota, a company that is now gone multi-continent.
Will you be going back to your existing limited partners for your second fund? Or do you plan to source for other LPs?
We will do both. Our fund will target $100 million. Our existing LPs have already contributed almost half – 40 per cent to be precise. We started to raise this fund about nine months ago and we are more than halfway through already. The final close will be in the first quarter next year, and the first close will be in about 1-2 months.
How different will your investment focus areas be for your second fund compared to your first?
We will continue to focus on the B2B space. We may expand outside of Southeast Asia, potentially in Japan and Europe for a small portion of our fund. In terms of our sectors, we will still target two main sectors – data and software. We have three sub-segments under data – data analytics, data security and AI. Under software, we are quite broad – enterprise software, software for large companies or SME software. We also do HR software, CRM software, processors, redesign software.
Every VC states that they bring a lot of value-add to their portfolio companies. Many seek discounts on their investments saying that their expertise will help companies grow and scale. But the sectors that you are talking about are highly niche. How far do you think your team can really help your portfolio companies across these sectors?
We do not see our team as the only source of knowledge to help our companies or to identify companies even before helping them. When it comes to assessing deep technology companies, we rely on university professors or consultants that we pay, and we do that very often because we need very specific knowledge for every company we look at.
We also talk to some of our LPs. Some of them have technical expertise. We also approach other corporates that are in our network to get support from them. That’s when the corporate network comes into play.
You also have a tie-up with SGInnovate. They have a focus on deep tech. Have you done any co-investment deals as a part of this initiative so far?
Not yet, unfortunately. Its quite recent, only six months old – but of course, we would absolutely like to do more. How it works is that, if any of the VCs or SGInnovate, that is part of this tie-up, has an opportunity, they will reach out to the other parties – then SGInnovate to see if there are synergies in terms of scope, portfolio or expertise. If that is the case, some of the VCs and SGInnovate will invest jointly. We had a few ideas over the last couple of months in terms of deals that we wanted to invest with SGInnovate, but those are still in the making.
Do you see yourself more as a strategic investor or a financial investor?
We are first a financial investor because we need to provide the returns to our investors. However, the way we do that is by providing substantive value-add, rather than just checking in and looking at the financials. It’s a stretch for our team to do this that’s why we have a large team compared to traditional VCs – we have 8 people which is quite sizeable for a fund of 50 million. We wanted to do that to have enough resources to deliver quality work for our entrepreneurs.
What do you think about the quality of the deal flows from Southeast Asia?
I would say it’s good, but it can be much better. The quality of a start-up is defined by three things. First, the quality of the team. Second, sustainable competitive advantage. This is very important. We do not see this very often. Some businesses have good but not great business ideas. We try to look very rigorously for competitive advantage that is sustainable and based on technology, not only on skills. Third, the type of market. The market has to be dynamic, but also one that it is not going to be disrupted by other players. If you take the payment sector three or four years ago, for example, many people were investing in this sector. Now you have several players coming in like Alipay, Grabpay, Go-Pay. The people who invested 3 to 4 years ago will not be in a good shape now. So it’s not only the size of the market but the potential disruption that would come into the market. The fourth factor is risk return. Some entrepreneurs have a bloated idea how they think their companies are actually worth, so the risk return would not make the company very attractive.
How do you foresee valuations in SEA vis-a-vis other regions?
You can view this in two ways. First, you can compare similar companies across multiple regions in terms of revenue. SEA in this respect is still very reasonable compared to India and China, but we don’t look at it that way. For us, valuation has to be measured against the potential of the company and potential value at exit. A company may be valued $100 million today, which may sound like a lot but if it has potential exit of $1 billion exit, then it’s not a high valuation. That’s how we look at it. We don’t look at the absolute amount but also at the upside and the fundamentals of the company to grow towards that upside.
What do you think are the real pain points for SEA?
The pain point right now is about finding great companies. Finding the money is not an issue. Great companies in SEA tend to be the same ones that receive a lot of investment, so they are usually oversubscribed rather than the other way round.
Finding good talent in the tech space tends to be a challenge here. Where do you see good talent coming from in SEA?
As we speak, the talent pool in the region is more concentrated in Singapore. We also see good talent in Vietnam, China, India and Australia. Finding talent in software engineering, data science and AI is a challenge, but that’s changing. The bets that we are making isn’t so much whether SEA has enough start-ups. Its whether SEA talent will be able to grow companies that can compete regionally, if not globally. There should not be fundamental obstacles for some of them to grow global businesses just like the Americans, French or Chinese. We believe there are entrepreneurs out there who can. In fact, we think we have found two or three of them at this stage, and we believe there will be more coming up.