Singapore-based venture builder FORUM is planning to launch a vehicle to plug what it sees as a funding gap for early-stage fintech startups in Southeast Asia, a top executive said.
FORUM is looking to deploy capital from the proposed vehicle in startups under its platform and not external companies at present.
“I need to address this pre-Series A gap. We’ve achieved a good track record and returns from our investments so far, so we’ve been approached by people to put together a pre-Series A vehicle. It’s not going to be a VC fund, but it’s to help our companies get through the funding gap,” said FORUM founder and CEO Greg Krasnov.
In an interaction with DEALSTREETASIA, the former private equity executive noted that most venture capital firms in Southeast Asia prefer to deploy capital at the growth stage.
“Most VCs in the region shy away from deals that are below $1 million. So how are you going to deploy large capital into fintech if startups don’t survive for long – at least till the pre-Series A round?” Krasnov asks.
He declined to share the vehicle size but said the firm targets to launch it within this year.
“We usually give our companies seed funding of up to $500,000 and then maybe get friends and family to bring it up to $1 million. But from there to Series A, they would need another $2-3 million, so that is what we hope to address with this vehicle,” he said.
Prior to founding FORUM in 2015, Krasnov built a digital bank in Ukraine and exited the company five years ago, making over $100 million in net capital gain for its private equity backers. Before that, he spent 10 years in international private equity in Europe at Bank of America (London) and Innova Capital in Warsaw, Poland.
FORUM has built six companies under its platform and has served more than 8 million B2C and over 70 B2B clients across 18 countries. Two of its startups, alternative credit scoring provider CredoLab and debt collection startup AsiaCollect, are currently raising their Series A rounds. Meanwhile, pay-as-you-go solar home system provider SolarHome is in the midst of its Series A second tranche and is targeting to close the round in the second quarter.
Edited excerpts of an interview:
As a venture builder, why did you choose to look at consumer retail?
Startups start with ideation, incubation, development and growth. VCs come in typically at the growth stage. We have incubators and accelerator programmes, which come in during the incubation stage, helping the founding team to launch their idea. What we do is that we help with ideation and we’re focused on the fintech space and particularly, the retail finance vertical.
It’s a very exciting space in Southeast Asia – we’ve seen how the space has played out in the rest of the world. I’ve spent a lot of time in Central and Eastern Europe (CEE), which are about 15-20 years ahead of Southeast Asia in this space. So, we’re able to predict some of these trends as to how they will play out, so we start with ideation and then we help the company to go into the incubation mode as well.
Retail finance is one of the most exciting spaces – if not the most exciting space – for Southeast Asia, specifically. We observed that from CEE, when there is a middle-class emergence which typically has about $3,000 GDP per capita, it creates an opportunity for consumer lending because that’s the point where people start having disposable income and want to leverage that to improve their lives – pay for wedding, buy that new refrigerator and things like that.
So, that is the point when they start taking loans. Indonesia, Vietnam, the Philippines and urban India – these markets are at the level of $3,000 to $4,000 GDP per capita. This is a trillion dollar asset space in the making for the next decade, it’s probably the single largest asset class opportunity in the world right now.
How did you go from being in the private equity space in Europe to now running a venture builder in Singapore?
The first 10 years of my career was spent in private equity in Europe. I spent a lot of time in Central Europe looking at things that are related to the middle-class curve and invested in some retail finance companies. After that, I thought I wanted to do something that is entrepreneurial. I then moved to Ukraine to build a consumer finance company and exited the business about five years ago. And then I realised I could apply what I’ve seen in Europe to Southeast Asia. The population and opportunities here are huge.
Do you face regulatory challenges in the consumer retail space?
In consumer lending, regulation is not much of a challenge but what we try to do is to bring international best practices because consumer finance is a very technical business. You need to have a great degree of control over your unit cost, risk management and how you interact with your clients in terms of collections is key. We’re not really encountering many regulatory negativities. For the digital banks, I think regulators in the region are interested in financial inclusion. For us, financial inclusion is really about opportunities.
From Europe to Southeast Asia, how do you view the fintech landscape in this region?
We’re way behind some of the other markets. If you look at the rate of per capita for fintech investments – in the US, it’s $51 per capita; China $18 per capita, in Asia excluding China, it’s $3 per capita. So that tells you something – I think there is a problem with both supply and demand.
In terms of supply of companies, what you have is a massive opportunity in terms of fintech and population but there is lack of teams that have executed retail finance of this scale. That’s one of the things we will try to fix. We leverage a lot of management professionals from Europe who have seen and done this before. The most difficult spots to fill up are operations, risk management, product and IT. So, there’s still a gap in terms of skill set, which may be a setback for VCs.
Also, VCs are still learning about fintech – it’s a new area. So that’s issue number two. The third issue is about early-stage capital in general. There’s a massive gap at the seed and pre-series A stage. Most VCs in the region tend to start with $50 million funds and don’t do deals that are below $1 million. So how are you going to deploy large capital into fintech if startups can’t survive until the pre-Series A round?
We have helped our companies raise over $20 million that are below pre-Series A stage in the last few years but we did it across 86 investors with an average ticket size of $200,000. And 80 per cent of the tickets have been below $100,000.
Is that why you’re launching your own fund?
To give the companies opportunities to reach growth stage and raise money from VC, I need to address this pre-Series A gap. We’ve achieved a good track record and returns from our investments so far. So we’ve been approached by people to put together a pre-Series A vehicle to help companies cross that gap. It’s not going to be a VC fund, but it’s to help our companies get through the funding gap. We usually give our companies seed funding of up to $500,000 and then maybe get friends and family to bring it up to $1 million. But from there to Series A, they would need another $2-3 million, so that is what we hope to address with this vehicle.
Ride-hailing unicorns like GOJEK and Grab are also very active in the fintech space. Does that pose any competition to the consumer retail side?
They’re entering the payments space and it’s interesting. A lot of people are throwing their money into this space but actually, a lot of them are doing business at negative gross margins right now. They’re all trying to figure out how to monetise this space and they’re starting to look at themselves as a marketplace to add on more services. So, the monetisation won’t happen in the payments space but in the other services.
And for GOJEK and Grab to move from their core businesses to consumer lending, there’s a lot of work that needs to be done. But that creates opportunities because these guys are enabling access in a way that has never been enabled before, but it doesn’t mean that they will be the dominant consumer lending player in the market because it’s not a winner-takes-all market.