Global venture capital firm GGV sees more investors being lured to Southeast Asia, driven by liquidity as well as the tougher regulatory environment in China. At the same time, the tech sector in Southeast Asia is fast catching up with China, in terms of development and adoption.
“The differential is closing, partially because COVID is forcing a new level of digitalisation,” Jixun Foo, managing partner at GGV Capital told DealStreetAsia in an interview.
GGV has been an active investor in tech startups in Southeast Asia, backing a range of businesses from Indonesian edtech company Ruangguru; to food tech startup Next Gen Foods; fraud prevention company Shield; and superapp Grab. It recently invested in Indonesian insurtech startup Fuse, and digital signature startup Privy.
Still, investing successfully in Southeast Asia still takes some doing. “We definitely see the opportunity, [but] there’s a set of challenges that we have to deal with,” Foo said, noting, in particular, the lack of engineering tech talent.
Meanwhile, the opportunity in China is now in enterprise tech, Foo asserted, given the scope for growth driven in particular by artificial intelligence and robotics. “That’s where the bets are, into enterprise tech or small to medium businesses tech, in this part of the world.”
GGV’s recent investments included Sudo, a Chinese privacy computing startup; and Jina AI, an open-source neural search company that helps businesses find information in unstructured data.
However, the VC firm still has exposure to the sectors in China that have come under increased regulatory scrutiny, and restrictions.
GGV’s investments in China include (Huohua) Spark Education, a Chinese after-school tutoring startup that recently withdrew its US initial public offering; and Didi Chuxing, which is set to delist from the New York Stock Exchange just five months after its IPO.
GGV has made nine portfolio exits so far this year, including Grab, which went public in the US via a SPAC merger earlier this month; and Hashi Corp, a San Francisco-based open source software company that raised $1.2 billion in a Nasdaq IPO a week later.
In January, the firm said it raised $2.52 billion across four US dollar funds, including GGV Capital VIII. The firm has offices in Menlo Park, San Francisco, Singapore, Shanghai, and Beijing.
Edited excerpts of an interview with Foo:
Grab is still a platform play across multiple segments of fintech, even as many companies develop separate verticals within the fintech space. How do you see this going forward? Given how underserved the population in Southeast Asia is, in terms of financial services, do you think that’s where a big part of Grab’s growth will come from?
I think that’s a key driver for value over time, although I think that today the financial services [business of] Grab is still very small relative to the overall size of the market. You may make the service available, but financial services is less intuitive, so you have to figure out a way to engage and encourage the adoption. And that takes time.
In the US, you have more specialisation. For ridehailing there is Uber; DoorDash does food delivery; Amazon does ecommerce, and you have Affirm that has the buy-now-pay-later services. There’s a lot more specialisation largely because the market is big, and it will create sizable unicorns.
The Southeast Asian market is relatively small and fragmented, and in the most part, GDP per capita is below $10,000. You have a diverse market, and to address this market you have to have a platform that can generate value across [the board] to create a substantial player.
Given all we’ve seen in China since November 2019, in terms of regulatory tightening, what has been the impact on investor sentiment, and what can we expect in time to come?
You can tell that many of the tech companies have been hammered quite a bit in the capital markets and that reflects the investor sentiment, and some of the fear, and regulatory concerns in the overall China market.
Having said that, I think what China has seen in terms of digitisation or tech in the last 20 years, has been more on the consumer end. If you look at the enterprise [sector], and the small to medium businesses, the level of digitisation is still very far behind, relative to the US.
Obviously it’s a different addressable market, and many of the US tech companies are global. [But] if you take the top five or top 10 enterprise tech companies in the US, and you compare them with those in China, the valuation differential is probably 20 times to 30 times. That goes to show that there is still a lot of room for enterprise tech services to grow.
That’s where I think a lot more emphasis is being placed, [with] a lot more investors, especially in venture capital and private equity. That’s where the bets are, into enterprise tech or small to medium businesses tech, in this part of the world.
The other thing is, we are in what I call a new phase. The drivers for growth in the first ten years in China was [personal computing], the last ten years was mobile [technology].
[Now] I think the drivers that will have a transformative impact on businesses and industries is going to be AI and robotics. These have been applied to healthcare, drug discovery, logistics and transportation. In the next five to ten years the bet will be on robotics and AI.
[Additionally] there are big themes that are being encouraged. Anything that supports climate [issues], from food tech to renewable energy, these are areas where we could still be investing in, and there’s a lot of government support around it.
Can we expect global investor attention, including GGV’s, shifting to Southeast Asia?
I think there’s a lot of interest and momentum around Southeast Asia. The fact that Sea [Group[ became a super unicorn demonstrates that Southeast Asia as a market, and its digitalisation is accelerating, so there’s definitely more capital being raised.
But we also have to be mindful that there is a lot of liquidity around, because of the relaxed monetary policy. That is benefiting not just Southeast Asia, but many other emerging markets where digitalisation is driving a lot of new investments.
We have invested in Grab, and have made quite a number of investments in Southeast Asia lately, in the food tech and fintech sectors.
The one general concern is just the engineering depth and breadth in the region, because we continually need to tap into India or China for engineering support. It’s not easy to keep up the pace with engineering and innovation, given the amount of capital that’s being put in, and the expectation of the investors.
[GGV] is doubling our team on the ground and expanding our presence [in Southeast Asia]. We brought on Wei Han [Liew], who used to be an investor and an entrepreneur in Indonesia before selling his business to ByteDance and joining us as a venture partner. We have Huey Lin, who used to be the founding COO of Affirm, and was at Flexport before she joined us as a venture partner. We’re reopening up our office and [managing partner] Jenny [Lee] is spending a lot more time on the ground there. We definitely see the opportunity, [but] there’s a set of challenges that we have to deal with.
How do you look at investments in Southeast Asia? How far [behind China] is it?
I will say it is about five years’ difference. The differential is closing, partially because COVID is forcing a new level of digitalisation, because it forces a change of behaviour.
The opportunity is there, but it’s not easy to build businesses across Southeast Asia, because it is fragmented by country, culture, borders. You’ll have a CEO trying to figure out how to incentivise, how to motivate the different team members across the region, with different cultures and different pay structures.
Do I look at one region, or three? Generally speaking, you’ll have to look at the region. You may start with Indonesia as a starting market, because it’s a bigger market. But to grow and scale your business you almost always have to think how you can scale globally, or regionally, at least. Like Sea, today, they are trying to go global, but they really started out with games, then Indonesia, then into Vietnam and many of the other Southeast Asian cities.
There’s so much money flowing into crypto, blockchain, NFTs, and Web 3.0. Where does GGV stand in terms of investments in these sectors?
Crypto is a very different dimension altogether. The way you invest, the way you monetise and the way you exit is very different. You get a different form of value creation.
I think that today, when we talk about crypto, we think about Bitcoin and [it is volatile]. I think in the long term cryptocurrency will come under [more] regulatory scrutiny.
We will, we have to, put some bets. Some of it is coming more from an entertainment, gaming perspective. Some of it will come from the blockchain technology perspective, but we haven’t really invested. We have, for example, invested in Coinbase, a crypto exchange. So we invest in platforms, but for us to invest in crypto directly, that’s not our cup of tea today.
A lot of Chinese companies, many of your portfolio companies, the preferred destination to list was in the US. How do you see exchanges in Hong Kong or China as listing venues, in terms of valuations, or a number of listings?
Despite some of the dual listings in Hong Kong, the liquidity in the Hong Kong market is still small relative to the US. The US dollar is still the dominant currency and is easier to trade without the currency exchange and currency risk. And so, while I believe that more Chinese companies will go to Hong Kong for a listing, it will take a while to build that momentum, not just in the ecosystem, [but] the sophistication, the investors, the liquidity in the market is also important.
Rachel Phua and Joji Philip contributed to this story.