GREE Ventures closes second fund at $67m, targets 30 investments across Japan, SEA, India

GREE Ventures CEO and partner Yusuke Amano (left) and partner Tatsuo Tsutsumi

Tokyo-based venture capital firm GREE Ventures, one of the most active investors in Southeast Asia that has also been eyeing India of late, has hit the final close of its second fund at $67 million, a top executive with the firm told this portal.

The new vehicle – AT-II Investment Limited Partnership Fund – that was floated in April last year, appears to have been oversubscribed, considering GREE Ventures had been targeting to raise $60 million.

“Our fund philosophy is pretty simple. Invest in founders and companies that will be the next set of large internet businesses in Asia, while encouraging cross-border collaboration within the region. We want to do this by playing an active role with the team from an early stage of the business and help shape the company towards its goal,” Nikhil Kapur, senior investment manager at the Japanese VC firm, told DEALSTREETASIA.

GREE Ventures, a subsidiary of Japanese gaming and social networking company GREE, said the limited partners in its second fund, or its main investors, include top Japanese corporate and financial institutions including the Organization for Small & Medium Enterprises and Regional Innovation, Japan; GREE, Inc.; and members of the Mizuho Financial Group including Mizuho Bank, Ltd., Mizuho Securities Principal Investment Co., Ltd., and Mizuho Capital Co., Ltd.

The firm’s first vehicle AT-I launched in 2014 had largely looked at Seed to Series A deals only in Japan and Southeast Asian countries. However, with the new fund, GREE has added India to its targeted markets.

“India is a new market for us with this second fund, and hence we want to be more and more involved there just like we did for Southeast Asia in the first fund. We have already made two investments in India in Flyrobe and PopXO, and are just closing on a third one,” Kapur said.

The new vehicle will enable GREE to lead rounds in the companies where it is deploying capital. Ticket sizes will range from $0.5 million to $3 million for Seed to Series A stage startups.

 

 

Kapur pointed out that GREE will consider some critical questions when it invests in any startup, including: “Is this business one of the largest that can be built in the region? Is there going to be a way for us to help the company connect the dots between various parts of the region? How can we help the team reach its vision?”

At the same time, he also admitted that finding companies that tick all these boxes would be a tall order.

The new vehicle has already invested in as many as 10 startups, including Jakarta-based Ayopop that aims to provide utilities and bill payment services to the underbanked population of Indonesia, and Delhi-based PopXO, that claims to be India’s largest female-targeted content platform.

Kapur was also confident that GREE could target Japan, Southeast Asia and India, despite the vehicle’s corpus.

“The size of the fund appears small to a lot of people for doing pan-Asia investments. For us, the size is dependent on what we feel we can deploy and return back to our LPs, and is not based on how much management fee we want to earn,” he said.

Asked how GREE would approach a market like India that is relatively more mature than Southeast Asia and has ticket sizes on the higher side, Kapur said India would only take a small portion of this fund as it was still early days for GREE in that market.

“Most of it will be used in Japan and Southeast Asia. Given that we are mostly investing in Seed and Pre-Series A stages, and also want to invest in not more than 30 companies across Asia so that we can spend enough time with each one of them, the capital requirements are not too high. We, of course, want to double down on the companies that we like,” he added.

GREE Ventures, which is led by Yusuke Amano and Tatsuo Tsutsumi, has made over 40 investments, since its launch about five years ago, and the firm said that its assets under management were to the tune of $120 million.

Edited Excerpts from an interview with Nikhil Kapur, Senior Investment Manager, GREE Ventures:

 

What would you say is the underlying investment philosophy that drives GREE’s investments?

Our fund philosophy is pretty simple. Invest in founders and companies that will be the next set of large internet businesses in Asia, while encouraging cross-border collaboration within the region. We want to do this by playing an active role with the team from an early stage of the business and help shape the company towards its goal. So in the end the criteria for investment becomes simple: Is this one of the top 10 teams from the region we can invest in? Is this business one of the largest that can be built in the region? Is there going to be a way for us to help the company connect the dots between various parts of the region? How can we help the team reach its vision? Finding companies that fit the criteria is a much tougher task though.

You have been looking actively at SEA and India. In terms of geographic allocations, how will each region get from this fund? Or are you sector and geography agnostic? 

We are quite sector and geography agnostic and will be investing from the same pool of capital across all regions. We have already made 10 investments in Southeast Asia and will continue to double down on the region, expanding on the strong foundation we have built over the last 5 years. Japan continues to be a big focus given the headquarters are there. Last fund we did 20 investments there, this fund we should do 15-20 again. India is a new market for us with this second fund, and hence we want to be more and more involved there just like we did for Southeast Asia in the first fund. We have already made 2 investments in India in Flyrobe and PopXO, and are just closing on a third one.

For a startup, why GREE? What is it that you bring to the table? Apart from capital, what doors do you open?

That’s a great question, and I urge all founders to ask this question, not just to us, but any investor they are looking to partner with. We bring to the table what most strong institutional funds bring: smart team to help shape your company, network of investors and corporates, and access to further pools of capital. What sets us apart from other funds is that we are probably the only fund taking an Active and Curated Investments approach at Seed to Pre-Series A stage, and having a dominant presence in the next big markets of Asia – Japan, Southeast Asia, and India. It obviously helps that we have seen 6 exits within the first fund already and know how to take a company through the full cycle.

How much can you really target India and SEA with a $67m fund?

Again a great question and I am glad you ask. The size of the fund appears small to a lot of people for doing pan-Asia investments. For us, the size is dependent on what we feel we can deploy and return back to our LPs, and is not based on how much management fee we want to earn. India will only take a small portion of this fund as it’s still early days for us in the market. Most of it will be used in Japan and Southeast Asia. Given that we are mostly investing in Seed and Pre-Series A stages, and also want to invest in not more than 30 companies across Asia so that we can spend enough time with each one of them, the capital requirements are not too high. We of course want to double down on the companies that we like.

When it comes to scaling across the region, a lot of VCs have been talking about SEA startups expanding to India, and India-based startups looking at this regions (SEA) as their first port of call – how feasible is this reality? We have not seen much in terms of success stories.

We truly believe that this is feasible and over the next five years will see this happen more and more in the region. Indian late stage startups such as Redbus, BookMyShow, Zomato, Practo, and even Oyo Rooms, have already started to expand to Southeast Asia for growth opportunities. Just because they don’t do a drumroll in press doesn’t mean they are not here and not active in the region. From these firms’ perspective it’s a choice between Indian Tier-2 cities vs Southeast Asian metropolitan cities and it’s a strategic call that they made to choose the latter. The other way around, that is Southeast Asian firms looking to expand into India, is yet to be executed successfully. But some firms are already hiring and building up their R&D centers in India, read Grab and Go-Jek, and this trend will continue. Whether that is or can be a way into the market remains to be seen.

Even for this region (SEA) specifically – SEA metros have comparable population with >5x spending power vs. India – yet not many startups are targeting the whole of SEA. Often for startups in this region, once they hit maybe 2 countries in SEA, their first port of expansion is US, Japan or even HK. Does the challenge of targeting SEA as a whole appear too daunting for most startups even in their growth phase?

I am not sure where you get the comparable population and 5x spending power in Southeast Asia but if you’re talking about cities such as Singapore and Hong Kong, the population there is way lower than the top metropolitan cities in India. Once the Consumer Internet startups in India have covered 8-10 Indian cities, then I think is a good time for them to consider Southeast Asian expansion. As for targeting ALL the cities in Southeast Asia, it really depends on where the market for the company exists. If the company has the ability to compete in the US market, then they should for sure expand there as the market is so much more lucrative in terms of spending power. However, countries such as Indonesia, Philippines, Thailand, and Vietnam are much more similar to India in terms of demographics and hence get experimented with first. That said, not every firm is adaptable enough in its DNA to execute well in these hyper-localized markets. Companies such as Zomato, in my opinion, have done a fabulous job of doing this.

Currently, for most global investors, their first preference remains China and India when it comes to Asia, and maybe followed by Indonesia. When do you see that mindset change when larger VCs and global investors see SEA as big an opportunity as India?

I think it will happen within a span of 2-3 years. Already you see some of the larger Indian/US VCs looking at the market very actively. Sequoia is becoming increasingly active and is beefing up the team here as we speak. Accel, Bessemer and a few others have come around to take a look. If they do not find enough deal flow in the Indian market and the Indian market doesn’t pick up back again fast enough, you might see them come here looking for deals sooner than you think. Remember that funds walk a very tight rope when it comes to deployment. They have fixed timelines of how long they want the fund to last for – usually deployment is first 3-4 years of the lifecycle – so that they can go back into the market to raise the next one. All this said, Southeast Asia will still remain behind US, China and India, just because of the population size, fragmentation of the market, and maturity of the consumer.

You’ve seen the startup ecosystems evolve across India and SEA. What are the similarities and what are the major differences? What are the big learnings that the ecosystem in this region can take from a market like India?

Demographics in India and those in emerging markets of Southeast Asia are very similar. The consumer behaviour is also very similar: price sensitivity, mobile penetration, spending power, and frustration with traffic jams. I think it would do well for SEA startups to start looking at India and see how the companies there are evolving and trying to fight against the American competitors. Companies in SEA have a small window of opportunity to build a fortress around themselves and create strong barriers that can protect them once the American counterparts start eyeing the SEA region. And the Americans are definitely doing this as we speak.

Overall, how are deal flows in this region looking like? A common complaint that most VCs say is that while the dry powder is available, the region is not producing requisite deal flows for deployment – do you agree?

Yes and no. Can we find strong founders to back that are building great companies? I believe so. Is it at the volume that we would like to see and would be comfortable with? I don’t think so. India and Singapore are doing a great job of encouraging an entrepreneurial culture. The governments in other countries of Southeast Asia already realise they need to follow suit. It’s time they act. Licenses, ease of setting up and doing business, taxes, corporate structures, foreign investments, these are all areas that governments need to focus on, but we are not seeing them pushing as hard as the Modi government in India.

When it comes to SEA, is Indonesia the next big bet? The theme of the past few years has seen Indonesia be the centre of attention due to its size and potential. Any comment on the prospects of startup ecosystems in Thailand and Malaysia? Do you see a VC bubble happening in Indonesia, as happened in India? How will this impact the fund space?

We do feel as a fund that the next big region in itself is Indonesia. This is why more than 50% of our investments in the region go to Indonesia. The market is large enough and homogenous enough (despite whatever people say) to build a big business in that can deliver venture grade returns. I don’t think Thailand and Malaysia have this luxury. This is why Thai companies end up expanding to Vietnam and other adjoining areas quickly. I also don’t think there is any bubble being formed in Southeast Asia. We are still far behind the amounts invested in markets such as India and China and we need more and more smart founders to step up and build companies. If they don’t, then both Chinese and Indian companies are eyeing the region and are more than happy to gobble it up to support their massive valuations.

What is the pain point for this region?  Is it Series B onward – say in the (US$) 10, 20, 30 million range – there are hardly any VCs in that space in Southeast Asia. Specialised guys and global funds may not do small tickets, but even the $10 million to $30 million is not easily accessible here.

Just the number of smart founders stepping up. Frankly, I don’t think there is a big gap in any of the venture stages. When strong companies exist, capital comes and chases them automatically. More and more Series B funds are being set up here. We even lost our Principal, Albert Shyy, to a Series B fund in the region. So the capital is there, we just need more and more founders to step up and take the risk. One thing I do feel missing here is Smart Capital in the early stages. I am yet to see many funds taking an active fund strategy. They prefer to write smaller cheques as part of a syndicate and sit back to see the companies grow on their own. Some of them then pick their favourites and go to help them and back them again. This is mostly because of the Babe Ruth effect that exists in the venture industry. However, to actually build an ecosystem from scratch, our fund’s opinion is to work with ALL the companies in an engaged manner. I know this sounds clichéd but I have hardly seen funds in the region walk-the-talk. Hopefully as the ecosystem matures, we’ll see this changing.

Moving forward, can Singapore truly grow to operate in the same global orbit as places like Israel and Silicon Valley? What are the challenges – is it talent pool, small market, supporting ecosystem? A related question: Singapore has been a hotbed of startup ideas and VC funding, but with all the available infrastructure and available government grants and funding, why haven’t we seen a Singaporean-born entrepreneur create a unicorn (US$1 billion exit and above) yet?

Singapore has to find its own niche. Maybe that’s in fintech because all the banks HQs are here. Maybe that’s in B2B SaaS because again most of the APAC HQs are here and it’s easier to sell to them when they are sitting next doors. But we can’t expect Singapore to be a Silicon Valley or an Israel. Silicon Valley saw the sweat and blood of at least two generations of entrepreneurs before it reached where it is today. Israel has always been the hot bed of military intelligence and tech experiments and this talent is what they are leveraging on. On the other hand, Singapore has the ability to attract good talent because it’s a comfortable country to live in and has direct access to corporate HQs. This is the country’s strength and founders who’ll leverage this will succeed. The country has already produced unicorns such as Garena and Razer. We’ll see more soon. It’s a small population, and a very young ecosystem, give it a break (and some time) is what I’d say.

Any view on the current exit architecture of the ASEAN region? How do you see the launch of startup stock exchanges impacting exit activity among startups? 

Maybe the stock exchanges will help. Maybe they won’t. It’s relatively easy to setup an exchange, but there is a question mark on how much retail investor appetite exists in the region for low-cash high-growth businesses. We at GREE Ventures are focused on working with founders to build companies that create massive value for the market. The exits will come automatically, one way or the other. And given that we have seen 4 out of 10 companies in SEA being acquired already within a period of 5 years in our fund, I don’t think there is a lack of exits when compared to markets such as India and China. Sure the exits are smaller than other markets, but that just means we as investors need to not be greedy and adjust our fund size accordingly.

What do you make of the view that VC funds are increasingly adopting a hedge fund-like approach, rather than investing in disruption and innovation?

Not sure what you mean by a hedge fund-like approach but I am assuming you mean VCs not taking too much risk. Basics need to be built first before we can start building really disruptive companies. Not everything is about “disrupting the market”, “bringing down the incumbents”, “building the next SpaceX or The Boring Company”. Sure, I’d love to see companies like that and founders like Elon Musk come out from this region. And given enough time, we’ll see that happen surely. But for now the need of the hour is to build a foundation for the ecosystem. If that means taking some business models and applying them to this market, I am perfectly fine with that. As long as we build a strong moat around the business, this would be an intelligent way to take. That said we have companies in our portfolio who are going out of their way to beat this sentiment. Healint has built the world’s leading Migraine tracking application and they have pharmaceutical companies chasing after them to provide data for R&D, something that not even unicorn companies in the US have managed to achieve. All this done with less than $2M of capital. Saleswhale is building world’s first automated sales development assistant for the mass market. So far this technology has been only built for large enterprises who are paying millions of dollars for it and now Saleswhale is trying to democratise the market. These are just a few examples from our portfolio, I am sure there are at least a dozen more companies doing something unique and “disruptive” in their own way but just because they don’t raise millions of dollars, they never catch the attention of the press. Which is perfectly fine, because their aim is again to create real value for their customers and not just get more hits on their websites.