We are Asia’s first truly cross-border seed fund: STRIVE’s Nikhil Kapur

Nikhil Kapur at DEALSTREETASIA's Asia PE-VC Summit 2017 in Singapore.

STRIVE, formerly GREE Ventures, has hit the first close of its $130 million third vehicle, and is targeting the final close by the year-end, Nikhil Kapur, who leads its Singapore office and a partner in the firm, told DEALSTREETASIA in an interaction.

The firm, with offices in Tokyo and Singapore, is Asia’s first truly cross-border seed fund, as it invests capital across Japan, Southeast Asia, and India, Kapur said, and added that STRIVE would focus on seed stage investments predominantly in the B2B and B2B2C sectors.

“The reason why we opted for a larger fund was to be able to invest in slightly more companies in each region with slightly larger cheque sizes. The markets are maturing and it’s taking a lot more early-stage capital to deliver significant scale. Hence we need to allocate for bigger seed cheques,” he added.

Citing examples of being a cross border firm, Kapur said two of its fintech portfolio in Indonesia had tapped onto one of STRIVE’s LPs for their credit lines, and an Indian B2B company it had invested in had started expanding in Indonesia leveraging an introduction to a key client.

The venture capital firm that is led by General Partners Yusuke Amano and Tatsuo Tsutsumi has begun investing from its third vehicle, and its portfolio includes ClassPlus (India) and TrustDock (Japan), among others.

Explaining the math behind a $130 million fund, Kapur said ticket size for the first cheque remained the same, as its earlier vehicles – $300k – $1 million, and the firm would have about $100 million to deploy (from this vehicle) net of fee.

“We reserve around 60% of our funds for follow-on, in line with our approach to allocate more towards each portfolio company. This leaves us with $40 million to invest in the early stages of 3 markets: Japan, Southeast Asia, and India. Based on this allocation, we’re unlikely to be able to do more than 20 investments in Southeast Asia and India combined. Spread across 3 years, this comes to 6-7 deals per year. So our pace roughly remains the same, maybe a slight increase from the last fund,” he added.

The Limited Partners (LPs) in its third vehicle include SME Support JAPAN (operating within the Ministry of Economy, Trade and Industry of Japan), GREE Inc., and members of the Mizuho Financial Group including Mizuho Bank, Mizuho Securities Principal Investment, and Mizuho Capital. The firm is also in talks with LPs outside of Japan for its investments in the Southeast Asian and Indian markets.

Kapur, now promoted to partner (from principal earlier), acknowledged the importance of exits, the ultimate parameter that VC performance is judged on, pointing out the firm’s track record here: “Our first fund, launched in 2014, has done spectacularly (well) in terms of exits. In Southeast Asia, we have seen 5 acquisitions in our portfolio from 10 investments. We have also done a secondary sale in one portfolio company. In Japan, 3 companies have gone public and 2 companies have been acquired. There are a few more IPO candidates lined up. All these exits have given us a great fund return. We are running at 1x+ DPI on the $50M first fund, a track record that barely any VC in Asia (ex-China) can boast of.”

Its second vehicle (2016 vintage) counts companies such as PopXO in India, Saleswhale in Singapore and Ayopop in Indonesia among its portfolio. Other notable investments in SEA include Kudo (acquired by GRAB), Vouch and Pie (Acquired by Google).

With STRIVE focusing on B2B and B2B2C sectors, Kapur said the firm had already seen initial success in this space in its portfolio with the likes of Kudo, Pie, Saleswhale, Hasura, and Healint.

“We see two kinds of B2B companies in the market, those targeting the domestic/regional market and those targeting global markets. The former usually has a transaction-based model along with SaaS. The latter tends to be pure SaaS, targeting enterprise markets in US/EU from day one. I am of the opinion that we are going to see multiple unicorns emerge in both categories within the next 5 years. B2B sector is definitely slower growth in comparison to B2C, but the time is ripe for a faster growth given investor interest and digital adoption of businesses globally and regionally,” he added.

These developments come even as several large funds including the likes of Sequoia (Surge) have begun entering the seed investment space.

“I am glad that the lack of institutional seed capital is being noticed by the likes of Sequoia. It has been a justification for my pitch for almost 2 years now that seed stage is suffering in these markets as every VC starts focusing on Series B-C rounds. Only time will tell how serious Sequoia and other VCs are about the seed stage. If they foresee these accelerators to be only a scout or pipeline for their larger fund, it’s unlikely to go well with the market. But if they take a more thought-out approach towards seed, then they are likely to taste success,” Kapur added.

At the same time, he also noted that seed stage investing is the easiest stage to enter and exit.

“It doesn’t take a lot of capital to start, but it takes a lot of effort and conviction to stay in. I feel only the folks who truly want to build companies together with founders and are driven by an intrinsic passion towards early-stage (businesses) tend to stay on with seed over a longer term,” Kapur said.

Edited Excerpts:-

Even as you launch your third fund, where are you on the exit front?

Our first fund, launched in 2014, has done spectacularly (well) in terms of exits. In Southeast Asia, we have seen 5 acquisitions in our portfolio from 10 investments. We have also done a secondary sale in one portfolio company. In Japan, 3 companies have gone public and 2 companies have been acquired. There are a few more IPO candidates lined up. All these exits have given us a great fund return. We are running at 1x+ DPI on the $50M first fund, a track record that barely any VC in Asia (ex-China) can boast of.

The young ecosystem in Asia is likely to learn soon that it’s easy for VCs to raise first and second funds on the back of networks and differentiated deal flow. But, by the time VCs have to raise their third and fourth funds, LPs start asking questions about cash returns, and at that point, showing superior performance is key to survival and growth.

For a startup, why STRIVE? What do you bring to the table, other than the capital? Have some of your investee companies been able to leverage the Japanese LPs you have?

Most seed VCs that startups are likely to come across fall under two buckets: those with small fund sizes, who invest small cheques in a few companies, and those with large funds, who take a highly diversified approach. With the former, startups are likely to run into issues raising follow-on capital. With the latter, startups are likely to see very little support till they figure out their product market fit on their own merit. At best, these startups are provided with a “platform” through which they can tap on to the VCs network of consultants.

Our approach is a unique one. “STRIVE” implies fighting vigorously to achieve one’s ambition. We marry a significant fund size with a small portfolio size even in seed. This means the portfolio receives tailored support from our experienced investment managers, an always-on team of professionals who are working day and night alongside the portfolio founders to jump through hurdles and avoid obstacles. Our curated approach also means that there is follow-on capital allocated for each portfolio company. Some might think that we are taking lot more risk by not being as diversified. However, our track record has shown us early signs of success where getting involved closely with each company from an early stage increases the likelihood of success.

So I ask you as a founder, if you have a chance to work with a VC for whom every outcome is an important one and who is “striving” day and night to make sure that your journey is a slightly smoother one, or would you rather pick a diversified VC who can write you off if you don’t achieve your goals in the first 6 months?

Apart from this unique approach to VC, we are also Asia’s first truly cross-border seed fund. We actively invest across Japan, Southeast Asia, and India with a tight-knit team, giving us access to networks in each of these markets. For example, two of our fintech portfolio in Indonesia have tapped onto one of our LPs for their credit lines. One of our Indian B2B companies has started expanding in Indonesia through our introduction to a key client. We’ve helped the startups recruit top-quality tech talent from across the region. There are many such examples in our portfolio. Our portfolio founders choose us because we can open up these varied networks for them, something that the domestic VCs are not as likely to do. This is why we end up working very closely with top-tier domestic VCs in each of these markets.

At seed stage, you will have a large portfolio for a $130 million fund. What will be the ticket sizes that you are targetting for the Fund-III and what do you look for in a pitch/deck/in the meeting with founders? Does data crunching play a role in how you determine which companies to back? 

Our ticket size for the first cheque remains the same, $300k – $1 million. Maybe if the market becomes more aggressive in the future we can increase the first cheque size slightly. We have actually been feeling constrained with our fund size so far with all the good deal flow we have been seeing in the markets we operate in.

Let me do the math for you. With a $130 million fund, we have roughly $100 million to deploy net of fee. We reserve around 60% of our funds for follow-on, in line with our approach to allocate more towards each portfolio company. This leaves us with $40 million to invest in the early stages of 3 markets: Japan, Southeast Asia, and India. Based on this allocation, we’re unlikely to be able to do more than 20 investments in Southeast Asia and India combined. Spread across 3 years, this comes to 6-7 deals per year. So our pace roughly remains the same, maybe a slight increase from the last fund.

This pace for a seed fund is in reality very measured compared to other seed funds in the region. We have the luxury to be selective and only work with founders whom we see exceptional leadership qualities in. You are unlikely to see our name in the press every month, but we hope that sharp founders recognise this as a positive thing rather than a negative one.

However, a slower pace of activity doesn’t mean we are slow as a VC. The last deal we did closed in two weeks. We did the whole process end-to-end in less than a month. In fact, we are the ones usually pushing the other funds in the syndicate to move faster. We prefer founders to be building the business than to spend time fundraising. We are able to keep up with this pace because we follow a standardised internal process for every deal. Each deal goes through the same funnel. Also, our investment managers are empowered to bring the deals to closure quickly, we do not hire junior analysts who are acting only as scouts in the market. When you bump into a STRIVE team member, you will meet someone who can take investment calls for the fund and push your deal towards closure.

Being an early stage investor, has it been a concern that you’ve not been able to double down on some of the most promising companies? By the time many of these firms do 6-7 rounds, you may get diluted down to really tiny levels? Is that the reason why you opted for a larger fund for your third vehicle?

We allocate significant follow-on capital for our portfolio companies already. Given our fund size, we have the capability to follow on only for 1-2 more rounds, not for 6-7 rounds. I personally don’t believe that a seed fund should have capital allocated for too many rounds. I would rather raise a separate ‘opportunity fund’ to maintain our pro-rata share in our portfolio if we see a lot of cases of companies raising so many rounds. So far, we haven’t bumped into that problem because a lot of our companies ended up getting acquired relatively early in their maturity cycle.

The reason why we opted for a larger fund was to be able to invest in slightly more companies in each region with slightly larger cheque sizes. The markets are maturing and it’s taking a lot more early-stage capital to deliver significant scale. Hence we need to allocate for bigger seed cheques.

As your portfolio becomes larger, will you look at driving some level of synergies between your investee companies so that some of them can leverage each other’s skills?

Definitely. This is one thing we are always hoping for. The best coaches for our younger portfolio are our more mature portfolio companies. We try to bring all of our portfolio on the same Slack channel and use it as a single point of communication with the founders. This further helps in connecting founders of these companies. Some of our strong technical founders are helping the others recruit and interview in their free time. Whenever possible, we try to organise small catch-ups between our portfolio companies, including with our ‘exited’ founders. We’d like to see more and more collaboration amongst the founders and even team members of each company going forward.

Early stage investments and companies need a lot more value addition, a lot more heavy-lifting. All VCs claim they value add – but with a $130 million fund, and as you are set to have a large portfolio, how much value add can the Strive team really do to portfolio companies? How much time and effort can your team assign to each of these companies? Can you continue to support them post-Series A stage?

Completely agree on early-stage companies requiring time and support, it’s the fundamental thesis for our unique approach to early-stage VC. Our team will double its size in the next 12 months, thanks to the management fee from the new fund. However, our new portfolio will not double in size, it’ll grow maybe 50 per cent. This means each manager can spend more time with each company.

We usually try to support each company till at least Series B stage. As more companies go beyond this stage, it will further free our time for our younger portfolio companies. Overall, we expect to spend even more time with our companies than before, thanks to this new fund.

From a value-added perspective, we split it into three key aspects: talent sourcing, operational support and financial support.

For talent, we help founders build their initial teams, all the way from introducing candidates, recruitment, interviews, convincing highly sought-after candidates to join the company, and managing internal conflicts within the team.

For operations, we chart out the company’s trajectory for the next couple of quarters and work closely with the company to achieve product-market fit. We use our experience of our previous investments to guide the founders on the signs of initial product-market fit and what to iterate on. We further try to introduce key clients from our network and build partnerships with other corporates and programs in the sector. In some cases, we guide the founders on the best practices employed by our portfolio companies specialised in a specific vertical such as backend tech-stack and sales operations.

For financial support, we not only provide our own capital in the future rounds, but we also help the founders fundraise from our large network of investors. We guide them in their pitch, the data room they should set up, the KPIs they should track and showcase, and the business plan they should build for the next couple of years.

We’ve seen some of the larger funds now entering the seed stage  (Sequoia Surge) – what are driving these VCs to start accelerators? Will some of these seed level initiatives be game changers, or will they be the same?

I am glad that the lack of institutional seed capital is being noticed by the likes of Sequoia. It has been a justification for my pitch for almost 2 years now that seed stage is suffering in these markets as every VC starts focusing on Series B-C rounds. Only time will tell how serious Sequoia and other VCs are about the seed stage. If they foresee these accelerators to be only a scout or pipeline for their larger fund, it’s unlikely to go well with the market. But if they take a more thought-out approach towards seed, then they are likely to taste success.

Based on our interactions with founders, a fair bit of them are averse to taking money from very large funds at a very early stage of their business. They tend to think that they are unlikely to be a needle-mover for these funds till their company becomes big, and might even end up having poor signaling issues in the market if this large VC loses interest in them over time for whatever reason. Let’s see how the market evolves in the next 2-3 years.

While billions of dollars of VC money has been invested, most of this has gone to mid-to-late stage deals beyond Series B. On the other hand, early-stage funding across India and SEA has seen a sharp, almost precipitous drop in the last two years. More worryingly, the number of seed and angel deals have more than halved during this period. What is behind this pattern?

Well, most of the dumb money has left the markets ever since the promise of overnight success of startups was broken. I believe a lot of the same capital ended up going into crypto a couple of years ago, and crypto market has seen its own bust cycle. This double whammy has hit these investors hard, and we are unlikely to see them in the market for some time.

For the smarter investors, they have moved on to mid-to-late stage deals as you have correctly mentioned. The seed VCs went on to do series A deals. The series A VCs went on to do series B deals and so on. The reasons seem to be the perceived lack of capital, need for follow-on funding for their own portfolio, significantly higher management fees, and a relatively lower-paced environment in larger rounds.

Seed is the easiest stage to enter and exit. It doesn’t take a lot of capital to start, but it takes a lot of effort and conviction to stay in. I feel only the folks who truly want to build companies together with founders and are driven by an intrinsic passion towards early-stage (businesses) tend to stay on with seed over a longer term.

Want to ask you about two factors that may be unique to SEA. First, the unicorns in this region – Go-Jek, Traveloka, Shopee, Grab, Tokopedia, among others – are expanding into new verticals such as fintech, mobile health, and remittances. When unicorns enter a certain vertical, will startups in that space find it difficult to raise follow-on rounds? In China and India, expansion into new verticals by some of the unicorns is not easy – each vertical itself has 1-2 unicorns. For instance, Didi and Ola can’t be fintech giants – there are the likes of Paytm and Ant, Wechat and others. Nor can Didi and Ola make a major foray in the food delivery space. How do you see this panning out?

I agree with you on the problem in Southeast Asia where capital attracts capital. Unicorns have been raising more and more (funds) in Southeast Asia and displaying increased ambition to attract more capital. The reason why this has happened is because the Southeast Asian investor ecosystem is very young. While the unicorns are growing, there isn’t another set of follower earlier-stage companies that are raising early-to-mid-stage capital. The few that managed also did not have strong competitive advantages or moats. As a result, unicorns keep raising foreign capital to enter newer verticals while younger companies end up facing a capital crunch when fighting against unicorns.

I believe this will change within the next 5 years. There will be a lot more domestic or regional capital in each stage, all the way from seed to series C. Companies will scale fast across these stages and grow to take on the unicorns in direct competition. The most well poised ones would be those who have inherent moats in their business model. And at that scale, the unicorns will find it tough to be as agile as an early-to-mid-stage start-up. Remember, these unicorns haven’t had the luxury of accumulating decades of experience building teams similar to companies such as Amazon, Google, and Alibaba. Most of the Southeast Asian unicorns are still facing chaos internally, with poor culture, misaligned teams, internal politics, and favouritism. They haven’t even seen the pressures of running as a public company with an eye for profit and need for accountability. At some point, these companies are likely to become too diversified for their own good and are likely to shrink their focus to a few key areas. Rumours of Grab spinning-off its financial services arm is a possible signal of this. The market will then transform into a much more democratic environment.

While the initial years of India and SEA startup ecosystem were largely dominated by consumer-facing companies, in terms of buzz and businesses are B2B ventures finally finding their feet now? Conventional software-as-a-service (SaaS), alternative lending, expense management, medical IoT, and AI-enabled predictive platforms have emerged as fast-growing areas now. In the next 10+ years, do you see B2B unicorns emerging out of India and SEA?

B2B ventures are definitely in the rage right now. We have already seen initial success in this sector in our portfolio with the likes of Kudo, Pie, Saleswhale, Hasura, and Healint.

We see two kinds of B2B companies in the market, those targeting the domestic/regional market and those targeting global markets. The former usually has a transaction-based model along with SaaS. The latter tends to be pure SaaS, targeting enterprise markets in US/EU from day one. I am of the opinion that we are going to see multiple unicorns emerge in both categories within the next 5 years. B2B sector is definitely slower growth in comparison to B2C, but the time is ripe for a faster growth given investor interest and digital adoption of businesses globally and regionally.

Apart from the B2B verticals you mentioned, I suggest keeping an eye out on supply chain, logistics and dev-tools companies coming out of these markets.

For B2B, the entry barriers are greater (when compared to B2C), even as the category may be a lot stickier because you won’t have organisations shifting their entire processes and software year on year. B2B requires not a two-year but a 10/20year window – do you see VCs having this level of patience/holding power?

It’s definitely going to be a test of patience for a fair number of VCs. However, if enough companies are scaling in this sector, I see a secondary market being opened up to provide exits for early stage VCs in this sector. This is likely to happen since B2B companies have a lot more predictable cash flows and usually generate interest from larger private equity firms. See, for example, Deskera’s raise recently. An early stage VC would probably have exited in the recent round had they helped fund the company 10 years ago.

Another significant advantage that B2B startups in Southeast Asia and India enjoy is that their cost base is way lower than that of their Western peers. As a result, they are likely to reach profitability much sooner in their lifecycle, especially if they are targeting global enterprises. This further increases the likelihood of these companies going public in a shorter time horizon. If you tracked Zoom’s IPO recently, you would have noticed that the biggest reason for their profitability at a relatively young age is because their tech is built mostly in China, helping them spend way lower on R&D compared to similar US companies. The same reason is attributed to Freshworks’ and Zoho’s success in India.

Despite unicorns like OYO, Zoho, Freshworks and Paytm having forayed into the Japanese market either directly or via resellers, the collaboration between the two ecosystems has been largely one-sided and driven by Japanese interests in Indian startups. Do you see this changing?

I think it’s unlikely. Japan is a complicated market; doing business there is as much a cultural affair as it is professional. It’s also an ageing population and a much more mature country. I believe consumer-facing companies such as Oyo and PayTM will face a tough time expanding into these markets. However, B2B companies are likely to taste success as long as they are willing to spend time, effort, and money localising their product. Salesforce has grown well in Japan, thanks to heavy localisation and empowering a relatively independent team. I don’t see why Freshworks and Zoho cannot replicate this success.

Seed and early investors have unique challenges – many of the early-stage investments may not eventually resemble what they become later, and many of these companies do multiple pivots. Many may not have even seen any revenues at the time of your investment, and many will eventually see founder/co-founder/early team members fallouts and leave – how do you handle such situations, or do you have a policy of minimum interference?

We have the opposite policy of your suggestion: that of close involvement in the early struggles of each company. Yes, almost all of the companies evolve significantly from the time we invest to the time they raise their series A (usually a good sign of having hit product-market-fit).

As seed investors, we are in the business of investing in people chasing an audacious dream. Our duty is to enable them to be nimble-footed, to guide their paths with a strong light as much as we can so that they can foresee the hurdles, the divergences, the off-tracks that they can endure. And should founders decide to go down an alternate route to reach their destination, we would follow them wholeheartedly, trusting their judgement over ours – this is what Jeff Bezos refers to as the disagree and commit mindset.

In the past, we’ve noticed that over time some startups might lose a few  key team members who do not believe in a new trajectory or are detrimental to the company, but in this case we try to help plug this gap as much as possible and strive on towards the destination with full belief in the founders that stay in the fight. We embrace the unknown, just like the founders do. As long as we are both driven towards the end-goal, not much can stop us.