Patience needed for ASEAN exits: Hanno Stegmann, APACIG

Hanno Stegmann at the Asia PE-VC Summit 2017. Credit: DEALSTREETASIA

Hanno Stegmann, the chief executive of Asia Pacific Internet Group (APACIG), a joint venture (JV) between venture builder Rocket Internet and telecommunications firm Ooredoo, maintains that Rocket Internet and its affiliates are firmly committed to the markets of emerging Asia, even as competition rises in the region.

Stegmann elaborates: “The overall perspective is that Asia is one of the most interesting markets for Rocket Internet and the JV [APACIG]. Rocket is doubling down on Global Founders Capital, which has been making a lot of recent investments. You see much more capital being committed to the region.”

Noting the success of ventures like Foodpanda and the presence of Zalora, he maintains that Rocket Internet and APACIG are committed to the region and have the staying power to compete with other players in the region.

In an interview with DEALSTREETASIA, Stegmann highlights the scope of commitments of APACIG, his view on the evolution of the venture ecosystem as it matures and how this will shape the contours of the regional ecosystem.

Edited excerpts

What’s the scope of commitment to the region, particularly with the presence of an engineering centre in Bangkok and the two in Europe? What’s the big picture for Asia? 

What we’ve learnt in building our various ventures is that proximity to the markets we operate in is very important. The first stage is launching something quickly and trying out something quickly; here, you can rely on the big technical centres like the one Rocket Internet has in Germany. When we move to the next step, you want to make sure that they’re closer to the market and it makes sense to have IT support that’s close to you.

Bangkok is close to Singapore and all the emerging markets we have a presence in like Indonesia, Philippines, Pakistan and we’ve been able to be close to the markets and teams where we operate, which has been very beneficial. It makes a lot of sense to have a centre of excellence in Asia and it helps with new incubation as well as supporting ongoing development and projects in the Asia Pacific.

We are very bullish on Asia and APACIG is here to stay; it is common with our startup activities in many different markets. I don’t understand why people question our commitment; we have been early to the market and a lot of major companies in the region have been built with Rocket support and investment like Lazada and Traveloka.

Just the fact that sometimes, people like to pick on how our portfolio companies choose to refocus and operate paints a completely incorrect picture.

What are the key market for APACIG at this juncture? 

The key markets – given we’re a consumer-focused company – are the large consumer markets. Indonesia, Philippines, Thailand and Vietnam are super interesting markets but we have to be first movers. The next generation markets that are also on the radar for us are Pakistan, Bangladesh and Myanmar – these are where there are still a lot of verticals we can explore and build deeply in.

For example, when Zalora shifted its focus away from Thailand, there was media attention focused on how we had exited but not on how we’ve launched other companies looking at other sectors. There are some rather negatively focused developments and reporting that can shift attention away from the positive developments that have emerged in our portfolio.

What’s your take on the view that Rocket Internet/APACIG is not engaged as a long-term investor and seeks a quick exit? 

If you look at any Rocket venture around the world, you can see this isn’t true. This is the wrong perception! We’re an incubator and probably have a longer horizon than anyone in the VC world. If you look at VC funds, they have four years of investment, followed by four years of harvesting and your fund needs to be closed at eight years maximum, so your horizon is restricted.

For Rocket, we’ll grow it and bring it to profitability. We build it and scale it and when there’s an opportunity, then we sell. That means our commitment from day one is much longer than anyone else. Of course, if you have an opportunity where a strategic investor is willing to offer a great price, then opportunistically we’ll speak to them and see if that makes sense to for us as an investor and for the company.

We have a good track record of selling companies at the right time for the company and for our investors and partners. That is why for some companies we build in the emerging markets, it’s clear that it’ll take 6-8 years to build them up, especially in the e-commerce space

You’ve got significant experience in the e-commerce space in Southeast Asia. Going forward, we’re seeing the BATJ and other investors with deep pockets entering the e-commerce space in ASEAN. How do you see the entry of these players altering the market? You’ll need a lot more to compete with these entities. What does it mean for Rocket Internet?

It’s certainly interesting to see what implications it will have for the ecosystem as it introduces more competition among the best companies. It will be a good thing for customers and processes to see who’s doing the best job. Overall, it will have a good impact on the ecosystem as it will grow and maturation in both payments and logistics will accelerate. There’ll be more opportunities for smaller merchants that want to enter the market.

It’ll be good for the growth of e-commerce and it’ll be good for Rocket as we have a good relationship with Alibaba, which acquired Lazada. It’s a very good partner and company to work with, and our investors have had a good experience with Lazada.

And when it comes to Indonesia, Rocket has deeper pockets than most players out there, excepting Alibaba and Amazon. Secondly, it means we need to focus our efforts on verticals where we have value to create and still deliver a unique selling proposition (USP).

For instance, we have an e-commerce marketplace in Indonesia which is mobile-first and is offering a specific experience which is very niche and has little to worry about. Meanwhile, other players who offer nothing special have to ask themselves, if they can develop a USP or whether they can compete on the mass market with Lazada and Amazon.

That basically means every player – including our ventures – need to focus and find their position in the food chain and ask what special value they offer. Our companies all have a good position and I don’t worry about them.

Looking at APACIG – a JV between Ooredoo and Rocket Internet – how does this shape the investment thesis and what’re the capital commitments?

It shapes the investment thesis by combining the capacities and customer base of Ooredoo with the entrepreneurial spirit and capabilities of Rocket and you get an organisation that is entrepreneurial and can access the customers, infrastructure and knowledge of a strategic partner like Ooredoo.

We still act like an investment fund, so we don’t have an overarching strategic imperative other than trying to combine values from both partners where 1+1 = 3. The overall commitment is $200 million, which is the starting capital given the incubator focus of the vehicle. We still have a long way to go in deploying all the capital and we haven’t used a majority of the fund.

We’ve got close to 50 per cent of the fund deployed. We don’t need to raise new funds or seek an exit event for capital.

You have Chinese capital entering the region and Amazon expanding its presence in the region. Do you see more competition for deals driving up valuations?  

Bottom line, it’ll have a positive impact on e-commerce and it’ll help the market sort out who’s doing a good job. There’s a need for exits and valuations, and those who aren’t competing on the same standards are going to face problems. We’re quite bullish in that we have a portfolio of some of the strongest e-commerce companies in the world. So we’re not worried about competition with the big guys. But it’s the second tier companies that will have issues.

For valuations, you cannot see they are being increased or reduced over the board but there’ll be a stronger spread and there’ll be market leaders where the leading companies have even higher valuation and premium because you have a couple of international players competing for it and a second tier who will be unable to compete.

My gut feeling is that a market like Indonesia, which is the focus of a lot of attention at this time, will see a lot of second-tier companies that raised funding at high valuations being unable to rationalise and perform at a level to live up to these valuations; you’ll possibly see down-rounds or them being unable to raise capital successfully.

There’s been a lot of discussion about exit architecture and the need for meaningful exits, as well as the formation of startup stock exchanges in Jakarta and Bangkok. How will these developments impact the overall ecosystem?

For a valuable company, an IPO is always an excellent route but in my personal experience, you need a certain critical mass and size to not be hit by the volatility in the stock market. I myself am not a big believer of startup stock exchanges because I believe that a company that scales to an IPO can list on a real stock exchange, whether in Germany, Hong Kong, Singapore, Australia or the US.

To create another stock exchange may see volatility, which can scare off investors after perhaps some initial highs in share prices for the firms. On exit, everybody just needs to be a bit patient. Everyone wants a big exit but the ecosystem in the region is very young.

So five-seven years ago, you wouldn’t have any startups but now there are many that have come up and as the ecosystem and the businesses mature, an exit will be a natural outcome of this development.

For exits, you need companies with significant scale and numbers where a big strategic investor is willing to buy them. Five-six years ago, if you’d told me that me Asia would have five unicorns close to IPO, I would have been sceptical.

You’ve got Japanese corporates launching venture units in Singapore and Chinese capital coming to the region. How does this impact the landscape, particularly with the upsides and downsides that come with entrepreneurs securing investment from different types of investors?

It’s a very heterogeneous landscape with European, local and Chinese firms. When we look at co-investors, we have to look at the goals of the company and investor. For instance, Rocket brings a lot of operational support and operational excellence. In that role we can be a strong partner, so for portfolio companies looking to expand to China, a Chinese investor would make perfect sense.

There are different things that a Japanese investor or a European investor can bring to the table for a startup venture. I’d look at it on a case-by-case basis. It really depends on what the company needs to do to develop

How bullish are you on Indonesia? 

I’m very bullish on Indonesia. I like the market. It has fantastic people, a large growing market and one with great potential and many emerging enterprises. My only doubt is that I’m an investor and I like to invest at rational valuations. Looking at some of the deals that have happened in Indonesia in the last 12 months, valuations were a bit high.

That’s why I sometimes prefer to invest in markets where not everyone is rushing into it as you get a first mover advantage. I think that is an advantage we don’t have in Indonesia anymore.

As for the rest of ASEAN? I think really interesting markets are those like Myanmar and Pakistan further afield. While they have similar demographics, our APACIG fund is restricted to Asia, excluding India. While I like India as a market a lot, it is super competitive.

Also Read:

SEA’s potential makes Chinese investments strategically rational, says APACIG’s Stegmann

Rocket-backed on-demand staffing platform UShift launches in Singapore

Rocket, APACIG launched 10 internet ventures in Asia-Pac web universe in 2015

China firms’ expansion a double-edged sword for Asia’s VC scene: Wei Hopeman