Southeast Asia is unlikely to produce the same number of unicorns as China due to market fragmentation and relative immaturity, said Helen Wong, partner at Qiming Venture Partners.
China is one of the world’s largest producers of unicorns.
According to a Hurun Research Institute report, Greater China has 202 unicorns in all, with another 70 to join the club in the next three years. The market added 21 new unicorns in Q1 alone, twice as many as the previous quarter.
Southeast Asia in comparison, has just 10 unicorns with names like Grab, GOJEK and Tokopedia leading the charge.
This doesn’t mean there aren’t any opportunities in Southeast Asia, says Wong, but factors such as the sheer size, depth and homogeneity of the Chinese market make it conducive for startups to scale. Wong added that the China and US-based venture capital firm is still taking a “wait-and-see” approach towards Southeast Asian investments.
Wong said the quality of deals in Southeast Asia is yet to reach the levels of Chinese startups. China’s cut-throat environment also means that entrepreneurs there tend to be more competitive and are forced to think more strategically – something which Southeast Asia still lacks.
“One thing that we try to get the founders to think more about is how to be more strategic. If you were to copy a model from China, how do you see evolving in the next three to five years instead of just a straight copy and paste? What are the core competencies you need to build?” These are the questions Wong says one should ask.
“It’s an evolution…I think we are still at an early stage of the ecosystem’s development,” she added.
Qiming Venture Partners has made four Southeast Asian investments so far: Reddoorz, a Singapore-based budget hotel booking site; Akulaku, an Indonesia-based online consumer finance platform; and Mucho, an Indonesian social e-commerce startup.
Qiming targets Series A to B deals in Southeast Asia, with ticket sizes between $5 and 10 million, but is open to deploying more if required.
Last November, Qiming Ventures’ managing partner Gary Rieschel told DealStreetAsia that it will give itself one year before deciding whether to launch a $100 million Southeast Asia fund.
Wong said there has been no development on this yet.
Qiming Venture Partners currently manages seven USD funds and five RMB funds, with $4 billion of assets under management. Some of its prominent exits include Chinese phone maker Xiaomi, and video sharing game site Bilibili.
The ongoing Sino-US tensions is also unlikely to slow Qiming’s pace of exits. According to Qiming, the VC led about 17 IPOs and “multiple” trade sales in the last 20 months. It expects the same number of exits to take place in the next 20 months.
Edited excerpts of an interview with Helen Wong, Partner, Qiming Venture Partners:
How is China’s investment landscape looking like these days?
It seems like the big guys – the BATs are not as active as before. First of all, they’ve stopped hiring. The whole internet market in China suddenly seems to be going through a period of reflection, especially after all that crazy growth over the last few years. The growth now is slower and a bit more rationalised, so it’s a period of adjustment. They’re also looking for new themes. Maybe next year with 5G, things will be different.
Qiming Ventures runs funds in the US and China. How have the LPs in the two funds been responding to the ongoing US-China trade spat? Is there a shift in focus on Southeast Asian investments because of what’s been unfolding?
We mainly focus on China. We also have a small US fund that’s only focused on healthcare. I think in terms of the LPs, Southeast Asia is still very new to them. We have given updates on the state of things in Southeast Asia and people are interested, but I think it’s still early days. LPs are still trying to figure out what the numbers are, what the track record is so far.
But what is the main concern around Southeast Asia for LPs and VCs? Is it the lack of exits? Or a fragmented market?
I think the main question for LPs is still the lack of exits. China, on the other hand, has been a really huge ride. In the last 10-15 years, we’ve seen the number of unicorns come on par with the US. Some of the China funds have even outperformed the US. So yeah, India and Southeast Asia still lag behind on a historical basis.
I also understand that Qiming is aiming to conduct 17 IPOs over the next 20 months.
We have been doing VC in China for the last 10 years, so we’re pretty well established. I would say this is “harvesting mode” for a lot of the companies we invested in a few years ago.
The other thing you may have heard is that China is rolling out a new NASDAQ-style tech board. This means that for the first time you’re allowing tech companies that were not profitable to list. We had already been investing in a lot of tech companies, all of which are very qualified to list, so we definitely expect a constant stream of IPOs moving onward.
Do you think the new Chinese tech board will give the HKex a run for its money in terms of tech listings?
Chinese investors are very interesting. Regulators have to approve the IPO and then sometimes when stock markets do not do well, they actually shut down the IPO market. So, you actually have periods where you have no listings. On one hand you can say that there is lower risk appetite because it’s regulated, but on the other hand, you can also say that it’s very high-risk appetite, because I think Chinese investors tend to like what’s on the cutting edge of technology.
Recently we’ve seen a lot of AI companies reaching very high valuations. This isn’t just unicorns, but decacorns as well. So, I actually think it’s a good time for us.
What about M&A and trade sale activity in China? How do you see that playing out?
China has been quite active. We sold quite a lot of companies to Tencent, Alibaba. I don’t have the specific numbers, but I would think that you will see more consolidation as market as the growth slows down. The good thing though is that the BATs have a lot of cash, so they can make a lot of acquisitions.
The other concern is that if consumption in China drops, it will really change the dynamics for how companies invest and how companies do business as well.
I think you can definitely see a slowdown in big-ticket items. Auto, real estate are some sectors. But you still see growth in what people call “affordable luxuries” like streetwear. I mean who would have thought that kids would pay $300 for a pair of sneakers. Those segments are growing. Women are also using more makeup, compared to just skincare in the past.
Another big theme in China is the lower tier cities. They have less pressure, they don’t have to pay a lot rent like first tier cities where real estate prices are high. We’ve been looking a lot at the lower tier cities which have been slower to embrace e-commerce. Mobile payment is so easy in China today, so their spend is growing.
What about deal flow in Southeast Asia?
The quality of the deals here on the whole is not the same as China. The Chinese ecosystem is so much more mature, and entrepreneurs are more competitive as well, so they have to be more seasoned and strategic in their thinking.
One thing that we try to get the founders to think more about is how to be more strategic. If you were to copy a model from China, how do you see evolving in the next three to five years instead of just a straight copy and paste? What are the core competencies you need to build?
You have so many Chinese unicorns in your portfolio. Southeast Asia on the hand is an incredibly fragmented market. Is it actually possible to see the same number of unicorns in Southeast Asia compared to China?
I don’t think we can expect Southeast Asia to produce the same number of unicorns as China.
We try to look for more pan-Asian opportunities, or those we believe that have the potential to go across the region. Akulaku, Reddoorz are both pan-Asian. The majority of their business may be in Indonesia, but they also have a growing presence in the Philippines, Vietnam and other countries. Of course, we hope they have the potential to reach a unicorn status.
What about valuations in Southeast Asia and India?
I think Southeast Asia’s valuations have gone up quite a bit, and we do worry about that. Because you know, the market is not as big (as China) or as easy to scale because of the fragmentation. So, I always tell companies to be careful that their valuation is not running ahead of their business. This will mean they have to raise larger rounds in future.
Some of the companies that we’ve seen in India actually asked for very high valuations and I mean overly high.
I also think India always has a premium. We always think about the 1.3 billion market when it comes to India, even though it has not delivered. There’s always that aspiration that you can reach more people.
According to our recent calculations, Southeast Asia VCs closed about $2.2 billion worth of funds in the first six months of 2019. Your comments?
More money is coming! (laughs) I do have concerns that they could be too much capital pushing up valuations in the region.
There may be a positive to more money coming in though. If you look at historical numbers, one of the reasons why a lot of startups in Southeast Asia die is because there isn’t capital to support them. It then becomes a vicious cycle. It’s negatively reinforcing the fact that because they can’t get enough money, they never grow big, and don’t bring returns. This can only be broken if more money flows into the ecosystem.
So while people have to be careful of valuations, it can also be positive to grow that whole ecosystem. Maybe hopefully, we’ll see the next batch of Grabs, GOJEKs and super unicorns that could create something interesting for Southeast Asia.
But if there’s so much money entering the ecosystem, wouldn’t you also need a certain number of startups to fail too? If you don’t have startups failing quickly enough, you might not have new ones coming up. Do you think this influx of capital will actually change this?
I don’t have a crystal ball answer. But I think it also depends on where the money goes.
I think the statistics are that, 70-80% of money goes to the unicorns, right? So, if you look at what’s leftover and spread it out across this region, I think it’s good – and definitely for people to fail fast and get early.
I do also think that sometimes giving a bit more money helps you to test different things and have a bit more patience to grow with your users. A lot of times you do need to educate your users.
Investors say there is a crunch in the $20-40 million deal space in Southeast Asia. Your thoughts?
I do hear more and more companies raising larger amounts of money over the last year. It seems like both supply and demand have picked up.
Southeast Asia is a very interesting market. You don’t just see investors from Southeast Asia, but also investors from South Korea and Japan. They have smaller domestic markets, unlike China, which is so large, so VCs like us get to choose if we want to deploy in Southeast Asia or not. There’s no shortage of deal flow in China. We are just trying to be a bit more strategic to look outside.
And then you have conglomerate money from Southeast Asia as well. Some of them seem to be active LPs, sometimes they even do direct. I always think that for corporate VCs, the money ebbs and flows, according to their line of business. As to how it’s doing, I think that the maturity of the market is not quite the same as China, India or the US. Those three will be the major VC ecosystems, but Southeast Asia may be a market that ebbs and flows a bit more.
Many of these Southeast Asian super apps are entering every sector, whether its ride-hailing, payments, remittances, e-commerce. This is unlike China and India where you see unicorns in each vertical. Is it a concern that these unicorns may eventually compete in the same space as you?
Definitely. I think super apps have more of an opportunity in a market that is very shallow. Because you have a small number of users, but the users know this brand so they might be willing to experiment with other services. So, super apps definitely do well in smaller markets.
But I also think that there’s only so much you can stretch as well. In certain verticals, you still need a lot of expertise, lots of operations that only a focused startup can execute and do well. So, it’s up to the VCs to pick which ones we want to work with. These startups will have to work with the unicorns and super apps to get that distribution too.
But definitely, they do have a lot of money and a lot of resources. But you’ll find that even in China, it’s not just the BATs doing everything. They do a lot, but there is still an opportunity for startups, simply because there are opportunities that the big guys cannot focus on or see because it is too small for them. There are always opportunities.
You invested in Reddoorz and its competitor is OYO, which is backed by SoftBank. For a VC like you, what do you think about SoftBank pumping this much money into the system?
This much money is unprecedented from one single investor. But, I think at the end of the day, you still have to deliver, right? Sometimes having too much money is bad for a company and makes the company lose focus.
OYO recently had a lot of bad press in China with people leaving, hotel owners unhappy. So, we always encourage our startups to raise as much money as they need. If you raise more than you need, try to not spend it all, because you’ll never know, right? The money comes and goes. Always focus on delivering the end value to your customer.
But doesn’t the SoftBank effect put you on the edge as an investor of Reddoorz? Reddoorz can raise $50m, but SoftBank can put in $200m in OYO and completely distort the playing field.
I don’t think it’s just about money, right? There is only so much money can do. I think part of the problem for OYO in China was that they grew too fast. When you raise a lot of money, you have a lot of pressure to show results. So, the easiest way to show results is grow your number of hotels. But can you deliver the value? If you cannot, this is what happens.
There was some news about Ritesh (OYO founder) wanting to buy back shares to increase his holding. I think the buying back shares is a bit weird, isn’t it? It’s like you’ve raised too much money.
But the other question is more of corporate governance, meaning who has voting rights who can control the direction of the company. Obviously as an investor, I prefer a board-driven approach to the company, but I understand some founders believe that they are the best people to guide the company forward. But then it’s really a question of – can one person really do everything? They have blind spots too. So, I think in an ideal scenario, investors add a lot more value to help guide the company forward. It’s not anybody’s baby. It belongs to everybody.