Indonesian ride-sharing unicorn Go-Jek’s latest funding round, estimated at $1.5 billion, had several global names – from Google and BlackRock to China’s Meituan-Dianping, Tencent and JD.com, as well as Singaporean sovereign fund Temasek and German insurance giant Allianz. Joining these global financial and strategic giants was Singapore-based private equity firm Hera Capital.
The PE firm’s strategy of raising funds on a deal-by-deal basis, as against the traditional PE model, allowed it to get a foothold in the Indonesia-based Grab rival, its co-founder and managing director, Sebastien Guillaud, said in an interaction.
“We now are pushing a new Deal-by-Deal PE model, which means “one deal, one fund” and that we raise on a deal by deal basis… We came up with that model which we find interesting, where we tell our LPs that we are looking at a specific deal, and that we might need to be ready to shoot a term sheet in next three to four weeks. Once that happens, the LPs become somehow indirectly engaged with the company and there is a link – they spread the word, try to create business opportunities and do the PR for the companies – this creates positive network effects that can be really appealing to the companies we are supporting,” Guillaud explained.
Go-Jek is not the only bet that Hera Capital has made in Indonesia. One of its largest investments is Indonesian fashion consumer brand Sophie Paris. Guillaud said the company sold around 15,000 bags a day and claims to be the third-largest fashion e-commerce website in Indonesia with virtually no marketing dollar spent.
During a freewheeling conversation, Guillaud discussed the firm’s investments in the region, the value-add it brings to its investee companies in the region, deal flows and pain points in SEA and the impact of Chinese capital in the region, among others.
Can you tell us about Hera Capital and its journey in the region?
We invest between $1 million and $15 million in high growth potential companies based in Southeast Asia (SEA), or in Europe, but in those companies that have a very strong potential in SEA. We invest in the business targeted at the emerging middle-class consumer in SEA. We invest in technology, media and consumer brands. I started the company with my partner Thierry six years ago, and we started investing about five years ago. We have done 14 investments so far. We are going to start exiting some of these companies soon. We exited two so far – but in one (ActSocial), we got paid in shares as ActSocial was sold to a leading French company called Linkfluence. We did not sell our shares at that time because it was too soon and we wanted to stay as we expected a much better outcome for us – it has been two years since and I am on the board of the company – they are doing pretty well.
The other one was a media company (Reworld Media) which went for IPO three months after we invested. It was an exit but we have not sold our shares so far. We think we should keep that investment on for a while. Our latest large investment was in Go-Jek – we invested a few months ago, the last round with all the big guns.
We have known some of Go-Jek’s top management team members for many years and we have been following their progress. For us, it is quite a big ticket because it is over the normal $10 million investments that we make, but compared to the big guys, it, of course, remains a small ticket. Our latest investment is in the F&B and hospitality business as we just invested in the legendary FCC hotels & restaurant group in Cambodia. Before that we also invested in Salad Stop, a company headquartered in Singapore, with 17 restaurants here in Singapore and expanding really fast in the Philippines, Indonesia, and even Japan; they opened in Spain last year and have just opened in Hong Kong.
One of our largest investments is Sophie Paris in Indonesia, a well-known fashion consumer brand and the largest seller of handbags in Indonesia– they sell around 15,000 bags a day. They also sell accessories, garments and cosmetics. We invested four and a half years ago in this company with the objective of bringing them online and it took time, more time than we expected! They are in Indonesia and the Philippines – they have some operations in Morocco – but it is in Indonesia that they are the largest. Their e-commerce in Indonesia is now growing really well – 45% of the company’s revenue in Indonesia was online in Q1 2108 vs 8% for the whole year of 2017; They have become the third largest fashion e-commerce website in Indonesia with virtually no marketing spent.
We have also invested in a seed round in a company that is a software stakeholders management platform working with large corporations – the Stakeholder Company TSC.ai. We did that one because I knew the entrepreneur very well, and my background too was in B2B software, so I thought we could really help him scale and accelerate. I bought Red Dot Venture as a co-investor at that time. The company is doing extremely well – great product, strong and profitable growth.
How are you structured as a fund?
We are MAS regulated – we have a proper fund management structure, and we have a Limited Partners (LPs) and General Partner (GP) structure. We have three funds which we have fully deployed. The funds are quite limited in size – the first one was $16 million, the second was the same size. We now are pushing a new Deal-by-Deal PE model, which means “one deal, one fund” and that we raise on a deal by deal basis; we have around 80 LPs. Some invested in the first fund, some in the third, and some in the three funds. Some of them like Indonesia, some don’t… Some like early-stage tech companies while some don’t. So after a while, we thought why push our LPs to invest in deals which are not really appealing to them? Wouldn’t it be better to deploy their funds in companies they chose to be associated with? Our LPs are family offices and high net worth individuals and now 60 percent of them are from Asia and 40 per cent from Europe.
So, we came up with that model which we find interesting, where we tell our LPs that we are looking at a specific deal, and that we might need to be ready to shoot a term sheet in next three to four weeks. We know our LPs well enough to know what they should like or not, which helps us qualify the deals to present to them. We then ask these LPs to let us know if they are interested – we push such opportunities to our LPs base and so it is first-come-first-serve basis. Once that happens, the LPs become somehow indirectly engaged with the company and there is a link – they spread the word, try to create business opportunities and do the PR for the companies – this creates positive network effects that can be really appealing to the companies we are supporting.
In this model, do you have a traditional structure for a fund?
It is a single asset fund – so it is regulated the same way. Same structure and fees are a little bit different. We can, of course, somehow fine-tune our terms according to each deal depending on the ticket size, our implication post-investment, etc. But for each fund, we, of course, need to return money – and financial returns – to our investors, and for that, we apply traditional PE best practice to every fund and every investment. It is a bit tiring because somehow we are always fundraising but it is great as we are always meeting and integrating new LPs.
So, when the companies want to raise the second round, it may not be easy to convince all the ex-LPs since some may be ready to participate. Does it mean you have to raise separately for round two?
We ask for a commitment on the total amount of capital that we think we will be deploying – upfront + potential follow-on. If I am investing $5 million and I think I may need to invest another two, I would get a commitment on $7 million and with the second tranche, withdrawal becomes optional. Of course and this is the beauty of deal-by-deal investments, we are not dealing with too many LPs on each particular deal, so if we need additional capital for a specific deal, we can always have discussions with our investors. It is not so complicated if we communicate with the LPs and if we know the company well enough.
You say you are very selective and that you work only a certain kind of entrepreneurs, and that you only do deals where you can add some value. This is what all VCs say – you also invest in companies in different sectors. As a team is it possible to bring expertise to startups across different sectors – so how can you really add value?
We have developed a tool to help us spot the key areas of concern prior to investing and define the improvement roadmap post investment. We have in-house expertise in some particular fields but we of course also use our networks of partners and consultants to support us and the company when more support is needed. We are especially active in supporting our companies in HR, corporate finance, geographical expansion and digital transformation – for consumer retail deals.
Considering that you have been in the region for the past five years, how do you see deal flows here? Is there a shortage of quality deals?
I think it is improving. I have been here for 14 years and I see better deal flow coming from the region. Singapore is starting to create entrepreneurs which was not the case ten years ago, and now you have this young generation of Singaporeans who are interested in becoming entrepreneurs. They are doing it not because they don’t have a choice, but because they want to do it.
In Indonesia, we see interesting companies every week. The Philippines and Thailand are also interesting and moving forward. At the end of the day, the deal flow is good – which we get from our personal networks, private and investment bankers, lawyers and our LPs. We do not see any problem in deal flow.
What are the challenges in the region – is it the series B pain point, or the talent crunch, or that SEA has a fragmented market?
For our portfolio companies, we do not have series B funding issues at all – so that is not a problem. A major issue is talent, finding the right people to scale and trying to be regional also simultaneously is very hard. And we are more and more focusing on companies which are targeting one large country in the region rather than trying to bet on becoming the next big regional player. On talent, we have difficulty finding the right tech people like engineers and data scientists or good CFOs.
The big change in the region is that we are seeing is a lot of Chinese capital. How has that change impacted deal valuations and other dynamics?
It has definitely pushed the valuations up, but it is also good because it has helped create unicorns – and when the early investors get exits, the capital will come back to create more entrepreneurs. Now because we have those unicorns, this has had a very positive effect on young people who want to become entrepreneurs and be ambitious enough to take that risk. Ten years ago you did see that kind of interest in Southeast Asia, but now we have Go-Jek, Lazada, Grab popping out of this region.
The other important thing was that two unicorns last year could list — Garena and Razor – so finally that is something that the ecosystem had not seen. Do you think that will also have an impact on the ecosystem? Secondly, overall how do you see exits?
You are right – those two were two significant exits last year which means that even in this region, one can return some money and financial returns to the LPs.
What brought you to be a part of Go-Jek and invest at a much later stage – at this stage, even if you invest $10 million or more, you only get a very small chunk of the equity?
For us, the amount is quite significant – the percentage of the stake does not matter for us as we have known the management team for some time and followed their phenomenal achievements. They are delivering their business plan, and they are focused on Indonesia, and we love that! We were not in a position to invest in the earlier rounds because it was too early stage for our first fund’s investment strategy. This time around, we created a specific fund for Go-Jek – this is the deal-by-deal model that I had mentioned earlier, and we got investors who are excited by such deals. You may say that we are late in investing in Go-Jek, but we are very happy with this investment.
How do you see the startup ecosystem in Singapore and where is the country in terms of being on track to emulate some of the countries like US or Israel?
It is going in the right direction. Ten years ago you would rarely find entrepreneurs in Singapore, and now we see many young graduates who are interested in joining startups, and they are very ambitious and talented people. One concern I have is that Singapore is making it a bit hard to recruit foreigners – when you do not find your talents here, it is slowing those companies down because if you cannot import the talents, and then you do not grow. That is a concern we have.
Even though the numbers look great with 600 million people, how big of an addressable market is Southeast Asia, because everyone cannot be targeting 600 million people, these are different countries, cultures and regulations. How do you look at the region – as one market or as different countries?
We look at it country by country and prefer to invest in companies focusing on one or maximum two large countries in South East Asia rather than companies spreading their resources and capital across too many territories to try and become a regional player. Indonesia, the Philippines and Thailand are large enough markets for fantastic companies to emerge.
Where do you see the ecosystem headed not just Singapore but other countries as well? Are we going to see a lot more interesting companies from the region?
I see more and more talented entrepreneurs knocking, and more capital coming to the region. I see companies going to exit so LPs are going to reinvest their money here. Also, there will be a lot of Chinese capital flowing into the region, which is very promising for the region. Companies being set up and payment infrastructure developing in the region. I think we are at the right place.
Do you think Go-Jek is bringing their financial services outside Singapore?
We can’t comment on that but it is clear that Go-Jek is extremely focused on Indonesia, they want to do really well there first before look somewhere else.
The way the ecosystem is structured, most of the investments by a VCs here goes into tech. Since you have done some non-tech too, do you think in this region, VCs are overlooking a lot of non-tech but interesting companies.
What we find very interesting with well-established consumer brands is their gross margin levels coupled with their potential for online growth. I think the traditional consumer retail segment is very interesting from an investment perspective as one can find great brands which have fantastic online revenue growth potential if you can convince the management team or the founders that they need to invest on that digital transformation. If we look at Sophie Paris for example, it is vertically integrated, designing and manufacturing its products while controlling its channel distributions. The margins are there and you can invest that money online in marketing when the digital front and backend platforms are ready.
As an investor in Go-Jek, are you concerned with Uber exiting this region? This strengthens Grab quite a bit.
Now it is one competitor less to worry about. Go-Jek is focusing a lot on Indonesia, and Uber was not really strong in Indonesia – so there is no much impact on Indonesia. Grab is going to spend some time and tears to consolidate the Uber business. We think that the Uber-Grab merger might actually turn out to be an excellent thing for Go-Jek.