Having started out his venture capital career in Indonesia in 2014, at a time when scarcity of capital in the market meant founders would take any money offered their way, Adrian Li, partner at AC Ventures, believes the tide has now started to turn.
The proliferation of available capital today, coupled with a better understanding of the VC game, has prompted many founders to be more selective on which investors they take on board and to carry out meticulous due diligence on VCs, the way investors have always done on them.
“I think VCs have to think carefully also about how they are being diligenced [subject to due diligence] by founders. We do much work on reference checking, understanding the founders’ backgrounds, and their work history, so entrepreneurs are now doing the same,” Li said in an interview with DealStreetAsia.
This, he explained, puts a greater onus on VCs to demonstrate value add, beyond mere capital or brand.
While it is imperative for VCs in Indonesia to adapt to the new generation of savvy entrepreneurs as their potential investees, they also need to keep up with the evolving demands of their own investors – the LPs.
The imminent listing of the country’s tech giant, Li believes, will inevitably fuel further interest by global LPs in Indonesia, which serves as an exciting opportunity for VCs but requires serious upgrading on their part.
“They (local VCs) will be held to the standards that global VCs are upheld to…everything is becoming more institutionalised, with much greater accountability for everything that we do,” he said.
AC Ventures was formed in 2019 through a merger between Li’s Convergence Ventures and local venture firm Agaeti.
With improved sourcing, decision making and value add, AC Ventures claims its active fund, which reached its first close last year, has seen a commendable performance. As a result, the firm says it has received heightened LP interest and is likely to increase its target amount from its initial announced figure of $80 million.
The creation of AC Ventures by way of a merger between two VCs is probably the first of its kind in Indonesia, and maybe even in Southeast Asia. A lot of VCs have worked together to set up joint funds or co-GP funds. Was that something you had also looked into initially?
We believe that if we wanted to unlock the synergies and the actual value potential of coming together, we needed to be one team, one partnership, one platform, and that would serve as a foundational base on which we could continue to raise successive funds and, most importantly, build a generational platform for supporting entrepreneurs in Indonesia and beyond.
The best construct for that was not a co-GP Fund, which from our view, it’s like two GPs coming together to raise a single fund, but not necessarily the next fund.
Its been over a year since the merger took place. How is it going so far? Can you give examples of how it’s working for you and your portfolio companies?
It’s worked out exceptionally well. We had very aligned values and principles in building the firm. We now have a much stronger team that supports improved sourcing, improved decision making, more value add to our portfolio, and a more connected LP base. On our current fund, which we call Fund III, we have seen some significant progress across our portfolio and fundraising.
Looking at the benefits in more detail. We have three partners, which’s the most significant in-market partnership for a venture fund in Indonesia. We have shared experiences as entrepreneurs and investors, a similar philosophy of being a hands-on partner to entrepreneurs.
But, we bring highly complementary networks and experience from different schools, organisations, and corporations from different regions. All of that comes together to enhance our overall collective experience and intelligence on how we source and analyse deals.
Also, our larger team size and added resources have enhanced our firm. We’re over 20 full-time professionals in our group now covering investment, operations and value creation. We also have over 100 portfolio companies and over 200 plus founders in our broader ecosystem, mainly in Indonesia with whom we are close, have invested behind and continue to support. That’s contributed to enhancing everything from our sourcing to our knowledge base and understanding of all the opportunities across the ecosystem.
When two VCs merge, I imagine one challenge would be handling competing businesses in the portfolio. How do you manage that?
So first off, conflicting or not, we don’t ever share confidential information from one company to another unless it’s what the founders want us to do on a mutually beneficial basis. Ensuring our founders’ trust is something that we absolutely adhere to.
Also, while we are supportive investors to all of our portfolio, this comes in phases. With our earlier funds, we generally followed other investors. Now, as most companies have raised successive rounds of capital, so we’re now smaller shareholders in the overall cap table. We are not serving on those boards and not generally as actively engaged as most of the resources and attention are being focused on the present Fund III.
Can you tell us more about Fund III? What is the thesis, and have you started deploying from it?
It is an Indonesia-focused, early-stage fund. By that, we generally define it as a seed to series A fund. The capital we deploy ranges from a few $100,000 up to $5 million. We, as a firm, are very thematically driven. Understanding the markets and business models that we see can be disrupted by technology and study them carefully. We work with venture firms that we are close to from China and India and other emerging market regions which are more mature than Indonesia, to identify and understand those trends and opportunities. It’s important to figure out the right time for those business models to emerge in the Indonesian market.
So we have a very well-structured thesis on those models that we see are highly disruptive. That plays upon what we see are secular, one-way trends for the Indonesian market, namely, the increasing adoption of e-commerce and its derivatives like logistics and the entire gamut of financial technology including payments, wealth management, robo advisors, digital banks, and so on.
Another sector that we are focused on is MSMEs. We think that’s incredibly interesting for Indonesia because it could well be different from the opportunity we see in some of the other markets, just by the sheer size of the MSMEs sector. In Indonesia, there are 63 million MSMEs that contribute to over 60% of the nation’s GDP and employ 97% of the adult working population. Historically, they have not used much technology. But that has been pushed forward a lot by the pandemic. As these business owners adopt digital technology, they find ways to reduce costs, be more efficient, and sell online. Finally, it is digital media and how monetisation of digital content can be used to disrupt industries like education and healthcare.
We have been actively deploying since the first close last year. We have made over 20 investments from the fund already. Fortunately, these companies have done very well. While not all funding rounds have been disclosed, we have had over 40 follow-on rounds across our portfolio since the first close.
When do you expect to hit the final close?
We expect to hit the final close later this year.
Can you talk to us about the size of your fund? You initially announced a target of $80 million, but we have picked up that it has been raised to $150 million.
We’ve been incredibly fortunate with the performance of the fund. And with the strong support from our LPs, we are likely to exceed our original announced target. The original target was appropriate, given that it was announced around the emergence of Covid last year. Still, the growth of the portfolio and the interest from institutional investors worldwide have helped us go past that original target.
We will be disciplined with the additional capital raised and make sure it augments the original strategy of the fund in particular with more reserves to back our best investments.
You started Convergence in 2014. How do you trace your journey in the VC space since then? What is different today?
The digital landscape has changed in a lot Indonesia. It’s certainly changed from the time I first arrived, in 2012. But even compared to, say, six years back, it has changed a lot.
In the last five years, entrepreneurs have become a lot savvier in terms of who and what they want to look for in capital partners. As entrepreneurs become more mature, they have recognised that not all capital is the same. There is now a greater appreciation for bringing a true partner to the business, especially for someone who’s going to come on board as a lead investor.
What does this mean for VCs? It is even more important today to demonstrate value add, beyond just the cheque or your brand. VCs have to think carefully about how they are being diligenced [subject to due diligence] by founders. We do much work on reference checking, understanding the founders’ backgrounds, and their work history, so entrepreneurs are now doing the same.
Our partners and our teams are under more pressure not only to better understand the investments that we’re making but also to communicate and deliver the value add that we can bring to the table.
What about the dynamics between the VC and LP? How has that changed?
With the change in the market, there are also differences in LPs’ goals and the makeup of LP investing in Indonesia.
Six years ago, it was probably too early for most institutional capital, especially funds of funds, endowments, pension funds, to be investing in Southeast Asia, let alone in Indonesia. So most early LPs typically were high net-worth investors, conglomerates and corporates. We’ve seen a shift in that now. There is increasingly more institutional capital coming in. That’s because the markets have matured.
Six years ago, we didn’t have the decacorns that we have today which hopefully will be listed soon. As those companies become public, it’s going to create a whole step-change in terms of the interest in Indonesia. As we get more institutional investors interested in the region, I think this will set up even higher bars for GPs in Indonesia and Southeast Asia.
They [local GPs] will be benchmarked to the standards of global VCs are upheld to in areas like how we evaluate and underwrite our businesses, how we report to our LPs, among others. Everything is becoming more institutionalised with greater accountability for everything that we do.
Several of your investments are scaling well and raising bigger rounds. Would you be looking to expand a growth stage fund, as some VCs have, to continue supporting those companies?
We continue to believe the best opportunity financially is still in early-stage companies. It is also a sector that we’re hugely excited about.
But at the same time, I would say that, across a broader ecosystem of our older funds, we can see several that are breaking out and on the way to ultimately becoming a billion-dollar-plus business. It would make sense for us to potentially work with our LPs to get exposure to some of those best opportunities that have outgrown our early-stage fund’s mandate. So, if we did anything there, we would work closely with our LPs on the best way to address this opportunity.
One question on the exit landscape in Indonesia. Do you see the growth of unicorns as a potential exit avenue for many early-stage startups?
The IPO exit landscape for Indonesian companies like Goto, Traveloka, Bukalapak is fascinating. So in the next 12-18 months, maybe we’re going to see all of these businesses successfully IPO. That will create recycling of capital into the ecosystem for VCs, investors, LPs. That’s going to trigger a whole new wave of interest in Southeast Asia from investors to global tech corporates.
The impact of this will signal for more institutional capital to invest in Southeast Asia, and this is similar to what I think we saw in China after the first wave of IPOs, like Baidu, Alibaba, and Tencent. This is going to support the ecosystem by creating deeper pools of capital, especially for the later-stage companies that need that funding to get to where the soon-to-be-listed companies are today. The other thing that it will create for companies in earlier stages is that these listed companies will have liquid equity currency. They will be more aggressive in their growth strategies as they build out their products and take advantage of the vast distribution. And also, the battle for getting the best talent continues to intensify. So that could be good news for earlier stage companies.