Malaysian telecom major Axiata Group’s digital services arm Axiata Digital is betting big on Indonesia as the next engine of growth for Southeast Asia, CEO Mohd Khairil Abdullah told DEALSTREETASIA in a recent interaction.
The digital services arm makes investments directly or through its venture capital-style vehicle Axiata Digital Innovation Fund (ADIF). The entity that came to life originally to fund local tech startups has now branched out to investing in financial services, advertising/adtech, e-commerce and entertainment.
“If you are looking at consumer-driven internet model, it has to be Indonesia. Two reasons — it is such a large population and a massive growing middle class,” Khairil said.
Axiata is undeterred by the lack of supporting infrastructure in Indonesia. “When you look at infrastructure that supports business and commerce growth in places like Singapore, that is missing in Indonesia. It allows players like us to come in and create disruptions around that and ride the wave. That is why we are very excited about Indonesia,” Khairil added.
In a detailed conversation on the sidelines of Wild Digital Conference in Kuala Lumpur last week, Khairil talked of the issues surrounding the risk appetite for investors in the region when writing cheques bigger than seed rounds, the challenges of the startup ecosystem in the region and the lack of talent to take startups to their next level of growth.
You invest across the spectrum from seed level investments to bigger rounds. There are very few players who want to play across the spectrum. What is the thinking around investing across the spectrum?
We invest across the spectrum via two vehicles. One is Axiata Digital Innovation Fund, its investments tend to be seed and very early stage. This unit of Axiata Digital also does internal and external incubation where we form a joint venture with someone. 11Street in Malaysia is an example where we partnered with South Korean e-commerce major SK Planet.
The seed one is generally a minority investment. Why do we that? We have an API gateway business where we see a lot of small startups plugging in. For a number of those instances, the minute they recognize they have an exposure to our customer base and our billing base, they scale up very quickly. Their valuation can then go from $10 million — corresponding to their size — to a $100 million in a very short period of time, all based on the assets that we bring to the table for them. We capture very little of that and we want to put some kind of equity call option on that. Our Axiata Digital Fund, we tend to design it to ride on that wave.
In your investments, are you looking for some kind of synergies with your telecom business. And secondly, if as a startup when that investment happens, is it bound to be with one telco that is Axiata or is it able to partner others?
Just to answer to that second part of the question, the answer is No. We have a telco-agnostic philosophy, meaning that if I invest in you, we want to build together but once we get to a certain point where you need to go beyond that and work with other telcos, we are not going to stand in the way. Generally, we think that our competition is not with telcos but with other digital companies that are eating into the pie.
To answer the first part of question, we look for a commitment around synergies. There are two parts to this – one is the synergy that goes as a part of the core business and another is extracted from the core business. In smaller scale startups, we look for companies that are extracting assets from the core business.
For a startup, what else do you bring to the table? Why would a startup come to Axiata?
Over a period of time — three years — we have built certain capabilities and some of those capabilities are around marketing of content such as video, music and literature. This is true for financial services too, if you look at mobile wallet implementation around the world like M-Pesa in Kenya, Easypaisa in Pakistan, and eZ Cash in Sri Lanka. If you look at my financial service stream right now, I have people who have worked on that.
What sectors are you betting on?
We have focused on financial services, advertising/adtech, obviously e-commerce (we have made certain number of investments around that), entertainment (music streaming and that kind of stuff). These are the major four verticals and horizontals which are all enablement platforms. We have invested in many platforms that allow digital companies or OTT to connect with us — either offline to online relationship or getting access to our billing relationship.
A lot of VCs say that SEA is 600 million people and on many parameters, it is way ahead of India. Why is it then when it comes to VC funding, there is a huge lag when compared to India?
The trouble with that 600 million market is that there is one market that is driving most of the interest in Southeast Asia. Singapore is relatively small and there is a set of interesting companies there but for those companies you don’t need to write a $100 million cheque. Malaysia is a relatively good market but if you are writing a $100 million cheque, it is questionable. So, if you look at that 600 million, it is really driven by excitement around one market — Indonesia.
Is Indonesia the big driver for Southeast Asia then?
If you are looking at consumer-driven internet model, it has to be Indonesia. Two reasons — it is such a large population and a massive growing middle class.
If you look from the Axiata Digital perspective, the bulk of our focus is on Indonesia where we have deployed the most capital. Not Singapore, not Malaysia but Indonesia. It is an amazing market. The thing about it is also that when you look at infrastructure that supports business and commerce growth in places like Singapore, that is missing in Indonesia. It allows players like us to come in and create disruptions around that and ride the wave. That is why we are very excited about Indonesia.
One problem that VCs don’t publicly state is that there is dry powder available and there are deal flows but they are not always quality deal flows. What is your take?
We look at it differently. If it is not a quality deal or a quality asset, we then try to find ways to add value to that, either to the assets that we can bring to the table or the capabilities that we can build. Otherwise, everything is priced in because they have these wonderful projections. These guys are going to build $1 billion companies, they have these wonderful projections they slap on you. And then you go right back and say, that is not quite true. So, things kind of knock between good quality and bad quality deals. If it is bad quality per se, we then find assets to add value to it. We do not have that issue.
The key concern we always have when we see the deals coming in is if we like the team behind it. That is where the ecosystem question mark is — the talent we have in this region. We have very talented people in the region but in order to scale up into these very large companies, talent needs to multiply in a very significant way.
How do you address that challenge?
It is tough. So far one thing we have done is we have been a lot more open to hiring from all over the world. You may have heard my Chief Strategy Officer is a Serb by nationality. My CFO is Sri Lankan, my chief investment officer is British Indian. We have had to go out and find talent from all over the world. This is a very new space and as much as I am trying to build a team and trying to coach people locally, it is very hard to find the right capability. We have now come down to two areas in that sense — UI and UX, which is a huge pain point for us, and analytics.
The proposition we have is as a telco there is bits of information that is flowing through our pipe. If you want to figure out that data and build a career with that data, we have the best environment to do that.
Talent apart, what is the other pain point for startup ecosystem. Is it the funding crunch or something else?
When we started off, we saw something that at a seed/angel level, you are quite okay because when people only need to write a $50,000 cheque, they are okay. But it gets to a certain scale where you require people to write a million-dollar cheque, that is where the big problem is. I think that is why we fixed that by creating ADIF which can write $1 million to $3 million cheques.
We play a role in writing $5 million and above but there is a crunch on the funding side generally.
When you say $3 million or above, for this region when do you see the risk appetite going up. Or is it more of an issue of liquidity rather than risk appetite?
I think it is risk appetite more than liquidity. The liquidity is there. So, if you look at those organisations or individuals that can write those kind of cheques — basically the HNIs or sovereign wealth funds — they won’t take the business model risk. No one is ready to fund $50 million for a pre-revenue company.
Your recent investment in Unlockd. Obviously, you saw lot of synergies but beyond that what attracted you to it?
The history behind this deal is that we had been looking at this as a model – an ad-funded communication model. Not Unlockd, because when we started we did not even know Unlockd existed with this model. In December 2015, we launched a business called Twig, where on your lock screen, you are presented with advertisements and if you see them, you earn points and you can use those points for mobile top ups. It did very well and then we said we wanted to take that concept to other markets.
If you take Indonesia, there are some segments where the operators cannot make money by serving them. So rather than getting rid of them, our view was they give them to us. Our view was that in some way we can find an ad-funded model to monetize. So, we were negotiating with our operating company in Indonesia to do that. Unlockd in the meantime had built a relationship in the US and had started looking at Indonesia, we got connected and then we said why don’t we combine the businesses rather than competing in these markets.
When it comes to Southeast Asian companies, when it comes to their port of expansion, they tend to target Hong Kong or US? Why is that?
The Southeast Asian markets, from my perspective, are relatively different. From a structure perspective maybe, there is more similarity between Thailand and the Philippines but it cannot lend itself to try and replicate it to the rest of Southeast Asia. But it makes no sense to try and expand it to the US. The models are so different. One thing that I would say is that we would invest in businesses in India because we find India is five years ahead of Indonesia but the structure, the demographics, and there are other parameters that are similar.
You said there are similarities between India and Indonesia. What about in terms of valuations?
I think valuations in India are relatively richer right now.
Does that stop you from looking at India right now?
No, we are still looking for opportunities in India. Certainly, we are looking at models and we have walked away from models where we think valuations are too rich.
What are your target markets apart from Southeast Asia and India?
When we do deals in the Europe or the US, we look for models that we can bring into our markets. For example, we looked at (insur-tech firm) BIMA in Sweden that has a model very much designed for emerging markets. We made an investment in (US wireless carrier) FreedomPop and we wanted to understand the model there.