Indonesian early-stage venture capital firm Skystar Capital is expected to hit the fundraising course for its third fund by the second half of next year, a top executive told DEALSTREETASIA.
Skystar managing partner Abraham Hidayat said the fund would “have a more equal split between early-stage and later-stage funding” even as he declined to disclose the target size.
The VC is now deploying its second fund – which it closed mid-2016 – with check sizes ranging between $100,000 and $1 million. It plans to start the fundraising process when it has utilized at least 50-60 per cent of the current fund.
“As you know there is a little bit of a crunch in the series B-C stages. We will still be doing early-stage (for the third fund), but we also want to allocate some for later-stages,” Hidayat said.
“At the end of the day, we are here to generate returns for our investors and we feel there are a lot of opportunities there. We feel we’ll get good deals in that space.”
Skystar Capital has been most closely affiliated with Kompas Group and Saratoga, its first two investors upon establishment. In 2014, the firm evolved from a joint venture to a more typical LP-GP structured fund as more investors started to join.
Now, on its second vehicle, Skystar Capital has about 10 investors on board, with Kompas and Saratoga maintaining the largest shares.
Skystar Capital’s most recent financing was in August when together with East Ventures, it co-led a pre-series A round of undisclosed sum into Talenta – a human resources SaaS startup. The round was joined by Fenox VC. The VC also co-invested with East Ventures and Convergence Ventures in peer-to-peer lending startup Julo back in July.
Since its inception in 2014, Skystar Capital has invested in about 14 companies. It exited Kudo in Grab’s acquisition deal of $100 million and is now in talks for a strategic buyout for one of its portfolio startups.
Kompas Group, the investor you are closely affiliated with, also owns an incubator programme called Skystar Ventures – which is targeting early-stage startups in the internet, mobile, education, and e-commerce. How do you differentiate both entities?
Skystar Ventures was established first as an incubator of startups under the University of Multimedia Nusantara (a university owned by Kompas Group). It incubates students’ ideas. After doing it for a year, they felt there was a need to give support from investment side on top of the education and mentoring. That way, if there a good idea appears they could properly back it up.
Kompas and Saratoga asked a third party to join, and together they created Skystar Capital. That was 2014, so initially it was just the three partners before a bunch of other investors came in.
In other words, we are not a single-LP, corporate VC. We have never really spread a lot of information, and that is why a lot of people tend to associate us only with Kompas Gramedia. In truth, we are more independent. We are now structured in a typical LP-GP arrangement where there is a management team and there are investors.
The two big investors are still Saratoga and Kompas, along with about 10 investors. They are a mix of Indonesian corporates, high-networth individuals, friends, and basically those in the network who are interested in the space.
Could you elaborate more on the initial structure of the firm?
Initially, it was just a joint venture between two companies.
So, first, the money came from the corporations. With time, more and more investors became interested to join. We then moved it to the LP-GP arrangement, structuring it like a typical fund for the second fund – which was officially deployed in 2016.
Could you tell us the size of the fund?
We never disclose our size. Usually, other people disclose it when it’s significant. Our size is just enough. Our typical check size is around $100,000 to $1 million, and we tend to invest small in the beginning then grow larger along with the companies as they also grow. With the amount that we have now, we can invest in 20-40 companies.
We’ve heard that you have plans to raise a third fund? Is this true?
Such is the life of a fund manager! Once the fund is fully deployed, they will start to raise again. Usually, we don’t raise right at the end. We will start perhaps at 50 – 60 per cent. My estimate is that we’re going to start raising some time towards the second half of next year.
Could you tell us more about this new fund? Will it have the same structure as the second fund and will the investment thesis remain?
When we talk about the commercial structure, again it’s going to be a fund type structure with LPs and GPs. In terms of jurisdiction, we will look at the most optimizing one with the lightest cost. We’ll see, depending on what’s most fitting for our diverse investors.
As for the investment thesis, most probably, it will have a more equal split between early-stage and later-stage funding. As you know, a lot of people say that there’s a little bit of a crunch in the series B and series C stages.
We will still be doing early-stage, but we also want to allocate some for later-stages, both for follow-ons and new investments. At the end of the day, we are here to generate returns for our investors. And we feel there are a lot of opportunities there. We feel we’ll get good deals in that space. There is a lot of early-stage investors but a lack of later-stage ones. We want to be there to fill the gap.
In other words, you predict that the market will be mature enough by next year to welcome more later-stage investors?
I think even now there’s already a lot of opportunities in the series B series C stages. There are now a lot of startups from 2014 – 2016 who are raising funds. And because there isn’t enough competition, the valuation is pretty reasonable.
Where are the challenges in investing in later stages in Indonesia?
Maybe the better question would be: why aren’t there enough investments in these stages?
First of all, it’s just a function of the age of the industry: it’s still a pretty young industry. There’s not a lot of opportunities in the past couple of years. But as we move forward there will be a lot more opportunities. We are young and we are still at the stage whereby these companies are just starting to grow up but no one is feeding them.
Number two, there is little to no track record. Only now we are starting to see unicorns emerging from this region. Previously, we only knew Indonesia had a lot of potential, but none of it had been realized. Now that we are seeing more success stories – actual large tech companies that can disrupt real industries, big enough market, etc. – there will be more and more investors coming in.
Three, it’s the problem with the local pool of capital; whether it’s conglomerate groups or high-net-worth individuals. Until recently it was still much easier for these people to write smaller checks as there weren’t enough success stories. Now, the local investors have more confidence.
If we look at the history, say from 2010 or 2011, we saw the likes of CyberAgent, Convergence, and Fenox, as well as a lot of Japanese-related funds. They made investments, and some of them turned out to be unicorns, like Tokopedia. Now, the current batch of startups is being invested by people like us (Skystar Capital), SMDV, Convergence again to a certain extent, Kejora. Again this pool of startups has started to grow.
As you can see there’s already a lot more opportunities now to choose from these startups. A couple of more years and there will be more need for series B and series B investors to support them.
Which sectors do you feel present ample deal opportunities?
Fintech is a big interest for us because there is still 65 per cent of the population unbanked despite the presence of banks, multi-finance, and insurance companies.
Health-tech is another area – there’s massive support from the government for this vertical to build platforms to cover BPJS (Indonesian healthcare and social security agency). As the country gets more affluent, they will demand better healthcare. And one of the fastest and easiest ways to provide health services is through online services.
Then, edu-tech and logistics, for obvious reasons. In the end, I take the top-down approach: what are the big sectors that haven’t been disrupted yet?
Even retail, for example, there are still a lot of verticals untouched. E-commerce is big but it’s mainly gadgets, fashion, and home and living. What about FMCG? What about housing? That’s also retail, and there’s still a big chunk of opportunities there.
This is the mantra: Find a large sector, then see whether or not there are solutions to improve that sector through tech.
We have seen the rise of fintech startups disrupting verticals like payment and peer-to-peer lending. What do you think of the rise of Bareksa and the likes, which are disruptors in the financial marketplace?
That is also interesting. Our stock market has been around for three decades but we only have 100,000 active trading investors. Why is that? Something must be wrong.
Indeed, costs of acquisition and operations are too expensive for many of the asset managers. They used to have to acquire clients with assets worth hundreds of millions rupiah to be able to cover the costs. Now with technology, the costs can be cut down significantly.
It’s definitely an interesting vertical to find out more about, as there is a lot of potential innovations there.
You correctly predicted Kioson’s oversubscription in its initial offering. From your observation, how is the morale of startup players about going public in the near future, after we witnessed the success of the first two startup IPOs – Kioson and M Cash – recently?
Among our portfolio companies, there haven’t been so much of serious conversations going there. But for sure it has planted some ideas on people’s heads because now they’ve seen the stock exchange is becoming more lenient (for startups). That option is at least available now.
My take is that successful IPOs are good for the industry. We even saw Kioson’s shares being suspended yesterday. (Kioson’s shares and warrants were suspended for the second time that week after this interview). We’ll see the performance (of the stocks) over the long run first.
Could you describe the exit strategies for Skystar Capital?
They’re typical as everybody else’s: outright acquisition or secondary sales. We exited Kudo recently with outright acquisition by Grab. One of our startups is also now in the process of strategic buyout. So these two are the most common ones, and will remain so until at least the next couple of years before IPO will start coming into the picture.