Golden Gate to raise third fund within 2-3 years, a few B2C, fintech exits on the cards: Jeffrey Paine

Jeffrey Paine, Founding Partner of Golden Gate Ventures.

Golden Gate Ventures plans to raise a third fund next year, with several of its portfolio firms due to see exits in the next three years, founding partner Jeffrey Paine told this portal.

Paine is a speaker at the Asia PE-VC Summit 2017, the region’s largest sector-agnostic private equity and venture capital conference. Early bird pricing for the event is available until August 31.

In an interview with DEALSTREETASIA, Paine discusses the general state of the startup ecosystem, plans for the third fund, the exit architecture in the region and other aspects of the venture fund’s operations.

Edited excerpts:

What are Golden Gate’s plans for a new fund? Are there plans for any country- or sector-specific funds?  

Fund III will be planned within the next 2-3 years and the strategy will be largely the same as of now. The fund size might be slightly bigger but I can’t pretend that we can double the size or predict its performance. A lot of it is about constructing the portfolio that can generate the best returns for the fund, etc. The next fund we will be focusing on seed and Series A as we’re doing now.

What’s the target fundraise for Fund III and how has the relationship with your LPs evolved? 

We haven’t marketed for Fund III. Fund I ($10 million) was mostly individuals and family offices and they did come back for Fund II ($60 million), which was much larger and saw more institutional capital, so we definitely hope they will follow us for the third fund.

In the region, first funds tend to be small and if you target the right companies and you’re early, then you can see 10x returns or more. For our current Fund II, it’s an 8+2 lifespan. We’re in our second year of the fund and we’ve got 2 more years for deployment.

Where is the ecosystem headed in your opinion, given its maturity and your role as one of the early players? 

Right now, if you look at the data, you can tell it’s going to be Singapore and Indonesia-centric. Its 70 per cent B2C as that’s where all the money is. So the deals are probably Indonesia-centric but it doesn’t preclude the sort of activity that the other SE Asian countries can achieve, we are confident to find great companies in other countries besides Indonesia.

Is that good or bad, given that Singapore had most of the attention for a long time?  

There’s no good or bad that comes with that. The reality is that if it’s a big market, then you address it and if you need the money to address it, it is there. Singapore has no large domestic market for B2C, so you have to focus on B2B. If you do that, it can’t be too narrow and focused on a single country. You need to go to Western markets and developed markets that speak English and that can be challenging. If the government were to ask me what we should do, then for B2C you need to get out of Singapore.

You need to be the top 5 in the world but the question is can we build large B2B companies? If you’re headquartered here and competing with the West, it is challenging, not impossible.

Firstly, it’s the professional and customer relationships and the second is that the money here lacks depth. Also, there’s market positioning to consider. You might be number three, but customers may very well go with the No. 2 guy in San Francisco or London.

So to get somewhere takes time and money because though it’s cheaper to operate in Singapore, relative to places like Silicon Valley, there’s a leakage from not being in the West. Having said that, we see more global from day one companies nowadays from our part of the world.

 

What’s your investment thesis, given that your fund is sector-agnostic? There are multiple VCs competing for a deal. What makes your fund different and what sort of expertise can you bring to that startup?  

We focus on the early-stage deals and come in early, but our approach also depends on what the founders are looking for. Sometimes, they’ll need a lot of money rapidly and there are firms that can give you that. So if that’s the strategy, then you need a bigger fund. Secondly, it’s the speed of the deal and it depends on how the fund is structured. It depends on a lot of chemistry with the founder or the brand.

What are some of the deals you’re glad to have backed?

Carousell. The team there wasn’t sure initially but they did C2C and didn’t waver. With Fund II, we’ve had a bunch like Alodokter – mostly Indonesian and healthcare companies – we really didn’t know how they would do but they’ve started exploding. The earlier you get into it, you realise that success depends on the team and the sector.

But what you don’t know is the timing and what will come up in terms of environment and regulations. If you back the right team, then it works out. Sometimes though, things don’t fall into place and they end up not working out.

In general, across industry verticals and your portfolio firms, what’s performing well? 

There are funds which maintain that they’ll only do deals that can return the fund. We don’t normally say that a lot but if you’re a one-country play solving a problem and we like what you’re doing and you as an individual, then we’ll invest. We kind of know where the enterprise value is in seven years and we go earlier. That happens a lot with B2B, SaaS and one-country plays.

If you put in $3-5 million in pre-A or pre-B, then returning a fund is hard as you don’t know where the portfolio firm will be. You don’t know if they have to roll up some things or list there as all this takes time. So with that context, the enterprise value tends to be in B2B, B2B2C and the fintech sector, which is going strong. Certain areas are crowded out but there are still new things coming out in terms of B2C marketplaces and one-country B2B plays.

How competitive is it when LPs look at Southeast Asia and you have new players trying to raise a fund and get their attention, given the wider choice of VCs?

Now that there’s a lot more happening and they can see exits and growth, they will revert to what they normally do, looking at your past performance and investment strategy. So, first-time funds are hard and if you’re hitting the road to raise a second fund, the performance of your first fund will make you stand out. But that’s just like any other country.

There are relationships, timing and luck that come into play as well. A lot of times I believe that all the elements like timing need to be aligned.

What’s the pain point in the region in terms of the funding round? Is it seed or Series A? Or is it that for the right companies the money is always available?

The top 10 per cent can secure funding without questions. But for companies that need time to grow, Series B & Series C rounds are challenging. It is the challenge of density as more funds are entering the region including corporates and listed firms from Japan and South Korea looking for opportunities, as well as China.

It is not that well-structured yet but it’s getting better. There are more growth funds being established that target the region like Gobi’s latest fund. And that fits very well with us.

Over the last two years, you’ve got companies that go for an early listing on exchanges like the ASX. From a VC perspective, what’re the pros and cons of an early listing? Do you ask your companies for early listings or is your fund not the sort that looks for a quick exit? 

It’s an option. When we first started, the listing event didn’t make sense. In the VC world, there are guys who are used to listing events and RTOs and a lot of them are from Malaysia that is used to KLSE and ASX. But then for the traditional guys from the West who come here, a listing is a different event. When we first started, once in a while we’ll hear about something happening on the ASX.

At the end of the day, you have to perform. But looking at SGX and all the regional exchanges setting up their new board, in the next three years, there are going to be quite a few developments and technology exit events. The investment bankers are dealing with a lot of tech or traditional enterprises with a tech spin looking to list in the coming years.

What is Singapore’s challenge, given that it wants to position itself as a deep tech place? Is it cost, capital, market size or talent? Or is it a combination of these factors?  

If you’re talking deep tech, then it is the talent, not the cost. You want to have the talent to be among the top five globally, not the top 10. Secondly, you need to have the team to be able to run a company

With deep tech, the first element in the equation is that he can build a product but not run a company. You need a combination of talent and if they’re the top few in the world, then you also need intelligent capital. It is quite straightforward — if you are among the leaders in the world, then the capital will come to you.

IIf you can solve the talent combination and the fact that they don’t mind leaving their job to start a company, then half the battle is won. The money for something potentially very big is there. Japan has it and a few players in Singapore have it. It’s is just that the nucleus of guys that actually come out to do it is lacking.

You’ve had Fundnel helping Dymon Asia raise their fund and Gobi raising part of their fund through Crowdo, reaching out to accredited investors to increase their LP base. Looking at Fund III, doesn’t this complicate the cap table and lead to more complicated investor relations. Is crowdfunding a venture fund a positive or negative development?  

It depends on the structure and whether I know the LPs. Is it strangers into an SPV and a single representative or do I talk to every single one? I think it is a good thing if investors can get into certain asset classes and funds, as long as structurally it is sound and the reporting is clear. Overall, I think its a positive development.

What’s your take on the current state of Singapore’s VC secondaries market? 

It is still new but people are understanding the secondaries space and it is maturing. There’s no stigma as they understand there’s a fund life. It’s a matter of cheque size and if the minimum cheque size is $20 million, then we work towards that. For platforms to trade secondaries, I think it is coming along. We’re not there yet.

Any comment on the exit architecture of the region, given the launch of startup stock exchanges and efforts by the likes of the SGX to build its tech listing pipeline (e.g. partnership with IMDA)? Can it be a good listing destination given its structural challenges it has with a lack of large listings, competition with and allure of the ASX, Hong Kong and Nasdaq, as well as the availability of private debt? 

The ones that are going to be big have a lot more choice while the smaller ones can list on the local exchanges, which are pretty good. To start with, it is going to be at the Series B and C stages. So if you are a local e-commerce company with offline shops that’s doing well and has different revenue stream, that should be fine. And as you go, then you start to acquire. So its going to be slow and steady.

Those that will explode in terms of growth will remain private and try to figure out how big they can grow, and once they know, they’ll target Nasdaq. Singapore’s role will be in the mid-cap space and Catalist is a good start but then somebody has got to do it. Y Ventures Group did it first and there’ll be more

You have companies like Moneysmart.sg and 99.co who’ve said that they’re working towards an IPO. 

If you’re doing an IPO it’s about how much money you make, so it’s about the top line and bottom line considerations. Whether you have bottom line focus or no bottom line but are focused on growing the top line, then you need to really show something on the numbers side. Whether the timing is right or whether they need to roll up to be bigger is another story.

Most of them are still trying to figure the business model for different markets and are still executing to dominate the second and third country. So it’s still early, even if they’ve been around for a while. The good thing is that if you’ve ever met the founders, then you realise that from the first year until now, their maturity and management style has evolved and I enjoy seeing this when I talk to them.

Right now, which portfolio firms are closest to an exit? Which are the dragons in your portfolio?

The low-hanging fruit tends to be B2C and fintech, which can be different things. For some of the payment companies in our portfolio, the time is right. For our B2C, purely because of certain countries and the appetite from Japan, China and the US, if you look at the top 30 companies in Southeast Asia, it is in these two categories.

A number of VCs complain that there is a lack of quality deal flow, that there is capital available but a lack of good entrepreneurial talent. Can you offer some perspective on this? 

I also run the Founder Institute here in Singapore, and there are many reasons. One is that the guys with the calibre to start companies are employees now. So the density of good entrepreneurs is lower because they’re CTOs, product heads or COOs right now. That’s one factor.

And those ventures that are well-funded try to retain these people. Secondly, newer ideas that are exciting are emerging less and less. So, it is a combination of things. But personally, coming out with something good is getting harder and if you’re based in Singapore with the high costs, finding people to join you is tough.

How far behind is Southeast Asia’s VC ecosystem compared to destinations like China and India?

China is about nine years ahead of the region while India is about four years ahead of the region. China is a different ball game altogether. On one hand we need to know how to play it but on the other hand, things happen very fast there.

So ideas get harder and when you really want to do something, there are now larger competitors in the region that are strong players and no longer from overseas. There are competitive pressures and deficits in ideation, which coupled with the low density of entrepreneurial talent translate into a challenging and increasingly difficult environment.

Also Read:

Golden Gate Ventures closes $60m early stage fund, to double down on SEA

Indonesia: Alodokter closes $2.5m round led by Golden Gate Ventures

Golden Gate Ventures, Wavemaker Partners most prolific investors in SE Asia

Series B gap a pain point in SE Asia from a Silicon Valley perspective: Rakuten

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.