Koichi Saito, the Founder and Partner of KK Fund, a Singapore-based venture fund with roots in Japan, is bullish on the opportunities that ASEAN offers, with the inflow of Chinese and Japanese capital into the region providing more opportunities for deal flow and exits.
Saito was previously a director at IMJ Investment Partners, where he oversaw investments into startups across the region such as iMoney and Bukalapak. Prior to this, he worked at Ishin Hotels Group, a private equity fund focused on the hospitality space that was founded by George Soros Real Estate Investors.
In an interview with DEALSTREETASIA, Saito discusses the KK Fund’s investment strategy and thesis, the fund’s limited partners, the Tokyo Stock Exchange as a possible exit destination for Southeast Asian startups, and the competitive advantage the firm offers to the entrepreneurs it backs.
In terms of the KK Fund, can you discuss the funds it currently manages?
We started fund one in early 2015, which has a corpus of a few million dollars, so it was a micro fund. From that fund, we made 13 investments in online marketplaces in the e-commerce space. At the time, we were investing between $50,000 and $200,000. Then we closed a second fund at the end of 2016, a $20-million fund. We’re still focusing on seed-stage startups.
We are still targeting online marketplaces and ventures operating with comparable business models. The network effects are great, so it’s always an attractive business model. While we push for online marketplaces, at the same time, that category is already saturated in some countries in Southeast Asia, especially Indonesia.
Now, we’re focusing on fintech and logistics. We’re also looking at retail technologies, media & entertainment and HR tech, an area where Southeast Asia is very much lagging. With reference to fintech, which has a lot of categories, we want to focus on the B2C or B2B2C plays, such as peer-to-peer (P2P) lending, insurance and remittance.
P2P lending platforms are a proven model in the US, China and Japan, as well as in Southeast Asia. However, there is a lack of credit scoring data, so with the need for alternative financing solutions in the region, there are substantial opportunities.
You’ve discussed e-commerce extensively. What’s your take on the potential of B2B or B2C e-commerce in Indonesia?
B2B2C commerce has a lot of potential in Indonesia, as does B2B commerce. But a slight concern about B2B is that when you deal with B2C commerce, which has a large user base, a lot of Japanese, South Korean and Chinese platforms want to buy that platform.
My concern is that with B2B e-commerce plays, the opportunity for an exit is more limited, in terms of the players that might want to acquire that platform, particularly if it’s not focusing on a specific category. While there are huge opportunities in the B2B space, if you focus on niche areas, then the situation may emerge where there is a more limited opportunity for an exit.
How has KK Fund’s investment strategy changed across the two funds and what is the investment philosophy that underlies the strategy?
While we remain focused on seed-stage investments, it’s all about the founders. When we look at the founders we vet for deals, we explore if the founder’s background is related to their core business itself or not.
Let’s say a founder has a banking background but then wants to start a fashion e-commerce venture for some reason. Now, if the co-founder has a strong background in the fashion sector, then a member of the founding management team should have a background related to that sort of business. The only asset in the beginning for a startup venture is their human network and domain expertise in the industry they’re operating in. Additionally, if the founder has a family business and they can leverage their family business network and know-how from day one, it’s very much an unfair advantage, so that’s great.
The second element is the commitment of the founders. We look at how much the founder put in terms of their own money. If they don’t put money and then ask for money from the VC, that’s not a positive sign.
We also look at whether the founder has another project to diversify their risk – in this case, then they cannot focus on a single business as their priority. If we invest in them, we don’t know which business is their core focus. And a founder should ideally be focused on a single business venture.
Besides the founders, what do you look for in terms of the business concepts?
It’s quite simple – how do you improve an existing business model in a developing country right now? We review whether their business model is addressing the real issue in Southeast Asia.
Let’s say, in the Philippines, there are a lot of remittances players. Now, I reckon only about 10 per cent of people in the Philippines have a bank account. They need a platform for admittance to a bank. If there is a solution that addresses such an issue not only in the Philippines but across Southeast Asia, then I am impressed.
Logistics is the same. There’s no good infrastructure to support logistics in Southeast Asia. A lot of startups are trying to solve this very real problem in the region and in this case, I’d be very positive about investing in such solutions.
You mentioned media entertainment assets as a potential investment. However, these take a number of years to build up and what we’re seeing is that Asian VCs, particularly the newer funds, seek to exit within a time frame of two to four years. So what assets do you find attractive?
For me, one very successful case in Japan is a gaming media portal called GameWith that was backed by JAFCO. They went for an IPO on the Mothers market of the Tokyo Stock Exchange (TSE) in June 2017, raising JPY 1.27 billion ($11.1 million). They are a media platform purely for gamers. This is a very profitable business model and there is nothing like this in Southeast Asia. We’re looking for this kind of model, with live streaming of course. They have these platforms in the US, Japan and China but there are no dominant players in Southeast Asia.
Also, a growing number of consumers are starting to spend money in the entertainment space now. Firms like iFlix have acquired 2-3 million paid users while charging $2 or $3 – but consumers are spending money for their entertainment here in the region.
With all the venture funds coming up in Singapore and across ASEAN and the increased competition for deals, what makes the KK Fund stand out that entrepreneurs should come to you?
It really depends on the founder but in terms of support, we have a lot of strategy meetings where we discuss their business strategy and the pitfalls of their business. We know about the different business models we’ve seen in Japan, as well as the US and China. We also share information regarding comparable Japanese and Chinese startups with them.
My partner, Kuan Hsu, works in the sector in China so he is very knowledgeable about Chinese startups and how they work.
We also found that we end up becoming the CFO for these firms and support them by helping them make presentations for their VC funding. In several instances, we successfully helped raise funds from Japanese investors for our startups, something that the local VCs in Singapore and ASEAN cannot access.
We bring a lot of startup know-how from Japan and the US, and in addition to that our startups can expect to secure an exit from a Japanese acquirer, with our limited partners (LPs) offering a potential exit, as well as our network of Japanese corporates and investors.
Who are some of your LPs and how would you describe your working relationship with them?
One of the LPs for Fund I is Incubate Fund, a Japanese venture capital firm. Their backers include the Tokyo Broadcasting System Holdings Inc., some government funds and SMNC. Incubate Fund also invested in our second fund, which is also backed by Mistletoe.
We also have Sega Sammy Holdings, a gaming major, and Tokyo-listed Septeni, which engages in Internet advertising and has acquired an agency in Malaysia. We also have Taokaenoi, the seaweed snack manufacturer, as one of our LPs.
For a venture capitalist looking to raise funds from Japanese LPs, what must they be aware of in terms of being able to secure the trust and capital from them?
It’s all about communication. Let’s say that on a monthly basis, we talk to the LP and provide reporting. We always ask them what kind of company they’re looking for in Southeast Asia or what kind of firm they want to invest in or collaborate with. Sometimes we help with introducing them to potential clients.
We always communicate with them about what they want, how they plan their strategy, and whether they have to change it for a new market in Southeast Asia.
Is there a specific mandate from your LPs and do they co-invest in later funding rounds?
There’s no investment committee where LPs sit and engage with us regarding our startup investments. And while they haven’t done any co-investments in later stage rounds, this is something that our LPs are looking at.
In terms of exits via a public float, you have the SGX Catalist and Hong Kong GEM. Now a lot of firms are listing on the Australian Securities Exchange (ASX). But in Japan, you have the Tokyo Stock Exchange (TSE) with its Mothers Market, which is very liquid and offers decent valuations. Is that a viable platform for public float of startups from ASEAN?
There are no companies on the TSE from Southeast Asia, and the bourse is open to firms from the region listing there. We have discussions with our associate from the stock exchange, which has a team in Singapore. And they’re very serious about bringing Southeast Asian stocks to the Tokyo bourse.
The valuations on the TSE are actually pretty attractive for both VCs and founders. We definitely we have to think about the options of being listed on the TSE. But there are some obstacles.
Part of it is having to submit the documentation and compliance reporting in Japanese. You also need to have a relevant Japanese angle – perhaps a major client in Japan or perhaps having a Japanese founder – as part of the investor story. Or perhaps even have a Japanese unit or Japanese investor that is backing the firm. It’s not a strict requirement but it is good to have a Japanese flavour to the investor story.
I think we have multiple returns on the Tokyo bourse which is greater than the ASX. After going public, a number of ASX-listed companies have seen their share price decline. From a VC perspective, the Tokyo Stock Exchange offers companies a very healthy stock price that can be sustained. And from a founder’s perspective, the Tokyo bourse can be more attractive with the liquidity and valuations.
On the other hand, it is harder to be listed there, with the ASX being much simpler to list on than Tokyo if you’re a foreign company.
The last few years have seen a lot of Chinese capital entering ASEAN, as well as Japanese capital. How has this impacted the ASEAN venture ecosystem?
In terms of exit opportunities for both startups and VCs, we’re very confident that this has improved. On the other hand, if you’re a small startup operating in the Indonesian e-commerce space, then it can be more challenging.
The important thing is for the local company to create a real user base that can be sustained and grown. They need to have products on their platform to differentiate themselves from the likes of Alibaba and Amazon, which can lead to it becoming a good acquisition target.
I think that the infusion of both Japanese and Chinese capital has been good for the regional ecosystem.
We’ve seen a lot of corporate venture capital units establish themselves in Singapore, such as Rakuten Ventures. Trend Micro also launched a corporate venture unit in the city-state. What’s the advantage of Japanese funds in running their funds from Singapore? Why not Tokyo or Silicon Valley?
One of the advantages for the Japanese funds that invest in Southeast Asia is that the local teams have to go through the leadership in Tokyo, so it takes a long time to decide investment. Also, the corporate leadership in Tokyo doesn’t clearly know the situation in Southeast Asia.
If a Japanese fund or corporate VC sets up the fund in Singapore, they need the leadership here so that they can get real-time information about the Southeast Asian market. For a Japanese or Chinese corporate setting up their ASEAN fund in the region, it shows they’re serious about investing in the region and having people on the ground here.
What’s the performance of Fund I been? In terms of multiples, what’s the performance you’re looking at and which portfolio firms are close to liquidity events?
Right now, we are aiming for multiples of 4x to 5x for our investments from the first fund, hopefully within five to eight years. So for our IRR, we can expect 25 to 30 per cent. As for exits in our portfolio, unfortunately, I can’t give a good answer to that.
KK Fund started investing about three years ago and I think we’ve done 17+ investments, with about four of our portfolio firms reaching the breakeven point. About 80 per cent of our portfolio firms have already secured their next funding rounds and I’m very satisfied with the overall company performance from my portfolio. We have to wait for perhaps two or three more years before we can discuss exits.