Lack of high-quality startups contributes to Series B crunch, says Latitude Venture Partners’ YC Ng

YC Ng of LVP at DEALSTREETASIA's Asia PE-VC Summit 2018 in Singapore.

Indonesia may be seeing a scarcity of Series B deals, but this phenomenon is hardly down to a shortage of scale-stage investors, according to YC Ng, a partner at Latitude Venture Partners (LVP), the newly-formed venture capital arm of Indonesian conglomerate Sinar Mas.

The lack of investment at the Series B stage in Indonesia has given rise to the notion of a funding gap, supposedly brought about by a lack of Series B investors in the region, as most VCs tend to focus more on backing early-stage companies.

While it is true that there may not be many local VCs focusing on Series B investments, YC argues that there is more than enough capital – domestic and foreign – to cover such deals.

“There are the Sequoias, the Alibabas, the Tencents, the IDGs – they are deep institutional money that is looking at this market and wants to fund great entrepreneurs building amazing companies. If you’re good enough, you’ll get it,” he said.

The fact that there are still very few Series B funding rounds despite the availability of funds, he said, indicates that the problem may actually lie in the quality and readiness of the startups in the country to raise bigger funds.

YC, whose foray into tech investment started around five years ago in the UK, explained that one of the factors that often leads to a company’s failure to raise growth stage funding rounds is incorrectly pricing valuations in previous rounds.

By overvaluing themselves and raising more money than needed, companies risk putting unnecessary burden and expectation on themselves. This could lead to bad business decisions and irresponsible spending of money.

“So what happens next? A year later, in its next round, the company can no longer raise money on ideas or early traction. One now needs to justify what one has done, especially given newer and higher expectations. Chasing higher valuations earlier raise the odds of missing expectations later. If that happens, the risk could be a down-round or a no-round. There is an implicit cost to price,” he said of many founders who struggle after overvaluing their startups.

Since it started operating earlier this year, LVP, which is spearheaded by third-generation Sinar Mas heir Linda Wijaya, has seen such high valuations from companies in its main focus sector of healthcare, YC said. While the firm hopes to educate companies about the matter of valuation, it has also tried to navigate around the problem by deploying capital into a venture builder program.

“Given the skew in value, we’ve committed resources on building or incubating. We ask those big questions from a hospital standpoint or from a potential customer standpoint; we look to enable and empower a group of like-minded individuals who want to make something awesome, and we power those initiatives,” YC said.

The firm said it is currently building a product prototype for the local healthcare market, which will be launched next year. On the investment side, YC said LVP invests globally with varying ticket sizes.

In an exclusive interview with DEALSTREETASIA, YC spoke at length about LVP and shares his personal views on the tech investment space in Indonesia.

Edited excerpts:

Can you tell us a bit about Latitude Venture Partners and the people behind it?

LVP is the brainchild of Linda Wijaya, a key shareholder of Sinar Mas. She previously ran APP Indonesia, so she is an operator by nature. The big difference from SMDV is our sector focus (healthcare), and that Linda is hands-on and has stepped away from APP to spearhead this fully. It provides a great deal of confidence, not just in terms of commitment, but also in terms of impact and reach. And that’s how it started early this year.

When it comes to digital, the group has always been active in investing. Over time, we realized that given its increasing importance, deeper involvement was necessary to maximize execution.

So would it be correct to call Latitude the corporate VC of Sinar Mas?

We are not the Sinar Mas CVC. That said, investments that we make have to be strategic and have to bring material value to Indonesia as a market.

Is it a single LP or can you have external investors?

At the moment, given that we are less than a year old, we are still a single LP fund.  This provides for flexibility around our mandate and structure, but there could be external investors in the future. Who knows? Let’s see.

Do you have certain sectors that you are interested in?

Our predominant focus at the moment is healthcare as that’s where we see the most value in the market. I would hazard a guess that it is 80 per cent of our focus, while the remainder may spill over to fintech, data and AI; those are our key focus areas.

You invest globally. Do you have certain geographic allocations for your investment?

Not geographically, I think it’s more sector-driven. The core focus is healthcare, but they are all sort of related, so like image recognition, other companies are maybe using it for public and private security. On one hand, improving value in the security space is great but there are also impactful use cases for medical imaging, X-ray/MRI, CT scans and so on.

How do you go about sourcing companies?

It has been a healthy mix. The bulk of it has been inbound, friends, referrals or funds that we have invested in.

Are your investments limited to tech companies, or are you open to other more conventional companies?

I think the way we view it is that pure tech plays in Indonesia are probably difficult to operate, given infrastructure and adoption constraints. Consequently, the whole idea is to invest in businesses that can be enabled by tech. Let’s say you have your AI and image recognition platform which is built on an AI processor, but links to hardware-related stuff. I would think about it that way as opposed to categorizing things as tech and non-tech.

For example, in the healthcare space, we are looking at how there is a very big shift in the industry, mainly driven by regulatory powers that be, so a lot of incumbents, hospitals and clinics and so on are doing their best to adapt to circumstances. Being built on older enterprise stacks that are optimized for problems in a different time, it may be challenging to evolve or adapt. A big question we ask is that, if you have troubles dealing with newer operational practices, do you fix the problem head-on, or do you take the opportunity to redefine yourself by creating hospital 2.0? And if so, how would you approach it? These are some questions that we ask ourselves all the time.

You make investments in the US, Europe and more developed markets. When you look at Indonesia and its startups and founders, how do you think they compare?

Speaking as a non-Indonesian in Indonesia, and this is a more personal view, Indonesia has a huge diversity of people. I’m two years old here (thus very new), but I’ve had a great sense of two things: entrepreneurial spirit and a certain sense of creativity. Indonesia is known for the first one but not very well known for the second, but it’s definitely there. Local founders exhibit that a fair bit.

The local startup ecosystem revolves around a relatively small circle – which kind of happens at the beginning of most ecosystems. They come from a similar background, they fund people with a similar set of experiences, and so on. I think that’s happening here. I think that’s how the ecosystem starts before wealth and value can trickle down into everybody else but it also implies that there’s a lot of untapped potential within the rest of the market. The question is then how do you empower the next generation of the community to create value. We would love to see more of these entrepreneurs emerge in the market.

At the moment, there are more and more VCs emerging in Indonesia, which means there are more funds for startups. This is good for the ecosystem, but is there anything we should be wary of?

Let’s look at two or three core trends. First thing is definitely more funds, both local and foreign, but more local investors, typically families and high net-worth individuals. The second trend is that there seems to be too much money chasing too few good investments. Everybody does the same thing at the basic level — e-commerce, marketplace, building a community for creatives, and some building just for the sake of building.

I think entrepreneurs in any given generation – and I saw this in the UK a lot – are going to fail if they don’t build something that makes business sense. Perhaps they benchmark to a particular business in the West (or East nowadays) that do really well and say, “Yeah I’m going to do it here” but does it make sense? Just because someone else has done it somewhere else doesn’t mean it makes sense over here. Localization matters – a lot. I am seeing a fair few things that don’t (immediately) make sense, but this may be a natural evolution of sorts.

Entrepreneurs, by definition, typically go against the norm, so telling them something doesn’t work doesn’t mean they’ll listen. They are stubborn, which is a great trait to have. Statistically, most of them will fail, but the current funding trend will hopefully speed up the learning curve. And I think that’s important for the local ecosystem.

Given that the VC business is so crowded now, how would you say LVP stands out? What do you offer that others don’t?

More capital chasing fewer deals leads to rising valuations. For us, consequently, we see a lot of value in venture building. For example, in the healthcare space that we are very focused on, there are not many companies to back in the first place. Not only are there just a handful of companies but even fewer are investable in terms of size and traction (given our targets). Of those companies, some are relatively expensive from a valuation standpoint. Instead, we’ve focused on building or incubating as a different form of investing.

We ask those big questions from a hospital standpoint or from a personal standpoint, and we’ll look for a group of like-minded individuals, who want to make a change or do something about this, and we’ll fund those initiatives. So if you know any like-minded individuals, do send them our way!

As an independent yet connected entity, we have the luxury of building independently yet leveraging off a conglomerate’s asset base – but we fully intend to build an open platform for the ecosystem.

We know valuation keeps increasing, where do you think this is heading? Are we seeing a kind of bubble?

Everybody says it’s a bubble. In my opinion, it’s not a bubble. A bubble by definition implies that when it pops, the mass market gets affected. I think compared to 1998 or 2007, tech in today’s market is relatively contained. The public generally won’t lose wealth if the tech bubble bursts as the bulk of funding is from private capital sources.

As an economist by education and training, I believe there’s a certain equilibrium. Whatever goes up, must come down. One of the bigger follies in today’s market is being purely driven by funding and valuation. A topic that is not talked about much is “What makes sense? Is it right to do that? Is it even responsible for your company to maximize funding?”. A company that does not or is not able to deploy its capital responsibly, here’s what could happen next: Say I raised a $20-million seed round at $80-100 million valuation. That’s awesome. I’ve come up with a great idea and get a lot of investment interest. Over the next year, I’m now answerable to my shareholders, so I need to achieve a particular goal, typically in the form of products or traction or whatever. Chances are, I may not be able to make it for two reasons: I probably cannot spend the money fast enough or smart enough responsibly. Secondly, that market adoption may not be that quick to occur.

So what happens next? A year later, in my next round, I’ve underperformed expectations and will be punished accordingly by the funding markets. I now need to justify what I’ve done, especially as now expectations are relatively higher. The consequences would be a down-round or possibly being unable to raise. I probably have spent all or most of the money given pressures, but irresponsibly. It’s probably what I thought was best given circumstances, but such is the case. And given difficult financial conditions, I probably have to shave off 50 per cent of my workforce, pivot, and/or scramble.

I think this is a necessary chapter in the startup or funding cycle though. It improves the maturity of the overall market.

Talking about the so-called Series B crunch in Indonesia and Southeast Asia. First of all, do you agree that there is a Series B gap? And second, is the irresponsible management of funds by startups partly to blame? Are VCs seeing that there are not enough good quality startups to invest in at the Series B stage?

When people talk about the Series B crunch, most point towards there being insufficient Series B investors in the ecosystem. I don’t think this is particularly true.

As an ex-operator, I feel that a great entrepreneur will get the money somehow, somewhere, from someone. A great company will get funding in most instances.

Generally speaking, there’s more money chasing too few (good) companies. There is increasingly deeper institutional money that is looking at this market and wants to deploy capital here as Indonesia continues to make its mark on the map – good companies will get capital appropriately.

But from within Indonesia itself, do you agree that there are not enough local investors at the Series B stage?

On one hand, good investors bring in more than capital – they bring in talent, experience and a network that tremendously helps a company grow. On this note, I think a company would place less value on whether the particular investor is local or foreign in nature. In a sense, it allows local companies to leverage off the maturity of other ecosystems. Grab and Go-Jek, for example, are largely foreign-funded. They bring huge value to the local ecosystem and I doubt most people have qualms with that.

On the other hand, larger local investors bring with them a different suite of values. Navigating the local landscape – operationally or from a regulatory perspective – is becoming increasingly important. We live in a global, yet fragmented, world and these values are increasingly important or almost compulsory to a given company. Larger and more sophisticated local investors with the ability to move the needle will tremendously add value here.

What is the plan for 2019? Do you have targets for how many investments you plan to make?

In short, do more. We’ll be launching a prototype in the healthcare space, and should be making a bunch of investments. Stay tuned.

Also Read:

Indonesia’s Sinar Mas said to have launched new VC arm with $200m corpus

Sinar Mas’ VC arm SMDV to focus on Series A-B stages, says managing partner Purwana

Sinar Mas, East Ventures ink JV with Yahoo Japan, target growth stage startups

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.