Leading venture capital (VCs) firms in the region remain extremely bullish on the startup scene in Southeast Asia, and view ASEAN as amongst the most exciting places to be in over the next decade, even as they predicted that investors who missed out on the China and India boom, were slated to pump in more moolah here than ever before, in what is touted as the last major market.
“Southeast Asia for the next 10 years is going to be one of the most exciting regions to invest in. If you think about it, it’s kind of situated between the two giants – China and India – and then if you look at it – Silicon Valley companies who missed out on China and India are looking at where are the last big markets that are left. And Southeast Asia it is,” said Thomas Tsao, Founding Partner of Malaysia-headquartered Gobi Partners, that is perhaps the largest independent VC in this region.
Speaking on a panel, at IBM Connect 2017, that was co-hosted by this portal, Tsao, whose firm has raised eight funds to date, said the region’s current venture ecosystem reflected China’s early days, with many VCs currently on friendly terms. “We’re at an interesting moment in time, where if you really spend some time to figure out those early relationships, then those relationships that you build now can be very important 5 to 10 years down the road, because of the peculiarity of where we are at in terms of Southeast Asia’s market development,” he added.
“We’re at an interesting moment in time, where if you really spend some time to figure out those early relationships, then those relationships that you build now can be very important 5 to 10 years down the road, because of the peculiarity of where we are at in terms of Southeast Asia’s market development,” he added.
Other panellists included Paul Santos, Managing Partner, Wavemaker Partners; Andy Zain, Managing Director for Kejora Ventures, a venture builder based in Jakarta, Indonesia; and George Ugras, Managing Director, IBM Ventures.
Indonesia & Singapore startup space
Singapore headquartered Wavemaker as well as Kejora, are raising their second vehicles. The latter had recently announced that it has hit the first close of its Kejora Star Capital II Fund, raising about one-third of the $80 million target. Post the final close, which is targeted for the year end, this will be amongst the largest vehicles raised by Indonesian VC firms.
Kejora’s Andy pointed out that recent success of Indonesian startups, especially that the country now had three tech unicorns in marketplaces Traveloka and Tokopedia, and ride-hailing app Go-Jek, were providing a tremendous boost to entrepreneurial ecosystem.
“The first wave of VCs began coming into Indonesia about 4-5 years ago, and they were from Japan, Korea and Singapore. But in the last 3 years, local VCs have begun coming up – local startups need a lot more handholding. It is only last 1-2 years that Indonesian tech startups have begun to hit the unicorn status – we now have Tokopedia, Go-Jek and Traveloka – that gives a lot of encouragement for the local ecosystem. Indonesia startup scene is on fire. It can’t be more exciting,” he said.
According to Santos of Wavemaker Partners, Singapore’s startup scene too was getting more vibrant, noting that unlike China or India, founders didn’t need to be local to succeed in the city-state or Southeast Asia. This was due to the region being able to attract and retain international talent, with Santos explaining ‘at the macro level, Southeast Asia is sunny’.
“If you look at our portfolio, we have founders from all over the world. That is the social capital that Southeast Asia can enjoy, and we take advantage of opportunities that are in front of us. The kind of founders that are coming makes the ecosystem more vibrant. If you look at all the rhetoric that see – the US sending people away, and Brexit… and if you are an entrepreneur, then why not Southeast Asia?” he added.
Amidst the positive outlook, not just for Southeast Asia, but for the region in general, IBM Ventures, which has had a history of having acquired startups in the US, and has also invested in several VCs in the past, has not been active in this continent, neither in terms of acquisitions, or in being a Limited Partner (LP) in local funds.
Will IBM change its approach and strategy under Ugras?
Dr. Ugras had joined IBM in 2016 from ACM, an early stage venture fund, where he was General Partner managing investments across big data infrastructure, cloud computing and analytics. Interestingly, IBM had been an LP in Ugras’s fund during his venture capital stint.
Ugras explained that traditionally, one was an LP two reasons – financial returns or for strategic reasons: “We are kind of defining what that engagement model ought to be – we are thinking about it – if you are raising a VC fund, your goal is to be providing financial return to your investors. The presence of a strategic investor (like IBM) in that fund is a little bit confusing, because what is the VC’s priority – is that VC going to serve my purposes as a strategic investor first, or is that VC going to serve its financial LPs that really want returns?”
“We don’t want to introduce that conflict into the equation. I would rather be that partner first, and then justify from that point, that if an investment opportunity arises that is unique, then we are always open to that discussion. But it should be strategic,” he explained.
Ugras noted that IBM’s own way to engage with institutional VCs in the region lay in the platforms, infrastructure and data assets it had to offer – particularly in domains such as healthcare, medicine and financial services – as well as a distribution network that included facilitating access to Forbes Global 2000 corporations for those startup with global aspirations.
Southeast Asia’s venture ecosystem
Despite the potential it offers, Southeast Asia continues to be underpenetrated by the VCs. Last year, Jungle Ventures, in a report had pointed out that while South-East Asia scored impressively on all fundamental factors, higher than India in almost all categories, and even better than China in a few, and despite countries here seeming to have a better macro picture than India, it remained underpenetrated by VCs.
Last year, Jungle Ventures, in a report had pointed out that while South-East Asia scored impressively on all fundamental factors, higher than India in almost all categories, and even better than China in a few, and despite countries here seeming to have a better macro picture than India, it remained underpenetrated by VCs.
Comparing the growth of the region’s venture ecosystem to the development of China’s. Tsao said: “China went from lacking capital to being a capital exporter basically in 10 years. Now, when you look at the situation, if you’re looking at venture capital, VC’s love it when there’s a shortage of capital, which is always when the returns are best. And it’s happening right here in Southeast Asia.”
He also pointed out to the shifting changes in investors’ mindset, from the time they rarely looked outside the Valley, to first making minuscule investments in China, to then raining capital into China and India, and predicted that it would only be a matter of time before they turned their attention to this region.
The same investors now are realising that Southeast Asia as the only large market left to grow, he said. However, Tsao noted that Silicon Valley VCs saw the region as ‘dis-aggregated’, a view backed by Ugras who highlighted the lack of awareness about how much cross-border business occurred in the region, with people generally associating the region with six different countries.
Ugras drew comparisons between Israel and Singapore, noting that in Israel’s case, many local enterprises there consumed startup technologies at a disproportionate rate.
Tsao also noted that as the regional venture ecosystem became more competitive, increasingly entrepreneurs would be seeking more than just financial resources from VCs, who would have to bring more value addition.
“It may not be happening right now. But what it took China 15 years to accomplish, ASEAN is going to do in 5. It’s just because the cycles are getting shorter and shorter,” he said.