US listings by SE Asian startups to draw more Chinese GPs to the region, says Ondine Capital’s Hsu

Randolph Hsu, founding partner of venture capital firm Ondine Capital

Venture capital (VC) firms that have trained in China’s cut-throat market and mastered the art of speedy decision-making can become a major force in growing the startup ecosystem in Southeast Asia, says a seasoned venture capitalist.

“I think making investments and building a portfolio requires a skillset. I’m lucky to have developed that skillset over the past decade in mainland China, where VC investment is a cut-throat business,” said Randolph Hsu, who founded VC firm Ondine Capital in Shanghai with JD.com alum Yen An Cho.

Hsu, a former executive at CICC Capital, Kuan Capital, and GGV Capital in China, is now leading Ondine’s investments in Southeast Asia, for which the VC firm has earmarked about half of its capital. The other half of its corpus is dedicated to Greater China.

“If there is a good investment, I may face competition from 10 VCs in Southeast Asia, but that number would be 100 in mainland China… We need to make swift judgments and decisions or others will just take over the opportunity,” Hsu said in an interview.

Hsu and Cho established Ondine at the end of 2018, a year that saw US-China relations take a turn for the worse after then-US President Donald Trump announced a 25% tariff on Chinese imports worth $34 billion. Faced with this new geopolitical dynamic, the Ondine founders changed their initial plan of focusing exclusively on mainland China tech companies and decided to create a more diversified, cross-regional portfolio.

Ondine is now an investor in Southeast Asian technology upstarts including used car trading platform Carsome; Malaysia’s business-to-business (B2B) e-commerce platform Dropee; and Love, Bonito, a female fashion brand based in Singapore.

In comparison with China, where foreign fund managers such as Sequoia Capital and Matrix Partners mostly operate through a China franchise and invest in both RMB and USD-denominated capital, many investors in the Southeast Asian market are just starting to build their local presence. Ondine, too, is in the process of setting up a Singapore office in the third quarter, after which it plans to launch an office in Jakarta.

“I can see, somewhere down the road, foreign VCs will definitely localise themselves in Southeast Asia. But the progress, I would say, is five to 10 years behind what’s happening in mainland China,” said Hsu.

Currently managing two US dollar funds and one RMB-denominated fund, Ondine primarily invests in startups with consumer technology in the fields of retail, education, logistics, and TMT.

In Greater China, the team focuses on advanced technology with elements of artificial intelligence (AI), big data, Internet of Things (IoT), 5G, and semiconductors, a field that Hsu believes will outshine other high-tech industries this year.

Edited excerpts of the interview:-

As a previously China-focused investor, how did you build a Southeast Asia portfolio that includes startups such as Carsome and Dropee in just 15 months?

First of all, I think making investments and building a portfolio require a skillset. I’m lucky to have developed that skillset over the past decade in mainland China, where VC investment is a cut-throat business. There is way too much money and way too many investors chasing limited, high-quality startups. If there is a good investment opportunity, I may face competition from 10 VCs in Southeast Asia, but that number could be 100 in mainland China.

Under such a tough investment environment, we need to make swift judgments and decisions or others will just take over the opportunity. We have been trained by China’s VC ecosystem, which helped us tackle the Southeast Asian market with our existing skillset and fast speed.

Second, my partner Yen An Cho specialises in e-commerce in mainland China. Together, we have witnessed the high-speed growth of China’s internet and e-commerce ecosystem. That enables us to rather confidently and quickly identify Southeast Asian startups with good potential and seize investment opportunities.

Third, I spent some time with GGV Capital [between 2011-2014], which back then, was a VC firm mainly operating in the US and trying to leverage its US experience and resources for China investments. My tenure at GGV allowed me to learn from their journey of building a China team from scratch. That really helped Ondine as a new fund in entering an entirely different market. Nowadays, most VCs in mainland China are localised. Even for funds headquartered in other countries, they would establish China offices and manage both RMB and USD-denominated funds.

Southeast Asia is still a competitive market. You are competing with players like CVCs [corporate venture capital firms], local investors, and investors from other countries like the US, Japan, and South Korea. They [foreign players in the Southeast Asian market] are just beginning to localise their operations because when you are more localised, you can secure better deal flow, and your investment process will be a lot easier. I can see, somewhere down the road, more foreign VCs will localise in Southeast Asia. But the progress, I would say, is five to 10 years behind what’s happening in mainland China.

Even for a new VC like Ondine, we have been trying to localise. We initially aimed to set up our Singapore office by the end of 2020, but it was delayed to the third quarter of this year due to the pandemic. The next step after launching the Singapore office is to build our presence in Jakarta.

In Southeast Asia, there have been discussions around a shortage of growth capital compared to an abundance of early-stage venture funding. Has the situation changed lately?

It’s a key observation. In Southeast Asia, there are many investors who can invest at a single ticket size of under $10 million. There are also investors capable of investing above $50 million in each deal. That allows them to back regional giants like Grab and Gojek.

But funds capable of writing cheques within the range of $10-50 million are very rare. That’s one of the reasons why our friend Nick Nash established Asia Partners, a private equity firm that focuses on providing growth-stage capital at a single ticket size between $10-50 million. We are honoured to work with them on many deals. That is also a reason why we aim to raise a bigger Fund II. But I don’t see our first cheque [to a startup] falling within this range. Our investments in Carsome, Snapask, and Dropee, for example, started with a smaller first round. And then, we have been doubling down all the way, hopefully till they go public.

At Ondine, we are not like other VCs that focus on pre-Series A or A round and bet heavily at early stages to avoid dilution. We employ a reverse-pyramid-like investment strategy, under which we invest a small but meaningful amount in the first round, and then double down with more capital [in the following rounds]. Like Carsome, we have been backing their four rounds till now. And we bet more on each round in terms of capital injection and percentage since their valuation goes up along the road.

Do you think more China money will flow into Southeast Asia in the next few years? And for the funding gap we talked about, do you think it will be filled by money from China and elsewhere instead of local capital?

I think more China GPs are paying attention to Southeast Asia. And I believe this region will gain more popularity among Chinese investors as more Southeast Asia-originated companies will be listed in the US in the following years.

That being said, I believe not many China GPs will fully capture opportunities in Southeast Asia. Major investors in mainland China will still focus on the massive Chinese market where there are many opportunities and a promising deal pipeline. That is different from Ondine, as we were born to focus on both two markets from day one.

China will become a big factor, but not the only factor. When people see Southeast Asian companies going public in the US, money will flood in [because they will know there is a clear path to exit]. I think a smart entrepreneur would know how to manage the firm’s cap table, by which I mean fundraising is not all about money, but also an opportunity to introduce well-rounded GPs and LPs with diversified resources. Grab, for example, is backed by a pool of investors worldwide. Ondine-backed Carsome also has investors across Japan, China, and the US.

As an investor who previously focused heavily on the Chinese market, what are your criteria for potential investees in Southeast Asia? Could you walk us through your experience of making your first investment in Carsome?

It is true that my VC career and investment experience was largely built in mainland China. In the case of Carsome, I have seen other used car trading platforms in mainland China. Some of them grow very fast, but they do not have solid financial performance and are still loss-making. When we first met Carsome, we reviewed their operating numbers and made a quick comparison with our “old” knowledge [from China]. We realised their growth rate was a bit slower compared with the Chinese ones, but their financial performance was great.

But we cannot simply use our experience in mainland China to guide investment decisions in Southeast Asia. We always need to recalibrate. But the good thing is at least we have something as a foundation for the recalibration. Personally, I’m not a believer of the “Time Machine” Theory [famously quoted by SoftBank’s Masayoshi Son], based on which some Chinese inventors believe Southeast Asia nowadays is sort of where China was 10-15 years before [in terms of startup and VC opportunities]. I do not buy that theory. I think we need to recalibrate everything, although our experience in mainland China can indeed help in our decision-making.

The true value of our China experience is to help portfolio firms in Southeast Asia. The real value add is to share with them what we’ve witnessed in mainland China. Potentially, it is something that they might be facing down the road. And potentially, we could offer solutions to it.

When it comes to consumer-facing businesses in mainland China, such as edtech and online-to-offline (O2O) grocery delivery, major players are still loss-making and burning through cash for marketing and client acquisition. 

You invested in similar businesses like Hong Kong’s on-demand tutoring startup Snapask. Are they using a strategy different from their mainland counterparts? What are the lessons to learn from the mainland players’ cash-burning model?

Our portfolio companies Snapask, as you mentioned, and Love, Bonito, a Singapore-based female fashion brand with operations across Southeast Asia, are developing in the battlefields of online education and consumer brands – the two sectors where mainland players are crazily burning money in exchange for a strong user base as well as unparallel growth and operational performance, yet lousy financial performance. Although their growth rates are slower than their mainland peers, Snapask and Love, Bonito’s development is strong and steady with healthy financial performance.

I would say their growth rates are satisfying but not surprising to me because our benchmark is [recalibrated from] China speed – under which it is not uncommon to see growth doubling every quarter. But that is at the cost of financial performance. After we recalibrated, we are happy with the healthy growth of Snapask and Love, Bonito. Theirs is sustainable.

Do you think this cash-burning model will one day start to pay back and eventually turn around the many loss-making businesses we’re seeing in the mainland market? Arguably China’s two biggest, privately-held edtech firms, Yuanfudao and Zuoyebang, are both tapping the stock markets for more capital after raising a few billion US dollars last year. Do you think after the IPO, the companies will potentially start to generate profits?

Honestly, I don’t know. But I highly doubt it. That’s how they got here. I think it’s very hard to take the IPO as a milestone to change how people do business.

Another example is Liulishuo, which went public on the New York Stock Exchange (NYSE) in September 2018. Liulishuo has been trying for nearly three years after the IPO to pivot, but the firm still cannot turn its financial performance around. I think that might be the case for many Chinese edtech giants who are trying to pivot and expand their horizons. But I think it will take years of trying. And I’m not sure if they can get a satisfying result.

Do you think the model of burning through cash for marketing and client acquisition, and looking to turn profits afterwards, is a good model, or it simply won’t work?

Definitely not [a good model].

In your view, what sectors will gain more prominence in Southeast Asia and China in the next one to two years? What could be the best areas for Ondine to look out for?

For these days, we focus heavily on service providers around e-commerce, including logistics, warehouses, and payments in Southeast Asia. We still look for opportunities around e-commerce itself. Although it’s a bit too late for us because there are already major e-commerce players, there might still be challengers, like China’s Pinduoduo, which came out of nowhere to take a big market share from Alibaba and JD.com.

In China, we focus heavily on semiconductors as we continue to see the country has reason for building its own semiconductor ecosystem instead of relying on foreign vendors. I think the trend will last for at least five to 10 years.

The valuation level in certain sectors, especially technology, has been on a rise over the past few years. It has been on an upward trajectory not just in Greater China, but also across other markets like the US, Southeast Asia, and India. What do you think could be the reasons behind the surge of tech valuation? Do you think this valuation level is sustainable in the long run? 

There is too much money in the market. It is still trending up because there is too much liquidity around.

On SPACs, Ondine is a PIPE investor in Israel-based semiconductor firm Valens Semiconductor’s SPAC deal. Many expected the SPAC bandwagon to further spread to China. Are SPACs really taking off in the country, given its drastically evolving domestic stock market?

The fact that SPACs can help companies go public faster is a value largely appreciated by many startups. But if a startup doesn’t have many offshore resources, talents, and connections, they may not know how to communicate with SPAC sponsors and SPAC investment bankers. Local investment bankers in China have not yet grown that familiar with SPACs.

If you pull out the list of Chinese companies that have gone public through a SPAC, you can see most of them are high-tech companies. Their founders were mostly educated in the US and some may still be in the US. For more local startups in mainland China, it depends on the experience and awareness of their founding teams, instead of the SPAC itself.

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.