Singapore-based venture capital firm Quest Ventures expects to hold the final close of its $50-million fund in March 2021, according to a top executive of the firm.
The vehicle, which targets early-stage digital startups across Southeast Asia, scored its first close in April 2020. Limited partners (LPs) comprising Temasek’s Pavilion Capital, Kazakhstan’s sovereign wealth fund subsidiary QazTech Ventures and multiple family offices and entrepreneurs have committed more than half of the fund’s target corpus.
“Southeast Asia and India are still where we and the LPs continue to see the growth is in,” James Tan, managing partner at Quest Ventures, told DealStreetAsia in a recent interview.
“Key markets for us are Indonesia, Malaysia, Singapore and Vietnam. The rest of Southeast Asia will be what we call secondary markets,” he added.
Geographically, the Singapore VC firm has a strong focus on Vietnam, where it has set aside $10 million to invest in early-stage startups. Tan said that Quest Ventures has been evaluating at least 80-100 deals on a monthly basis.
Edited excerpts of the interview:
What is the investment sentiment you are seeing in Asia?
In Asia, there are two pockets of growth: Southeast Asia and India. I’m deliberately leaving out China because it is going through a series of issues with the US. So Southeast Asia and India are still where we and the LPs continue to see the growth is in. It’s very obvious that globally you do not see any other such massive population or growth potential.
On the micro side, there are still plenty of opportunities for investors to invest in because we are starting from a low base. Southeast Asia is not one contiguous market, different markets are all starting from a different base. As long as they are participating at the right stage, right check sizes, I think we will continue to see returns.
Last year, we reported that Quest Ventures plans to invest up to $10 million in digital economy-focused companies in Vietnam. How is it going?
We are very actively looking into Vietnam, having been evaluating at least 80 to 100 deals on a monthly basis. So many accelerator programmes are happening, and we are also connected to the universities in the ecosystem that are actively generating companies for us to review. That is not going to stop anytime soon, the energy is just there.
The $10-million plan is for investments over the course of three years, and we have been eight months into this. The evaluation will take some time, but the flow will come. There are two factors [that make Vietnam interesting]. One is that there are already many companies from outside Vietnam which are interested in the country. Obvious examples are companies like Grab – when they go in, it is more obvious that we will back someone like that versus someone local because of economies of scale unless the local players want to partner with them or be acquired by them. Vietnam also has a window of opportunities here. Next is the internal opportunity. We are a Series A fund, and we are evaluating hundreds of companies coming out from the local accelerators.
What is the investment gap you’re seeing? What is affecting the ability to scale by Vietnamese startups?
There is a big gap between the accelerator stage and Series A stage. The likes of us are going in those demo days and finding that these teams are still too early. They have just a few of us to go to, in order to raise more funding before they are ready for Series A – the so-called pre-Series A. I think pre-Series A is not a good term. It means the startups are mis-planned and therefore they are unable to raise a Series A round. So we thought we would get that gap covered. I’m more concerned about that gap than the Series A to B gap because once we go in the Series A stage, we are bringing our friends from the Series B and C stage.
Taking 500 Startups for example. The quality of the companies that we see from their demo days in the US and in Vietnam is no different. The founders have demonstrated sufficient traction, with some exorbitant numbers of 20- 40 per cent month-on-month growth. The problem with Vietnamese startups versus those in Silicon Valley is that Vietnam is a much smaller market compared to the US, or closer to home, Indonesia. Is it going to be one day that the size will be equivalent to Indonesia, at least in a particular startup? If not, are we going in too early? Should we wait for them to grow at a much faster trajectory before we go in? That will be one consideration that I have.
If you come to invest in a Vietnamese company, for example, then what will you do to help them overcome that gap and expand?
The last thing we want is if we invest in the pre-Series A stage and some years later people will look at Quest Ventures and say, ‘You did this three years ago at pre-Series A stage and none of them are able to raise Series A or Series B thereafter’. We’re very careful that it will not happen. To do so, we have put in place a plan called Capstone and cross-border arrangements such as the Vietnam Global Innovation.
With Capstone, we have a 100-day plan where we put the companies into the 100 days to plan for the next 365 days. And after that one year, they are expected to go fundraise for the next round. If they fail to get a good start within the first 100 days, you can assume that they have no time to catch up and no time to adjust. Bear in mind that this is not an accelerator programme. Companies will be going through top process with us and have a very good plan for growth at the end of that one year.
Vietnam – no matter how big we want to believe it is – is still small when you compare against the whole of Southeast Asia. So we want to let the companies have the mindset [of expanding regionally] as early as possible. Even the likes of Tiki have not gone outside. We are asking ourselves ‘Where is the Tiki that has gone out?’. If we wait until the Tiki stage [to expand out of Vietnam], it is too late. We want companies to be ready to scale up from Series A.
Given the impact of COVID-19, do you have a shift in deal-making or the sectors you are looking at?
I think investing in COVID-19 themed startups is very short term minded. There will eventually be a solution for the pandemic, it is just a matter of time. The theme for us has always been digital economy, investing in to move from a non-digital world to a digital world. In the digital economy, it’s winner-takes-all. We have only one Grab. Even as Gojek has been outside of Indonesia, [its presence in other countries] is still small.
So what are the technology verticals where businesses can apply the largest tech component and win the market?
For now, the obvious one is e-commerce. Unfortunately, the current players are really big and will continue to get bigger. But the likes of last-mile delivery are still not very strong. The players who have got strong e-commerce operations have not 100 per cent conquered last-mile delivery. There are opportunities for independent last-mile delivery players to do and become 3PL fulfillment agents for these large e-commerce players. This is just one segment. With many things going online, such as education, there are so many sectors to cover.