Edtech firms may turn into unicorns as SE Asia market matures: Strategic Year’s Conrad Tsang

Conrad Tsang, founder and chairman of Hong Kong-based private equity firm Strategic Year Holdings

While e-commerce and mobility sectors have seen the emergence of regional tech giants, Southeast Asia may be set to usher in its first edtech unicorn given the huge demand for quality online education in the region, says a top private equity investor.

“Southeast Asia has yet to nurture its first edtech unicorn because the TAM (total addressable market) is not as big as the e-commerce and TMT sectors,” said Conrad Tsang, founder and chairman of Strategic Year Holdings Limited, in a virtual interview with DealStreetAsia. “GoTo and Grab are decacorns because their TAM in Southeast Asia is huge. Edtech companies, whose TAM is smaller, will grow into unicorns later.”

The region has yet to witness its first billion-dollar-worth edtech business, although players like Ruangguru are leapfrogging to approach that milestone with the support of investors including Tiger Global Management, General Atlantic, and GGV Capital.

Tsang, the helmsman of Hong Kong-based PE firm Strategic Year, is using the playbook of industry development in more sophisticated markets to envision the potential of SE Asia’s emerging economies.

In SE Asia, the team is particularly interested in markets like Vietnam, Indonesia, Cambodia, and the Philippines, as well as other cross-border opportunities.

Besides edtech, Strategic Year also invests in TMT, e-commerce, consumer products & services, and other tech-enabled segments related to healthcare, fintech and beyond.

An investor in Malaysia-based used car trading platform Carsome, Indonesia’s upskilling services provider Cakap, and Vietnam’s education service provider Teky Holdings, Strategic Year has so far closed two investments in 2021 in Indonesian healthtech platform Halodoc, and fresh produce platform Sayurbox. It plans to complete two to three more deals for the rest of this year depending on the COVID-19 situation.

While actively making investments in the market, Strategic Year is also in the process of raising several hundred million US dollars for a new fund to focus on SE Asia, DealStreetAsia has learnt from a source, who declined to be identified because the information is private.

Edited excerpts of the interview with Tsang:

Please walk us through your experience of creating Strategic Year and the team’s investment mandate.

I started Strategic Year Holdings Limited in 2016. On the private equity side, we have always been a growth and venture investor, largely investing in Series B to Series D rounds. We’ll do Series A investments when the opportunities are appealing.

In the past two years, we’ve been spending more resources and time on Southeast Asia, including markets like Vietnam, Indonesia, Cambodia, the Philippines, and some cross-border opportunities. Already having colleagues based in the local market, we opened a new office in Singapore led by one of my partners.

Our investment strategy in the growth space targets the rising consumption power of the entire population of some 630 million people [*675.8 million as of July 2021] in SE Asia. We specialise in sectors including TMT, consumer products & services, and anything that is tech-enabled, such as healthcare, environmental technologies, edtech, fintech, and beyond. Overall, we work with high-net-worth individuals, family offices, and people who share our values to make investments together.

I started my career making investments in the US, and then the next decade and a half in China, and now in Southeast Asia. I’m seeing a lot of similarities. When China officially joined the WTO in 2001, its GDP was growing at about 11-12% per year with slightly over $1,000 in GDP per capita. By now, its GDP per capita has exceeded $10,000. I see the similar potential within the demographics in the emerging parts of Southeast Asia, which are going through the path that China had one to two decades ago.

We want to leverage experience in the US and China to help entrepreneurs in SE Asia grow their businesses in their home markets and hopefully repeat the success that we saw in the more developed regions.

What is your average cheque size for growth-stage deals, versus Series A and earlier-stage deals? Your investments in startups like Carsome, Halodoc, and Sayurbox are small amounts. What is your strategy around businesses where you made smaller-size investments?

It is about building relationships. Our initial investment amounts are not big because it’s more for the entrepreneurs to get to know us better. As a value-add investor, we emphasise to portfolio companies and co-investors our abilities in adding value beyond the capital that we bring in.  That’s why the initial investments may not be big, but the subsequent ones would be under the regular investment range that you typically see.

What is the value add that Strategic Year brings in?

Our value add includes business development, financial control, corporate governance, and human resource management. We also help portfolio companies find M&A targets, prepare for the next round of fundraising, or even search for customers and suppliers.

In some cases, especially during the pandemic hit, we have helped portfolio companies negotiate with property owners for rent reductions or even early termination of the leases, as well as conversations with their employees about temporary salary cuts, among others. Part of our value add is to help out entrepreneurs when they’re in a difficult situation.

In the case of Sayurbox, we introduced them to one of China’s leading fresh produce companies so they could compare notes, discuss growth trajectories, and share their successes and failures.

Vietnam’s Teky Holdings, a provider of STEAM education to K12 students, was scrambling to look for solutions to continue business operations when the country went into lockdown last year. They came across a Beijing-based company that provides live streaming solutions to help teachers and students interact online. We helped them connect with the firm and negotiate commercial terms. Teky ended up licensing the Beijing firm’s streaming technologies into its online platform.

We also help portfolio companies hire the right talent with our on-the-ground network to speed up their expansion into an unfamiliar market. Our access to a strong deal flow can also help companies identify potential acquisition targets if they prefer a buy-instead-of-building strategy.

You previously invested in companies like Great Wall Motors, Noah Education, and coal mining firm Hidili Industry in China. How is the team positioned for its China strategies in the next one to two years? Why are you looking at SE Asia when China remains the second-largest venture market after the US?

We continue to look at the Chinese market, but the demographics and opportunities are quite different from when I first invested in the country two decades ago. That’s why the deals that we would look at nowadays are very different from the ones that we did in the early years; whereas, in SE Asia, a lot of deals that we continue to do are similar to what we previously did in China.

In terms of the demographics in China, the median age of China’s population has risen to about 38 years old, while the population growth rate has been relatively flat. That’s why the government felt the need to further relax its two-child policy. Going forward, we will probably see a lot of demand for senior care, health care, and deep tech. These are the areas where we will see more and more of our peers deploy their resources.

At the same time, we’re seeing more opportunities in SE Asia on a regular basis. The median age is about 26 years old in the Philippines; 29 in Vietnam [*32.5]; and 30 in Indonesia, nearly eight to 12 years “younger” than China. The kind of opportunities is like what China had years before, around sectors like consumption upgrade, edtech, consumer products & services. When SE Asia’s income per capita rises from the current level of $2,000 to $5,000-$6,000, the demand for these offerings will only increase.

Venture-backed players in China’s online grocery and edtech sectors have been pouring enormous amounts of capital for user acquisition and market expansion. Are you seeing a similar type of cash-burning model in SE Asia? 

I looked into many companies in SE Asia with similar business models. It’s interesting that most of them don’t seem to share the mindset that they need to burn a lot of cash to acquire users as their Chinese peers do.

I wonder if it’s because the players in China understand that there’s a massive total addressable market (TAM), which demands them, or the investors behind them, to use this high-cost method to acquire users. In comparison, each of these SE Asian markets is not as big as China. Even in Indonesia, the biggest of them all, the TAM is only a fraction of China. Maybe because of that, entrepreneurs and investors [here] understand the need to spend some money on marketing and acquiring users. But they don’t see the need, or at least the short-term benefits, of burning cash to achieve the scale.

For our portfolio companies like Sayurbox, Teky, and Cakap, we take their profitability plans very seriously. We discuss with the management teams all the time and see how they are tracking the different layers of contribution margins using metrics like gross margin, CM1 [contribution margin], and CM2, etc. We also look at the cohort in terms of their marketing expenditures, cash flows, and unit economics. Although it is good that they can keep raising money when the capital market is vibrant, investors would ultimately look for the bottom line of whether a pre-profit firm will be able to become profitable somewhere down the road.

Back in 1990 and 2000, a lot of tech companies easily raised money through private or public financing, but they simply burned the capital without considering the outcome. Fast forward to 2003 and 2004, many of them went bust because there were no profitability concerns and investors, for whatever reason, decided not to back them anymore.

Having seen a cycle like this, I’ve grown a strong impression that we need to make sure the management team is highly cognisant of the path to profitability before making our investment. And post-investment, we should keep reminding them of the necessity of making a profit by year three or year four.

In your focused sectors, do you think fund managers are less or more patient in waiting for their portfolio companies to turn a profit during the pandemic?

At Strategic Year, we have a degree of sympathy for businesses that are seriously impacted by the pandemic in SE Asia, like operators of restaurant chains and fast-food chains. When countries like Malaysia, Indonesia, and Vietnam are under strict social distancing measures, there’s not much that a business can do. Even though some shifted to online orders and home deliveries, it doesn’t necessarily make up for the revenue loss from their regular operations. We don’t have much involvement in this kind of business, but I think investors need to show a bit of sympathy and patience.

But one thing that we emphasise to entrepreneurs is that survival is the key. If you can survive, you will become a leading market player when everything goes back to normal. We’ve seen a lot of these cases where dominant players emerged from crises like the dot-com bubble and SARS after competitors went out of business. I think consolidation is happening across various sectors, which is probably unavoidable. As an example, our portfolio firm Carsome in early July took a stake in Jakarta-based offline car and motorcycle auction service firm PT Universal Collection.

Within SE Asia, which markets do you think have the best investment opportunities? 

Every market is different. I think good companies don’t necessarily make a good investment because you also need to consider their investment terms and valuations. At Strategic Year, we tend to look at emerging economies within SE Asia, including Vietnam, Indonesia, the Philippines, Cambodia, and some cross-border opportunities.

I believe that there will be more cross-border activities. Increasingly, companies like Carsome and Akulaku [Indonesian fintech firm] are looking to repeat their business models in neighbouring countries and become cross-border players, wherever their founding teams originally came from.

When it comes to edtech, SE Asia is still maturing as compared to the markets in China and India. What do you think of the feasibility of building a pan-Asian edtech giant given the diversity of languages and curriculums in the region?

It will be a learning curve and it won’t come overnight. It will be up to the management team, as well as the investors behind them to work together with the first step being the formation of a local team [in the new market].

For example, Indonesia’s Ruangguru is trying by expanding operations into Vietnam and Thailand. On the one hand, I think edtech companies like Ruangguru need to cement their leadership position in their home markets. They also need enough capital and help from their investors to familiarise themselves with new markets before they eventually get there.

On the other hand, SE Asia has yet to nurture its first edtech unicorn because the TAM is not as big as the e-commerce and TMT sectors. Back in around 2010 when Alibaba was already a decacorn, New Oriental, now one of the biggest private education companies in China, only had a valuation of less than $1 billion. I think it’s a reflection of the TAM. GoTo and Grab are decacorns because their TAM in SE Asia is huge. Edtech companies, whose TAM is smaller, will grow into unicorns later. It does take time.

As players like Ruangguru are approaching a unicorn valuation and growing into the first batch of billion-dollar-worth edtech firms in SE Asia, do you see regulatory bottlenecks coming in their way? 

In general, education investments should be for the good of society globally. Education should “make humans become better humans,” and “equip people with the skills and knowledge for them to contribute to society.” Be it SE Asia, China, or anywhere else in the world, educators should always strike a balance between commercial and social impact. And because of the sensitive nature of education, the sector itself should be subject to regulatory monitoring from time to time.

Recent regulations regarding the K12 private education sector in China are closely watched by governments and industry practitioners around the world. One takeaway is that for-profit education providers should exercise self-discipline, always remind themselves of the “doing good” nature of education, and continue to improve their products and services. As a business, education is a long-term one. Educators should be patient, take long-term views, and avoid speculative behaviours.

What can SE Asian consumer internet businesses, especially market leaders, learn from their Chinese peers in the context of Beijing’s clampdown?

If we look around the world, there have been many cases where government bodies stepped in to correct anti-competitive or monopolistic market practices, resulting in industry giants being fined heavily. In 2000, tech industry giant Microsoft was ordered by the US government to break itself up into two separate entities due to its alleged anti-trust business practices.

Recent actions taken by the Chinese government to correct anti-competitive or monopolistic practices are not unprecedented in a global context, and this will unlikely be the last time any government steps in. SE Asian tech giants and market leaders should learn from these cases studies, review their business practices from time to time to avoid anti-trust practices.

In SE Asia, where capital is increasingly a commodity, how do you enter into some of the most sought-after deals in the region against fiercer competition from local and foreign investors?

If you look at our portfolio companies, we invest alongside global top investors who are usually bigger and more relevant than us.

Why are we in these deals? We have developed a lot of relationships with entrepreneurs in the region early on. Although we may not invest in those at the seed and early-stage, we bring in value-add resources and intangibles, helping them conduct market research or connect with early-stage investors for fundraising. One of our values is to make friends and develop a good reputation, so people will come to us for more interactions and potential opportunities.

By the time they reach our sweet spot, we would already have a relationship with them for a year or two. That degree of trust puts us in a very good position to invest alongside other big investors, especially when some of these investors were brought in by us anyways.

Another strategy is that we invest in relatively fragmented markets and promising companies that are not yet in a market-dominant position. That allows us to invest under more favourable terms. And there’s also more room to add value, through which we help them grow into a market leader. We are usually two steps ahead of them to identify and nurture companies with good potential. Otherwise, it would be difficult to squeeze in a hotly competed deal in direct competition with those big names.

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.