Singapore-based seed investor Cocoon Capital is launching its second $20-million fund targeting seed stage funding in enterprise tech startups in Southeast Asia, particularly in the deep tech, fintech and medtech niches.
Cocoon has already achieved its first close at $11-$13.1 million (S$15-$18 million) and aims to secure its final close by end-2018. Cocoon launched its first fund at $7 million in 2016.
According to an official statement, Cocoon’s investors include Vulpes Innovative Technologies Investment Company; Martin Hauge, partner at Creandum; UK-based seed fund Playfair Capital; Jani Rautiainen, co-founder of PropertyGuru; Martin Roll, global strategy consultant and bestselling author; Oliver Tonby, Chairman of McKinsey’s offices in Asia, excluding Greater China; and Michelle Yong, director of Singapore’s Aurum Investments.
Cocoon Capital said it has increased its LP exposure to Southeast Asia in this fund, with two-thirds of them coming from the region.
The new fund will target seed rounds across 25 to 30 investments, and will adopt a wider market focus to include emerging markets such as Indonesia, Vietnam, the Philippines, and Myanmar.
In an exclusive interview with DEALSTREETASIA, Cocoon shared that while it has seen more VCs do Series A rounds, it hasn’t seen many doing seed stage financing.
“There is very little funding available for a lot of early-stage companies,” said Michael Blakey, co-founder at Cocoon Capital. “The good thing is there are a number of angel networks formed by Angel Central. BANSEA has come back in full force now, and you’ve got Keiretsu. Those three are going to help, but its about catching up to support the amount of money that is being raised for Series A.”
Edited excerpts of an interview with Cocoon Capital managing partners, Michael Blakey and Will Klippgen:-
What is the size of the second fund?
Blakey: Our funds are denominated in Singapore dollars. This second fund is going to be S$25 million ($18.2 million). The previous fund was S$10 million ($7.3 million). We aimed to target our first close at S$10 million, but we’re doing it at S$15-$18 million ($11-$13.1 million).
About half of the investors from the first fund are continuing in the second one, the rest are new investors. We’ve got a lot more Southeast Asian investors this time, some of whom are from Indonesia. The last time we had quite a large contingent from Europe. This round about a third of them are from Europe.
Did these SEA investors come to you? Or did you go about looking for them?
Blakey: We went to look for them. We wanted more local investors because we tap into their resources, and work very closely with our LPs. We find there’s a lot of value add that you can get from people who can understand the cultural nuances and have the networks to support the companies we’re investing in.
When are you targeting your final close?
Klippgen: December. We’ve got most of the funds committed for the amount. We’re working on a number of very exciting deals, so instead of waiting for everyone to get their ducks aligned, it’s very much about getting the first close in and making those investments.
Blakey: Having said that though, we still have some space in the fund. We still have about 15 to 20 per cent of the fund left.
You were targeting seed rounds, about 5 to 6 companies a year for the first fund. Any change here or in your overall strategy?
Blakey: We’re still aiming the same. The reason the fund is getting larger is because the first fund was just a two-year investment period. We were also starting a different model for our first fund and we wanted to try it out before committing ourselves long-term. So far, it’s worked out extremely well for us.
For this second fund, we’re doing an investment period of five years, with the overall fund tenure being 10 years, which is a more traditional way of raising a fund and that is why it’s bigger this time.
We’re doing five to six deals a year, capped at six. We were originally targeting 8 to 10 investments for Fund I. For Fund II, it’s going to be 25 to 30 investments. In terms of the stage of companies, we’re still very much into enterprise and deep tech.
One of the differences this time is we’re doing more investments outside of Singapore. For our first fund, about 80 per cent of it was Singapore-based. We’re looking to shift that.
Deep tech will still be from Singapore because we don’t see many opportunities there elsewhere in the region, but in enterprise tech, we’re seeing more exciting opportunities from countries like Vietnam and the Philippines. We even saw some interesting companies in Myanmar.
There is very little funding available for a lot of early-stage companies, so we very much hope this will have a big impact on the ecosystem.
How do you view the opportunities in markets like Vietnam, the Philippines, Myanmar?
Blakey: We think they’ve got large market opportunities and they’re looking to scale to be regional plays. We tend to go for regional or global plays. We also see that the founders and ecosystems are getting stronger, so we’re spending more time there building relationships, doing mentoring and education within these ecosystems to find the right founders to back. It’s always quite difficult to know what to invest in, so we’re investing a lot in people at this stage. The ideas kind of come secondary I think.
A lot of VCs are extremely bullish about Indonesia. Why is Cocoon not looking at this market actively?
Blakey: I think two reasons. We are looking into Indonesia but it’s not our core focus at the moment. We’ve got a venture partner who is based there so we will look at it but there is so much money chasing the same deal. The problem with all of this focus on Indonesia is: so is everyone else. There are so many large markets which are very much under-served too.
There are huge opportunities in Indonesia and we will definitely invest there, but I think we want to help companies expand into Indonesia. Markets like Thailand, Vietnam, Myanmar also have a lot of similarities to Indonesia. In terms of regional play, Indonesia is critical for us but we don’t want to put all of our focus there.
In Singapore, there’s a lot of capital in the Series A, B, C, D – but there’s very little capital in the seed stage. When you go outside Singapore there’s even less venture capital altogether. The reason is because it’s a very difficult space and we’re usually the first institutional investor coming in. We may come in almost at the same time as the angels, if not slightly later but there’s a lack of good seed funds that operate outside of Singapore in general.
How do you go about scouting for seed companies? In markets like Singapore, you have platforms like Entrepreneur First, but you don’t have the equivalent of that in Vietnam or Indonesia. How does this make it more challenging for you?
Blakey: There are pros and cons. If you take Vietnam, for example, you don’t have EF, but there are a couple of accelerators. They mostly tend to focus on B2C, which means you have to look harder. However, it also means that there are hardly any funds looking at the stage that we’re looking at.
We attend several events, which we find is an easier way to build the brand. We also get a lot people coming to us. We find that our founders are our biggest advocates. These founders talk to each other all the time and they are also the biggest supporters of what we do. This is because we take on a more hands-on approach as we do few deals. At least 50 per cent of our time is just spent working on our portfolio companies so we build very close relationships.
A lot of the time we get phone calls from founders and they’ll say – there’s this really interesting founder, they’re looking for funding and advice – can you sit down and talk to him? A lot of these founders try very much to support one another as much as possible, and they do talk in their own meet-ups.
Klippgen: We recently invested in a company in the Philippines called pounded.com which is an e-commerce store. We try to invest in extraordinary founders. In this case, the guy studied in Canada and came back to work in the Philippines. We found that in the local community in the Philippines, everyone knows Christian because he’s a really good founder and speaker and he’s someone that they look up to. This has a double effect of building the perception of being a good VC and picking good founders.
You don’t find yourselves being edged out by players like Wavemaker Partners?
Klippgen: I mean sometimes, obviously. They’re one of those you would consider partner-colleagues slash competitors…(laughs)
Blakey: I think especially in the deep tech side and especially in Singapore. I would say Wavemaker and SeedPlus are all very much focused on enterprise software and deep tech. But I don’t think there is an oversupply. If you go the UK, Silicon Valley or Shanghai, you find a lot of companies chased by VCs. Over here, you don’t have that situation. There are very few VCs who are in the same space as us and there are enough good companies.
The big difference that I’ve seen in the last five years is that when I first moved here, I was seeing one or two companies that I thought were of exceptional standard. But now I’m seeing a few every month. The quality has definitely progressed and some founders are on their second or third startup, so they’ve gone through the learnings. The ecosystem is becoming stronger and I think the market is more ready than it was and ready to accept technology.
Klippgen: Speaking of competitors, we all have a different perspective and approach. Wavemaker, for instance, has a very different idea of how they do their value-add. SeedPlus has a different view: they all have different personalities in the fund. The founders themselves also have different preferences so, in some sense, there is a bit of a self-selection mechanism going on. If people prefer a more hands-on and engaged VC, they would choose us.
What is your value-add then? You have been mentioned before as being interested in educating and nurturing founders.
Blakey: I think that is what differentiates us. I don’t think there is anybody in the region that has our level of experience over the number of years. Will has been doing this since 2004. I’ve been doing this since 2000. We’ve worked with numerous companies and it’s personal development. Even as angel investors, a lot of what we do now is the model we followed that gave us the returns that we achieved individually as angel investors over the years.
We do a lot of personal development for founders. It’s very much a misnomer that founders are good CEOs. Just because you come up with an idea – and a lot them between the ages of 25 and 35 years – many of them have never managed or built companies before. It’s a skillset and knowledge base that isn’t necessarily something you learn in school. We hold one-to-one sessions with each founder to help them develop into CEOs and we can afford to do that because we only do a few deals a year each.
You mentioned earlier about the seed crunch and how you’re seeking to plug that gap. Have you seen many changes on this front in the last year?
Blakey: We have seen VCs coming into Series A, but we haven’t really seen new seed funds. The good thing is there are a number of angel networks formed by Angel Central. BANSEA has come back in full force now, and you’ve got Keiretsu. Those three are going to help, but its about catching up to support the amount of money that is being raised for Series A.
Everybody has been raising a new Series A fund. They’re only going to want to do larger deals as the funds get larger, which naturally forces them up the food chain. It’s good for us so we’re sticking to what we know best and have done for the nearly 20 years – seed stages which is the biggest opportunity for Singapore and the region.
Have you had any companies that have “graduated” from your fund yet? Either in terms of moving up to Series A or getting sold?
Blakey: We’ve had one that moved up to Series A. There are another one or two that may follow this route too. We’ve only been investing in the fund for two years.
Did you do the follow-on rounds or did you pass it on to someone else?
Blakey: We are LPs so we have a slightly different structure. One of them is that we give our LPs the right to invest in the next round, and we don’t charge them for it.
We have a number of family offices who don’t want to get involved in the early stage stuff because there’s very little data and they understand that a lot of founders need a lot of hand-holding. The way that we work is that we do the initial investment, we do a lot of corporate governance and training, and we always keep our investors and LPs informed of the progress of the companies.
So when our companies come back in 12 to 18 months time looking for a larger amount, our LPs and family offices can come in and say – okay we’ve seen your growth, we’re not making a decision based on one or two meetings. We’ve been able to build a relationship over 12 months or so. So we’re basically building a portfolio for our family offices to invest in later rounds. We think we’re being overly generous by not charging any carry fee actually. The more traditional approach will be to charge for access.
Klippgen: We also don’t take a salary here. We’re not allowed to benefit or take any kind of salary from the fees we charge LPs. A typical early stage fund can charge 30 per cent of the money that an investor gives to them in fees. We charge less than 1 per cent a year – about 0.8 per cent. We are the cheapest fund in Southeast Asia, and we are the only fund where the managers and the partners do not take a salary.
Blakey: We only get paid on success. As angel investors, we’ve had lots of success which allows us to not take a salary over the years and support ourselves through our investments so far. This is why we try to morph the best of angel and the best of VC into one.
What this means is that we are incentivised. We are not allowed to raise another fund as long as this one is still active. So we can’t raise multiple funds at any point of time. For our LPs, they know that we are 100 per cent focused on this, not just on initial investments but supporting companies in the long-term which for angels, is the more traditional approach to take.