Following the recent launch of its joint venture – EV Growth – with East Ventures and Yahoo Japan, Indonesian VC firm Sinar Mas Digital Ventures (SMDV) says it is looking to move away from seed investments and focus more on later stages of funding.
Formed in 2014, the venture capital arm of Indonesian conglomerate Sinar Mas has participated in seed investments in startups such as EV Hive and Snapcart, Series A rounds in Orami and Happy Fresh, as well as Series B rounds in Omise and Sale Stock Indonesia.
“We do want to start to focus. That’s why we formed a partnership with Yahoo Japan and East Ventures to form EV Growth,” SMDV Managing Partner Roderick Purwana told DEALSTREETASIA in a recent interaction.
Through EV Growth, he explained, SMDV will focus on Series B funding with its partners, while on its own, the VC will be looking at Series A investments. The focus on higher stages of funding is an effort to fill a gaping funding gap for startups in the country.
“The demand is huge. Everyone wants capital but the ones supplying the capital are limited. There are a lot of people doing seed investments. A few are doing Series A, but not many. Those doing Series B — those that can write a check of $10-15 million — are not many in number, especially those that are dedicated,” he said.
In a wide-ranging interview with this portal, Roderick talks about the VC space and competition in Indonesia as well as SMDV’s strategy.
What made Sinar Mas want to venture out into the venture capital space?
Sinar Mas has for a long time seen technology as the future, but it needed a vehicle that was more dedicated. Technology has disrupted the daily activities of humans. For a group like Sinar Mas, technology needs to be given attention to or else we’ll just stand still and be disrupted.
What was the process like?
The process was fairly simple. This is only a vehicle. In the beginning, we were investors in other funds while learning the trade, and then later we developed the capability to do our own investments.
Quite a few companies are getting into the VC space. What do you think is behind this trend?
The reasons are different, I think. A lot of companies, when they get into VC, they become corporate VCs, or CVCs, whose main goal is generally strategic in nature, not financial. They invest in sectors that would support their main business. So the main aim is to either increase revenues of the group or reduce costs. If they get a financial return from it, then great, but it would not be their main goal.
Big companies form CVCs for innovation. They are slow, like a big ship. They may have the resources but they are heavy too big to manoeuver. Startups are like speedboats, they don’t have many resources with them but they can speed around. They have a different DNA than big companies. It’s hard to create a startup within companies, so they just invest in existing startups to stay involved in the game.
For us, we are not exactly a corporate VC. We are part of a group but our structure is semi-independent. For us, it’s financial first, strategic second. For example, the Sinar Mas Group has a telco company and an agribusiness company but we don’t invest in startups that are related to those businesses. We are flexible in our investment and focus on areas where there are financial gains to be made.
Where do your funds come from? Is it from the group or is it raised from other LPs?
We have an LP structure. It is actually funded by companies affiliated with the group but it is professional – they act as an LP. We have a GP that operates it as well.
As a VC vehicle of a large corporation, what different challenges do you face as compared to regular VCs?
In our daily operation, we don’t have more challenges compared to regular VCs. But one thing is that people feel we have an affiliation with a big group. It can be positive and also negative. Some are interested in working with us because of our affiliation with Sinar Mas, while others say they cannot work with us because of the affiliation.
Independent VCs with no affiliations are free to do anything. But on the positive side, there are (more) resources. The Sinar Mas group is fairly big. It can connect us with this or that person, or can open doors that independent VCs may not be able to access, or may access but not as fast as we can.
What would success look like for SMDV?
It is pretty simple. Because we use a standard fund structure, our success would be financial gain where there is fund life, exits and so on. The fund business is not easy, we have targets and what not, and in the end, success is measured by financial gain. Second, we want to be around for a long time, so we want to build sustainability, particularly with entrepreneurs, founders, communities and so on. So, of course, the first one is the financial gain but tied to sustainable capital and community building.
What about your exit strategy? Do you have an exit timeline?
Funds have a fund life such as 10 years or so. But the Indonesian ecosystem is still in its early years, so we need to be a bit patient. We will not drive exits except if the founders drive it themselves. If the founders want to exit, we exit together with them because we invest in the founders and because we don’t know who is coming in next. But from our side, we don’t tell them to exit, because we are quite a long-term investor. This group in Indonesia is not one to play around and get out quickly.
Any portfolio companies nearing exits?
We don’t know because today our investments are not just in Indonesia and Southeast Asia. There are some in the US and others. So we don’t know at the moment. There are some more mature than others, closer to positive cash flow. Exits are either IPO or acquisitions. As for IPO, none of the companies has filed to go public at the moment, but if they will be bought by someone, we don’t know.
What do you look for in startups? Any certain criteria?
This is pretty standard in the VC world. There are three criteria. Team or founders or people; product-market fit; and market size. These three things need to be there to make it interesting. The product-market fit is very important. We usually come in the later stages. We don’t come in early, so usually, there are already products. So we can see whether or not people buy the products. Without that, they would not get market share, even if the market is big. But what is most important, and this may be a bit cliché, is the people. Because these are startup companies which are dependent on the people that run them because they need to juggle so many things. So all these three are important but the most important would be the people.
What qualities do founders have to have?
They need capability and integrity. In terms of capability, there is a standard minimum such as they need to be an expert in their field. And we usually look for startups with more than one founder, because it’s impossible to find someone who is good at everything. Secondly, it is integrity. Sometimes the founders are young and have never held so much money from investors before, so it’s a matter of someone who can be trusted with the money without us having to be there with them daily and know that the money will be used responsibly. But what is also as important is passion and hunger.
Are these kind of leaders hard to find?
People with capabilities are in abundance. The hunger is hard to find. What is also lacking is people with maturity and experience. There are a lot of founders, but how many have exited? Not many. Good founders, they get capital, grow business, exit. After they exit, they do one of two things: they use the money to invest or mentor others, or they start a new business. Maybe it’s just not the time yet in Indonesia for that. It should be better in the future.
Are there certain verticals that you prioritize your investments in?
We are pretty agnostic, we are open to almost all verticals. Some that we are looking at are e-commerce, fintech and B2B logistics. The vertical doesn’t have to be related to the group business. If we see a gaming company that is excellent, of course, we can come in. But investments can be done in two ways: either we lead or we follow. In sectors such as gaming, for example, it’s impossible that we lead the investment.
We notice you have been involved in seed, Series A and Series B rounds. What stage of funding do you focus on?
We don’t restrict ourselves. There are a number of startups where we enter at the seed stage, but also there are some in Series A and Series B. More often, it is Series A and Series B. For us what’s important is the stage of the business itself. There must be a proof of concept at the beginning. Then there will be the product or service and then see whether or not there is traction, and then comes growth stage and then perhaps pre-IPO. We don’t enter at the proof-of-concept stage, where there is only an idea because that is not our expertise. There are some like Wilson Cuaca of East Ventures who can source startups by instinct. We can’t do that, it’s not in our DNA. At least they must be able to have a product or service, ideally already with traction.
As you mature, will you focus on one stage of funding?
We do want to start to focus. That’s why we had a partnership with Yahoo Japan and East Ventures to form EV Growth. Through this vehicle, we will focus on funding of growth stage startups anywhere between $5 million to $15 million in Southeast Asia. For this one (SMDV), we will focus on the other funding stage.
Can you disclose your fund size and ticket size?
For fund size, unfortunately, we don’t disclose that. But the ticket size is around $3 million to $10 million. But it doesn’t have to be all in one go. Usually, we enter maybe with $1-3 million first and then we follow it up with investments in the next round.
You mentioned investments outside of Southeast Asia. Can you tell us more about that?
We have invested in startups in the US, China and Japan. For those, there is a lot of follow-on investment too. I think there are many that are looking at us because we are from Indonesia, they want to enter Indonesia over time so they have asked us to enter there first. The sectors are technology, machine learning, services and software.
How do you see the VC competition here in Indonesia?
I don’t really see it as a competition because today there is a mismatch between supply and demand of capital. The demand is huge, everyone wants capital but the ones supplying the capital are limited. There are a lot of people doing seed investments. A few are doing Series A, but not many. Those doing Series B — those that can write a check of $10-15 million — are not many in number, especially those that are dedicated. And then there is private equity, hedge funds who come in with huge money of around $50 million to $100 million, even $200 million. But in the middle stage, there is a gap. So we support a large amount of VC coming in because VCs are different than private equity.
Private equity firms usually go into an investment alone, so they are in competition with the others, whereas for VCs, it is very rare that startups only have one investor. So, for us, it’s also de-risking. For example, if we have $100 million, we can put the $100 million in five companies or we can put in smaller amounts in 10 or 15 companies, so we are also sharing the risk because we also need a fairly big portfolio.
Tell us how you go about sourcing startups. Do you like to go alone or with a partner?
We are lucky because our check size is fairly big so there are quite a few of our friends who come in and say, “This company has grown quite big. Maybe its time to meet with you”. And, again, in our ecosystem, the venture capital firms that give out these funds are not many. It’s different in China and the US where the competition is tight and VCs try to fend off competitors. Here, we invite others to join us. So sourcing, so far, is not too much of a problem.
What are you looking for from the EV Growth joint venture? Are such partnerships going to be a new trend among VCs?
We VCs provide money but capital alone is not enough. We need to give more than that. We need to provide additional value. Looking at our affiliation with Sinar Mas Group, it has plenty of resources it can help with, but maybe our knowledge is in certain fields only. In time, we need to work with partners that bring different value. Yahoo Japan, for example, is a $28-billion company and part of SoftBank, the largest internet property in Japan. They can help with skill, governance, experience, as well as other things. East Ventures in Indonesia is one of the most active in the early rounds. So what we’re looking for in the partnerships is additional value from different companies. That’s why we have kept it open to other LPs.
Whether or not this will be a trend, honestly, I don’t know. There is a trend of growth funds being raised for Series B funding, but whether VCs will be joining up to raise the fund, I don’t know. For us, it makes sense, but I don’t know if others feel the same.
How many investments have you made so far? How much money has been invested?
More than 10 so far. The figure is quite big, that’s all I can say. We don’t have targets for how many investments we make. In 2014 and 2015 we were very active, in 2016 we slowed down, in 2017 we started to be active again, so it depends. But ideally, it’s not more than four or five investments in a year.