There’s a dearth of quality seed deals in Singapore, as founders depart for greener pastures like the Silicon Valley while entrepreneurs from other parts of Southeast Asia come to close the region’s talent gap. This landscape shift has begun to push seed investors like STRIVE (earlier known as GREE Ventures) further abroad to find Asia’s next billion-dollar company.
Nikhil Kapur, partner at STRIVE, which closed its 12 billion Japanese yen (above $100 million) third fund in end-2019, said it has barely seen any strong seed startups in Singapore of late, particularly in the B2B, SaaS and product-led sectors it invests in.
“To be frank, Singapore is not really where we are spending a lot of time at this point,” said Kapur, adding how the tech talent belonging to the first wave of SaaS startups in the country, which include TradeGecko, Pie and Deskera, are increasingly shifting abroad. Singapore’s heavy emphasis on deep-tech over the last few years has also sucked the ecosystem dry of any potential upstarts in B2B and SaaS sectors.
The B2B market makes tremendous sense at a time like today, with consumer-facing apps like Uber, Grab and Gojek losing lustre among investors for their short-sighted ways of doing business. It’s a sector that’s far less crowded and far less competitive.
But even so, strong leads are hard to come by. Until this market matures, STRIVE believes it’s more likely to find better quality B2B, SaaS startups in India, a market it also deploys capital in. Several Indian companies are leading the way in this respect and these include prominent names such as Freshworks, Zoho, Kissflow, which have lured capital in millions over the recent years.
The presence of downstream SaaS investors like Tiger Global also paint a more positive picture for the Indian market. Kapur notes that such investors in the later Series A, B and C rounds are still absent in Southeast Asia – an indication that it’s still very much early days in this market.
Edited excerpts from an interview with Kapur, and STRIVE’s investment manager Ajith Issac:
How’s the seed landscape looking like these days? We’ve seen the likes of Sequoia’s Surge, Antler and Entrepreneur First ramp up last year. But at the same time, seed VCs like SeedPlus are folding up.
Kapur: It’s very cyclical, right? That’s why we are in multiple markets because we can manage the capital and we can figure out whether we want to deploy more or less. To be frank, Singapore is not really where we are spending a lot of time at this point. We do get good deals from time-to-time but if you just talk about the amount of deal flow that we’re seeing, there’s definitely less good quality flow in Singapore these days.
Why is that? Is it because the quality of overseas deals has risen? Or is it because Singapore talent is not keeping up?
Kapur: It’s a combination of better quality outside and not as much coming out from Singapore right now. I think Singapore is trying to figure things out.
There was a whole SaaS wave that started back in 2014-15, a time when our fund was active and we deployed in companies like Pie, which ended up getting acquired by Google. TradeGecko came up during that time as well, and there was a good ecosystem building up.
But then this whole focus on deep tech happened, which to my knowledge has not lived up to its full potential. I think this is partly because there aren’t too many downstream VCs in Series A-B, and partly because these companies are yet to prove real commercialisation or validation of the product.
Secondly, you also need buyers. But if you look at the enterprise buyers in this market, many haven’t even adopted technology 1.0 yet. So, there will be some pockets, perhaps where the government is buying something in defense, military technologies, or offshoots here and there but there is no concentrated ecosystem required to support and nurture these kinds of companies. Maybe in a way, the timing was a bit too soon and we’re now in this state of flux where this doesn’t seem to be growing the way everyone expected.
But shouldn’t we expect more B2B companies emerging given how crowded the B2C market is today?
Issac: It’s actually surprising to us too. What we’re starting to see is a resurgence of B2C companies. It’s almost as if the ecosystem has gone backwards. Most of the inbound pitches that we get are all B2C, even though we’ve already gone through that whole B2C wave in Singapore.
For deep tech, the market ultimately is Europe and the US. Yes, you can potentially build something here, but you probably have to spend half your time in the US. It’s been the same story for our portfolio companies, Healint for instance, spends 80-90 per cent of the time there and generates 90 per cent of its revenues from the US. That’s another reason why deep tech companies are also struggling right now – it’s neither here nor there, stuck between a rock and a hard place.
What about beyond Singapore? What kind of opportunities are you seeing and pursuing elsewhere? Are these also B2B SaaS opportunities?
Kapur: We have two essential markets, India and Indonesia. I spend almost 50-60 per cent of my time sitting in India, and quite a lot of time in Indonesia as well.
We are looking at B2B and SaaS mostly. If you go to India, you see a lot of companies building for the global SaaS market. That playbook is very much set by the likes of Freshworks, Zoho, Kissflow.
That is very exciting for us because when you see talent, which is already mature and understands and knows what it wants to do, capital becomes an enabler.
The other bucket comprises B2B SaaS companies serving SMEs in emerging markets in Southeast Asia. Again, if you look at India, there are companies, which are starting to scale like Okaycredit. I call them horizontal SaaS for SMEs. The next wave we are seeing on that side is vertical SME plays. We’ve already done three investments in that space which are starting to grow very rapidly. We did one in education, one in healthcare, and one in construction.
Growing a B2B SaaS startup in Asia has its own unique challenge too.
Isaac: One observation we made was that from a behavioural perspective – businesses in Asia are not purely transactional unlike those in large parts of the West where people moved to online quite naturally. Over here, it’s relationship based. As a result, business intermediaries tend to play a very key role in making that purchase decision, whether in service or product. So, then the overarching thesis is how do you enable these intermediaries? How do you empower them and help them do more? Once we start looking at these, it becomes clear that we can paint the entire landscape.
Are we seeing any pickup in the number of downstream SaaS, B2B investors in the market yet?
Kapur: There aren’t many, just a few. For instance, we’re definitely seeing Tiger Global get very active in India. Even players like Sequoia and Accel still invest all over the map. It’s the same in Southeast Asia, most tend to be generalists. The thing is that those funds are just so big that they need to do a bit of everything and anything. Southeast Asia funds are also a bit smaller.
So, should we be taking a concentrated approach? At the seed stage, the volume is very high, which means you can focus and specialise. But at Series A, most of the markets in Asia (except China), the volume is not at a stage where you should start specialising.
But if I were them, I would be specialising on a partner basis. In other words, I would have one partner looking at the end consumer, and the other looking only at B2B. We’ve seen this happen in Japan and other more mature markets. But it’s not something that we’ve seen happen in Southeast Asia yet.
Would this eventually force you to launch an opportunity fund to grow along with your portfolio companies?
Kapur: I was thinking about exactly that this morning. If we start an opportunity fund, we won’t be leading rounds in our own portfolio. It’s like taking money from one pocket, putting it in another and eating a bit on the way. That’s just wrong, in our opinion.
So, do we need an opportunity fund? Yes, we do, because most of our companies are now raising their Series B and C rounds, and we just don’t have the capital to even keep our own ownership in those companies. Do we need extra capital to be able to keep up on that? That’s our LPs call, not ours.
So, what are your LPs saying?
Kapur: We’re starting to see interest, but I think it’s still new and nuanced. Whether they want exposure from Series B onwards is based on their belief that these companies can actually be billion-dollar. Series B happens at a $50-100 million valuation, and you still want to earn your own your 10x on these companies, so the question is – are these companies going to become a billion-dollar in the next five years?
There haven’t been that many exits as well. Your comments
Kapur: Yeah, you can call it whatever then that’s a failure of your calculation on the timing of the market. You can’t go to an LP and say oh, we didn’t have any exits. I’m sorry but you’re not getting your money back. LPs don’t listen to that. So, I think we’re gonna see a lot of this being shaken up in the industry over the next two to three years because a lot of those funds are 2012 vintage.