South Korean VCs increasingly aggressive in SEA, but must step up local nous

When South Korean President Moon Jae-in unveiled a new policy in 2017 to deepen the country’s ties with Southeast Asia, it spurred a new vigour among the country’s companies to do business in the fast-growing region.

South Korea started to see many of its companies from various sectors setting their sights on Southeast Asia. Not least among them, its venture capitalists.

In the last two years, Southeast Asia’s tech scene has seen a significant number of deal activity involving South Korean investors. This ranged from big deals such as the $50-million investment in e-commerce unicorn Bukalapak from Korea’s Mirae Asset-Naver Asia Growth Fund, and smaller under-the-radar deals such as the undisclosed seed funding secured by Indonesian proptech startup Mamikos from BonAngels Venture Partners and Kakao Ventures.

Apart from commerce and property, South Korean VCs have made bets in almost all of Southeast Asia’s other key sectors including fintech (KIP’s investment in Singapore’s C88), automotive (SoftBank Ventures Korea in Singapore’s Carro), travel (BonAngels and Nextrans in Vietnam’s Vleisure) and logistics (Nextrans and FuturePlay in Vietnam’s EcoTruck).

The last couple of years have also seen South Korean VC firms setting up joint funds with their Southeast Asian counterparts to target the region’s startups. These co-GP funds include Korea Investment Partners’s $87 million fund with Golden Equator, which has backed companies including Rever and OhMyHome.

Other such joint funds are Intervest and Kejora Ventures’s over $100 million fund, Hanwha Asset Management and Golden Gate Ventures’s $200 million growth fund and most recently, KB Investment’s fund of around $100 million with MDI Ventures.

The Mirae Asset-Naver Asia Growth Fund is a limited partner (LP), or investor, in Vietnam-based VinaCapital Ventures’s VC fund. Its direct investments in Southeast Asia include RedDoorz, Deskera, Bukalapak and HappyFresh. 

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The Lure of Southeast Asia

It is fair to say that the push from President Moon prompted more investors to identify Southeast Asia as one of their main markets. However, to put the increased Korean VC activity down to mere government policy would be gravely unfair.

As it happens, the president’s call came at a period when Southeast Asia had been seeing a dramatic rise in deal flows and activities.

In 2017, Southeast Asia’s PE and VC investment levels surpassed those in Europe for the first time, with as much as $23.5 billion invested into the region, almost three times as much as that of the previous year, according to data by Singapore Venture Capital and Private Equity Association (SVCA).

Investments into startups, meanwhile, doubled to $8 billion, the report said.

This was followed in early 2018 by several mega-deals. Alibaba invested another $2 billion into regional e-commerce giant Lazada, while Indonesia’s ride-hailing major Gojek closed its $1.5 billion funding round.

Korean investors have, in particular, taken a shine to Indonesia and Vietnam. According to the Vietnam Tech Investment Report by Cento Ventures and ESP Capital, 13 of the total 61 venture funds operating in the country in the first half of 2019 were South Korean. The group, the largest ahead of VCs from Singapore (11 funds), has grown from just one fund in 2015. 

“Korea was ahead of the time in the mobile/ internet industry. As a leading country of its own, Korea can be such a good reference to build our view for Southeast Asia which has a great potential to grow,” said a spokesperson for SoftBank Ventures Asia, which is an investor in unicorns Tokopedia and Grab.

The potential growth for startups is not the only pull factor for foreign VCs, but also the improving exit opportunities, according to Charles Rim, partner at South Korea-based Access Ventures which has a specific focus on Southeast Asia in its second fund.

“One of the reasons we launched our fund is that one of the biggest improvements happening in Southeast Asia is the exit environment. It is the largest global internet market in terms of potential growth. That is why a lot of businesses are coming to the region and a lot of acquirers are actively looking at Southeast Asian companies. Silicon Valley giants like Google and its competitors are starting to look more seriously at Southeast Asia companies as an investment and acquisition opportunity,” Rim said in an interview with DealStreetAsia.

Competitive domestic market

For startups in Southeast Asia, the influx of South Korean investors has been more than welcomed, not only because of the abundance of capital they come with but also of the fresh point of views that they offer to companies.

Of all the startups that have received investment from South Korean firms, Indonesia’s fashion commerce company Sorabel is arguably one of the best placed to attest to the additional values offered by South Korean investors.

Sorabel, which last raised a Series B+ round of $27 million, currently has four Korean investors on its cap table, having raised funding from KIP in an earlier round, and welcoming onboard Intervest (though the Kejora-Intervest fund), NCore Ventures, and Shift (unconfirmed) in its ongoing new round of funding.

“One of the biggest value-adds is providing perspectives and benchmarks from the Korean industry. This is especially helpful because many investors study and reference China, but China is different to Indonesia in many fundamental ways and having multiple perspectives of what works and what doesn’t work across different markets is tremendously helpful,” said Sorabel co-founder and CEO Jeffrey Yuwono.

While a lot of startups are no doubt benefiting from their partnership with South Korean VCs, it can be argued that companies like Sorabel are doing as much a favour to these investors by opening their doors to them.

For many South Korean VCs, investing in Southeast Asia is no longer a matter of preference, but a necessity. This is because the domestic market has almost reached a point of oversupply in terms of funding, making the market extremely competitive for local VC firms.

“In 2018, the amount invested in ventures exceeded $4 billion, and next year alone, the Korean government has a budget of $14 billion for R&D support for startups and SMEs. Many early-stage VCs and accelerators do not find a good company to invest in, which is why they are broadening their investment towards SEA/India recently,” said Michael Hwang, CEO of South Korean early-stage accelerator Big Bang Angels.

With over 100 portfolio companies and three exits under its belt, Big Bang is among the VC firms that have started to shift its focus towards Southeast Asia. Hwang said the firm plans to collaborate with a Singapore VC firm to set up a Series A fund.

Such partnerships have started to become a common strategy for South Korean investors to establish a better foothold in the Southeast Asia market. Big Bang is the latest to announce such plans, but will not be the last, Hwang said.

“For Korean VCs, creating an overseas VC and a joint fund is a new experience, but I think it is a necessary step. Because we are expanding our investment area, there are not many reliable partners. So I think this trend will increase for the time being,” he said.

Playing the local game

One of the latest to have officially launched a joint fund with a Southeast Asian VC is KB Investment, a subsidiary of South Korean financial giant KB Holding. The firm announced a fund of around $100 million with Indonesia MDI Ventures, the VC arm of state-owned telco giant Telkom Indonesia, to provide financial and strategic support to the region’s startups.

According to KB Investment managing partner Eric Yoo, the co-GP arrangement was part of KB’s effort to become more localized in Southeast Asia – something most Korean investors have not committed to doing, and, as a consequence, has hampered their performance in the region.

South Korean VCs, he explained, have generally been employing a “case by case and project-based” approach when investing in Southeast Asia. They also typically look at the incoming deals first, instead of actively sourcing deals, and also tend to merely work by way of referrals from fellow Korean investors or big players like Sequoia. While this strategy can bring about good deals, it does not give them a solid understanding of the dynamics of the market, which is critical for long term success in the market, Yoo said.

“Many people in Korea cannot understand why Gojek is so big and why Go-Pay can dominate the market so quickly. These stories are very localized and require an understanding of the context. The big guys do not understand the uniqueness of the market,” said Yoo, who was formerly a director at KIP.

Operating at a more local level, Yoo added, is not only essential in order for investors to know more about the startup community, but also for founders to become more familiar with the presence and value offered by South Korean investors.

“Korean investors don’t have the brand at this moment. Many founders think that Korea only has money, and that’s it. We need to build our own unique brand in SEA but that’s not going to happen at this moment,” he said.

“I don’t think it will change a lot in three years. Some have set up offices in Southeast Asia, but we need more time. Because only setting up an office doesn’t make sense. We need to hire local partners, local managers and operate in a local way. In order to create this kind of development, it takes more than five years, I think,” Yoo said.

SoftBank Ventures Asia is among those firms planning to set up an office in Singapore.

“Setting up [an] office in Singapore has everything to do with expanding our investment focus in the Southeast Asia market. The new office will be shaped up in November and we are greatly looking forward to our journey of finding/supporting/growing together with the next unicorns!” said a spokesperson.