Southeast Asia’s seed-stage investment ecosystem has transformed dramatically in the last 10 years.
Venture capital firms (VCs) like Jungle Ventures and Golden Gate Ventures, which began with modest $10-million seed funds each, now oversee portfolios amounting to hundreds of millions of dollars. Entrepreneurism, once a frowned-upon profession in Asia, has become the dream pursuit for thousands of hungry tech professionals, as overseas investors eagerly buy into the promise of Southeast Asia’s growth story.
Founders today have countless choices in startup accelerators than ever before. Series A investors, too, have way more of these programmes to run through to identify and scout for top talent. While Southeast Asia may not be short of promising founders, that very pool of talent has become significantly more fragmented today than ever before.
The dynamics of seed investing is also evolving.
Cut-throat competition at the Series A stage is leading Southeast Asian VCs to eye seed funds to capture talent further up the pipeline. Seed investing is also increasingly regional and global in scope, as foreign investors identify similar investment theses across emerging markets in Southeast Asia and around the world.
Southeast Asia’s fragmented talent pool
When Joyful Frog Digital Innovation Asia (JFDI) was first incorporated in 2010, the concept of an accelerator didn’t even exist in Asia. Its co-founders, Hugh Mason and Meng Wong, met by chance at a networking event in Singapore, who clicked instantly on what they observed to be highly promising features of the Singaporean market.
“There was a lot of intellectual capital, smart people coming out of top universities. There was also a lot of financial capital. But at that time, there was no social capital for entrepreneurship. No place for entrepreneurs to come together,” shared Mason, co-founder and CEO of JFDI.Asia.
A year later, the pair started Hackerspace, Singapore’s first co-working space and a little later, JFDI.Asia, the city state’s first startup accelerator programme. Between 2012 and 2015, JFDI made 70 pre-seed investments, spawning some of Southeast Asia’s earliest tech startups, including names like TradeGecko (acquired by Intuit) and Glints (backed by Wavemaker Partners, Monk’s Hill Ventures and others).
By 2015, JFDI’s first-mover advantage was fast eroding.
Several corporates and institutions began jumping on the bandwagon to launch their own accelerator programmes. “We ended up with a ludicrous situation of 40 or 50 accelerators in Singapore,” shared Mason.
“We could see that there was going to be a race to the bottom on price. So we thought to ourselves, okay, we’ve deployed our capital. There’s no way that we can make the business model work. In the US, you can get a return within a couple of years on US valuations. But you couldn’t do that here,” he said.
The issue wasn’t that JFDI’s investors were impatient for returns. On the contrary, all their investors understood their challenges as pioneers and expected this to be an 8-10 year wait at the very least. But this rapid “fragmentation of talent” across copycat accelerators was making it difficult for JFDI to stay competitive.
The turning point for them came when Mason and Meng were invited to a Singapore founders forum in 2015. “It was a bit weird because there were hardly any entrepreneurs. It was all investment bankers and civil servants,” he recalled.
“Singapore Prime Minister Lee Hsien Loong announced his Sudoku puzzle solving programme, and I remember Meng and I looked at each other and said, our job is done. The PM is publicly endorsing startups. This is now mainstream. We don’t need to be here anymore,” he said.
In 2016, JFDI shut its accelerator programme. Entrepreneurship and venture capital catapulted significantly after. The startup community has only fragmented further since, shared Mason.
Today, there are 216 incubators and accelerator programmes in Singapore alone, according to StartupSG’s website. But all of them are competing for a share of a tech talent pool that is unlikely to have grown significantly in size in the last five years.
The strain in deal quality in programmes like Entrepreneur First suggests that this continues to be a challenge for accelerators today since the success of these programmes is fundamentally tied to the depth and volume of talent they can attract consistently each year.
While fragmentation of talent wouldn’t necessarily mean an overall dip in seed deal flow quality, it could lead to more arduous deal sourcing efforts for early-stage VCs, particularly if these funds have yet to build a solid reputation in the market.
The proliferation of Series A funds may drive more activity into seeds
Venture money is in great supply, but one common frustration among seed investors is that it tends to be reserved for startups that are Series A and above and in B2C sectors. Some cite an “overabundance” in Series A funds in the region.
According to DealStreetAsia data, 57 out of 81 or roughly 70 per cent of Southeast Asian VCs were Series A or “early-stage” funds that successfully raised capital in 2019 to the first half of 2020. Of these, 16 were seed funds while eight were growth-stage vehicles.
Older VCs like Jungle Ventures and Golden Gate Ventures, who made their debut with seed investments, have graduated into Series A and growth-stage deals. Well-established seed players like Wavemaker Partners are also raising $100-million seed funds.
The $50,000-1 million pre-seed bracket, on the other hand, has yet to see the same level of investor exuberance compared to all the other larger stages. Wing Vasiksiri, managing partner and co-founder of iSeed SEA, shared that competition for pre-seed and seed deals in Southeast Asia is still nowhere close to the US, India and China at the moment.
“In the US especially, a seed round would get filled up very, very quickly. You have to move super fast otherwise you would just be left behind,” said Vasikiri. This may open new opportunities for early-stage funds to enter.
Funds like B Capital, Jungle Ventures and Qualgro VC are already showing an early interest in seeds, according to multiple industry stakeholders. Some of them are actively considering seed funds to capture talent earlier in the deal pipeline.
There are a variety of ways this could manifest.
General partners (GPs) may independently raise a separate seed vehicle between partners at the firm as a “scout vehicle” to locate high potential seed talent outside their Series A mandate.
GPs may also opt to be a limited partner (LP) in smaller micro seed funds to capture deal flow.
Alternatively, scouts at venture funds may also go out to raise their own funds if they find that there is LP interest to raise a micro/seed fund across multiple LPs.
“I’ve seen that play out first hand in the US, and I imagine something similar is going to play out here. I also suspect we will see individuals, operators or solo capitalists go out, raise a small angel fund and start deploying capital that way over the next few years,” he added.
Seed investing to be more regional and international
Southeast Asia’s seed funds have also grown increasingly regional and international in scope as well. There are a few reasons for this.
First, the exposure of Southeast Asian startups like Shiok Meats, Shipper and BukuWarung at prominent programmes like Y Combinator is giving foreign investors a taste of talent potential from this region.
Second, investors are also discovering common investment theses that may be applied across emerging markets with similar demographics, technology penetration and usage.
There is a range of emerging market funds so far, with some deploying across India and Southeast Asia (Sequoia Surge, iSeed), others in emerging South Asia (SBK Tech).
Middle East-focused funds like VentureSouq have begun deploying in Indonesia (via Buku Warung), US fund-of-funds Rally Cap Ventures has an emerging market fintech thesis covering Latin America and Africa, and is actively looking for seed GPs in Southeast Asia as well.
SBK Tech, a $20 million first-time fund that covers “emerging South Asia”, was specifically advised to expand its geographical focus beyond its home base of Bangladesh to cater to LPs who may find deploying into a single emerging market fund too risky.
“So far, we’ve found that LPs were more inclined to speak with us when we took a wider emerging market focus. Many of these markets are just at the beginning of their digital transformation journey which has been further accelerated by COVID-19. It’s a great time to be presenting these underserved tech startups to the LP community,” shared Sonia Bashir Kabir, founder of SBK Tech.
Others are envisioning a slightly more contrarian take.
Seed investing, long the domain of local investors with regional networks, can and will increasingly be global in scope too, shared Singapore-based venture platform, Hatcher+.
Hatcher+ has constructed a VC-as-a-service platform called Venture+, which throws wide open the fundraising options for pre-seed and seed deals to the global market.
The platform collates a growing data set of some 600,000 global transactions to date covering equity transactions and venture events including IPOs, financing, exits and M&As.
Hatcher+ then uses this data to offer a range of services including deal flow and portfolio management, predictive analytics, and founder/investor matching services.
Clients may use this to invest from anywhere, in any deal, anywhere across the world.
Hatcher separately operates a venture fund deploying specifically in pre-seed and seed deals, capturing LP interest among corporates, family offices and high net worth individuals (HWNIs) – a growing category of investors who are keen to get into seed investing but aren’t quite sure how.
Hatcher’s LP base is global, as is its deal flow. “We’ve been involved in several seed rounds that have investors from four or five different countries. So it’s absolutely true. The seed is the new series A,” shared Sharp.
“Everything has been stepped forward. Sophisticated investors want to get their hooks into the business so they can put in Series A money. Series A-stages are going up, and it’s forcing everyone earlier and earlier,” he added.
While venture models like Hatcher+ aren’t mainstream yet, funds like theirs as well as micro VCs, and traditional seed VCs will certainly create an increasingly dynamic seed landscape both here in Southeast Asia and globally.