If somebody was thinking about starting up a company in some place in Asia, there would be no better place than Singapore claims Brijesh Pande, Managing Partner, Tembusu ICT Fund-1 & founder of Pepri Ventures in an interaction.
While the city-state has a slew of factors working for its, the city-state’s challenges include a lot of silly money chasing deals, big product companies not doing innovation here, and lack of linkages between the R&D its universities undertake and the local startup community, he adds. Pande also said he was bullish on the opportunities that Indonesia, Thailand, Vietnam and Philippines presented in terms of consumer-tech.
In this interaction with DEALSTREETASIA, Pande gives his perspective on the city-states startup ecosystem, the challenges it faces and the role of its government in its maturing startup ecosystem.
As a VC/Fund in Singapore, what is your take on the startup scene here?
Talking about Singapore specially, if you look at Startup Genome, they rank only two cities in the top 20 globally, Singapore at number 10 and Bengaluru at number 17. Singapore jumped up seven places from 2015. Honestly I can’t think of a better startup environment or ecosystem in Asia than Singapore, and the reasons are the following.
First, support from the government for early-stage startups here is phenomenal. So the biggest investor in the startup ecosystem in Singapore is its government. Second, when you look at the the whole thing around IP, ease of doing business, transparency etc – there’s nobody comparable to Singapore in Asia.
Third, it as an ability to attract human capital – and I’m not talking about cost of living – I’m talking about as a place to live where global human capital would like to migrate to, and would not mind moving their families – it has the ability to attract global talent here. Fourth, we are the epicenter of the Asian story. More than 50% of the global internet, broadband and mobile users globally today are in Asia. So if somebody was thinking about starting up a company in some place in Asia, there would be no better place than to think in Singapore.
However, there are challenges and drawbacks. The big product companies are still not doing product innovation in Singapore. So if you look at Silicon Valley, it was born on the back of big tech companies domiciling in the valley, and the disgruntled from those big companies left to set up tech startups, because they had the requisite technical skills.
So one big challenge we have is finding the second tier of technical talent. It’s not easy to find human capital. Luckily because of the four factors that I mentioned earlier, there’s an amazing amount of entrepreneurs who are ex-Google, ex-Microsoft and from all over the world – Brazil, US etc migrating here to set up their companies – but they are always running into that challenge about the next level of tech talent.
Secondly because of the impetus that the government has provided, there’s a lot of silly money floating around as well. So yeah – lot of deals have been done, and honestly a lot of bad deals have been done. So whenever I meet people they say, ‘Oh Singapore is a very tough place to get Series C and D’. No! That’s because your business models were not good enough to be funded.
Capital today has become fairly global. If you have a good story – which is a growth story – which can capture the region or globally, then you are going to be able to attract capital. My estimate is that there is still half a billion dollars of dry powder that people are sitting on in this part of the world.
So we are one of the funds which were fortunate to be a part of (Singapore government-linked) ESVF2. ESVF3 has been announced. I’m not sure whether ESVF1 has been fully deployed by all the funds. Temasek has been active and you’ve got all the high net worth family office kind of crowd as well. So there’s a lot of dry powder sitting around to do what I would do – venture kind of deals – out here.
Yes, it is the right place to be setting up a startup, but the aspect about the second tier of human capital is a little bit lacking.
Recently, I was on a judging panel for one of the research and development programmes for deep-tech in Singapore. And I was fascinated, there is a lot of interesting R&D being done in Singapore – the linkage of R&D in our Universities versus the startup community is not there. Many of these R&D centres have tied up with the big tech companies, or with big corporates – but that linkage between the startup community and R&D is still not as strong as it should be.
One example I can cite is the NTU’s Robotics Centre – it is cutting edge. It is at par with anything globally. These are like the creme da la creme of people looking at advanced robotics, and again it’s a place where not many people have closely interacted with. So making that linkage between our R&D being done in the Universities versus the startup community – I think there is an opportunity which need to be looked at further.
So does that make Singapore more of a place where you park your company – register is here as the legal system and IP is good, but operate and target other markets in Asia?
Singapore is trying to replicate the model of Israel. Israel has a population of a little over 7 million. We are similar in size. The third largest number in companies listed in Nasdaq after American and Chinese are Israeli companies. So part of tech development is the function of national security. So defence-tech which Israel is at the cutting edge of, is the function of their geopolitical situation. In Singapore, in water technology, we punch above our weight globally – because for us water is a national security issue.
Now the question is, how do you get into sectors which are not still considered national security? But the good thing is all my interactions with the government, I find that they have taken a very serious view on deep tech or the digitization of the economy, and that is going to reap its benefits at some point in time. So yes, for Singapore startups or those creating something saying they are going to target the local market, it won’t be good enough. That is why our fund does enterprise software. For enterprise software, it doesn’t matter where you are based. It just has to be based at the right place – to be close to your target market – which is the Asian consumer.
You spoke about silly money floating around – has that distorted market realities in Singapore? Companies that should have closed down a long time ago are still in the business, because they got funding, were eligible for grants – but in India, China or the valley, the market would have not allowed them to last for so long. This fragments the ecosystem in terms of capital, talent among others.
There is some similarity in terms of silly money, as that of India and China – I would say that when you take ultra high net worth or family offices – in the US – they would readily become an LP in a VC platform.
Whereas culturally, the mindset here is that, ‘we can do it better ourselves’. Culturally we don’t like paying for services, and such a lot of money has gone by these guys – yes, some of them have done well undoubtedly, but a lot of them have got burnt. So that silly money aspect is similar to you’ve seen a lot of crazy deals being funded in India as well.
One other big component here is that, at some point in time, and I honestly hope it happens sooner rather than later – the public sector support will start diminishing. When you see some of those schemes – where you have all these leverage schemes like 85:15 being weaned away (where the Singapore government was contributing 85% of the funding, with the VCs eligible under this scheme putting in only 15%) – that is when people will stop taking disproportionate risk.
So as it migrates and becomes more a private capital market, I think there will be a correction happening. Like I said, this is a price that you end up paying for trying to spur the activity, and I think all the decision makers within the government are very well aware of it. It’s like they do understand that there will be some pains to begin with – but it is beginning to mature – it’s moving to the right direction.
So the early stage venture fund scheme – it is a great build on the technology incubation scheme. Whereas technology incubation, it was disproportionate amount of risk being placed on the government, but at least on the ESVF now, only 50 per cent of the capital comes from the government, and the remaining 50 per cent from the other LPs. It’s risk sharing in equal measure, and as I see things moving along – at some point in time, it will become a situation where the government is a pure LP, as opposed to providing any subsidy to private capital.
There’s another very interesting phenomenon happening in Singapore – fintech. Apart from everything else, a big driver of fintech is the financial services industry that is undergoing a huge compression – it is seeing a huge amount of restructuring. This has been the bankers’ centre – but, there are a number of people who are now looking for alternative careers.
It is very easy to gravitate towards to something which you understand – processes, payments etc and setup up a fintech company. Fintech, I think, is going to soak up a lot of the crazy money as well in the next couple of years at least.
Has the VC ecosystem in SEA matured? Or, when do you see more VCs coming up in this region, who can hold on to their portfolios for a longer tenure, and not seek quick exits.
The typical private equity funds are more of five-year kind of funds. We have a long-term view and our average holding period, I would think would be between four to five years, but again typically within an eight year time frame, we are fairly confident that you should be able to get one or two exit opportunities, even if the company has not hit like a hundred million dollars plus of revenue. But your are right – I’ve seen many guys calling themselves VC and saying they are running a five-year fund.
But you’re setting yourself up to fail, or you’ll keep on going back to your investors asking for extensions. So it’s easy to get money into a fund which only invests in the sectors that people want to see or believe – but, if your doing sectors like enterprise software, you better have a little bit of a medium to long term view.
The maturity will come – like I said, the reason we set up what we did was, we saw there was a huge gap. So I’m sure there are many other people who are thinking like us, and at some some point in time, if they start seeing a few more successes of enterprise software or deep tech coming from our part of the world, I think there’ll be interest.
But again on the bigger end, you’ve now got some of the global majors, who’ve all have a fairly big corpus of an Asian fund. These are longer term funds – they should be able to allocate. But at the VC level still, we don’t see many people competing with us, which at this point in time, we are very happy about.
When you look at SEA, which are the markets that you are bullish on?
So in consumer-tech, I think there are opportunities in Indonesia, Thailand, Vietnam and Philippines. But again, in terms of deep-tech, the only place that I would put my money on is Singapore, and it doesn’t mean it has to be companies that are always founded here – but if somebody has regional or global aspirations, we typically tell them, ‘look if you want to be an ongoing concern, to be able to draw the right talent pool etc, you better come here (be based here in Singapore).
It’s different if you are just an India focused deep-tech company – then don’t leave your borders. But the one thing which Silicon Valley, or the US ecosystem has done so well is that, they are able to attract human capital from all over the world towards their companies, and this has helped them go global.
But, has Singapore priced itself out of the market? Yes, people are attracted to living here, but in terms of costs, it is higher than most of the first world countries. Cost of living here is comparable to some of the most expensive cities in the world.
The pricing has been a function of Singapore largely being a financial services hub as well. So financial services, the services hub concept, and the sector itself is facing a major correction, and at some point in time, I expect to see things like the pay levels etc for the top tier rationalizing. B
ut honestly, when I look at the tech companies we’ve funded, the cost is not that humongously high, and when I’m talking about deep-tech, it’s much lower than doing this in the US for instance. So my answer would be basically yes and no.
That talent which comes here – they need a higher salary to sustain the lifestyle they would have elsewhere. But I think at this point in time, we are not seeing a disproportionate;y high amount being paid to good tech talent here versus in India or anywhere else in the region.
Take us through Tembusu ICT Fund I – what are the key differentiating factors for his fund? Why should a startup approach you, as against the other VCs out there? What is that you bring to the table?
I think first of all is, we understand deep-tech. Our entire ecosystem is people who have invested, or who have operating expertise supporting this fund. There are a couple of operating partners who are CEOs of tech companies, there’s an investment team which has done a lot of tech investments and we’ve also got a full time CTO. So there’s no other fund in Singapore that has a full time CTO who has a thirty plus year of technology experience.
Our first differenciator is the ability to understand and dissect the risks that we’re getting into or the basic business model. Secondly, the biggest challenges for companies is not the cheques that they get. It’s the post investment, the ability to grow – we are able to help them because we are so specialised in a number of ways. Take for instance our CTO – he can help with everything – from coding to product architecture to thought leadership – we are able to get in there and help our portfolio companies with that.
The second piece is for enterprises – a big challenge is the go to market. So enterprise companies run out of money, not because of their marketing costs, but it’s their time to market. Typically, in 18 to 24 months is a typical sales cycle in an enterprise. So Tembusu and Pepri Ventures (the investment vehicle of Brijesh Pande) – our combined network is very very good for being able to take on enterprise companies, and grow them in Asia and beyond.
Third thing of course is the ability to be a long term investor without having the pressures that come with having investors who have a two-three year kind of horizon.
You talked about enabling enterprise companies to expand in Asia and beyond. But is Asia expansion an option? IT and software firms in Asia look at US and Europe as their first port of call when it comes to expansion. Or maybe Japan – but I don’t think that are they open to looking at other Asian markets.
Ok so you’re right. If you were a company which is doing maybe revenues in excess of $20 million dollars, then it opens up a whole bunch of people that you can approach. But people who have come up with a good revenues or pre-revenue or maybe you got one or two pilot customers, then it is very different. It’s difficult to find committed resources that’s one. Secondly, not many of the US or other markets have teams who are based on the ground out here, to be able to add value to these companies (if they were to collaborate or acquire them).
We saw this gap and that there are not many people who have created a proper platform. So undoubtedly, there are some who have made significant returns in venture investing here. It’s a good collection of individuals, many people with good investment expertise. But we did not see many people who are staffed up to be a proper platform for deep-tech, and that’s why we’ve created what we have.
So it’s not just that – I mean imagine, if you’re a company which has got a great idea but do you think you’re going to get a meeting with Andreessen Horowitz just straight off the boat? It’s not that straight forward. Okay, it is different if you’re in the Valley and you run into them in a coffee shop – so again, many of the guys who do deep tech are not that prevalent so it’s not that straight forward to be able to raise your early funding.
I think our current portfolio is a great testament to that. We’ve got a video analysts company which is the first globally to solve for abnormality detections using float trajectories. They are in advanced discussions with companies in France and in the Middle East – they are currently in the process of deploying their technology in Sentosa (island).
Everybody has said this technology is globally unique. They were having a huge challenge for people to even understand what it is they do. So if you’ve looked at public infrastructure – I mean this is round breaking technology. Zero people who were in a position to be able to help them when they need two million dollars which we’ve just invested in them. You know you’ll get guys who’ll give that 500, 600k kind of money, but any kind of product expertise.
I do agree with you that capital is mobile, but the quantum of it, especially with the many specialised guys who are running big funds – it’s very difficult for them to focus on 1 to 5 million dollar kind of tickets in this part of the world where they’re not present.
Agreed, but even when it comes to larger ticket sizes – say in the 10, 20, 30 million range, there are hardly any VCs in that space in Southeast Asia. Specialised guys and global funds may not do small tickets, but even the $10 million to $30 million is not easily accessible here.
I think if you look at sector agnostic funds, which are Singapore-headquartered, they tend to be in the range of 100 to 200 million dollars. So if you look at 100-200 million dollar fund, you’re not going to be investing more than 5-10 million dollars in any one company – so that is the typical sector agnostic fund.
I think at some point in time, we’ll see more funds like us who are geography agnostic but sector focused. So the reason China and India are huge markets is that they have been able to raise significant money for their internal stories – that’s why you’ve had follow-on financings there. So typically, a Series C, Series D kind of company in Singapore would start looking at Temasek, or GIC, or Vertex and some of the others
Secondly, there is a lot of noise… I mean the seed stage has got a significant amount of support and capital coming in, which has resulted in the funding in many poor business models, which would not have been funded otherwise.
So honestly, many of them don’t deserve to be raising follow-on rounds. I have met many entrepreneurs come and meet me and say, ‘oh there isn’t enough capital here’. There is – there is a fair bit of capital available. But if you’re unable to show a Series C, Series D kind of growth opportunity, it’s difficult to attract that capital.
The VC story is not complete without discussing exits? In fact, exits should the primary parameter to evaluate any VC. But when it comes to exit, SEA has not seen many good ones – when do you see the exit story changing?
Honestly when people start doing more product companies, they’ll see a better rate of exits – see if you look at digital consumer typically, it tends to be consolidated under a few large buyers. So let’s say an Amazon coming to this world – they might want to pick up certain companies – those guys are few and far between. The second exit story typically tends to be a listing. It’s a challenging market for IPOs.
So that is why the digital consumer story has been challenging from an exit perspective. Whereas when it comes to product companies or people who have deep tech, once you hit that 15-20 million dollar revenue target, the big companies will be saying: ‘do I do this and build versus buy decision’? And if you are an Asian tech companies, then there global tech companies, Asian telcos…all of who may be interested in you. Large IT companies always look at an acquisition-led growth. In India, TechMahindra alone spent more than $3 billion dollars buying product in 2015.
So for companies which are actually deep-tech, I think there is a big trade sale opportunity for them, and not necessarily an IPO kind of route. So, when you are talking about exits, it also depends on the nature of investments people do – and when you see the current investment trends fading, you will start seeing a better success rate in terms of exits as well.
Several of the large IT companies have in-house funds, and they have even segregated it further, to have funds just for products. In the last two months alone, three big corporates have reached out to me to exchange ideas because they’re looking to set up their own in-house fund. So there is a lot of money which is coming into acquiring or funding some of the deep-tech startups in this part of the world.