Startup valuations globally are on the rise, but is this growth sustainable and justified?
“It all boils down to fundamentals at the end of the day,” said Vertex Holdings chief executive officer Chua Kee Lock during a fireside chat at the recently-concluded Asia PE-VC Summit 2021.
“The question is whether it is a multi-billion dollar concept or just a $50-million idea…What we need to do is make sure that the team and technology are real. [And that] we’re not investing in some fluffy concept,” shared Chua.
Venture capital as an asset class continues to hit record highs in terms of capital raised and invested globally.
According to Preqin’s Global Private Equity and Venture Capital Report 2021, $297 billion was invested and $391 billion realised through exits in 2020 for venture capital alone. Closer to home, SE Asian startups have raked in at least $17.2 billion since the beginning of 2021, according to DealStreetAsia’s SE Asia Private Capital Markets 2021 report. This is more than double the amount raised for all of 2020.
Vertex Holdings has taken advantage of capital flooding global markets by raising its first bond – a S$450 million ($330 million) seven-year issuance to support its venture capital activities at the holding level.
The bond issue seeks to not only diversify its sources of funding but also allow investors exposure to venture capital as an asset class. Vertex Holdings has an active portfolio of over 200 firms in technology and healthcare across key innovation hubs around the world. Its regional portfolio includes Grab, PatSnap, Validus, Tickled Media, FirstCry, Warung Pintar and Nium.
Vertex is also reportedly in talks to launch a special purpose acquisition company (SPAC) on the Singapore Exchange (SGX) — a move that will see the Singapore-based venture capital firm dabble in public market investing. Chua declined to comment on Vertex’s SPAC plans but shared it as something the Southeast Asian ecosystem should support and leverage to grow regional businesses.
We’re increasingly seeing LPs deploy money into venture capital. How have LP conversations evolved for Vertex both on a global level as well as for Southeast Asia?
If you look at the past five to six years of performance for venture capital as a group, it has generally performed better than many other asset classes. So a lot more money will enter this sector. But in terms of where the money is being deployed in the past 10 years, this has mostly been pouring into the US and China, and to some extent a bit more to Israel.
SE Asia in the past has been less attractive to many international investors, largely because relative to everything else, obviously, it looks small. If you look at five, six years ago, SE Asia venture capital has been $2-3 billion. Up to September this year, you will get $10 billion and many more companies raising money. You also see a lot more exits – Grab and many others are seeking IPO. So there are a lot of international investors and LPs seeing the opportunity to create returns in Southeast Asia.
In the last 12 to 18 months, we are getting a lot more people asking questions, inviting conversations to update where we are, and talk about our performance. We will continue to see more of this, especially with the China-US trade war still looming, everybody will be mindful to find other places to deploy capital. I think the next few years should be pretty good for venture capital in Southeast Asia.
We’ve seen a significant ramp-up in VC deployment activity from new and more investors globally. The pace is picking up and the cheque sizes are growing larger. Where are we heading as a VC market and what does this mean for an investor like Vertex?
For Southeast Asia and India team, this is actually still in the early stages. So at least in terms of cheque size, it’s still relatively small compared to what I see in China and the US today. Of course, as a company scales over time, it’ll become bigger. Series C and D rounds will become even bigger. In SE Asia, it would be $5-10 million generally speaking. Of course, there are some $200 million rounds that are still exceptions and outliers. SE Asia is a big market with 600 million people population, a growing middle class, internet and broadband and tech-savvy young people. So there’s a lot more opportunity to capture attention and create better revenue. That’s why a lot of times, you see early-stage companies raise modest amounts of money in the beginning, but once they’re able to prove their concept, their Series B rounds become much bigger and comes around much faster, because they are able to capture that lion’s share faster. I think that that will continue to be the case for the next couple of years.
Has there been any surprise on the upside around valuations especially after the pandemic last year? What are you seeing on this front from a global level as well as here in SE Asia?
I guess the unfortunate thing is when you have a lot more money coming into one market, whether it’s China or the US, you generally will create inflation. In any business, this is one of the problems so I think we are no exception.
We are seeing that valuations are getting higher than what they used to be. But relative to exit, if you are able to exit at an even higher valuation, that is fine. The question is always whether this concept is a multi-billion dollar concept or just a $50 million idea. So there’s something that we still have to ask ourselves at the same time. Entry prices clearly have gone up there is no doubt, but I think they will continue to go up as the market continues to attract a lot more money.
Do you think valuations in SE Asia are growing at a sustainable pace?
For venture capital investments, the valuation sometimes to a large extent is proportionate to the exit market. The public market in the past few years has been really hot, thanks to many countries printing a lot more money. It’s a lot of this money coming into the stock market that drives up the valuation in public markets, which also brings up private market valuation.
Relative to China and the US in terms of entrepreneurial experience and capability, maybe SE Asia is slightly behind. Whether it is valid and justifiable ultimately is still back to the same thing. If you pay higher, can you get even higher exit valuations and so on. So I think when you do investments, you still have to assess the team, the exit valuation, the concept and its execution abilities.
Can you give us a sense of Vertex’s exit expectations in the next 6-12 months? Is this the time for Vertex to accelerate the exit momentum for some of your portfolio companies?
First of all, the company has to be ready. If you are a software company, the company has to be at least $100 million in revenue whether ARR or annualised to have a decent IPO. Whether it’s our Israel or China fund, we have different portfolios at different levels of development. Some of them are much more advanced, others are still much further behind. A $20-million revenue company can’t get much attention inside the market. So you have to prioritise some of these developments.
Some of our companies are getting very close to that and we definitely encourage them to go and raise more money in the public market. The public market is not necessarily an exit for many of us, it’s just the beginning of raising more capital so you can continue to scale faster. If your company’s ready to do that, we should always encourage them to do this. If they’re not ready then don’t we don’t force them to do it, because the company could collapse after IPO. That’s something that we’ve had to always prioritise.
We’ve also witnessed a great bifurcation between the US and Chinese ecosystems in the last year. Chinese tech giants have been pulling out their IPO plans in the US. The Chinese government has also been clamping down on several of its own sectors. How do you see this playing out in terms of exit scenarios for Chinese companies?
This bifurcation will continue for a while, so I guess Chinese companies will probably find it much more convenient to go IPO in Hong Kong which is quite an efficient market by itself. Some companies may even find it better to be listed on the STAR Board in Shanghai or the Shenzhen Board. One of the advantages for the large Chinese companies is that they have a lot more options, so I think that’s not going to be an issue for Chinese companies. In SE Asia today, the US is still the only option for us for now. Hopefully one day that will change.
Is Vertex becoming more cautious with pre-IPO deals in China, considering that the path to US IPOs is facing heightened regulations from Beijing and Washington?
Our China funds are early-stage funds, so we don’t really do pre-IPO investments. But having said that, I think there are still some great pre-IPO Chinese companies. We’ve invested actively in China in the past. We don’t invest in sectors related to the military or weapons because those are too sensitive. Now we just have to include data and education in that category, but it doesn’t mean there’s nothing to invest in. China’s consumer sector is still very big, so are its semiconductor and software sectors. The biotech sector is also very large and growing very well. There’s a lot more we can do.
Vertex is well known for being the first institutional investor in Grab. Some may wonder why Vertex decided to take a partial exit on the firm much earlier. Could you take us through some of your thoughts around Vertex’s exit strategy?
There are a couple of things at play. First, the company needs to be ready to go IPO and not everybody is able to execute so well as what Grab has done. They’ve scaled so fast and so well and expanded to compete against Uber and practically killed it. Very few people are able to do this well. So credit to Anthony and the team for being able to achieve this.
For us as a venture capitalist, the priority is always to grow the company, build in strength over time, take the company IPO, which will be the ideal case. In the absence of that, if somebody comes around and offers us a better price in terms of M&A to buy the whole company at a better price then why not?
Now of course as a VC, it’s always about returning capital to the investor. I always point out to my younger colleagues that it’s very nice to have the so-called “artificial mark-up”. We open a restaurant and give customers an artificial mark-up to buy food, but it’s all still down to real cash, right? So for your investor, it’s all about distribution and about returns.
At that point in time, if you feel that you have a good price, and based on what you’re trying to achieve, relative to timing and everything else, you feel that is a good price, you should create a return and give money back to your investors because if the investor has the money, they probably can generate a better return than you can. If you’re not able to 3x or 10x the money, maybe it’s better for you to take the money and give it back to the investor, let them create that better return.
For us, whether it’s Grab or anybody else, it’s all about these considerations. Is this the right price, is this the right time, or can we do even better if we wait? Or is it better to give the money back to investors or to let them use the money for other purposes? These are the considerations.
How far away is SE Asia in terms of exit ecosystem maturity compared to some of the other ecosystems out there like Israel, the US, China?
What we are going through is not very different from many markets. I still remember 15 years ago, when sina.com went IPO, everybody pointed out to me that this was only one example. And then Netease came and they would say – only two examples.
Fast forward to today, China has accelerated and many companies have gone IPO. So today you are going to see the same thing. First, we hear about Razer, then Garena and Sea Group. Now it is Grab and Bukalapak. We are just counting numbers. At some point in time, we’ll be hearing about it every day.
We will see more of these examples in the next 4-6 years. That’s why we’re seeing a lot more international investors paying attention to this market.
Can you talk about your plans for SPACs in Singapore?
All credit to SGX and MAS on the recent SGX SPAC rules. They’ve come up with very well-balanced rules. This should create a lot of interest for people to try to create a blank check company in SGX and use these to acquire firms in SE Asia.
Why this is so exciting is because today, if you are a technology company and you want to go IPO, the US is the only option. And today, you can go to a US IPO, you have to be $5-10 billion before any serious investor would consider you for the listing. Of course, there is the Hong Kong market and that is largely a China story. For most of Southeast Asia, there’s no such thing as a China story for the moment. So you are still sort of stuck, right? What if you’re around $2.5 or 3 billion and you want to raise more money? Is there such an option?
So this SGX blank check company approach gives additional avenues to some of these companies, which for the interim will allow them to raise more capital at a decent valuation and then continue on their growth trajectory. For us in Southeast Asia, I think we should support it and try to see how we can leverage this to grow our businesses.
Did Vertex ever consider a SPAC listing in the US before?
Yes, the SPAC idea is not new. We actually studied it a few years ago and decided not to do anything in the US largely because, at that point, we felt that there was just too much noise. I read some statistics that there are 300 SPACs that raised almost $150 billion. So just imagine, SPACs only have 24 months to find a company to acquire, or you’d have to return money back to investors. Think about that — out of these 300 SPACs, many of them were created 1-1.5 years ago. Many of them are expiring soon. How many $5 billion companies can you acquire?
I think the US is one of those cases where there’s a lot of excitement and a lot of them are now running out of time. In 12 months, they have to find a good target to acquire or they will have to return the capital. The worst thing is that in the past six to seven months, we’re seeing share redemption rates rising, with some going as high as 95%. On average, I believe it was something like 65%, which is still incredible.
That means if you raise $100 million at the SPAC IPO, $65 million of that will disappear, and $35 million will remain but you still have to pay a cost of about $7 million. So the actual amount left is $20 million. That’s not a lot of money for a technology company out there. In Southeast Asia, that’s like a Series B or C round. For an IPO, you should be raising something like $150-200 million, isn’t it? So it’s quite an interesting trend that’s happening there now.
How is Vertex different from the other Temasek-backed firms?
We are a venture capital firm and Temasek has other private equity teams. They are certainly addressing different sectors. Of our six funds, five of them are in the early stage fund and the growth fund is more in early-growth stages or Series C and D, not so much in later growth rounds. So, in a sense, we are much more focused on the early-stage technology sector. The other Temasek groups address other sectors.