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Southeast Asia Venture Capital Competition: Silicon Valley Isn’t Yet Aware of the Rivalry with Corporate Capital

By Lin Kun, 21st Century Business Herald

“What makes a good venture capitalist?” At a Limited Partners (LP) Forum held at the end of April at Le Meridien, Kuala Lumpur, the above question was asked, receiving honest and unfiltered answers from attending LPs that each play different roles.

Pension funds are most concerned with whether venture capital is profitable; government venture capital firms hope that, aside from making money, venture capitalists will also look into further developing the entrepreneurial ecosystem; and corporate capital is mostly concerned with whether venture capitalists are capable of searching for successful entrepreneurs that have adapted or are adapting well to their respective ecosystem.

Gobi Partners has seemingly recognized each LP’s focal point and has successfully catered their services to these preferences. This early-stage venture capital firm, with its roots in China, discovered and entered the Southeast Asian market early on, seizing the initiative to set up new region-specific funds such as the Meranti ASEAN Growth Fund (MAGF). It has also partnered with LPs such as Malaysia Venture Capital Management Berhad (MAVCAP), Alibaba, and home shopping company GS Shop (a subsidiary of top Korean family-owned business conglomerate, GS Group), and has the support of other well-known LPs.

In the 8 years since entering the Southeast Asian market in 2010, Gobi has closed 4 Southeast Asian funds and one Alibaba Hong Kong Entrepreneurs Fund, invested in 43 Southeast Asian companies (including 4 growth-stage companies), and 14 Hong Kong-based companies. In Mainland China, Gobi manages 3 RMB funds and 2 USD funds. This amounts to approximately $1 B worth of assets under management globally.

Things have changed, the current Southeast Asian market is unlike what it was in the past. While it was often seen as uncompromising before, it is now flooded with many new players – local corporate venture capitalists have been coming together to set up early-stage funds to get a head start in competing for early-stage startups, while the increase in foreign corporate capital has accelerated the pace of mid-to-late stage startups. Overall, the market value is at its highest, so how do the pioneers maintain their edge?

Venture capital firms like Gobi also have to consider the following: apart from those startups that replicate Chinese business models (and have gone through the localization process), what innovative investment opportunities are still available in the Southeast Asian market? How else can venture capitalists provide additional value to their investees? And lastly, how do venture capitalists tread that fine line between the portfolios of financial investors and the considerations of the LPs’ strategic plans?

Local Corporate Capital Initiates Early-Stage Investment

In the past two years, the growth of Southeast Asian tech startups has promoted the involvement of many local families in the venture capital market. Gobi’s Managing Partner (ASEAN) Kay-Mok Ku discovered that, “the recent emergence of early-stage venture capital funding Southeast Asia has mostly been backed by family offices.”

Similar to China, the second generation rich from Southeast Asia’s manufacturing and real estate industries are reconsidering their companies’ development strategies and are expressing the desire to set up their own early-stage funds (Seed round and A round). However, unlike China, many large-scale investors such as Alibaba, Tencent, and other listed companies hold large amounts of capital but rarely involve themselves in early-stage investments.

The reason behind this is that early-stage funds with the range of $5 to $10 M are relatively easy to raise. This is akin to China’s private equity boom which took place 10 years ago; as private equity (PE) appealed to many young second generation rich, they playfully test the PE waters with their parents’ money.

“Naturally, there are many gifted and talented people, and so the chances of success are high,” said Gobi’s Founding Partner Thomas G. Tsao. He added that, “unlike the usual impression most people have of the second generation’s reckless and impulsive nature, many Southeast Asian second generation rich possess finer qualities than just seeking pleasure day in and day out. They have been groomed for business since childhood and are capable of managing and using resources.”

There aren’t many high quality early-stage startups in Southeast Asia, so the successive entry of family offices and a few early-stage investment firms such as 500 Startups, Wavemaker Partners and others has greatly intensified the competition for early-stage investments in Southeast Asia, even giving rise to the battle for startups.

The Blossoming of Growth Funds

While many investment firms are still caught up in the dilemma of whether the number of early-stage investment firms is proportionate to the number of early-stage startups and are just in general hesitating to enter the Southeast Asian market, Gobi has already entered the growth-stage investment market and has received many recommendations for Seed round and A round startups from family offices and foreign early-stage investment firms.

In late August 2017, Gobi announced the first closing of the MAGF at $50 M. The firm stated that the Fund’s total size is $200 M, and that it is focused on securing Series B and C rounds for Southeast Asian-based innovation and tech-related companies.

“While a growth fund amounting to $200 M isn’t big news in China, it is considered uncommon in Southeast Asia. Growth-stage startups that are looking to raise $5 to $20 M are in fact facing funding gaps in Southeast Asia,” said Tsao. At present, there are only a handful of investment firms that invest in B rounds (or later). A similar situation also happened in China 10 years ago.

This is because, aside from the hot climate of Southeast Asia and external conditions such as infectious diseases, LPs are having a hard time finding investment firms that have invested in the region and seen success.

For instance, in the initial stage of being in Southeast Asia, Gobi did not meet any Chinese venture capital firms. Even though individual firms such as Zero One Ventures have 1 or 2 venture capitalists stationed in Indonesia, they are yet to build a complete team, and their business in the region is not large-scale.

Ultimately, the one with the largest amount of capital gains the upper hand in a capital shortage. In 2014, Softbank and Sequoia Capital invested a total of $100 M in Indonesian e-commerce company Tokopedia and deprived its competitors from receiving any investment. This resulted in plenty of harsh criticism towards Softbank.

“As the pool of entrepreneurs expands with the injection of capital, there will be a shift to the inflection point of the risk-reward ratio. In cases where the overall valuation of the startup is not high, growth funds can obtain the rate of return from early-stage investments by investing at a relatively later stage,” Tsao said.

It is understood that in Southeast Asia, Seed round investments only require $250 K to $750 K, while A round investments require $1 M to $5 M, and a B round would require funds ranging from $5 to $20 M.

“Our observation of the Chinese market has highlighted the need to create and add more value [to a startup] by using different products. The idea of applying the Chinese experience in this region has also gained support from many LPs, and this confidence has helped us to raise funds smoothly,” Michael Zhu, Gobi’s Managing Partner (China), added.

Investment Opportunities: Not Merely About Business Model Innovation

It is not fitting to claim that startups in Southeast Asia are just clones of Chinese Internet companies and their business models, or to assume that these startups lack technological innovation. The region actually has its own unique advantages over cutting-edge issues like Artificial Intelligence (AI), Blockchain, and Big Data.

Big Data, for instance, is mainly dominated by WeChat and e-commerce companies in China. In Southeast Asia however, Big Data is dominated by Go-Jek. Kay-Mok told reporters that e-commerce could only account for 20% of the consumer services industry, whereas 80% of the remaining data is offline, and is yet to be discovered and utilized. This fact opens up a different window of opportunity in Southeast Asia.

Additionally, China does not provide a favorable environment for digital currency, cash loans, and other similar businesses to survive due to a number of reasons, whereas Southeast Asia has remained open to it. For example, the Indonesian government not only welcomes cash loans, but also grants licenses to many companies. Among the first batch of companies that received their licenses, several were fully Chinese-funded.

In China, Blockchain has sparked fierce debate as a result of raving speculation. While many companies are still buying into the guise of blockchain technology, and implementing fake ICOs, startup companies in Southeast Asia are already considering introducing blockchain technology to their business to remove any bottlenecks from their expansion efforts.

Triip.me is one of these companies. The Vietnam-based tourism platform has a network of 6,000 local private tour guides from different parts of the world that develop specialized products. Even though it is easy to get these guides certified, the personalized local experiences they provide undergo strict scrutiny and requirements, resulting in low efficiency for Triip, as well as rendering the effort to expand difficult. These obstacles have made Triip place high hopes in Blockchain.

Triip’s CFO Stacey Lee is a successful serial entrepreneur. She previously founded e-commerce portals that target female audiences, as well as mothers and babies. Subsequently, she decided to join Triip and enter the enormous travel market, which is worth $168 B; the company’s business model attracted her. She told reporters, “We hope to use the decentralized aspect of Blockchain, which is a more methodical approach to earn profit.”

Bridging Southeast Asia: The Need for Experience and Value

In 2010, Gobi Partners had just made its way into Southeast Asia, and it was a time of struggle for Thomas Tsao. Even so, Gobi did not view the timing of their entry into the market as too early. Tsao’s decision was questioned and doubted by many who deemed that it was too risky to venture into Southeast Asia. Nevertheless, with the investment experience in China under his belt, Tsao firmly believed that startups in Hong Kong and Southeast Asia would surely succeed.

In fact, at the time an extrinsic motivation propelled Gobi into investing in Southeast Asia. Around 2010, the Singaporean government made investments into a batch of startup companies and were in search of a huge market to use as a reference point; they identified the Chinese market as their ideal choice. Upon learning about Gobi’s experience in China, the government reached out to the firm, simultaneously stating their hope to cooperate with more Chinese funds with Gobi’s help.

Kay-Mok told reporters, “we initially planned to bring Southeast Asian companies into China. Conversely, it is now Chinese companies that want to enter Southeast Asia.”

Many Chinese companies are in fact getting a lot of business from Southeast Asia. For example, ¼ of Tuniu’s revenue comes from Southeast Asia. Half of Camera360’s users are from overseas: even though they compete fiercely with Meitu in China, they have secured first place in Southeast Asian markets such as Indonesia, Malaysia and Thailand, despite not doing any promotional campaigns in the region.

“So, why don’t we check out Southeast Asia?” Tsao asked.

Gobi believes that it can help increase the value of Chinese companies by aiding their expansion into the Southeast Asian market. Firstly, by sharing their business models to investors, and then by helping them to seek new funds. When the firm invests into the later rounds of Southeast Asian startups, most of these rounds will involve regional or international companies, and Gobi plays the role of connecting them with overseas investors. For instance, Gobi assisted Mainspring Technology (Indonesia’s Toutiao) by introducing them to Toutiao. “We maintain good relationships with many Chinese investment firms and are informed of the ones that are interested in investing in Southeast Asia. When companies are challenged by funding gaps in the region, we bring them into China.” Tsao said.

Gobi’s investment experience, which has been accumulated over the past 16 years, can definitely benefit startups in Southeast Asia. “We have seen all the inevitable obstacles to be faced in the growth process of various startups, all the challenges encountered in each round of funding, yet all these problems have their own solutions,” Zhu said. He is also convinced that Gobi is well-equipped with investment experience in both regions. “However, specifically having a localized team makes it even easier for us to seize opportunities.” He said.

Are the VC and PE Markets Pressured by Corporate Investors?

Unlike early-stage investments which are highly sought after, growth funds have been less popular in Southeast Asia, whereas certain mid-to-late stage investments are favored by corporate investors, particularly those from China, Japan, South Korea and other countries, who have been increasingly investing in the region, creating pressure on other parties.

In 2017, the main players in several of the biggest M&A deals in the Southeast Asian market were all Chinese companies: in April, Alibaba and the Southeast Asian e-commerce platform Lazada Group reached a $1 B holdings acquisition agreement. In July, Tencent invested $150 M in Indonesian ride-hailing startup Go-Jek; subsequently, Southeast Asia’s ride sharing app Grab announced the closing of a new round of funding worth $2 B; investors in the round included Didi and Softbank. In August, Indonesia’s largest e-commerce platform, Tokopedia, announced that Alibaba will be leading a new round of funding for them that was worth $1.1 B.

In fact, apart from Asian companies such as Alibaba and GS Shop, many American and European companies, including Amazon, are entering the Southeast Asian market. In addition to gaining market growth through VCs as LPs, these corporate investors have also been actively searching for M&A deals of large startups.

“Besides paying attention to whether the startups have sufficient room to grow, Alibaba is also concerned about whether our own resources will be able to help the company to grow, and what impact our help can have.” Said Kenny Ho, Alibaba Group’s Head of Investments for India and Southeast Asia.

On the other hand, in China speculations and theories about the “BAT Threat” have been rampant, and some media have even concluded that “Tencent has no ambition,” indicating that corporate investors (especially Internet giants) have transitioned to new investing strategies, thus putting pressure on VCs and PEs. So how do VCs or PEs handle their relationships with corporate investors?

Why do VCs and PEs feel pressured by big companies in China? Zhu answers that, “it’s because there are too few exclusively technology companies in China. Many companies will need to consult BAT about financial aid, and it’s pretty much required for their business model. As they desire to create a big market, a large sum of money is therefore needed to subsidize the market (of course, VCs are also responsible to an extent because they encourage this effort). Moreover, for companies to just make it to the next round, another round of investment is necessary. But in this market, who could be able to write a cheque worth $1 B just like that? Using funds to finance a startup may require 50 [funds] but just one BAT will be able to get you that money.”

Due to China’s background in trade war, Zhu is convinced that there will be a wave of technology companies that will be able to breakthrough in the future. “There are rumors that chip manufacturing companies can go public without even having to wait in line. This encourages China to master more core technologies and greatly reduces the reliance of these companies on BAT. It also indicates that the survivability of VCs and PEs and their ability to provide value is definitely present. What it depends on really is the VC’s or PE’s strategy for value creation and what kind of company they will invest in.”

The attitudes of startups play a big part when it comes to procuring funds from VCs/PEs or corporate investors. The difficult choice they face is whether to become just a strategic figurehead for corporate investors, or to maintain independent operations. “Many companies receiving funds undermine the need to obtain funds from Tencent or Alibaba at an earlier stage. It is a game of relationships.” Says Zhu.

According to Kay-Mok, many startups have realized that they can’t utilize innovation to completely disrupt the ecosystems of big companies. Silicon Valley’s corporate investors are a notable example: Cisco does many M&A deals annually, and most of them are actually startups created by former employees. These people could not create new businesses while still in the organization itself because there are too many hierarchical complications. Now, with this situation also taking place within Alibaba and Tencent, more of such phenomena will happen in China in the near future.

Zhu believes that this situation may also occur in Southeast Asia, but it will require some time. According to the provided data, the Southeast Asian market is relatively fragmented and more complex than the one in China; a large company does necessarily mean that integration will be a success. “Different countries such as Indonesia, Malaysia, and Vietnam all speak different languages and have different cultures. A procedure is necessary to help Internet companies take root in these countries. And this is why Gobi invests and stations people everywhere; it allows communication with local entrepreneurs.”

In fact, companies that are not under a big company’s industrial ecosystem will usually be immediately acquired. Zoom, which is committed to providing short-distance delivery services for e-commerce companies is a typical example.

As Southeast Asia’s transportation infrastructure is underdeveloped, motorcycles play an important role in being the solution for last-mile logistics. This marked the birth of Zoom. Currently the company has 150 full-time riders as well as more than 4000 part-timers.

Jeevan, Founder of Zoom, believes that even if e-commerce providers bear good intentions when providing in-house delivery to ensure a good service experience, there is still room for third-party delivery services. He explained that the local e-commerce companies have attempted to create their own delivery fleets, and although they were able to guarantee the quality of the service, it was subjected to the fluctuating number of orders they received every day. After operating at a loss for a few years, they had to give up. Additionally, the current focus of e-commerce companies is still GMV growth. The advantage of third-party delivery companies is that they can collaborate with many e-commerce businesses. For now, third-party delivery services still have a window of at least a few years. In the future, the delivery business will most probably be absorbed by e-commerce giants, but this may take some time.

Furthermore, corporate capital has been blocked for policy reasons. Since only less than 40% of the total Southeast Asian population have bank accounts, the unbanked have become the target of local startups, as well as many international third-party digital payment giants. OnOnPay, a Vietnamese version of Ant Financial Services Group that was created three years ago, once almost had a working deal with Alibaba.

To date, despite only having 150 employees, the operational framework of OnOnPay is not inferior to Ant Financial. Aside from providing payment services, the platform also has other asset management modules, which are based on data analysis. Its users can even pay their utility bills on the platform. In 2016, the company received $800 K from Gobi in their Pre-Series A round.

Currently, there are 1,800 affiliated stores on their platform that are bringing in monthly sales of about $2 M. These types of companies are perhaps considered perfect M&A targets by corporate capital, however, according to insiders, at one-point OnOnPay had the intention of being acquired by Alibaba, but due to policy issues the acquisition did not take place. Despite this, the company still maintains a working relationship with Alibaba.

Silicon Valley Is Not Yet Aware

Although in the past year the media has repeatedly reported on Tencent, Alibaba, JD, and other huge investment deals in Southeast Asia, there can be no denying the fact that 80% - 85% of the business done in the region still goes into the hands of two companies: Google and Facebook. The tools and software that are commonly used by Southeast Asian white-collar workers are Google, Whatsapp, and LinkedIn instead of Baidu and WeChat.

According to Kay-Mok, this indicates that the future battle for the platform space in Southeast Asia market would take place between China and the US. “Geographically, Southeast Asia is closer to China, and shares similar cultures. It’s an advantage that Chinese companies can leverage.” He also believes that Chinese companies must first achieve stability in the region in order to realize a globalized strategy. While the English language gives American companies an advantage because of the fact that it is universally spoken and understood (thus making communication easier), China reigns in the hardware and software industries, as more than 50% of pre-installed mobile apps come from China.

What’s comforting is that Google, Facebook, and other US companies are not paying too much attention to the change of traffic in the region. Tsao believes that, “for the time being, US companies have no interested in the Southeast Asian market. Chinese companies have enjoyed a good momentum in the region recently, but this is just the beginning. And there’s still room for improvement.”

“Many US companies are ‘pulled’ to enter markets in other regions. Chinese companies on the other hand, are ‘pushing’ to enter other markets. AliPay owes its expansion to Chinese tourists who brought it out of China,” added Kay-Mok. “US companies feel that this market is too small. They believe that as long as they focus on the US market, they will naturally achieve globalization, and win the battle for digital supremacy. Chinese companies pay attention to the regional markets and local strategies, while also looking to acquire users online.”

Aside from corporates that remain uninformed about the region’s potential, the Southeast Asian market has still attracted the attention of Silicon Valley mainstream funds, even though Asian funds are already eager to test the waters. At present, these Silicon Valley funds are still deliberating on whether to enter China or India – the two largest markets – leaving Southeast Asia out of the picture.

The strength of these Silicon Valley funds is to conquer the Western market, while entrepreneurs in Southeast Asia are mainly here to address local needs. Tsao said, “China’s VC firms are making the first move this time around. Once this market becomes more mature, you’ll see Silicon Valley making its way here.”