There is no shortage of capital flowing into Southeast Asia’s startups. According to the Singapore Venture Capital and Private Equity Association, both private equity (PE) and venture capital (VC) investments in Southeast Asia have been on an upward trend since 2015. 2018 saw USD 10.5 billion invested in PE and VC deals in the region, with a notable increase in VC investment activity from USD 2.7 billion in 2017 to USD 4.6 billion in 2018.
Therefore, the biggest challenge facing startups in the region is not capital, but the lack of human capital, a group of VCs observed during a discussion at Singapore’s Innovfest Unbound conference last week. That’s why they have increasingly been extending support to their portfolio companies beyond capital investments, with marketing, recruitment, and legal advice.
“The biggest problem in our region is the lack of human capital. So our biggest team isn’t the investment team – it’s portfolio services. These are senior people our startups can lean on for help in finance, marketing, recruiting and talent,” said Abheek Anand, managing director at Sequoia Capital during the discussion.
The problem is a lack of trained talents, Nikhil Kapur, a partner at VC firm Strive, agreed. He observed that most startups are led by first-time founders who need almost 24/7 support. “As a result, within our investment team, we hired full-stack VCs, who help our portfolio companies manage their day-to-day operations and advise them on how to grow from zero to one,” he said. He also advises entrepreneurs to spend at least half of their time on finding the best talents at the beginning of their startup journey.
Cheah Sui Ling, operating partner at Wavemaker Ventures said that startups often value investors who can provide advice on strategy and hiring, adding that startups typically have rarely had the opportunity to meet many C-suite managers before they go to pitch to VCs. “For the startups [in our portfolio], it’s been rather helpful for them when we bring them to meet [managements of big firms]. I have brought a bunch of people to meet Comcast and Keppel,” she added. Other than networking, Wavemaker also conducts sales workshops for its startups on how to sell to enterprises.
Investment strategy
Spotting the next unicorn is never easy. Sequoia’s Anand said that he goes into every meeting with startups with what he calls a “first-principle” approach towards the conversation.
“The approach is actually quite simple. Is this market going to be large enough to produce an outsized company and is this a founder who has a unique insight and is particularly well-equipped to solve this particular problem? And if you go in with that lens, then any company that you are meeting becomes relevant,” he added.
“[However], if you go in with the lens that you are only going to invest in AI companies or blockchain companies, then you end up missing some of the [interesting] things. The most interesting companies are the ones that are very hard to predict,” Anand said.
Check sizes vary
Sequoia, according to Anand, is extremely flexible in the way it invests. “We can invest everything from USD 500,000 to USD 500 million in one company. So it’s a very broad range,” he added.
He added that Sequoia also offers to be the only source of capital for a startup, but founders do not have to exercise the offer. “Our philosophy is very much [like this] – let’s do what’s the right thing is for the company and let’s have the founders focus on building the company and not be distracted by capital raising and let’s make sure that the company is capitalized to the extent that they have a disproportionate shot at being successful in the market,” he said.
Anand said that Sequoia has also written checks of about USD 5 million each last year for pre-launch companies that it believes in, and are going after very attractive markets. “The way we approach these opportunities is saying [that] we know these are founders that we really like and markets that we understand. What can we do to make sure these founders have an outsized chance of being successful in what they do?” he added.
Other venture capitalists are much more modest in their check size, with Wavemaker’s Cheah saying that the firm started out with smaller checks of USD 250,000 to USD 300,000 with its earlier funds. Now, with its third fund, it is able to write checks of USD 1 million to USD 2 million.
Meanwhile, STRIVE’s Kapur sees a gap in funding for very early-stage startups. Therefore, the firm started investing between USD 100,000 to USD 500,000 in pre-launch companies. “[We only invest if startups] have a strong founder, [and is in a] good market that we probably understand. [Then, we] are willing to commit and take a lot of risks. Otherwise, we would just ask the company to launch [first] and show us the first one or two signals from the market that customers have started purchasing or at least using the products in an active manner,” Kapur said.
Despite the constant flow of capital, venture capitalists continue to be picky. In fact, Kapur feels that it is even more difficult to get capital funding from venture capitalists now compared to a few years ago.
“VCs are becoming more demanding in terms of the scale that they need to see and the product to market fit etc [before they commit to any funding]. VCs are also getting more intelligent in terms of differentiating “what is a good company but not a great company,” he said. As a result, VCs are becoming more conservative in their investments especially at the Series A stage. “[Startups] need to show significant scale before the USD 5 million to USD 10 million sized checks start coming through,” Kapur said.
Exit to unicorn
A VC’s performance is judged on whether the firm can make money from its investments. The VC at Innovfest’s panel generally did not foresee any problems in exiting their portfolios in the region. They predict that M&As and secondary sales will be the more popular way to exit as compared to IPOs.
Wavemaker’s Cheah said that she had worked on 3 exits last month alone.
“What’s helping is that there are decacorns and unicorns in the region that can acquire these [startups] because they are building products and solutions that these companies want,” she added.
“[An exit via] IPO, I think, [will be] quite difficult, unless you are a billion-dollar type of company like Razer. There are not that many companies that can get there within a short period of time. So I think at least from a B2B perspective, there will probably be more M&A exits,” she added. Razer was listed on the Hong Kong Stock Exchange in November 2017.
Nikhil said that Strive has invested in 9 companies and has exited 5 in the past 7 years. “We are now seeing a lot of secondary sales happening especially for early-stage investors like us who come in at the seed stage, and are able to [exit via] another bigger fund who wants to come in at a Series B level,” he said.
KrASIA is Innovfest Unbound’s media partner.