S-E Asia VCs move to keep edge as regional startups gain global attention

Singapore

SOME South-east Asian venture capital (VC) firms are at risk of being jostled out of early-to-growth stage deals by global investors impinging on their turf, as the latter are willing to move quicker and pay higher prices for a piece of the region's booming startup space.

The pace and size of their investments underscore the extent of international interest, as global funds come to scout for what could be the next Grab, Sea or Bukalapak.

With decades of experience in spotting and scaling companies, foreign firms move fast. Industry players say it takes about two to three weeks on average for most global VCs to issue a term sheet for early-to-growth stage deals.

Many South-east Asia VCs, on the other hand, used to take one or two months to do the same.

The speed at which a deal goes through depends on many factors - such as the size of the funding round, how competitive the deal is and whether a firm is the lead investor or not. Earlier stage deals, for example, tend to close much quicker than later stage ones.

It also depends on how experienced an investor is. A lawyer at a global law firm told The Business Times (BT) that some international firms might be able to do their due diligence and come to a conclusion efficiently because they have invested in and seen companies with comparable business models around the world.

Silicon Valley-based Rocketship.vc, for instance, built a global database to track statistics such as a startup's revenue growth, competitors and Web activity. This helps them keep tabs on promising businesses and founders, said its partner Madhu Shalini Iyer, who was formerly Gojek's chief data officer.

Data collected over the past few years has helped them save time in certain due diligence and research processes. The VC is also "quick in making decisions", said Ms Iyer. "We will give a definitive answer regarding their investment instead of letting founders wait around."

That is an aspect that many startup founders say they appreciate, since it helps to provide more certainty. One founder of a South-east Asia-based fintech company told BT that international firms will tend to come back with a "no" even if they decide not to invest, plus provide a proper explanation.

"It doesn't feel like going to a fish market and having a conversation. If they don't back you then also they will leave that in a very respectful manner," the founder said, requesting anonymity because he did not want to jeopardise fundraising efforts by discussing firms in public.

Global funds are not betting small too. Some are used to funding startups at higher valuation multiples in their home country, and are less likely to "haggle over valuation as long as it is in a reasonable range", said the fintech startup founder.

The rules are thus being changed and regional players are scrambling to keep pace.

Although they still bring value in terms of on-the-ground experience, hands-on engagement and local networks, observers say that the rising competition means South-east Asian funds will need to differentiate themselves further to keep the edge or get left behind.

It's about having the expertise and ability to help, industry players told BT. Capital is not the only thing that founders need.

At a more granular level, VC firms could ask themselves how they can add value to startups they invest in: do they have a sector expert that can sit on the board and work with founders; do they have the network to make necessary connections and interactions; or can they help navigate the industry well?

Regional firms seem to have recognised this and are not backing down. Tan Yinglan, founding managing partner of Insignia Venture Partners, told BT that South-east Asia VCs will have to "play to their local advantage to stay ahead".

Mr Tan added that many more regional VCs like Insignia are stepping up, focusing more on hiring talent to set up country-specific or sector-specific teams to build localised niches. With their networks, they can also be a platform to eventually connect early-stage startups to global growth-stage investors.

Early-stage VCs like East Ventures or Alpha JWC for instance, differentiate themselves by having strong local networks and presence among early-stage startups in Indonesia, helping startups navigate the local market.

Speaking at BT's regional webinar on Tuesday, managing partner of East Ventures Willson Cuaca said that his firm has over 12 years of experience in Indonesia, and understands the local market very well. "You can't just take that away, there's still value in what we call 'local wisdom'... It is not as simple as coming in with the money and then competing."

Besides relying on a local advantage, others such as 500 Startups South-east Asia have set up early accelerator or incubator programmes to help them get a foot in the door early with promising founders from the region.

Some are using a data-driven approach instead. January Capital, for example, has started building its own tech platforms that can see when "really promising founders set up a startup or incorporate a company", said Jason Edwards, a partner at early-stage VC January Capital and founder of data intelligence platform VentureCap Insights. "We use that in a very outbound approach to reach founders at the earliest time."

And some regional VCs reckon they still have an edge.

"There will always be gaps that foreign or global VCs will never be able to fully address in the same way that a local firm would be able to, in terms of expertise or even simply because of focus and resources. Strong relationships and alignment on value-add from a local investor can trump even the best numbers on a term sheet from a global marquee investor," said Insignia's Mr Tan.

For South-east Asia's tech entrepreneurs, the changing dynamics are not a bad thing. Global investors' hunger for earlier stage deals in the region could mean better terms; while founders can tap on advantages and experiences from both regional and global players.

East Ventures' Mr Cuaca noted at BT's webinar that global investors not only bring money, they also bring knowledge and expertise. "With both, we can look at recruiting more people, and building more innovative products."

Insignia's Mr Tan agreed: "There's also holistic value in having a diverse board and cap table with both local and global investors."

But for rank-and-file venture capitalists who cannot find their own niche, life is not so good. Missing out on the region's hottest deals could hurt them badly: possibly translating into poorer returns.

As January Capital's Mr Edwards puts it: "The competition is heating up. Funds that were around 10 years ago did not have much competition and so good startups would have gone to them. Now things are very different. If VCs just sit back and wait for the best startups to come, they will be waiting for a long time...

"We need to adapt and be proactive."

• Garage is BT's startup vertical. Read more news, analyses and opinion at bt.sg/garage.

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