6/25/2020 Disrupting Venture Capital in Southeast Asia - The Startup - Medium

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Disrupting Venture Capital in Southeast Asia

Chia Jeng Yang
Aug 30, 2019 · 8 min read

By some estimates on Pitchbook, venture capital dry powder has increased up to 11x in
the past 6 years in Southeast Asia. The amount of competition has increased at all levels
intensely as large internationally renowned investors (Naspers, Founders Fund, GGV
Capital, Vulcan Capital, etc) focus on SEA, while prominent local investors and
founders either set up (Tanglin Venture Partners, Asia Partners, Insignia, etc), or
double down with larger funds (Strive, Vickers, Golden Gate Ventures, Openspace,
etc).

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Deal information for SEA from 2009 to 2019. Notice the 2015/2016 in ection point.

To say competition among venture funds in SEA has increased across the board is an
understatement, and it is transforming venture capital and startup entrepreneurship
during a very exciting time.

I spent the last 9 months traveling across Southeast Asia, Europe, and the Bay Area
talking to venture funds to understand where we are at, and how venture funds
themselves are transforming all over the world to cope with increased competition.

I wanted to answer one question:

How will venture fund strategies adapt to generate above-market returns?

How will venture fund strategies adapt to generate above-market

returns?
Funds fundamentally aim to allocate capital into the best-performing companies. You
have three options to outperform the competition and be in the position to invest in the
best companies:

Add value, source better, build it.

I looked into what the different factors were and who was playing in which strategies,
breaking them down below. Value-Addition honestly deserves an article of its own, and
I touch on the high-level of the various arms of Value-Addition in the second half of this
article.

Breaking down Community Creation

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The name of the Venture Capital game is informational asymmetry; who is building the
best startups in stealth mode, where are the best would-be entrepreneurs, how do
funds become the first fund potential entrepreneurs think of when raising money?

Funds build communities that potential and current founders turn to to find like-
minded people, and support, in the aim of turning these communities into avenues for
lead generation for potential investment leads, as well as to build their reputation as a
thought leader in the field, as Spark Capital does with Spark Sessions. CRV also uses
their Accelerated Slack Group of mainly undergrads to get information on new
consumer trends among Gen Z’s.

Breaking down Venture Building

If you can’t find it, build it. This has been an attitude taken by a number of venture
funds who find that they hold the keys to a number of important factors of building a
highly successful company: Access to talent, capital, and an understanding of what
needs to be built.

On the highest spectrum of venture building involvement, companies like Rocket

Internet have famously built and sold billion dollar companies like Lazada in SEA from
scratch to acquisition. These funds tend to own the vast majority of the cap-table.

Moving downwards, funds like Insignia and East Ventures have been known to work
with promising founders on the initial idea, provide the initial Seed capital, and with
members of their investment team joining as key C-suite early employees. These funds
typically then continue their involvement with the company as an investor into their
later rounds and typically own outsized but not significant majority stakes in the
company.

Working in a similar manner, though on a shorter-term basis, companies/programs like

Antler, EF, and Surge, work with individual founders in a programmatic manner, and
help them find cofounders to start companies together, investing an initial pre-
Seed/Seed capital, with no guarantees of a follow-on investment. Post-
investment/program, the founders are typically left to build their companies, with
some support from their investors (who typically generate hundreds of companies
through this model).

. . .

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Breaking down Value-Addition

While googling “VCs that add value” provides several rude memes created by jilted
founders, there are some great funds that add incredible value to their portfolio
companies.

There are two main ways(Capital and Non-Capital value-add) that funds maintain a
competitive edge over others to attract the best companies to accept their money on the
cap-table. Many funds, especially in the US and Europe develop very specialized theses
and are known in the market for their knowledge and ability to deploy help and capital
in specific niches (Point Nine Capital and Redpoint in SaaS is a great example).

Breaking down Capital Value-Add

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Founders like two things in their investors:

They invest fast and they can be reliably counted on to support me with capital.

Investing fast requires shortcutting the typical investing process, either through an
algorithmic/checklist approach or a deliberate portfolio building approach.

Quant/Checklist Investing
Quantitatively driven investing approaches will inevitably disrupt venture capital.
Ryan Caldbeck’s (CEO of CircleUp) famous Twitter storm on how quant-based
investing is already disrupting CPG venture investing sparked my initial interest into
quant-based venture investing. By automating the assessment of large stores of data,

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typically operational performance data on company performance (G.Analytics,

financial, cloud usage, etc), funds are able to get to an investment decision within days,
if not minutes. Credit financing companies like Clearblanc and Brex are also getting
into this space in big ways, and are likely to compete with VC funds in providing capital
to startups.

Checklist driven approaches set aside clear and narrow criteria for investing, typically
based on qualitative filters. Alumni Venture Group co-invests alongside only top-
investors and does not negotiate terms, allowing for fast investment decisions to be
made. Correlation Ventures utilizes data science to identify top companies based on a
variety of metrics, including who previous and existing investors are to co-invest into
deals, investing in as little as 2 days.

Portfolio Investing
Portfolio investing strategies rely on the fact that venture-like returns have to rely on
the vast majority of the investments failing. Aptly captured by 500 Startups’ and the
Hustle Fund’s investment thesis, instead of optimizing for finding the one or two
companies that will become unicorns, funds invest widely into hundreds of companies,
and early with small checks, wait to see if there have been significant successes and
double-down on the winners. This is backed by research showing that the best funds
invest widely and have more strikeouts than mediocre funds.

Reliability
Some funds like to tout their ability to be ‘life-cycle investors’, being able to support the
financing needs of founders from Seed to IPO. The argument is that this framework
allows founders to focus on executing on their business and that their investors would
have the capability and capital to support them at every stage of the way, and with
increasing reliability given the accumulated relationship over time between the founder
and the investor. Life-cycle investors may also sometimes have flexibility in the ticket
size, valuation and rights under the investment agreement. In SEA, such funds include
Softbank Ventures Asia, GGV Capital, Global Founders Capital, and Sequoia.

Breaking down Non-Capital Value-Add

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Proprietary Data
With venture capital being an asymmetrical game, touting access to proprietary data is
an excellent moat, though hard to gauge between funds (or publically rank — Because
I’m no hater — y’all VCs are my friends).

Such information can include helpful fundraising data, relevant networks, market
validation, and more operational data like target/goal settings (i.e. “Your CAC needs to
be XYZ at this stage in this market, your sales efficiency needs to improve by x% given
comparable data from our portfolio companies and the companies we see.”)

Strategic Advisory
All investors add value to their portfolio companies and founders. Some hold
particularly strategic positions because of the specific niche they hold. SOSV’s
Chinaccelerator, in particular, has found a niche in startups looking to break into the
Chinese market from the outside. SOSV’s HAX arm, and TNB Aura, provides specific
expertise in the hardware space, a notoriously hard area for VC funds, with deep
domain experts and former hardware founders to call upon.

CVCs have traditionally played an important role here for their access to the
distribution channels, expertise and business units of their larger corporate parent.

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Internationally renowned funds like Founders Fund, Naspers, Softbank Asia

Ventures will also find themselves in an advantageous position to act as an
informational and network bridge between global business models and networks that
would have increasing relevance to SEA as the ecosystem matures.

Outside SEA and in particular in the U.S., some funds have carved out very specific
niches to cater to very specific business models. Tusk Ventures focuses on industries
that are looking to disrupt heavily regulated industries (ridesharing, insurance, etc),
and works with lobbying groups and politicians to ensure a smooth-sailing for their
portfolios. Unshackled.VC focuses on providing immigration advice to help immigrant
founders get access to the US market by providing help with visa and migrating into the
US, with the thesis that immigrant founders hold large untapped potential, especially if
they are trapped outside the US for immigration reasons.

Brand
When startups do not have much to show, perception can be everything. Some startups
rely heavily on outside validation in the form of the investors they have on their cap-
table to show other investors, potential senior hires, and potential corporate clients, of
their legitimacy and as a weapon to wield in conversations.

Operational help
VC funds have been increasingly moving to a model where they are able to work more
closely with their portfolio companies to help them certain parts of their companies.
A16Z famously pioneered this model at scale, with entire teams set up across different
functions, with experts in marketing, business development, finance and recruiting on
the A16Z team working hand in hand with their portfolio companies. Among other
events, A16Z would organize matchmaking events at their offices for their portfolio
companies and large corporations. Openspace Ventures employes VPs of Product, HR,
Marketing, etc to assist their portfolios with strategic and operational issues — key
hires, platform decisions, etc. Sequoia has a similar approach with their own team of
VPs & Directors of Engineering and HR.

. . .

As competition between venture capital funds continues to heat up, especially with
internationally renowned VCs moving into what was a previously regional-only funding
scene, I expect funds to increasingly compete in one or more of the above ways. My
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hunch is that as the main bottleneck for SEA remains talent and a fragmented market,
funds will increasingly turn to position itself with a strategic go-to-market advisory
niche or venture build (an avenue I am bullish in and have written here before). Either
way, the nascent VC industry of SEA is about to transform itself once more and there
are exciting times ahead. With a buffet of capital sources, it is a great time to be a
founder in Southeast Asia.

Thanks to Sahib Singh from Leapfrog Investments for thoughts/comments.

. . .

Chia dives into consumer investment trends across the U.S. and Asia, builds projects in the
venture capital and public policy space, and works closely with early-stage (Pre-A) founders
and can be contacted at jengyang.chia@gmail.com. Previous work here: http://chiajy.com

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