This Q&A was compiled and curated from three separate interviews: with DealstreetAsia as featured in “COVID19 liquidity crunch puts Southeast Asia’s VC value-add to the test“, with KrAsia as featured in “How will COVID19 change the funding landscape in Southeast Asia?“, and with the Ken Southeast Asia as featured in “Willson Cuaca and East Ventures’ race against themselves“

The near future of Southeast Asia’s venture capital will be about translating the investor optimism accumulated over the past five years around the region into hardwon results — whether that means secondary sales to beef up a fund’s DPI or exercising pro-rata to double down on potential acquisitions or IPOs. COVID19 has shaken things up in terms of what kinds of companies will be crossing the “exit” line. Still, for the venture capitalist committed to Southeast Asia, this is just another bend in the winding path that is the region’s growth trajectory.

We share some of our thoughts on the future of venture capital in Southeast Asia, from the impact of COVID19 to how firms in the region are working the pipeline to gear portfolio companies for exits.

Key Takeaways

(1) A lot of dry powder has accumulated in Southeast Asia. While there are new opportunities where this capital can go to, firms will focus on supporting their portfolio and becoming more strategic with their investment choices.

(2) Spending time and making needle-moving introductions continues to be a compelling VC value-add, especially during these times, but there’s a shift to more data-driven strategies to support companies — from hiring to finding strategic investors. 

(3) With the greater incentive to digital adoption (and thus greater competition), a key question for investors looking at potential investments will be the “root” of a platform’s offering — how sustainable is its customer acquisition? Are customers coming because of incentives or real value?

(4) While the early-stage VC game is built on the idea “making enough shots will eventually bring a money-making shot in,” early-stage VC’s optimize every shot from getting the ball to making the follow-through. To that end, firms engage in various approaches from venture building to securing investor pipelines from seed to pre-IPO. 

(5) The next one to three years of venture capital in Southeast Asia will focus on bringing as much of their portfolio as possible out of the crisis while also narrowing down exit strategies for each investment.

COVID19 impact on capital allocation, value-add, investment theses

Q: Has Insignia shifted its capital allocations significantly as a result of COVID? 

A: The rising activity and optimism in the region towards the end of the decade resulted in a lot of dry powder among funds this year. Fortunately, we were a part of that wave, closing our second fund last year.

So while we are spending more time in our portfolio, we are still meeting new companies. We see this as an excellent opportunity to find the founders and their companies that stand out from the rest. There are a lot of “green shoot” opportunities out there for technology platforms with changing consumer and business behavior. The crisis can be a defining moment for tech startups in Southeast Asia — if it survives and thrives, in the same way that past crises made the Alibaba’s of this world.

Even then, we still remain strategic with our selection and thorough with our analyses. Due diligence timelines are lengthening across the board, and it’s trickier, not being able to visit the company and have in-person conversations with the team. That said, we advise founders to work with their existing investors or investors who already know them instead of depending solely on fresh relationships.

Q: All VCs say they value-add to their portfolio companies. Do you think COVID is the real test for VCs in terms of actually proving it? 

This crisis is a test for founders, but it’s also a test for investors. Over the past decade, it’s been easy for funds to invest in a company that goes right into a hockey stick growth curve, but it is in a downturn that founders will see whether their partners will be there for them and whether these partners will spend the time to help them through this crisis.

We get asked a lot about capital allocation for our portfolio, but the most valuable resource a VC can give to its companies during this crisis is time. This time spent getting to know what each company needs can translate into the right investor introductions, business partnerships, and money in the bank that ultimately buys time for the companies to survive and eventually grow out of the crisis. There’s a lot to be said for simply being there for the founders, and that’s what we are doing with our founders regularly.

That said, we also see VCs in Southeast Asia building up their data capabilities. While “qualitative” value-adds will always be central to how a VC operates, as more startup activity is documented in the region, there’s greater incentive for investors to use various platforms (in-house and third-party) to optimize dealflow, identify potential co-investors, and keep several eyes out on the market.

Q: How has COVID shifted the way you’re looking at new investments? How far has Insignia’s overall investment thesis changed as a result of this epidemic? Are you exploring a “post-COVID investment thesis”? 

A: We see our role in the ecosystem as a counter-cyclical investor. This crisis may be the time for us to make more investments. But for the same reason that we see a lot of opportunity in these times, we also want to be a bit more selective, and put more analysis into our investment cases.

In terms of the opportunities, we are looking at how startups are catering to the evolving internet consumer experience coming into a pandemic-ridden world. The internet consumer demands more daily activities to be accessible online, from test prep to stock investing. We expect this evolution to run through the whole gamut of sectors. The barriers to internet adoption are lowering, and so a sustainable retention strategy will be all the more critical — is it incentive-dependent or value-driven? This evolution will not only raise the bar for user experience across platforms but also force competitors to get creative with distribution. Instead of going directly to the consumer, products and services could be offered through a B2B2C approach or by linking up with existing high-usage platforms (Pinduoduo-esque).

In particular, we’ve seen how our edtech portfolio like Edmicro and Pahamify have seen spikes in growth as their countries went into lockdown and students and teachers searched for the best tools to help them continue learning and teaching. Fintech platforms like Ajaib and Flip, because they were able to simplify the complicated and costly offline processes of investing and interbank transfers, have also been seeing user growth with consumers preferring to handle their finances from the comfort of their couch.

Gearing up for growth and exits

Q: It seems that large firms tend to attempt to control the pipelines from incubation/seed to growth stage. Is this something other early-stage VC in Southeast Asia need to learn to navigate? If yes, how? What effects is it having on the VC and startup ecosystem? What opportunities and pitfalls does this create, in your view?

A: Controlling the pipeline from seed to growth stage puts early-stage VC firms at an advantage when it comes to securing optimal deals for their companies down the road. This is especially the case for founders who are unaccustomed to fundraising or do not have the network to leverage in later stages of fundraising (e.g. beyond Series A).

However, it is essential for the early-stage VC firm engaging in this “vertical expansion” to have the network, firepower, and brand to be able to tap into growth stages. Otherwise, the blind will be leading the blind. This is likely why only the more well-endowed or more established firms can actively control their pipelines.

At the end of the day controlling the pipeline is all about maximizing the value VC firms can give their portfolio while also creating more assurance for LPs/investors in an ecosystem that is still largely unproven. This also has the potential to close the gap between early-stage and late-stage investors in Southeast Asia.

Q: Where do investment thesis typically really differ from one another — would you say Insignia has a different approach? If certain factors — “anticipating technological cycles, identifying the right type of founder, and getting in early and fast on a deal” — are a given in a VCs decision-making process, what else makes a difference in spotting and getting the best deals? Is it connections, reputation, or something else entirely?

A: When it comes to early-stage VC, anticipating tech cycles, identifying the right type of founders, getting in early and fast on a deal are part-and-parcel of the early-stage VC’s approach because this has been proven in more mature markets like the US and China to generate the best returns and create more enduring impact. Where firms distinguish themselves is through their people (partners) and the brand that comes out of the deals their people engage in and the companies that their people can help grow. Even if these people aren’t necessarily known figures, the work speaks volumes in an ecosystem where trust is a paramount currency.

When it comes to securing the best deals, the foundation (for the longest time) has been an investor’s connections and reputation. More recently, VC’s globally have also been leveraging on various data sources to supercharge their networking and sourcing capabilities. Patterns that have emerged from more mature markets and previous investments inform the use of this data.

At the same time, while VCs generally thrive and wither on connections and reputation, the bigger picture of market creation or digitalization plays a role in finding deals (or even making them happen). Venture capitalists don’t just invest in individual companies in the hopes that they become the Alibaba’s or Amazon’s of the world. Given the return timeline and probabilities, VCs invest in markets that are facing significant shifts that startups can tap into technology and scale. Which markets these are precisely, and the entry points are where firms and venture shops often differ in perspective.

Q: What’s the appeal of venture building as a VC? Why aren’t more VCs doing this?

If controlling the pipeline for later-stage funding is on one end of “vertical expansion”, venture building is on the other end. Ultimately this is part of a VC’s approach to fire on all engines and level out the odds typically stacked against startups. Combining a lucrative read on the market with an unstoppable founding team can result in a better shot at growth, which then leads to better odds in securing later-stage investors.

Again, just like controlling the later-stage pipeline, this requires firepower to commit to the venture and connections to find the right founders. Though it can be cheaper than playing the later growth rounds, there are a lot more variables to contend. Sometimes the market prediction may not translate into an on-the-ground product-market fit, or the founding team may not be able to execute on the vision.

We are also engaged in venture building. This is where the value of LPs come in, beyond the capital they invest in our fund. Some of our LPs are experienced investors and tech founders in mature markets and their ideas have driven us to explore possibilities for similar ventures in Southeast Asia tailored to the region.

Read how we think the LP-GP relationship is evolving >>>

Q: What do you think will be the main challenges for early-stage VC in Southeast Asia/Indonesia in the next 1-3 years?

There will be two challenges: defensive and offensive. The defensive challenge would be for VCs to make it through COVID19, which has no clear end yet in sight for the region. This means ensuring that portfolio companies have more than year’s worth runway stocked up for winter and that investments made during this period either contribute to keeping companies in the green or investing in “green shoot companies” that are emerging from the crisis. Venture building can be a strategy for the latter if the right founders can be found, and sunrise sectors can be spotted. Even once the health crisis resolves, the economic impact will linger and recovery will not be as fast as many have previously hoped.

The offensive challenge will be to drive exits (or more concretely, DPI) for the fund. In the next three years, many of the active early-stage VCs in Southeast Asia will be well into their first fund’s lifetime or halfway through, and the onus will be on these investors to concretely realize returns.