In recent years, we’ve seen many foreign companies double down on their corporate venture investments in Southeast Asia, with the likes of Facebook and Paypal recently investing into Gojek or Alibaba into Traveloka and Tokopedia earlier on. Through CVCs, regional conglomerates and governments have also become active investors globally and vehicles for the region’s existing exits, like Telkom’s MDI Ventures or Globe Telecom’s Kickstart Ventures.
CVCs globally have always played a major role in the growth of Southeast Asia’s startups, with many outfits lined up along the startup fundraising track. And from the corporate’s perspective, CVCs are a way to beef up the company’s financials and place long-term strategic bets in fast-growing regions like Southeast Asia.
At this year’s Hong Kong Fintech Week, our founding managing partner Yinglan Tan talked to two early-stage corporate venture investors who have been investing in Southeast Asia, getting their insights into how the landscape has changed for CVCs and what opportunities lie ahead for both startups and CVCs amidst the COVID19 crisis and clamor for exits in the region. Below are our curated notes on the panel discussion.
(1) CVC investments are always a tradeoff between the founders’ desire for independence and the value-add of the CVC, which has significant chances of materializing into an acquisition down the road.
(2) GPs are an important factor for founders to consider with CVC investments, as GPs wield varying influence within their parent companies and in the larger ecosystem, impacting value-add for their portfolio.
(3) With their depth of insight into specific markets and verticals, CVCs are a channel for their parent companies to mitigate risks across investments (private and public).
(4) The cross-border nature of some CVC’s value-add has helped the firms to mitigate the risk of lack of liquidity in Southeast Asia, which is changing as more investors look to sell positions and drive exits.
CVCs still with much to prove in Southeast Asia
Pailin “Pie” Vichakul, Principal at SCB10x, Siam Commercial Bank’s CVC arm, shares that SCB10x was one of the first CVCs in Thailand back in 2016. Back then, companies tended not to take money from CVCs, and there were some doubts as to having a CVC on the cap table. “But as we set the precedent and track record, things started to change, and [it’s now] quite common to have CVCs on the cap table…they can create value.”
Saemin Ahn, Managing Partner at Rakuten Ventures from Japan, agrees with Pie. When “CVCs had something to prove…[that we] had as much value-add as commercial VC firms.” At Rakuten Ventures, Saemin and his team worked to grow that trust with their portfolio and leveraged on these relationships to “bring in stronger and strong investors,” like they brought Naver into a recent round with Carousell.
How founders should think about CVC investments
Even as the sentiments towards CVCs as effective investment vehicles are slowly changing, Pie, Saemin, and Yinglan point out that founders should be aware of the diversity in investment approach and GPs when seeking funding from corporate venture capital firms.
CVCs look for different things in their investments. They could be simply looking for pure financial returns or proof-of-concepts or both. Pie emphasizes that it’s important to understand the CVCs from their portfolio and investment timelines. Regardless of what CVCs look for, Yinglan points out that founders should also be prepared for the tradeoff between their desire to remain independent and and the (long-term) value-add of the CVC, as “the presence of CVC investment does increase the chances of getting acquired,” although this is not always the case.
Founders should also be prepared for the tradeoff between their desire to remain independent and and the (long-term) value-add of the CVC – Yinglan Tan
More than the CVCs themselves, Saemin and Yinglan bring up the importance of looking at the GPs in the firm. The strengths of the CVC depends on the GP (and his/her status in the parent corporation) and the liquidity the firm is working with. “You can’t just depend on the synergy [between you and the CVC], as GPs depend on their influence in the corporation.” Yinglan adds that when it comes to advocating for investment and customer purchase, a good partner in the CVC can advise the startup accordingly.
You can’t just depend on the synergy [between you and the CVC], as GPs depend on their influence in the corporation. – Saemin Ahn
Even with this variety, when it comes to closing the deal, CVCs should still be treated like commercial VC firms, says Saemin. “[Have a] definitive agreement…do not give them rights that you wouldn’t want to give commercial VC firms…have alignment on goals and risks.” Treating CVCs and commercial VC firms equally extends to board meetings as well, adds Yinglan.
COVID19 Impact on portfolio, parent companies, and liquidity events
On portfolio support
Finding this investor-startup fit and building a healthy investor relationship is crucial to maximizing the investor value-add, regardless if it is a CVC or a commercial VC. And in times of crisis, these relationships become all the more important. Pie cites their efforts at SCB10x to help their portfolio find bridge funding and generate more revenue streams.
Given that a vast majority of internet companies are in a relatively better position in terms of growth and profitability with the accelerated digital adoption, Saemin adds that helping companies get adjust to scaling and managing the company interally is just as, if not more, important than the product or busienss during this time.
Understanding how to orient your team [in COVID] is an unknown territory…understanding that physical of your startup is, daresay, more important than product…how do I want to do standups, how to work with engineers and sales managers? – Saemin Ahn
On new dynamic with parent companies?
And in this crisis, CVCs are not just focusing on how their portfolio is adapting, but also their parent companies as well. At Rakuten, Saemin has been “challenging [his] board to reassess the idea of venture capital not just for product placement…look at how our contextual knowledge of the tech industry can inform a better strategy for our public equity investments.”
The depth some CVC arms are able to go into vis-a-vis the global or home country perspective of their parent companies provides the latter with more insightful context to mitigate risks in investments.
On push for greater liquidity in Southeast Asia
These unprecedented times have also pushed for greater liquidity in Southeast Asia, and that means exits. The role of CVCs in driving these exits is more long-term, according to Pie. Some CVCs have no investment horizon and “can help the startup longer (compared to institutional VCs) [and] potentially become one of their acquirers.”
In Rakuten’s case, the lack of liquidity in the region was a risk they had already been actively mitigating by supporting their portfolio to go cross-border and diversify their businesses. “We saw inherent deficits in Southeast Asia…cross-pollinating investments…US business in Southeast Asia, Southeast Asia businesses in US and Europe…mitigated risks of lack of liquidity and exits with global perspective so we get apples-to-apples comparison on pricing.”