Last week, our founding managing partner Yinglan Tan went on MONEY FM 89.3 Prime Time’s Market View segment with Tian Tian Chua to share his thoughts on Southeast Asia’s startup and VC market amidst the global economic challenges and uncertainties. 

Listen to the full conversation on Spotify or Apple Podcasts

What is interesting about the flow of this conversation is how Yinglan’s sharings actually cover the various aspects of the venture investing journey, from deploying capital to sourcing and portfolio management, as well as the company building journey, from market to business expansion and the long-term, second-order impact of enduring tech companies in the region. In other words, it’s nearly an end-to-end coverage of the various aspects of the startup and VC industry.

TLDR Highlights

Because of the breadth of this conversation, we were able to piece together seven takeaways for the Southeast Asia founder and investor. These takeaways cover how Southeast Asia’s startup and VC ecosystem is maturing and evolving. 

(1) On Capital Deployment: Market where downturn is drying up from growth stages as opportunity (and competition in deployment) shifts to early stages. 

“Valuations in the growth and late stage are being severely corrected and those who have lived up to their valuations are now focused on profitability and self-sustaining models rather than depending on new future fundraise for further scale. Opportunity is shifting more towards earlier stage rounds in emerging markets and prices in the seed and Series A rounds are still holding strong.”

(2) Finding Founders: Investors are incentivized to pay a premium beyond capital to find and back founders who are able to attract smart capital.

“We are actually not as good at predicting the future, as we are good at finding founders who are building for the future. And I think when we find these founders, we are prepared to pay a premium or and prepared to help them a lot by providing a lot of value…but I would think that the best founders and companies are still able to attract capital, especially smart capital.”

(3) Managing Outcomes: There may be bargain hunting but it does not matter as much when you’re investing over time in a hotbed market.  

“For tech [taking advantage of “bargain hunting”] matters less because the outcomes are so big, right? So if you pay 20, 30% more, it doesn’t matter if the outcome is going to be a hundred times, right?…So having said that, what we are seeing in the market is that even for us and our peers, we are reserving more capital to support our existing portfolio.”

(4) Going for International Scale: More capital is being invested into regional and international expansion, scope is important.

“So we think that [Eezee has a] nice scope for B2B marketplace like this in Southeast Asia…And we also see that there are about a few Singapore companies that have gone beyond Singapore and expanded into Indonesia, Malaysia, and the Philippines. So we have partnered with companies like Carro that have done the same thing and gone international.”

(5) Building for Long-Term, Second-Order Impact: It doesn’t matter as much where you start as it does how far and big you are willing to grow. 

“If we want to build successful companies, we have to back unstoppable founders, and the GoTo founders certainly represent that. They went through many challenges, and as investors, we have to be able to run alongside them, and this goes beyond just making pure investments. And the other interesting thing about GoTo Group going public [are the] implications for the rest of the ecosystem.” 

(6) Evolving the Business: The market favors companies that solve the visceral and open up “big outcome” dimensions through their business.

“We made the decision very quickly when we first met at the seed round…because we found that they were trying to solve a unique problem, which is to help the unbanked in Indonesia be banked. So now they have scaled up to be way beyond that to also serve small businesses with hundreds of millions of transactions a month on their platform in rural Indonesia. They also have another business, which is even more exciting, which is this StraitsX platform…So this could be a big outcome by itself.”

(7) Exits and Unicorns: Big outcome exit opportunities are increasing in terms of companies and destinations.

“There is no hard and fast rule for VCs for timing exits. So we are very patient investors. A fund life is a decade. Having said that we do expect more exits to take place in this market. As we see the market being more strategic to acquirers, we still think that the best acquirers of our companies are the public markets, going public in both local and foreign exchanges.”

Breakdown: Practical Implications, Memes, and Resources for Founders and Investors

But what are the implications of this for founders and investors? In the breakdown below, we share the full sharings of Yinglan, note some implications for both founders and investors, and tie the ideas to past articles and podcasts on Insignia Business Review.  

(1) Downturn is drying up from growth stages as opportunity (and competition in deployment) shifts to early stages. 

“Compared to 2019 with the impact of the so-called SoftBank backed IPOs, and 2020 with the pandemic, this would be the most pronounced [downturn], given the scope of the impact on tech market. So most investors are focusing on gross profit, or even net profitability, depending on the nature of the company.

What we see in the market, actually, it’s quite interesting. We actually built a tool on our website to look at the market; users can test it under insignia.vc. We see that valuations in the growth and late stage are being severely corrected and those who have lived up to their valuations are now focused on profitability and self-sustaining models rather than depending on new future fundraise for further scale.

At the same time, the opportunity is shifting more towards earlier stage rounds in emerging markets and prices in the seed and Series A rounds are still holding strong. So we are seeing very interesting companies emerge and there’s no better time to start a company.” 

Implications for Founders: Dilution may become a bigger challenge than it is normally, especially if the company is unable to generate its own cash flow and needs further funding in a market where prices have going down in stages where companies are more sizable. 

Recommended Reads: Fundraising in Capital Winter, Counterintuitive Offensive Measures in a Bear Market

Implications for Investors: There’s greater incentive to go in earlier, meaning competition may become skewed in terms of firepower towards larger funds. Funds are at a crossroads of balancing price competition and the risk of earlier-stage companies. 

Recommended Reads: Dissecting Influx of Foreign Capital into Southeast Asia (SuperReturn Asia 2021)

(2) Investors are incentivized to pay a premium beyond capital to find and back founders who are able to attract smart capital.

“While we have seen a lot of interesting sectors that we like, we are actually not as good as predicting the future, as we are good at finding founders who are building for the future. When we find these founders, we are prepared to pay a premium or and prepared to help them a lot by providing a lot of value.

So investors with dry powder like us, we still have the leverage and buying power in a capital trust and market, but I would think that the best founders and companies are still able to attract capital, especially smart capital.” 

Implications for Founders: Considering the best partners in this capital scarce market is not just a matter of investment terms but still what they bring to the table for the company, especially if they are buying a significant portion of a round allocation. The companies that are best at fundraising are not looking for funding — instead their product, business model, and team are inherently attractive to investors. 

Recommended Reads: Yinglan shares what Insignia is looking for in terms of founders and investments

Implications for Investors: Leverage has shifted to investors, but it doesn’t mean if you can, that you should. But this also means that smart capital will tend to converge on companies (especially post-Series A ones) that may already demand a premium (either in capital or other resources). This means investors are hard pressed to stand out to these so-called “capital magnets.” 

Recommended Reads: Five ASEAN-First Futures Insignia is Following

Not all premiums are equal

(3) There may be bargain hunting but it does not matter as much when you’re investing over time in a hotbed market.  

“For tech [taking advantage of “bargain hunting”] matters less because the outcomes are so big, right? So if you pay 20, 30% more, it doesn’t matter if the outcome is going to be a hundred times, right? It’s still gonna be a good investment. So having said that, what we are seeing in the market is that even for us and our peers, we are reserving more capital to support our existing portfolio.

And then we also have predicted a slow recovery rather than a sharp recovery. So we tell our companies to have at least 24 to 36 months runway or aim for profitability. Southeast Asia is continuing to be a hotbed for VC activity. Especially we see a lot of investors from China, Japan, Korea, and given the US-China tension, they’re all coming to Southeast Asia to look for opportunities.

And the other thing is now the market is getting more proven with more IPOs and notable exits in the region.”

Implications for Founders: Founders won’t look far to find capital refuge in this capital-scarce market — more bridge and follow-on rounds will be raised with the support of existing investors, not to raise the market value of the company, but to ferry cash flow through the next 24 to 36 months and/or fund specific initiatives to unlock deeper monetization and ideally profitability.

Implications for Investors: Given the expected slow recovery, investors will be forced to adjust their allocation more towards existing investments, potentially larger checks vs more spread-out checks to newer investments. The maturing exit landscape and flock of investors coming into the region also provides more incentive to ferry existing investments to favorable, if not winning, exits (from secondary sales to public market exits). 

Patient but aggressive and flexible

(4) As more capital is being invested into regional and international expansion, scope is important. 

“We’ve been happy investors in Eezee since the seed round, when they’re much smaller. So we’re first institutional capital that invested with Eezee and they have grown significantly over the past year. They sell more than 130,000 items in more than 600 categories from 2000 suppliers. So we think that that’s a nice scope for B2B marketplace like this in Southeast Asia. They also have great customers like Exxon Mobile, Shell, Resorts World, and we see them growing five times in volume in the past year. 

And we also see that there are about a few Singapore companies that have gone beyond Singapore and expanded into Indonesia, Malaysia and the Philippines. So we have a partnered with companies like Carro that have done the same thing and gone international. That’s really one trait of Singapore based companies: having the ability to go international.”

Recommended Reads: Eezee raises US$7.5 million Series A round

Implications for Founders: Going international is not just a function of war chests, operating capability, and available resources, but of the potential scope that product-market fit can accommodate across target markets. Market will see more companies raising to expand across multiple markets, but the inherent nature of Southeast Asia as a complex region raises the costs of this expansion.  

Recommended Reads: How Singapore startups go global

Implications for Investors: As the ecosystem goes through the learning curve of internationalization, value-adds aligned towards international scale will be increasingly important as part of the “premium” to be paid. 

Easier said than done

(5) It doesn’t matter as much where you start as it does how far and big you are willing to grow. 

“In fact, I just met and caught up briefly with the current GoTo Group CEO and we were reminiscing on the old days. I think that was really a different era where the competitive landscape was quite different, and they were not the market leader. They were actually coming back from behind. But they had a unique insight that — especially in Gojek that a two wheeler model in a congested market like Indonesia was going to grow faster and it was proven correct. 

Recommended Reads: Indonesia’s Big Market Opportunity (DealstreetAsia PE-VC Summit)

But I think the meta-point here is that if we want to build successful companies, we have to back unstoppable founders, and the GoTo founders certainly represent that. They went through many challenges, and as investors, we have to be able to run alongside them, and this goes beyond just making pure investments. 

And the other interesting thing about GoTo going public [are the] implications for the rest of the ecosystem. So for our portfolio companies like Ajaib, which are digital stock trading platform Indonesia. So retail investors are able to buy stocks like GoTo stocks on a digital platform. 

Recommended Reads: Ajaib CPO and Co-founder Yada Piyajomkwan on connecting retail investor demand to tech IPOs in Indonesia

And then I think the other interesting point about this is that many of the alumni from Gojek and Tokopedia have learned the experience of working in a big company and started their own companies like being Pinhome, AwanTunai, Tentang Anak. Those companies we are partnered with I think they benefited a lot from working in big companies like Gojek and Tokopedia.”

Recommended Reads: GoJek and Tokopedia Mafia Learnings

Implications for Founders: Profitability and scale are not necessarily mutually exclusive. Nor are non-market leaders in this market completely lost. At the end of the day, companies are built by people, and unstoppable people — from leadership to the frontline operators — are what separates those who are left in the dust and those who can turn unfavorable positions into leading ones.

Implications for Investors: Good investors push their founders to go faster from behind; great investors run ahead of their founders to show them what’s possible and beyond. Tapping into unicorn creation cycles will also be increasingly valuable in spotting future generations of unstoppable founders. 

Of course better earlier than later to clear up the gap

(6) The market favors companies that solve the visceral and opens up “big outcome” dimensions through their business.

“We were also the first institution investors in Fazz, and we made the decision very quickly when we first met at the seed round when they just graduated from Y Combinator, because we found that they were trying to solve a unique problem, which is to help the unbanked in Indonesia be banked.

So now they have scaled up to be way beyond that to also serve small businesses with hundreds of millions of transactions a month on their platform in rural Indonesia. So that’s one part of the business that’s quite exciting serving the underbanked and unbanked. 

They also have another business, which is even more exciting, which is this StraitsX platform. I think they are one of the few licensed platforms in Singapore that allows stablecoins for the Singapore dollar and Indonesia rupiah. And they are backed 1:1 by the Singapore dollar and Indonesia rupiah. And they are built on three chains, Ethereum being one of them. So this could be a big outcome by itself.

And I think by banking the unbanked in rural Indonesia, [Fazz] has been solving a visceral problem. But I think this new layer adds a new dimension to the business.” 

Implications for Founders: Complex problems tied to non-negotiable needs and problems fundamental to functioning society are less impacted in terms of product-market fit by today’s market challenges like inflation.

Implications for Investors: Market sizing is not just a function of literal size (e.g., potential monetization) but also how sustainable and relevant this monetization will be ten years down the road. Are there ways the business can grow or other dimensions it can add to remain relevant otherwise? 

(7) Big outcome exit opportunities are increasing in terms of companies and destinations.

“There is no hard and fast rule for VCs for timing exits. So we are very patient investors. A fund life is a decade. Having said that we do expect more exits to take place in this market. As we see the market being more strategic to acquirers, we still think that the best acquirers of our companies are the public markets, going public in both local and foreign exchanges.

So what we do to help them is a lot of things, like we have them hire key people. We introduce them to valuable investors. We help them with regulators. We help them on some key insights that ideally we have them avoid some pitfalls, but at the end of the day, growth is still driven by having the right people, not necessarily by the number of people. So we believe that if the company is run by the right people, with very high-quality founders and management, I think the company will do well. So that’s one. 

On our current portfolio, we already have a couple of unicorns in the portfolio, so GoTo Group being one, Carro being another, Ajaib in Indonesia being a third. We think very highly of a few more like Flip in Indonesia is one, Fazz, which you just mentioned is another interesting one. Super, a social commerce platform in Indonesia is also a very interesting one. So the market is looking very bright for tech in Southeast Asia.”

Implications for Founders: While M&As and secondaries will still dominate the exit landscape especially in a capital-scarce market, the pathway to public markets is slowly being de-risked for tech companies in Southeast Asia.

Implications for Investors: This market incentivizes investors to focus more on portfolio management and growing their existing portfolio.