Asia’s untapped VC market

"Nothing is stopping us from looking at Southeast Asia, but the question for the venture capital market there is finding relevant opportunities," Arvind Sodhani, president of Intel Capital, told AVCJ at the Intel Capital Global Summit in California earlier this month. "For example, Thailand is a country that we go to all the time but we never find anything."

It is no surprise that Southeast Asia - boasting solid GDP growth, increasing disposable incomes, youthful demographics and deeper broadband penetration - has caught Sodhani's eye. Parent company Intel Corp. is scaling up its presence in emerging markets in response to rising demand for smart phones, tablets and laptops and desktops. While the VC unit is supposed to make money, it is encouraged to do so in a way that facilitates the spread of microchips.

In May, it invested $17 million in Singapore-based sales e-commerce group Reebonz.com and Hanoi-based internet company Vietnam Communications Corporation (VC Corp). These deals took Intel Capital's spending in Southeast Asia to $95 million across a dozen portfolio companies since its inception. However, that amount only represents 5% of its $1.9 billion invested in Asia during the same period.

Intel Capital's geographic allocation reflects broader trends in Asian venture capital. In 2011, Southeast Asia only accounted for 4% of the region's VC market by value, compared to 38% in Greater China, 36% in South Asia and 19% in North Asia. For the year to September, this share dropped to just 1%, with $7.8 million committed across 24 investments.

"Unfortunately, the way people - especially big corporations - look at Southeast Asia today is still labor arbitrage," says John China, head of the venture capital and private equity division at Silicon Valley Bank. "But for VC investments, we look at entrepreneurs, and my honest attitude towards the region is that we are not there yet."

Entrepreneur hub?

The problem is twofold. Firstly, Southeast Asia is a completely different animal to China and India where venture capital deal flow is sustained by returnees who form entrepreneurial communities. It is questionable whether home-grown entrepreneurs understand what VC investors are looking for.

Singapore might be the exception to this rule, but it is by no means a hub for the region as a whole. The city-state is home to more people with overseas experience compared to its developing peers, and then the government actively promotes innovation. In March, the National Research Foundation (NRF) picked eight more incubators for its Technology Incubation Scheme: 85% of total investment, or up to S$500,000 ($400,000), in each portfolio company is covered by the government.

Despite the critical leading role played by the NRF, Silicon Valley Bank's China argues a venture capital market requires more than just government incentives to flourish; there must be an established ecosystem in which entrepreneurs are willing to take big risks.
"On a recent trip to Russia, I looked for entrepreneurs who are willing to give up their stable jobs for start-ups," he says. "After the day's meetings, we posted on Twitter that we were holding a party for entrepreneurs in the hotel - 180 of them showed up and from that I knew there was a channel in Russia. In Southeast Asia, there isn't such a critical mass."

Secondly, Southeast Asia comprises multiple countries and long-standing divisions along lingual, religious, economic and political grounds - not to mention historical rivalries - mean the region does move as one. A business model that works in Indonesia is not necessarily a good fit for Vietnam, while the realities facing nascent economies like Cambodia and Myanmar are far removed from those in Singapore.

It is difficult for entrepreneurs and investors to have expertise in all these countries, while each is still too small to sustain a fully-functioning venture capital market.

Furthermore, even though the likes of Vietnam and Myanmar have introduced open-door policies, there has never been an overwhelming trigger event in Southeast Asia that meant capital flooded into areas that it previously couldn't access.

The obvious contrast is China and Indonesia, both relatively large-scale markets. While the former properly opened up to foreign VC in the 1990s, unleashing a stream of investment that has graduated from manufacturing to consumer plays, the latter has always been open to overseas capital, even though it melted away after the Asian financial crisis.

"Indonesia has been open for such a long time that the low hanging fruit has mostly been taken. Although it is an interesting market, there can be no real comparison with China," says Finian Tan, founder and chairman of Vickers Capital Group. "If you ask me whether Southeast Asia's VC market can be as large as China, the answer is a definite no, because it is not a homogenous market."

However, Tan adds that there are still good venture capital opportunities from a micro perspective because much of the region is largely untapped. According to AVCJ Research, since 1990 only 88 regional- or country-specific venture funds have been raised in Southeast Asia. The largest is Vertex Technology Fund III, which achieved a close of $200 million 12 years ago. During the same period, there have been 482 China-focused VC funds.

So what is the key to survival in a nascent venture capital market? The first priority is staying close to individual entrepreneur communities in order to secure good deal flow.

IDG, for example, has been in Vietnam since 1992 when it launched PC World Vietnam, the country's first computer publication. IDG Ventures Vietnam was established in 2004. With offices in Ho Chi Minh and Hanoi and, it has invested into over 40 companies in the country.

"For foreign players, if you just come and go, you can merely do one shot or two," Truong Nguyen, vice president of IDG Ventures Vietnam, tells AVCJ. "People might feel that the infrastructure and economy is not ready, but you only understand the country when you enter it."

Vickers Capital's Tan shares a similar view, adding that one must mingle in the crowd to get better deal flow. Born in Singapore and fluent in Malay, the industry veteran has spent 15 years building networks in entrepreneur communities through ties to angel investors and university professors responsible for entrepreneurship.

"Private equity is different, all bigger companies are the same - they have track records, want to go public and deal with capital markets," says Tan. "But you need to be on the ground for VC investment. If I went to Silicon Valley now and set up shop, it would also take a very long time to generate exceptional deal flow."

Bet on diversity

An alternative approach employed by some venture capital players is to emulate private equity and target businesses that cater to the whole of Southeast Asia or even the wider international market. This strategy might require a larger-than-normal commitment, so a prospective VC investor needs to be certain that the company is capable of executing its strategy.

Intel Capital, for example, was tempted to invest in Reebonz two years ago but only participated in May when the online luxury retailer reached achieved sufficient scale to sell its handbags and accessories to customers across Southeast Asia, North Asia and Australia.

"In Southeast Asia, you need a business model that actually transcends the entire region so that you have a good probability of success," says Sudheer Kuppam, managing director of Asia Pacific operations at Intel Capital. "If you look at some of the deals we have done - including VC Corp and Reebonz - they are growth stage companies instead of early-stage."

VC Corp itself has taken steps to ensure its business has sustainable scale, but this involves creating a diversified product portfolio in one country rather than trying to operate region-wide. Established in 2006, the Vietnam internet company has 850 staff working on 30 different products. Last year, e-commerce revenue grew tenfold, Vuong Vu Thang, deputy general director of VC Corp, tells AVCJ.

"It's not easy for company to be successful in Vietnam and many that received venture capital investment in the past several years are not functioning anymore," Thang adds. "You cannot do one thing here and be successful. So either you diversify your geography, or you diversity your products."

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• Topics
• Venture
• Southeast Asia
• Early-stage
• Venture
• Southeast Asia