SOUTH-EAST Asia has seen a sharp increase in venture capital (VC) and private equity (PE) capital investment in the past few years. According to Bain & Co, the number of recorded VC deals for 2017 rose to 524, four times the level of 2012, and PE deal value rose 75% to US$15bil (RM62bil).
While there seems to be a more cautious sentiment in the tech sector, VCs opined that it is early days yet for the investment boom in the region, paving the way for more unicorn companies – startup company valued at over US$1bil – to emerge.
Kejora Ventures general partner Raymond Hor noted that a lot of investments are also now moving to later-stage companies.
“But at Series B, players are asking for more money and at higher valuations. So I think the market is taking a breather. Because valuations are more expensive now, let’s be more selective.
“(This may) cause a feeling of slowdown. But as a whole, I don’t think the investment boom is over,” Hor said in a panel discussion at the recent Wild Digital Southeast Asia 2019. He added that his South Korean partners are looking to bring more money into the region.
During the session, titled “After-effects of the investment boom in SEA - Where are the unicorns?”, fellow panellist Gobi Partners partner Khairul Khairi also highlighted the need to ensure that there are sufficient funds at every stage of a startup’s growth so that everyone will have the opportunity to grow to their potential.
“There are a couple of unicorns in waiting, (and are) about to breakthrough. Once the floodgates are open, you will see more,” says Khairul.
The hunt for more unicorns in the region is apparently not a wild goose chase. In his session “Where the money is - Predicting Southeast Asia’s next 10 unicorns”, Asia Partners co-founder and managing partner Nick Nash said South-East Asia is currently in a sweet spot known as the “unicorn zone”.
“South-East Asia is right in the middle of the zone. We are going to be there for about 10 more years. And this is an incredibly special thing,” he said.
He opined that South-East Asia is Asia’s most under appreciated region and its “best kept secret”. Not only is the region large and exciting, it has also been relatively unperturbed by the US-China trade war, showing remarkably low volatility to year-on-year gross domestic product (GDP) growth since the start of this century.
Nash also noted that about 15% of consumer income in the region is discretionary income, which allows for strong consumer purchasing power.
“That massive increase in spending power makes all of our companies possible. When you go through the unicorn stage, you get significantly larger companies, and predictable and repeatable unicorns. And not just big companies, but also lasting companies,” he added.
According to Nash, the last big country to go through the unicorn zone was China, from 2003 to 2013. During the period, China saw a wave of tech initial public offerings (IPO).
Interestingly, he pointed out that the tech sector in the US and China saw an inflection point after the emergence of 10 to 11 unicorns in these markets.
“And right here in South-East Asia, we are at about a dozen unicorns. That means that it is not just because of the capital coming in, and not just because of the (investors’) fear of missing out (on deals). There are also all the employees of those (current) unicorns who will now want to be founders of the next 20 unicorns,” he added.
And where will these unicorn companies come from? Nash points to China as a guide.
In China, he noted that the companies came in four tiers. The first group of companies that came into the market were infrastructure, telecommunications and basic data-type companies.
This was followed by a wave of web-based companies such as apps, games, travel and the very first beginnings of e-commerce.
Next, came the specialty e-commerce which were videos, social and specialty retail-type companies.
“And finally, 4G was so prevalent that they were able to create a massive and totally immersive online-offline hybrid environment, like food delivery, response services and payments all around China. This is the playbook.
“Brick by brick, they built themselves one of the world’s most impressive tech ecosystems,” said Nash.
In comparison, South-East Asia has caught up mid-way.
“By the numbers, we are exactly 10 years behind China. The most interesting half of the page hasn’t been built out yet. And this is where the next 20 multi-billion dollar unicorns will come from. Some of them are going to be in completely new categories,” he said.
While most startup ideas may have been based on those in more advanced markets like the US or Europe, regional companies will have an advantage by deeply localising these ideas.
However, Khairul cautioned startups against merely chasing after the unicorn status.
“As sexy as unicorns are, we are more interested in 10-times returns on investment. If you think about it, rhinos are just another fat, unsexy version of unicorns,” he added in jest.
Rather, he advised companies to have a path to profitability.
That said, he noted that having unicorns in this part of the world is a signal to the market and a gauge of sentiments that would attract more capital to the region.
“Everyone starts off with a big vision. But when it comes to being on the ground, things are going to change.
“The spirit that we take here is that, everyone has to be enthusiastic and motivated to want something big, whether investors or founders themselves. But even if it does not work out that way, it is important to be making profits anyway,” said East Ventures partner Melisa Irene.
Is the unicorn route meant for every startup? Not really.
“But the spirit from the beginning is to keep a goal that is big enough for everyone who is participating,” she said.