Funding tap turned on
Venture capital industry in Southeast Asia ready to move to the next level.
- 2 Jan 2017 at 14:00
- WRITER: PATHOM SANGWONGWANICH
The venture capital industry in Southeast Asia is moving toward a vital transition as "exit activity" among US venture capital funds in regional startups increases, according to Expara, which provides investment and services to the startup field.
In 2012, US$50 million worth of exit activities were recorded, increasing to $400 million in 2013 and $1.2 billion in 2014 before easing back to $800 million last year.
Exit activity refers to the process when venture capital investors sell all or most of their equity stakes, which is called trade sale, in a startup to larger corporations in the same or related industry. The term also denotes how investors choose to list their shares in an initial public offering on a stock exchange.
Venture capital is a type of private equity investment in which firms or funds provide financing to small or emerging companies with high growth potential.
"Exit activity is the most important indicator of an attractive venture capital market. If we cannot sell investments that make money, there is no point to invest in startups," said Douglas Abrams, the Singapore-based managing director at Expara.
"To me, this is the most exciting indicator in our market that we have reached the inflection point as exits really start to take off," he said. An inflection point is an event that results in a significant change in a company's progress, yielding either positive or negative results after such a turning point.
In his view, Singapore's venture capital ecosystem reached its inflection point in 2012, while Thailand is expected to hit a similar point next year and Vietnam is about two or three years away.
"This is a very exciting time to be involved with entrepreneurship in venture capital in Thailand because when a company or market in a [venture capital] ecosystem hits an inflection point, it is set for exponential growth," said Mr Abrams.
The underlying trend supporting his view is reflected through how US-based venture capital funds have entered the region to invest in startups.
"The US is the cradle of the venture capital industry, meaning [this] industry developed in the US first and has achieved global prominence as the world's number one centre of excellence for the venture capital industry," he said.
"I think it is a very good sign when US venture capital investors start to seriously look at and get involved in investment in Southeast Asia."
Sequoia Capital has invested around $960 million in startups in Southeast Asia and India, while the Silicon Valley-based firm 500 Startups has investments worth $26 million in the region, according to Mr Abrams.
500 Startups recently announced a plan to double its investment in Southeast Asia to $50 million by launching a second 500 Durians fund, according to the Tech in Asia website. Besides good economic growth prospects, 500 Startups managing partner Khailee Ng said Southeast Asia featured ideal characteristics for investment, such as a social media-savvy population, growing smartphone penetration, and a rising middle class.
The presence of at least five "unicorns" in Southeast Asia -- venture-funded companies that have reached a $1-billion valuation -- attests to the potential, said Mr Abrams.
For instance, the valuation of Singapore-based Garena, a gaming company founded in 2009, has jumped from $140 million to $4 billion, while Indonesia's Go-Jek, a transport and logistics service startup, is currently valued at $1.3 billion, up from $550 million.
Startups generally can be divided into three main categories -- green, red, and grey -- based on how their business operations are compatible with existing legal status, said Mr Abrams. Green refers to clear legal status, red denotes illegality, and grey symbolises ambiguity over regulatory uncertainty, with crypto-currency startups recognised as the notable example in this case.
"Regulatory uncertainty can be very good for startups because it blocks competition by established players. This is why often in these areas you will get startups that can become market leaders because the big guys are not willing to step into areas of regulatory uncertainty," he said.
With the prevalence of Airbnb and Uber, there is, however, a fourth category with orange seen as the appropriate colour. Orange means the operation clearly does not comply with local laws, but nobody pays much attention to it, or enforcing existing regulations against illegal status proves difficult, said Mr Abrams.
"A company like Uber has developed a valuation of $65 billion by operating an illegal business which governments cannot shut down," he said, referring to the ride-hailing service. It has attracted fierce opposition from conventional taxi operators throughout the world, while regulators say most drivers lack the proper public-transport licences.
Financial technology, better known as fintech, is also an eye-catching sector that operates in both the grey and orange areas, said Mr Abrams. It bears close watching because it has attracted funding from commercial banks, with some Thai financial institutions being notable funding sources.
"Singaporean banks were the first banks to start launching aggressive venture capital programmes and a fintech accelerator, but I think Thailand is catching up very fast," said Mr Abrams.
In dealing with the regulatory uncertainty surrounding some venture capital-funded startups, Mr Abrams said governments could lower or reduce barriers for startups associated with venture capital funds as well as provide incentives for the startup ecosystem.
Besides good progress in fintech, the internet of things, agricultural technology and medical technology are expanding their footprint in Southeast Asia. Thailand, for instance, could become a market leader in agri-tech and food-related innovations thanks to the country's massive food industry and related research conducted by local universities, he pointed out.
"In general, if a country does not have a well-developed enterprise ecosystem, it will be extremely difficult to create a successful startup there," he said.
Mr Abrams recommended that entrepreneurs consider relocating their startups to countries offering optimum conditions, but this does not mean that they should pass up on opportunities for business operations in a less developed country as there could be some changes in venture capital funds over the next few years.