As we commence 2015, I thought to pull together some thoughts on what we can expect to see in the coming year in investments and startups in South East Asia. The ecosystem is getting pretty exciting and we are definitively still at Day 1- it is all to play for.
Summary of predictions for South East Asia
In summary, divided by category are my predictions: (TL;DR)
Investment side
- Reverse shifts in investment stage focus for early and late stage investors
- More foreign investors enter the market: Continued foreign investment from Japan, move from the Chinese and nascent interest from US and EU
- Increased availability of early stage financing, but still limitations on investable companies
- More later stage funding announcements
- Increased volume of structures to pump out a volume of startups
Valuations and exits
- Seed valuations for great companies/founders will increase
- Continue to be small exits
- Messaging companies may make purchases to ‘fill in’ their ecosystems, global brands make niche acquisitions
Operating environment
- Introduction of ASEAN but no obvious benefit
- Potential for more questionable regulation, particularly in ecommerce
- Continued HR challenges resulting in wage inflation and importation of specialty talent
Startups side
- Increased regionalization and category leader dominance
- ‘More’ startups in certain verticals
- Foreign entrepreneurs and Rocket grads will drive a lot of new startups
- Struggling startups will complain there is a Series-A crunch
- Start to see more overseas expansion of well funded EU/US companies
Detail on predictions
Now diving into my bullet points (I’ll keep this short):
Investment side
Reverse shifts in investment stage focus for early and late stage investors in South East Asia and India
Large fund migration to early stage to create optionality in India
- Valuations for later stage companies in India are frothy to say the least, though not on par with China (yet)
- With breakout winners such as Flipkart, Myntra, Snapdeal etc, no GP wants to explain to their partnership and LPs as to why they missed another
- The large, established VCs such as Accel, Sequoia etc will increasingly cut ‘smaller’ checks at seed stage in order to create optionality for the future. As a percentage of funds this is a no-brainer
- The entrance of the big boys to seed stage will create competitive pressure on seed stage investors to get ‘good deals’ as well as the potential for startup casualties at next stage due to signaling (This could be a whole blog post)
Increased focus on Series-A stage from seed/pre-seed investors in South East Asia (Singapore)
- The ‘established’ and new VCs, mainly in Singapore, are migrating upstream, focusing on Series-A
- This is logical for a few reasons as they can apply more capital and frankly, managing many seed stage companies is arduous
- There is the potential for inflation of valuations as many VCs compete for a limited pool of top deals at this stage
- Founders may rejoice in the short-term that they got a ‘better deal’, but time will tell if they live up to their post-money at the B-round (and not get down rounded) where real metrics, not hope is the reality for scaling capital
More foreign investors enter the market: Continued foreign investment from Japan, move from the Chinese and nascent interest from US and EU
Japanese money will continue to pour into region
- Japanese see South East Asia as their back yard and given various domestic factors will continue to be buoyant about investing in South East Asia
Chinese will start dipping their toes in the region
- Whilst the Chinese market continues to be a huge opportunity, a few companies have hired teams to invest in South East Asia, though have not yet invested
- In 2015 we will see the first few co-investments to learn the market and perhaps they may even lead a deal, particularly where there is strategic value
US and EU investors will dip their toes into the market, but not in a large way and only as followers
- My extensive discussions with EU and US investors have found a growing interest in South East Asia, but not a commitment (yet)
- For select opportunities, such as in SaaS which are inherently global by design, we may start to see co-investments as a means to test the waters at early stage. These will be small as getting IC agreement will be no small matter, and any failures will dampen further tests
- There will be sizable investments at the Series-A stage in select SaaS companies, but likely we will see home-grown companies relocate to ‘driving distance’ of the new leads
Increased availability of early stage financing, but still limitations on investable companies
Funds that announced new funds will actually close and be investable
- There are approximately 7 funds that announced Series-A second or first fund raises this year. Early next year they will have second close and funds will be invested
- We will see more activity at the Series-A stage particularly in Singapore and Indonesia
Series A investments will still be limited due to availability
- Despite increased availability of funds, there persists a lack of quality, investable companies at the series-A stage (and below)
- Each year the quality of companies and founders improves leaps and bounds, but there is still some way to go for the committed funds to be allocated successfully
More later stage funding announcements
Start seeing more Series-B and C funded companies as Series-A companies mature
- I expect to see 2-3x the number of b/c round investments in 2015 over 2014. I know of 7 companies raising $25m+ at present
- Whilst there have been high-profile monster rounds such as Tokopedia and Grabtaxi, I do not expect many investments of the same volume as there aren’t any high-flyers waiting in the wings formed in the past year
- There are in fact a number of investors looking to write checks of a minimum $25m but no where to allocate, I expect the teams to continue to be frustrated that they cant spend cash in tech
Long established companies will start raising significant funds for the first time
- As companies such as Tokopedia raise large funds, we will see a few older, privately funded companies take external funding to compete
Increased volume of structures to pump out a volume of startups
More incubators and accelerators (and even pre-accelerators)
- 2015 will see a proliferation of more incubators and accelerators (Though I question the value of many, and the viability of others)
- The structures will become increasingly niche and focused, though availability of sufficient companies that fit the bill will be TBD. Startup Boot Camp, Accenture etc are launching fintech programmes and JFDI is now focusing on more mature companies (As evident by latest batch)
Corporates will continue to be more interested in startup scene
- Telcos have been the biggest proponent of corporate support of the startup scene to date, particularly in Thailand, where each telco has a programme. There are to a lesser extent initiatives in each of Malaysia, Philippines and Indonesia
- In 2015, I expect to see 2-7 new schemes per country, or at least involvement from more corporates such as banks who seek the perception of innovation and potential financial return
Valuations and exits
Seed valuations for great companies/founders will increase, as will the amount raised
- As more money pours into the ecosystem, valuations will slowly tick upwards. This will be more pronounced in the more visible markets of Singapore and Indonesia.
- I believe there will be a bifurcation between hot startups and everyone else, with the hot companies commanding twice the valuation and commitments
- There have already been examples of larger seed rounds being raised and two of our investments we led in 2014 were in fact the largest. For hot startups with great teams, seed rounds which historically have been ~$500k will start to regularly be in the low millions
- Tepid-hot startups will try claiming the same valuations and quantum investments but will fail. I have already seen founder expectations inflating, but that investors have not flinched and have dramatically cut expectations at the knees by a factor of 3-5x
Continue to be small exits
- The quality of companies has improved and many companies are reaching the point where they are noticeable. This year and for the next few I expect an exponential increase in acquisitions, but 2015 will definitely not be an inflexion point
- I do not anticipate many large acquisitions for some time as founders will sell out early, and the larger more successful companies will keep pressing ahead given there is an availability of growth capital (even if most people are not aware that there is)
Messaging companies may make purchases to ‘fill in’ their ecosystems, global brands make niche acquisitions
- The key area of acquisitions I see are companies such as Line, Garena etc looking to acquire promising startups to cross sell to their existing database
- The only ‘global’ brand name acquisitions I see coming in 2015 are for niche businesses that infill a requirement. I can think of a couple that will transpire opportunistically in H1
Operating environment
Introduction of ASEAN but no obvious benefit
- ASEAN is coming, but I don’t see any benefit. There will be a lot of talk.
Potential for more questionable regulation, particularly in ecommerce
- In 2014 there was a lot of opaque regulation in Indonesia and Thailand for ecommerce. I expect either more curve balls (if retailers pressure) or clarity (if ministers realize the opportunity).
- Uber has created waves in each of their countries in Asia and may stir up a hornets nest that may create repercussions in other sectors. Given the capricious nature of many governments, the outcomes are impossible to predict
Continued HR challenges resulting in wage inflation and importation of specialty talent
Continued inflation of salaries as startups compete for talent (and not even great ones)
- 2014 saw salaries for very ordinary, but relatively experienced (6 months!) staff more than double, particularly in Indonesia
- Until there are more failures (where more people come into the system to pollinate), startups becomes socially more acceptable to parents (Starting to happen in SG) and more foreigners come to educate staff in specialty skills (e.g. UI/X, Marketing, Tech and Product), I expect salaries to keep inflating this year and staff naively jumping companies every 6 months (I know ecommerce buyers who have worked at 3 competing companies in the past 2 years)
Start to see importation of more foreign talent
- There persists a real lack of top specialty talent. As companies get larger, and more funds become available, we are going to start to see a more systemic migration of talent from EU and the US. Already South East Asia and India is being viewed as a place you want to be, which was not the case a year or two ago
Startups side
Increased regionalization and dominance
More startups with a regional foot print
- Seed rounds have increased and more companies received Series-A funding in 2014. The classes of 2013 and 2014 are finding their feet and are going to start expanding regionally
- I expect the top markets to be Singapore, Malaysia, Thailand and Indonesia, with Philippines being top of the list for only the odd company
Emergence of more clear category leader dominance
- Within each category, 2014 was a year where startups started breaking away from the pack, resulting in a virtuous cycle of more funding enabling them to accelerate growth
- 2015 will be a year where we will start getting clarity on which the vertical leaders truly are. These will be the companies raising large fund towards the end of 2015 and certainly in 2016
‘More’ startups in certain verticals
- More activity in the payments space, and investments in FinTech
- More ambitious (i.e. serious funding) ecommerce companies launching, backed by corporates, against the likes of Lazada (Why, who knows!). This has happened in Thailand and Indonesia and will happen in Q1 in Malaysia
- More startups in the offline space: logistics and service models (e.g. instacart clones etc)
- More marketplace models (e.g. StyleSeat, Thumbtack etc.)
Foreign entrepreneurs and Rocket grads will drive a lot of new startups
- Given recessions and the sheer number of smart staff imported by Rocket, I expect a high number of funded companies to be founded by European and former Rocket staff
Struggling startups will complain there is a Series-A crunch
- In the past 2 years there have been a number of companies invested in, which, many in my opinion, should not have been funded. To some extent the proliferation of investments was driven by liberal application of SG schemes (Mainly NRF TIS).
- The consequence is that we will read about ‘how hard it is to raise’ follow on funding (Series-A crunch of Asia), and three outcomes for those startups: 1. Crappy: Shut down in H1, 2. Poor: Shut down but some may get bridge round lifelines, and 3. Mediocre: inadequate Series-A, which will not give them the resources to truly survive and prove their milestones.
- NRF TIS have seen poor companies being championed by the approved VCs and have slowly been making restrictions and the bar for funding harder (e.g. ecommerce is not in favor). Expect to see only select categories receive support
- Many companies should not have been funded which gave false positive affirmation to the idea, but the boon will be to the ecosystem as the companies shutter with staff pollinating the ecosystem and the founders (hopefully) learn lessons to reapply to progressively better companies
Start to see more overseas expansion of well funded EU/US companies
- South East Asia and India is starting to come up on the radar of heavily funded companies in EU and US, enabled by success stories largely generated by Rocket and large funding announcements who have done much to educate and create the market
- I expect to see the first move towards regional expansion to South East Asia and India. By way of example, Quandoo and Braintree (Arguably not a startup being part of PayPal, but operating like one) are already making some headway
- Whether the companies succeed in making an impact is yet to be seen (e.g. Shopify via SingTel has not done well and may pull out I hear). What is clear is that this will be positive for the ecosystem by providing more visibility to the region, sending over more talent and the marketing spend will increase the overall market size
What does your crystal ball say? Let me know in the comments.