UNI­CORNS DE­PLOY FUND­ING INTO COR­PO­RATE VENTURE FUNDS IN RACE FOR SUPERAPP STA­TUS

Drawn by the growth story in South­east Asia, cor­po­rate venture cap­i­tal funds by uni­corns as well as by for­eign chal­lengers are set­ting their sights on op­por­tu­ni­ties in Sin­ga­pore.

Singapore Business Review - - CONTENTS -

When ride-hailing gi­ant Grab con­sid­ered how best to achieve its superapp am­bi­tions, it set up Grab Ven­tures, a Cor­po­rate Venture Cap­i­tal fund, to nur­ture star­tups in South­east Asia through its seed ac­cel­er­a­tor pro­gramme, Ve­loc­ity. In Novem­ber

2018, Grab un­veiled the first batch of star­tups which in­cludes In­dian on­line tick­et­ing plat­form Book­myshow; In­done­sian beauty ap­point­ment book­ing por­tal Min­utes; Ger­man on-de­mand home clean­ing plat­form Helpling; In­done­sian on-de­mand mar­ket­place for home ren­o­va­tion ser­vices Se­jasa; and Singaporea­n edtech startup Tuee­tor.

Grab’s ma­jor ri­val, Go-jek, ear­lier es­tab­lished its own CVC fund, Go-ven­tures, to gain early ac­cess to tech­nolo­gies and in­no­va­tions that could add value to its ex­ist­ing op­er­a­tions. An­a­lysts ex­pect the CVC trend to be­come a key in­dus­try theme in South­east Asia, as the en­try of more play­ers cre­ates only more op­por­tu­ni­ties for col­lab­o­ra­tion amongst firms seek­ing to lever­age a uni­corn’s for­mi­da­ble ca­pa­bil­i­ties and a uni­corn to quickly as­sim­i­late star­tups that pose a threat to their op­er­a­tions.

Over­seas CVC funds are also be­com­ing more ac­tive in fast-grow­ing re­gions as in­vest­ment op­por­tu­ni­ties in their do­mes­tic mar­kets dry up, set­ting up the stage for stiffer com­pe­ti­tion and higher VC fund­ing in 2019.

Uni­corns hoard fund­ing

Over­all, VC in­vest­ment ac­tiv­ity into Sin­ga­pore-based com­pa­nies has in­creased, from US$1.34B in 2014 to US$4.92B in 2018, ac­cord­ing to the Sin­ga­pore Venture Cap­i­tal & Pri­vate Eq­uity As­so­ci­a­tion (SVCA).

A sig­nif­i­cant pro­por­tion of in­vest­ment ac­tiv­ity in Sin­ga­pore last year was fun­nelled into uni­corns in Sin­ga­pore, such as Grab, which re­ceived US$2.6B in fund­ing and at­tracted two rounds of mas­sive cap­i­tal in­jec­tions from Soft­bank Cap­i­tal, Didi Chux­ing and Alibaba Group, ac­cord­ing to SVCA. “The Sin­ga­pore VC scene is dom­i­nated by tech­no­log­i­cal com­pa­nies with the vast bulk of funds flow­ing to large firms with a dom­i­nant pres­ence in the re­gion,” a spokespers­on from the as­so­ci­a­tion told Sin­ga­pore Busi­ness Re­view.

Me­gadeals in­volv­ing Grab with a to­tal value of $7b pushed the ag­gre­gate value of VC deals in Sin­ga­pore to in­crease by 500% as of the first quar­ter of 2019 to $8.697b from 2018, ac­cord­ing to data from Pitch­book.

This in­flux of large in­vest­ments in uni­corns led by Grab has ac­cel­er­ated ac­tiv­ity in their CVCS, which when taken to­gether with other al­ter­na­tive sources, as well as tra­di­tional sources like lo­cal VC funds, helped push to­tal VC fund­ing in the re­gion to more than US$11B in

2018, noted Tan Yinglan, Found­ing Manag­ing Part­ner at In­signia Ven­tures Part­ners.

Tan ex­pects a new batch of com­pa­nies val­ued at US$100M to emerge soon, as growth funds ramp up their in­vest­ments in the re­gion whilst global VC funds part­ner with ac­tive lo­cal VCS in back­ing ear­lier-stage com­pa­nies. “This is a pos­i­tive di­rec­tion for the ecosys­tem here,” he reck­oned, cit­ing how the in­flux of fund­ing to­wards larger Se­ries A and Se­ries B fund­ing is cre­at­ing a fresh batch of mar­ket lead­ers in key ver­ti­cals like Fin­tech and lo­gis­tics and clos­ing the fund­ing gap be­tween Se­ries B and Se­ries C.

South­east Asia’s nine uni­corns – which in­clude Grab, Lazada, Razer and Sea Group and Go-jek – raised US$16B out of the to­tal US$24B fund­ing from 2015 to the first half of 2018. “This trend will likely con­tinue and ex­tend to­wards com­pa­nies in the US$100M club,” said Tan. “These com­pa­nies raise on the back of po­ten­tial growth in the re­gion and en­trench their lead­ing po­si­tions through mar­ket or prod­uct seg­ment ex­pan­sion,” he added.

VC fund­ing should con­tinue to ex­pand in 2019 with in­creased fo­cus on Se­ries B and Se­ries C deals, with venture arms of uni­corn com­pa­nies like Grab, Go-jek, as well as SEA and Lazada all be­com­ing ac­tive in the early-stage ven­tures, ac­cord­ing to Kiren Tanna, co-founder and MD of ZEN Rooms.

Superapp chal­lengers?

There has also been in­creased ac­tiv­ity of over­seas CVCS tar­get­ing spe­cialised star­tups that have gone be­yond the Grab and Go-jek route, and 2018 saw “mean­ing­ful in­creases” in at­ten­tion and cap­i­tal com­mit­ments to South­east Asia, espe­cially from Korea, China, and even the US. “That is a pos­i­tive in­di­ca­tion of long-term sen­ti­ment.” Korean funds and firms, in par­tic­u­lar, are look­ing at South­east Asia to de­ploy cap­i­tal to “par­tic­i­pate in the growth story” and the trend will likely con­tinue un­til 2020, said Tanna, point­ing to Korea In­vest­ment Part­ners’ $120m fund with Golden Equa­tor and Yanolja’s first cross-bor­der in­vest­ment in ac­qui­si­tion of stake in ZEN Rooms.

One sec­tor that has also seen in­creased deals is lo­gis­tics, which is quickly be­com­ing one of the fastest grow­ing ver­ti­cals by VC fi­nanc­ing in South­east Asia, noted Justin

Hall, part­ner at Golden Gate Ven­tures, in a devel­op­ment sig­nalling pos­si­ble road­blocks to the uni­corns’ global am­bi­tions.

“The pre­vi­ous wave of star­tups came from hor­i­zon­tal plat­form play­ers like Go-jek and Grab whilst the next wave of uni­corns will be spe­cialised ver­ti­cal play­ers which will be­come lead­ers dominating their own spe­cific ver­ti­cals,” said Tan, cit­ing the US$60M Se­ries B round by Carro, a com­pany that of­fers an ar­ray of au­to­mo­tive ser­vices rang­ing from a used-car mar­ket­place to af­ter­sales and fi­nanc­ing.

“One of the in­ter­est­ing things that we’ll see over the next few years and pos­si­bly quite soon is that some coun­tries may not feel that com­fort­able hav­ing a for­eign al­most-monopoly player or an oligopolis­tic sit­u­a­tion with a cou­ple of play­ers dominating the cash­less trans­ac­tions in their coun­try,” Hugh Ma­son, co-founder and CEO of seed ac­cel­er­a­tor JFDI.ASIA said in an ear­lier in­ter­view. “There comes a point when as a coun­try, all the cash is go­ing through a for­eign sys­tem that knows more about its cit­i­zens than they do as a govern­ment.”

Re­gional pow­er­house

Sin­ga­pore stands at the fore­front of in­creas­ing VC in­ter­est into South­east Asia given its pos­i­tive rep­u­ta­tion as a lo­ca­tion where com­pa­nies can set up their re­gional head­quar­ters. An­a­lysts ob­served how for­eign com­pa­nies with size­able war chests are in­creas­ingly mak­ing an in­ten­tional de­ci­sion to ex­pand into the re­gion ei­ther di­rectly or by team­ing up with strate­gic part­ners, which was the case when Hong Kong-listed Ping An Good Doc­tor formed a joint venture with Grab to de­liver health­care ser­vices to the re­gion.

“Sin­ga­pore re­mains the head­quar­ters of many VC funds in the re­gion due to its friendly reg­u­la­tory regime and in­ter­na­tional rep­u­ta­tion, but re­gional op­er­a­tional pres­ence is still key. A suc­cess­ful VC in Sin­ga­pore is one which has ‘boots-on-the-ground’ in each lo­cal mar­ket,” said Tan. “It is es­sen­tial for VC firms to build ca­pa­bil­i­ties

which al­low it to mo­bilise lo­cal net­works and re­sources to help re­gional star­tups tackle ob­sta­cles in their home mar­ket.” Ac­cord­ing to Chik Wai Chiew, Ex­ec­u­tive Di­rec­tor and CEO of Her­i­tas Cap­i­tal Man­age­ment Pte Ltd, “the chal­lenge is when seek­ing to scale, VCS in Sin­ga­pore has to tap on the right re­gional part­ners to help the start-ups with lo­cal­i­sa­tion and mar­ket ac­cess.”

Out­look

For 2019, the SVCA said that reg­u­la­tory changes, such as re­cent ex­ten­sions for tax in­cen­tives and new in­vest­ment flexibilit­y for struc­tur­ing of funds (for in­stance, the new Vari­able Cap­i­tal Com­pany (VCC) le­gal struc­ture) may fur­ther en­cour­age in­vest­ment into South­east Asia and for VC fund man­agers to op­er­ate out of Sin­ga­pore.

How­ever, Khor Qianyi, Se­nior An­a­lyst and Head of ESG at Quest Ven­tures, warned that un­cer­tainty around the new reg­u­la­tions, specif­i­cally the VCC, which was meant to in­crease VC ac­tiv­ity in Sin­ga­pore, poses a chal­lenge for VC firms along with the lack of later-stage fund­ing from Se­ries B on­wards.

Tan ob­served the widen­ing dis­par­ity be­tween star­tups with VC back­ing. “We are see­ing smart money chasing top deals where mega rounds are get­ting larger. ‘A’ level startup with all-star founders are rais­ing huge early stage fundrais­ing rounds whilst growth stage mar­ket lead­ers are load­ing up on cap­i­tal to en­trench win­ning po­si­tions,” he said. “Whilst ‘B’ level star­tups at­tract fund­ing from VCS which missed out on the ‘A’ level star­tups, the re­main­ing star­tups find it hard to raise their next fund­ing.”

“The in­dus­try, in­clud­ing tech­nol­ogy me­dia, needs to move away from as­so­ci­at­ing large deals with large mar­ket im­pli­ca­tions,” ac­cord­ing to Qianyi. “Whilst small deals do not sound ex­cit­ing, it is im­por­tant to track them when they are still start­ing up. As Jack Ma said, ‘Small guys be­come big guys.’”

Tan like­wise warned that a “cap­i­tal win­ter” could be in the cards if macroe­co­nomic in­di­ca­tors worsen and cap­i­tal mar­kets stum­ble. “When that hap­pens, com­pa­nies which had been rais­ing on van­ity met­rics could see fund­ing dry up very quickly, as was the case with bike-shar­ing com­pa­nies in China,” he said. “Com­pa­nies will be judged by their fun­da­men­tals, and ex­cep­tional star­tups with solid met­rics will con­tinue to do well in their fundrais­ing. Fundrais­ing for the startup in­dus­try as a whole would get harder.”

DEAL #1: GO-JEK HAS ITS OWN CVC FUND, GO-VEN­TURES

DEAL #2: GRAB AND THE FIRST BATCH OF STAR­TUPS PAR­TIC­I­PAT­ING IN ITS VE­LOC­ITY PRO­GRAMME

Khor Qianyi

Kiren Tanna

VC Exit Ac­tiv­ity ($M) of Com­pany by Exit Type

VC deal flow of com­pa­nies based

Chik Wai Chiew

Justin Hall

VC Deal Flow ($M) of Com­pany’s based by In­dus­try Sec­tor

Tan Yinglan

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