Of COVID-19 and funding winter: Why these 2 VC firms are bullish about SEA amid back-to-back crises

With the startup world undergoing a funding winter following a global recession caused by various macroeconomic factors, including the Russia-Ukraine war and inflation, the early-stage investment has tapered down. Many tech companies, including high-profile ones, have reduced their workforce in doves, anticipating a tougher fundraising climate and slower growth. The new crisis comes as a double whammy as the world has yet to recover from the onslaught of COVID-19. 

The collateral damage has not spared VCs either. They have become frugal and are now urging their portfolio companies to spend wisely and expect a long and hard winter. Many VCs, who have witnessed similar crises, including the 2008 economic slowdown in their previous avatars as founders/top executives, are seeing similarities between the recent crises.

We spoke to two prominent and active early-stage VCs in Southeast Asia — Intudo Ventures and Altara Ventures — to understand how they view these crises.

There are several reasons why we believe their views are relevant in this matter. First and foremost, these two VC firms are actively investing in tech companies in the Southeast Asian region. As a player on the ground, they see first-hand the changes that are going on in the ecosystem and have taken steps to adjust to it accordingly. Their insights could provide us with a window to how to best approach startup investing in this climate.

Second, both VC firms are actively investing in the Indonesian market, with Intudo Ventures even putting it as its core focus. With Indonesia being the largest and one of the most prominent tech hubs in the region, we believe that whatever is happening in the market –and how investors are approaching it– will eventually determine where the regional tech ecosystem is going.

This article will look into how the two VC firms deal with this situation and the insight that we can get from it. Hopefully, this can help us prepare ourselves better for what is coming.

The VCs and the people behind them

We need to start by understanding the VC firms that we are talking to and the spokespeople representing them.

Intudo Ventures: Founded in 2017 by Eddy Chan and Patrick Yip, Intudo is an ‘Indonesia-only’ VC firm. It has launched three funds so far — Fund I, worth US$20 million (2017 vintage), Fund II, worth US$50 million (2019 vintage), and Fund III, worth US$144 million (2021 vintage). It seeks opportunities in agriculture, B2B & enterprise, education, finance & insurance, healthcare, logistics, and new retail & entertainment. It invests in the seed/pre-A stage with a ticket size of US$1-3 million, Series A with US$3-8 million, and Series B and beyond with US$8-25 million.

Also Read: Indonesia-only Intudo Ventures hits final close of Fund III at US$115M, to back 12-14 firms

The VC firm has invested in 25 companies, including Xendit, Pintu, BeliMobilgue (acquired by OLX Autos), Kargo, PasarPolis, Halodoc, Pinhome, Nalagenetics, Populix, Andalin, TaniHub, and Yummy Corp.

In this interview, we speak to the Founding Partner of Intudo Ventures, Eddy Chan. He works closely with top Indonesian “Pulkam SEA Turtles” and local Indonesian talent via professional and student associations. He has been featured as a speaker at the annual Harvard Asia Business Conference (2019-2022), MIT Asia Business Conference (2020-2022) and Southeast Asia MBA Weekend (2018-2022).

Before co-founding Intudo, Chan worked on venture investments in startups in the late 1990s, including PayPal, Palantir, and Affirm, founded and operated venture-backed technology companies with operations in Silicon Valley and Asia, practised corporate/M&A law and worked as an investment banker.

Altara Ventures: Singapore-based Altara is a US$130 million early-stage VC fund launched in 2020 by a group of tech and investment veterans, including Koh Boon Hwee, Tan Chow Boon, and Seow Kiat Wang. Its focus verticals are fintech, consumer, enterprise software, logistics, healthcare and edutech. Its average ticket size is US$3-5 million in pre-Series A, Series A and selectively some Series B companies.

The firm plans to support 20-25 companies operating primarily in the Singapore, Indonesia, Vietnam, Malaysia, Thailand and Philippines markets.

Altara has invested in more than ten companies, including Tonik, Stasfin, Sampingan, Med247, FreeAgent, PolicyStreet, Clevai, Saturdays, Senseye and Oddle.

In this interview, we speak to Dave Ng, General Partner at Altara Ventures, where he focuses on working with promising entrepreneurs building for the region and beyond.

Previously, he was the Head of Southeast Asia for Eight Roads Ventures, where he led investment and portfolio activities for the region. Before that, he was Venture Partner at B Capital Group, where he helped launch the Asia office.

Over the past decade, Ng has partnered with many talented founders and firms, including Ninja Van, Carro, Akulaku, StashAway, Icertis, FreeAgent and LeadIQ. Besides investing, he has also spent many years building and operating within the technology industry. He was previously at Oracle, leading strategic activities in its Cloud business. He was also an early team member at enterprise SaaS pioneer Zuora. Before that, he was a management consultant at the Boston Consulting Group.

Investment thesis

There are both differences and similarities in the way Intudo Ventures and Altara Ventures approach startup investments.

Intudo Ventures: Its mandate is defined by the three ‘Ins’ of Intudo: Indonesia, Independent, and Involved.

Indonesia-only: Intudo Ventures takes an Indonesia-only approach to investment. In its view, any successful venture-backed business in Southeast Asia must eventually go through Indonesia to be relevant. It only invests in Indonesian homegrown companies.

An independent firm: Intudo Ventures is an independent VC firm. Every LP is capped at no more than 10 per cent of the total fund size to ensure that Intudo acts as an independent firm that can invest in the most return-driven manner and ensure that all LPs are treated equally.

Involved/concentrated approach: It strives to take the lead/co-lead positions in almost every company it backs. It looks for non-consensus overlooked companies, emerging leaders, and undisputed category winners instead of trying to index the market.

Altara Ventures: The VC firm says it has seen many activities over the last ten years in Southeast Asia and is excited about the next 20 years. Several areas excite Altara. The first is the irreversible rise of the region as a sustainable tech ecosystem. This has been driven by a rising consumer middle class and hence, consumption power, which spurs the entire digital and Internet economy.

The second is the adoption of technology among businesses, both large and small. All companies must have a digital playbook or face disruption or irrelevance. Finally, SEA’s economic structure is shifting to become more tech biased. It has seen this in S&P 500 and will happen to IDX, SGX, KLSE and the likes. It is just a matter of the speed it is happening.

The opportunities they see

Before we can understand how they approach the incoming (ongoing?) crises, first we need to understand the opportunities that these firms are seeing –and seizing.

Intudo Ventures: Indonesia’s venture funding sector is entering a maturation stage, where capital, talent, and ideas are more abundant than ever. The influx of global capital has changed the game, with more investors looking at the market. We are seeing more capital and talent being recycled into the ecosystem, creating new companies and opportunities for growth.

For Indonesia, the underlying dynamic is the digitisation and transformation of traditional industries, a process that has only accelerated with the pandemic and correlating economic fallout. Technology enablement was historically a ‘nice to have’ for companies of all sizes. However, post-pandemic, it has become a ‘must have’. There will be a continuation in the scaling of ‘pick and shovel’ foundational businesses such as payments, logistics, and enterprise services to support e-commerce and key traditional economic sectors.

Digitisation is happening across the Indonesian economy, ranging from conglomerates, the government, SMEs, to small mom & pop businesses. We have witnessed this throughout our portfolio in the sectors in which they operate. Consumers have also flocked to digital offerings throughout the crisis, and many will continue to adopt technology to meet daily needs. This dominant trend will continue to be the driving force for the Indonesian venture market for the foreseeable future.

However, as optimistic as we are about the future of Indonesia, it has been a long journey to get here. Over the past decade, Indonesia has gone from a VC backwater to becoming one of the most compelling emerging markets for investors. For fundraising, founders had few options, with only a few mainstay firms to choose from at the early stage and even thinner in growth.

Also Read: Altara Ventures hits the final close of inaugural fund oversubscribed at US$130M

From an investor landscape perspective, Indonesia has evolved from a market dominated by corporate VC firms and regional fly-in investors to one where local investors have begun to dominate the landscape and gatekeep access to the market. Talent, still cited as an issue today, was even more scarce.

Awareness of Indonesia among investors has grown dramatically. When we started as a firm, some investors even laughed at us for the notion of setting up a firm to exclusively invest in Indonesia. We had to spend hours educating potential investors on Indonesia, including what now feels like basic market knowledge. Those days are gone.

Founders are now blessed with an abundance of options. Capital has become a commodity through the maturation of Indonesia’s venture market. With the market flush with capital, founders now want more than just money. Unless it is a global firm with significant brand power and know-how, founders expect their investors to offer concrete value-add deliverables—in particular in-country resources, access to customers and regulators and hands-on guidance. Gone are the days of fly-in fund managers.

Altara Ventures: It is looking to partner up with passionate folks who have the audacity, grit and right mindset to build for the future. It seeks to back companies that 1) meet the consumption, mobility, education and healthcare needs of the 650 million population, 2) in the digital transformation of businesses, logistics and supply chain and 3) groundbreaking deeptech.

It finds large domestic markets like Indonesia, the Philippines, Thailand and Vietnam especially interesting for consumption-driven models, solving large market gaps. It is also excited about Singapore’s potential in deeptech and healthtech. It also likes the creativity and regional mindset of Malaysian founders.

COVID-19 vs funding winter

So how should we approach these back-to-back crises?

Eddy Chan: The pandemic was an unprecedented crisis that permanently changed how people live and conduct business, underscored by mass digitisation. This is true for Indonesia, which experienced several shocks over the past couple of years, but has shown resiliency as a market and people.

These two events are interrelated cause and effect issues. The human toll– not just the lives lost but also the second-order effects — continues to play out, including the current market downturn, which is the fallout of monetary policy, supply chain shock, and geopolitical factors.

When money was easy due to pandemic-related policies, it was being doled out irrationally, creating bubbles along the way. As the spigot has been tightened, businesses dependent on easy money suddenly have to rely on operational fundamentals. 

Companies that took high valuations based on irrational investor demand will have to rationalise these valuations through changes in business strategy and a shift to sustainable growth.

In the early days of the pandemic, we believed that the crisis would compel the shuttering of many startups in Southeast Asia, and there were many examples. Still, the boom in fundraising masked many of these issues. Now that we’re on the other side of this process, we expect startups to struggle in fundraising. For those with means in our portfolio, it will be an ideal time to consolidate their market position and adopt an M&A strategy.

Also Read: Funding winter: VCs ask startups to focus on corporate funds from developed countries

Ultimately, we believe that there will be a greater appreciation for local expertise among founders and investors alike. Local investors are best suited to deal with in-market crisis events and have the tools and resources needed to support company growth in both good and bad times. Many regional investors with Indonesia exposure have tried to shore up their Indonesia credentials through junior hires over the past couple of years to mitigate in-market issues. 

For global investors who first tasted Indonesia during the recent bull run, it may be challenging to support founders as the market cools off and their attention is turned elsewhere. Indonesia is our sole focus, and we act as their eyes and ears on the ground for many global investors. We expect many investors who made their first investment in Indonesia during this period to visit the country and gain a greater appreciation for in-market dynamics.

Dave Ng: I have seen a few more cycles — the late 99 and 2000 iconic dot com boom and bust, the housing market bubble in the US in the mid-2000s and then the 2008-2009 recession. 

The impact of each of these is somewhat similar and comparable, although slightly different in the degree of severeness.

This time, we are talking about inflationary pressure much higher than we’ve seen before. If we draw a comparison, it takes us back to even the inflation in the 70s and 80s.

It will cause the capital to go up, especially on the debt on the lending side of things. Imagine your business (large and small) leveraged many times; your cost of doing business will go up substantially with the increase in interest rate. All this will have a trickle-down effect. 

Therefore, we are already seeing that many large tech companies are tightening their belts, either by slowing down or stopping hiring or, even to some extent, starting to trim down or organise their workforce and laying off people. 

We have seen that even in our ecosystem here in Southeast Asia among some tech startups. This will have a ripple effect across the economy. 

The worry here is we get into a stage of stagflation, meaning that you have high inflation and very little growth. So you’re stuck in that state, and we don’t want to be in that situation. 

Should we celebrate unicorns?

For many years, in the global startup ecosystem, there has been heavy emphasis on the unicorn status. This has led to many companies (and investors) rushing to be (and invested in) the next unicorns. But is this a worthy cause, especially as more companies are encouraged to be more sustainable these days?

Eddy Chan: Unicorns are a proxy for success but are not successful in themselves. There are many examples of companies that have flopped after gaining market accolades and attention due to valuations and fundraising amounts.

Global attention comes with these companies as proof points for market viability for the market as a whole. It generates considerable pride among employees, investors, and local stakeholders to show that Indonesia can build such calibre companies.

So, celebrating unicorns is not unwarranted, but chasing unicorn status can lead to unhealthy business and investment practices. Unicorn chasing is often a FOMO game, and it’s not the space we operate in as an “early-stage” investor.

As early-stage investors, we aspire to cut through the noise and hype to look at ideas and founding teams that have the potential to shake up the market and create new business models and categories in their own right before they take off. We are naturally very excited when our companies raise money and gain market attention, validation, and share in their success.

Conversely, some deals we’re most proud of may never reach unicorn status. Still, they’re successful businesses already, generating positive income, providing employment, and creating value for Indonesian society. Some of them were once considered “unfundable” before Intudo put money in and raised capital from top global investors. With a consensus return to fundamentals across the market, we believe that investor mindsets may coalesce around more sustainable business models and fundamentally strong teams.

Also Read: Funding winter? Indonesia marches on … and why it will survive the gloom

Dave Ng: In the early days of coining the term ‘unicorn’, it was all about companies achieving certain milestones. For example, a SaaS company gets to US$100 million in ARR (annual recurring revenue), or a consumer company’s net revenue reaches a substantial level. It was the point when most companies crossed the billion-dollar valuation.

So I am always for celebrating positive milestones. It is important for founders to recognise every little milestone they achieve because starting and building a company is challenging. It’s also crucial for investors investing or partnering with companies to celebrate and help them celebrate every little milestone. 

However, I think there has to be a balance. We shouldn’t disproportionally celebrate milestones that are pretty on the surface but have no real substance. 

So it’s important to celebrate every milestone, which could sometimes be non-financial related. Sometimes it could be people-related, culture-related, or product-related.

Wrapping up

Globally, VC investment is under severe stress or, in other words, undergoing a course correction. There are many reasons to be anxious about this. First, nobody is sure what will be the outcome of the ongoing financial slowdown. Apart from that, experts have also warned that the winter will likely last longer than expected with even the biggest companies having their valuations inflated. How many unicorns with inflated valuations will remain unicorns when things are finally settled? What will happen to the rest of us?

The answers to these questions remain elusive. However, we also like to point out that this is not the first time a crisis has happened.

If we have survived one before, there is a likelihood that we might survive the next one.

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