This is the second article of a series of essays aimed at providing guidance for entrepreneurs in Southeast Asia who are seeking to secure successful fundraising.
Throughout the past decade, I started companies, joined great founders, scouted for investment opportunities, and mentored upcoming entrepreneurs across Southeast Asia (SEA).
This month alone, I am helping a cohort of Korean startups with a series of workshops. All those events will cover fundraising and doing business in SEA:
- Nailing down the right narrative through storytelling
- Simplifying complex business models through design
- Understanding opportunities across SEA
- Building an effective fundraising process
- Understanding how the SEA fundraising landscape differs from other parts of the world
The reality is that nobody loves fundraising. Most founders have plenty of priorities apart from their next raise. But for most startups, external investment is an important step in their journey. After all, it takes time, great talent, and all kinds of other resources to build a sustainable business.
As with most things in life, you can study the fundraising process as much as you want, but building fundraising decks and pitching investors are skills that people develop predominantly by getting their hands dirty. Yet, that does not mean you should jump straight into the fundraising process without doing your homework.
In my experience, founders raising capital in Southeast Asia face one of the following challenges:
- First-time founders do not understand what VCs are looking out for. This stems from the lack of warm relationships with regional investors.
- Seasoned founders who built businesses in other parts of the world face challenges when adapting their stories to the expectations of VCs in SEA.
While I am not an expert, I have had a front-row experience in observing how Southeast Asia transformed. From a little-known region into one of the most exciting startup ecosystems worldwide.
So, this week I wanted to take a moment and share my learnings. Years of experience in observing and participating in the greatest wealth creation the region has ever seen. Condensed into one essay.
The subtle differences in raising capital in Southeast Asia
About a year ago, I participated in a program called A+ Accelerator. While attending the program, we were raising capital. As an outcome, we were simultaneously exposed to the feedback of both American and Asian VCs.
Also Read: Thriving Southeast Asia: The unstoppable rise of growth and prosperity
Whenever we pitched an American VC, they urged us to focus on product development. Stressing the importance of reaching product-market fit. But on the other hand, Asian investors kept on asking questions about our traction, unit economies, and revenue growth.
Most Asian-based investors did not want to dive into our product. All that mattered to them was proof of business, speed of execution, and solid business fundamentals.
Admittedly, being exposed to the different requirements from each side was confusing. So we created two decks. One deck was focused on market size, product, and why now, geared towards the American crowd. While the other deck emphasised traction (aka growth of service providers and clients on our marketplace).
While the experience was frustrating at times, it was also fascinating to witness. It taught me a valuable lesson. A lesson about adapting your narrative to the needs of the ecosystem where you operate.
In turn, I started documenting my learnings and sharing them with founders in my network. So far, the feedback has been great, which triggered the idea of writing this essay.
Developed markets vs emerging growth markets
I guess it goes without saying that building a business in the western hemisphere is quite different than building one in Asia. In fact, the topic has been fascinating to me for a long time. I even wrote my Master’s thesis on how innovation takes place in Hong Kong vs Denmark.
Raising capital
The US has been the canonical example of a great startup ecosystem. Investment deals happen fast. Valuations are high. Acquisitions are frequent. Ticket sizes are getting higher and higher. There are 3000 venture capital firms and more than 70,000 startups.
The market has produced incredible successes, ranging from 600+ billion to several trillion-dollar companies. All that has resulted in an incredible talent magnet. Attracting the world’s brightest minds to participate in the world’s greatest wealth creation.
On the other hand, Southeast Asia is still a relatively young ecosystem. It started gaining traction only in 2010, with the first major success cases coming to life in 2016. Couple that with the unique circumstances of running a business in emerging markets, and you can imagine how different the two ecosystems are. While I am not an expert on the topic, I have observed the following differences when raising capital in SEA.
Valuations are lower and driven by solid unit economics and revenue growth. Ticket sizes are smaller but definitely growing. Exits happen mainly via M&As (80 per cent of deals), followed by secondary sales (15 per cent) and IPOs (only five per cent).
Fourth, it’s rare to see deep-tech activity. Most startups address challenges across travel, e-commerce, transport and food, online media, and financial services. Awareness around ESOP is still lacking. And overall, investors have an appetite for proven business models.
The fewer exit opportunities are definitely top of mind for investors looking for winners in Southeast Asia. Series A and above startups would aim directly for an IPO. Whereas earlier-stage ventures would typically accept acquisitions coming their way.
I am obviously handpicking criteria to emphasise the differences. Many things are similar as well. But I think it’s more valuable to focus on the differences. In that way, you can manage your expectations better. Then, adapt your business style when doing business across the region.
Trends
Next, I would like to highlight a few underlying trends that drive the growth of the ecosystem:
- Governments have recognised their important role in the ecosystem. Throughout the past decade, we have seen the launch of initiatives like Thailand 4.0, Indonesia’s 1000 startups, Malaysia’s Penjana Kapital, and Singapore’s Startup SG Founders (in the past, I have written on the great initiatives Singapore offers).
- Later-stage deals are becoming more common, showing the ecosystem’s maturity.
- Rebound in larger acquisitions (+US$30M) with companies like Tradegecko’s acquisition by Intuit, Fave’s acquisition by Pine Labs, and Moka by Go-Jek.
- Given how it takes up to a decade for a tech startup to go through an exit, it is expected to see more success cases soon. The exit cycle matters because tech talent that has been through an exit tends to either launch a new business or invest in the ecosystem. On a long horizon that builds the foundation for a great ecosystem, as we have seen in the west. In fact, there are already some examples of Grab, GoJek, and SEA mafias.
- Growing appetite from global late-stage funds and LPs. For example, American and China-based family offices, Tiger Global, Insight Partners, Hedosophia, Harvard Endowment, Sequoia, Accel, Lightspeed, Hustle Fund, SOSV, and many others.
- E-commerce is the largest growth driver. Today, it accounts for US$120B GMV, followed by online travel and media.
- The average ticket size for seed and Series A deals increased 6X in 2021 compared to 2017, while the Series B deals are seeing a 4X increase.
A few tips for raising capital in Southeast Asia
To succeed when doing business in the region, you need to have an intimate knowledge of the local culture. After all, most Southeast Asian countries happen to be collectivistic and top-down/hierarchically oriented.
In some cases, Western cultures are the opposite. Scoring high on individualism and adhering to egalitarian leadership principles. In turn, it’s easy to be perceived as too direct, pushy, or even incompetent at times if you do not adapt your relationship-building style.
While many key players in the startup ecosystem are western educated, my experience repeatedly taught me the importance of building long-lasting relationships. You must build an emotional connection from the beginning. Which involves frequently going out for meals and drinks.
Also Read: Tech firms in Southeast Asia poised to ‘leap’ forward with gender equality
Get to know later-stage founders and try to deliver value. Involve them as advisers, angels, or mentors. As the relationship strengthens, those founders will start opening their networks. That will result in warm introductions to the VCs that backed them.
On another note, in most countries (other than Singapore), the legal system is not terribly reliable. Therefore, relationships carry more weight than written contracts. Only when there is strong trust between two parties will you be able to secure deals? Most VCs know each other quite well, be mindful of how you manage those relationships.
Last but not least, be well prepared at all times. SEA-based VCs tend to position themselves as industry agnostic. Studying their portfolios will show how they might be more bullish/bearish on certain sectors. Outreach to investors who would be excited about the problems/markets you are building.
Given the affordable talent in Indonesia, Vietnam, Thailand, and the Philippines, many first-time founders tend to overhire. In turn, experienced VCs would expect to see a cautious plan for hiring people.
Some VCs are increasingly calculating the revenue per headcount. After all, human resources in a tech startup tend to be the largest cost item. So founders should devote significant time to identifying, attracting, and retaining great talent.
Couple that with the current investment climate. Many VCs would expect you to have at least 18 months of runway these days. If your model relies on lavish spending to acquire users, you will have a hard time fundraising capital.
All that leads to a reassessment of what metrics founders have to track. In a good investment climate or more developed ecosystems, GMT/GTV are acceptable metrics. In Southeast Asia, investors care about your actual revenue. In the case of my last business, every time I pitched our gross revenue, I got interrupted instantly.
Then the investor would ask, “that’s all good, but what’s your net revenue?”So think deeply about how you would grow your gross. About your margins. Also, how would you launch adjacent verticals to flesh out the path to considerable profitability?
Southeast Asia is not a homogenous market
The US has a large total addressable market where people speak the same language and have high purchasing power. Southeast Asia, on the other hand, is far from being a homogeneous block. Instead, you can consider it a unique collection of 10 diverse cultures and languages.
Most of those countries share quite a low standard of living. You will have to conquer each market one by one, requiring a proven model and an incredible execution. A clear go-to-market plan highlighting your deep understanding of the market’s complexity is a must. In my experience, the best way to prove the viability of your plans is through:
- A history of success.
- Running experiments that prove your assumptions in each market where you plan to operate.
Even established organisations find it hard to capture the market successfully. I have seen a variety of strategies, some more successful than others. For example, LinkedIn has parked its regional headquarters in Singapore.
Also Read: Successful business models for tech startups in Southeast Asia
In turn, they send sales teams to fly to each country frequently. Others, like TikTok, would invest considerably in core markets like Indonesia to build solid traction.
Obviously, most startups are less resourced and thus need to have proven go-to-market plans localised for each country.
A word of caution here. Many founders tend to over-expand too fast in a bid to plant flags and position themselves as a regional success case. I have been guilty of that myself twice. Expanding too fast comes at a price. You sacrifice:
- Deep understanding of the nuances of each market
- Focus
Conclusion
Rumour has it that Southeast Asia has entered a golden era for startups. The region has transformed from a little-known corner of the world to one of the most exciting innovation ecosystems.
A few days ago, I asked a founder who had just closed a seed round in Singapore about his observations on the topic. In his view, building a new venture in Southeast Asia attracts an incredible amount of attention from top-tier VC firms. It has never been easier to raise a round. The appetite for risk amongst local family offices, angels, and VCs is much higher today than ever before. That’s not a surprise, given the market’s strong fundamentals.
But there is still work that needs to be done, though. Operating across all those fragmented markets is hard. A strong focus on traction and revenue builds sustainable businesses. Yet, that comes at a cost, making it much harder to start and grow new companies. The relatively low number of exits results in fewer seasoned operators. Thus lower talent density.
Having said that, I am super excited to continue building in Southeast Asia. Let’s assume we take the perspective that history repeats itself. Then, study the world’s best ecosystems like the US and China. It quickly becomes obvious how SEA is just getting started.
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