Last two weeks we hosted in total six visiting Chinese VCs in our Jakarta office. Some of them were frequent visitors while others came only for the first or second time.
All of them are looking for deals, primarily Pre-A, Series A and (to a certain extent) Series B. And all but one of them are saying: deals are now much harder to find compared to last two years.
They find it odd as well – especially when they spend a few days around SCBD and see all the hustle and bustle – aspiring entrepreneurs, aspiring teams.
What was missing?
Specific comments from them are usually in the following three categories:
- “fewer” Chinese entrepreneurs are building internet business in Indonesia – a prime target they did in the past
- Those deals passed on to them by local and Singaporean VCs are too expensive
- The obvious sectors (or “race tracks” as they call them in China) have been occupied – other opportunities are hard to assess
Fewer Chinese founders?
You might ask why Chinese VCs always prefer Chinese founders. First, the communication gap across the chain of command in Chinese VCs is smaller if the founders are Chinese; Second, and more interestingly, is that it is really easy for them to do the background check, especially for early-stage companies where the people matter more than anything else.
The notion of ‘fewer’ Chinese entrepreneurs is actually debatable. While probably nobody has done any series study, we see a continuous stream of Chinese founders setting up businesses in Indonesia. There is one caveat – they and their business models are less visible than those who came earlier: Akulaku, VShow, Babe, Advance AI, J&T Express etc.
Traditionally, most Chinese founders in oversea internet markets were concentrated on ‘lighter’ business models such as gaming, content and social. These are the models which are quick to test/adapt and do not require too much on the ground localisation work. Many of these entrepreneurs are very good at customer acquisition, growth hacking and product. Kuai, are their role models.
However, as for any other business model, timing is crucial. For ‘lighter’ models a critical flaw is that – they are not defendable until you have reached a critical mass of users. Big boys can easily copy *exactly* what you do in product, hire better people than you ever have, and outspend you in marketing.
Reaching critical mass has been hard. In emerging markets, while customer acquisition costs were low when these models flocked out, monetisation was also hugely challenging – ads were sucked into the Facebook orbit, and payment was not smooth.
For many, before they reached maturity, big boys are already coming. When ByteDance introduced Tik Tok, VShow floundered; big ad exchanges in China crushed the small customer traffic platforms run by Chinese entrepreneurs; ByteDance’s Toutiao took control of Babe.
Facebook has been doing that to emerging social platforms like SnapChat. While you could argue that SnapChat had reached a critical mass before that happened, it is undeniable that SnapChat has not had an easy time since.
Mobile Legend is probably the only shining star amongst these models – however, as a gaming business, they are very profitable and do not really need investment.
The heavier models, like logistics, e-commerce and offline, take time to develop; they also often require much stronger local knowledge and team. So it is natural to see a gap here.
Too expensive?
And when the gap is formed, but capital is readily available, what happens? Prices go up – basic supply and demand. We have said that in this market, it has become so vast with so many players on both the supply and demand side that information flow is no longer efficient.
People who invested the limited amount of “good quality” deal flows can relatively easily sell their portfolio to later stage folks and book a handsome on paper gain.
Solution if you do not want to overpay? Go early and explore more sources of deal flow yourselves – this is why in our 2019 predictions for Southeast Asia, we said intermediaries (or as they call Financial Advisors/FA in China) are on the rise. Yet, so far nobody has been good enough to be standard-setting.
To an extent that we are launching our own advisory business in Jakarta 🙂
Obvious sectors?
Again, same as the “too expensive” part, here one needs to discover opportunities beyond the obvious. And this can only be done through deep understanding about the market – ShareChat and Udaan in India, MuslimPro in Southeast Asia and Payfazz in Indonesia are only ‘discovered’ by Chinese investors after they achieve significant traction. Earlier stage trends are much harder to spot unless you are on the ground and see yourself.
In a related point, the fast-growing local VC ecosystem also makes it harder for Chinese VCs – they are able to see business opportunities earlier, and by the time foreigners came, it is already expensive.
Chinese VCs have always mumbled about not being able to participate in early-stage deals in Thailand because of the strong local ecosystem of funding such opportunities (a notable exception is Flash Express – an e-commerce logistics company backed by Gaorong and a number of Chinese VCs).
Encouraging Signs
However, we see encouraging signs. More people are coming more frequently, and some are starting to build local offices. In early 2017, we counted two Chinese VCs who frequently sent a partner or a VP to Jakarta to scout and help portfolio; last week amongst the six we saw, two of them had already travelled to Jakarta more than four times this year.
I do believe that more Chinese VC participation is good for the ecosystem – while they are not silver bullet giving you the best technology overnight, they are often able to effectively share what has been happening in China, with the lessons learnt, so your vision is broadened, and you do not make the same mistakes your Chinese counterparts had already made.
We obviously welcome all stakeholders to come and have a chat with us any time in Jakarta – we are located at GoWork Pacific Place, and you can write to us [email protected].
