Introduction
This is the transcript of the Momentum Works – Cento Ventures event: On stranger tides: Southeast Asia tech investment 2023 held on Friday, 12 May. You can download the full event deck here.
Speakers: Jianggan Li (Momentum Works); Dmitry Levit (Cento Ventures)
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Jianggan
Good afternoon, everyone. Welcome to the briefing On Stranger Tides Southeast Asia tech investment in 2023, jointly hosted by Momentum Works as well as Cento Ventures. So you might be curious about, you guys hear me? You might be curious about what’s on this cover, which we will explain towards the end of this presentation. Today, you will hear mostly from me, I’m Jianggan, and I’m the CEO of Momentum Works as well as Dmitry who is on stage now. Dmitry founded Cento Ventures a few years ago, but he had a much longer history, investing in tech startups in Southeast Asia. I actually would have liked some of my team to join but they are now on a cruise somewhere in Penang.
Anyway, for those of you who do not know Momentum Works, a bit of background. We started as a venture builder and we have morphed into a venture outfit covering different aspects of the ecosystem, leveraging our experience as a venture builder insights as well as community. Some of you might have seen some of our reports published to the market, we cover different aspects of the venture ecosystem. So the reports are mostly free and you can find them on the link below, insights.momentum.asia, try to download as many as you can before we change our mind and start charging. We also have a subsidiary called Momentum Academy where we deliver immersive learning experiences to large organisations as well as established tech companies. Over the pandemic I collaborated with Professor Guoli Chen of INSEAD for a book called Seeing the Unseen behind the Chinese tech giants, global venturing. So we have analysed about 20 companies and summarised lots of case studies and then lots of lessons learned. If you’re interested. You can get a copy. And progressively we will share more about the case studies through our channels. Over to you, Dmitry, for introduction.
Dmitry
Thank you very much. I am Dmitry. Thank you for having me today. I’m part of the team at Cento. The few years ago that the firm started, that would be 12 Jianggan. Quite a few and we focus on Southeast Asia exclusively. We work with founders in this region, at the early stages of the scaling of their companies. And we are somewhat known in the ecosystem for obsessing with finding facts on the ground and data on the ground and investing around that rather than the high level narratives. But we also like getting together with friends and discussing those narratives occasionally.
These are the founders we have the pleasure of working with and the next slide, that will be their companies and moving forward slightly. Today we will be chatting. Well, yeah, a few reports we’ve published over the years. This year is a bit special. I think it’s our 10th and also it’s quite a pivotal report I think for the ecosystem because we are at a bunch of turning points. Next slide please. And you can find the file on our website and on Momentum Works website. The file on the left would be the more detailed nitty gritty chart-rich one, the one on the right is translated for the convenience of our mainland audience. A few disclaimers as it always happens with our reports there is a fair bit of controversy around the numbers we use and around the data we choose to focus on.
As you know, having operated in this region I’m sure most of the audience does. Quite a few technology enabled and technology adjacent businesses are within the purview of the local VC community. And quite a few deals and transactions are reported as technology transactions. And sometimes it’s a little bit tricky because there are companies from Istanbul and Taipei and Boston that are filed as Southeast Asian businesses because of the incorporation in Singapore and there is a number of asset heavy logistics companies of food and beverage franchises that are reported as technology businesses, we will try to cut through this clutter and we’re a little bit specific on what we do and do not include in our numbers. You can have a look at our methodology in the report. But for the purposes of today’s discussion I’ll just summarise that all the numbers you’ll see today concern companies that derive most of their revenue from Southeast Asia and that are generally understood to be technology companies, and moving on from that.
Jianggan
So, we have been discussing about and since we worked on a report where we’ve been discussing what kind of narrative that most suits what’s happening now. And of course, as Dmitry just now pointed out, we seem to be at a crossroad of many things and there are many factors which are impacting the sentiment as well as the real movement of money. So we eventually settled on dividing this narrative into four chapters. First gradually then suddenly, second when the party’s over, third forgotten sage and the fourth new rules of the game. So we will have some time for Q&A towards the end. But feel free to just type any questions and comments any suggestions that you have in the chat box. Let’s try to make this as interactive as possible.
So the last time we did this in May last year, I think the sentiments were very different. There was a bit of screaming or a bit of concern across the global market, but in Southeast Asia, the investment scene was actually still going on pretty well. So over the past a couple of months, we have had lots of discussions with different investors in the region or coming from outside the region looking into Southeast Asia. And quite often the discussion will start with how do you feel? And I think that’s a question that we probably want to ask everybody here as well. Without further ado, let me pass it over back to Dmitry to talk about gradually, then suddenly, the first narrative.
Stranger tides of Southeast Asia tech investment Part 1: Gradually then Suddenly
Dmitry
To me and Midjourney so thank you for the imaginative backgrounds today. And let’s go to the next slide and just talk a little bit very briefly, I promise. It’s Friday afternoon after all, of what actually transpired last year. Media of course, especially Twitter, has made us aware in early 2022 that the world is coming to an end. Some of our more US based investors actually started telling us the world is over as early as November 2021, causing some turmoil in boardrooms. But, next slide. If we really now look back at 2022 and the top line numbers of how much investment has gone into the region. You know what, we had a pretty regular year round here now everybody will look at the drop off in the second half of 2022 and ask What’s that? But if we look at the next slide, just a little bit of pattern matching from the previous couple of years suggests that it’s always been the same. In Southeast Asia. The bulk of investment always gets announced in the first half of the year. And there is a half 50% drop off in the second half of the year with 2021 having been an outlier on every level imaginable. So at the surface, on the surface, pretty reasonable year.
And a couple of things that were slightly different if we look at the next slide of course we will all notice that towards the second half of the year especially the mega deal category, started getting thinner and thinner. Traditionally we call 100 million dollars plus per transaction a megadeal. Slightly dubious name but for lack of a better one. And if you look slightly earlier up there early in the stack of venture investors. Next slide, please. You would see that business as usual across pre-A, across A, across B. And it’s only in the category of $50 to $100 million per transaction that a very rapid change has occurred and it occurred. So it was a very, very popular category in the first half of the year. And then it almost entirely disappeared in the second half of the year. Having said that, while all of that was happening. Next slide.
Jianggan
I think Dmitry would you want to explain to the audience that and what’s the time that we’ve tracked, is that the time that deal was announced or is the time that the deal actually closed?
Dmitry
Oh, sure. We try to use it as closely as possible when the deals get closed. But that’s only possible if the records have been filed with one of the corporate authorities that we actually have visibility into. Thank you to the good work of VentureCap Insights and DealStreetAsia. If the deal is something that we find out from co-investors or media then it’s probably around the time it is announced. So there is fuzziness give or take a quarter. Having said that, such a drop off I don’t think it can be explained with the mismatch of dates. And on the next slide, I just want to bring up some happy memories. It was not all about investments and exits last year. We also had the release from lock downs from across most of the region, not all of the region. And despite all the stuff that was happening in the media, we all promptly celebrated in the first big get together of the ecosystem in Bali and we talked about the next stick words and we talked about Metaverse, which is now slightly quaint to remember. Now, what was actually happening below the surface.
Let’s have a look at the next slide. In our report you will find much more on the topic. But for the purposes of today’s discussion, the only visible sign of fundamental changes in the ecosystem was this variance in Series B and maybe in series B valuation specifically. And if we could just have a look at the next slide. For the first time I think this year we made an attempt to break the ecosystem numbers down by country properly to see which valuations prevail at which stage, in which country.
And this chart is one of the most puzzling ones I came across in the decades of working on these reports with my colleagues. And after looking at the data underneath, what seems to have happened in 2022 is the following: The late stage investors, very very specifically global late stage investors from North Asia specifically Japan, and very much from the US and South Europe. They felt something is not right with the world as I’ve mentioned in early 2022. And they reacted to that specifically in Southeast Asia in a very peculiar manner. They stopped or nearly stopped the mega deal activity. 50 to 100 Mil activities started blossoming in the first half of the year. And then they realise that the world is actually more broken than they felt. Thank you Federal Reserve, and they started putting much less money into much earlier stages, but due to their bulk and heft, they’ve managed to overheat the entirety of Series B just by trying to escape from later stages.
And as you can see, Indonesia was an especially popular destination for that. And then towards the very late part of the year that ceased entirely. Crossover players left the ecosystem, late stage investors stopped and even sovereigns slowed down a bit. And so the valuations changed. As you can see, Vietnam had a really sharp change in series B, Indonesia, very sharp change. Philippines, Malaysia, Thailand has a bit of an interesting data artefact. Singapore stayed more or less flat. We can dig more into the story in the Q&A section.
Jianggan
Sorry, what is happening in Thailand? This seems to be the only green here and it’s actually up quite a bit.
Dmitry
It’s kinda an interesting one right? So I cannot quite explain why suddenly folks are starting to find Thailand on the map. I’ve kind of been waiting for that for 10 years. It’s not local corporate VCs, they have been slowing down. It looks like just more folks from the region from Thailand and from Singapore and getting on the plane and going to Bangkok and investing and for some strange reason, folks see Thailand quite optimistically. So the pre money valuations are up in the second half. This is not thanks to the big logistics company you might be thinking of, we do not count that particular investment as technology investment and happened in Q1 this year anyway.
Jianggan
I think at a later stage there is also this large GIC led investment into LINE MAN Wongnai in Thailand, which obviously is not captured in this series B chart.
Dmitry
Yeah, wouldn’t have fed into Series B. I kinda sorta think I should go deep into numbers and check on the crypto community. They’ve been quite rambunctious in Thailand. Even after Zipmex, even after Bitkub.
But moving on swiftly to the next slide for the taste of things to come. Again, I cannot say enough good things about DealStreetAsia and VentureCap Insights who worked tirelessly to give us the numbers for the first quarter. There are certain methodological issues, sometimes we agree and sometimes we disagree with the definition of technology companies. But it looks to me like the first quarter of this year was somewhere between $1 billion and $2 billion of investment. And if it’s $2 billion it’s a pretty regular year, annualised. If it’s $1 billion it’s a pretty dire year. We’ll tally it up, we’ll share it with the world but for the moment, probably worth having a look at the peer regions, the ones that usually respond to global crises quicker than Southeast Asia. And India, LATAM courtesy of DealStreetAsia and LAFTA respectively, show us the shape of things to come. Q1 is expected to be rather miserable, whether deservedly so or whether it’s just the reaction to the total mood of the ecosystem. We’ll discuss that in our next instalment.
Stranger tides of Southeast Asia tech investment Part 2: When the party’s over
Dmitry
Now, if we could go to the next slide and open our section two I would suggest that there is a distinct feeling in the ecosystem of something being over. Some sort of a journey, some sort of a cycle between Jianggan and myself, we decided to call it this feeling that the party is over. And it looks like it’s actually two different and distinct parties that were going on, one for a couple of years and one for probably a decade.And if we could just look at the next slide that we will dwell on that for quite a bit. This is how between the two of us we decided we will summarise what’s been going on and everybody in this ecosystem is, sorry in this room and in this call already knows everything about interest rates evolution and how they changed and the cost of capital.
So we’ll not dwell on that. But probably good to recap that we started this decade, 10 years ago with prominent venture capitalists in the US coining the term unicorn. As more and more billion dollar companies started emerging in the technology space, and back then they were truly rare and precious. And this phenomenon carried on and on and on. Many more billion dollar valuations have emerged due to as we now know pretty low cost of capital, as well as a few key interesting features of the venture ecosystem that have been first published in this paper referred to on the slide that we will get back to in a moment.
And the show was supposed to be over, this particular unicorn party as we call it. Probably circa 2018 2019. You know a few IPOs in the US went too right, a few fantastic Netflix and HBO documentaries and movies emerged, that was supposed to be it. Unfortunately pandemics happened then governments responded. Cheap capital became a negative cost of capital. And so without exiting party number one, we enter party number two, which for effective purposes, we decided to call the “new laws of physics” where up is down and where cost of capital is negative. At the very height of it GRAB managed to de-SPAC.I still don’t know how they managed to time that well. And it would seem that, Federal Reserve decided that party number one should be done. And if we have a look at the next slide, we can see the implication of that. This would be PitchBook, one of the sources of data that I wish would do a better job scanning Southeast Asia for data points, reporting on the US, number of billion dollar plus companies and the number of new billion dollar companies emerging in each period. As you can see on the left, we are now dealing with $2.5 trillion worth of shareholder value locked in equity of sizable digital companies, of which very few are now emerging in 2023. And one wonders if there is enough dry powder in the coffers of corporates and if there is enough liquidity in the exchanges of the world to absorb 2.5 trillion USD. And let’s just remember that this was only the US, not noting quote unquote China, India and the rest of the world including Europe.
So that probably doesn’t put an end to the era of unicorns just yet, but certainly justifies the question whether it’s over. And moving over to the next slide. This piece of reading has almost been forgotten, I think in the last 10 years in the excitement of the bubble. But now it is very much recommended reading for anyone who wants to understand how the CLP ecosystem ended up causing the situation of the last 10 years. Unless you want to discuss this a bit more Jianggan, we can switch to your view of how Southeast Asia reacted to the last few years of special laws of physics.
Jianggan
Before that, a quick question, did you actually read that in 2012?
Dmitry
Enthusiastically, this was one of the foundational blocks of Cento’s original strategy which we tend to adhere to even today. Small funds deployed carefully.
Jianggan
And how do you feel for the last 10 years and especially at the heart of the party?
Dmitry
Like, we missed most of the party, we got some good ones, but probably this Kauffman research did lie quite heavily on our collective consciousness at Cento, still does.
Jianggan 27:39
Interesting. For any of you who are interested, we’ll put a link to the paper here and after this presentation, we will circulate a deck where you will get links and also links to other materials that we have been sharing in this presentation. Talking about unicorns, some of you attended our last presentation a year ago, where there was like a movement of looking for unicorns and I think the natural birth rate of true unicorns in Southeast Asia was few and far in between. So what can be done? A few methods have been invented to systematically breed unicorns and we have actually done a bit of analysis and we have summarised seven. Let me quickly go through some of them. So the first one would be the actual proper way, right you have a company and a company raises seed money, raises series A money, series B, Series C, and each time the company pushes for a little bit of growth and eventually reaches the unicorn status or the unicorn valuation.
At the height of the pandemic we had the second type manifested more prominently through SkyMavis whose crypto game, Axie Infinity was quite popular in the Philippines. So you have a company which just experienced exponential growth in a certain sector and investors put money in and gave hefty unicorn valuation. So we have the third type which is, if you have a large corporate, which is investing hundreds of millions of dollars into a subsidiary I mean, usually a tech subsidiary. And at some point of time, this company becomes semi independent, raising external money at a valuation of more than a billion dollars. The fourth is actually kind of interesting.
We all know that the world now is a strange and probably unsafe place. And lots of companies are actually moving their headquarters to Singapore for a variety of reasons. And of course, I mean, many of these companies are seen as a Southeast Asian unicorn because their headquarters and probably part of the core team are physically located in Singapore. The fifth method is probably the most dubious, which is issuing a small set of shares at very high valuation. And of course, by implication that the company as a whole is valued more than a billion dollars. We had some companies doing that in the early days of the Unicorn breeding movement, but of course, this is very easy to spot. The sixth method, which I think is also kind of common, is you have tech in their business, you have a traditional p type business with minimal or no tech, and you spin a tech story like you install horns on the forehead of the horse, and it becomes a unicorn. Now there’s a seventh method which was manifested in a particular company in Singapore called iFAST. It went public in Singapore Stock Exchange long before you had high valuation and over the course of the years, and it actually grew to become worth more than a billion dollars in terms of market cap. I think last I checked that company’s at 1.24 bil Singapore dollars, I mean by the standards of other unicorns, I think it’s not doing too badly.
Anyway, these were the methods and of course, we are now in an age where every large tech company talks about rationalisation, people are talking about reducing costs, reducing headcount, etc, etc. When it comes to unicorn breeding, we also see a rationalisation going on. This is actually the same slide as the one which we showed you just now and the mega deals, the deals which are above $100 million in absolute amount, have reduced significantly in a region. And of course, so this is something that we already know. So the interest rate has been climbing up, but if you look at the past more than 10 years, it was mostly close to zero or zero. And if you take it even further, I’m not sure if any of you remember like before the.com crash and people talk about money being free. And if we look at what we have experienced over the last 10 years, money was not free in the 1990s. So we have been living in a very, very interesting world and the world for the next 10 years would be drastically different or slightly different. I mean, that remains to be seen.
That’s it. I think Dmitry and I as well as our teams have been also doing quite a bit of benchmark across different emerging markets because I believe that many of you guys are capital allocators and you will look at the different emerging markets, looking for an exposure and deciding where to allocate capital. So we did this chart comparing the capital invested in 2022 versus 2021. And the good news is that in Southeast Asia despite a 28% down from the previous year, it’s not dropping too badly.
Jianggan
So we did some exercise about Latin America in 2021. And that time, we felt that the money was bursting out of the United States into Latin America, which was, in our opinion, round deals. Lots of infrastructure, lots of tech possibilities in Latin America, we’re under invested before that. But that money came in fast, and it disappeared fast as well, as we can see in this drop. Um, of course, the only region which had the increase in capital investment in the Middle East and Africa, which I mean some of you will probably know from the geopolitics as well as the global commodity prices and there is the ability to invest.
Next page shows we did some interesting comparisons. We took the average of capital invested between 2017 to 2020. And then use that as the baseline for each region’s sort of normally expected capital to be invested. And when we look at the levels of 2022 and compare the average of 2017 to 2020, we realise that Southeast Asia is only 1.1x. And very, very close to the two previous levels, which means that we’re not too far away from the baseline. And probably it also signifies that moving forwards the chance of this actually going down significantly is probably lower as well. The interesting region here that we’re looking at is the Middle East and Africa. And I mentioned about, of course, having the ability to invest in a region, but also see this huge increase in capital invested over the last few years. And I do see lots of structural opportunities there. And I think from the founders point of view it is a great market to be in, and from an investor’s point of view Dmitry, what do you think?
Dmitry
Well, above my paygrade. Probably looking at Southeast Asia for the next few years, Southeast Asia and Korea. It does look to me that eventually every ecosystem reverts to the mean, whatever the mean is, and I would say I hope what we’re looking at here for Middle East and Africa is the new normal but all previous experience suggests that there is about 2x to 3x contraction of the ecosystem that these regions will have to go through, which would be painful and probably not the right time for us to enter the market anyway.
Stranger tides of Southeast Asia tech investment Part 3: Forgotten sage
Jianggan
Yeah, section three. I like the way we debated. I mean, this image was drawn by Midjourney. And for a while we’re trying to figure out whether that is sunrise or sunset, but anyway, so the Forgotten sage refers to a person that, if you have been in the ecosystem long enough, that is before 2015, you would probably have heard of or been familiar with that person. Oliver Summer, the founder of Rocket Internet. So in 2011, he sent an email to the founders within the rocket ecosystem. And of course, the use of ‘Blitzkrieg’ kind of irritated some people, but there’s some interesting quotes there. Let me read it out. “This is the last chance in your life, the chance for another billion dollar ecommerce company will never come again.” So he was giving some urgency saying that hey, all of you guys who are building ecommerce companies in Latin America, Southeast Asia, Europe, etc, etc. You have a billion dollar opportunity. And of course now billion dollars doesn’t seem to be that much money, but back then we’re dealing with a region and that was even actually before 2013, we are dealing with the region where it just returns like a small 100 million kind of proceeds to investors.
If we look at how assessing a region has evolved. Over the last decade, you will see that I mean, probably with the exception of 2020, and in most of the years, there’s more than $1 billion and last year $4.6 billion returns to investors. And here we’re not talking about sort of the on paper value created, we talk about actual dollars that went back to investors. So it’s actually not too bad for the region per se, and it’s been actually growing.
So, some of you after seeing the report, ask us what made up the 4.6 billion last year, and of course, we know that there have been a couple, actually three specifically public listings two IPOs and one de-SPAC but when we look at the private market, the non secondaries as well as the trade exits, so we do have a bunch of shares being sold for Dana and CODA payments. So you guys might be familiar with the business, Dana is a wallet focused on Indonesia and CODA payments sells virtual goods like game credits, etc, largely Indonesia as well, but also in a few other markets. And in terms of trade exits, we had acquisition of 2C2P by Ant group, and we also have acquisition of a coins.ph. And of course there are a few smaller acquisitions. And we’ll talk about acquisition, we’ll define that as a change of control, which means more than 51% of the shares changing hands, Wallex, E2Pay and Wave Money.
So you might have noticed that there’s something in common with all these companies, most of them and actually all of them, which drive about, I think 90% or something of the proceeds here are actually from FinTech, and notably the payment space. Of course, there’s also a debate at the moment that “Okay, are there still more payment opportunities in a region?” Since I mean, the existing ones have all been sort of captured and you have a round two leading payment gateways, and you have a lot of other players in a different ecosystem. I’m not sure how Dmitry thinks, but my sense is that you might still have other opportunities targeting specific use cases and tuning them because you still see a lot of payment inefficiencies in the region. I’m not sure if Dmitry has anything to add for this page.
Dmitry
Certainly. it might be a little bit technical, payments is a space that changes its entire architecture every 10 to 15 years. In Southeast Asia, changes architecture every five to seven years. In the last decade, we’ve moved from cash over the counter and cash on delivery being a novelty, to wallet being a novelty to fast switch and a local switch built by a government being a novelty, to now compatibility of those switches between countries being a novelty, that’s a lot for the emerging region to go through within a decade. And therefore I think there will be an ongoing churn between payment companies and the various global strategics that want to take position in this space. So within digital financial services, we watch payments very, very carefully. And we’ve had the pleasure of working with 2C2P directly so a little bit of learning has been obtained. So yeah, it will continue focusing on giving cash to investors for the next decade.
Jianggan
So kind of you and Cento, congratulations for the last year.
Dmitry
Thank you. It was difficult to say goodbye.
Jianggan
When we actually go to the public market in terms of the IPOs and de-SPACs the region had, of course, I think this story is kind of clear that most of the companies actually suffered a drop in share prices, post IPO or post a public listing. So of course, there’s a bit of a global context in it. But for the investors, who managed to exit at the IPO or slightly after they probably avoided this fate. Talking about that, so eventually, if someone writes a book about the tech evolution in Southeast Asia and also the capital market, the colourful sort of parties that are thrown for companies going public are probably a key chapter of that and of course, there’s post popular listing, there’s also a strong pressure from investors at now. Okay, you have been growing for a decade or even more, show us the profits. So, on the right, I think there was an article at Bloomberg, which was published two days ago, about how investors, how Southeast Asian unicorns need to sort of deliver the profits and we posted the link here you can go and read it yourself. But from this chart, you will see that I mean, people actually making a lot of effort towards achieving profitability. Sea Group has already reached that, and let’s see if they can do that for the next quarter as well, which is supposed to be announced sometime this month.
Also, last month, with some of my colleagues that have been in China for three weeks meeting lots of GPs, LPs and strategics, and also some of the corporates who are trying to expand into Southeast Asia as well as in general global markets. So we generally feel that there are two kinds of sentiments. First is that “oh, I have been to Southeast Asia a few times. I’ve met lots of companies, and it just seems that the market is much smaller than I had initially thought.” And some of them validated their initial thesis that Southeast Asia as a market is way smaller compared to what they were used to, which is China. And the second type of people that we spoke to are more optimistic. But many of them are telling us that we think that there’s still lots of untapped opportunities. We just don’t know where these opportunities are and the companies we’ve spoken to do not yet give us that kind of confidence.
So the picture on this page, I actually took it myself a couple of weeks ago, in Singapore’s Marina square, and I’m sure you guys are familiar with luckin coffee, the Chinese coffee brand which had a bit of a scandal but came back strong and profitable. So they opened I think now four stores in Singapore. And we have counted a few stores they have. They probably are doing like 2000 orders each day during the weekend. We haven’t counted the weekdays. But this picture is interesting. So you do have this Tanamera, which is the Indonesian coffee chain, which started renovation, probably around the same time as luckin coffee, and this picture was taken at the end of April. And the luckin coffee was bustling with people. And Tanamera was not open yet.
So no judgement on what is good, what is not good. But I think the expectations can be very, very different. And the whole narrative about what we expect out of China, versus what you see in reality in Southeast Asia. Why companies in China have very thin profits, why companies in Southeast Asia, despite some of them moving at a slower speed, have much better profitability compared to their peers in China. So there’s a whole narrative here, but it all points to having the right understanding about the nuances in the market, which at times would actually take lots of effort on the ground to be able to understand properly.
Stranger tides of Southeast Asia tech investment Part 4: New rules of the game
Jianggan
So with all this, what is happening and the macro stuff, we move to the last section, new rules of the game. This picture as well as the previous pictures generated by Midjourney. So this is not Dubai or Abu Dhabi. And Dmitry over to you.
Dmitry
We actually wanted to talk for a duration of another 20 slides about how Southeast Asia will roll going forward and then realise that we’ll cross the 45 minute mark. So I just have one. And if we could just see the next slide. I think everybody who is investing or operating in the region already felt it in the last few months. It looks like the rules are changing again. And I would focus on one particular set of rules that has been the usual, probably especially in Singapore, Indonesia, but also in Thailand, also in Manila for the last six, seven years since probably 2014. And the rule was that narrative beats substance. A well presented story by a highly presentable group of founders with extremely high fit with the market they are about to solve, always trumps less presentable founder, not very smooth delivery of the story, but better numbers and perhaps a profitable growth.
Very rapid transition in the last 120 days, longer due diligence cycles, much more premium upon profitability and proper unit economics. Investors by and large no longer punish the company for not growing 200% year on year and instead ask perceptive questions about exactly where is the growth coming from? Without passing judgement, just like Jianggan as to what is the normal state of affairs and what is not, let us just comment on how when the capital flows out of the system, smaller, more practical and more agile players attempt to out compete the ones that thrive when as it were, the water was deep. But from 1000 year old mirror wisdom to some a little bit more modern, Jianggan back to you.
Jianggan
Yeah, so actually, I think many cultures would have sayings similar to this. And of course, some of you might have also heard of Jack Ma’s saying that okay, “Sharks do not beat crocodiles in the Yangtze River” and of course, what he was actually referring to as crocodiles are actually alligators because there are no crocodiles in the Yangtze River. Anyway, I think those of you who are familiar with the China narrative will probably have heard of this theory about the flying pigs, so it was commonly attributed to Lei Jun, the founder of Xiaomi, who made a speech about this subject in 2015. And of course, the narrative back then was that as an entrepreneur, you need to choose the right thing to focus on. You don’t go against the trend, hence the saying that okay with the wind even a pig can fly and of course, the whole narrative also includes how do you grow wings while flying etc, etc. But, this is what stuck with people’s minds. With the wind, even pigs can fly.
But of course, this narrative lacks one thing in the real world: that the direction of the wind can change, and sometimes the wind can stop. So, Jack Ma actually said, you all know who Jack Ma is, said in a conference speech in 2018. That after the win the pig will fall to its death and of course, I mean, all these sayings and if you put them together, you start to form some understanding about what can potentially be done and what should be the right narrative. We would have given you something more recent about what these Chinese entrepreneurs or the successful Chinese internet tycoons are saying, but of course, for the last two to three years, they have been very, very quiet and I will not speculate on the reasons why they were so quiet.
So this is the last slide of the formal presentation. This is something that we have noticed, a change that whenever there’s a downturn, whenever people feel that there are too many unicorns that it is difficult to, to give birth to new ones and people start inventing different animals. We have seen okay, the unicorn year is over, now is the era of zebras. We have seen that okay, it is winter now the rhinos will survive. We have seen things about cockroaches. We have also seen some interesting combination or hybrid creatures, unicamels, profitcorns, unicroaches, etc, etc. So I think we have discussed this with the team and we actually think that, that’s enough. So there’s no point in creating new animal similes and the market is where it is. And I think there are still lots of more opportunities to be tapped. But I think from a narrative point of view, as Dmitry has mentioned just now, now is probably the time that the water recedes and that the ants, the smaller, nimbler players surface. Anything to add Dmitry?
Dmitry
Will be asking my partner who is a member of Singapore Venture Capital Association to submit this as a proposal to the community. No more animal based comparisons, this deck was the last one, over.
Jianggan
Okay, so exactly 3:45pm, we finished our presentation. And of course, if you’re interested, you can download the full report and we will circulate the material for this presentation via email after this talk. So any questions or comments?
Dmitry
I think this is the first one when we don’t have questions or it’s Friday afternoon. If none appear, then our inboxes are open. I’m on LinkedIn. Not on Twitter, but definitely reachable through the contacts on our website and I’m very very happy to discuss. Oh, just a moment. I’d be really happy to get into the weeds of specific nuances in the market with everybody here. And let me respond to Kay’s question. The backdrop for valuations on what happened in Indonesia? Actually what happened in Indonesia and Vietnam from all I can see, it all revolves around the names of Tiger, head of SOFIA, GoTo and a few others that were not just there in 2022 they were there in the unusual for them stages. They were doing Series B at pretty interesting valuation levels, and that was the first half of 2022 and then they decided to stop and regroup, second half of 2022 and that was sufficient to cause the drop that you see here in both Indonesia and Vietnam. Why didn’t they travel to other markets and why didn’t they skew them like that as well? A long interesting discussion which won’t happen here Kay unless we have some time. Jianggan, any thoughts on your side on why Indonesia and Vietnam were so volatile this year?
Jianggan
But yeah, so Indonesia, I think people who are familiar with the market and who have looked into deals in Indonesia and if you should look at the valuations that you’re seeing with the companies versus the numbers that you are seeing, it’s actually quite difficult for them. I mean, for our point of view, we’re looking at the Greater China investors to actually make a bet into this. The narrative of Vietnam from China’s perspective, it’s actually quite interesting because it oscillates between “we’re very excited about Vietnam. It’s where our factories are going to move into”, to “hey, I’ve checked out the factories and aside from the basic assembly plants, anything more sophisticated, they don’t have upstream and downstream or will take much much longer time, If it’s ever possible, if it can be done before automation happens, to move the supply chain there.” So I would say that from China’s point of view oscillates quite a lot. You might want to take the other questions.
Dmitry
To Phillip, on the corridor between the Middle East and Southeast Asia. Several questions here.
Do GPs raising in the Middle East make it easier for the companies from Southeast Asia to expand to the Middle East? Very good question. Not exactly obvious to me how this would work. Having said that, from the conversations with some of our friends and some of Jianggan’s friends as well. Some of the characteristics of some of the markets, because the Middle East is very diverse; do track closely to stuff that we saw in Southeast Asia in the last 10 years, especially in Malaysia. So we’ve been looking for the whole Kuala Lumpur to Dubai, Kuala Lumpur to Abu Dhabi corridor for the last 10 years and haven’t found much. I do hope that the situation changes in the next 10 years. I do not know anything about liquidity of public market platforms in the Middle East, you’ll have to forgive me. I can switch to Vineeeth’s question but first Jianggan any thoughts on Phillips’?
Jianggan 56:23
So I spent a bit of time in the Middle East in 2017 at the beginning of the ecommerce boom. And at that time, it just felt that the opportunities in the region which are untapped, and the spending power, at least for the Gulf countries were much higher compared to Southeast Asia. We also did a little bit of checkup at the border Middle East markets, Iran and Turkey. They’re pretty good markets actually. But the question here is, lots of GPs are raising money in the Middle East region. And I think the reason is quite straightforward, right? I mean, as US money becomes a bit more cautious and people are trying to look at sovereign wealth funds in Southeast Asia, Asia, as well as their counterparts in the Middle East as well as family offices in the Middle East, who still have the US dollars to deploy. So that’s happening now.
And I’m not sure, just like the party like last September in Singapore where everybody came to Singapore to raise money, I’m not sure how long this is going to last. And I do think that a few good deals will be struck. And a few GPs will figure out, I mean, how to deploy some of the money raised from Middle Eastern investors back to the Middle East. So I do think that there’s lots of journeys that we have gone through in China, maybe in Korea, and certainly in Southeast Asia, which would be useful for the Middle East region And how exactly that transpires, I think there’s a confluence of different factors, which will probably take a bit of time to be apparent. And we’re also studying this actually quite carefully. So we’ll share what we have found on our blog regularly, Dmitry back to you.
Dmitry
Yeah, Vineeth just asked me a question that I can talk about for hours. I’ll try not to do that. But please, check me. Apart from FinTech payments domain do I see B2B SaaS having a bright future in Southeast Asia? Absolutely. I know it’s not a majority of you, there is always this general view of Southeast Asia, that a large enterprise will buy software from the US or China and the small enterprise will never ever pay ever. But the real answer from my perspective to this question is contained in the question itself. FinTech and payments domains desperately need the B2B SaaS ecosystem to succeed. How do you extract the data against which you underwrite? How do you find the lower cost opportunities to sell insurance? How do you find the transactions that you want to settle?
If you’re a payment company, you integrate with B2B platforms, and B2B platforms cannot exist without well developed FinTech and payments universe because yes, sometimes there is trouble getting people to pay you for software. So in Indonesia, the ecosystem has mastered taking a cut of the lending products distributed, but it’s not necessarily the only pathway. You can participate in payment arrangements. You can cross sell insurance, you can sell data for as long as it’s legal to sell data. So these two need to continue being entwined and then both will succeed. I’ll stop here otherwise, it will be another white paper, Jianggan probably the next one is for you.
Jianggan
Let me add a bit to the B2B story, maybe an easier way to do it is to as some companies try to add power into the greater Southeast Asia narrative. I mean, maybe if you can add Australia to the greater Southeast Asia narrative and p2p will have a much brighter future.
Dmitry
Anyone can join ASEAN, it’s absolutely going to be a bit of a SaaS paradise.
Jianggan
Yeah, There were some references to Chinese tech competing in SEA; what are your more detailed thoughts on this? Esp. with COVID ending and reopening of China. It’s very difficult to talk about this without touching geopolitics, and also the regulatory environment in China, which at the moment can be a bit sensitive. But we do see a strong desire for many Chinese businesses to actually expand outside China. And that goes beyond just the tech companies. We see companies across different value chains. I mean, the electric vehicle companies, there are so many of them and so competitive in China, manufacturing companies, many of them have been sending things across the border on Amazon, but many of them are also looking for other ways to expand into the region through online and offline channels.
So there’s lots of undercurrents going on and if you are in some venture capitals, and you will notice that there are tremendous amount of Chinese businessman who register local businesses and start selling things on Tik Tok and some of them actually are doing millions of dollars of GMV per month so so there’s a confluence of many things happening at the same time, as Dmitry said, it probably deserves another book to talk about this, but of course it evolves so fast. So yeah, writing a book takes time. Next question. You want to talk about that Dmitry?
Dmitry
Yes, it’s a fantastic question. But it’s a far future question. So I’m not entirely sure how to answer, probably over to you Jianggan, you like predictions. I’ll just make one slightly flippant comment: “Are Middle Eastern funds the new soft bank?” may just make a technical note that the old soft bank was a Middle Eastern fund, slightly represented as a Japanese entity, or Japanese Korean as the case may be, but what do you think Jianggan? Are we coming back? Are we going back to the big bubble anytime soon?
Jianggan
I think I’ve dealt with a number of Middle Eastern investors, and I also had some experience with the ecommerce in the Middle East. I do think that actually many investors are pretty well informed in a way but of course, in the actual evolution of businesses, tech business scene in the Middle East has not evolved as much as what you are seeing in China or the US. So I do think that now there are lots of like, Chinese GPs going into the Middle East to raise money but might make sense for lots of the Middle East LPs or sovereign funds to actually make more detailed trips to this region or to China to check out what’s actually going on. But, I do think there’s lots of money which can be deployed. I’m not sure whether they would actually be deployed at the same scale that Softbank did a few years ago.
Dmitry
Question from Gerald. I’m always struggling a little bit with the definition of sustainability related startups because in the grand picture, every startup should try to be building something that’s sustainable. But usually in this phrase, oh, yeah, sure. Usually, when the question is posed that way, it comes back to the climate tech side of sustainability. Look, was the US spending What’s that $3 trillion give or take on the initiative and the European Union trying to match. This is going to be probably the theme of the next five years. In terms of narrative, and in terms of substance on the ground, we see a lot of green shoots that are not even close right now to the stalwarts, like B2B SaaS or FinTech that we just discussed, but I think we highlighted climate tech specifically as one of the top three breakout sectors of 2022 and its speed of growth is comparable to the early days of crypto enabled gaming.
Oh, Sheji, I know it takes a while to collate the numbers for the q1 2023, Methodology; do we consider a large integrated healthcare group in Singapore to be a technology company or not? That sort of thing. So it would probably be if you really put a gun to my head, please don’t. I would say 5- $6 billion annualised this year. This shapes up to be about half of last year. That’s a very crude approximation based on rich data that our friends at the venture capital side gave to us as a preview. Jianggan, would you like to comment on that?
Jianggan
I used to make lots of predictions but now it’s not so fun and a tiring business to do. So I will not do it.
Dmitry
But it does look like, let me also repeat one of the points that came up in the presentation, that’s a really important point that merits another visit, which is, the future is unknowable. Because a lot of decisions are being made outside of this region based on things completely unrelated to this region, such as the Federal Reserve System and all that. But if you believe in the reversal to mean, Southeast Asia hasn’t got far to fall, an adjustment of 10 or 20%. is what I will be expecting for this year, that the first quarter looks more like a 50% adjustment. I think it’s mostly market panic, and things will stabilise. If I were in Africa at the moment, I would be much more worried. What was it, like 3x of baseline?
Jianggan
so you’re looking at about $8 billion of investment in this region annualised based on Q1. And also, another thing which will be interesting to watch is that there have been so many growth funds which have been raised for Southeast Asia and it’ll be interesting to see how this gets deployed. Because I know a number of growth investors are doing very few deals, but over the past four months, so it’ll be interesting to see how that plays out.
Dmitry
The dry powder is there, just sitting there not doing much, but it has to eventually.
Jianggan
Cool, it is 4pm exact. Thank you all for attending this. And thank you, Dmitry for sharing and also thanks to all of you who have asked us the questions. We’ll try to organise the answers into something more structured to share with you and the deck will be circulated by email after this talk. So we wish you guys a great weekend.
Dmitry
Thank you guys, thank you for having me Jianggan.
