KUALA LUMPUR, Nov 28 ― There is an undeniable gap between the potential of South-East Asia as a market for technology startups, and the number of venture capital funds available to such entrepreneurs, but that will change when there are more success stories.
“The conversation we’re having today … is the right conversation,” DTA Capital Partners chief executive officer Dali Sardar acknowledged at the monthly Disrupt panel discussion and networking session organised by Digital News Asia (DNA), which on Nov 27 focused on the theme No love for Asean? Addressing the regional funding gap.
“This conversation we’re having today is the exact same conversation the American Venture Capital Association had 40 years ago. They had the same problems – there was a lot of money, but entrepreneurs were still not getting funded,” he said.
Because of the dearth of private sector investments, many US technology ventures were initially funded by government, Sardar said. “It’s the same thing we’re seeing here in South-East Asia. We’re going through the same trend.
“What changed in the United States were the success stories. When you have a few success stories, the entrepreneurs who exited successful businesses in turn became investors,” he said, noting that this would drive the ecosystem.
“What we need in Asia is a couple of big success stories. This is the trend; there is no shortcut around this,” he added.
His fellow panellist Patrick Grove, founder and CEO of the Catcha Group, concurred, “The difference between the United States and Europe and this part of the world are success stories. Success breeds success,” he said.
When there are big success stories, then those who have invested in such companies would have the confidence to recycle their money back into the technology ecosystem, Grove argued.
The Catcha Group has been successful enough, with three public-listed companies under its belt – two in Australia and one in Malaysia – with a total market capitalisation of about RM1.5 billion. And true to Grove argument, it is in the midst of launching its own venture capital fund which is expected to take off next January.
He also noted that the people behind other Internet successes such as JobStreet.com and MyEG – two of the most successful ‘first wave dotcoms’ in all of South-East Asia, have also become either angel investors or have the financial wherewithal to launch new businesses.
For instance, MyEG is contributing RM20 million to the RM60-million (US$19-million) seed fund being established by Cradle Fund Sdn Bhd, an agency under Malaysia’s Ministry of Finance. MyEG and tis founder and chief executive officer T.S. Wong have also acted as angel investors in other startups.
Grove was pretty much the catalyst for the Disrupt discussion, when he spoke at the AVCJ Private Equity & Venture Forum 2013 in Singapore in July, saying the lag came from weak leadership and business-savvy within venture capitalists (VCs) in South-East.
At that forum, he said that given the economic projections for the region, there was a significant gap. The United States has about 1,000 VC funds; China has 600 and India has 400. South-East Asia, which boasts some of the most Internet- and smartphone-savvy populations in the world, has only 20 such funds.
“This is an insanely low amount,” noted Disrupt moderator Karamjit Singh, also the founder and CEO of DNA. “That number Patrick (Grove) highlighted was pretty much the trigger for today’s discussion.”
However, Grove (pic) also noted that VC funds were not the only avenue open to entrepreneurs.
“We ourselves started in 1999, and we’ve always found it tough trying to get VC funding. If you look at all the companies we’ve had, we’ve managed to raise something like US$150 million to US$200 million over the last 14 years, and only US$2 million of that came from a VC fund, Intel Capital. That’s a mere 1%,” he said.
The Intel Capital injection was for a company called Dealmates, a joint venture between Catcha and MindValley.
“It’s pretty hard to raise VC funds in the region, but it’s not impossible. There are people building 100-million; 500-million or one-billion-dollar companies, and they’re doing that because they managed to get funding.
“Since the funding scene is so tough here, entrepreneurs need to be more creative in being able to find other sources of funding. We [at Catcha] have been very fortunate since we’ve built relationships with fund managers in Australia, and managed to bypass the VC channel.
“But that being said, we had to wait eight years before we could legitimise that fund-raising path – before that we had to do the ‘friends and family’ funding rounds; I myself had to re-mortgage my own house twice – in 2002 and 2004 – to fund Catcha,” he said.
“That’s Lesson No 2: You don’t have to necessarily rely on VCs; there are so many other sources of funding,” he added.
The third thing that has to happen, after sufficient success stories and entrepreneurs themselves being more creative in getting funding, is government support. While the Malaysian and Singaporean governments have been supportive for a number of years, more governments in other South-East Asian countries are also beginning to back the start up ecosystem.
“There is a lot more support now than there were five or 10 years ago,” said Grove.
‘You need balls of steel’
One entrepreneur who is feeling the pain very keenly was Disrupt panellist Nizran Noordin (pic), cofounder of taxi-booking service TaxiMonger, which has been surviving in a particularly competitive environment on a bootstrapped budget.
Nizran said that his company is up against fellow homegrown player MyTeksi and more recently EasyTaxi, a Latin America-founded company now owned by German powerhouse Rocket Internet, which is pumping in US$15 million into the business here.
He also noted that taxi companies themselves have started developing their own apps, such as Sunlight Unicablink which has 10,000 taxis in its stable, and Public Cab, which has 4,000.
“We’re very happy with the market and product validation we have, with about 15,000 users, but … I would like to have a user base of 1.5 million users – and we can’t reach that unless we can scale the business,” he said.
Nizran founded TaxiMonger with funds from his existing systems integrator business, to the initial tune of RM800, 000, but believes that he needs an additional RM2 million at least to scale the company.
[RM1 = US$0.31]
“I’ve met about 40 to 50 VCs in Singapore, and have access to a database of another 30 based in the Middle East,” he said, but nobody has bit yet.
“I think the process of getting a VC is pretty much like looking for a wife. One of VCs I met in Dubai, who owns his own football club in the United Kingdom, kept saying he would be coming in, but it hasn’t happened. It’s like having a girlfriend who keeps saying, ‘Yes, I’ll marry you; I’ll marry you,’ but nothing ever happens,” he added.
“It’s exciting but tough, and if you want to be an entrepreneur, you will need balls of steel,” said Nizran. “Meeting one VC prepares you for meeting the next – it’s like the dating game; you learn what you did wrong with your first.”
‘You have no business’
Contrary to the other panellist, Dr Gabriel Walter (pic), cofounder of high speed LED start up Quantum Electro Opto Systems (QEOS), has an entirely different experience.
“I come from a totally different angle here. In my opinion, it’s very easy to raise money in Malaysia. You have a government that is very active in looking for success stories, and it has changed policies over and over again, just to enable that.
“You also have a tremendous number of grants – I mean where else can you get RM500,000 just to try out your Internet business?” he said.
QEOS itself has raised over RM37.6 million over the past five and a half years in Malaysia. “Almost half of it came from grants. We recently got RM400,000 for our R&D (research and development) work, and we didn’t even ask for it,” he added.
And QEOS did not have to give up much – only about 30% of its equity, with the original founders still holding on to 70%.
Indeed, Walter said that reading media reports of some Internet companies getting funding only surprises him.
“They’re just offering services. What happens if another guy comes in with more money? If your advantage is how much money you’ve raised, then the next guy who comes in with more money, he’s going to win,” he said.
He said too many of today’s Internet companies put ‘first-mover’ advantage as the be-all and end-all of their business plan. VCs would want to know how their investments are going to be protected when the next challenger comes in.
“Somebody is always going to come in and take away your cake. Your investor is going to ask you the question, how are you going to protect your business? If you don’t have an answer, then don’t do the business.
“If you can’t answer the question, then why should anybody investor invest in you? I wouldn’t,” he said. “In my opinion, if you cannot raise money from professional investors, then don’t start a company. It means there’s something wrong with your business model.”
“VCs all think alike. They’re Excel spreadsheet guys. If they cannot project your returns, then they’re not going to invest,” he added.
QEOS is not your usual technology startup, having been formed to market Walter’s PhD research work in optical electronics. It is an unusual company because it develops actual technology, instead of being a startup that uses technology.
“A lot of technology companies aren’t technology companies at all, but merely companies that use technology for their business. There’s no barrier to entry,” he said.
“Google versus Yahoo was technical competition – Google’s search was faster, there were complex mathematics and a complex technology infrastructure behind it.
“You need some form of technology basis for an investor to see value; your advantage can’t just be that you’re going to market it harder – anybody can do that,” he added.
Disconnect, not a gap
Indeed, Walter also argued there wasn’t so much a funding gap as much as a disconnect between how the entrepreneur expected to make money and the investor’s understanding of how this could be achieved, if at all.
“It’s not the VC’s job to understand you; it’s your job to convince them that there’s money to be made here. Every time you fail to raise money, don’t blame them – look back at your plan and try and figure out why you couldn’t convince them this would make money,” he said. “Go back to your business plan and presentation, and refine, refine, refine.”
It is a point that DTA Ventures’ Sardar (pic) could relate to, saying that sometimes entrepreneurs were just too infatuated with their business plans and didn’t have the self-honesty to pivot and change them.
When told by a member of the audience that this was described as the ‘ugly baby syndrome’ – only a parent could love such a child, and think it the most beautiful business plan in the world – he said, “As hard as it is for me to say it, in the business world, if you have an ugly baby, then you just have to abandon it.”
“[When it comes to] the successful companies we’ve harvested as a VC, the actual business that was sold was a completely different business from what was told to us on the first day.
“The big difference is that they were honest enough to say, ‘This is not going to work, let’s rethink our plan.’ Things change, and the ability of the entrepreneurs to change is paramount.
“A lot of companies that close down do so because there was a lot of finger-pointing and not enough honesty to recognise the need to change,” he added.
As for the tough funding environment in the region, Sardar said that VCs anywhere in the world have certain standard practices and requirements.
“We don’t want to appear hard to please, but when we look at 100 business plans – and this is true anywhere in the world, not just in Asia – we may shortlist 10. Out of the 10, we may end up investing in two or three at the most.
“The [funding] success rate is very low. Most companies, even in the United States, do not get funded. This is not just me, this is the VC industry. It’s not like the banking industry, where as long as you have the collateral, you’re going to get the loan. In the VC business, even if you have the idea and you’re smart, you still may not get funded,” he added.
Sardar also admitted that he has sometimes chosen not to invest in a company despite it having a good idea.
“Entrepreneurs sometimes have this tendency to chase for valuations. Taking the money to build your business is far more important than getting a valuation.
“We sometimes prefer deferring a valuation based on multiples of future earnings, so please don’t chase us for a valuation – take the money to build your business,” he said.
What he looks at in a business is the character of the entrepreneur. “It’s not how cutting-edge your technology is or how great your business model is, it’s about people, people, people,” he said, adding that he has even invested on a company because of the tenacity of its founders. ― Digital News Asia
A previous version of this article contained errors but it has since been changed.