IFC aims to be a long-term partner to ventures it backs: Pravan Malhotra
Pravan Malhotra, International Finance Corp.’s venture capital lead for South-East Asia and Asia internet investment, on the start investment scene in the region
South-East Asia still lags behind in deal flows—investments raised by start-ups—when compared with China and India, and 75% of investments in the region went to just five start-ups in 2016, Pravan Malhotra, the International Finance Corp.’s (IFC’s) venture capital (VC) lead for South-East Asia and Asia internet investments, said in an interview. The five start-ups were Grab, Go-Jek, Garena, Tokopedia and Trax.
While funding for start-ups in South-East Asia and India is largely focused on seed and Series-A stages, with fewer funds active post-Series A so far, the situation is fast changing as top Series A venture capital firms are raising larger funds to keep pace with internet sector growth and follow-on funding needs of top portfolio firms, Malhotra said.
IFC recently invested in several VCs in South-East Asia, including Wavemaker Partners, a seed-stage fund, Jungle Ventures and Jungle SeedPlus. Malhotra also said IFC would evaluate country-specific funds in Indonesia, Thailand, Myanmar and Vietnam as these markets mature. Edited excerpts from the interview:
At IFC, you do a lot of direct investments, too; what is your investment thesis? What are your sectors of focus? Where do you expect to find new opportunities in 2018? For a start-up, what does IFC offer, in addition to capital?
We invest in technology-enabled businesses that deliver impact on a large scale. The digital revolution is blurring the lines between the physical and digital spheres. Internet of Things (IoT), artificial intelligence (AI) and big data are creating new market segments and new business models while improving productivity and efficiency.
This revolution will generate business opportunities worth billions of dollars for Asian businesses by 2030. We believe many of these opportunities will be generated in emerging markets, where the users of these technologies are based.
IFC provides early- to late-stage venture capital financing through direct investments, typically in the range of $3-20 million. Globally, we focus on verticals such as healthcare, ed-tech, fintech, internet and clean-tech. Through our investments, IFC aims to promote innovation across sectors, support local entrepreneurs and accelerate cross-border technology transfers.
Over the next year, we will be actively tracking companies in five verticals in South-East Asia, namely digital health, ed-tech, e-logistics, fintech and business to business (B2B) internet, including enterprise SaaS (software as a service), marketplaces and data analytics.
South-East Asia represents a market with huge potential. IFC’s increased focus on supporting innovation and digital transformation in emerging South-East Asia has led to partnerships with regional early-stage venture funds that help build local start-up ecosystems.
For example, we have recently invested in Wavemaker Partners, a seed-stage fund, and earlier in Jungle Ventures and Jungle SeedPlus, which are Series-A stage and pre-Series A funds. Through these fund investments, we have indirectly invested in 19 companies in Indonesia alone, alongside our existing direct investments.
Having one of the largest footprints in emerging markets, we aim to be a long-term partner to the ventures we support—with growth and expansion capital, sector knowledge, and our global expertise and network.
Asia–East Asia Pacific and South Asia together account for the largest exposure in IFC’s VC portfolio. Which are the markets you are overweight on?
Local entrepreneurs and companies with innovative business models and ambitious growth plans underpin the long-term potential of emerging markets. We look forward to working with these companies, particularly in emerging and less developed markets in Asia. So we are actively investing in all emerging markets in Asia.
Besides the typical markets such as China, and India where the venture investing industry got a head start, we see a growing number of interesting opportunities in countries such as Myanmar and Indonesia. In Indonesia, IFC has invested in RedDoorz, a branded budget hotel chain that re-sells managed hotel rooms. In Myanmar, IFC has invested in Oway, a leading online travel platform with products that span airlines, hotels, tours, taxi bookings and ride sharing.
Our traditional approach has always been to provide financing and advice to help clients deliver impactful projects in emerging markets. With our new IFC 3.0 strategy, we are working to create, deepen, and expand the markets themselves, especially in the poorest and most fragile countries.
Most VCs, be it India or South-EastAsia, don’t want to do non-tech. With tech accounting for a disproportionate slice of capital committed to start-ups, and considering the mandate that you have, how do you get the VCs that you’ve invested in to look at sectors such as education, healthcare, and agribusiness, among others?
Education, healthcare and agribusiness are sectors that IFC has always been actively promoting—we help build human capital by improving the quality and availability of healthcare and education. For the financial year ended June 2017, IFC’s clients have helped provide education for 4.9 million students, delivered healthcare for 34 million patients, and created opportunities for more than three million farmers.
The two criteria for many investors are large market size and scalable business models. Investments that fit these two criteria have a higher probability of providing sound financial returns and great developmental impacts. There are still many opportunities in education, healthcare, and agriculture space to be explored, and technology development doesn’t make these sectors obsolete.
The use of mobile, AI, and big data is spurring a rapid change in all these sectors, with a growing number of start-ups trying to capitalize on the digital opportunity to develop innovative tech solutions and products such as online doctor consultations and online tutorship and training platforms. There will be more investible opportunities in these sectors.
How does IFC’s direct investment in start-ups, as well as its investments (as a limited partner) in VCs, further the World Bank Group’s development agenda?
Development impact is central to IFC’s mission and we are always committed to the World Bank Group’s twin goals of eradicating extreme poverty by 2030 and boosting shared prosperity.
Despite innovations that have enabled many communities to leapfrog into the 21st century, developing countries still trail developed nations in internet and broadband penetration: as of 2016, more than half the global population remained cut off from the internet’s digital economy.
IFC is supplementing the World Bank’s efforts in accelerating the digitization of economies through its investments in access infrastructure, digital ID and e-Government platforms, fintech and payment infrastructure, along with supporting the digital ecosystem through investments in start-ups and VC funds. Through its collaboration with World Bank, IFC is working with governments in the region to further their digital initiatives across sectors. IFC promotes progress through investments in telecom and information technology sectors, in projects tailor-made for each area’s most pressing development challenges. In FY17, we invested $910 million in these initiatives, including funds mobilized from other investors, expanding our portfolio in this sector to more than $2.4 billion.
Our portfolio firms are creating a huge development impact globally. For example, more than 1.7 million patients have access to health services through IFC VC portfolio firms, and more than 22.7 million students have been reached and educated by our VC investee companies. More than 46,000 jobs have been created and livelihoods directly supported by our investee companies.
Since IFC VC deploys funds from IFC’s balance sheet, do you feel you have an edge, and can wait longer than typical VCs for exits?
Yes, we are longer-term patient capital. This differentiate us from regular VC investors, especially when it comes to segments such as healthcare and education, where the return is typically shown only in the longer term. Investing through our own balance sheet and without the exit timeline requirements allows us to focus on both financial return and development impact. IFC has a robust balance sheet. Besides raising capital through bond issuance, IFC invests its liquid assets globally and manages them versus recognized industry benchmarks. We aim to outperform those targets while preserving capital and ensuring funds are available as needed for our private sector investments in developing countries. Since we have permanent capital, we can stay invested for longer as compared to other VC funds.
When you see the VC scene in South-East Asia, as most of the firms now look to raise their second and third funds, do they have exits to justify bigger funds from previous ones, or even new funds? As a limited partner, how do you see the situation?
Funding in South-East Asia and India is focused on seed and Series-A stages, with fewer funds active post-Series A so far. However, top Series-A VCs are raising larger funds to keep pace with internet sector growth and follow-on funding needs of top portfolio firms. We are starting to see more interest from funds on Series B in the region. In South-East Asia, Singapore continues to be the base of choice in the region, though Indonesia is seeing more activity.
We’re also seeing that acquisition is the predominant exit route in South-East Asia, with very few IPOs to-date. Most M&A (merger and acquisition) activity is from developed market buyers unlocking value for earlier investors as against largely stock acquisitions in India. Additionally, China is becoming an active acquirer in the region. But South-East Asia still lags behind in deal flows, when compared with China and India.
In South-East Asia, 75% of investments went to just five start-ups in 2016—Grab, Go-Jek, Garena, Tokopedia, and Trax.
You have invested in several VC and PE (private equity) funds. Has IFC increased its commitments to such vehicles of late?
IFC has always been at the forefront of mobilizing private capital and it continues to be our mission to deploy capital where there isn’t yet an existing or well-functioning market. Our strategy to invest in VC and PE funds in the region is complementary to our direct investments—while our direct investments support typically mid- to late-stage start-ups, our investments in venture funds help us support seed and early-stage start-ups, and our investments in PE funds help provide growth stage capital to more established businesses.
IFC is one of the largest investors in emerging markets, investing around $19 billion every year. We have over 4,000 staff in 100+ country offices, and we continue to be committed to these regions and markets we are in. We’ve been actively investing in early-stage technology since the early 2000s, and so far, IFC has invested over $1 billion in new technology-related businesses.
In addition to investing in Singapore-based funds that target the region, we will evaluate country-specific funds in Indonesia, Thailand, Myanmar and Vietnam as these markets mature.
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