India offers potential, but it comes with challenges, says Chua Kee Lock9 min read . Updated: 24 Mar 2017, 06:47 PM IST
Vertex Venture Holdings's Chua Kee Lock says global investors who missed the China bus rushed to India, and were partly to blame for the sky-high valuations that start-ups once commanded
Singapore: Although valuations have fallen significantly, investor interest in injecting capital into Indian start-ups remains subdued, says Chua Kee Lock, group president and chief executive officer of Vertex Venture Holdings Ltd, Singapore’s largest venture capital (VC) firm with $1 billion under active management.
Vertex is the venture capital (VC) arm of Singapore’s state-run investment firm Temasek Holdings Pte. Ltd.
Global investors who had missed the China bus rushed to India, and were partly to blame for the sky-high valuations that start-ups once commanded, Chua said in an interview.
Has the lack of an active angel investment community in South-East Asia disrupted deal flows at the VC level? Is this factor forcing VCs in South-East to look at seed and pre-seed levels?
There are a lot of accelerators and incubators in this region. Yes, there may not be a large angel investing community here like in India or China, but accelerators and incubators make up for that when it comes to seed-level funding. There are also several micro-funds out there. We are now seeing a lot more people talking about ideas, about starting up, and we are getting a lot more proposals, and a lot more entrepreneurs are reaching out to us. Outside Singapore, Thailand is coming up as a start-up destination, and Indonesia has always been exciting. But this region is still behind in deal flows, when compared with China and India.
How do you see the start-up ecosystem in South-East Asia when compared with India and China?
China is in a different league altogether. In India, there are still concerns on valuations. The euphoria of unicorns in India has come down, and we see that companies like Snapdeal and Flipkart have issues—these were companies that everyone was chasing at one point of time. Unfortunately for India, it has now swung to the other side, and all big international investors have become very cautious about (it). We are not seeing them jump with joy on India. International investors are still active in China and South-East Asia, but their appetite for India continues to be down.
Today, the contrast is that no one is asking us details of our India strategy anymore. The valuations in India have fallen. Earlier, both the entrepreneurs and early investors were chasing unrealistic valuations. International investors have now realized India is a different country—it is very different from investing in China, or in the US and Singapore. India offers great potential, but it comes with challenges. The earlier approach of saying—"wow, this is a market of 1.2 billion people, with a market size that is similar to that of China"—that is over. The approach of, “India valuations don’t matter because of its market size, and that you will eventually make money", is also gone.
Let me give you an example. Snapdeal last raised funding at a valuation of around $6.5 billion in 2016—it has a revenue of around $200 million. Just look at the multiples—you have a revenue-to-valuation multiple that is over 30 times. Look at jd.com—it had raised $1 billion just before its IPO (initial public offer) at a valuation that was almost equal to its revenue. Many who missed the China opportunity, and companies like jd.com, then rushed to India—how else can you explain Snapdeal raising capital at a valuation that is more than 30 times its revenue? Fundamentally, India still has many good companies—but are the valuation multiples justified? No. In the short term, demonetisation also does not help.
There are more than enough deals in South-East Asia. But results will take time—you can’t build companies overnight. Most VCs in the region are not looking out—they have sufficient deals across Asean (Association of Southeast Asian Nations). Indonesia is set to grow. But because everyone learnt lessons from India, VCs here are not going to pay 30 or 50 times the company’s revenues as valuations, when it comes to Indonesia. VCs will be far more careful. During our last interaction in 2015, on India, I had said then that it was easy to raise money as the market was hot, but had added that the music would soon stop, and at that time, you should not be caught without a chair. Some VCs were upset with my stance then. They asked me why we were not actively investing in India. But I had been speaking from experience of having seen such cycles.
During the last interaction, you had also talked about Vertex launching a new $200 million fund for South-East Asia and India? What is the status of that vehicle?
We have spent about 50% of that fund—it was a captive fund which was fully funded by Vertex Venture Holdings. We’ve now stopped investing from that fund. Mid-last year, we began working on a third-party fund for India and South-East Asia. The target is $150 million, but we will probably raise more than that. More than half of this new fund will be from external investors. Our earlier fund for this region—that we’ve frozen now. It does not matter whether we roll the investments in the earlier $200 million fund over into the new one. All new investments will be through this new fund.
Since 2015, all GPs (general partners) were allowed to raise money externally, up to half the amount. Our China team went out and raised money from external investors—the US and Israel teams also did that, and the South-East Asia team also adopted this model last year. VCs are all about people—if we have the ability to raise external money, it helps you to have standard industry terms, and you can compensate your people as per industry standards. Then you probably can retain people, and get better people in the fund. We now have a structure that is aligned to industry standards. Our LPs (limited partners) are from all over the world—from South Asia, some are from the Middle East and some are even global players. In terms of commitments from our LPs, the range varies—from a million dollars to a couple of million dollars, to even $15-20 million.
I recall you saying that Vertex had stepped up the pace of investments as you were looking to make the best of the situation at a time when most investors were scared to invest.
We have stepped up the pace of investments. A lot of people were afraid, and valuations came down, and markets were choppy. Entrepreneurs are always there. It is only about fair valuations. This year will be good too—deals are still not priced high. Not a lot of people are rushing in, and that is a good sign, and our challenge will be not to get carried away, but maintain discipline. Just because no one is rushing in, or are not hurrying for deals, does not mean that we should invest more—we should be more careful at times like these.
What is your investment thesis? From among your portfolio companies, which ones are you most bullish on?
In this region—South-East Asia—we are focused on software, and I think this sector has the scope to produce disruptive companies that can be attractive. Our portfolio companies like Singapore-based Instarem and Bengaluru-based Flutura Decision Sciences and Analytics (Flutura)—these were some of the early companies that we found in this space. There are several players, and it takes time to evaluate if the technology is correct, if the start-up has the right team, and the right product mix. There are still a lot of pain points in this area, and so there are issues to be solved.
We are also bullish on the enterprise sector. We are seeing a lot of enterprise-related innovation. We will always continue to be bullish on fintech. From our portfolio companies, Grab is doing well, and it is the dominant ride-hailing app in this region, and they are present in over 35 cities. Grab is investing heavily in Indonesia. They have a lot of unspent cash, and we don’t need to worry about them for a long time. PatSnap, a patents search company, that is part of our portfolio, recently raised Series C from Sequoia China—we are bullish on that company because they have a solid team. We had originally invested in Paktor, which started off as a dating app and now they have pivoted and are into everything from mobile streaming to mobile dating and they are growing so rapidly. They recently acquired companies in Taiwan, Brazil and the US. All these companies look to be successful bets for us.
It is not that we don’t have any pressures of exit. All of our funds, even if they are captive, have a 10-year life. So, we will also begin looking for exits when the fund is in its sixth year onward—that is a typical cycle.
Fund-raising is never easy—since Vertex is Temasek-backed, does that make it easier for you when you talk to external investors and try to get them in as LPs?
Performance is all about track record. We have been in this business for a long time. People look at our record and compare that with other VCs in the industry and then decide if they want to invest in us. People also like the fact that while we are a local fund, we are connected on a global platform and all our teams share information with each other. For instance, if we are evaluating a cyber security start-up, our expertise here will be limited. We can reach out to Vertex Israel on this—our partners there have the best record when it comes to this sector. You may be investing in the best player in cyber security in this region, but our Israel team can help us understand if this company can compete with the best in class at a global level.
How do you see exits?
This is important, and we have a problem here in South-East Asia and India. China has already gone through this, and over the past couple of years, we’ve been seeing a lot of IPOs and M&As (mergers and acquisitions) there. Success stories lead to bigger IPOs, and also help in creating larger success stories. It, in turn, leads to bigger companies like the Alibabas, Tencents and Baidus. Then these companies become the acquirers. Say 10-15 years ago, you did not have a Google or an Amazon buying up companies; but today, exits come from these companies acquiring start-ups. For this region, it will take another 5-6 years to address the issue of exits. In India, we got an exit with Yatra, and that was a sizeable one for us. But in general, in India, so much money has flowed in, and it is not great for investors’ confidence that we’ve not seen returns or some decent exits. Fundamentally, India and South-East Asia need to see exits—right now, we have some success stories, but we are not seeing the 50 times returns type of exit. Maybe over the next five years, more unicorns will emerge, and these companies will turn acquirers. In the short term, exits will largely be through M&As. It was the same for China and US earlier. IPOs can happen only when the market is mature. You must also remember, for technology firms, there are no boundaries—you don’t have to wait for capital markets in Singapore or Malaysia to develop before you can plan an exit. Remember what happened in China—the technology firms directly went to NASDAQ. Entrepreneurs now have a choice between NASDAQ, NYSE and Hong Kong if they want to explore a listing.
What is the pain-point in this region when it comes to raising funding.
The pain-point is raising more than $5 million—it is Series B and upwards. China went through this pain point some 10 years ago, and then you saw international VCs come in to do Series C, D, E , F rounds. This region has the same problem, but this problem will address itself.