Managing the Noise: South-East Asian Signals


(This is Part Three of a Three Part Series: “The Two Most Important Words in Venture Capital: Pattern Recognition”. You can catch Part One here, and Part Two here.)

Beyond the universal signals, South-East Asian investors have their own form of pattern recognition. Here are some of their most common signals.

South-East Asian Signals

Understand Why Investors are in South-East Asia

This is perhaps the most singularly defining characteristic of South-East Asian investors.

If I haven’t already said it enough, South-East Asia is an entirely different beast. The ecosystem is different, more immature; the technology is focused on far different verticals than what you’d find in more developed markets; there is a distinct lack of exits; and the venture capital industry is barely five years old, and even then, that age varies by country.

And that’s exactly why we’re here.

If you’re operating in a mature market, if your customers are in a mature market, if a significant portion of your workforce — primarily the managing team and/or the founders — are in a mature market, then you shouldn’t be speaking to investors in South-East Asia to lead your round.

As part of a syndicate round, especially in the early stages when HNWIs are more likely than not the ones writing the cheque, this might be more appropriate. But once you start engaging institutional investors, these geographic limitations become much more distinct.

Having a South-East Asian investor onboard should only make sense — to you and the investor — if the region is or will be a significantly important market for the growth of your company. They will appreciate and understand the idea that you need a strategic investor on the ground to help you expand. But it doesn’t make sense for you to be focusing on Europe or the United States, and yet engage exclusively with investors in South-East Asia.

Ironically, the same goes double for entrepreneurs in China and India. “But,” you might ask, “those are developing markets, like South-East Asia. Why wouldn’t investors based here want to invest in those types of deals?”

A few reasons:

  • First, signalling. Both India and China already have well-established startup ecosystems and venture capital industries. Investors based and operating in those markets, that are closer to the ground and with more robust networks, are going to be better suited to helping and understanding your market. If you are approaching investors in South-East Asia who have no history, experience, or network in those countries, then it gives the impression that local investors already passed on you.
  • And again, location matters. We aren’t in South-East Asia because we want to invest in China and India, otherwise we’d be living in New Delhi, Bangalore, Shanghai, or Beijing. We are in South-East Asia because we want to invest in South-East Asia. Unless the investor has a public record of investing globally or across global markets — as an example, Singapore-based Jungle Ventures has several notable Indian investors and investments under their belt, and a few other funds like BEENEXT and GREE are starting to look heavily at India — then chances are their mandate is specifically focused on South-East Asia.
  • India and China are both vast, astonishingly complex, and relatively inaccessible to foreigners. South-East Asian investors are going to be at a tremendous disadvantage investing in either country from abroad. This will affect their appetite to invest, and in the rare instances that they do, 99% of the time they will only follow a well-regarded local lead investor.

Show Your Local Pedigree …

Startups require localised teams to function effectively, at least in the early-stages of a company’s maturity. This doesn’t only apply to having feet on the ground or domain expertise, but people that actually how the market functions, culturally and operationally.

This obviously applies to foreigners, but South-East Asia is so heterogeneous that even entrepreneurs from the region are going to be at a disadvantage if they’re targeting another country in the region.

This goes beyond culture and language, though those two can be tremendously difficult hurdles to overcome. That heterogeneity also extends to hiring & firing, financial and tax regulations, and even operational and marketing initiatives. In short, what works in your home country is likely not going to work exactly the same in a new market. When you apply that thesis across the six primary markets in South-East Asia, suddenly it becomes extraordinarily difficult to scale.

Hence, showing how you intend to overcome that knowledge barrier is key when speaking to investors. If your company is based in Singapore but is now expanding, show me why you’re suited to grow your company in the Philippines. Who are you hiring? How have you tailored your marketing campaigns for that market? What brands and telcos are you working for, and how will those partnerships either help or hurt your initiatives with others? If you’re based in Thailand but want to tackle Indonesia, tell me how you intend to overcome local incumbents? Who is your country head, and are they well-equipped to navigate that market.

Show investors your local pedigree, even if you aren’t a local. You don’t want to be a regional company. You want to be a local company that operates in six markets.

… but if you’re an Expat, Prepare to be Scrutinised

On some occasions, I’ll meet an entrepreneur who wants to leave their local market and relocate to South-East Asia, where competition may be lesser, livings and operating expenses are orders of magnitude lower, and the ASEAN market is considerably larger.

Local investors often consider this a red flag.

It’s not to say these founders shouldn’t relocate to ASEAN, but the term itself is a misnomer. It implies that the region is a relatively homogenous market, with parity across economic indices. Unfortunately, this couldn’t be further from the truth.

Indeed, to say that Vietnam is different from Germany, or Indonesia far removed from the United States, is hilariously understated. South-East Asia is so different from anything else out there, especially in comparison to developed markets, that they might as well be from different universes.

The reason why this is important is that for the uninitiated, it’s going to take at least six months to really understand your target market and consumer. And that’s being extremely charitable; I’d peg this number closer to one year to really understand local cultures and doesn’t even include the time and resources spent incorporating a local entity or navigating the often byzantine legal and financial regulations of your typical South-East Asian country — not to mention doing it in another language if you’re looking to target Vietnam or Indonesia.

To expect to raise from local investors before any foundation has been laid, even if you’ve built a product or service and are ready to “export” it, so to speak, is a tall order, and will be regarded as such by local investors. Be warned.

Note, a caveat: the “homing pigeon.” These are entrepreneurs who were educated abroad, usually from a wealthy family, that intend to return to their home country and start a business. If that sounds unusually specific, that’s because it is: many prominent regional startups were started this way. I won’t mention them to avoid making any association between their success and their families — nor would I ever imply the latter a guarantor of the former — but it does provide often provide a leg-up.

Because of the network these entrepreneurs typically possess, from both abroad and back home, and the safety net their family wealth provides, many investors actually look positively on these types of entrepreneurs.

Incumbency and Competition: Part & Parcel of Growing in South-East Asia

One of the unique consequences of South-East Asia’s six primary countries is that they all operate like parallel universes: the same concepts, strategies, and products can be applied and executed in each individual market without ever coming across one another.

But that doesn’t mean they won’t.

I’ve written about Goldilocks startups before, where I describe companies that are either hyperlocal, global from the outset, or operate in “just-right” markets. Hyperlocal companies can sustain themselves just by focusing on their home markets, whereas globally-oriented startups must work on immediately obtaining customers across multiple markets to survive. The last set of companies, which I dubbed Goldilocks startups, operate in markets large enough to grow operations, perhaps even grow into a sustainable business, but are too small to foster the development of regional company.

And the problem with these kinds of startups? There are a lot of them.

When Goldilocks startups mature and have more or less tapped out the revenue channels in their local market, they will require new opportunities to grow revenue. And that ultimately means crossing the rubicon and expanding into another country, and competing with incumbents, in the same space, doing the same thing, but with a two to three year head-start.

This is part and parcel of doing business in South-East Asia, and is a major consideration for most investors here. You’re the market leader in your home country? That’s great. But I’m not judging you by that criteria alone. I’m wondering if you can be the leader in multiple countries in South-East Asia, and I am weighing you not only against your competition now, but your competition in other markets.

Give us Hybrids, not Copycats

Copycats aren’t necessarily a bad thing. HappyFresh is a clone of InstaCart; RedMart a clone of FreshDirect; Lazada, Amazon; iFlix, Netflix; GrabTaxi, Uber. Indeed, if that small list is any indication, entrepreneurs would be well-served bringing proven business models to developing markets.

Investors are acutely aware of this. We have no problem investing in copycats, and more likely than not we know exactly the company you’re attempting to clone. But we’re also acutely aware of the market conditions on the ground in South-East Asia, and we implicitly know that you cannot emulate the same strategies that resulted in success elsewhere and expect it to work here.

For example, credit card penetration in South-East Asia is in the single digits; in Indonesia, the region’s largest market by population, it’s at about 2%. For eCommerce companies, how exactly do they intend to collect payment when the most common form of payment is virtually nonexistant? Another example: viable physical infrastructure and a healthy supply chain, including last-mile delivery and fulfilment, is spotty at best, woefully broken at worst. For companies that require tight supply chain and inventory management to protect their slim margins, how do they guarantee delivery in countries where it can take two hours to deliver a package a distance of three kilometres?

What ultimately matters is not the company you’re cloning, but how you’re going to localise it to the local markets. Don’t waste time telling me why a Stripe or Zappos clone is important for South-East Asia. Tell my how you intend to make it work for Indonesian consumers, or Malaysian SMEs, or Filipino banks and telcos.

Can’t process credit cards? Doesn’t matter, you’ve developed a way to manage cash-on-delivery and you’ve set up distribution networks through convenient stores and retail shops. Clunky delivery trucks not getting to their deliveries in time, or at all? Who cares, you’re outsourcing deliveries to small, nimble ojeks.

Show me that how you’re creating a hybrid, not a copycat.

Remember, investors no matter where they live or work, operate according to their pattern recognition. Whether it’s honed or not, conscious or not, investors will review deals, parse through introductions, and make decisions based on that pattern recognition. The trick is to separate the good signals from the bad, and make sure all investors see is the former.