An article published in November 2017’s SVCA newsletter
Dmitry Levit, Founder and General Partner at Cento Ventures, takes time off his hectic schedule to give us his take on VC activities in Southeast Asia.
Thank you for the award, and for recognising the outstanding performance of 2C2P, our portfolio company in question. Having operated in Southeast Asia for the past 6 years, we have given a fair bit of thought to the strategies that make digital companies in this region successful. We are a firm designed to help startup founders pull together disparate geographies, assets, and pieces of value chains to build a business capable of operating in Southeast Asia’s famously fragmented markets. We found the word ‘cento’ to be helpful in reflecting the notions of both completeness, think “100%”, and de-fragmentation, one of the older meanings of the term ‘cento’ being a patchwork. The new name is also a reminder that our results are the product of hard work by the founders and the teams we backed; as yet another meaning of the word ‘cento’ refers to the technique of assembling a poem from excerpts of other authors’ writings.
When thinking about investment, we prefer to look at different sectors of the economy and how they react to improving connectivity of consumers and businesses. In each area of economic activity, from entertainment to transportation and from advertising to retail, we see a number of opportunities to address consumer needs, as well as a plethora of upstream business models that will help the various players in the value chain align better. Jirnexu, a Malaysia-based financial services company we have backed, is a good example. While operating a consumer-facing financial product portal, Jirnexu also enables and automates some of the upstream business functions that allow banks to serve consumers better.
Since the job of applying digital technology to industry sector value chains across Southeast Asia only started barely a decade ago, it is hard to say that any particular sector is over-invested. A few categories have seen more activity and investment than others. Retail and local transportation services, for example, have absorbed a significant amount of capital lately which, according to our in-house research, is 70% of all VC financing in 2016, and more than half of all VC financing in 2017 to date. However, most of Southeast Asia’s economic activity continues to be transacted offline. From our point of view, plenty of investment opportunities still exist across all sectors.
There is usually a logic to how a certain industry goes through a digital transformation, whether it is gradual or disruptive. For example, in advertising, it is hard to build sophisticated data management platforms when publishers have yet to deploy advertisement servers. In payments, it is premature to expect consumers to use advanced wallets where cash-over-the-counter facilities are lacking, and blockchain based know-your-customer (KYC) systems for banks may struggle when banks’ call centres are not yet performing. In our opinion, in any investment climate, it is important to get the timing of sector digitalisation right, and not to invest into a business model whose time is quite some way from arriving yet.
The current surge of financing has been directed primarily at a few late-stage digital companies, most recently Grab, Go-jek, Traveloka, and Sea Limited. According to our research report, about more than 80% of all venture capital going to Southeast Asia is absorbed by late-stage funding rounds. Financing for other deals has increased as well but is far from filling the ecosystem with enough players for us all to start competing for the growing number of opportunities. The accumulated ‘technical debt’ of the region is such that opportunities to invest in smart entrepreneurs applying digital technology in large potential markets, at least across Series A and B, will likely continue to outstrip the available capital for the foreseeable future.
Of course, startup founders should and sometimes will hold discussions with multiple investors but more often rather than competing, we find ourselves in discussion with the entrepreneur about combining our participation in the company’s financing round with contributions from strategic investors, who can add critical assets on the ground, other VCs with different and complementary networks, or even individual contributors with the experience and gravitas to serve as solid advisors to the founder. Our role then is to align everyone’s interests and incentives.
The arrival of later stage players is very welcome. These investors are a source of liquidity to earlier-stage investors and sustain their portfolio companies through subsequent stages of growth. They rarely find it economically viable to move into earlier stages of financing, which means there is little that should worry VC funds who focus on these stages. IPOs are still not a common option for Southeast Asia liquidity, despite a few one-off listings which are exceptions that prove the rule. Global markets still lack a good understanding of this region’s digital opportunity, as much of the limelight remains on China.
As digitalisation occurs across more industry sectors in which Southeast Asia has an edge, we’re excited to see what innovation and start-up creation takes place. A trend we hope to see continue is for technology companies that play specifically to the strengths of the region, rather than replicating something invented elsewhere. We hope to see more cases of business models born in Southeast Asia that go on to succeed in global emerging markets.
Figures quoted by Dmitry can be found here