KHAILEE Ng is not afraid to take the narrow path to accomplish his goals, even if it is full of obstacles along the way. His tenacity has made him a successful venture capitalist and fund manager in the Silicon Valley and Southeast Asia.
He made a name for himself on the local start-up scene when he teamed up with his good friend Joel Neoh in 2010 to launch GroupsMore, a company that offered local consumers discounts and promotions for goods and services. It became the largest company of its kind in the country and five months later, it was acquired for “a seven-figure sum” by US-based group-buying site Groupon as part of its expansion into Asia.
After that, the partners went their separate ways. While Neoh joined Groupon before setting up regional fitness-sharing platform KFit, Ng made his way to Silicon Valley. Today, he is managing partner at 500 Startups, considered to be the world’s most active early-stage venture capital firm, having invested US$200 million in more than 1,300 technology start-ups globally.
Ng is also fund manager of the firm’s 500 Durian Fund, which was launched in June 2014. The Southeast Asia-focused fund has invested US$25 million in 119 start-ups thus far. The start-ups include ride-sharing company Grab (now valued at about US$3.5 billion) and Carousell (a community marketplace that allows consumers to buy and sell items via its mobile phone app). The latter raised US$35 million at its Series B funding round in August.
“The 500 Durian Fund is one of the top-performing funds of the firm. Of the 119 companies in the fund, 34 have raised more than US$2 billion for further growth. To date, none of the businesses have shut down,” Ng tells Personal Wealth in a phone interview.
Earlier this month, the venture capital fund launched the 500 Durian Fund 2, aimed at investing another US$50 million in Southeast Asian start-ups. Malaysia Venture Capital Management Bhd (Mavcap) is one of the fund’s investors. “Our second fund builds on the encouraging results of the first fund,” says Ng.
Angel investing
Ng became a venture capitalist after a successful foray into angel investing. He had used his share of the proceeds from the GroupsMore sale to be an angel investor of iMoney, which today is one of the most popular financial comparison portals in Malaysia.
Ng recalls that iMoney founder Lee Ching Wei approached him in 2010 through Facebook (FB). They had attended the same secondary school, but he had not heard of Lee until he received the latter’s message.
“Having built two start-ups of my own, I have been exposed to a lot of ideas, whether online or through conversations with people. At the time, I had a lot of media coverage, so people who had business ideas were reaching out to me online. Lee was one of them,” says Ng.
“We were from the same secondary school, but he was younger than me and I did not know him. He reached out to me on FB and told me that he wanted to be an entrepreneur. He showed me his profile on FB and we decided to meet. I ended up being an angel investor in his company, which later became iMoney.”
Ng continues to be an investor in the company, which has grown by leaps and bounds. The experience gave him the confidence to go to the next level. “This experience got me very excited about creating more businesses and working with smart people. I became a venture capitalist and it has been a lot of fun,” he says.
His beginnings as a venture capitalist, however, was not without challenges. Not only were governments and corporates reluctant to invest in start-ups at the time, there were not many people who were able to provide him with the support he needed as they were more familiar with properties and public-listed equities.
Ng broadened his scope to include Southeast Asia and found that the region was almost like a desert for venture capital. That was when he decided to head to Silicon Valley, so that he could gain the experience needed to grow the industry in this region.
“I was concerned that in this part of the world, we were not the creators of our own creations. We were just the consumers of other people’s creations, such as Google and Facebook. Yes, we have buildings such as the Petronas Twin Towers. But in terms of new technology, we were falling behind,” says Ng.
Getting to Silicon Valley is not difficult, but joining a venture capital firm is. Ng eventually got his foot in the door when he secured a meeting with 500 Startups founding partner Dave McClure. But it took him three attempts to set it up.
The first was through a former colleague at Mindvalley, where Ng had worked as a strategist and product manager before starting GroupsMore. “One of the bosses I worked with at Mindvalley had been a director and colleague of McClure at eBay,” says Ng, adding that he wanted to meet McClure because 500 Startups was the only firm in Silicon Valley to bet big on start-up opportunities in the developing markets.
The second attempt was through a friend of his who tried to introduce him to McClure. But that, too, was unsuccessful.
Ng made his third attempt after he was accepted into the US embassy’s International Visitor Leadership Programme, which allows young leaders from around the world to meet industry leaders in the US. “I used the programme to reach out to Dave. There were three contact points and I sent many emails to introduce myself to him. Eventually, I persuaded his assistant to set up a meeting,” he says.
Ng finally met McClure and volunteered to serve as a mentor for 500 Startups’ accelerator programme. He proved himself and began managing the 500 Durian Fund in 2014.
The 500 Durian Fund
The 500 Durian Fund has been successful under Ng’s leadership. He says the net internal rate of return (which is the internal rate of return after deducting the 2% annual management fee) is currently “double digits on paper”. The actual return of the fund will only be known in a few years when the fund exits the companies.
“The fund is still new. We need three to five years to determine whether the companies we invest in will eventually be successful. It has only been two years,” says Ng, who attributes the fund’s outperformance to various factors, including its widely diversified portfolio and investment criteria.
He says venture capital as an asset class has not been very successful, even in the US, over the past 10 years. The main reason is that venture capital firms tend to have very concentrated portfolios that only invest in 5 to 20 companies.
“Unlike equities, where you invest in about 20 to 30 companies, it is best for venture capital funds to invest in 50 or more companies to hit the sweet spot in terms of risk-adjusted returns. That is because the risk of a start-up failure is much higher than equities and you could lose all your money,” he points out.
Another reason to have many start-ups in a venture capital fund’s portfolio is to increase the chances of spotting the elusive “unicorn”, or a start-up that eventually grows into a US$1 billion company. “It is like hitting the jackpot. Once you spot a unicorn, the returns are enough to cover the losses of the entire fund and still earn a profit,” says Ng.
These unicorns are like Facebook and Google, which started small and are the world’s largest companies in terms of market capitalisation today. For instance, cloud communications company Twilio Inc was a unicorn for one of 500 Startups’ main funds. The company has been valued at more than US$1 billion since its initial public offering in the middle of the year.
Grab, which came out with its ride-hailing platform in Southeast Asia, could be the jackpot for the 500 Durian Fund. According to news reports, the company is now valued at about US$3.5 billion.
The diversified portfolio of the fund is one of the key contributors to its stable performance, says Ng. “So far, most of our funds have generated double-digit returns. However, the numbers do not mean a thing until the fund generates a return.”
Investing in start-ups
How does Ng identify potential success stories? He looks at five criteria when investing in start-ups. The first three have to do with the start-ups’ founders.
“The first thing I look at is whether the founding team has an unfair advantage over its competitors. With Grab, for example, the founders’ family has links with the taxi industry and they have a wide network and many skills compared with others. If you are just a man in the street trying to compete against them, you have less of an advantage,” he says.
“The second is evidence of repeated usage — whether people will use the products or services again and again. And the third is growth. Many start-ups grow their businesses organically through word of mouth and recommendation by friends. But let’s say this start-up advertises on Facebook to get people to use its product or service. If you have to spend RM10 on the advertisement to acquire a customer to earn RM3, you are losing money. Even if you have a good idea, if it is expensive to get a customer, you will never get your money back.”
The other two criteria are related to valuation. “The next thing we look at is 30x. Through benchmarking, we have to evaluate if we can make 30 times the capital we put in. For example, Uber is valued at US$60 billion now and Didi Chuxing (Chinese ride-sharing company) is US$30 billion. Let’s say we invest US$10 million in a start-up in Southeast Asia with a similar business model, it is possible that it will grow into a US$30 billion company,” says Ng.
“The final thing is 3x, which means between now and the next round of financing, we need to ask ourselves if we can get three times more money out of our initial invested amount in the start-up.”
Ng says it is crucial that the start-up’s founding team knows how to manage and utilise the funding they receive as many start-ups have failed because of this. “Start-ups do not die because of competition and the lack of good ideas. They die because they run out of money and cannot get more money for their company. So I think professional management, which is how much money you have, and to know how much more you can get to survive, should be a primary focus.”
Looking for more opportunities
Ng is on the lookout for more opportunities to invest in Southeast Asian start-ups. With the US$50 million that the 500 Durian Fund 2 aims to raise, he will put the money into a few segments with growth potential.
He says one of the emerging opportunities is in the e-commerce space as there are more young entrepreneurs in the region starting their own brands and marketing to consumers over the internet. If successful, these products, which are designed and manufactured locally, will go viral and amass a huge or cult following.
“There are homegrown products being sold online. They are not generic products that you can get on Taobao or other online marketplaces. In the Malaysian context, it is like The Last Polka ice cream, which produces the Gula Melaka flavour and attracts a large pool of followers,” says Ng.
One of the 500 Durian Fund’s investee companies is Bro.Do, an Indonesian designer and manufacturer of shoes, he says. “Indonesia manufactures a lot of shoes, including top quality Italian brands. That is how the new generation of local brands have come about. They are manufacturing good quality shoes at a cheaper price.
“Bro.Do is one of them. It also sells its shoes on Instagram and other websites. A lot of hipsters who want to be cool buy things like this. The company produces 6,000 shoes a month and they are always sold out. When it eventually opened a small shop in a shopping mall, there were long queues. The cash flow is very good for such companies.”
Ng says this investment theme works especially well in countries such as Indonesia and Thailand where there is a strong sense of national pride. “The Indonesian and Thai people really support local brands. We see this in Malaysia and Singapore too, but not at this scale.”
Besides fashion products, he is looking at homegrown health foods and cosmetics, which are expected to gain traction moving forward. Enterprise procurement is another theme he is looking at. Ng says he is invested in companies that provide apps or websites for companies to order everything they need, from food catering and T-shirts to business cards.
Enterprise consumption is rivalling consumer consumption in cities around the world and it is an area not disrupted yet by the internet and technology. There is potential for start-ups to tap this market, says Ng.
“There are a lot of companies spending on things such as food, name cards and T-shirts. The process tends to be long and involves sending emails, getting quotations from suppliers, bargaining and accounting. There are a lot of problems to be solved within the enterprise itself. So, what these start-ups do is to let companies use their mobile apps to order these things efficiently, with all the transactions recorded online. We are investing in start-ups with this business model in Malaysia, Singapore and Indonesia.”
However, these emerging opportunities may need three to five years before investors can see returns, he points out.
A new beginning
Khailee Ng, managing partner at 500 Startups, has for a long time been identified by his long hair. This year, he decided to cut his tresses short. The new hairstyle also represents a new start in his life.
“I have had long crazy hair for the first chapter of my adult life, so this short hair is just a sign of my personal evolution. In the past year, I have also reduced my body fat from 21% to 9%, reconnected more deeply with my parents, embarked on a serious romantic relationship and started doing things which I gave up when I was overworking,” he says.
“I realise that working really hard may be useful in the short term, but fund management is a long-term game. I need to have energy from good health and relationships to produce high-level productivity in the long term and see the companies we invest in reach their peak and generate cash returns. The happier and healthier I am, the better job I will do.”
Ng says this new outlook on life does not affect his investment approach. In fact, his life experience has taught him that personal health and the support the founding members get are as important as their talent.
Instead of investing in traditional asset classes with lower risk and higher liquidity such as stocks, bonds and properties, Ng invests most of his money in start-ups and also through the venture capital fund he manages.
While venture capital is often perceived as high risk, Ng does not think so. That is because he has accumulated extensive knowledge and experience in the industry. More importantly, he enjoys investing in start-ups.
“My investment appetite has always been different from others. I think investments are about understanding yourself and what makes you happy. You can make ‘happy money’ and ‘sad money’, and you can invest happily or sadly too. Some people really enjoy investing in equities and properties, but I really enjoy investing in start-ups,” he says.
“I enjoy creating the future and investing in people and companies. Like fund managers, I put my own money in some of the funds I manage.”
Ng has diversified into some equities, mainly local blue-chip stocks and US tech stocks, for liquidity purposes. “I am terrible at equities. I invest in stocks just for the liquidity as the money invested in start-ups is locked up for several years.”
However, he is not a fan of property investing. In an interview with Tech in Asia, Ng says the biggest regret in his life is investing in property. “Asking me to invest in property is like asking Michael Jordan to play baseball. I do not do it very well and it is not what I enjoy.”
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