Cover Story: The supportive venture capitalist

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on October 22, 2018 - October 28, 2018.
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It was the first day of Chinese New Year in 2015 when Andrew Tan paid his long-time mentor a visit in his hometown, Batu Pahat. They sat in the garden and spent most of their time catching up. As dusk fell, Tan noticed that his mentor was starting to look perturbed.

“He walked back into the house and brought out two candles. He lit one and we continued to talk,” he says.

Later, as Tan got up to take his leave, his old teacher took the dying candle and lit the new one. He gave it to me and said, “Sifu is getting old and the day is getting dark … I’ve used my last light to light your candle and I hope you will take this light and pass it on. Make other people successful.”

This conversation bothered Tan for days. Tan first met his mentor when he was just 13, in a pub where he was working part-time illegally (the two were subsequently arrested, though not charged). The two gradually became closer and the old man started to coach him towards a better future. At that point, he made the young boy promise that he would pay it forward one day. But until that evening in Batu Pahat, he had not delivered on that promise.

Tan got back to Kuala Lumpur as soon as the holidays ended. He got cracking on setting up his venture capital firm, TBV Capital Sdn Bhd, also known as TinkBig Ventures. He figured that helping build entrepreneurs was what he was most passionate about and the area that he could make the greatest impact.

The venture capital firm provides seed stage funding, and in most cases, TBV is a start-up’s first accredited investor.

To prove to his mentor that he meant business, 80% of the US$10 million raised for his first fund came from Tan’s own pocket.

“I wanted to prove that I was sincere. So, in

the first fund we set up, I was the largest general partner and the largest limited partner,” he shares. For the second fund, he and his team raised US$30 million from investors across Asia.

“My investments are unique. We were early in the market, and I realised that there was a gap that needed to be filled. A lot of start-ups that came to us were still in the ideation stage with minimum product viability. They could not raise a lot of money from us because it was still early days and the risk was very high because there was still a lot of validation to be done.

“In the first round, they were perhaps only able to raise about US$50,000 to US$100,000. What we realised was that once they raised the funds, it gave them about 8 to 10 months of runway, from hiring talent to deployment of technology,” he says.

But Tan understands that subsequent fundraising exercises can be terribly distracting for a debuting start-up and could even cause its demise.

“After they raise the first round of funds from venture capital firms, most founders of any business will realise that they are only left with four to six months worth of money. This will make them restless and anxious. They will need to focus their energy on fundraising and in that period, they will start to neglect the business, the operations and how to scale it going forward,” he says.

“I want to take this burden away from them. I tell them that once I invest, I will do a follow-up round. So, they don’t have to worry about the next round except to make sure that they deliver the promised solution and achieve their targets.

“My philosophy [to them] is simple — do the work and the money will follow.”

After two rounds, if the company requires more, Tan says he will personally help them pitch to another venture capital firm or even to co-investors in his network.

It is for this reason that TBV has partnered 32 venture capital firms in Southeast Asia. In Malaysia, one of TBV’s prominent partners is Cradle Fund Sdn Bhd.

“TBV’s relationship with Cradle is such that if I deploy a fund, Cradle will match my fund. Together, we have completed about RM3.2 million and invested in four companies,” Tan says.

As far as venture capital investment goes, RM3.2 million is not a large sum, but having the ability to tap an exhaustive Rolodex of contacts is what matters, he says.

When TBV invests in a company, the team also helps define the start-up’s legal framework and agreements.

The firm has since invested in 22 companies, with most of their investments focused on developing companies in the fast-moving consumer goods (FMCG) space across Southeast Asia.

Tan says TBV has dispersed close to US$8.6 million to start-ups in the early stages of building their business, investing from the seed stage to series A funding. Its ticket size per investment typically ranges from US$250,000 to US$1 million.

His decision to go into the FMCG market was driven by the fact that the sector directly addresses consumer needs and solves “real-life problems”.

“I want to find ways to adopt technology to provide more cost-effective solutions and convenience to our users,” he says.

Low-hanging fruit
While the popular trend is to embed big data and artificial intelligence, Tan says the majority of the markets in Asia are not ready adopt such technology. “I chose to go into the FMCG space because it is truly a low-hanging fruit right now. We are in the forefront of technology, but it is a transitory phase for a lot of companies.

“You will hear a lot of venture capitalists telling you that the next frontier in this area is being able to harness tools like artificial intelligence, big data and blockchain. While these are all great technologies, is the market ready to adopt such skills on a wide scale?

“So, while we are in a transitory phase, how do we make the existing technology seamless to enhance the quality of life? That was the focus of the initial fund.”

The FMCG companies in TBV’s portfolio include instant booking event venue and service platform VMO Rocks Sdn Bhd; Singapore-based upcycled fashion marketplace REFASH Inc; online florists FiftyGram Sdn Bhd; sports matching app SportsPlay; and TAG La Technology Sdn Bhd, which came up with a gadget that allows one to keep track of one’s personal belongings using Bluetooth technology.

“I believe the consumer market is the biggest because of its very important characteristics — an aggregation of users. The most expensive market cost for any business is customer acquisition because you have to spend a lot on marketing and advertising,” says Tan.

“So, what we do is, when a customer comes through [any of the investee company’s] systems, we categorise them. They might want to conduct a survey, gift something, order food, arrange for logistics or even look for a beauty salon.

“The intention is to create a lifetime of values for my customers. So, I invest in companies like VMO, FiftyGram, REFASH and a company called Haps (Plain Vanilla Group Pte Ltd) in Singapore, which provides an easy ticketing experience.

“Basically, the same database of customers can be shifted around. We share all the resources among our family of portfolios, and they can teach each other what they have learnt about the market.”

Another area of focus is in the nascent agriculture technology (agritech), which Tan believes will be the game changer in the near future.

The United Nations Food and Agriculture Organisation (FAO) says the global population is expected to reach 8.3 billion, with those in certain developing economies and regions expected to grow up to 50% by 2030.

While the net population change in developed countries between 2015 and 2030 is estimated at just 12 million, the change in developing countries is estimated to be at 1.1 billion over the same period.

This is expected to result in an increase in demand for food by at least 50%. The FAO also points out that 60% of the world’s population will live in cities.

These statistics prompted Tan to invest in a Taiwanese tech company, which is currently testing a sensory device used to measure the nutrition content of soil. “In agritech, we see a lot of interesting intersections between the Internet of Things and the Industry 4.0 kind of technology. TBV has invested in, for example, a new device that is planted in the soil to measure its nutrition content.

“Moving forward, this device will also be able to measure rainfall, air pollution and humidity.”

At the moment, the device is being tested across 100 crops. Once it is ready, Tan hopes that it will eliminate the guesswork in agriculture.

“I believe food security and food sustainability are going to be the next big issues. Instead of playing a guessing game, it is about time we used data to forecast the output of crops, diseases that we need look out for and counter-measures that we can put in place to avoid them,” he says.

As TBV has only been in operation for three years, it has yet to make any major exits from its portfolio companies.

But it has had some small exits such as a company that developed an accounting software from which TBV made 4.6 times internal rate of return (IRR) over 18 months.

“Another one was a sports app we ventured into with a China partner. It gave us an IRR of 3.2 times of the valuation,” says Tan.

“Out of the 22 companies, we have already raised the second round of funding for six start-ups. The average IRR we have delivered is 10.72 times the companies’ valuation.”

It is Tan’s networking capabilities that drew Denmark-based 3B Ventures managing partner James Digby and general partner Jan-Cayo Fiebig to collaborate with TBV.

The Nordic impact venture capital firm launched their US$60 million Frontier Fund II in July and appointed Tan to manage the investments, which will be used to invest in 60 high-growth companies in areas of energy, water, agriculture, education and health.

The entrepreneurial grit
Apart from the financial viability of a company, Tan also focuses on the founder’s perseverance. He says this is another unique proposition of the company.

“To be honest, I don’t have very minute or specific investment metrics. There is no shortage of venture capital funds in this part of the world, but there is still a gap — in the kind of help entrepreneurs receive from their investors,” Tan says.

He deduces that this could be because most funds are heavily driven by balance sheets and risks, so much so that they lose sight of the entrepreneurs they are trying to help.

“All money is great, but not all sources of capital are equal. A lot of start-ups are just looking for money, but to those that approach TBV, my advice is to not just focus on the money but also look at the kind of support, resources and network they can leverage, either through their mentor or investors,” he says.

“The key is the willingness of your mentor and your investors to get their hands dirty by driving you.”

He also advises start-ups to learn to how maintain lean operations and understand the value of bootstrapping. “If you don’t know how to make money without money, you will never make money with money.

“I have founders coming to me and saying that they will only be able to make their ideas work if I were to give them RM1 million, but that doesn’t [work] with me. If they have the passion and commitment, they will be able to do something without the money.

“Ideas are a dime a dozen. If you need RM10 million just to execute your idea so that you can earn RM100 million, I don’t buy that kind of talk, because in the early stages of your business, you’ll be very energetic and the business will grow.”

This is something that Tan knows only too well because he had started and sold off two companies at the beginning of his career after he graduated with a master’s in international trading and e-commerce in 2003 from the Queen Mary University of London. He was able to pursue his studies then with the help of his mentor, hard work and dedication.

“I worked for eBay Inc for three years in the UK and at the age of 25, I returned to Malaysia. I started my own company that provided content for mobile phones and I took it through an initial public offering in 2006,” says Tan.

He started another company in Hong Kong, this time in the recycling business that segregated electronic waste. He cashed out of that company in 2014 and spent most of his time travelling the world before returning to Malaysia in 2015.

For a brief period, Tan was the CEO of CrowdPlus.asia, Southeast Asia’s first

equity crowdfunding platform. As exciting as the opportunity was, Tan says dealing with retail investors drained him.

“Handling 300 investors was just too tiring, but I realised then that I would rather focus on growing a group of companies and managing a lump sum of investment,” he says.

The limited partners
Like Tan, the investors in the TBV funds are corporate figures who are willing to share their know-how in establishing and scaling businesses.

“I have 18 high-net-worth individuals supporting TBV as limited partners. Most of them are from Singapore and Indonesia. Six are from Malaysia,” Tan says.

“These are people who have made it in life and want to do their part to invigorate the entrepreneurial landscape.

“When I approached them and pitched the endeavour to them, I did so with a clear idea of creating a sandbox environment. I was also very selective because I needed to ensure that they are a phone call away. So, my partners are people who are willing to support our entrepreneurs, especially when it comes to market accessibility.”

For the corporate heads, Tan also promised an exciting opportunity — to have a taste of running a start-up.

He says most of his partners were sold on a key element of his pitch that their investments would spur corporate innovation. “In big corporations, there is a lot of red tape and you cannot afford to make mistakes. So, I tell them, ‘why not invest in me and I will share whatever I’ve learnt and whatever technology that we develop that might be suitable for your organisation’. We can even implement it in the beta version for them.

“They want to invest in start-ups because they want a taste of running it. They are interested in how new technology is shaking things up and how it can be integrated in their multinational companies.”

This arrangement works comfortably for both parties as corporates have the ability to try things out without damaging their reputation and start-ups are given an avenue to gain new business opportunities or even fine-tune their products before offering them to end consumers.

Tan says that in some instances, the limited partners could propose a leveraged buyout if the technology is beneficial to their respective operations. “Every corporate wants to get into the start-up scene, but they are not doing anything because there is too much at stake, especially in terms of reputation, especially if they are listed companies. A bad reputation will hurt their core businesses, so they don’t want that to affect them.

“In turn, my request to them is to provide our portfolio companies market accessibility, because what is the point of having a good technology, if there are no users?”

Rise of corporate VCs
Tan says the change of leadership and the policies that the new government is implementing to invigorate the entrepreneurial backbone of the country look promising.

“There has been an influx of funds as the new leadership is promising transparency in government structures, and I think this will create more venture capitalists,” he says.

These policy changes are bound to attract more corporate venture capital firms. “I think we will be seeing more listed companies in the arena.

“It is a unique business model and their funds are evergreen. They don’t need to exit ... they can invest in multiple rounds and they can create a good sandbox environment as well as provide market accessibility. But the only drawback for a corporate venture capital is that it will only invest in its own verticals and its own industry. But that’s good as well.”

Besides that, he expects growth in alternative financing models such as equity crowdfunding and peer-to-peer (P2P) lending in the next couple of years. “A lot of angel, sophisticated and accredited investors are more comfortable getting into equity investing and P2P lending.”

Tan adds that companies developing solutions for the agritech and healthtech sectors are expected to do well in the near future as the awareness of safe food and better healthcare is on the rise.

“Malaysia has the world’s most recognised halal standards for food. More people are consuming brands from Malaysia without any reservation because of the standards we uphold,” he says.

“Healthtech is another sweet spot as more healthcare providers are looking to improve their services. We have an investee company in Thailand that has developed an identification technology that synchronises the database of 12 of its member hospitals in Bangkok.

“In the event of an emergency, all the paramedic or healthcare personnel needs to do is scan the QR code on your phone and all your medical information will be there, and immediate medical treatment can be given. It is a simple solution, but it has the potential to save lives.”

Tan says one of the most valuable lessons in the life of an entrepreneur is failure. The manner in which an entrepreneur leverages that experience and bounces back, makes all the difference. “Failure brings criticism, and criticism will help you on the path to gaining wisdom.”

He asserts that his primary goal in setting up this venture is not to rake in millions. “Regardless of what I invest in, I’m not looking at what kind of returns I will be getting. I am here as a venture capitalist because I want to be a part of the solutions that impact the lives of the people.

“If I wanted returns on my investments, I would have just continued running my companies.”