This article first appeared in Personal Wealth, The Edge Malaysia Weekly on September 2, 2019 - September 8, 2019
There are more venture capital investment opportunities in Southeast Asian technology start-ups than those in Japan, says Koichi Saito, founder and general partner of Singapore-based venture capital firm KK Fund.
One of the advantages of being an investor in Southeast Asia is that there are no clear winners yet in many of the verticles, he points out. So, there is room for these start-ups to become unicorns in their respective industries.
Companies whose valuations have crossed the billion-dollar mark in this region are mostly in the ride-hailing and e-commerce verticles. Verticles such as logistics and healthcare have yet to see any tech giants.
It helps that these investments are still relatively affordable as most of these companies are still raising funds in the Series A and B rounds, says Saito. “Southeast Asian start-ups have the opportunity to receive money from all over the world because investors are becoming more cognisant of the region’s reputation as the growth market of the future.”
On the other hand, the start-up scene in his native Japan is shrinking. While the world’s third largest economy may seem like a hotbed of high-growth tech start-ups, due to the advancements and innovations in the sector, there is actually more growth in Southeast Asia, says Saito.
He points out that the Tokyo Stock Exchange has a Mothers (market of the high-growth and emerging stocks) board. Established in 1999, it allows the listing of companies with strong potential to be reassigned to the First Section (market of large companies) in the near future.
“While this market serves as a very good platform for start-ups to list, it also spoils these companies. Even if a company is in the red, it can go for an initial public offering (IPO) and get a valuation of about US$300 million almost immediately. That is the reason we do not often hear about Japanese unicorns — they always list before they can become one,” says Saito.
As a result, Japanese start-ups tend to stay within the country, he adds. But Southeast Asian start-ups have to look at the global market to ensure sustainability. So, these companies are always executing expansion plans and looking for ways to scale.
“Also, it is usually difficult for Japanese start-ups to attract global venture capitalists (VCs) because scaling is very important to these investors. They do not care about US$300 million exits. While it is easier to monetise and raise funds in Japan, Southeast Asia is more attractive in the long run,” says Saito.
He and his partner, Kuan Hsu, launched KK Fund in Singapore in 2015. The firm currently has 21 companies from across Southeast Asia, Hong Kong and Taiwan in its portfolio.
Prior to founding KK Fund, Saito was a director at IMJ Investment Partners, responsible for its investments throughout Southeast Asia. These included financial comparison website iMoney, e-commerce business Bukalapak and online real estate services marketplace Zipmatch.
Looking for gems
While the region is appealing for venture capital funding, Saito acknowledges that it is difficult to find gems among the many burgeoning start-ups, especially as a seed-stage investor. To identify those that deserve capital, he looks for a strong management team with good storytelling skills and an “unfair advantage”, among others.
Saito’s definition, a strong management team comprises individuals who are well connected in the industry they are trying to penetrate. “For example, I invested in [Malaysian] insurtech company PolicyStreet. The company’s founders are very well connected in the finance and insurance industries. One of the founders, Winnie Chua, even has a background in actuarial science. This is one team that I consider to be very strong,” he says.
While it is not a necessity, Saito also looks at the founders’ family backgrounds to determine whether they have an unfair advantage over the rest. For instance, there are founders whose families own large businesses, which they are able to leverage from the get-go. While this may be viewed as quite unfair, he thinks it is a good thing.
“I also check the founders’ commitment to growing the company finance-wise. How can they ask us for US$500,000 in seed capital if they only put US$100 into the company? They could walk away scot-free if the company faces any problems in the future. If they put in a decent amount of money, say US$100,000, then I see that as a good commitment,” says Saito.
It is very important to him that at least one of the founders possesses a good storytelling ability. He points out that start-ups have to tell their stories until they reach the Series D funding round to attract investments.
If a company does not have good key performance indicators at the time, at least they are able to deliver clear messages on its future goals and what it can do with the financing to convince investors. Without this ability, companies will find it challenging to raise funds, says Saito.
“While we can train founders to pitch [for funding], there are still a lot of risks. Some people are just not meant to deliver the story. I have found some founders to be too honest. They blurt out all the company’s details, so much so that they paint a very bad picture for prospective investors,” he adds.
Solving real problems in the region
In Southeast Asia, financial technology (fintech) remains one of the most interesting sectors to invest in, says Saito. He thinks the region needs alternative financing solutions that can be best addressed by homegrown fintech start-ups.
“There are a lot of segments under the fintech umbrella in Southeast Asia that can be disrupted by companies that fully understand a problem. For example, some regulators do not impose interest rate caps. So, there are a lot of ‘loan sharks’ in Vietnam and Indonesia lending money to people in the lower-income group at crazy rates — some up to 50% per month,” says Saito.
“By comparison, some lenders in Malaysia charge about 25% per year. It is 22% per year in Japan, so that is less than 2% per month. Those in Vietnam, Indonesia and the Philippines charge 20 times more.
“Start-ups in these countries are offering interest rates that are between those charged by banks and those by other lenders, which I think is quite interesting. This is definitely a good opportunity to tap into.”
Insurtech, or insurance technology, is another area that Saito likes. He points out that in Southeast Asia, insurance is not something everyone can afford. Typically, it is only for people in the middle to higher-income group. As a result, insurance products are not designed for those in the lower-income group.
“Those who cannot afford insurance have to get medical attention at public hospitals, where the facilities are not the best and can be crowded — some patients need to wait hours to get attended to. In private hospitals, patients receive good care and do not have to wait for service. So, we need some kind of insurance product that can fill the gap for those in the lower-income group,” says Saito.
PolicyStreet is addressing this problem. The homegrown company sells micro-insurance products to people of all income groups. As the founders have extensive expertise in the sector, it is able to work with insurance companies to develop new products. Saito invested in the company because there are no insurtech unicorns in Southeast Asia yet.
In June, PolicyStreet announced that it had obtained the approval of Bank Negara Malaysia to conduct a financial advisory business. With this approval, it can source, aggregate, compare and customise products and services as well as advise consumers and businesses on insurance products that best meet their needs.
Another company in KK Fund’s portfolio that Saito thinks will be able to disrupt its industry is Venteny, a hybrid employee benefits and fintech solution platform based in the Philippines. In addition to providing clients with employee loyalty programmes, it also offers short-term loan services.
“In the Philippines, it is quite difficult for those in the lower and lower-middle-income groups to borrow money from banks. Many of them do not even possess a credit card,” says Saito.
“Venteny provides micro-financing to employees based on the data they get from the employees’ companies, their social media behaviour and their online shopping history. The company is growing very fast because it is solving a real problem.”
He also likes the logistics sector, having invested in a few logistics-related companies. He points out that the cost of logistics as a percentage of GDP in Southeast Asia is actually double that in developed countries such as Japan and South Korea.
“TheLorry, a Malaysian lorry rental platform, was actually my second venture capital investment after home services marketplace Kaodim. I think the company has a very interesting business model,” says Saito.
“Usually, logistical processes are paper-based and the prices are not clear to consumers. TheLorry is trying to solve the inefficiencies and lack of transparency in the logistics industry. And I think it has done a very good job of addressing the problems.
“The company’s revenue is finally picking up and it is getting bigger business-to-business accounts such as those of Unilever and Coca-Cola. It has also expanded to Thailand, Indonesia and Singapore. Hopefully, there will be more to come.”
Launched in 2014, TheLorry provides services such as transport, professional office and house moving and furniture disposal. Bookings are made entirely online — users get an instant quotation upon filling up a form on the mobile app or website. The price quoted is final and extra charges only apply if another trip is needed.
In the near future, Saito wants to invest in healthcare-related companies because he thinks there is a lack of clinics and hospitals in the region. He is keeping an eye on an offline/online hybrid clinic company based in Hanoi, Vietnam.
The founder — a paediatrician by profession — realised that there were not enough clinics for children in the city and surrounding areas. So, parents had to travel far and wide to get medical attention for their children. To solve this problem, he launched an app that would allow him to give online consultations, says Saito. This is another company trying to solve a real problem.
Saito says he is optimistic that he will be able to make successful exits. He has already partially exited one of the companies in the portfolio and a full exit from another company is in the works. Nevertheless, exits remain a big hurdle for VCs in the region.
“In countries like Japan, an IPO is the obvious way to go. Here, it is mergers and acquisitions. We know that not many companies here would want to spend US$100 million or US$1 billion acquiring a start-up,” says Saito.
“Despite this, I think it will be easier five years from now. We are seeing big tech companies and investors enter the scene. So, I think the ecosystem will eventually thrive, making exits easier for early-stage investors such as ourselves.”
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