An Investor’s Take On The “Southeast Asia Kool-Aid”


Matt Walters is a principal at Ardent Capital, a Bangkok-based VC firm with investments across Southeast Asia. Matt comes from the US where he was previously the founding head of business development and CFO of Topicmarks, acquired by Tagged, Inc. in 2011.


Sometimes when I read things, I feel the need to jump in and add my 2 cents. Maybe it’s because as a philosophy major, I love a good debate. Maybe it’s because for some reason I think all blog posts are aimed at me. I’m not sure. Either way, recently, Oliver Segovia wrote a piece for e27 about the Southeast Asia “Kool-Aid” and its dangers and I felt compelled to write something of my own in response.

At Ardent, we are big believers in a “regional strategy,” and we like to encourage companies we deal with to be so as well. I’ll cut to the chase in case you need to get back to building the next Google. It’s exactly because it is hard that you want to do it.

We love encouraging companies to think outside their own country when scaling, not just because we have made large sums of money doing it ourselves, but also because it makes an attractive target for potential acquirers. And this is precisely because it is hard to do. A great book to read is Clayton Christensen’s The Innovator’s Dilemma, in which Christensen describes the trouble that large businesses have with reacting to innovations and new markets.

The problem is that large businesses have a significant ROI hurdle, or amount of return that they have to deliver for their efforts and capital. This is what allows startups the opportunity to grow and flourish – they can put in the “hard yards” of building out a company with significant potential without having the pressure of delivering returns the next quarter. And this includes the difficult task of regional expansion. When a potential acquirer enters into the market, they won’t want to piece together six different companies to establish a local presence. Negotiating local languages, cultures, regulations and tastes is difficult to do and takes time and involves risk, exactly what scares off large companies from entering the market in the first place. Six companies also means six rounds (at least!) of diligence and negotiations, as well as risk that the companies won’t integrate well or play nice with each other.

When a startup handles the regional expansion, puts in the hard effort to build a regional company, the startup creates value for the acquirer and is paid back handsomely during acquisition, which is a win for both the VCs and the startup founders alike. As we like to say, hard work pays off.

A premium on reach

Full disclosure, I haven’t started any companies in Southeast Asia myself, but the co-founders at Ardent have, most notably Ensogo which exited in 2011. I’m not sure if Paul would want me to disclose the exact amount, but let’s call it a high eight-figures sum. They also exited New Media and AdMax for considerable sums of money and they directly attribute the high valuations they got to the fact that they were operational in multiple countries across the region at the time of their exit. In fact, if you look at the valuations for other daily deal sites in the region versus Ensogo, having operations in multiple geographies can be cited as one of the key differentiators for the premium that was paid. I think those are three good examples to point to of companies that successfully executed a regional strategy through to exit.

I do have a background in multinational startups though, including as an early employee at Room to Read. When I left in 2008, we had scaled operations to 13 different countries across four continents. So I feel like I know a thing or two about scaling startups across international boundaries. The sun never set on Room to Read’s operations, which sounds romantic until you’re on a 2am conference call negotiating a contract with a partner in Johannesburg and have an 8am business meeting in San Francisco the next day. When we launched in a new country, we took the time to analyze everything that would be involved in implementing operations, including local government regulations to logistics infrastructure to availability of local talent. I can tell you first hand – it’s not easy. And we messed it up a lot. (You don’t know real business nightmares until you go through finding out members of your senior staff have been stealing from you 10,000 miles away.) But we kept on going, because that’s how you build a global, best-in-class organization.

Premature escalation

To be fair, when building a startup, you do have to spend time focusing on getting it right first before you focus on scaling on anything close to a regional level. We live in an age now when there has been extensive research and analysis done on best practices for launching a startup, one of which is the renowned Startup Genome Project.

One of the biggest contributors to the failure of a startup is premature scaling. This means aggressively scaling up the business before true product/market and product/customer fit has been established. The reason for this is that so much can be, and needs to be, learned from initial customer feedback. (If you haven’t read Eric Ries’ The Lean Startup yet, stop reading this blog and go read it. No, seriously.) It’s only through multiple iterations and small failures that a company can get the product right. In this stage, it makes the most sense for a company to stay in its local country to figure this out. Customer feedback will be easier to get, and expenses will be kept down. However, once this stage has passed and a company has validated its product/market and product/customer fit, it’s time to start scaling.

I hope this sheds some light on why VCs are so bullish on a regional play. TechinAsia’s Minh wrote a great article on the “Southeast Asia” strategy which has some good points as well so I won’t bother covering them here, but one worth repeating is that it’s ok to have a country-only focus where suited. There’s money to be made in that as well.

(P.S. if you are building the next Google, call me!)

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