500 Startups and other investors on the current early-stage VC landscape

In the world of investment, information is king. For VCs, however, dealing with information asymmetries is a constant struggle. This is even more striking for early-stage VCs, as they need to make decisions based off of an idea and their profiling of a founder’s ability to execute.

Gobi Partners recently invited me to moderate their early-stage VC panel, and I was excited to learn how these experienced players were adjusting in the midst of rising Chinese influence in the Southeast Asia startup ecosystem. 

The panellists were from 500 Startups, Wavemaker Partners, and FuturePlay—three VCs that have played important roles in the Asian entrepreneurial ecosystems.

(L-R) Oh Hyung Kwon (principal of Seoul-based FuturePlay), Jack Chan (author and TIA Kuala Lumpur chapter head), Khailee Ng (managing director at 500 Startups), and Paul Santos (managing partner at Wavemaker Partners).

Rising Chinese influence a boon

In 2017, Alibaba spent a little over US$2 billion on acquisitions in Southeast Asia alone. WeChat is also rolling out its WeChat Pay services this year in Malaysia, the first country outside China.

So, it’s fair to say that China’s influence will continue its rise in the region. However, the panelists were not too worried about this. Paul Santos (managing partner at Wavemaker Partners) invests in mainly B2B startups. According to him, “Most of my investee companies are usually Singapore-based, SME-focused, and are looking to go global. In these arenas, China does not compete as hard, at least not in this region yet.”

On the flip side, Santos thinks this inflow of Chinese money could make for viable exits. Khailee Ng (managing director at 500 Startups) echoes this view, bringing up one of their investee companies, Grab.  “Without Chinese interests and participation, Grab might not have been funded to such a degree and scaled to such heights,” he said.

One of the criticisms toward the ASEAN ecosystem is the lack of growth funds to take local startups to the next level. Chinese investments could be the catalyst the region needs.

Competition among VCs to intensify

In 2017, the average and median deal sizes for the top five early-stage funds in Southeast Asia have increased significantly up by 139.4 percent and 114.3 percent year on year, respectively. The ecosystem is maturing quickly, and the panelists expect the competition between VCs to follow suit.

While new entrants are coming into the market, the panel thinks early-stage VCs will be relatively protected from the competition, given the nature of seed round deals. “If you’re in seed round, you are happy to share because you want multiple support systems for the startup.” Ng added.

Also, given that new entrants can write bigger cheques and would rather take more targeted bets, the competition will first intensify in the growth funds segment. Santos thinks growth fund managers also suffer from their bigger fund size since they are under more pressure to deploy raised funds. “Investors don’t like putting money with fund managers if they have problems deploying them,” he added. “So the hotter deals become very competitive and, as a result, the valuation goes up.”

Oh Hyung Kwon (principal of Seoul-based FuturePlay) shares the same sentiment, saying it is already happening in Korea. Kwon thinks the rise of ICOs has resulted in less deals for later-stage VCs. According to him, when there are deals, “the same company could be 3x more expensive from a while ago” due to scarcity. 

Negotiating with entrepreneurs

Early-stage VCs tend to be run by former entrepreneurs, and their starting point is often to help the founders they invest in. However, negotiating terms becomes tricky for both entrepreneurs and investors alike. Ng thinks that getting the relationship right with founders is of utmost importance because term sheets are always renegotiated after the first round.

Kwon pointed out that liquidation preference is one of the terms he always looks out for.  “Some startups promise their investors 2x or 3x liquidation preference, which makes no sense.”

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