The Venture Capital Gateways in Asia
The general economic climate today is one that consists of rising trade tensions between the U.S. and China, European political uncertainties and ongoing Brexit discussions, as well as rising interest rates and slowing global growth.
In fact, a poll of top managers (chairmen, chief executives and managing directors) by Citibank and Singapore’s Business Times indicated that 86.5% of respondents placed U.S.-China trade tensions as the top geopolitical challenge this year. Most also believed that global political stability and the international trade situation would worsen in the first six months of 2019.
Indeed, the belief in a worsening political climate and trade situation tends to have negative implications for economic growth and consumption, as well as investor confidence and overall investments. This is because political instability tends to be linked to uncertainty in the social and regulatory environment which negatively impacts investor confidence, including that of venture capital (VC) investors.
Against the backdrop of this volatility and waning investor confidence, we spoke to VC investors to get their views on where the bright spots in their industry are:
The Korean VC market has been on a growth path since 2015 when new investment in domestic venture companies exceeded two trillion won (US$1.8 billion).
In 2018, South Korea’s total amount of investment in startups reached a record high of 3.43 trillion won (US$3.04 billion), up from 2.38 trillion won (US$1.2 billion) in 2017.
This continued growth is attributable to the increasing awareness that VC plays a key role in nurturing innovative enterprises and creating jobs. Furthermore, such growth means that VC companies investing in South Korea have been successful in fostering startups that can grow into unicorns and decacorns with an enterprise value of at least US$1 billion and US$10 billion respectively.
The South Korean government has also played a key role in fostering startups, having made an initial investment of US$3 billion in 2015. In 2017, the government made a further pledge to establish a US$9 billion venture fund with public and private finances. These investments have already seen dividends, with Google and SparkLabs – amongst other big names – setting up offices in the country.
With these large investment flows, the South Korean government plays an important role in the VC investment scene through: a) direct capital investment as Limited Partners (LPs) to funds; b) indirectly via a variety of preferential tax incentives for VC activities.
Despite South Korean government support, the amount of capital provided by VCs and angel investors are still small compared to South Korea’s market size. In fact, whilst South Korea has the highest government backing per capita for startups, only 0.1% of venture startups raised funds by way of VC and angel investment, therefore reinforcing South Korea as a prime contender for more venture capital and angel investments.
In contrast with the protectionist sentiment prevalent in western countries today, ASEAN (the Association of Southeast Asian Nations) seems to be opening its doors now more than ever before.
ASEAN’s five largest emerging economies – Indonesia, Malaysia, Philippines, Thailand and Vietnam – have a combined population of 548 million, or 87% of the total ASEAN population. These countries have also maintained an average GDP growth rate of 4-5% per year since the formation of ASEAN in 1967.
Factors that have contributed to this growth – and will continue to do so in the future – include a large population comprised of millennials who are willing to spend in order to keep up with consumer trends; an existing internet user base of 260 million, which will grow to approximately 480 million users by 2020; and as a consequence, an internet economy that is expected to grow to approximately S$200 billion by 2025.
Leading this phenomenal growth are the e-commerce, as well as online media, travel and transportation industries. Unicorns in these markets include the likes of Lazada, Tokopedia, Traveloka, Grab and Go-Jek, as well as Sea (previously Garena), VNG and Razer.
On the horizon, the Southeast Asian investment ecosystem is entering a new phase of growth with expected deal values over the next five years (2019 – 2023) totalling US$70 billion – double the level of the previous five years. It is also expected that the region will produce at least 10 new unicorns by 2024, making the region a prime VC investment destination.
Singapore as a Base for VC Investments
Singapore’s position as an international financial centre makes the country a vital hub that connects global investors to Asia, as well as one that brings Asian opportunities to global investors. The country also represents a world class financial centre that possesses a sound regulatory framework and a business-friendly environment.
To make Singapore even more attractive, the Monetary Authority of Singapore (MAS) has simplified regulations to facilitate the activities of Venture Capital and Private Equity managers, and is working to strengthen the ecosystem for family offices.
These factors make Singapore an ideal base from which investors can take advantage of opportunities in Asia.
Bringing the Best of Asia Together
One fund combines both South Korea and Singapore’s advantages to bring the most promising venture capital opportunities of Asia to investors. One way investors can take advantage of these opportunities is the GEC-KIP Technology and Innovation Fund* – a $120 million venture fund for Southeast Asian tech companies jointly launched by Golden Equator Capital (GEC) and Korea Investment Partners (KIP).
The fund focuses on identifying exceptional Asian companies and accelerating their expansion across Southeast Asia and North Asia (South Korea, Japan) with the overarching objective of generating outsized returns and improving the quality of life in emerging markets. Specifically, the fund invests in Series A and B high-growth startups based in Southeast Asia and South Korea that are looking to expand into the region via Singapore. To date, over 65% of the fund has been committed by Asian institutional investors including financial institutions, family offices, government agencies, wealth managers as well as high-net-worth individuals.
Currently, the GEC-KIP Fund has invested into two companies: a US$27 million Series B+ round in Indonesian fashion e-commerce startup Sorabel (previously Sale Stock) and a S$4 million Series A investment in Singapore proptech startup Ohmyhome.
What This Means for Investors
The deepening ASEAN financial integration offers significant potential for investors to take advantage of the strengths of the Singaporean economy as a conduit for international capital, and as a provider of specialist expertise.
Hence, both investors as well as companies seeking investments can use Singapore’s advantageous geographical and financial position as a base for venture investments in the region.
One example of such a company is GEC’s portfolio company M17 Entertainment which was formed through the merger of Taiwan-based livestreaming firm 17 Media, and Singapore-based Paktor which operates a dating app. According to Daren Tan, Managing Partner at GEC, “M17 has scaled Southeast Asia, but they truly started to find the strengths and big developments when they scaled into markets like Taiwan, Korea and Japan.”
*For more information on the GEC-KIP Fund, please email us.