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ask a vc: 500 startups

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We’re speaking to Southeast Asia’s leading VC funds to find out about their thoughts on the current state of the region’s startup and venture ecosystem and what they currently are looking for in companies. This week we’re speaking with Vishal Harnal, General Partner at 500 Startups who invests across Southeast Asia.

tell us a little about 500 Startups, and 500 Durians

500 Startups is a global venture capital firm and ecosystem builder. We invest in early-stage companies around the world and across different verticals. We believe that talent and opportunity exists across the world, but access to capital and expertise does not. Our mission is to bridge those divides. To date, 500 Startups has invested in over 2,200 companies across 70+ countries.

In Southeast Asia, 500 Startups invests through the pioneering “500 Durians” family of funds. The 500 Durians team has backed over 220 companies across multiple sectors ranging from consumer and enterprise internet to deep and frontier technology. We focus on the seed stage and invest between US$250,000-US$500,000 in the first round, and then follow on with up to US$5 million in subsequent rounds.

how is the Southeast Asian startup and VC ecosystem looking in 2019?

The Southeast Asian venture capital ecosystem has changed phenomenally over the past 3-5 years in almost every dimension. We’ve gone from having zero to now having eleven companies valued at over US$ 1 billion in the region. The success of those companies has removed any taboo associated with entrepreneurship and has inspired many talented individuals to start companies or join startups in Southeast Asia. Entrepreneurs are innovating not in internet and software businesses, but also in biomedical, space, AI and robotics. With more success stories and more companies being birthed, an avalanche of capital has followed suit. Much of that capital is focused on the later stage funding rounds.

Based on everything we know, this is just the beginning of the inflection point for Southeast Asia’s VC ecosystem – there has never been a better time to be an entrepreneur or investor in Southeast Asia.

the number of VCs seems to grow each year. Will this continue and do you see more large US funds setting up shop in Singapore?

Yes, I believe the number of VCs in the region will continue to grow at an accelerating rate as the ecosystems become more robust. There are a few trends making this happen.

  • Venture capital has become more accessible, especially at the early stage. Angel investors are spinning out as funds and syndicates are starting to professionalise.
  • More corporates from the region are starting Corporate Venture Capital arms. At the same time, international corporates are setting up regional CVC arms in Singapore. They are participating in other funds or directly into companies.
  • Family offices from the region are seeking greater exposure to investors by investing in funds or directly into companies. Many of them are looking to diversify outside their traditional businesses in real estate or finance.
  • US and China based VC have either set up or are exploring setting up Southeast Asia focused venture practices. We’re seeing many more investors from those countries in the ecosystem. It’s a sign that the ecosystem here has reached a degree of maturity.

has the series b crunch been resolved?

I never felt there was a “series B crunch” per se. The experience we’ve had with our (very large) portfolio is that the best companies have no difficulty raising Series B rounds and onwards from international investors. The real crunch was always that there were very few local or regional VCs investing at the later stage.

That has also been resolved. Over the past year, many regional firms have raised large Series B and C stage funds. It seems that the regional ecosystem is now complete – all we need are some more exits.

what is the impact on the ecosystem of the tech unicorns?

The biggest impact that local tech unicorns like Grab and Bukalapak have had is that they’ve created massive interest in entrepreneurship and venture in the region. Until these companies became successful, there was grave doubt about whether Southeast Asia had the capacity to produce large venture-backed companies. That is no longer the case as evidenced by the exponential increase in the number of companies being formed, number of people participating in the startup ecosystem, and the volume of capital being allocated to venture in the region.

The next greatest impact the tech unicorns have had is on the learning and received wisdom of the Southeast Asian ecosystem. Until these companies reached scale, few people in the region had experienced what it was like to work at a startup from the early stage to unicorn. Now, there are thousands of individuals, especially the early employees of these firms, who have seen and learnt what a fast growing technology startup is like. What we’re seeing is that these people are taking that knowledge and starting their own companies. That cycle will continue and further strengthen the ecosystem.

people talk about Indonesia a lot, but what other countries in Southeast Asia are producing amazing startups?

We’re still very bullish on Singapore as a market. One area in particular where Singapore startups excel is in deep and proprietary technology. The world-class universities, post-doctorates and research centres have allowed this sector to flourish in the country. There is also significant support from the government and private sector for such companies.

The other market that we’re excited about is Malaysia. While it is largely overlooked by other investors, we’re seeing remarkable entrepreneurial talent coupled with low valuations. Businesses range from consumer and enterprise software to food and agri-tech.

what kind of startups are catching your eye, and how has that changed in the last 12 months?

We are vertical agnostic investors so we see everything from shoe companies in Indonesia to rocket companies in Singapore and can invest in both.

One area we have been focusing on more over the last year are startups that have proprietary technology and valuable intellectual property. For example, we’ve invested in companies that do laser-based terrestrial and satellite communications, computer vision on edge devices, 3D printed liver tissue, among many others.

The second area that we’re exploring more are startups that are more impact focused and are solving hard societal, medical and economic problems. These startups can be just as scalable and profitable as any others but are largely overlooked. Examples are companies that provide financing platforms to farmers, IOT solutions for fisheries, a platform for vegan food discovery, a student accommodation marketplace, among many others.

any predictions for the Southeast Asia ecosystem over the next 2 years?

I’m no oracle, but here are some things I think we’re going to see:

  • An increase in capital and entrepreneurs from India. The Indian outposts of US VC firms are starting to map the Southeast Asian market. My sense is that the returns in India have been lower than expected and Southeast Asia is a booming nearby market. Indian entrepreneurs are also looking at either starting new businesses or expanding their existing businesses in Southeast Asia. Some reasons are perceived lower competition, far better demographics and purchasing power, and a more robust funding environment.
  • Vietnam is likely to become just as hot as Indonesia. We’re seeing a lot of smart money investing in and scouting Vietnam as a market.
  • Hopefully, one or more of the regional unicorns will have an exit. That again is likely to spur even more interest in entrepreneurship and investment in the region.

any tips for founders pitching to you?

Founders often overlook and downplay the most important part of the pitch – themselves. To me, early stage investing is primarily driven by an assessment of the founding team’s experience, capabilities, drive and insights. I’d love for founders to focus more on themselves and why they are the right people to build the company they want us to back!

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