Southeast Asia’s frontier markets, which boast some of the world’s highest-growing economies, need to demonstrate exits to sufficiently pique investor interest, opined panellists at the recently concluded Asia PE-VC Summit 2023.
In Vietnam, where the upcoming US listing of VNG Corporation is expected to boost the visibility of exit options for local businesses, liquidity for venture capital (VC) investors remains a concern, said Touchstone Partners co-founder and general partner Tu Ngo.
“By and large, there are still a lot of discussions and questions about exits. There has to be a stronger push from the local regulation side for companies to list, whether it’s a domestic or dual listing. That is the incentive for later-stage investors to come in,” she said during a panel discussion titled SEA’s frontier markets emerge as startup hotspots: Can they deliver for investors?
For early-stage investors such as Touchstone, it is harder to predict when the big exit will be, Ngo said. Especially in turbulent times such as right now, a VC should work with founders, regardless of how their companies perform, to tackle challenges. That’s a better way to generate alpha for the fund’s investors than just focusing on the best-performing companies, she asserted.
Another obstacle that founders in Vietnam face is the lack of quality C-suite tech talent, she said, because big conglomerates have scooped up most executives. “You need those talents to scale from Series B to later stages,” she lamented.
Touchstone has invested in Vietnamese companies such as electric vehicle maker Selex, Forte Biotech, Eureka Robotics, fintech startup Credify, healthtech company Medigo, B2B distribution platform Quqo, and others.
Her co-panellist, Singapore-based Qualgro’s general partner Weisheng Neo, said his firm was “deliberate about how exits will shape up” as the firm typically invests at the Series A and B stages.
“We passed one investment where founders were very good, the market was great, product and value proposition was great, but we couldn’t see where the exit would be,” he said.
Several of Qualgro’s exits were to multi-national companies seeking a foothold in SE Asia. “That channel is overlooked. But when some of these large conglomerates from developed markets come to SE Asia, they want to look for multi-country assets to buy. So, our core thesis is to invest in companies that can scale across different countries in SE Asia,” Neo added.
Qualgro has sold several portfolio companies, including audience data firm eyeota, AI-based ultrasound imaging company Medo, wireless headphones maker Nura, cloud-based point-of-sale and retail management software Vend and communications platform Wavecell, to US and Canada-based companies between 2019 and April.
In Southeast Asia, other than the big markets of Singapore and Indonesia, the VC has backed invoice processing company Bizzi and edtech startup Edmicro in Vietnam, travel company Oway in Myanmar, and edtech company ErudiFi, which has operations in Indonesia and the Philippines.
Jelmer Ikink, the founding partner of the Philippines-based Foxmont Capital Partners, said: “Our exit strategy is not necessarily to create a unicorn or until companies become a regional business. We can exit at the $100-200 million valuation, where the group of exit partners is also larger.”
Foxmont has invested in the live streaming app Kumu, PICKUP Coffee, employee salary platform Advance and e-commerce enabler Armada in the Philippines.
From a limited partner’s perspective, Geetali Kumar, the regional lead for venture capital and disruptive technologies for East and SE Asia at the International Finance Corporation (IFC), said the development finance institution encourages GPs to mark their portfolio to a fair valuation after a period of valuing them at their last round’s valuation.
“Let’s look at the market multiple, apply some haircut, and try to find a valuation that makes more sense,” she said.
IFC makes direct investments in tech businesses and LP commitments to VC funds in SE Asia. It has invested in digital retail distribution platform Growsari and tech group Voyager Innovations in the Philippines, as well as backed managers such as Ascend Ventures Vietnam, Jungle Ventures, and Emerging Markets Investment Advisors.
One of the key fallouts of the current global geopolitical tensions is the redirection of capital from China to other regions such as SE Asia and India. SE Asia has become a big beneficiary of this trend and become the darling of investors, IFC’s Kumar said.
She also pointed out that founders from China are increasingly moving to SE Asia to set up businesses, while Chinese companies are seeking to set up shop in the region to diversify their revenue streams. “The region is benefiting from that knowledge of building a tech business in China,” she added.
Kumar was very bullish on markets such as Vietnam and the Philippines. “For IFC, these are the highly prioritized markets.”
She explained that these markets have what matters, such as favourable macro conditions, high digital penetration among a large population, and growing talent.
Private capital in the Philippines has increased by 25 times over the last decade, said Ikink. Filipino startups raised over $1 billion for two consecutive years in 2021 and 2022, while the country’s share of SE Asia’s aggregate funding has consistently increased from 2% to 13% over the last four years, per a Foxmont report on the Philippine tech ecosystem.
Vietnam and the Philippines brag a sea of opportunities, with both projected to have the highest internet economy growth in SE Asia up to 2030, according to the e-Conomy SEA 2022 Report.