As investors become more cautious, there is greater interest in growth-stage venture capital funding, says Isaac Ho of Venturecraft Group.
The number of venture capital (VC) deals globally has fallen as investors hit the brakes on their start-up investments amid volatility in China and a slowing global economy. As investors scale back, one venture firm in Singapore, Venturecraft Group, is betting they will turn towards growth-stage deals.
Venturecraft is a relatively young VC founded by local serial entrepreneur Isaac Ho. It has several big-name backers, including Sun Tongyu, co-founder of e-commerce giant Alibaba Group Holding, and Mike Cai, founder of Meitu. The latter is a China-based photo touch-up app valued at more than US$2 billion ($2.8 billion). Ho recently started a $50 million fund to invest in growth-stage medical technology and the Internet of Things, or IoT, start-ups. This is Venturecraft’s second fund in two years — it previously raised $4 million to invest in early- stage companies.
“I believe there will be a shift towards fundamentals in the next few years,” Ho tells Enterprise. “More resources will go into businesses that [produce] results.”
In Asia, VC deals have fallen for three straight quarters. In 3Q2016, the number of rounds and total funding dollars in the region declined to 323 deals valued at US$7.2 billion, less than half the total number of deals last year, according to “Venture Pulse”, a quarterly report by KPMG and CB Insights released on Oct 13.
Most of the deals in Southeast Asia over the last few years have been early-stage investments. However, as investment monies dry up, these start-ups are likely to face a dieoff. Golden Gate Ventures managing partner Jeffrey Paine said in a previous interview he expects nearly 30% of Southeast Asian startups to call it quits. As for the surviving companies, Ho thinks they would be looking for growth-stage funding right about now.
Local firms and venture capitalists say there is a gap in growth-stage funding, especially in the Series A and B rounds. “While there are investors and funds, the ecosystem is probably not established sufficiently to support all the potential great companies that will take the next leap,” says Wong Mun Yew, founder of DNA diagnostic firm, Asia Genomics. The company’s subsidiary, Imagene Labs, is planning to raise a Series B round of US$20 million.
There is only a small number of venture capitalists in the growth-stage investment space in Southeast Asia. Sequoia Capital, which recently invested in peer-to-peer marketplace Carousell, and SoftBank Capital are among the biggest. “Few funds operate with an investment size of around $10 million for each deal, so they are in a position to cherry-pick,” says Monk’s Hill Ventures (MHV) managing director Lim Kuo-Yi. The firm invests in Series A and B rounds.
As there are more companies seeking investments than VC firms willing to fund them, valuations in Southeast Asia are lower than in other regions. They can be almost 1.5 times cheaper for growth-stage rounds, says Ho. “I believe more VC firms will be looking into this space. Some venture capitalists might even change the split between early-stage investments and later-stage ones in their portfolio.” MHV’s Lim expects about 40% of its fund to go to Series B investments in the future.
There are drawbacks from funding later-stage companies: The returns on investment are not as attractive as with early-stage bets. “There is also a lot less room for unsuccessful investments because venture capitalists make fewer bets in late-stage investments,” says Vickers Venture Partners vice-chairman Jeffrey Chi, “but at the same time, there is a lot less risk because the companies are more mature.” Ho says companies at this stage would have a proven track record and revenue stream. This means they would have a better chance of an exit or buyout.
“We expect most of our companies in Fund II to be ready for an exit or buyout in two to three years’ time,” he says. Venturecraft’s Fund II, which invests up to $10 million in each startup, aims to give investors a return of two to three times their capital.
Venturecraft, which is an appointed accelerator under SPRING Singapore’s Sector Specific Accelerator Programme, has invested in eight technology start-ups. Seven of the companies, including online publication e27, are from the first fund. The platform recently raised US$2.2 million in Series A funding led by China-based start-up services provider TechTemple Group. Venturecraft also participated in the round.
Another of its portfolio companies is spectrometer- maker Attonics Systems. Ho says the company is on the verge of commercialising its product, which is the size of a pen and is being marketed as the “world’s smallest spectrometer”. With Venturecraft’s help, the startup has seen plenty of investment interest in the past year, its CEO Philipp von Pein says.
“What we like is [Venturecraft] is made up of a diverse team of experts. This is critical to a start-up with limited resources and experience outside of the core business,” he explains. “But just as important, we felt that [Ho] treated us in a fair and transparent manner when it came down to the contractual negotiations.”
Venturecraft has announced its first investment for Fund II. Earlier this year, it led an undisclosed round for MiRXES, which runs diagnostic tests for cancer detection. MiRXES is already profitable, but is still awaiting regulatory approval to roll out its cancer-detection tests across Singapore. “We believe it has the potential to be our home-grown unicorn [a company valued at above US$1 billion],” Ho says.
Fund II will invest in at least six more companies in the next two years. The majority will be in medtech and the rest in ICT. “Three of the companies are home-grown. The rest are American companies that want to break into the Southeast Asian market and set up shop in Singapore,” Ho says. “Among them, there is IPO potential, but not in Singapore.”
He is clearly optimistic about later-stage investments: “Our funds are structured to be evergreen.” Venturecraft does not have an exit tenure for any of its funds, which means it invests in the companies until it achieves a buyout or public listing.
On that note, he plans to start a third fund to invest in late-stage companies or pre-IPO firms. “If the company has a strong value proposition, we would like to stay with it and provide it with funding for as long as it takes [to reach a buyout or an IPO],” he says.
“It also gives us the chance to build a longterm relationship with the founders and board members, who are often fund managers, that we can leverage on in future deals.”
It also makes better investment sense for its investors, according to Ho. “If we were to stay with a company under Fund I, its valuation at that point would be around $5 million. When it reaches growth-stage, it can be around $30 million to $50 million. If it does not choose to sell out quickly, it can raise funds through our Fund III with a valuation of above $100 million. As we have the same shareholders throughout our funding rounds, it gives investors who have invested with us from the start a chance to reap high returns.”
Tapping Chinese market
In just two years, Venturecraft has come to be known for its connection to the Chinese market. It helps Southeast Asian companies break into the Chinese market through its network of investors. It also helps Chinese companies invest in local start-ups.
“My view is, the unicorns in China are reaching their peak,” he says, “They need new markets to grow their businesses, but instead of starting from scratch in Southeast Asia, they are looking for M&A opportunities.” It does help that the valuations for start-ups in Southeast Asia are much lower — “tenfold cheaper”, as Ho claims — than China’s.
Many of these companies are eyeing Singapore start-ups. “We have a lot of R&D talent here, which can produce new intellectual property. There is also a trust factor in our regulatory strength to protect IPs,” he adds. As such, Venturecraft has attracted a host of Chinese investors, including those who have backed e-commerce platform Taobao. com. Other China-based investors have also participated in rounds with Venturecraft. They include Douglas Khoo, who co-founded Chinese travel start-up Qunar. Baidu is invested in Ctrip, a Chinese provider of travel services which has a 45% stake in Qunar.
While Ho’s investors did not want to be interviewed, they collectively say that Venturecraft understands the intricacies of forming partnerships with Chinese companies. “He was a clear choice for helming a regional venture capital firm that will bridge the link between Singapore’s start-up enterprises and high-growth markets like China,” they said in a statement to Enterprise.
Most start-ups in Singapore are looking to expand in Southeast Asia, but a growing number is aiming for the North Asian market. “We help them by introducing them to partners who can validate their products,” Ho says. That strategy makes sense for growth-stage companies that already have viable products in their portfolio.
For instance, Venturecraft is working with messaging platform LINE on the latter’s e-commerce site. Singapore companies that want to break into North Asia will be able to use the platform to test the demand for their products. It also helps companies navigate China’s complicated web of regulations, which differ from province to province. In MiRXES’ case, it successfully brokered a meeting with the Hangzhou government, resulting in the start-up receiving state grants and space to set up shop.
When asked what qualities he looks for in his portfolio companies, Ho says simply, “People.” “Even if you have the best idea, if your team is not the right fit, it is unlikely you will make it,” he says. A good team, he explains, will be able to pivot when their ideas fall through, allowing them to command a higher valuation from investors in the future.
Ho is currently travelling regularly to close deals for Fund II. He knows he has to act fast because Southeast Asia’s VC scene will not stay stagnant for long. “I believe the valuation for growth-stage companies will go up as more investors move into this space.”
This article appeared in the Enterprise of Issue 751 (Oct 24) of The Edge Singapore.