There and Back Again: A Journey Between Operations and Investment

July 23, 2019

Co-founders: Nicholas A. Nash & Vorapol (Brook) Supanusonti 

 

SVCA: Hi Nick, General Atlantic (GA) won SVCA’s “VC Deal of Year” Award in 2015, for investing into Garena (since renamed Sea). You then jumped across the fence to become Group President at SEA, IPOed the company on NYSE and now you are back on the “dark side”! So early retirement was too boring? Why start a VC Fund now?

Nicholas: After our experience with General Atlantic and Sea, we saw that there is still a sea of opportunities in Southeast Asia. With this fund, we are targeting tech companies across the Southeast Asian region with our experience as both fund managers and operating managers from both GA and Sea. In fact, Brook and I joined Sea having worked together also at GA and we co-founded Asia Partners together with Oliver, Kien, and Pitra.

One particular point in our investment thesis is that Thailand will be an important pillar in our portfolio, with undiscovered gems lying in wait in the Thai ecosystem. With fewer funds chasing portfolio companies in Thailand, alongside a higher GDP per capita than its regional counterparts, higher consumer willingness-to-pay, and more developed logistical and technology infrastructure, we believe that Thai startups will reach profitability sooner than their counterparts in popular investment destinations like Vietnam or Indonesia.

An expansion into a regional presence in Southeast Asia will be crucial for unicorns. From our experience at Sea, a likely portfolio company setup will include a Singaporean or Malaysian headquarter where you can find management talent and major satellite operations in other SEA countries like Thailand, Vietnam or Indonesia

Another point from our investment thesis can be found in the US-China trade war. China’s stock markets fell 13% in USD terms and the US stock markets fell 1% in terms of USD terms. But Southeast Asia’s performance is flat in the face of this trade war, a defensive market in the face of global economic uncertainty. Additionally, countries like Vietnam have demonstrated strong growth with little standard deviation unlike China and developed markets like Germany. In the light of this performance, Southeast Asia is our unsung hero for investment funds like ours.

Another point is that we are looking at Series B or C rounds in Southeast Asia as we still see a lack of funding for startups looking to raise funds at these rounds. These growth companies best suit our investment thesis as we have seen from our own research that investment at these stages into good companies can net us and ultimately our LPs impressive returns! In fact, our Series B investment into Sea returned 48% IRR!

SVCA: Is there still a dearth of capital with mega-PE funds and corporate VCs also jumping into tech VC deals? We interviewed Ashish Shastry of KKR earlier and he mentioned that KKR is expanding their strategy to invest at an earlier growth stage.

Nicholas: We are happy to have more funds like KKR in the ecosystem as they will fill investment gaps in the stages down the line. Funds like KKR simply do not have the bandwidth to keep on doing smaller deals in the earlier Series B or C stages but we are confident that they will contribute beneficially to the colour of Southeast Asia’s venture capital ecosystem.  

SVCA: Your new firm, Asia Partners, launched on 13 June 2019 with a great first close at USD 80 million! What kind of technology businesses will the firm be looking at? Is it the same investment thesis (growing middle class, consumption expansion etc) or are you looking at deep-tech or focusing on something else?

Nicholas: As mentioned, Thailand would be one of the places that we are looking into, with Brook heading investment activities into Thailand and each of the country heads looking into their respective areas.

While the investment thesis of growing middle class and consumption expansion is still valid, we find that Southeast Asia is on the crux of another spurt of growth that was seen in China in the early 2000s and the United States in the 1970s when countries reach US$3,500 to US$7,000 GDP per capita. From our research, Southeast Asia is currently 5 years into that region of our chart that we call the “Unicorn Band” where we observed the majority of Chinese and American startups experienced exponential growth. We believe this will play out similarly in Southeast Asia in consumer-driven tech companies which will grow in tandem with the rise of spending power of consumers in the region.

SVCA: With your extensive experience both as an investor and in operations, do you plan to run or operate Asia Partners differently; say in sourcing, negotiating, adding value or exit?  Are there lessons learnt from your time as part of management in SEA that has changed your perspective or thoughts on VC investing?

Nicholas: At Asia Partners, we plan to be structured just like the portfolio companies we invest in. We will have our office here in Singapore and our country heads will be looking intensively into their respective regions. That way, we can capitalize on the strengths of being in Singapore and having partners with regional experience looking into local opportunities.

For adding value to our investments, we plan to be large minority holders, with the caveat that we will not be prescriptive in our recommendations to our new investments. The majority of skill gaps in startups can be solved through hiring and does not require a restructuring of the company. Instead, we will be working on business strategies with our portfolio companies utilizing our past experience of being both an investor and in operations.

SVCA: Talking about exits, 2019 has been a bumper year for tech IPOs in the US although many have not done well publicly. In contrast, since SEA and Razer went IPO in 2017, there has not been IPOs from Southeast Asian unicorns. Any thoughts on this “dry spell”?

Nicholas: The recent IPOs of Lyft and Uber have dampened the appetite of public investors in America for other rideshare companies due to their underperformance in share prices and financials. We don’t think that Grab and Go-jek will be imitating those IPOs here in Southeast Asia or on the American bourses soon. We do believe that there is a lull in the IPO market for unicorns at the moment but there is a growing layer of consumer-driven tech companies in Southeast Asia that are ready to become the next wave of unicorns that will be poised to IPO in the near future.

SVCA: Both SEA and Razer chose to IPO overseas. Are there measures, policies that need tweaking to encourage more IPOs in this part of the world?

Brook: From our experience, it is easier to list in the HKSE due to less stringent regulations and a good valuation for the company. For ourselves, when we were at Sea, we chose to list in the NYSE due to it being the largest capital market for tech companies as well as being very liquid for public market investors. To encourage more IPOs in Southeast Asia or in Singapore, we could look at making it easier to dual list in Southeast Asia and another popular bourse and also to reduce the capital gains tax for employee stock options in Singapore.

SVCA: You just did a first close on your new Fund, did you encounter any changes in LPs’ attitudes/expectations/demands in general? How about with regards to issues like ESG (Environment, Social, Governance)?

Brook: Yes, LPs have been asking more questions about ESG considerations in our investment process. At Asia Partners, we want to go beyond checking the boxes. We look at ESG from our own lens, which is how do we make ESG values more authentic, more quantifiable? We have John Wood who founded Room to Read as our Advisor and we have concrete programmes that will be run after each investment; such as “adopt a school” or grants within the country of investment with focus on female education. These will reflect our ESG values and will be funded out of our management fee to make a specific, quantifiable impact in the country we are investing in.