Investors agree Southeast Asia has a series B problem. Here’s what’s filling the gap

Startups in Southeast Asia have seen an influx of funding at the seed and series A stages, but the same can’t be said for series B, experts observe.

“A lot of seed and series A investments have happened and many of these companies will get to series B stage, but we don’t have a lot of series B funds. There’s only a handful that are really dedicated to writing US$7 million, US$10 million, US$15 million checks in Southeast Asia,” Stefan Jung, a founding partner at Venturra Capital, said today at the Tech in Asia Tokyo 2016 conference.

Also onstage were Hanno Stegmann, CEO of Rocket Internet Asia-Pacific, and Vishal Harnas, venture partner at 500 Startups. Both agreed with Stefan’s view.

“It’s difficult in Southeast Asia,” Hanno noted. “There aren’t many funds that have the track record of doing multiple investments in the series B space. You have people like Sequoia and Softbank, then it gets thin.”

“We’ve made our study – there were around 100 series A investments in the last 12 months […] there should be companies coming up for series B. There’s still a lack of series B investors, not a lot of options to choose from,” Stefan further explained to Tech in Asia on the sidelines of the conference.

Non-VCs coming in

The investors don’t seem so worried though. They said they’re seeing “non-VC players” filling in the gap.

“We’ll probably see more rounds that are syndicated like US$4 million, US$3 million investments added up to get to US$10 million upwards. That means three to four entities investing together in one round – with no one clear investor leading it,” Stefan said.

“That’s exactly what we’re seeing in the last half of the year. Private equity funds that are interested in new tech investments saw the opportunity and have invested. There’s hedge funds. I’ve also seen a lot of strategic conglomerates looking at larger tickets,” he added.

For his part, Vishal shared, “We’re seeing corporates that are starting to invest in that stage, where there’s slightly more stability.”

The key word there is “stability.” Series B is probably the hardest round to raise. You can’t just be a founder who’s smart and with a great idea – your business must be doing really well. This is the stage where vision and promise are replaced with hard numbers that show a clear path to success.

“If you raise series B, a large part of that fundraising is clearly for your path to profitability,” Stefan stressed.

Chinese particularly keen

In particular, Chinese VCs and late-stage companies are growing more interested in Southeast Asian startups. “We’re bumping more and more often into these companies. What they’re trying to do is shop around for startups that are at the later stage as well,” Vishnal revealed. “Many of the VC firms in China or companies that are already valued at over a billion dollars who can’t push the envelope any further in their markets are looking at investing in Southeast Asia.

He said the region holds huge potential – with its population of over 600 million, a rising middle class, and growing internet usage and smartphone adoption.

“For companies that have matured in their own markets, the logical step is to look at neighboring regions,” said Hanno.

“Southeast Asia is the next opportunity,” Stefan added.

Take for example Alibaba and its US$1 billion stake in Lazada, which is Southeast Asia’s answer to Amazon. With China now a very mature ecommerce market, the Lazada takeover brings the Chinese giant onto fresh and fertile ground.

That deal in itself encourages more investments to come in in Southeast Asia, said Stefan.

“That’s one inflection point. The biggest confirmation of the maturity of the market is when you see exits. We’ve seen iProperty, Lazada. There have been some pretty good cases so how will this develop in one to three years will be interesting to observe.”

Hottest market

Indonesia, where Venturra Capital is based, is the hottest nation in the region for startups.
“It’s one-third of the population of Southeast Asia. A lot of investments have concentrated there – GoJek, Tokopedia, Bukalapak, and Matahari Mall,” he said.

It’s so hot that it makes them wonder whether it’s time to look at other countries more closely. “We’re in the middle of ‘it’s hot’ but maybe “it’s a little bit too hot.'”

Vishal said there’s increasing interest in Thailand. “Other investors come to us, ask us what we have in Indonesia, and if they can’t find what they want there, they look at Thailand next, then the rest of southeast Asia.”

Non-Southeast Asian investors are looking more carefully into filling the gap in series B funding in the region, concluded Hanno. “But it’s still a long way to go to fuel the ecosystem and make it really fluid.”

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This article by Judith Balea originally appeared on Tech in Asia, a Burn Media publishing partner.

Feature image via Tech in Asia.