Series B gap a pain point in SE Asia from a Silicon Valley perspective: Rakuten

Rakuten Ventures – which late last year doubled its Global Investment Fund to US$200 million – is a true-blue corporate VC that only commits capital into companies that can be profitable and can have a global play


BEAM Team

29 May, 2017

Series B gap a pain point in SE Asia from a Silicon Valley perspective: Rakuten | BEAMSTART News

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The investment thesis for Rakuten Ventures – which late last year doubled its Global Investment Fund to US$200 million – is not based on synergies with the group’s Japan-based ecommerce parent. Rather, the firm is a true-blue corporate VC that only commits capital into companies that can be profitable and can have a global play, Saemin Ahn, its managing partner said in an interaction with DealStreetAsia. 

“For us, our core has not been geography. I’ve been saying to everyone that I would invest in a pig farm if it was profitable. I’ve been saying that for a year and now I’ve seen Meituan.com and Sinovation Ventures invest in it. And now I’ll say that I’ll invest in a bamboo plantation if it’s profitable. That’s what I’m saying from now on,” Ahn said. 

He also pointed out that since the firm’s parent had 50 to 60 subsidiaries, it was very easy to draw lines of synergy, and yet Rakuten Ventures had not adopted this model. “Our first and last priority for Rakuten Ventures is that when we do the investment, the company can stand on its own and develop that roadmap in the future by itself,” he said. 

Prior to his current position at Rakuten, Ahn worked with Google Korea and Google Singapore in partnership development and media-related roles. His last role was as Strategic Partnerships Development Manager (APAC) from April 2011 to April 2013, before he joined Rakuten Ventures. In an in-depth interview, Ahn discusses Rakuten Ventures’ investment strategy and what he sees as the road ahead for the Southeast Asia ecosystem. 

Edited excerpts: 

The Silicon Valley players are still building up their footprint in the Asia-Pacific. Looking at Southeast Asia, will it follow the China model where BAT (Baidu, Alibaba and Tencent) have stakes in multiple competing internet companies? 

The first of these e-commerce players is Amazon, and we just saw them acquire Souq. So whether comparable players in the space will be acquisitive or more investment-based is up to the books. It’s up to them to choose smartly, depending on whether the company has sufficient uplift. 

The Western players are more cost-conscious given how they have to operate on a quarterly basis and account to their shareholders in the US market. 

What Chinese investors have done is to lower and mitigate the risk and as proxies, have small stakes in companies. They then ratchet up their investments as traction grows or the opportunity cost of missing a deal becomes higher than that of the company going into higher losses as it competes. 

India is a few years ahead of Southeast Asia in terms of deal sizes and consolidation. How do they compare? 

India and Southeast Asia are similar but different in meaningful ways. India has the actual concentration of user demographics and there is a fundamental sentiment that the market will get very big. Southeast Asia is big with higher ARPU (average revenue per user) but is also highly fragmented. 

If you’re thinking about building out an Alibaba story, that could happen in Indonesia but it is a very hard play. On a quantitative level, I think consolidation and acquisitions will play out in Southeast Asia, but not in the sense of three giant companies merging into one or where you have eBay selling its stake in Flipkart. India’s situations were brought about by a lot of artificial liquidity in the market. 

One of the ways of looking at ASEAN is 600 million people with greater purchasing power and higher smartphone penetration compared to India. Jungle Ventures recently came up with a report saying ASEAN should be treated as a contiguous market, given that they are the same in several parameters and the behaviour of people in the metros are very similar. Considering this, apart from being a fragmented market, why has this region attracted less VC money and been late to the party? 

For VCs on the ground, it doesn’t look all that fragmented or different. It’s more unified because of the demographics. But when you’re talking about VCs, they can have both a helicopter and ground view of the venture landscape. 

Many of those VCs aren’t familiar with investing in a fragmented market like Southeast Asia. They see Indian fragmentation as something that’s more manageable – in terms of risk mitigation – than what they see in Southeast Asia. This is in terms of culture, geography and the overall economic divide. 

Last year, Rakuten Ventures mentioned that it was avoiding the Indian market. India and China are the leading markets in the mind of most investors. What has led Rakuten Ventures to stay away from markets large corporate VCs would like to have exposure to? 

We’re not looking at the Indian market specifically. For India, show me the progress. Show me a company that doesn’t lose $500 million trying to sell lotions and diapers. 

A lot of these companies that we look at as unicorns or the next Amazon, they lose about the same amount that Tesla loses trying to remake an industry. 

Economically, that’s non-bridgeable for the time being. Because we are a much smaller player than a lot of the VC firms, we want to look at what investments we can make meaningfully that can bring a company closer to sustainability and a much more robust business model, and we’re laser-focused on that. 

When we put a few of those draconian measures on how we make investments, a lot of the deals that originate from India fall out of those parameters. We have to be dispassionate about investment targets and be more steely-eyed in terms of where we put our capital.

What about China? 

China is such a different market. For goodness sake, you have a company – Meitu – that’s a selfie app that does $500 million revenue a year. Who could have known? The level of alienness towards that really means that you’re obligated to have feet on the ground and put a lot of resources down there. 

Also, the Chinese investment ecosystem is very much a closed circuit. You have to be in the inner circle to get the deals that you want at the prices that you want. It’s also not a very permeable market you can look at for the mid-term. So for those reasons, at least for now, we’re not looking actively to pursue projects there. 

For Rakuten Ventures as a fund, what are the core markets and sectors? 

For us, our core has not been geography. I’ve been saying to everyone that I would invest in a pig farm if it was profitable. And now you see Meituan.com and Sinovation Ventures investing in a pig farm. Now I’ll say that I’ll invest in a bamboo plantation if it’s profitable. That’s what I’m saying from now on. 

We’re looking at specific verticals of artificial intelligence, advertising technology, and adtech. There are sectors that can have very high barriers but we are looking at tech specifically. We also look at things related to consumer applications, data transfers, data contingency and Big Data. 

One of the crucial signifying markers is that we don’t look for disrupters. We don’t like that terminology. We want to look for ventures that are good, effective supplementers because I believe those are models that are harder to execute. 

If you discuss disruption, you’re saying that we don’t want the legacy mode, but to start anew and do everything by this standard. But I look for companies that are able to supplement on top of what’s actually running and make it a 100 times more economically effective and efficient. We then look at how we can develop the next stage of that company. 

But isn’t Go-Jek more of a disrupter than a play that requires a focus on execution? Rakuten Ventures wasn’t in its latest round, which was led by Warburg Pincus. 

For me, its “potayto, potahto”. As a disrupter compared to being a supplementer, the way that Go-Jek has developed itself is that it has become more a smart aggregator of all the other services involved. We’re not saying we’re going to compete with an existing player and disrupt that marketplace. 

Go-Jek took a very intelligent and pragmatic step in saying “There has to be a way to develop and pack this up into an offering that people would like en masse.” They’ve done that very well and we view that as more of an ultimate supplementer to the marketplace. 

Where do you think Go-Jek’s model can be replicated? They have a set of global investors, and they can maybe take their model to markets like Myanmar, Thailand or the Philippines. Indonesia has its own unique set of parameters where Go-Jek works. So where can it go from here – India or China? Will it be very hard to take it to other markets? 

Because Go-Jek grew up in an environment that requires the model and process to be much more durable, overall the product deliveries and its payments are rated very reliably in terms of their threshold. It is more cutthroat and harsh, so their model can be replicated in many emerging markets in places like LATAM (for instance, Brazil) and maybe even in some of the South African regions. 

With Rakuten’s investment in entities like Lyft, Careem and Cabify, it has a lot of implications in terms of supply chain and logistics. With these global investments, does that guide your investments in Southeast Asia? 

 In many ways, the investments that we do simply reflect how we rate and qualify the companies. After that, what influence that has on what Rakuten Group can do in the future is determined by how they contribute to the bigger picture. 

It is very easy to draw lines between the companies, given how Rakuten Group is structured. We’ve got 50 to 60 subsidiaries and to draw lines of synergy is very easy to do. But our first and last priority for Rakuten Ventures is that when we do the investment, the company can stand on its own and develop that roadmap in the future by itself. 

So it’s not a bigger picture view about synergy with Rakuten Group’s other investment that drives it, but whether it is profitable as a standalone entity and makes sense for Rakuten Ventures to back it? 

Rakuten Ventures from the start is a true-blue CVC. We are paid, promoted and terminated on the basis of how we pick companies that can become successful in the future. For us, our main goal point is a successful exit, whether from a public offering or trade sale. 

In Southeast Asia, are exits a barrier? Even for some of the big exits, the numbers don’t add up as they’re distressed sales. Not that India or China is any better, but for any serious VC when it comes to this region, which lacks a track record of exits, is this a barrier? Or is this situation more because it’s a maturing ecosystem? 

I think there are different facets to answer here. Number one, the M&A ecosystem is maturing and in the mid-term, it will catch on and we’ll see a lot of those acquisitions happening, But there is still a barrier to an acquisition happening. For the Rakuten Ventures portfolio, of the 12 portfolio firms we have, three to four are located in Southeast Asia. 

We look at these companies and how we can develop their business model and if they can go global, and so on. We have a company in Singapore called Visenze that does barely any business in Southeast Asia. In terms of market traction, right now they’re in Portland talking to a bunch of e-commerce platforms that have their innovation hubs there. So from that perspective, if we invest in companies in Southeast Asia, we want our companies to have strong market share trajectory or push out into global markets with minimum friction. 

So do Southeast Asian companies have what it takes to compete globally in terms of skills and other competences? 

 I can’t speak for the tech ecosystem because that’s very hard to do. What I’ve tried to pick is what goes on in a specific vertical. What goes on in adtech? What are the specific deficits that happen in ad tech in developed markets and how developing those assets in Southeast Asia can clear up the debt that a lot of these tech companies have? 

If you look at artificial intelligence (AI) or computer vision, how can you develop the right kind of talent pool but at a lower cost so that when we deliver those offerings to the global market it’s more cost-effective? 

A market like Singapore is definitely a hotbed for a lot of great talent for tech-centric startups and I continue to invest in the ecosystem. I can say right now that Rakuten Ventures in the past four years has invested more than S$84 million into Singaporean companies. 

I’m not sure who else has invested here as much as us. We are as Singapore Inc. as you can get. So we are committed to the ecosystem and developing the right assets to make sure our companies are dominant in local markets, such as Carousell, or be very aggressive and agile in global markets such as PocketMath and Vizense. 

The focus of most investors is in Indonesia and its digital economy. Viber, a Rakuten company, has a user base of 25 million in the Philippines, a nation of 100 million. Can you comment on the ecosystem there? 

 I can’t comment on Viber specifically. I was the one that executed the acquisition and have advised on the roadmap but I can’t speak confidently what their thought process is. I can say generally that there is definitely a lot more that platforms like Viber can do in places such as the Philippines and Indonesia. 

But what I stress when I talk to many US investors is that many overseas companies underestimate the culture gap. and how that affects consumption in Southeast Asia. 

You have marketplaces that should be ready to accept electronic payments en masse, but a lot of transactions are still cash on delivery. That tells you something about the ecosystem. It’s not about technology but more about how people gain trust and trade the currency of trust. From this perspective, I think Viber can do a lot in Indonesia. 

Looking at the bigger picture, how much space is there for messaging players? With several global players and ecosystems in play – you have five at play in Southeast Asia – considering the sheer traction that messaging has in the daily life of people, what is the real possibility of the messenger market remaining a four or five player market? 

 I think it’s at maximum a three player market. Depending on how migratory the country is, most people will use no more than three apps for communication. I think that in 2017 it’s really hard for any messaging app that’s new or any smaller player that wants to retain its user base to penetrate successfully into different markets. 

There’s a litany of reasons for this – network effects resulting from what other people are using is one major factor – but the small opening of hope for the investment sector is that the concept of media consumption and communication is changing for younger demographics. 

If you look at how the Snapchat generation, the 16-20 years demographic, communicates with each other, it’s very different from using a basic messenger to get stuff done. The trends of the younger generation will change the way that the Facebook and Viber ecosystems of the world will interact and connect with the younger demographics. 

Earlier, you spoke about putting S$84 million into Singapore. How do you see the ecosystem here given that it is an outlier in Southeast Asia with very different parameters? 

For a lot of Singaporean tech companies and startups, it will take a long time for developing markets in the region to catch up. Malaysia is different as it is following on pretty quickly. 

For me, the way I invest in Singapore is to look at it as a binary. It’s a really rich market in terms of ARPU and consumer power, so if I’m to invest in a startup that’s consumer facing and is locally built, I’d want it to be dominant in local markets. But I wouldn’t expect it to be aggressively pushing into developing markets with equal traction and ARPU. 

I would look at product focus for localisation and domination, or I look at tech focus for pushing into global market aggressively. Those are what I’ve focused on and it’s served me well until now. 

Considering Japan, which was the wealthiest country in Asia for decades, how come it hasn’t seen the same level of VC activity as compared to India, considering its a much larger economy and there’s a lot of disposable income? 

There’s a lot of macroeconomic reasons for this, but in my view it has to do with how permeable the public markets and equity markets are in Japan traditionally, compared to the US. For a company to be born in Japan and push into the TSE MOTHERS or Jasdaq is actually a much softer landing than compared to Nasdaq and NYSE. 

When you compare Nasdaq and Jasdaq, there is a death valley for companies that are founded that either cannot IPO and must remain private and eventually die. In Japan’s case, the policies and economy have been much more nurturing of smaller companies to grow to a position where they can take on public market scrutiny and push into a profitable stage. 

If you compare Japan to India in terms of the investment, which one has been growing for the past 10-20 years to a point where you can see actual potential from capital gains compared to the other? That’s the thesis a lot of companies are going into. 

You can ask why large Japanese firms such as Softbank are not investing millions into Japan but instead billions into India? It’s because India represents more of the hyper-growth vision that more public companies steer towards for their investment push. 

Many VCs see Series B as a pain point in this region. Is it a real pain point or is it just that many companies in the region don’t deserve a Series B? 

It is a pain point if viewed from a Silicon Valley perspective. Doing an apples to apples comparison, there is a barrier to getting Series B funding as a startup. But that also holds true for raising a Series C or Series D round. The capital and the willingness to take risk in Southeast Asia, for now, is limited compared to the US, or places like China and South Korea. 

From that perspective, there is a barrier towards making your companies more sustainable from that kind of liquidity. It’s not necessarily a bad thing as it also makes companies think more clearly about how they can wean off VC liquidity. I’ve been a strong proponent of companies – once they take VC money – having a timeline for no longer having to take VC money. 

I think having to take VC funding throughout the company’s lifecycle is not the healthiest thing to do as you’re giving away a valuable asset in the form of equity. 

If your company is sustainable and profitable and has a track record of paying off debt, you should seek out the cheapest form of corporate debt that you can possibly get in the world. All of these economic factors push South-east Asian companies to think about the bottom line and more cost-effective constraints they can apply to themselves. 

You’re geographically agnostic sitting in Singapore. But what are the themes, expertise and capabilities to look at deals on a global basis? What’s the approach for an investment in Silicon Valley? How does Rakuten Ventures operate? 

Looking at themes and capabilities, how we invest means we don’t require a whole team of investment managers or pipeline managers to look at deals we want. We traditionally take a hedge fund approach where we approach themes through a lot of internal discussions and based on those themes we invest in those verticals. 

I’m always bullish on advertising tech, Big Data, AI and how it connects to some deficits in analytics platforms. A great example is an internal thesis we have called “capacity deficits” where we look at specific verticals that have an abnormal amount of liquidity shoved into it. 

Look at Big Data in 2015; there was upwards of $1 billion invested in Cloudera before it went public. When I saw that, I saw an interesting phenomena. Firstly you couldn’t find a data scientist to hire to save your life; everyone was joining Cloudera or launching their own startup – so from that perspective I was looking at startups working to solve the data scientist shortage and develop a business model that could enable a lot of startups or big companies to develop smart applications. 

That thesis led me to a company called Algorithmia, which offers an algorithm for marketplaces. A lot of companies and developers understand that they don’t want to develop an algorithm from scratch in order to develop an application. So those are some of the things we look at for thematic investments. 

As for how hands-on are we, as much as the founders want us to. Very often, we invest in companies we understand and whose vision we agree with and we end up talking to the company not as an investor but in providing product feedback or roadmap, but not in the sense of being board members making decisions. 

A lot of hedge funds got into startups and realised they don’t work in the same way as publicly listed companies. And in markets like India and China – there’s not much of that in Southeast Asia – all the bullish hedge funds have made a fast retreat after a great 2-3 years after realising it didn’t gel with their thesis. What’s your take on this compared to the VC approach? 

There are hybridised hedge funds in the US that have made it work such as Coatue Management that did multiple injections into companies like Box and different entities. They are able to get in at the pre-IPO rounds. 

I’m not sure how hedge funds do their math or due diligence. For us, when discussing hedge funds methodologies or ideas, we have to look at how they actually decide on investment themes and look at due diligence in the traditional sense. By that I mean the P&L of the companies we invest in, how things are developing in terms of their unit economic model is sustainable. We’re taking a meat and potatoes approach to how we’re valuing companies. 

For me, what I did was that I took what I liked about hedge funds and married it to my context. So if I understand what’s happening in adtech and I apply the financial rigour of a balance sheet analysis, that can be beneficial. But one without the other means a huge blind spot and a deficit for operational success. 

With the likes of Alibaba and Amazon coming to the region, what does it mean for the dozens of smaller venture-backed players in the region? 

One thing they have going for them is that Alibaba is a public company, so they can’t spend their cash reserves so freely. They’re manifesting their plans through assets like Lazada and RedMart. But in the end, how much visibility and operational context do Alibaba and Lazada have in the Southeast Asian market? 

Without that, Alibaba cannot get the cost savings they normally do with their logistics infrastructure in China. So in many ways, we can call it game over because it seems so big but then you also have a market as large and as competitive as China where you have players like JD.com pushing very aggressively and Baidu still being a force of nature and Tencent always pushing harder into e-commerce platforms. 

So there’s always room for competition and understanding how you can position yourself in a meaningful manner in the market ecosystem. 

Where do you see the VC ecosystem headed? Southeast Asia is in a state where many people think they can come together and start a venture fund, which has been observed in different countries before things settled down and people realise it takes more than capital to be a successful VC. 

I think the VC ecosystem will, in the end, look a lot like Silicon Valley in the future. 

What I see is that the whole maturation cycle will be highly accelerated in Southeast Asia where you’ll see multiple blooms of different stage investors investing but also falling out and that cycle will be accelerated in the actual success and failure ratios. 

So for me, what I’m seeing right now is VC firms blooming and dying out quickly until the ecosystem reaches a cadence that everyone is comfortable with as an ecosystem. 

For Rakuten Ventures, do you operate like a traditional VC fund by having a lifespan for early investments? What is the fund cycle? 

Our fund is about $280 million. We have a global fund of $200 million and a Japanese fund of $80 million together. What’s important for us is that when we constructed Rakuten Ventures, we took the strong parts of commercial venture capital and combined it with the strongest parts of corporate venture capital. 

In that, one of the biggest deficits of commercial VC, patience is expensive. It’s the most expensive thing they have to deal with. In the 10 years, if you haven’t deployed all your capital by year six on a 7+3 model, you are in big trouble. 

That’s when you start to see VCs making more brash investments that are high-priced. Because Rakuten invests off its balance sheet, then the $280 million is there for me to use and there is a branding effect we can utilise. We invest a lot of liquidity in companies we believe in and want to back but we might also find one company to invest in for that particular year. 

We can afford do to that if it suits us. We can invest in one company a year. There’s no pressure of a fund cycle. Impatience really clouds investment roadmap, stability and IRR. 

Very soon, in the Bay Area, where the VC scene is going through maturity and changes, you will see a different kind of VC taking a different management fee and carry model to mitigate that kind of high-risk judgement vectors.

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