Can Southeast Asian VCs nurture frontier tech unicorns?
This story is brought to you by Minh Vuhong, Antonio Castro Neto and Pierrick Bouffaron . Minh is an ex-VC and active tech Angel investor, currently leading APAC at Omnipresent. Antonio and Pierrick are partners at AM2, a Singapore-based venture studio that creates and strengthens science-startup projects in the advanced materials and advanced manufacturing fields. Join an incredible community building the future 🔥🤖
The tech ecosystem in Southeast Asia has been extremely active in 2021. The region saw a boom of referenced unicorns — 35 to date, out of 16 in December 2020 — driven by structural factors such as robust funding from the private equity markets and a rising middle class. A few weeks ago, Grab made the news in Singapore as the largest IPO by a Southeast Asian company in U.S. history (despite later upheavals). While valuations over B$1 are not a proxy neither for long-term sustainable growth nor startup ecosystem success, this new intensity is a welcome indicator of both global investors’ interest in the regional market and the emergence of a pool of talented entrepreneurs.
Looking at the list of freshly minted unicorns, none however can be categorized in the frontier tech categories, i.e., built upon a core of science-driven or engineering ‘disruptive’ innovations. As another confirmation of the local ecosystem appeal for consumer tech, fintech and general business innovation, this first generation of private equity-supercharged ventures essentially belongs to the high growth, platform-based, digital services category — i.e., marketplaces, e-commerce, mobility and B2B SaaS. As Marc Andreessen would rightly put it, software and mobile are devouring SE Asia.
In parallel, investors have been shying away from the SE Asian frontier tech scene for a long time, and we logically witness an inherent concentration — i.e., talking about regional tech is essentially talking about digital tech — and fragmented maturity of the ecosystem. Post-exit entrepreneurs fueling the tech scene with fresh capital and bespoke entrepreneurial expertise, we can expect that the second generation of local tech leaders follows the trend and focuses on these consolidated digital bases. The digital market drivers in the region (e.g., retail consumption growth) don’t lie: they represent powerful magnets for ambitious entrepreneurs-to-be.
What about frontier tech then? While Singapore boasts globally renowned research institutions — i.e., NUS, NTU, and A*STAR — and surrounding countries mature their academic capabilities to design the future of their respective nations, what is really the place for frontier tech in SE Asia, and can Southeast Asian venture capitalists nurture frontier tech unicorns?
While we could debate at length over the constant inclusion of lightly augmented digital services — disguised behind the convenient “artificial intelligence” term — in frontier tech, a general definition of frontier technologies covers the fields of advanced materials, advanced manufacturing, artificial intelligence, biotechnology, blockchain, robotics, photonics, electronics and quantum computing. Working on frontier tech means putting a lot of efforts of productization, market positioning and go-to-market out of a piece of academic research — often over several years, commonly two to three times more than for digital business models — with the involvement of a mixed teams of scientists, engineers and business people. Market fundamentals, playbooks and growth metrics are specific to the field, and meteoric growth (and valuation increases) is very rarely seen during maturation stage. Most Southeast Asian investors hesitate to embrace these new investment models, wary of technology risk, their unfamiliarity with the required execution, as well as the expected time to exit.
It is essential to remind the reader that the average venture capitalist builds its strategy around two interrelated dynamics: (i) demonstrating overall portfolio performance in order to (ii) raise larger and larger funds over time. Venture capital firm managers — the General Partners, or GPs — are paid with management fees but incentivized through carried interest, i.e., usually 20% of the net profit created while investing the money of their backers — the Limited Partners, or LPs. To ensure a virtuous and continuous financing circle with those LPs, GPs are to demonstrate best-in-class performance repeatedly over time. As more and more venture capital firms emerge, especially in a booming region like SEA, competing with each other for the deals, GPs feel pressured to show results in a 5 to 7-year timeframe in order to ignite the next roadshow, and cycle. As a result, ventures showing times-to-exit close (or above) the historical 10 years mark become less relevant. Interestingly and due to the current digital mantra, Singapore has been recently ranked 4th country for its “time to unicorn”, with an average of 6 years and 11 months. It is both a cause and a consequence. GPs prefer to play shorter-term games and favor general tech: easier to understand, ‘faster’ time to exit.
In contrast, frontier tech companies broadly require a longer route from ignition to exit, while featuring more elements of disruption. In Singapore, the recent IPO of the NTU spin-off Nanofilm took 20 years in the making, without being backed by ‘traditional’ venture capital firms. In fact, the founder and CEO still held 50% of the company by the time of the IPO. He has shared at length in the press his difficulties to raise locally and the necessary move to the U.S. to succeed. On the other side of the table, and while not solely related to embracing frontier tech at scale, the recent news of Sequoia US morphing into an ‘evergreen’-like fund can be seen as a slow paradigm shift, in which venture capital funds try to get free from these structural short-term constraints (fund lifetime, size, incentives) to embrace long-term performance. Here enter new approaches to address the frontier tech opportunity, while a growing number of hybrid finance models and frontier tech backers emerge.
Obviously, time-to-exit is not the only barrier. Appreciation and evaluation of the technological risks, still-to-be-written execution playbooks and gut feeling towards complex technologies are all serious elements in the way of democratizing frontier tech investments. Pre-revenue valuation exercises are not widespread. Many SE Asian venture capitalists also highlight their challenges in accessing top-grade deal flow on a recurring basis, pointing out the ecosystem size and the lack of frontier tech entrepreneurial maturity.
Therefore, we believe that three collective efforts will be key to change the status quo in the region:
1. Embrace and learn to articulate longer investment time frames.
We explained how GPs are broadly driven to demonstrate fast and solid performance to LPs. In Southeast Asia in particular, where exits in the venture capital ecosystem have yet to materialize at scale — even in digital — the urge to demonstrate an ability to exit portfolio companies is massively shared across the board, sometimes more than in mature ecosystems like the Bay Area or the UK. Paradoxically, the current environment led to a situation where the VC landscape sometimes has lost his original ‘venture’ mindset to rely on quick wins and distributed investments. In this context, while the local venture capital space is still maturing and proving consistency to LPs and the market in general, there is space for new entrants — new teams, new GPs — and investment theses, as well as a door open to a few frontier tech ‘exposition investments’ within more generalist portfolios. In parallel, the whole ecosystem and the GPs may want to start educating their LPs on the opportunity to address the frontier tech asset class, not only for financial but also for strategic motivations. Benchmark against frontier tech VC firms from the US and Europe that have already demonstrated returns always helps, in particular in a region where strong analytical decision-making is pervasive.
2. Ramp up internal firm capabilities to assess frontier technologies.
New approaches and skill sets to address the specifics of frontier tech are necessary among venture capitalists, and in the surrounding ecosystem (i.e., partners, mentors, consultants). Growing in-house knowledge, and identifying the right experts and executives outside to support the portfolio companies, will be paramount in the years to come. Structurally, it really boils down to acquiring a problem-market orientation mindset favoring risk mitigation over risk minimization, and challenging the portfolio strategy to balance the distribution of returns. As investors grow frontier tech know-how to advise and understand the evolving local and international landscapes, they will naturally help bridge the current capital gaps and support ventures through the funnel, while exploring different exit options including M&A by strategic corporations. On that aspect, more and more VCs believe that no exposition to frontier tech is going to be riskier in the years to come, as the sector is poised to disrupt many incumbent firms and private equity portfolios.
3. Partner with ecosystem players to strengthen execution playbooks.
Frontier tech venture building capital (e.g., studios, accelerators, specialized incubators) broadens the investment opportunities for the creation and early days of frontier tech startups, supporting them over their venture building journey, reaching milestones and moving them through moments of truth. Such initiatives not only grow the local deal flow but also point towards new opportunity niches, quickly reaching out to international markets. In parallel, more and more frontier tech-savvy corporations play their role of go-to-market accelerators, validating innovative business models through venture client model, co-partnership and corporate venture capital. Last but not least, government and public stakeholders play paramount pedagogical and ‘de-risking’ roles by powering research in universities and supporting the translational efforts to the market. In Singapore, the National Research Foundation, SGInnovate and Enterprise Singapore are particularly proactive. Studios, corporates and governments all bring valuable ingredients.
Frontier tech entrepreneurs are to be at the epicenter of a deep interconnected ecosystem due to the complexity of the task at hand, as well as the scientific and industrial background necessary to succeed. The entrepreneurial team starting from a garage is a myth in the space. The capacity to partner often differentiates the successful startup from its struggling early-stage competitor. Make no mistake: VCs are an important piece of the puzzle to move to the next frontier tech maturity stage. How local and global venture capitalists address the Southeast Asian scene in the coming years will be a key driver of frontier tech unicorns breeding.
