What to look for in early-stage tech deals in Southeast Asia

As an investor handling someone else’s capital in a developing market full of risk, I tend to move quietly while operating with extreme prejudice. Southeast Asia has no shortage of cash aimed at early-stage tech companies. Naturally, everyone wants to believe they will back the next Grab or Lazada. What the region ultimately lacks, however, is smart money — specifically fund managers who can actually help promising startups that are still in gestation to thrive.

It’s no secret that markets like Indonesia are nothing like Europe or Silicon Valley, where lots of well-educated talent is working on the cutting-edge. Emerging Southeast Asia is simply not the place to be if you want to build robots, map the human genome, extend lifespans, or take humans further into outer space.

Instead, local founders are simply aiming to solve basic problems such as delivering access to education, folding citizens into the formalized banking system, and bringing baseline healthcare to remote areas. In other words, helping Southeast Asia catch up with the modern world.

Folks at the top of the local venture capital game will tell you to take an extremely founder-centric approach to early-stage deals (e.g. Do you believe in this person, their integrity, and their ability to execute?). This all sounds good and fine, and I largely agree. But in addition to a lack of smart money in the region, there is also still a tangible shortage of high-quality founders. Instead, what we often see are ambitious and well-intentioned entrepreneurs who lack the core competencies needed to build, scale, and steer a billion-dollar tech business.

This is not to say that great founders don’t exist here. They certainly do. But if you’re an investor sizing up the market from the outside, it will be best to know what you’re looking for before dishing out any term sheets. Here are a few hallmarks of what we look for in early-stage deals.

Clear understanding of a problem

The first and most important thing that passes through my team’s radar when viewing a pitch is whether or not the founder has properly identified the right problem. Often, fledgling founders in our office will think they have a handle on this, but in fact their understanding of said problem is still rudimentary.

For example, a founder may be pitching on how to cut down long queues at popular restaurants in Jakarta. Perhaps they want to get Indonesians to start making table reservations by offering incentives such as deals and rewards on a mobile app. This sounds interesting in theory and it might even work for a small number of users. But in reality, the founder is failing to understand why table reservations will never be a widely adopted behavior in the nation’s capital.

Several market conditions work against it. The most obvious one is the fact that debilitating traffic in the city often makes sticking to a fixed schedule virtually impossible for regular people. People are often late by hours to their venue of choice. This dynamic also lends itself to the fact that food delivery apps are already letting consumers avoid traffic altogether — and they’re dominating the market.

Combine these with a fairly small total addressable market for high-end dining in general and you’ve got a non-starter. This list of variables goes on, but the key takeaway here is that the entrepreneur hasn’t reached the core of the problem yet.

Large greenfield opportunities

My attention gets piqued when we see a pitch from a startup operating in one of Indonesia’s large but relatively untapped sectors.

For example, we can see that right now only around 2 percent of people in Indonesia are covered by insurance programs and we can predict that it’s only a matter of time before the nation’s burgeoning middle-class starts to seek out policies. We are already starting to see the trend set it, as certain companies are angling to offer micro- and modular-insurance online to Indonesian consumers.

For this reason, we invested in a startup whose mission is to democratize insurance by making it universally accessible, affordable for all, and easy to use with no paperwork. For me, this was definitely a bet worth making, especially considering that the foundering team ticked all my other boxes.

Elite domain expertise

But even if you can see that the founder has a solid grasp of the problem to solve in a wide open, greenfield sector, it doesn’t necessarily mean you should pull the trigger on an early-stage deal. It’s important that you believe this founder is undoubtedly the best person to solve the problem. This is where I tend to let my prejudices take hold. Key questions I ask myself include:

What kind of track record does this founder have? Can they be considered an expert in this space? Do they have any insider know-how, strategic cards to play, or unfair advantage to speak of?

If any of the answers to these questions generate seeds of doubt among the team, it’s unlikely that we will go in for the investment round.

Global perspective

One particular thing I like to evaluate in Indonesia is whether the founder I’m speaking with truly has knowledge of the outside world. Have they worked, studied, or spent any considerable amount of time in a more mature technology ecosystem?

I like to know if the entrepreneur can justify the potential of their company in the local market by sharing case studies and insights from more developed markets like China, India, Europe, or the US.

If something failed in different market, but the founder believes it will work here, I want to hear a detailed rationale coupled with personal anecdotes.

When investors use the word “vision,” it’s not always about imagining the local future, but often about whether the founder can see the world through a global lens.

Local collaborator

If you’re a foreign player looking to get in on early-stage tech deals in Southeast Asia, it’s advisable to align yourself with a local partner who can give you these kinds of insights about the market and the founders it produces. The best way to get your feet wet here is to saddle up to a firm or fund manager you trust, then co-invest with them for a while as you get your sea legs.

MDI Ventures is a corporate venture capital initiative backed by Telkom Indonesia, with headquarters in Jakarta and operations in Singapore and Silicon Valley. It is an independent entity aiming to bridge the gap between large corporates, smart global investors, and innovative startups in Asia Pacific.