In this cover story, The Edge Singapore speaks to founders, venture capitalists and private equity partners to identify the challenges in building Southeast Asian unicorns, Singapore’s role as an entrepreneurial hub and the outlook for dealmakers as macro obstacles remain.
STAGE 2: GROWTH
While battle-hardened entrepreneurs embrace risks in pursuit of unicorn status, investors may have different interests or motivations. Rising interest rates implemented by central banks to counter inflation have restricted investors’ capabilities and hindered the flow of venture capital this year.
Recent data from research firm PitchBook shows that although the venture capital market could find its footing as headwinds weaken and activity stabilises after a sharp correction that began at the end of 2022, investors are still not as willing to finance early-stage companies. The largest global drop in venture financing this year was seen in angel or seed deals, which was almost half compared to the previous year. These deals are typically reserved for funding start-ups that are still in their “concept stage”.
In the Asia Pacific (Apac) region, venture financing deals fell by 32% y-o-y in the first five months of 2023, according to research by GlobalData. This absence of investor enthusiasm and demand amid painfully higher interest rates, which affects returns on equity, is a worrying sign for the start-up ecosystem, where early funding rounds are generally considered a fundamental indicator of its wider performance.
Explaining the significance of venture finance for early-stage start-ups, Saison Capital partner Looi Qin En says that capital injection is essentially the “rocket fuel” that powers the engines of growing companies. “Venture capital is most useful when the business or the market is new and untested, and where capital and resources are required to do the testing,” says Looi in an interview with The Edge Singapore.
He adds that venture capital is critical for high-growth companies as it has the potential to shorten their testing phase from as long as five years to just one or two years.
But Looi, whose portfolio at Saison is heavily focused on emerging markets in Asia, says that from a macro perspective, the early-stage investing landscape has remained relatively stable in Southeast Asia although growth-stage investing has admittedly slowed down substantially.
Explaining the relative resilience of early-stage investing in the region, Looi says: “A lot of the funds already raised sizeable amounts of capital in 2020 and 2021, and because fund investment cycles are typically between three and five years long, there are still healthy amounts of capital available.”
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Looi notes that the early-stage landscape also tends to see a “healthy amount” of activity, given its close connection with innovation as entrepreneurs build new ideas. “General innovation is still going strong but, of course, it is slower than two years ago,” he says.
Regional venture activity
Southeast Asia, where some of the world’s fastest-growing economies are located, remains a hotbed for start-ups and investors eager to cash in on its demographic dividend. Already, there are signs that regional venture activity is picking up. On July 13, Singapore-based early-stage venture capital firm Antler announced its launch in Malaysia in partnership with the country’s sovereign wealth fund Khazanah.
A Khazanah spokesperson says the partnership will “unearth and nurture” Malaysia’s entrepreneurial talents by providing them access to a global platform and network and offering comprehensive support throughout the entire funding lifecycle from the pre-seed stage to the growth stage.
This distinctive “founder-focused” approach is one that Jussi Salovaara, Antler’s co-founder and Asia managing partner, prides his firm on. “At Antler, our investment approach is guided by a distinctive philosophy: Back exceptional people first. We place significant weight on the strength of the founders as we believe they are the primary drivers of start-up success,” he says in a separate interview with The Edge Singapore.
While venture capital “sits at the heart” of start-up success stories, Salovaara believes that the “right founders” can bring them to life. As such, Antler specialises in “day-zero investing”, through which it is committed to supporting founders throughout their entire journey, starting from the pre-seed stage and extending to Series A and beyond.
“We look for individuals with the necessary drive, grit and ‘spike’ [an area where they excel better than most others] to navigate the challenging journey of building great companies,” he says. “Once convinced of the founders’ capabilities, we examine the market potential. We’re attracted to large and growing markets ripe for disruption or innovation. The scalability of the solution is crucial too.”
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The way he sees it, Southeast Asia is likely to be a key market that increasingly attracts investor interest as the venture capital landscape continues to diversify geographically, away from traditional start-up capitals of the world like San Francisco, New York and London. “The mix of technological adaptation and substantial unmet market needs in [regions like Southeast Asia] offers a compelling growth story.”
He notes that it is “fascinating” to observe “subtle distinctions” across entrepreneurs from different parts of the region. For example, Singaporean entrepreneurs often display strong skill sets and inclination towards tech-driven and scalable solutions, thanks partly to the country’s advanced digital infrastructure and government support for tech innovation.
On the other hand, founders from countries like Indonesia and Vietnam are highly resilient to challenges and have a knack for “making it work” even if things get rough. Still, Salovaara says it is equally important to acknowledge the shared traits across the region. “The entrepreneurial spirit in Southeast Asia is characterised by adaptability and a keen sense of opportunity. These traits are the product of dynamic and fast-growing economies, rich cultural diversity and rapidly evolving digital landscapes.”
Singapore as a ‘launchpad’
A characteristic that Singapore does not share with its Southeast Asian neighbours, however, is the size of its domestic market. According to Saison’s Looi, although Singapore remains the hub of investment flows in the region with a slew of start-ups headquartered or incorporated in the country, many venture capitalists have long been aware that Singapore’s market is “small and limited”.
Looi explains that the “absolute size” of the Singapore population simply puts a strain on the limits of its market. Given that the Singapore economy had also established itself much earlier than other Southeast Asian markets, this meant that its domestic market is relatively crowded compared to that of its neighbours. “The question is: Do you want to fight with all these players who have already raised tens or hundreds of millions of dollars in funding for this population of five million or do you want to tap on greenfield emerging markets?” he asks.
Saison Capital’s Looi believes Singapore can be a “test bed” for companies but venture-backed businesses have to expand quickly if they want to achieve rapid growth.
The angled shift in government grants — away from just supporting local business activity and towards helping Singapore’s companies expand overseas — could be an acknowledgement of the limits of its local market. Looi’s assessment of the situation is that all parties of the start-up ecosystem in Singapore have “recognised and accepted” these limitations as the nature of the situation.
He sees growth potential in three markets: Indonesia, the Philippines and Vietnam. “While we have invested in a handful of Singaporean companies, most don’t just serve the Singapore market. Instead, they use Singapore as a test bed with the intent of going out pretty rapidly to these breakout areas of growth.”
Still, Singapore retains its advantages from the venture capital attention in the region. The concentration of specialised talent in Singapore compared to surrounding countries, such as risk compliance required for fintech and blockchain technology — areas in which Saison is heavily invested — means that spillovers continue to benefit the developed economy.
However, for start-ups to achieve growth levels that justify their valuations, Looi believes that “forcing inorganic growth” by concentrating only on Singapore could be futile. “Singapore can be a ground for testing, but companies have to get out quickly if they want to grow because venture-backed businesses are playing a game of rapid growth. We’re focused on exponential — not linear — growth,” he says.
‘Secret weapon’ in venture building
Opportunities for exponential growth within Singapore may be limited but the country’s robust rule of law and relative political stability mean it remains the de facto location of choice to headquarter a business for start-ups and multinationals.
This environment remains ideal for venture-building studios like Singapore-headquartered Rainmaking APAC for its unique approach to building its own companies alongside multinational corporate partners.
In an interview with The Edge Singapore, CEO Samuel Hall explains that Rainmaking APAC is not a venture capital firm as it is not focused on raising capital to invest in external start-ups. Hall says: “Our studio acts as an early co-founder in the start-ups we generate and take forward. When we build investment confidence to find and seed fund a new company, we can invest directly into that start-up.”
“This means that we can invest both sweat and cash into the start-ups that we build, but only into the start-ups that are created by our studio, not into external start-ups,” he adds.
In the build phase, teams from Rainmaking APAC act as serial interim founders at the pre-seed stage to go from an idea or opportunity to an investable venture at seed, pre-A and A-stage. “Once we achieve sufficient validation to build investment confidence at the seed stage, our dedicated talent function recruits and embeds a specialist founding team that will build and scale that venture for the long-term,” says Hall.
Aside from building new companies, the studio also seeks to scale series A+ ventures to new markets and significant enterprise value. In this phase, the teams act as interim growth and new market expansion partners and apply venture validation methodology to test the soundness of the operating models used in new markets, the addition of new revenue lines and the opening up of new customer segments.
In both phases, Hall says the existing asset bases and scale strengths of corporate partners can be a “vital unlock”. “As an entrepreneur who builds ventures in partnership with corporate partners, you have access to a secret weapon: the insights, intellect and most importantly, the assets held by that partner. Assets such as infrastructure, customers, distribution access and regulatory credibility,” he says.
He believes this is a critical factor for successfully building start-ups because assets enable entrepreneurs to run experiments that gather data and allow for hypotheses to be tested. In turn, this testing reduces execution risks. “The more meaningful data you generate, the more hypotheses you can validate or invalidate, and the more risk you can erase.”
When corporate partners can effectively make their assets available for experimentation, entrepreneurs can dramatically increase the rate at which data is generated and more opportunity costs can be mitigated, says Hall.
“By expediting the time to data, they can expedite the time to validation, which in turn expedites the time to scale or fail,” he says. “The bottom line is that this creates an environment that supports a higher likelihood of success on a faster timeline.”
Rainmaking APAC’s Hall says that corporate partners’ existing asset bases and scale strengths can be a “vital unlock”.
Hall’s expeditious model of building businesses through corporate partnership was recognised earlier this month. On July 7, management consultancy firm Bain & Co announced the acquisition of Rainmaking APAC in a bid to “enhance and expand” its venture-building offerings across the region, which — led by Singapore — is a “thriving innovation hub” that has continued to attract talent and multinational companies to set up new businesses.
Accelerated growth but no quick exits
In venture capital, start-ups can achieve later-stage funding and scale their businesses more quickly through relationships. Salovaara says that Antler’s global reputation and strong connections within the venture capital community can prove pivotal to accelerating growth. “We have an extensive network of co-investors, which includes top-tier venture capital firms and angel investors worldwide. We regularly facilitate introductions and networking events between our start-ups and potential investors.”
Antler’s early-stage investment tickets range from pre-seed investments of US$125,000 ($165,000) and upwards to Series A and later-stage investments that are typically around US$1 million to US$10 million — its portfolio companies have gone on to secure a total of US$718 million in follow-on funding.
While Salovaara is not shy in acknowledging the later-stage funding successes of his portfolio companies, he is more restrained when talking about expected returns. The way he sees it, it is important to understand that venture capital is a “long-term game”. Although he certainly aims for high returns, he notes that Antler focuses on building game-changing companies that “solve real problems and generate sustainable growth”.
Antler’s Salovaara says venture capital is a long-term game: "We’re not chasing quick exits; we’re investing for a better future."
He believes that investors’ objectives should not be to “enter with an exit in mind” but also to be part of the start-up’s journey to build lasting value. As such, Antler’s investment timelines vary, given the nature of start-ups’ rapid evolution. “We approach our investments with a long-term perspective, supporting the start-ups we invest in as they scale and helping them navigate towards a successful exit when the time is right.”
“We don’t typically set targeted timelines for an exit as successful start-ups often require long-term investments that could span several years. This also allows us to ensure that the exit timing is optimal for the company’s growth trajectory and market conditions,” says Salovaara. “We’re not chasing quick exits, we’re investing for a better future.”
Read more:
STAGE 1: FOUNDING
Has the region lost its start-up zeal?
STAGE 2: GROWTH
Corporate venture building: where entrepreneurs go to grow?
STAGE 3: EXIT
Positive outlook for late-stage deals in Southeast Asia in 2024 and beyond
