A Shanghai venture capital fund managing around US$700 million opened an office in Singapore last year, but they did not make any investment even after six months of looking at early-stage startups in Southeast Asia.
Since its founding nine years ago, the fund has focused on the Chinese market while building a portfolio of consumer startups. A partner at the fund told Lianhe Zaobao that over a period of six months, he has met with roughly 50 early-stage startups in Indonesia, Singapore and Vietnam in the fields of electric vehicle (EV) manufacturing, beauty products, e-commerce and consumer finance.
He considered 50 startups as very few for venture capital firms, saying, “In China, we often meet with two or three different startup teams a day. But Southeast Asia has much fewer startups in comparison.”
However, he also pointed out that the startup founders he often meets are still mainly Chinese entrepreneurs.
Replicating success in Southeast Asia
This fund is among the many that have flocked to Southeast Asia since 2022. Affected by anti-Covid measures, geopolitical tensions between China and the US, and the Chinese government’s tech crackdown, a group of China-based dollar venture capital funds began setting up offices in Singapore. They are keen to invest in the next Alibaba and ByteDance in Southeast Asia while continuing to be highly profitable in the Chinese market. They also hope that companies in their existing portfolios that have struggled to make it big in China will be able to make a name for themselves overseas.
... while Chinese venture capitalists are still hoping to replicate the success they had in China in Southeast Asia, investors from Southeast Asia and the world have already decided to reduce their investments in China, including Chinese funds.
But they would soon realise the difference between their hopes and reality. On the one hand, while most of these funds failed to invest in any Southeast Asian startup, they are not making any hasty conclusions on the development of the Southeast Asian market in such a short period of time. On the other hand, most funds have also failed to seize the opportunity of setting up a Singapore office to transform into an international fund. Moreover, they have not been able to tell a new story of bringing “China speed” to Southeast Asia to solve fundraising woes.
Clearly, while Chinese venture capitalists are still hoping to replicate the success they had in China in Southeast Asia, investors from Southeast Asia and the world have already decided to reduce their investments in China, including Chinese funds.
“Back then, people were affected by external circumstances. Under China’s three-year-long pandemic, nobody was able to travel for a long time. Dollar funds also faced many restrictions in China. So everyone thought about heading to Southeast Asia.” — Shanghai venture capital fund partner
Since last year, managers of China’s dollar venture capital funds have often mentioned Singapore and Southeast Asia to their peers or the media. An organising staff of SuperReturn, one of the world’s largest private equity events, told Lianhe Zaobao that over 100 Chinese venture capital firms attended the conference held in Singapore in September 2022, the largest number of participating Chinese investors since 2019. During the conference, China’s venture capital media reported that Singapore’s hotels were “fully booked” in September.
These reports described the rosy scene of Chinese venture capital funds making a beeline for Singapore: investors flocking to Singapore to register companies, set up offices, open bank accounts, apply for work permits, go on business trips to Southeast Asian countries, etc.
Japanese investor Lu Ziming (陆子鸣), who has been based in Singapore for seven years, told Lianhe Zaobao that Chinese investors have been frequently reaching out to him on social media platforms since October 2022. He said, “After exchanging pleasantries, they would ask if I had any good projects to recommend.”
The aforementioned Shanghai fund partner told Lianhe Zaobao, “Back then, people were affected by external circumstances. Under China’s three-year-long pandemic, nobody was able to travel for a long time. Dollar funds also faced many restrictions in China. So everyone thought about heading to Southeast Asia.”
And this was how the Southeast Asian market was sensationalised. Jungle Ventures, a Singapore-based venture capital firm investing in early-stage startups, told Forbes in 2021 that venture capital investment in Southeast Asia grew 5.2 times between 2015 and 2020. Statistics from Bain & Company also found that the deal value of Southeast Asia’s private equity market had hit a record high of US$25 billion in 2021.
During the Caixin Asia New Vision Forum in June this year, Singapore’s Deputy Prime Minister Heng Swee Keat said that Singapore is promoting venture capital and private equity funding, and supports startups that are riding the waves of scientific and technological innovation. In response to Lianhe Zaobao’s query, a spokesperson from the Monetary Authority of Singapore (MAS) said that the MAS supports asset management companies in using Singapore as a base to develop their business and to seize opportunities in Asia and the world.
Many people also have a FOMO (fear of missing out) mindset and are worried that they may miss out on the next Alibaba or ByteDance in the region near the equator.
An investor who participated in the SuperReturn conference last year recounted that many Chinese investors at the time generally agreed that the next big opportunity was not in the US or China, but in the budding Southeast Asian region. They hope to set up a base in Singapore to develop their business in the region.
Many people also have a FOMO (fear of missing out) mindset and are worried that they may miss out on the next Alibaba or ByteDance in the region near the equator. The term FOMO is commonly used in investment circles to refer to people who are so afraid of missing out that they do not think rationally.
... only 25 of the 350 equity deals in Southeast Asian markets were made by Chinese investors in the first half of this year. — Echo Wang, co-founder of BridgeSEA Capital
Market size matters
But after looking at the figures and when it is time to make actual investment decisions, these investors would “regain their senses”. The aforementioned Shanghai fund partner said that he had once almost invested in an Indonesian EV manufacturer. The startup had a Chinese and an Indonesian partner, and both had studied abroad. While the product was not bad, “the market was not big enough”.
He explained, “Although Indonesia is already the largest Southeast Asian economy, its GDP is just on par with China’s Zhejiang province. Besides, the founders are not planning to expand into Vietnam or Thailand.”
Notwithstanding, he understands their concerns because every Southeast Asian country has its own policies, language and culture; in the early stages of starting a business, they did not want to be overly ambitious.
“However, venture capital funds still seek out high-risk, high-return investments. If the market is not big enough, it implies that future business valuations and exit channels would be weak,” he noted. He eventually decided not to invest in the startup.
Echo Wang, co-founder of BridgeSEA Capital, a financial institution headquartered in Singapore, told Lianhe Zaobao that according to the firm’s statistics, only 25 of the 350 equity deals in Southeast Asian markets were made by Chinese investors in the first half of this year. She said, “Chinese funds may have looked at many of the projects among these deals, but they eventually only made a few investments.”
Wang analysed that Chinese investors could be affected by market fragmentation and low valuation caps. “They haven’t been here for a long time and have yet to adapt to this market,” she explained.
Behind the few investments made
On the surface, Chinese enterprises established their presence in Southeast Asia a decade ago and Chinese investors had also invested in famed Southeast Asian enterprises such as Grab, Shein and Sea Limited. But in fact, Chinese investors were never as active as Japanese and South Korean investors in the Southeast Asian market.
According to data from Alibaba Cloud and IT Juzi (IT桔子), a startup database and information service provider, the highest number of Chinese investments can be found in North America, where the economy and other areas are more mature and the market is more unified. Between 2015 and 2021, Southeast Asia has always lagged behind North America in terms of the market with the most overseas equity deals by Chinese capital. Looking at the Southeast Asian market alone, data from BridgeSEA Capital also shows that Chinese investors only invested in a total of 273 projects between 2013 and 2022.
Since last year, while the funds flocking to Southeast Asia may be doing so for profit, it may not entirely be so — they could also be hoping to de-risk. Over the past three years, amid the Chinese government’s tech crackdown, tense China-US relations, and increased regulatory scrutiny of US-listed Chinese companies, Chinese dollar funds that rely on listed tech enterprises to gain profits once they exit became trapped in a predicament. Coupled with disruptions to economic activities as a result of China’s anti-Covid policy and numerous investment restrictions amid geopolitical tensions, many dollar funds set eyes on Southeast Asia.
... the core reason is the failure to adapt to the pace of Southeast Asia. Everything is measured against “Chinese standards”, from market size, company growth and founders’ ambitions, to employees’ living expenses and working hours.
BridgeSEA Capital’s Wang believes that Southeast Asia is an ideal “next stop” for many Chinese enterprises, including dollar funds, because of the massive population of people of ethnic Chinese descent, close proximity to China, and seemingly neutral geopolitical stance.
So, why are people just looking but not investing? There are many objective reasons, but the core reason is the failure to adapt to the pace of Southeast Asia. Everything is measured against “Chinese standards”, from market size, company growth and founders’ ambitions, to employees’ living expenses and working hours.
Wang explained that there are several reasons for this. First, Chinese investors spend little time in the Southeast Asian market and have not cultivated it. “Some managers only come on occasional business trips to have a look,” she said. Second, they only focus on Chinese-led projects, which is limiting. Third, they think the market is too small.
Another underlying reason why Chinese funds are not actively investing in Southeast Asia is the complex motives of China dollar funds to go global.
Unrealistic to replicate the Chinese growth story
Cynthia Ding, the founder of technology startup Yincubator in Singapore, told Lianhe Zaobao that today’s Chinese investors are accustomed to the “big fish in big waters” of the Chinese market, and have been spoiled by the rapid growth due to globalisation and the honeymoon period between China and the US.
She said that some Chinese agencies expect founders to expand the market in six months, achieve growth numbers in 12 months, and take the company public in three to five years. Chinese investors think this is the norm, when in fact it is not, and such requirements are hard to achieve in any market. Ding believes that such unrealistic expectations make it really difficult to make investment decisions.
Another underlying reason why Chinese funds are not actively investing in Southeast Asia is the complex motives of China dollar funds to go global. A previous founder of a Chinese private company who has been involved in investment in Singapore for four years told Lianhe Zaobao that most dollar funds that came to Singapore last year initially did not think of investing, but were looking for funding. “But most of them failed and couldn’t get any money in Southeast Asia,” the person said.
Since 2021, the funds allocated to Chinese assets in the North American market have plunged, and the Southeast Asian market seems to be an ideal destination to seek funding. On the one hand, Southeast Asian countries such as Indonesia have “old money” from family businesses that have thrived for three generations; on the other hand, Singapore has one of the largest inflows of global high net worth individuals, and is where a number of family offices and sovereign wealth funds are located. These are important targets for China dollar funds seeking funding.
In reality, Southeast Asian companies prefer to invest capital in their own industry expansion, while family offices and high net worth individuals tend to invest in higher-yielding capital markets such as US Treasury bonds.
... many Chinese venture capital firms mentioned investing in Chinese entrepreneurs starting businesses overseas or expanding abroad, to implement a strategy of de-risking and to diversify the risks brought about by geopolitical factors. — Zhou Xiaoyuan, manager of a joint family office in Singapore
Singapore’s sovereign wealth fund is also reducing its investments in China. According to the Financial Times, Singapore’s Government Investment Corporation (GIC) reduced its investments in Chinese private equity, venture capital funds and enterprises last year. IT Juzi’s database recorded only two direct investments by GIC in Chinese companies in 2022, down from 16 investments in 2021.
According to Zhou Xiaoyuan, who operates a joint family office in Singapore, many Chinese people have come to Singapore to establish family offices or invest in joint family offices since the second year of the pandemic. When asked whether the main purpose of family offices is profit or wealth preservation, she said without hesitation, “Wealth preservation.”
She said, “Family offices also consider venture capital institutions, but most of them tend to invest in more local (Southeast Asian) institutions because they are more familiar with the exit mechanisms here.”
Zhou shared that last year, many Chinese venture capital firms mentioned investing in Chinese entrepreneurs starting businesses overseas or expanding abroad, to implement a strategy of de-risking and to diversify the risks brought about by geopolitical factors.
She explained, “The investment logic of most venture capital firms is that if Chinese entrepreneurs have been successful in China and have experience, they can replicate that success overseas.” However, she believes that it is unrealistic to take the stories and assessments in the Chinese market and apply them to Southeast Asia.
She added, “Moreover, Chinese companies expanding abroad still have a significant Chinese presence, and who knows where they will exit in the future.”
The uncertainty of exit channels for investments with Chinese elements is the most concerning issue for investors. Zhou gave the example of Shein, a clothing e-commerce giant registered in Singapore with its main market in the US, but its supply chain is in China. The company wants to go public in the US but remains hindered by its Chinese identity.
She said that the success of many internet projects in China has specific historical backgrounds and windows of opportunity. “So-called de-risking means that too many assets were once placed in China, and now we cannot put all our eggs in the China basket,” she noted.
After the hype fades, the market will filter and identify individuals and companies that can truly establish themselves in Southeast Asia. — Cynthia Ding, founder of technology startup Yincubator
Cultivating regional and global benefits
Nonetheless, the Southeast Asian market does not lack potential, notwithstanding the Chinese fund companies “looking but not investing” there. Industry professionals believe that Asia is no longer solely focused on China, and the time has passed when all money and strategies revolved around China.
According to the Organisation for Economic Co-operation and Development’s forecast, the average GDP growth rates of the ten ASEAN countries in the next two years will reach 4.6% and 4.8% respectively, showing strong economic resilience in an uncertain global environment. Indonesia, which investors are most interested in, achieved 5% economic growth in 2022, while Vietnam saw rapid growth of 8%.
Yincubator’s Ding told Lianhe Zaobao that while in the short term some people are only looking without investing in the Southeast Asian market, in the long term it is not necessarily a bad thing.
Ding said, “After the hype fades, the market will filter and identify individuals and companies that can truly establish themselves in Southeast Asia. Coupled with the spillover effects from China, such as the overflow of talent, technology and supply chains, and the abundance of goods and services on the supply side, this is a good thing for the local development of Southeast Asia.” She was confident that there will be more companies entering Southeast Asia.
BridgeSEA Capital’s Wang said that every market needs to be cultivated. She remarked, “Japanese and South Korean teams have been paying attention to the Southeast Asian market since five or six years ago, earlier than most Chinese funds. So, Chinese funds are actually still learning the ways of the Southeast Asian market, and it is difficult to make quick decisions in the early stages, which is normal.”
Several local and Chinese investors who have invested in Southeast Asia told Lianhe Zaobao that Southeast Asian consumers are simple — they are after cost-effectiveness, are willing to spend, and are very pragmatic, which makes for good investment opportunities in the consumer sector.
Ian Goh of Chinese dollar venture capital firm 01VC noted that they have invested in multiple projects in Southeast Asia, primarily in consumer goods. He said, “Consumer goods can fully leverage the advantages of Chinese manufacturing because China has a mature industrial chain. Consumers only care if the product is good and cost-effective. Investors are not particularly interested in the (political) labels of Chinese companies.”
He added that Chinese founders use mature supply chains to start consumer businesses and are essentially detached from politics. Dollar funds can invest with confidence, and founders are also willing to accept them.
Another advantage of the Southeast Asian market, which is currently in its budding stage, is that it is “new” with many possibilities. Hu Boyu, founding partner of Beijing-based venture capital fund XVC, said that there are still many rapidly growing companies in this market, especially in the financial sector.
Hu said, “The financial sector has a large per capita sales volume and broad adaptability, such as credit cards.” He also said that there is no longer an opportunity to be involved in the credit card business in China, but there are still many opportunities in Southeast Asia. XVC invests in one to two companies in Southeast Asia every year.
Wilson Cuaca, founding partner of Indonesia-based Southeast Asia venture capital fund East Ventures, told Lianhe Zaobao that Southeast Asian companies can choose to go public in various markets globally, including Singapore, Japan and the UK. US growth funds have also been going into Southeast Asia in recent years, and mergers and acquisitions are a common exit strategy. Cuaca said, “In fact, Southeast Asian companies still enjoy the benefits of regionalisation and globalisation.”
This article was first published in Lianhe Zaobao as “蜂拥下南洋，中国风投左顾右盼难出手”.
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