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Southeast Asia catches eye of venture capitalists

BANGKOK -- It was a long time coming, but Southeast Asia is finally attracting investments from top-tier global venture capital firms.

Indonesian venture capitalists listen to entrepreneurs' ideas at the Tech in Asia conference in Singapore in May. (Photo by Ken Kobayashi)

     Until the turn of the century, the conventional wisdom among Silicon Valley venture capitalists was to avoid investing in companies more than 50 miles -- about 80km -- away because they are difficult to coach and keep an eye on. Then, in the 2000s, top investors such as Sequoia Capital, Kleiner Perkins Caufield & Byers and Accel Partners began betting on Chinese and Indian startups. Some of their Asian portfolio companies successfully listed on the Nasdaq or the New York Stock Exchange, or were bought out by other companies.

     But for the most part, Southeast Asia remained off the radar.

Enter the giants

It was therefore monumental that Sequoia, arguably the world's most prestigious and successful venture capital firm, decided to include Southeast Asian startups in its targets for a $530 million fund launched in India in May 2014. That led to its first big bet in the region in December 2014, when it joined Japanese Internet and telecom giant SoftBank in investing in a $100 million fundraising drive by Tokopedia, an Indonesian online retail marketplace.

     Sequoia has had an outpost in a co-working space in Singapore for more than three years, mainly to help its Indian portfolio companies move into Singapore and other Southeast Asian markets. But the Tokopedia deal shows Singapore is beginning to function as a base for building its Southeast Asian portfolio.

     While the big names are just landing on Southeast Asian shores, the pioneers are upping the ante. Venture capital investments in the region were worth $1.04 billion in 2014, a more than fivefold increase from the $205 million spent in 2012, according to British market researcher Preqin.

     Anecdotal reports by Tech in Asia indicate Japanese money is leading the wave. The venture capital arms of Japanese Internet companies such as Rakuten, Gree and CyberAgent, as well as Japan-related investors such as East Ventures, IMJ Investment Partners and Rebright Partners, are said to be among the most active players in the region apart from SoftBank. Silicon Valley venture capitalists such as Walden International and Fenox Venture Capital are also building their investments in the region. A leading Silicon Valley incubator, 500 Startups, is among the most active startup investors in Indonesia.

Come one, come all

Local venture capitalists are getting in on the act. Singapore already has a large stable. Among them, Golden Gate Ventures is headquartered in Singapore but has an office in Silicon Valley. Its team is a mixture of Asians and Americans.

     Vietnam, a socialist country trying to catch up with its more developed ASEAN peers, is also nurturing startups and capital providers. IDG Ventures Vietnam, the country's largest venture fund, manages more than $100 million in assets and has invested in more than 40 startups since its inception in 2004.

     Individual "angel" investors are active in the region as well. Eduardo Saverin, a Facebook co-founder, moved to Singapore and has invested in local startups including online grocery store RedMart, which was founded in 2011 and is one of the most widely used e-commerce services in the city-state.

     After funding a startup, investors typically look for a way to cash out. One desirable option is to float the company's shares on a stock market. And the stock exchanges of Singapore, Kuala Lumpur, Bangkok, Manila and Jakarta seem eager to bring startups on board.

     In December, an information technology startup went public for the first time on the Philippine Stock Exchange in Manila, which is dominated by conglomerates with long histories. The company, Xurpas, was founded in 2001. Its main business is developing digital content for mobile phones, such as games and fortune-telling services. Nix Nolledo, the founder of Xurpas, is idolized by young, ambitious Filipinos and is a regular on the lecture circuit.

Nix Nolledo, CEO of Xurpas, third from left, celebrates the company's listing on the Philippine Stock Exchange in December.

     Nolledo started his company with about $1,200. Now that Xurpas has raised 1.36 billion Philippine pesos ($30.1 million) through its initial public offering, it is growing by snapping up foreign companies.

Getting institutionalized

Entrepreneurship and an investment-friendly environment can produce a crop of growing companies and create tens of thousands of new jobs. This in turn leads to more entrepreneurship and investment. One of the main sources of U.S. economic resilience is this virtuous cycle.

     But creating a hothouse of business growth is not easy. Henry Nguyen, managing partner of IDG Ventures Vietnam, used to work for Goldman Sachs' technology team in New York and has seen the problem from both sides. "Silicon Valley has a whole ecosystem of capital, management, talent, legal services and so on. In Vietnam, you need to figure out everything on your own," he told the Nikkei Asian Review.

     The most important prerequisite is having stable laws and regulations to govern matters such as commercial transactions, contracts, securities investment and employment -- and the administrative and judicial institutions and people to enforce them. This legal and institutional framework secures investor rights and imposes strong discipline on entrepreneurs and startup companies. In Southeast Asia, only Singapore has such a framework fully in place.

     Even the U.S. saw a serious decline in venture-capital investment after the dot-com bubble burst in 2001. Many investors began to see some founders of new companies as snake oil salesmen. If venture-capital funds, angels and IPO share buyers rack up big losses in Southeast Asia, the region might see startup funding dry up. The current boom in investment signals the need for cautious valuations and decision-making.

     If Southeast Asia's governments and private sector embrace such capital discipline by establishing strong institutions and market-oriented ecosystems, they stand a good chance of creating a sustainable cycle of startups and investment. That will lead to more resilient economic development, with capital and income more widely spread. But if vested interests and those close to political power squelch this new economic force, the region may fall into the middle-income trap.

Nikkei staff writers Sachiko Deshimaru, Manabu Ito and Yuka Wakayama, and Ho Chi Minh City correspondent Kim Dung contributed to this story.

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