Figure: A newspaper (credit: TechDaily)
Investments are often seen as an important milestone for many businesses. It shows the confidence investors have in the businesses built, offering a monetised exit (even if partial) to the current shareholders. Investments are also crucial for businesses that need huge amounts of cash, whether it is to sustain the business or scale.
The investment landscape in Southeast Asia (SEA), where many businesses are headed to, is complicated and difficult. With a lack of information and strict investment regulations, obtaining funding may be an arduous journey. This article serves as a guide to help your business get funded in Southeast Asia.
While all investors seek a return on their money, it is important to understand their interests and convince them to invest. Different investors have different investment needs and styles. This affects the type of companies they invest in, along with the timing and exit options. Understanding these interests can help a business structure the investment deal that is attractive to their target investors.
Types of Investments
The SEA investment landscape is vastly different from Western economies. Private investment is much more attractive and popular among SEA investors due to the limited opportunities the public market offers compared to Western countries. Venture Capital (VC) and Private Equity (PE) firms help wealthy investors access the private investment market to get lucrative returns on their money.
While PE still holds a majority share in total investments, VCs have been growing steadily in recent years. CVCs have also started to become increasingly popular as large multinational corporations (MNCs) such as Google aims to make strategic investments in start-ups to improve product lines through an investment arm, Google Ventures.
Understanding the types of investors and the goals they have is important to focus on who to look to when sourcing for investments. Their goals must be aligned with the company goals. For example, a startup that is aiming to become a global market leader should not look for a CVC investment as it would be difficult to compete against their investor in the future.
Timing of Investments
The number of investments up to Series A rounds accounts for more than 75 percent of investment deals in SEA. This is an astounding percentage of investments in early stage companies, especially with a high number of PE firms. Why is that so?
The SEA economy is vastly different from the U.S. economy. In U.S., buyers and sellers are able to meet easily on the stock exchanges easily accessible across the nation. SEA on the other hand consists of 10 different countries each with their own stock exchanges and rules that inhibit liquidity from matching that in U.S.
This reduces the attractiveness of expensive Initial Public Offerings (IPOs) in SEA as public stocks would not do well with a lack of market depth and liquidity. Without IPOs, investors in later stages would find it hard to find exits that would allow then to get back their return on their money.
However, with the steady development of infrastructure and policies in the region, investors are looking past seed rounds to businesses that have slightly higher track records and better proof of concept in the markets.
Late stage investments remain a minority, consisting mostly of unicorns such as Grab and Gojek, with the low number of liquidity events and a lack of attractive exits available to investors. However, this may change in the future as financial markets change with disruptive technologies to make international investments more accessible and attractive.
Size of Investments
The shift to middle stage investments has also affected the size of deals investors are interested in. Deals under USD 5 million have started to fall while deals above USD 5 million are rising. This may raise difficulties for businesses that are looking for smaller sized investments with lower valuations. Businesses may end up having to give up more equity than expected in order to obtain capital through equity, resulting in a loss of control and future fundraising opportunities.
After understanding the interests of investors, companies will have a better idea of which investors they are looking for, and what the investors are seeking. However, there are three factors that companies must be clear about in order to successfully negotiate a meaningful deal with investors.
- Goal Alignment
With different types of investments, it is important for companies to understand their long-term strategy before seeking out potential investors. Even if investors do not get a majority share, they will have a say in the direction of the company. This is why companies must ensure that there is an alignment in goals to prevent internal conflict and delays in decision making in the future.
In SEA, majority of investors are looking for an exit to monetise their returns. Companies must clearly pitch when they intend to provide investors with an exit and the expected returns. Additionally, they must be able to back those claims up with clear steps to achieve that future valuation. This includes why other investors (PE/CVC firms) will purchase the company at that valuation.
With the numerous concerns and interests of SEA investors, companies that face strong headwinds to raise funds through equity should look to other options. Understanding the alternatives will also help companies understand the bottom-line of their valuation during negotiation talks with investors.
Security Token Offerings (STO) and Initial Coin Offerings (ICO) have become more popular among investors as the transaction costs are lower compared to an IPO. However, their popularity and legality differ from country to country. Companies must understand the legal constraints that surround such fundraising options in their target countries.
Companies can also look into offering convertible notes or royalty deals that will help investors to achieve the desired returns even without an exit in the near term. Furthermore, there are certain FinTech applications that are looking to allow trading of private companies that are being developed which would provide late stage investors an exit even without an IPO.
Investors can be extremely useful, on top of the funds they provide, . Many investment firms are able to offer strategic suggestions to propel businesses to stronger growth. Companies must be clear about their long-term strategies before jumping into obtaining investments through equity. This will help them to focus on the type of investors they want, creating a partnership that is effective and beneficial for the business.
While investors may be beneficial to many companies seeking funds, they also pose a threat to the control of the businesses. Companies must always plan for alternatives and take up investments after careful deliberation and calculating risks.
About BlackStorm Consulting
BlackStorm Consulting (http://blackstormco.asia/) is a boutique growth consultancy firm that specialises in corporate strategy, profit management and investment management. We mainly serve clients in three sectors: FinTech, Technology, Gaming, Media and Telecommunications (TMT), and manufacturing.
Our clients and connections are internationally present and range from small and medium sized businesses, MNCs, to government agencies.