Asia’s wealthy investors targeting venture capital boom

Asia's high net worth individuals are eager to participate in the continuing venture capital (VC) boom, but remain discerning in their investments, according to experts.

While China has been a clear leader in attracting VC investment, investors are also looking at promising start-ups in markets ranging from India to Thailand, Indonesia and Malaysia, they added.

Venture capital funding continues at a robust pace in the region, although it slowed marginally in the quarter ending June. According to VenturePulse, KPMG’s quarterly global report* on VC trends released on October 11, companies in mainland China accounted for half of the top 10 global venture capital financing between July and September, while 10 of the top 12 deals took place in Asia.

Chinese companies attracted $10.2 billion of venture capital investment with 95 deals between July and September, while across Asia, VC-backed companies raised $12.3 billion over 283 deals, the report noted.

VC-backed comapanies in Asia pulled in $12.9 billion in the quarter ended March, according to KPMG.

Interestingly, the report also noted that there is a clear preference for late-stage venture capital funding opportunities, compared with angel/seed funding (very early stage funding).

"Much of the overall venture scene is still skewed towards the massive late-stage rounds being injected into the small crop of mature, large businesses such as Flipkart (Indian ecommerce website) or Paytm (Indian digital payment app),” it said.

“There is no shortage of capital for companies with good ideas and good management,” Philip Ng, partner and head of technology, KPMG China told AsianInvestor.

“There is, however, a shortage of speculative capital willing to fund anything that looks like a business plan. That is a big distinction."

During 2015 and 2016, there was no such distinction and company valuations started to stray far away from the underlying fundamentals of the market, added Ng.

Selective investing

The KPMG report noted that investors are being more selective with all deals—even those at the earliest stages of funding. Many investors are conducting significant due diligence even at the seed and angel funding stages, the report noted.

That is certainly the case with high net worth individuals, according to Rachel Lau, partner at Malaysia-based RHL Ventures, which invests in start-ups that are more advanced, and have achieved certain milestones in their business.

“In the past, investor behaviour was more reckless. Now investors are more cognisant of the significance of strong cash flow, and consider what can happen to a firm when the money runs out.”

RHL Ventures is a compelling example of how some wealthy families are going about venture capital investing. RHL was founded in 2016 by three millennials from wealthy families, and uses family funds to invest in small and medium sized businesses with links to Asean economies.

The KPMG report noted that technology remains a hot favourite with venture capitalists, with China start-ups taking the lead in attracting investments.

For RHL Ventures, disruption is a key theme, said Lau. "One of the key criteria we use to invest in a company is figuring out how a company is disrupting an industry and how unique its service or product is,” she said.

“Then we see how the company is monetising the disruption and estimate the growth potential of the company.”

The firm is actively looking at fintech, artificial intelligence and robo-advisors quite closely and has invested in some of these technologies, she added.

Nevertheless, she believes that while there is tremendous interest in venture capital, HNWIs remain relatively cautious about where they invest.

“The younger generation is very keen to invest in technology at an early stage, but it is not happening on a large scale yet,” she added.

Some wealth managers in countries such as India seem eager to match their clients with venture capital opportunities: earlier this month, Mumbai-based Sanctum Wealth Management announced that it was tying up with Equanimity Investments, a venture capital fund, to help clients invest in early stage start-ups both in India and overseas.

Equanimity Investments is backed by renowned emerging markets investor Mark Mobius of Franklin Templeton, among others.

The KPMG report noted that in India, individual states are setting up ecosystems to promote investment in specific market segments such as mobile, e-commerce and fintech.

Hot investment areas

Across Asia, artificial intelligence, in particular, has been a hot investment area for venture capitalists throughout 2017, the KPMG report noted, although many start-ups have struggled to monetise AI technology.

In addition, the report identified education technology as an area of promise. This, along with fintech and automotive tech is of special interest due to its potential to open up education channels over the internet.

Gan Fong Jek, managing partner and co-founder of Singapore-based venture capital firm Jubilee Capital Management, however, believes even more advanced technology is in the works: “Some companies are experimenting with AI to help children optimise their learning by improving the speed at which they learn,” he noted.

This could be applied in the education sector, where technology and sensors can be used to help children focus better while training them to think smarter, he said.

JCM, which invests mainly in financial services, consumer lifestyle, enterprise software, artificial intelligence and cybersecurity, has invested in companies from China, Southeast Asia, the US and New Zealand.

“We are assessing a pipeline of investments in Israel,” he said, adding that Israeli startups were strong in cyber security and healthcare—two areas that are enjoying high interest among Asian investors.

Nevertheless, as RHL Ventures’ Lau points out, successful venture capital investing is about being patient.

“We have seen our families build businesses from scratch and we know that building a business takes time. You can’t just invest and get out in a year or two,” she said.

An investor needs to sit out through a full business cycle, which ranges typically from five to seven years.

In terms of returns, Lau said that her team considers opportunities that can triple the initial investment.

For now, the outlook remains relatively buoyant: “We continue to receive steady enquiries from companies looking to set up venture capital funds in the region and from large funds hoping to set up holding companies to attract investments from the region,” Udit Gambhir, managing director of Asia at SGG Group, a corporate services provider that focuses on fund administration services, told AsianInvestor.

KPMG also expects VC investments to remain relatively steady in the last quarter of 2017, with artificial intelligence and technology expected to continue dominating the headlines.

*Data in the KPMG report is from Pitchbook.