Hey VC, looking to make a quick buck in South-East Asia?
By Justin Hall March 13, 2015
- Many think the VC scene here is one of huge exits and mammoth salaries
- While the SEA ecosystem is developing fast, be prepared for the long haul
WORKING in venture capital in South-East Asia, I’m blessed with the opportunity to help entrepreneurs, colleagues, and all sorts of people create value, help others, and hopefully make them a nice financial return.
It’s tiresome work sometimes. The hours are tricky, and it can be incredibly stressful, but I know I’m lucky to be in this industry.
That’s honestly what got me into this in the first place: The opportunity to meet folks much, much smarter than myself.
And so I’m often pinged with various requests from folks, especially those working overseas, looking to enter the venture capital industry here in South-East Asia. “Naturally,” I would say to myself. There’s a ton of opportunity here. And the food is amazing.
But then the caveats: Before I move I need at least this much money. Or, I want a clear path to another industry or geography after putting in my time. Or, my personal favourite: I'm working in Silicon Valley. Doesn’t that command a premium on my knowledge?
To those people, a polite word of advice: South-East Asia isn’t ready for you yet.
Let me be clear: I’m not judging them for this. Far from it. Going from a cushy six-figure job in an awesome startup ecosystem to a salary that’s almost half that with no real predictability of what the future will bring is a tough pill to swallow.
That’d be difficult for anyone, let alone someone looking to work in South-East Asia for the first time in their life.
But all too often whenever I say the words ‘venture capital,’ I can almost see the dollar signs flashing in their eyes. Venture capital, it seems, has become synonymous with huge exits, mammoth salaries, and incredible upside potential on investment.
Sure, that might be true. Everywhere else but here.
And the reason for that is the economics of venture capital.
Funds work on the 2/20 principle: 2% of the assets under management, i.e. simply put, the amount of money in the fund available to invest; and 20% of the carry, or the return on investment after investors into the fund receive their initial investment back, i.e. profit.
What’s more, the 2% operating fee stacks across multiple funds, meaning that if the managers of a US$10-million fund begin a new US$50-million fund, the operating fees (read: their salaries) amount to the aggregate of both funds.
And given that many early-stage funds have very long time horizons, or the date at which all financial positions are closed, it’s common to see new funds have ‘overlapping’ time horizons.
In the Valley, well-respected managers can and do launch new funds every three to four years, sometimes in even shorter time-frames.
The big returns, of course, come from the exits: The trade sales or IPOs (initial public offerings), when companies ultimately sell their shares to buyers at a significant bump-up from the valuation investors came in on.
When investors put in US$1 million and get back US$20 million, in simplistic terms, that difference is split, 80% to the investors into the fund, 20% to the fund managers themselves.
And if you’re making even larger bets … well, it seems all too common now, but investors can make hundreds of millions of dollars in returns when their portfolio company goes all the way from pre-seed to IPO or acquisition (Here’s looking at you, Facebook and PayPal).
Sounds great, right?
… Except South-East Asia is still a long way off from seeing these sorts of figures.
The venture capital industry in South-East Asia is still extremely nascent. Next to the venerably ancient grandfather of entrepreneurialism, Silicon Valley, South-East Asia’s industry is a metaphorical child by way of comparison.
While Singapore arguably began its deliberate and well-financed foray into Internet and mobile technologies at the turn of the century, venture capital as an industry didn’t really pick up until the mid-to-late naughts.
Even then, you only had a handful of funds, and they were primarily focused on Singapore and if anything, spent most of their time and energy outside the region.
Compare that to the middle of this decade, and it’s a different beast. Funds are forming at a tremendous rate; funding rounds seem to be occurring every week, at ever-increasing sizes; and global funds are starting to elbow their way onto the negotiating table.
But even now, when you consider that Asean (the Association of South-East Nations bloc) has a population of over 700 million people, some of the fast growing economies in the world, and is rapidly moving online in all spheres – be it consumption, media, or in the workplace – the few dozen or so institutional funds represent a drop in the bucket.
That’s a few dozen funds for over half a billion people, the fourth largest GDP (gross domestic product) in the world (when considering Asean as a single entity), and some of the fastest growing markets in the world.
Indeed, only China eclipsed the Filipino and Vietnamese economies in terms of fourth quarter 2014 GDP growth, at 6.9% and 7%, respectively.
Hence, the relative immaturity of the industry means that fund managers haven’t had the opportunity to launch new funds to overlap existing ones. Therefore, stacking economics have not yet come into play.
More significantly, the big exits that can define an entire ecosystem have not yet occurred in any real, sustainable way.
The end result is that funds in South-East Asia are still many years from seeing the same kind of economics that make venture capital so lucrative in the States and other, more mature markets.
Translation? Sure, come to Asia to work in VC (venture capitalism), but starting out, you’re probably going to earn less than many of the entrepreneurs you’re investing in.
This will change. It is happening now. Within three to five years’ time, there will likely be a third generation of fund formation in South-East Asia, even greater than the one we’re seeing now; the economics will begin to stack in very real, impactful ways; and the exits will go from single-digits millions to over US$100 million or more.
But we’re not there yet.
Come to Asia because the opportunity is here, because the entrepreneurs are amazing, because people are solving real-world, serious problems that have a noticeable impact on the quality of life.
But if you’re coming to Asia just to make a quick buck?
Good luck. You’re not ready.
Justin Hall is a principal at Golden Gate Ventures, an early-stage fund based in Singapore. A former Rakuten Network manager and scholar at NUS, he sources investable early-stage technology companies from South-East Asia. You can reach him via Twitter at @JVinnyHall.
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