Investments, and navigating South-East Asia's legal morass
By Justin Hall January 16, 2015
- Legal challenges await investors looking to their neighbours for opportunities
- Investment vehicles not recognised, different financial and regulatory regimes, etc.
MILITARY coups in Thailand. Political wrangling in Malaysia. Byzantium laws in Vietnam. Logistical and infrastructural hurdles in the Philippines and Indonesia. Rapidly growing costs in Singapore.
Forget New York. If you can make it in South-East Asia, you can make it anywhere.
So what’s the one of the biggest hurdles to the fast growing albeit relatively nascent venture capital industry in South-East Asia?
A piddly five-to-10 page investment agreement.
Differences in culture, economic growth and technological development all notwithstanding, perhaps the most formidable challenge affecting the unrestricted flow of venture capital across South-East Asia is the sheer complexity in navigating the legal environments within each respective market.
Venture capital is rapidly maturing in South-East Asia. Fund assets under management are growing in size, investment rounds are becoming larger, and investors are becoming more sophisticated.
The direct result is that the venture capital across South-East Asia is becoming much more cosmopolitan, so to speak: Investors are not only considering local opportunities anymore, but regional ones.
While a tremendous amount of activity will still be confined to Singapore and Indonesia, there is incredible potential in the Philippines, Vietnam, Thailand, and Malaysia.
And invariably, investors that look to their neighbours for opportunities will run into difficulties drafting an appropriate, legally-binding agreement.
These difficulties can range anywhere from the lack of recognition for particular investment vehicles, such as convertible notes; the financial burdens associated with founder equity vesting or ownership; or even the administrative and legal costs to simply drafting and signing an agreement as a foreign investor.
If the opportunity is good, as is generally the case when investors are willing to put so much of their cash on the line, they will usually grit their teeth and slog through the painful process of dealing with local lawyers, negotiating terms with local investors, and educating the local market on relatively foreign terms like convertible notes and vesting.
The money, time, and resources wasted is significant, potentially affecting an investors’ appetite for further investment into a particular market. At best, they may reduce their quantity of investment; at worst, they stop investing in an offending country altogether.
This needs to change.
The United States, and by extension, Silicon Valley startups, benefit from the ‘cookie-cutter’ standard: These companies generally incorporate in Delaware, issue 10 million authorised shares, and set aside a specific allocation to the founders.
This kind of standardisation makes the legal and administrative burdens of incorporation, scaling, and, most importantly, raising funds, infinitely easier for American startups than elsewhere.
More importantly, the law of the land helps establish a benchmark of transparency and fairness. Not only is it simpler to establish common criteria acceptable to all parties from a legal standpoint, but it gives startups and investors the opportunity to critically gauge and assess the quality of their agreements.
Parties can see what other startups or investors are receiving, and because they all operate according to the same laws, they have a far easier time identifying conditions or clauses they do not find agreeable.
While there are obviously some exceptions, there are key principles dictating investment agreements and, by extension, what is considered equitable to founders and investors alike. This would not have been possible without some kind of standard.
South-East Asia, by its nature, simply does not support that kind of standardised venture capital. The laws governing finance, corporate structure, and investment between countries are simply too different.
Drafting and negotiating a legally-binding, fair agreement is simply much harder here than elsewhere.
But the real significance of this problem is the resultant lack of transparency. When laws between nations are so different, the investment agreements and contracts so dissimilar, it invites a complete lack of transparency, especially within cross-border investments.
And that lack of transparency can often bring disaster for participating parties.
Predatory investors are more capable of slipping in exploitative clauses into their agreements; good investors can get caught unawares with unexpected legal or financial complications; and startups signing legal agreements outside of their familiar jurisdiction may have difficulty understanding or even abiding by particular conditions.
Most significantly, you do not have the same kind of universal commitment to any set of guiding principles determining the difference between a good agreement, and a terrible one.
When term sheets are dictated by different laws, and as is often the case, different languages, then even the best agreements in the region are wholly inaccessible to the vast majority of entrepreneurs and investors in the region.
This needs to change. And it will.
Thanks to the rise of regional investors, especially early-stage funds, there is going to be enormous pressure to create a standard set of principles that will be appropriated and localised to the local markets across South-East Asia.
500 Startups has been a tremendous proponent of this in the United States through its KISS (‘keep it simple, stupid’) documents, and I expect they will attempt something similar here under managing partner Khailee Ng’s thoughtful, pro-entrepreneur leadership.
People often point to the growing number of institutional funds, unprecedented investment rounds, or massive exits and acquisitions in recent news as sure signs that the venture capital industry across South-East Asia is only just now taking advantage of the region’s entrepreneurial potential.
But imagine having one set of guiding principles, one agreement acceptable to all parties, investor and entrepreneur alike, but localised to the local laws of every country in South-East Asia?
There’ll be no stopping us then.
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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