Investing not just for profit but to ‘own’ part of any disruption
Starts with being comfortable with founders, no regulatory hurdles
IF one wonders how a sovereign fund such as Temasek Holdings, with an enviable portfolio of blue-chip brick-and-mortar companies such as Singtel and Keppel Corp, views the potential threat of disruptive technologies to its portfolio of companies, well, let’s just say it takes it seriously.
Just ask Chua Kee Lock (pic above), group president and chief executive officer of Vertex Venture Holdings Ltd, the largest South-East Asian venture capital fund.
Initially set up under Singapore Technologies back in 1988, in 2008 it was taken over by Temasek, which injected US$250 million into the now wholly-owned subsidiary to kick-start its activities again after the fund went into hibernation from 2002 to 2007.
Pleased with the performance of the fund, Temasek injected a further US$325 million in 2013 and US$165 million in 2014, with Vertex focused on making investments in Asia and the United States.
Like any other venture fund, Vertex is expected to generate returns, but more than that, it is also acting as an internal disruptor to Temasek’s portfolio.
Witness Vertex’s investment into GrabTaxi, the Malaysian-founded taxi app startup that recently raised US$250 million from Softbank Corp and is out to disrupt the existing taxi ecosystem.
The investment was made despite Temasek having a stake in SMRT Corp, a large public transport company with a sizeable taxi fleet in Singapore.
As Chua points out, while Temasek’s companies are doing well, the challenge is that rapid innovation in technology is disrupting many industries, and fast.
Companies need to keep a wary eye out. Chua says that in a recent conversation with an executive of a multibillion-dollar company in Europe, “the executive told me that its biggest challenge was to avoid becoming the next Nokia.”
With Vertex at the forefront of making investments into disruptive technologies and companies, the mindset is one of keeping track and investing into those it feels have a real chance to disrupt the market.
“Whether we invest, or someone else does, this [disruption] is going to come, so we will look into any disruption in the IT sector that we feel is likely,” he explains.
No ‘me-too’ companies, but rather those that are trying to completely change the model an industry is built on.
Messaging is clearly very important, Chua pointing out how an entire cluster of companies was trying to make incremental improvements on the SMS experience in the early 2000s.
“Yet look at how WeChat and WhatsApp, leveraging on technology, have completely changed that model. And really, this is what we are guided by when making investment decisions,” he tells Digital News Asia (DNA) during a recent chat in Singapore.
Vertex is also a patient investor, willing to give a company time to establish a dominant position in the market, and then figure out a way to monetise its market leading position, he adds.
How patient an investor? “All the companies we have invested in this part of the world have had very little to no revenue,” says Chua, using Reebonz as an example.
In 2010, Vertex invested US$2 million into Reebonz, a branded e-commerce flash sales fashion site based in Singapore. It was intrigued by the idea of a fashion site that could offer consumers cheaper branded goods. The funding allowed Reebonz to launch and get market traction.
While revenue then was nothing to shout about, the site got a lot of interest from visitors. This was sufficient for Vertex to realise that if Reebonz could establish itself in the region as a trusted e-commerce player, it could eventually turn the business around.
Pointing to how Alibaba in China initially gave its services for free until it reached a market-dominant position, and then started charging, Vertex will want to know if the entrepreneur has a plan to dominate the market. If he or she does, then Vertex is prepared to ride through the initial period of losses.
And that is what it did, investing a total of US$15 million into Reebonz since that initial investment, with the company going on to raise a lot more money – its last announced round being US$40 million in May 2013. Late last year, Reebonz was reportedly considering a Nasdaq listing.
Vertex’s investment into GrabTaxi falls into the market disruption category from a business model point of view, but with that model yet to be worked out. “We have a good sense of what it should be, but we are still trying to figure it out,” Chua admits.
From experience, Vertex is aware that not all models have a clear path to profitability. “We know that it takes time, is not overnight, and that many things are not obvious. So the question we ask then is, ‘Can it change things?’ ‘Is it easy to do, meaning, are the barriers to entry high?”
Looking at the taxi market, Chua notes how difficult it is to get a taxi in South-East Asia. “Why do I have to rely on the taxi company to get me my taxi?” he poses.
But thanks to GrabTaxi, the intermediary is now eliminated, he says, citing this as an example of peer-to-peer service, and noting that this model is spreading to other verticals as well, such as with peer-to-peer lending.
The biggest external challenge with such models is the regulatory landscape and this is also, aside from the ability of the founders to execute, the main reason why Vertex will walk away from deals. “If we feel the regulatory environment will not accommodate a particular disruption, we will not invest,” he says.
To even get to this stage, Vertex has to be comfortable with the founders. “That is the key. Don’t bother if you are not comfortable with the team. It is very dangerous to go in hoping to fix the team – it is akin to trying to fix the engine of a plane halfway through [its flight].”
Next Week: Is there a bubble in startup valuations? Lessons from Chua’s own startup, MediaRing
Singapore’s US$96mil bid to address Series A crunch
GrabTaxi’s US$250mil round: The pressure is on
SEA dating app Paktor secures Series A, amount undisclosed
MyTeksi’s GrabCar launches in Singapore
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