Khailee Ng: Understanding SPACs, ESGs, and the underlying trends

• Important for the first SPACs in Southeast Asia to set benchmark.
• Helping firms understand the E and S in ESG to be on ‘right side of history’

Khailee Ng, managing partner of VC 500 Startups, recently was interviewed as part of Gobi Partners Limited Partners Conference, where he shared his opinion on SPACs and ESGs. His take on these two new developments in the startup space is unsurprisingly similar to his attitude of picking winners for 500 Startups: They're both things to get excited about, but there needs to be a dose of reality about what is possible, given they are promising rather than proven.

Take for example Special Purpose Acquisition Companies, or SPACs. As an alternative to IPOs for fund raising, they have recently seen a rise in popularity in the US IPO market, with 237 counts raising US$79.87 billion in 2020, as compared to 59 of them raising US$13.6 billion in 2019, a more than 400% jump.

The trend looks likely to roll around to this region. "A lot of the SPACs being raised in the US are targeting Southeast Asia (SEA)," said Khailee, with the simple reason that it is one of the fastest growing internet markets around. 

However, he is slightly cautious about diving straight in with the companies he represents. "We don't want them to go public with a SPAC, just to tank. We want them to have a viable exit and we want our companies to be ready for the public markets."

Khailee is aware that the hot SPAC market is being closely watched. "I think that the first few SEA and non-American SPACs to list will set the benchmark," he said. "We need one very responsible company and one very responsible SPAC to set the example," he believes.

"Let the first SPAC go out the door with the very best and most responsible company, and with the very best partners who aren't in it just for a quick buck. (If) we can matchmake those two, we would set an example, and (create) the kind of domino effect that we want."

ESGs - the chance to be on the right side of history

Khailee also took time to give his opinion on the trend of investing into companies that show strong Environmental, Social and Corporate Governance practises (ESG), and what should underpin those decisions.

According to a recent MSCI 2021 Global Institutional Investor survey, around 79% of investors in Asia-Pacific increased ESG investments “significantly” or “moderately” in response to Covid-19, and 57% of investors in the region expect to have “completely” or “to a large extent” incorporated ESG issues into their investment analysis and decision-making processes by the end of 2021.

"The ESG framework has been around for a very long time, but recently it's been catching fire where a lot of very large and established LPs are starting to ask their managers to take it seriously," he observed.

He suggests that ESG is a convenient label with a lot of room for interpretation. "No one's gonna dispute the G in ESG," he said. "But when we talk about the E and being cognizant of environmental impact, and as for social, how to define (it)... I think that part probably requires a bit of soul searching."

"We believe that as leaders, we have to embrace it ourselves," he continued, adding that the founders have to be the experts as well.

"How can we invest in the founder if the founder doesn't embrace a growth mindset and growth hacking?" he asked. "So we want ESG to get to that point where the founder knows innately what impact he or she and their company has, both good and bad."

He feels that 500 Startups has an opportunity to affect change. "Since we're coming in the early stage, let's introduce the world of ESG to startups, and give them an on-ramp so that the rest of the industry will shift because we planted those seeds."

"In 2021 we're starting in Asia, so you can watch this space," he promised. "I want to be on the right side of history on this one."

Blockbuster unicorns and sleeper-hit unicorns

Khailee explained that they try to not go too overboard when it comes to evaluating the latest trends, even if those trends are all that is seen on the news. "A lot of discussion in the media centers around what's hot," he opined. "They latch on to trends, they latch on to memes, things with catchy words!"

He says it's very similar to the landscape of unicorns. Very few unicorns - perhaps 10 or 20 out of 500 - get well-known and become representative of the group.

"Then you start to realize that not all unicorns are cash guzzlers, and many of them raise very small amounts of money, (but) they create outsized returns," he said. "So you must have blockbuster unicorns and sleeper hit unicorns"

Khailee said that understanding why those unicorns can spend less money and yet make bigger returns are of interest to him. This is similar to analysing current trends, and taking the effort to understand them.

At 500 Startups, they look at about 30 sectors per fund, and look at up to 100 companies in the discovery phase for the fund. "Most of the time half of our seed funds will go into this discovery phase where we're really placing bets on 30 different sectors, and a lot of them may represent and may be drivers of such trends."

"A lot of times we want to make sure that we understand what the drivers of these trends are, and also making sure that our funds are exposed to them in a measured way."