Resetting Expectations on Southeast Asia with Arnaud Bonzom
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So it's why if you have 1 billion to invest, we're not expecting you the same return that if you invest 10 million. So then at that time, when all this money flew to Southeast Asia, people think in South Asia, oh, we made it. Now all the world look at us. We're finally a good ecosystem. Everyone will invest in us. But that is just the tide, right? And then when the tide withdraws, the first place they're going to go out will be Southeast Asia because it's not the one offering the best outcome for them. So that is going out.

And I don't think so is coming back at any time. So people shouldn't expect to get those people to be as aggressive that they have been there. Lastly, the great company will always raise capital. The top one will always find their way. So there's no issue for those. The thing is for the one just below them.

Welcome to Analyze Asia, the premier podcast dedicated to dissecting the pulse of business technology and media in Asia. I'm Bernard Leong, and the venture capitalists in Southeast Asia are working out how to return their DPI for their LPs. What's the future moving ahead in a non-zero interest rate era for VCs in Southeast Asia? With me today, Arnott Bonsam, founder and managing director

director of Black Mongrels and also angel investor within the Southeast Asia ecosystem, will help us work out whether we should reset our expectations again for the Southeast Asia startup ecosystem. So Arnaud, welcome to the show again. Thanks for having me, Bernard. Yes, I think the last time we spoke was somewhere around 2018. So since our last conversation, what have you been up to?

Well, we went through a lot of things, right, from this COVID era. So I think the last few years, I've continued to do a little bit of angel investing. More recently, I also started to be LP in some funds. So I had also the chance to have that view on the ecosystem in the region, but as well as in Europe and in the USA. So the last time you come on the show, I know you have really shared some lessons, but I guess over this past decade, what are the lessons now you would share with my audience that you have learned?

If you look at the ecosystem, like I got the chance to be involved in a startup ecosystem in South Asia 13 years ago. You had the chance to witness for even if longer than that, right? I think at that time we thought it was early, but I think it was already super early, like 13 years ago. I think it's just early now. We had the expectation at that time it was early, but it's still super early today. I think when you look at any metrics, it's still the beginning of the Southeast Asia startup ecosystem. We listened a bit too much of those

narrative telling us it's a large market, it's a uniform market in some form. Even if the Southeast Asia, what do we call it, Southeast Asia? Why do we put those countries together? What is the real reason behind it, right?

And then also there were a lot of issues on perspective because we put those Southeast Asian countries together, but then we benchmark against, for example, China or India, which are only one country, even if there's a lot of nuances in those very large countries. But we also see benchmark of Southeast Asia versus Germany. So why in one sense we take a region,

that we can also discuss being ASEAN, but with not one currency, one government or one regulation. And we benchmark across one country like Germany. We don't even bother to benchmark across Europe or the Eurozone, right? So then I see a lot of reports when they will benchmark like, oh, look, Southeast Asia is the same economy than Germany.

I'm like, yeah, maybe an absolute number, but you have not the same population in Germany that you have in all Southeast Asia. And you have one language, one government, one currency. So I think often the perspective hasn't been the right one. And they've been using the way to convince us that

that Southeast Asia, it's the right time. But I think it's, again, still very early. We're still in the early days. I think as well, also the Lightspeed report that have been published recently, we're showcasing is when you look at a lot of numbers, it's still the beginning of the region. Mm-hmm.

We have met in a couple of conferences recently. I think the most nearest one was the Tech in Asia Sync AI conference. We've been discussing this about this report from Lightspeed Partners, specifically entitled Southeast Asia Resetting Expectations. I have actually seen a couple of other VC reports that are very similar. There was, of course, the Hype Face report.

then there is the chart of this illusionment. And then now we are trying to get back to this reset expectations, right? So I think the way I'm going to start the conversation, because I think there are a few themes we want to tease out from that report.

And we will definitely put a link to it. I think the first part of the report I wanted to talk about is the global economic challenges, because we are in a non-ZERB era now, coined by people in Silicon Valley. And also there's a lot of revised growth forecasts for Southeast Asia. But to be fair, according to the famous Google Bin and Temasek report, Southeast Asia, actually, the GDP has actually hit $200 billion earlier by three years ago.

So from your perspective now, how do you think about this new outlook on the region? And what does it mean for, say, the resilience of the region's startup ecosystem? Because I deal with a lot of AI founders, myself being a founder of an AI startup. And we have a much more pessimistic outlook in terms of the fundraising part of the journey.

I don't know if it's pessimistic. I will say it's maybe likely to be more realistic. It's just it's not as bright and as easy that some people may expect. Some people also have studied on that path just a few years ago, and they set up the expectation during the COVID time where it was a lot of money around and quite easy to raise. So if that is being what you're being used to, then it's definitely not a good benchmark. When you look at the region,

It's true it's growing, it's growing fast. If you just look at numbers like the growth of the GDP is around 5%. And I can tell you any European countries will be very happy to be able to do that. They struggle to just get 1% or 0.5% growth. But what people have to remind themselves is that if the growth is 1%, the question is also from which base are we starting?

And it's more difficult to grow when you already have 2-3 trillion economy than when you are like a 1 trillion economy. So that is also something that people have a tendency to forget is the growth in South Asia, it's way faster than, for example, Europe. But we start with very small numbers. If you look at Indonesia, the GDP of Indonesia, it's close to the Dutch GDP.

For people who don't know, Indonesia is around 260, 270 million people. Netherlands, it's around 18 million. And you have close to the same GDP. If you look at the ranking of the World Bank on GDP per country, Indonesia is between Spain and Netherlands.

So Spain is slightly more. But Spain, same. It's a low two-digit million population. So that gives a sense that it's still very early. We're still at the beginning of it. And same, when you look at the disposable income and what is not only the top 1% income of the population, but even if the top 10%, it's quite low.

Because we're still at the beginning of the region. So I think it's also looking at those perspectives. And you also see a lot of founders in Southeast Asia, they will be, oh, I'm starting with Singapore and then I'm expanding maybe to Indonesia. But as I mentioned, the GDP of Southeast Asia is roughly Germany. I don't know any founders that will say, oh, I'm tackling the German market and that would be good enough.

And I don't know any VC that would be, oh, sure, I think that is good enough. We're going to back you. That is a bold enough vision for us. But most of the investors and most of the founders in Southeast Asia will settle for a Southeast Asian vision. Unfortunately, for a large part of business, that is too small. There's a few exceptions. If you do, for example, some fintech companies,

And that could be big enough, right? You just have to check on the 200 biggest public company in the world from the Forbes ranking, the number of banks that you have there. It's crazy. So if you look, I think it was like, I don't remember. It was several hundreds of them. I don't remember the exact number. But if you look at some verticals, there's a few that South Asia were big enough.

If you look at a different perspective, you look at India, which is smaller than Southeast Asia in terms of size of markets, but was also close to two times the population. But you will see a lot of B2B founders, they would don't look at India at all. You look at the ZOO, Freshworks, all those B2B founders, they will go US first. And later on, they will go to India. And they have a more uniform market in a way that what you get in Southeast Asia.

I say in a way because it's not that uniform. Like when you have such large countries, you can see differences across part of the country. But it does give an example that even if those B2B founders in India, they don't look much at India market, they look at US to start with.

So that could be a buffer for multiple years for Southeast Asian founders. How do you build a business maybe for the U.S.? And those founders exist. I just came across a founder a few weeks ago that have raised close to $6 million. But the team is based in Singapore, but the only market they're looking at is U.S.,

And they haven't raised from any Southeast Asian investors. So they're really under the radar. So there's an option there. There's a possibility. You can look at the Israeli founders. They don't look at the Israel market because they know, obviously, it's too small. But Southeast Asia is to be in that trap that we got for multiple years in France where people think the market is big enough.

Until the learn is too small. And that better to go very quickly to a bigger market like USA, for example. Except, as I mentioned, in some exception. But that is really an exception. It's not the majority.

So the exceptions would be something like a Superbase, which is now a Series C company. They got into YC. I mean, they have... I thought if Superbase, they would qualify them as Singaporean or Southeast Asia. Well, they claim to be Singaporean and there's a lot of Singaporean angel investors involved in it. Yeah, so Paul was under Entrepreneur First program with his previous ventures, which was also a program that was highly supported by the Singaporean government through SG Innovate.

I think Superbiz is playing more like a US card now, but it's true. They went to YC, they raised the first round at 6 million, then 30, and the last two rounds was 80 million each. So they are shy, I think, of 4 million to have raised 200 million in total now.

It's a very impressive company. And that is the kind of company you can maybe get out of Southeast Asia. It's possible. And there's a few others like that. PetSnap, that's another one. There's now, I think, in their DE round already with Vertex. And then there is MitoHealth, but I think they're still very early. They just got onto the last YC batch. So, I mean, the reason why I brought up exceptions is because I'm trying to tease out why would... I mean, they're anomalies, right? They're always anomalies. If you look at the...

Two biggest you mentioned, they're both B2B. Superbay is very focused US. They also managed to get, which is super impressive, to get COA2 in their first round, which is a crossover found. And usually they do more public market than private markets.

And if you look at Pat Snap, they are also, I think they studied out of China. The founder studied that the ideation or the early, early, early days was China. I know the founders. Jeffrey is a Singaporean. He went to study in Philadelphia. His co-founder, one of his co-founder, Guan Tian, was my student in entrepreneurship. So he's a pure Singaporean.

No, I'm not saying it's not a Singaporean company. I'm not saying it's not Singaporean. I know it's Singaporean. But I'm saying the early days was more linked to China and you still have China as a large market.

So what is interesting on those two, they have both US or China as one of the largest markets. There are not that much South Sea Station. True, true. I don't disagree with you on that. So that's the fair part, right? And if you look at MeToo Health, it's very early. Kenneth is a repeat founder also. I think he mentioned there are only two South Sea Station startups that were part of this YC batch.

So I think that is a bit sad that there is not more and it's maybe a mix between what is the interest of YC for the region versus how many founders are applying. I've seen founders from Aspire or from Zendit being very supportive to support all the founders through the application process. But I wish we can see more of that. And I will say if any government can support

search initiative, they should find ways to send more funders to YC. Because you can look also, there's a bunch of pretty good South Sea Station companies went to YC. You mentioned Superbase, Aspire, Zendit. They get a good number of them. But the question I will look there is how many of them are B2B? How many of them are fintech? And when I see a company like Mito Health, I will say, if you have something different to offer, maybe tackle US first.

Or you have to look at maybe how do you bring US tech around healthcare, but adapt to the Asian population. But it may be some interesting angle there. But true, Amito Health, super early. I think they just finished YC. So very early. So I think the funding patterns for 2021 and 2022 were definitely anomalies, right? Because of the ZERB era.

What about now, if you think about 2023 and 2024 funding patterns, compared back to the pre-pandemic years, I think 2019 and 2020 will be a better gauge if we just take those two areas. What do you think do they look like for these? One part is to understand the context of how a venture capital firm works. Usually they deploy capital across 10 years.

And that works quite well in the US because you get a very dynamic ecosystem where a company can grow very fast, can get acquired very fast, can go IPO very fast. And 10 years is what we call in the startup ecosystem an overnight success, right? So that is how long it takes.

In Southeast Asia, on the emerging market, it takes longer. You have less velocity. So then first you have 10 years funds and they may have more needs to have extension. So usually they will have the right to have one or two, one or two year extension in their agreement with their own LPs.

But the thing is, then they also deploy across three, four years. So a lot of money that's being raised has to be deployed across those years. What happens is, it's not only by when we look at the growth of an ecosystem, we look at the annual, across annual metrics. But it's very arbitrary. When we look from 1st of Jan to 31st of December, it's completely arbitrary the way to look at it.

But we have to keep in mind that those funds, they plan across three to four years. And then they do those capital calls and they deploy that money across those years. So for a fund, the dynamic is across more like three, four years for their first check. And then they will start overlapping those three, four years. They will have their follow-on check. What happened is a lot of them across the COVID time have raised also way too big funds. So a lot of them end up to have a lot of capital to deploy.

And the challenge is you face multiple things. It's one, company, even if before COVID, may have already been used to too high valuation for what will make it a sustainable business model for VCs in the region. Because then you have to think about exits, the valuation of those exits, the size of those exits. And then basically that is going to be very tricky for a VC to make money out of it.

So before COVID, valuation was likely to be a little bit too high for the region. And I see deals with more experiment founders, like repeat founders in Europe. And I can sometimes get into deals where valuation is similar than a first-time founder in Southeast Asia. And I'm like, the market is not the same size. The odds are not the same. So it's just the Southeast Asia sometimes is like overpriced. Which I agree with you. The title of the report, which we are talking about today is Recepting Expectations.

from your point of view now, like LP, do you think that the investors have been over-optimistic about the region's potential? And then maybe what is the real expectations? Is it in the light of current global or regional headwinds or tailwinds? What does it matter? I think...

Another challenge in the region has been the size of the funds. So if you look, that was interesting, if you look at the first fund done by Gary Tan and with Alexei from Reddit, Initialize, I think the first fund was, it's sub 10 million. I don't remember if it was 7 or 9 million. Very, very small fund. And they eat Coinbase in it. So the return of that fund is close to half a billion. Yeah.

from a seven or nine million fund, right? So they started very small and they were already quite great people with good track record, right? Here in South Asia, you get funds that start very quickly to be very large. And then the question is, when you do the math is, what should be the size of the one exits of your portfolio company that will return the funds

three times, right? And you only deploy 80% of the size of your fund. So you need to return more than three times to make it 3x return for your LP because you have the management fees to also go through that.

So basically, I think you also have a lot of funds that are too big now. And it's why we started to see things like PIC15 announcing that they are returning money to their investors, but not as a DPI, not as a success, but as we're not going to call that money and we're reducing the size of our fund because it's a mix about, it's great to be able to raise money, but you also need to have the discipline about how many great teams do you think you can find and back them and how can you get a return out of that?

So that is a challenge in a region is for me, a lot of funds are too big now and PIC15 did the hard work of being able to reduce the size of the fund. I'm wondering if all the funds will do that or not. But that is something that is, it has to be also done in a region to bring something a little bit more healthy. So we need to have this full rebalance, but

But at the same time, I would not be against founders and VCs of being optimistic because if those people are not, it's not going to work, right? We need to have people that are, if you think I've had the chance to talk to a bunch of Unicorn founders, when you know them also minimum and you ask them between four eyes,

If you knew how difficult it would have been, would have you done that company? Most of them will say no, never. So luckily, they were very optimistic. They thought it would not be that difficult. So they did it, right? So I would never say to a founder or to a VC, like, you shouldn't be that optimistic. The balance, I will say, is more about discipline. It's more about don't raise too much money. Don't go too much into those kind of things. And it's the same on both sides.

And not every one of that discipline, don't raise too much money, don't deploy when valuation is too high. For me as an angel, I barely invested during COVID time because I felt it was just crazy. And then you're like, but how do you get your exit? And what is difficult is the timing because you invest now and the exit is in 10 years. So then it's like, how would be the market in 10 years? You have no idea. It's impossible to predict. The thing is Southeast Asia 10 years ago, we think, okay, we don't know much about the exit. So we have to believe it will be okay by then.

the thing now across 10 years for a lot of funds that everything now that found three or four lps are like okay we trust you we believe you for the first decade but now show us how this exit landscape is taking form and now it's very difficult to say no it will take more years trust me and and we will get there so i think that is something that is more difficult so it's why you see also a lot of

Funds that are focusing on liquidity events to continuity fund or trying to do some gross fund or some of them doing some work around the stock exchange. It's a lot of those initiatives to try to provide liquidity. But same, if you just look like I think it was this week, Kazana in Malaysia, the Southern Wells Fund, announced the founder fund. And one part of it will be for emerging fund manager.

So this is still, we're still early days. If a government do a fund of funds for emerging fund manager, it's still very early in the ecosystem.

So what you're saying is that there is a restructuring of the major VC firms. We talk about Insignia, we talk about P15 or former Sequoia India. And then I think there's also the, I've seen also startup VCs that are now going into roll-ups. I don't know why are they in the business of rolling up companies since it's a way to return DPI. Why not, right? What do you mean by roll-up? You mean by merging them? I've heard of VCs trying to do roll-ups now in Southeast Asia. Yeah.

You were given a picture of the restructuring of what I call early-stage VC firms. But then when we think about the bigger ones that came into Southeast Asia, like the GoChu and the Tiger Global, they have also now reduced their participation, but they were in the mega funding rounds of Grab, GoJag, or now GoTo. What does that mean? What I'm going to see is that there's going to be still some early-stage funding because the VCs still have some dry powder.

What does it mean for the startups within this region trying to look for late-stage funding? And I think there's going to be something like a chasm of, I call it, Series B to Series E funds missing again.

Where does it go and take us then? Yeah. So you mentioned for example, peak 15, it was Sequoia, India and Southeast Asia. You also got GGV who splits in two with notable. You got also Matrix partners who also splits across the world. So what happened is those were among the few that were series A and above. In fact, most of them were more multi-stage.

but also across so many regions from the US to China to India to Southeast Asia. Interestingly, I think one of the last ones in that category is Lightspeed that is still operating across all those regions. So that is being a split and you're being, for most of them, explained by the tension between USA and China and it was difficult to invest in both sides at the same time. So that is one bucket. Another bucket is

You got some of those very late stage investors, those crossover, those Kuo-Tu, Tiger, etc. that were investing up to Southeast Asia. But that was also in a very specific context is when it was also very easy for them to raise money because of the interest rate. It was a time where everything looks, anywhere you put money, it will be increased the value almost immediately.

on the spot. And then you have to look at different buckets. So those people will invest first in the USA because it's likely the best market. And a lot of them anyway are American. So they will start by USA. Then before they may look at Europe, they will look at China. Then maybe they do things in Japan, then India. And only after all that, Southeast Asia. So Southeast Asia wasn't a must-have.

At that time, it became a nice to have because there was so much money. And the more money you have, the more difficult it is to find an amazing place to invest that money. So it's why if you have $1 billion to invest, we're not expecting you the same return that if you invest $10 million. So then at that time, when all this money flew to Southeast Asia, people think in Southeast Asia, oh, we made it. Now all the world look at us. We're finally a good ecosystem. Everyone will invest in us.

But that is just the tide, right? And then when the tide withdraws, the first place they're going to go out will be Southeast Asia because it's not the one offering the best outcome for them. So that is going out. And I don't think so it's coming back at any time. So people shouldn't expect to get those people to be as aggressive that they have been there. Lastly, I mean, two things. One, the great company will always raise capital. The top one will always find their way.

So there's no issue for those. The thing is for the one just below them. So that will be very difficult for those people. And then you may have different paths. Some will have to be way more capital efficient for sure. Some will have to look maybe at how do you get a break-even quickly. If you look at the later stage, I think the trickiest part is maybe more like series B, C. And it will also depend on the size of the round. But if you start to be a

sites, significantly large rounds, then those investors invest globally. So it would depend on the size, but the trick may be more around series B, A, B, C, depending on how big you raise. But in South Asia, if you look at any stage from, even if Angel, Angel is maybe one of the less stock one and there's more need there. But if you look at pre-seed series A, as you know, with your company, Doge.ai,

There's not a very long list of top VC. And not only thinking about the company, but the partners. There's not that many partners or GPs that you dream having on your cap table. Because the volume of VCs is very low. The quantity is very low in the region. You go USA, you will say like, oh, I raised my services. Like, oh, I can go Seiko. Yeah, I can go Funderfund. I can go Benchmark. I can go Bessemer. I can go any of those names are amazing.

If you go Southeast Asia, it's difficult to find five top names you really want to have on your cap table at each round. But because the ecosystem is small and it takes time, if you think about California or Silicon Valley, it took 70 years to build that ecosystem. 7-0. A company like Sequoia is 50 years old. If you look at Southeast Asia, there's a very small number of GPs that have been doing that job for more than 10 years.

One fund is at least 10 years. Sometimes it takes 15, 17, 18 years to exit your first fund. Right. So a lot of them haven't done their first tour of duty completely. On that example, China.

So I just had Yao, who is over at my class in NUS Business School, and he pointed out China's scale, like how fast, the fastest company that went IPO was Pingoduo in three years. So I think China only took less than 20 years to reach that scale. So China... I mean, given its current problems, which we don't want to talk about here, but if it had let it be...

It probably has done everything that Silicon Valley has done in probably 20 years, 20, 30 years. They have been way faster, I fully agree. But they're also being way more protective of their markets, which give me an example of a big foreign company that succeeded there. Yeah, there is none. Uber managed to reclose 30% market share. Kaya got sold to Baidu. So it's very difficult, right? So it's a large market. They're fully protected.

you can get massive outcome. I agree, right? If you look at the part that's been up from Sequoia Hongshan, it's amazing what they did. Like Neil, what he's doing is amazing, right? And you have done like some very great deals there, but it's also a closed market and a large one. So it's why I always talk about the USA because the USA is the biggest accessible market to anyone. I'm not saying it's easy.

but the biggest kind of uniform accessible market where you get everything from clients to investors to acquired or to IPO. It's true China managed to do that but also the question at which costs and what will be the future of it is also a lot of question mark. I mean it's interesting to compare to understand how things work but you cannot fully apply the model because

There's not really an ASEAN, right? There's not really like a strong leadership there to have one voice to rule all those countries, which what you have in China for all the province. Do you think like Southeast Asia should just be compared to Europe? I think that is for me the best comparison rather than trying to do China, India and US because those are I call singular focus markets.

If you work in one, you work across all. But I don't think the region itself is like that. Maybe, exception Indonesia, population get larger, it could go close to the India size. Yeah, I think the comparison is still difficult to make because otherwise you just compare Germany to Southeast Asia.

And then you compare, if you just look at the current GDP, right? And that is not reflecting the purchasing power parity. And then you have to look at, it's only one country, but then it's likely to be two or three cities. How many cities do you have to cover with how many languages, how many currencies, how many regulations? So at one point I'm like, should we give up the Southeast Asia aggregation and just talk about Singapore and or Indonesia for now?

or the Vietnam, Indonesia and Philippines or what they now, AC Ventures called the VIP markets. Yeah, I don't know. At one point we got some greater Southeast Asia with Taiwan. So it's for me, I will look more at countries.

and each of them are different countries. You get a lot of founders that expand across a few and then go Australia. They're like, man, I'm making more money in Australia than any expansion plan I've done in Southeast Asia. And it takes way more work to do all those ones. So it's like, if I knew it, I would have been Australia immediately. I agree with you. But I think I have a different separate

segregation now. I actually have a very different way of thinking about the entire Asia-Pacific market. Let me be specific. Asia-Pacific? When I say Asia-Pacific, there are actually three markets. You know that Middle East is in Asia-Pacific? The developed markets are the Hong Kong, Singapore, Australia, New Zealand.

Japan, Korea. Well, Taiwan is still considered. Yeah, that's probably the seven markets, right? They have pretty common features. They have certain sales costs. Maybe average sales cost is about 80 to 100 USD. Then whatever is what I call the developing, which is the Indonesia, Malaysia, Thailand, Philippines,

Vietnam, depending on this growth stage where cheap labor has outperformed SaaS costs. So this is a number given to me from a top consulting firm that average SaaS cost per user per month in Indonesia is only $5. It means to me that I would rather pay a cheap labor to do the same work than using a SaaS software. That's the reason why SaaS never happened.

which I think a lot of the VCs are smoking crack about, you know, oh, we need a SaaS market, which that doesn't exist. Because if you just think about the average SaaS cost per user per month in a specific market, if your cost is not high enough, it doesn't make sense. So there's a developing. Then the last segment is, I call it frontier. The last one is, I call it the frontier segment. This is your Laos, Cambodia. Myanmar was at some point, it was like that. But now because of all the civil war within, it stopped.

But if you can take it in these three buckets and you just only attack markets that make sense to you, if you just take out developed, for example, okay, forget about the fact that maybe there's China, Japan, or Korea being very insular. If you can take on one of those and then plus the other six, you're probably a pretty significant player. No, I fully agree. So it's why as an angel, one of my quick question, if when I invest in company that are based outside of the U.S. is when are you going to the U.S.?

And if you can look at that... Well, I mean, it depends, right? For me, it's two options and an answer. Either you want to be the eBay and you have to be in the US, or you have to explain why you want to be the OLX and focus on emerging market and what is your take on that and why you should be there. And maybe because eBay is too big in the US and is an impossible battle that you think you cannot win. So I think there is option, right? But you need to be clear why. And I fully agree with you on the SaaS.

But for me, it's multiple additional angles. So one of them is people are not used to also to pay for those software. And there's also potentially a part of ego of people prefer to say I manage an 100 people team versus five people that I pay extremely well and then enhance what they can do with software.

It's not a mindset of having small teams. Despite Elon showing us you can have smaller team at Twitter, no X, by axing 80% of the staff, right? So we also into everyone want to have a larger team. I prefer smaller team, lean team, and having that discipline of using the right tools and go faster. But it's definitely not the case in the region. Also, if you look in overall, not have any fun SaaS on the mindset. When there is something that you have to pay for,

American will sell more than investments. European will say, oh, I have to pay for that. And often the emerging market will be, oh, that is a waste of money. I can do it myself or I can hire someone to do it. So it's a very different mindset, but it also depends on which stage are you in your development. Of course, when you're in the US and in Silicon Valley and you are paying a developer 200K US a year, paying a SaaS subscription is nothing in terms of percentage of how much is already the package of the person.

If you pay an engineer three or four or 500 US as a fresh graduate in Vietnam, then it starts to be more significant about any software you put on top of the person about how much that costs as a percentage of the salary of the person. So I think we will make come there, but those things take super long.

And it's why also you see a lot of companies that are offering way different pricing. Look at the pricing of a YouTube or Spotify across Southeast Asia region. Singapore is paying way more. Any user base in Singapore are paying double or triple than anyone else in Southeast Asia because they also adapt to the purchasing power. But it's true, right? If I have to sell into a market, I have to sell a SaaS software. The people that I used to pay and are

willing to pay and have their staff having credit card and they can pay directly with their credit card and then expense it. USA is way more into that. Of course, we're going into a fatigue of those subscription and some are going back to now back to you remember your Windows license, you only pay once and then you have it forever, but you don't have a date. You get a few SaaS companies that are going back into that. So it's not anymore SaaS, it's not anymore the subscription part of it.

But we're getting bad also to those models, which may be a better fit for Southeast Asia or emerging market at least to say you just pay one time and you get it forever. And sometimes if you know what is your long-term LTV, you can also adapt to that and even if make more money on selling on one time versus a subscription. One question I have now is that because there's a slowdown in the IPOs and also the M&A activity across the region,

How would you see startups and VCs adapting to this prolonged exit drop? I mean, I'm sure you already mentioned earlier on that VCs are starting to do other work like dealing with stock exchanges and trying to figure out things. Do you think that there are any other way to get past this exit drop situation? Yeah, I think for the startups, for a lot of them, and I've been very happy because I've

The last 12 months, a lot of funders that I know for a decade in the region, a lot of them happen to turn profitable. So that means unlimited runway and they have more time to see things coming. So that are great news for a lot of them. And a lot of them are into businesses that are that easy, honestly, to be breakeven in Southeast Asia. That on the startup side, your biggest mode is likely to be profitable or to be in a very good growth or being a super attractive deal to still be able to raise money.

Exits, you get multiple angles. Like VCs can get exits through secondaries. They can sell directly secondaries. They can wait for an up round and sell. But that is not necessarily easy because a lot of them have valuation in their book that are super high and they don't want to put down because then you really reduce your ERR and you may reduce your ability to raise your next fund. So they are into a tricky path where it's like, do I need to show discipline and show what is the real value of my portfolio?

Or should I be...

less conservative and show a bit higher and raise on that. So it's going to be very tricky for a lot of them. IPO is not only closed in Southeast Asia, it's closed globally pretty much. So it's not just a Southeast Asia thing. But of course, for Southeast Asia, it's more difficult because there's not much path to IPO in Southeast Asia by default, even if in good times. Some are going to those secondaries. You have secondaries that people have sold like their full funds to other investors, right?

But it's going to be some tricky time, but I think it's

You know what they say, right? It's an hard time that you have great people and then those great people do easy time and easy time create like weak people. I like the hard time because it's going to correct a lot of things. It's going to put everything back in place. It's painful, but it's needed. And I think that will also help more founders to be focused on building must-haves and not nice-to-haves. I think with so much funding in the past, that tolerate too much nice-to-haves. The problem I have

now is that a lot of companies will don't shut down. So you have a lot of cockroach in Southeast Asia, even if you give them- Zombie companies. I have a name for it. Zombie companies. Yeah. Cockroach, zombie. So a lot of them will find a way to don't shut down. And of course, out of a hundred of them, maybe one will find a path to survive and thrive.

But it's a lot of misallocation of talent and resources, and it will be way better and way healthier that all of them shut down. And I agree, if you're one of those founders, a lot of them don't want to give up. And I understand. But in the USA or in Europe, you will have way more frequently a founder saying, ah, we're growing too slow. Not even if...

flat. We're going too slow. That is not going the way we want for the last 12 months. You know what? I shut down. I return what money left on the bank account to the investors and I build something else. Interesting you say that. I don't know much stories like that in Southeast Asia. The people who return capital to me are the crypto startup founders in Southeast Asia. So that has happened much more in crypto, less on all the other Web2 companies I am as an angel investor. So that's number one.

So that we need to celebrate more of that, of people like being comfortable, like it's fine. Just move on, focus your time on something else. So given what you know now, knowing what you know now, what is the one thing you know about the Southeast Asia startup and VC ecosystem that very few do? I will say it's maybe the lack of discipline across all the board, from founders to investors on two things. One, don't raise too much.

Second, raise from the right people. So either as a founder or as a GP, your investor base matters a lot. And it's the same thing if you raise a fund and all your investors are angel and identical individuals and corporates. In difficult times, none of them will be there for you. They will all say, sorry, I'm not investing in the next fund.

But if you put the extra work and get a few founders found, endermen found, someone was found, those people are way less likely to withdraw because when they do the first check in your first fund, they already know they're going to invest in fund two and fund three. Not the case for the corporate, not the case for the angels, not the case for the INH individuals. Same thing for the founders.

Be aware to who you raise from. Be aware of what is the vintage of their fund. Know what is the size of the fund. Get a sense of their return. And a few of them file in the US. So there's a bunch of information you can get from the SEC. A VC that have sub 40 LPs in their fund across fund three, fund four, I don't judge much in fund one, fund two, you know they get good traction. So if they get good traction and they get not too difficult time to fundraise, they may spend more time with you.

So there's a few signals like that. And I feel I was being surprised that a lot of GPs and a lot of founders don't know so much their own investors and how things work and don't ask themselves too much questions. And they just want to, oh, that makes my life easy today. Let's not ask too much questions. Let's move on.

But it's important to understand what does it mean. So I'm going to ask you a pretty definition question. So there's a term called distributions to paid-in capital or people now call DPI. Can you explain DPI to my listeners? And also, why is it so significant in measuring the success of VC funds? And how does it apply to our market?

So the short answer is basically the money you give back to your LPs. So the long answer is to keep things simple, you have an 100 million found. So you raise that found as a VC and you get those LPs that are people who are going to give you their money. So you...

To keep it simple, you are barely investing your own money. You're investing other people's money, right? So you can see the VC as a service provider that on the behalf of sovereign wealth funds, insurance companies, founder funds, are investing their money into startups, right? So out of this 100 million funds, you will only deploy 80 million because the rule is 2% in management fees. So I mean, every year you get 2% to run the fund.

So that means it's 20 million off. So you are going to deploy this 80 million. And then at the early days, the main metrics will be your IRR. So that is more about what is the value of your portfolio, but you don't have materialized yet and exits. And usually one of the standard way to evaluate is what is the value of the last round that have been let by someone else than you? Because otherwise you are just putting your own valuation and it's not the best way to do it.

But we can, I mean, there's, yeah, there's a lot of things we can discuss, if anything, about that. But yeah, so then we're not, we're not mentioning any VC firms, DPI numbers, but somebody has done that for us. But then, but then basically when, when you have the ERR, you can see that as a picture of someone who do an 100 meter dash and you adjust the five first meters. It's like who have done a good start.

So a good start is a good indicator, but doesn't tell you that it will finish first the rest because some may be very good finisher. And then the DPI will come when you start to get your exits. The DPI is the money you give back to your LPs, right? That's right. So the way it works, you deploy 80 million, the first 100 million that come back, come back to the LP because they gave you 100 million at the beginning, right? Again, I'm not talking about the GP commit and those details. I'm simplifying here a little bit. Yeah. And then...

So this means I return one X. If you return one X at the time of, it means you just return them the money at the end of the, I mean, not at the end, but you return the money they gave it to you. So that is, you shouldn't do that at the end of the fund. It shouldn't come on the year number 10. So the timing of that also matter. If you start to give them their money back after two, three years, it's also very good because you're likely to raise your next fund at that time and they may send it back to you for the next fund.

So one of the best ways to raise your next fund is to start to return money of the previous fund, right? But sometimes it takes time. The money of the front one will start to be returned for the fund tree, right? And then the DPI, what people expect is to get three times the money back because the way you benchmark that is across like public markets. And that is what people expect to get is three times the money back.

is going to be extremely difficult for most of the funds in South Asia to return 3x because when you go into liquidity events like secondaries, you usually get a 20% to 30% cut on the last valuation for providing liquidity.

But if the last valuation were overvalued, you can see a 50% to 70% cut. Right. 5-0 to 7-0. So that is going to be brutal. Do we have any self-to-soft bank issue situations like Grab or whatever where early investors are actually sold early and got back their X return and then actually it's only the institutional funds that hold the bank? I think if you look at Grab,

and what I can share because I've been shared publicly, Vertex have exited quite a good timing. So you get, in a way you can call that almost a Cinderella strategy is you have to leave before midnight because anyway, every company are going to fail one day, right?

But if you look at Grab, depending on which valuation you enter, and if you exited when they were close to $40 billion, today is worth $14 billion, right? For a company that has raised more than $10 billion, right? So the timing matters. And I think a lot of VCs were very focused on

at what price I enter, which makes sense. But a lot of them weren't very price sensitive, which is a mistake, right? Because if you invest in a company at a valuation of 25 million versus the valuation of 2 million, if 50 million exits, there's one you make good money. I mean, it doesn't return your fund, but it's not bad. The other one, you barely make any money out of it, right? But the entry point matters, but the exit point matters less.

a lot. And the challenge also is when you invest in private market, even if very early, it's very different to manage that versus when the company becomes public.

It's two completely different jobs, like private versus public. And even if doing preceded investment versus Series B or Series C investment, they're two completely different jobs. So that is not easy also for a lot of investors to understand when is the right time to get some money out of the table and start to return some form of DPI to your investors because you have to sacrifice a little bit of the performance of fund one

to ensure you can raise fund two. So for example, I'm LPs in fund one. I know they're going to sacrifice that. But I know it's part of the job. If they want to raise fund two and build the firm, they will have to do those sacrifices and at some point to take money off the table. So timing-wise, Vertex did pretty well with Grab and also with a company called SpaceMob that sold to WeWork. And then they actually cashed out WeWork during the SoftBank round.

Yeah, so it's why if you look at, I mean, you can also look at the WeWork funders who make kind of good money out of WeWork, right? Yeah, but we're talking about the VC funds that fund companies that sold to WeWork, right? It's a question of timing, right? You can look at C Group when the share was around 250, you can make a lot of money too, right? So it depends on...

of the timing and when are you willing to take the money off? But it's very difficult to know that too. So it's interesting to see who got the discipline to get a bit of money off when needed. And if you can see on Vertex, and of course, when you look at Keylock and the rest of the team, they also have been very experienced. People who have been there for a long time, so they know what they do and they have that discipline on investment price and

divesting. But we talk a lot about investing and not so much about divesting. Divesting is another art of knowing should you hold forever? It's why also you look at Sequoia US that also changed the structure of the company to be able to hold forever. I think it's because they were having also a few companies. I'm not even mentioning Apple's

But a few that went extremely well and where way more value was created after IPO, but also because now we have so much money in private markets, you can argue almost the opposite is a lot of value is created before IPO.

So as well, so a lot of those crossover funds came to like the Kuoatoo and the Tiger came to private markets because they were seeing that value at IPO were like super high, which wasn't the case before. Like you look at the IPO value of Amazon, it's, I think it's a single digit billion, right? Today, if you do a single digit billion, IPO is like, ah, you're not doing very well, right? It's a small company.

A lot of private won't go at sometime like 20, 40, 50 billion for the IPO. So it means you get 50 times more value credit as private versus being public yet.

So do you think the current DPI problem in the Southeast Asia VCs are going to hamper them in terms of how they're going to raise their next few funds? Oh yeah, I mean, as I mentioned, the money you return is likely to be the money they reinvest in you. So you're already not offering that much of that alternative. Second, there's still a lot of questions about exit in the region. How do you get that money back? And that will be very difficult to find a good reason there.

So I think that will also likely reduce the size of the farms in Southeast Asia. So I wouldn't be surprised to see a few of them raising smaller farms or growing the size of their farms lower.

But I think it's a good thing because if the fund is smaller, then they're more likely to offer a good DPI. They will be focused to invest on greater companies. Also less capital for the founders will make them build more, much too nice to have. So I think it's a good selection and it will be painful. We may also have less VC, but same, it takes 10 years for a VC to die basically. So we're not going to that immediately.

But I think I strongly encourage founders to check who is really active. And when they met a VC, ask, how many deals have you done in the last six months? If there are precedes and they have done none, that's definitely not a good sign for you of talking with them. So I just want to ask a couple of quick by-round questions and then try to get your thoughts on that. I think my first question is, what would be the advice you give to founders now in this kind of 2023, 2024 scenario?

So for example, I got a funder recently backed by some of the top VC in the region asking me, oh, what is the best thing I should do to get acquired? I'm like, build a great company. At the same time, it's a very simple answer, but it's a very complex way. How do you make your company a great company? And then I told him, second, the best time to sell is when you don't want to sell. I was telling him, I know a funder that when he sold his company in Southeast Asia,

So that it was a fully bootstrapped company, sold it for two digit million. The founder was solo founder, owned 95% of the company. So good money for him. If you look at that time, all the numbers like, man, don't sell. You are like...

on the exponential growth, like you are leaving so much money out of the table. He sold, one or two years later, the business really started to shrink and you're like, oh my God, if you knew about it, that was perfect timing. So it's very difficult, right? It's very difficult. And I think for me, the best time to sell is often when you don't want, but then it's also as a founder when they have that position is,

Would you have any regrets if you sell? And I think that is where my question is. Are you comfortable selling or do you want to get to be all in and really try it? And we get all those examples, right? Facebook did it all to, I think it was Microsoft. Yahoo, Yahoo. Yahoo also doesn't want to sell for Microsoft. It was like, what, 40 billion? And then it got sold for almost nothing to Verizon. So if you look back, it's very easy to know when was a good time, when is a bad time.

And those are very difficult decisions to navigate about what is a great time to sell. But I will say, build a great company,

Things will go through. But as you know, it's extremely difficult to build a great company. And it's like, what do you need to do? What is your next few step? It's very difficult. But also what I've seen is the people who build great company want a good indicator is that way more decisive. They make decision. They move fast. So you have to embrace that risk and you have to push hard and be quite bold on how big you want that to be. If you're into a venture-backed business, if you're building an SME,

It's a very different way to run. And for me, it's just a different form of entrepreneurship.

And we have a tendency to place one above the other, but I have deep respect for people that are craftmen, doing a lot of craftsmanship or like even if chef in a cuisine, you get people doing amazing things. But yeah, I think for a lot of those founders is do your best to build a great business and think about what is it to build a great business to grow through that. What is the one question that you wish people, more people would ask you on about the Southeast Asia entrepreneurial and investor landscape? Oh, I think...

well okay i will target a specific audience i wish that government asked more what can they do to remove the bottle the current bottleneck the current bottleneck so i'm going to ask you that question now what would you wish that the bottlenecks be removed such that that is the case in southeast asia or if i'm a government or i will do a bunch of things first okay i'm very aggressive so first i will give to

Entrepreneurs, five-year visa, stop the one, two, three years visa, give five years. Entrepreneurs shouldn't focus for the foreign one on their visa runway, but focus on the cash runway and build a great business. And if you look at a lot of, not China, but if you look at Europe or USA, a lot of great companies have been built by foreigners. So you need to have those foreigners to enhance the ecosystem. So

So I will give like long-term visa. I will find ways to train the GPs. So we'll bring GPs of European or US found to give them advice, support them, do workshop with them, do those kinds of support, tell them a little bit more about the rope of the ecosystem that are competing anyway, but find incentive for those people to come and do that.

I think what Kazana is doing is great, but I wish we can see like a founder fund at a Southeast Asia level from the governments, but I don't think so that it's possible. But if I can dream about it, I will dream about how do we have like a Southeast Asian founder fund from the government to invest in the best funds, but focusing mostly on emerging fund manager, especially fund one, fund two.

And then it's also about how do you build, later on, how do you build fund-to-fund on the region? How do you build a fund for secondary fund, right? So in a way, and I've seen that in other markets, as a government, you have to build a fund to seed fund-to-fund, right? So you get those kinds of things. If you look at the region and you compare it with other regions,

And that donation would be almost impossible to have people to agree on that. But can you have specific stock market for specific type of companies and not necessarily competing against each other? It's like you are a tech company, you go in as SGX, you are, I don't know, another segment, you go to this stock market, you are another segment, you go to this stock market, for example, or how do you merge all of them and you only have one? But that is impossible, right? Because you need to have size and there's no much size there. So that is a bigger challenge, right?

And then I think I will, even if from more like a local perspective, I will start, that is a very long-term thing, but I wish I can see any students, any kids of six to 10 years old have to run a limited stand or something like that. Like make them do

a project that from A to Z is about what is my cost? How do I produce things? How much are selling it? Like a tiny business. And let them experiment the whole thing, right? Does location matter? Does my price matter? Does my branding matter? Does all those kind of things, right?

And then give them a taste of that and give them that across the years. And I also want to see more women building businesses in the region. We don't have that many. And I also want more women build scalable business. Like, for example, in France, there's way too many of them who go to EdTech. I think in France, founders in EdTech is like 40% women.

Okay. You just have one walking past my window with my wife, which is a CEO of a high-growth company. Okay, but not EdTech, which is great. Yeah, my traditional closing question. What does great look like for moving forward in Southeast Asia? What, sorry? What does great look like for the startup and venture ecosystem for

Southeast Asia for the next five years. Maybe I'll make it simpler for. Yeah, what I want to see is more stories that haven't been much covered. Like, for example, the Cosmos Software slash Millicast story. So that was a company started out of Singapore. I ended up to get through them because I was doing some scouting for AWS. So I give them some AWS credits. I unfortunately didn't get the opportunity to angel invest because they end up to never raise capital, but they end up to be acquired by Dolby.

So if you think about Dolby acquiring a Southeast Asian company for their tech, there's not much stories like that. And I want to see more great stories like that of Southeast Asian company building unique technology that can bring value to a lot of people globally and not just Southeast Asia. I want to see more things happening at the global level. And that I think for me is a

It's a validation that if Dolby on the sound part by a Southeast Asian company for the tech means we can create great things out of Southeast Asia too at the global level. So I want to see more great stories like that. And I also want media and other people to be less picky on which stories they cover or not, depending on is it built locally? Is it built by local or by foreigners? Is it built by...

It's like Malaysia, please embrace more Grab as being a Malaysian company. It's like Thailand, please embrace more Agoda as a Thai company. You know, we say all this, right? But one of the things I felt that the VCs totally missed was all the best crypto companies. Yeah. Nansen AI is in Singapore, funded by Andreessen Horowitz. YGG from Philippines, funded by Andreessen Horowitz.

AX, XC Infinity, or Sky Mavis, Vietnam, funded by Android, CoinGecko, is in Malaysia, Etherscan, Malaysia. So, you know, sometimes I agree with you with that sentiment, and most of the VCs miss those crypto companies, which is really... I think...

Crypto, interestingly, I mean, what have been done quite well is having Token 2049 in Singapore, which is the biggest event of token globally. But then I agree with you, the crypto, it's kind of another dimension.

It's a different set of investors. You get a few South Asian investors having one or two percent looking at crypto, but it's not easy and it ends up to be like a different subset. And a lot of reports you will see in the region wouldn't really mention crypto companies. It's a different, it looks like they don't consider them as being startups. It's like startup, SMEs and crypto. Crypto is also another bucket.

But I mean, on the some you mentioned, I mean, like, for example, Axie Infinity also being backed by 500. So it's not only by the 500 Southeast Asia or the Vietnamese team. I think it's a Vietnamese team who did it. So some of them also backed by local VCs. Very few. But I agree with you, very few. And it's interesting then to see how come Andrius Andorovits come up to here to find things that people here are maybe not finding. Yeah.

But no, it's true. There's not much there. I mean, Lunex was also doing a bunch of crypto things. Yeah, there's not that many crypto funds in the region. I agree. That is something we also have to see more. And also, yeah, when there's a new wave, it's good to surf that wave instead of trying to surf the previous one when there's so much incubants you have to

You have to beat. So I agree with you. It's this new wave of crypto. Now there's new wave on AI. How can you surf those waves or those tides? And how can you build business there is likely to be more likely to be successful there. Even if you still have for the region, some interesting things to be done in SaaS, some interesting things done in fintech and some other area.

But for all of them, be mindful of what is a real size of the Southeast Asian market and the real ability for you to raise capital, to sell your product, to sell potentially your company or go IPO. Don't like too much to yourself on those things and be more, not pessimistic, but be more realistic. And I think sometimes people don't want to be realistic. So I think as you're telling the truth, they're calling you being pessimistic.

And it's like, no, no, that is just the truth. Show me the numbers that tell me the opposite. And often they don't have, they just want to be

expecting a bright future without much reason why to expect such things. Yeah. I mean, thanks for coming on the show. And I think we have a pretty good time discussing the Lightspeed report and all this DPI conversation and talking about truths that a lot of people do not agree with us on. So definitely have to come back before episode 500. In closing, two quick questions. Any recommendations that have inspired you recently?

Oh, okay. So first two things. One, I think kudos to Lightspeed for that report. I think it's good to have people to set it loud and not only having the bright side of all those reports telling us everything is wonderful. Second, I will say kudos to YouTube because you're going close to your 500th episode, as you mentioned, and that has been 10 years also of a night's success for you running it.

And we are both seeing so much people launching podcasts in the region that I think most of them haven't reached episode 10. So it's a very difficult thing. So like, congratulations for you. On the rating, I think one was quite surprising and I haven't shared about it much because it was just leaked. So I really don't want to share those two things too much. But it was the memo written by MrBeast.

It's like a 30-page document. It's super interesting. One super quantitative thing there is he loves consultant. And I think, interestingly, usually people don't like consultant. So that was very interesting. I like it because he's also, his style is like very direct. He really tells you. But if you look at it,

Don't look too much about the structure of the sentence, but more about what is behind and why don't decide to do one guide for each team. But like I do one for everyone because we are all one and I want everyone to understand what is the other job of the other people in the company.

I think it's a very interesting document. Of course, it could have been way more Polish, but honestly, how many companies have such documents? I'm like, get, it's like move things. I mean, break things, move fast, right? It's better to have that than having nothing. So I'm super impressed by such people who are able to redefine all industry. If you look at entertainment, it's redefining everything. And the guy is super bold. He's always reinvest everything.

I think it was some interview people saying, "Hey, if you got a query for 1 billion." It's like, "No, I don't even bother to entertain such requests." And if it's like 10 billion, it's like it's not going there for him. So I think it's impressive to see such people. And he also built that from a very remote place. So it could have been done out of Southeast Asia. It doesn't have this read to be in the USA, right? So I think it's such things that are super inspiring.

And it's why I follow a little bit what he's doing. And I think now we find Mr. Beast's chocolate in 7-Eleven in Singapore. And so it really goes up to every auntie and uncles can know about it.

So, you know, I think that is very inspiring to see such people to build like such massive business. And again, I don't know for him, it's more than 10 years for sure. But again, it takes super, super long. So just to add, he was a 10 years low-level consumer gadgets reviewer before he got to MrBeast. So he spent 10 years studying YouTube before he started MrBeast. So for those out there, it does take time. And it's very...

He's also very intense about everything. And if you look at the level of details, the amount of money also he spent to do his miniature, the guy is not joking. He's really not joking. And he's not cutting corners and he's investing a lot of money. And he really focused on the outcome and not much about how much it cost him. And I think he mentioned multiple times he had to borrow money because he was burning too much money. So, I mean, you need also to have balance. I think he's kind of

get balance there. But I like the all in. I always like when you look at Jeff Bezos with Amazon, how much he was about reinvesting and building it. And I feel that is truly inspiring to see people being so bold and long-term in their business. How do my audience find you? LinkedIn is the best way. Okay. So many thanks for coming on the show. Everybody can find us on YouTube and Spotify. And of course, subscribe to us in any other way. So, okay. Arnaud, we'll catch up again soon. Thank you, Bernard.