Introduction
This podcast was first published in China Startup Pulse. In this episode, host Oscar Ramos and Peng talk about Peng’s journey as an investor and how he perceives the great potential in Southeast Asia. More importantly, Peng summarizes a very important trend in SEA’s startup ecosystem, "Technification". They also talk about the impact that China's Internet giants have on SEA through investments and M&A.
Oscar Ramos, Host: Welcome to another episode of the Asia Startup Pulse today with guest Peng T. Ong, Co-Founder and Managing Partner of Monk's Hill Ventures. Peng, welcome to the podcast.
Peng T. Ong: Thank you. Thank you very much.
OR: Peng, you've been an investor for a long time you started your career investing in China, but you are now investing in Southeast Asia. What can you tell us about your journey as an investor and why you decided to originally start Monk’s Hills Ventures?
PTO: Yeah, so my investing sort of experience started way before China. Before I went to China, I spent most of my career in the Valley as an entrepreneur--Silicon Valley as an entrepreneur, so lots of opportunities are obviously there to do seed investing, but not professionally. And then when I was in Singapore, I did help our government in Singapore, run a particular fund--tech focused one. After that, I went to China and I joined a firm called GSR Ventures. They're one of the top Series A venture funds in China. And I spent four years there really understanding China.
But as my partner at Kuo-Yi and I talked, over the years when I was in China, and towards 2012, we started realizing that the ecosystem in Southeast Asia was getting big enough, the GDP per capita was high enough, there was enough discretionary spending going on that we thought at that point, 2012 or so, that tech would start taking off, right, we're probably a bit early, but not so early. And we decided to start a series A fund, we saw a lot of seed deals at that point. So we thought seriously, if it would be timely. So we did.
OR: What would you say is the main difference of the Series A and the seed round?
PTO: The seed round is, I've got an idea. I think if I did ABCDE, I can start building a repeatable, scalable business, a big business, right? And the seed investor goes, “Yeah, I believe you, here's the money, go try it.” That's a seed investor.
A Series A investor is coming in after a year, maybe nine months to 24 months, after you spend some money trying out the idea. And you're telling us the Series A investor, I think we have a business here, we ran this thing, and we've got this amount of traction with our product. And we think with your Series A investment, we can crank it up. And that's the ideal situation. Sometimes when you start cranking up, you realize there are some problems to the sales engine and all kinds of issues. So that's the difference between seed and A is whether the sales engine is up and running, or at least kind of you have some idea how the sales engine is going to run as opposed to it's a design and a theory.
OR: Peng, you're investing across Southeast Asia and you've also been an active investor in China. And when we say Series A, and we've tried to make it more and more specific, and we say okay, how much is actually a series A, the range goes really, really, really wide. So can you talk a bit about your perception of Series A
PTO: So the seed and series A I described to you is what we think about in terms of risk categories, right? Series A and seed. It is also a label they put on the share purchase agreement, right? To that extent is just a name. So you've seen seed deals look like series A in terms of valuation, in fact, seed deals that look like Series B or C in terms of valuation and new money raised, you know, people raise, I've seen people raised like 50 million in the first round, right? A seed deal, 50 million new money, right? But that's very rare. That's probably a serial entrepreneur, he's already built a billion dollar company doing something else. You know, that's unusual.
OR: Yeah. Maybe the seed round aid with themselves by pulling a few millions?
PTO: Yeah, so the label is just the first label that went on the share purchase agreement, right? So is this series A, but they might have already spent, you know, three, 4 million getting there. So when we say series A or Series B, or C, for that matter, we don't really refer to that label on the shareholder agreement. We're thinking in terms of the stage of the company, where, how much do we understand about your business today? Right? That's what we mean by series A.
So Series A would be you kind of sort of got a sales engine going, I think we look at it, and you go “How much does it cost to get one qualified customer?” Okay, here's the numbers, you know, approximately, you know, $100, whatever, right? So you get some ideas how to run your business, by the time you're at Series A. You haven't scaled it up, you're maybe a half million, 1 million, 2 million in revenues. You haven't really scaled it up to like 10, 20, 30 million.
OR: You found something that someone wants, you seem to be able to deliver on that promise. But still, you're working on these repeatable and scalable growth engines for the company.
PTO: You might even have some level of visibility into the repeatability, but you haven't scaled it out. So you think you can repeat it and scale it out and that's where the risk is. This is the VC part of the investment, right? That's the risk involved.
OR: But if we give you the number, if we give it a number, you can think about it in different ways. Nobody gives you an idea of how much you can get when you are raising money or how much do you need to take the company to the next level in different markets.
PTO: In Southeast Asia and Asia in general, there's a huge variety. I mean, you have like an eight digit series A in some markets, and you have like series A that could be like low seven digits. That's in most businesses, there's no simple answer to this. The second question you ask, How much money do you need? Right? It's actually a very what we like to call first principles kind of question. It's not a theoretical question in a vacuum.
How much money you need depends on what you're trying to do with the business. And what are your plans? How's your ramp up rate? How much visibility do you have to your pipeline? Doing a business plan, and in your business plan, you do the math, and you go, Okay, I need 3 million, and I better reason to a million and a half to have a buffer. So it's four and a half million, I'm going to raise four and a half million. So that's how fundamentally we like to see entrepreneurs attack that question, as opposed to, “oh, I can raise 10 million, because I'm good at fundraising. So let me raise 10 million.” No, that's not I think, the right way to approach that problem. I don't know if that answered your question.
OR: Yeah, that definitely is a good way. I mean, what we're trying to find here is the difference that you can find in the region and how this gives you a bit of a pulse of the maturity of the venture capital ecosystem. I think also, somehow, we talked about Southeast Asia as a region, but it's so I mean, there's a lot of differences, when you look at the different parts that have different countries that are part of Southeast Asia.
PTO: Yes, really, there is a whole range--I can probably name you three, four companies that recently got funded Series A at the mid $50 million, mid seven digits kind of range, right? So around 50 million plus or minus that kind of range. For series A deal in Southeast Asia, where it's most of it in the series A.
In the past, it’s been either six digits or teens, seven digits, right, between 10-20 million, and then they started more recently going above ten, to 20 to 25 and 30. That kind of range that is normal for Southeast Asia. In fact, I would say that 25-30 is on the high side or for a series A. But I've seen, you know, half 50 million. That's not uncommon.
OR: Do you think this is more driven by the growth of investment? Because they're more investors, then there's kind of like supply-demand law comes there, and then allows entrepreneurs to secure more resources? Or is it because the region's becoming more competitive, and then you actually need more?
PTO: I think it's not about how much capital the company needs. Number one, obviously, how well they're executing. But the price revenue ratios have actually gone up, right? I think it's the sort of the global recognition of the fact that Southeast Asia is becoming as interesting a venture market as Europe or US. We're starting to have--or China for that matter. We're starting to have multiples that are closer to the US, China, Europe kind of range and I think that's good for the region. It’s basically I think, in some ways a recognition that the risk is a bit lower now. So you can pay, you don't have to squeeze as much of the multiples out of the company.
OR: I think one of the areas right now that you are the most interested in. What are the type of industries you are more bullish on in Southeast Asia?
PTO: We tend not to be focused on one particular sector or another particular sector or trend, invest, etc. Again, back to what I said, we're really first principles, right? When you tell us we have a business to build, we go, how are you going to build it? Who are going to sell to? All the basic questions. But that said, the most interesting trend, I think we talked about this earlier, one of the most interesting trends to us is what we've been labeling the technification of the service sectors.
So in China, 15 years ago, you can see a lot of the services, China today has about 12-13 billion in GDP, about half of that in services. And if you look at the services business in China, a lot of the profit margins in services go to tech companies that weren't around 15 years ago, the new companies. So these companies have been taking China from really pen and paper human beings running around kind of services business to fully AI-empowered, software-enabled services businesses. For example, trucking, 70-80% of trucking goes through one one company in China, Full Truck Alliance. E-commerce, about three, four companies as the bulk of retail going on, right?
So you can see all the services sectors and financial services, employment, HR, you know, home purchasing, you know, the whole gamut of services that encompasses your half the GDP of the country. It's all technified in China, right? In fact, the challenge now for tech entrepreneurs in China is all these areas are now red oceans, they're no longer blue oceans. So what are you going to do next? That's one of the challenges in China.
But if you take that view of life, and you apply to Southeast Asia, we're about 10, maybe 15 years, at worst case, behind China. Our GDP is around what China was when all this technification started happening about 10-15 years ago and we can see it happening here. Look at transportation Gojek, Grab. Look at, retail, you got Shopee, Tokopedia, Bukalapak. So a lot of the services sectors are beginning, starting to be taken over by tech companies. And I think this is one of the most interesting trends in the world, actually, for tech investing, because we're not talking about small chunks of the economy. This is half of the GDP of Southeast Asia is in services, it's 1.5 trillion right now. I think in 10 years would be 3 trillion, right? And in 10 years, that 3 trillion, most of that profit pool from that 3 trillion will belong to a lot of tech companies. So that's why it's exciting.
OR: Actually, you know, when you're talking about that, it is true. And I try to explain sometimes when people come to me about China and try to understand a bit more about the technology ecosystem. And they look at the companies like--well, I mean--that technology is not rocket science.
PTO: No, it's not.
OR: It's not about the technology, it’s not about the technology behind it. It's about the concept. It’s about how they actually have the technology in the core DNA of what they do. And if you combine that with a growing consumer population that is becoming more demanding, more sophisticated, and a lack of infrastructure, even sometimes very low technology companies develop technology where they can actually have massive growth. And I remember when I when I, when I came here to China, 15 years ago, I was really surprised by what seemed like just hotel chains and and restaurant chains, without particularly using technology, but probably more than others. They were going public on the NASDAQ. And I was like, Well, why? Because if you look at the company, as a black box, and you look at the numbers, they're growing super fast. And on top of that, you add a layer of technology and most of these companies, they are technology companies at their core, but from the outside they’re a service company.
PTO: They’re trucking businesses, or they’re headhunting businesses and so on. Yeah. And the point here is that there's no way they can grow that fast, and service that many users in a short amount of time without technology, right? Their efficiency, their productivity is just going to be human based systems if they didn't have tech. So it's a combination of using tech and really super optimizing services business, that we're not even using computers. So it's like going from the Bronze Age into the into the computer age in one step.
If you understand how emerging market services business work, you realize that's very, very inefficient, right? So we're not just trying to computerize this, this is why we don't use the term digitization, or computerization. It's just really looking at the business and asking yourself, how do I use technology to make this even more efficient than first-world systems? So arguably, I think China has one of the most productive tech, more sophisticated services sectors in the world now, because almost all of its new. It's been built the last 10 years and this is what's happening here in Southeast Asia, we're building out a lot of these capabilities.
And the businesses are actually what we've been calling digital first challenges. They're challenging the existing brick and mortar businesses with digital technology.
OR: Yeah, at least for China, where you had a very fragmented industry. In some cases, you create a layer of--not just optimization, but a layer of standardization.
PTO: You have to reimagine how the business is going to work. You can't just do the same thing with computers. So let me give you an example. We have a company called Glints, it's a recruiting company. It has headhunters and headhunters do what others do--they talk to the candidates, they talk to the managers, and they try to find that match. The challenge is if I have a database of a million engineers and my client says give me five engineers in Tangerang, which is near Jakarta, and I want them with this qualification, etc. How do I find it? How do I find those are those five engineers to show the client very difficult. So this is where AI comes in. This is where technology comes in, we can have the system go search and give you the matches and the matches will be very good, much better than what a human being can do. This is not a human-scale problem. So as a result, for instance, it is approximately twice the productivity of the average headhunter in Indonesia. So that's one example where you're doing very traditional services business, but you're using technology to really drastically improve the efficiency.
OR: When you look at businesses like these, you have a combination of not necessarily rocket science. And you're not competing against an existing technology company, you're competing with a traditional company that has brand credibility and expertise. So what is the core DNA of successful funding team for that type of space? Are we looking for like the tech guys? Or are we looking for the industry experts? Obviously, you always need a combination, but who plays the CEO role? Who is the one that drives really the strategy and the vision for the company?
PTO: So my ideal answer to that is that the CEO has both expertise. But if I had to choose, the CEO should be very humble about the domain and work with his partners to figure out the domain. But he or she will have the technical expertise to understand what technology can do, the process expertise to understand how to apply the technology to really super, super optimize the system. So this is, this is not just technology innovation, this is business model innovation. Are there ways to generate leads that don't require you to pay lots of money for customer acquisition, and so on. That's a lot of things that just require deep thinking about where the value creation is, and how do you super optimize the value creation.
OR: In this area, you mentioned right now that China did create that industry of technology enabled services that basically are traditional companies with a core DNA that is different. And they are probably on like I just said, I mean, for me, I live in China, but travel abroad to different places. I have like an experience of the service here or in other places, and I can see the value, I can see the efficiency, I can see how this becomes very, very competitive. And when these companies are like thinking, “Okay, should we expand internationally?” You already have the experience, particularly in Southeast Asia, we're in the e-commerce domain where China also became really, really active in that area, and they develop very unique ecommerce models. And those e-commerce models expanded to other parts of the world, they did have these expansion, and then they play a very important role in shaping and contributing to the evolution of the e-commerce market in Southeast Asia. What is your view on the service industry?
PTO: My view on the service industry in Southeast Asia or in China?
OR: In terms of what is China’s role gonna play in the technification of the service industry in Southeast Asia.
PTO: I see, I think the first and probably the most important thing, they were the foreigners, they started doing that in the economy 15 years ago, right? Lots of lots of lessons to be learned. There are a lot of models. You see, it used to be “copy to China”. So you copy us models to China. And then pretty soon, China started evolving its own models. Now it's copy to Southeast Asia, right? Some of the models.
Obviously, I'm just being a little bit facetious. You don't just copy everything without using your brains. Some things don't translate culturally, some things don't translate through legal systems, etc. You need to copy and modify and paste, right. So you've seen that happen. If you ask the guys who--I won't name names--but the guys who started GoFood in Jakarta, where did that idea come from? Well, I tell you, because when they visited China, they talked to the folks at Ele.me. GSR was one of the investors. Ele.me literally means “are you hungry” They looked at that model and go, yeah, we've got the drivers here so can we do that? So within a year go full, it's up and running and growing like crazy, right? So this copy to Southeast Asia thing, but you got to be sensitive on how you adapted for the local case, culture, etc. So that's the number one, I think most important thing.
I think China also has interest in having visibility, influence--not China--but Chinese companies, visibility influence, maybe some level control in Southeast Asia. So they've been active, you see Tencent funds here, you see Ali investing here, and so on, and so forth. So you see some of that, and that helps the maturity of the ecosystem, also having funds come in. I think the good news for Southeast Asia, for Southeast Asian entrepreneurs is China is a big place. And all the Chinese executives are busy fighting the battles in China. So they're not coming down to Southeast Asia as vigorously as they could, right? If they've settled the China challenges, so it leaves Southeast Asian entrepreneurs to Southeast Asia to go build up their businesses. And you see most of our large companies are not they're not Chinese branded companies. They are local companies.
OR: The local companies, but as you mentioned, like the Chinese, Chinese corporate venture capital investors, particularly those associated to the large internet companies, are among the most active investors in China, and in the corporate venture capital space, they're among the most active investors in the world. And they're relatively different than most of the typical corporate VCs, because they did have a very important role shaping and there are some times relatively early in the process of investing, investing in companies. So how is the role that they are having from that investment side? Are they coming as a very strategic investor? Are they changing the model?
PTO: They're coming in as a strategic investor, to build alliances, to build relationships, data sourcing for them, so they understand what the markets are here. But they do come in typically, they're not doing your $10 million deals, right? They're doing my 100 million dollar deals. So they're working with companies that have gotten to a certain scale already in Southeast Asia. So that's the difference. You don't see Ali or Tencent, or any of the Chinese big companies doing Series A or seed level kind of investing out here.
OR: Let me rephrase the question in a different way. So one of the concerns sometimes that that exists, when entrepreneurs raise from a corporate VC, I'll say that in China with some of these strategics is relatively different, because you know that there's going to be a change. And you know, there's already a commitment. But that doesn't necessarily mean that eventually what's going to happen is that you're going to get acquired, or you're going to be somehow controlled and your operations are going to change because you will have to basically integrate in the corporate VC. What is the perception from Southeast Asia entrepreneurs when they potentially get investment from one of these companies? Do they see that as a next step for acquisition? Or they know there might be potential different paths?
PTO: If you're a good CEO, you realize that one of your responsibilities is to make sure the optionalities are there for the company, right? You can go public if you're at a certain level of revenues and profits. And then if you have strategic alliances, you can have exits through some of the big Chinese companies or the globals. So you want to lay out all these options and actually bring them closer to you, right. And the way you do that, from a strategic angle is by getting strategic investments, pretty straightforward. They are invested in you, they send a board member, they know how you're doing, they appreciate your business. And at some point, if it makes sense, you can talk to them about M&A.
But the way you do it, it's not to leave them as the only choice for you. You need optionality. You need to say. "Well, if we don't do this, I'm gonna go public or this other companies interested." You want to make sure you have optionality. I think that is the trick to most CEOs, strategic decisions along these lines. The way I've seen it, most of them have figured this out, you know, the Chinese investors typically don't come in and buy out 50%. And company is controlling it, right. That's not how it works. You know, they are like any other investor, they take a chunk of the company, and they have a board member, and they work with the company as they grow, right. And quite a number of Chinese companies are doing that now. It’s very friendly. I think the thing you got to realize is one of Southeast Asia's advantages that the Chinese companies don't have, is our companies are multinationals very early. We've got people in different parts of Southeast Asia, different languages, different cultures, and we figured out how to all work together in the company, the Chinese companies, if they want to go out, they got to take advantage of that, and not just bring the Chinese operating culture into Southeast Asia, which might or might not work in some places and they're smart enough to know that. So it's not about taking over and controlling everything. It's about working together.
OR: With the amount of islands that you have in Southeast Asia, you need to start working on remote practices really fast. Otherwise, here you get, you get a fast speed train, and you can cross the country in like, a few hours. But yeah, but in Southeast Asia if you wanna you want to travel like 100 kilometers? Most likely, you need to get a plane.
PTO: Yeah, Philippines and Indonesia, two fascinatingly different countries, from a logistics and internet spread point of view. Just very different. 15,000 islands each. How do you figure out how to wire up all that?
OR: Definitely. I was gonna say all the infrastructure that is critical to make this happen. Because at the end of the day, we said that the technification of business is not rocket science. But there's actually technology that has been developed. And some of this technology is actually relatively localized for the specific use case. Now we've seen for example, how, here in the industry, simply of the older workforces that are powering some of the on demand services, they have eventually developed a lot of auxiliary technology. Some of them even become startups themselves that became unicorns to be able to provide specific support for payments or support for the robotisation, or even like specific devices that might not make that happen. Do you see that infrastructure layer that needs to power, some of these new services are going to be technified in Southeast Asia, coming from outside or being develop also locally? Because the reality is too different to be able to bring in something that works on somewhere else.
PTO: Yeah, I see a lot of it being developed internally, the credit systems, you know, people are starting to think, how do we figure out credit in Southeast Asia? How do you do that in Indonesia? How do you do that in the Philippines? So you're seeing a lot of these systems being built out as we speak and I think a lot of it's going to be just built locally.
OR: But are you seeing also I mean, one of the key things that is so so I mean that initial push off of Okay, yeah, we need we have a specific, difficult problem to solve is not just opportunity problems, like really a big, big challenge that needs to be solved. And we need to solve these here. We saw that as a push to work on more, not just B2B on enterprises, startups, but actually to work more on on core technology startups and then the whole geopolitical situation that kind of like forced China to find their own alternatives to some of the international technologies that they couldn't have access, it cannot have has given a push to the whole high tech and tech ecosystem. Is this also coming to Southeast Asia? You see that also happening?
PTO: No, I think over the next few years, you're going to see China becoming more and more independent technologically. And you're going to see two branches of technology being built out, one, rest of the world and one, China. And the nice thing of being Southeast Asia, I think will be exposed to both. And we have both available at some level, not the super, super high tech, spy stuff, but the general development technology and AI and all that stuff will be available in Southeast Asia. So we don't need to go build our own chipsets and design our own foundries and so on. I don't think it’lll happen in Southeast Asia.
OR: Well, I mean, if you can benefit from getting the best from the best from everywhere, and you're actually in a good position to shape that supply demand curve to your own purpose because obviously once once this technology that is available and ready to be competitive for the domestic market in China, I mean obviously they’re gonna be going and look for alternative market items. And as the international players that know that kind of get cut from the, from the China market, they will be also trying to make sure that they don't lose even more. Yeah, so there's gonna be an interesting situation there.
PTO: Yeah, so rather focus our attention as a venture fund on sort of what economic improvements, efficiencies we can build out in Southeast Asia, as opposed to building core technologies, about maybe 20-30% of our funds is like SaaS and core tech businesses. The rest of it, we're trying to really focus on these services, that sort of technification kind of play, where you can create multi billion dollar companies, because they are very good at some particular services and value proposition,
OR: Anything that you think would be great to talk about?
PTO: I think, give you a few more examples of companies who are looking at or investing in. We see, travel experience packaging company, meaning you buy a skew that gives you a very unique experience. You know, that's an interesting, next generation of travel company. I think you'll get interesting the next few years, people have been cooped up so long, if we want to travel and I think you know,
OR: You know you're talking with a real VC when they're talking about travel, where we are still doubting our mobility. That is really that is really forward looking.
PTO: Yeah, well, not not that much, you see that the internal travel has already picked up quite a lot So you can see the writing on the wall. Travel is one thing--education. That's one of my favorite topics.
We have a company, you probably know this, if you know English in Southeast Asia, your salary just got bumped up, right? So we have a company that actually is not teaching you how to read and write English is teaching you how to speak proper standard American English. It has an AI that coaches you. So the shortage of Native English speakers is now not a problem. You can actually learn standard American English using an app. So things like that is happening across. Education is happening across.
Insurance is another interesting area, the consumption of insurance is going to go up over the next few years in Southeast Asia. And the tech behind it is just very primitive right now. So lots and lots of opportunities.
I know the audience for you is a lot of entrepreneurs. So I just want to reinforce I think what's kind of obvious now, there's a lot of opportunities to build really, really big companies in Southeast Asia at this point. This is a once in a lifetime opportunity after that, you might have to move to Africa to have that same opportunity when Africa goes through that technification process. So come help us build. I think this is a really good time to do this.
OR: Well, thank you very much, Peng, for joining us today for the podcast, for sharing a bit more insights about these trends, where it comes from, where it’s going to. I love the last message to welcome people with open arms to transform the region and to create new opportunities here.
PTO: That's what tech is for right? To make a difference in life.
