Carmen Yuen | BFM 89.9 | VVSEAI Fund 5's investment focus and how we work with our portfolio companies

Carmen Yuen, our General Partner for Vertex Ventures Southeast Asia & India, was interviewed by Richard Bradbury and Roshan Kanesan on BFM 89.9.

Carmen shares about our #VVSEAIFund5, where we think the growth opportunities are and how we work with our portfolio founders. If you have questions such as "are we active or passive investors? How do we help our startups to succeed? How Will Vertex Ventures SEA & India Invest USD541 Million?" Tune in to the podcast on BFM 89.9.

Transcript:

Radio Host: Vertex Ventures Southeast Asia and India has completed the fundraising for its fifth round. Sorry, that's fund five and they got a commitment of over around 541 million US dollars, half a billion dollars right there. Fund five is 80% larger than fund four which they raised over in 2019.

So Vertex Ventures, an early stage VC that is sector agnostic and focused on Southeast Asia and India, in particular, they seem to have a focus on the digital economy in Southeast Asia and India, which they say is driven by the rise of the consumer class, the acceleration of access to tech enabled digital financial services, the digitalization of small businesses and the continuous improvement of infrastructure to help support these needs. But ultimately, like most VCs, they back startups, at least believe it.

Some of the companies they've invested in include used two wheeler marketplace, Beepkart, from India. Malaysia's very own Storehub, which is an all in one, point-of-sale system, as well as Singapore headquartered cross border payments company Nium. So quite a few familiar names here. But obviously these are just the tip of the iceberg when it comes to their portfolio. Fund five will continue this theme investing in high growth startups seeking the early round of institutional funding in Southeast Asia and India. Primary focuses will be Singapore, India, Indonesia, Thailand, Vietnam, of course, Malaysia and other emerging hubs in and across the region. Some of the areas that we'll be focusing on include enterprise technology, FinTech, consumer, internet, digital health, sustainability, of course, as well as mobility– all very important themes as we look towards the future. If you have any thoughts over the startup ecosystem, areas that we should be focusing on or even any questions in terms of where Vertex is going with their own fundraising or the funds deployed, you can get in touch with us over on WhatsApp.

But now to learn more about fund five, how the 541 million USD could be deployed and for Vertex Ventures’ view on Southeast Asia and the Malaysian startup landscape. We're speaking today with Carmen Yuem. She's the general partner at Vertex Ventures Southeast Asia and India. Carmen, welcome to the show. Can you hear me loud and clear?

Carmen Yuen: Yes. Hi, Roshan. And thank you so much for having me. I can hear you loud and clear. And thanks for the great introduction of our fund.

Host: Brilliant. Carmen, you are joining us remotely. Where are you based right now?

Carmen: So I'm based in Singapore. So I'm actually sitting in the heart of town, Raffles City shopping center area if people are familiar with Singapore.

Host: That's an awful lot of money to have in your hands Carmen and how do you feel about that?

Carmen: I think the work is just begun. So we will likely start looking for great companies, wonderful founders for us to work with. Lots of conversations with the ecosystem players.

Host: Let’s get into it that right so could you give us a little bit more context?We give a bit of an introduction earlier, but could you provide more context around the sectors of industry that fund five in particular will be focused on?

Carmen: Yes, sure. For sure. So since we started, so this is way back in about 2010. Our investment mandate remains unchanged. So we are an early stage investor, and we invest in the seed round, series A and Series B. It's pretty interesting because some of the Malaysian founders that we spoke to, thought we were late stage investors. So I sort of put it out there that we are seed series A and Series B.

Now in terms of sectors we have expanded our sectors of focus, as we started noticing some emerging trends. We started with the consumer internet economy. Then we had the Enterprise Solutions, FinTech and in fund four, we added all digital health, equity, tech and sustainability and most recently mobility. So for fund five our hands are full with a focus on the six sectors. Yeah and on why I mean, I can go into the whys we have chosen on some of these sectors, happy to elaborate, let me know.

Host: Yeah, please do.

Carmen: Okay. So on the consumer economy, thanks for that. On the consumer economy. I see. ASEAN is actually the world's fifth largest economy. I'm sure we all know that. We are probably very proud after China, US, Japan and Germany. And we have a very large yet very young population. Our median age is only about 32. So the Philippines is extremely young for that matter. And many of them have, many of our young population have the aspirations to get good jobs, hence, they want to step up into the middle class. And such a trajectory actually spells a lot of opportunities in the consumer economy. So this will range from how the youths will consume things like education, skills, training. How they choose to eat, is it just merely basic food? Is it functional? Is it health conscious options. How do they entertain? Do they just merely do live stream? Do they believe in live concerts? Taylor Swift was one example of that. Yes, they still do that. And then of course you've got the way they travel and way more so consumer economy remains a very hot sector that is to look at.

On the enterprise solutions, or what we call software as a service. More than 75% of our economy is made up of small medium enterprises. And the rest are the large guys. But the large guys when they started they were once small, they were once nimble but as they grow, they started building loads of inefficiencies. So the companies we invest in seek to address some of these inefficiencies by providing enterprises with the tools to enable them or to enable their staff to be more productive, and to have better visibility to different aspects of the operations. So we help them to save money. For SMEs, COVID actually gave all of them a wake up call on why they need to digitalize and there's still a lot of room for them to learn to adopt technology. So again, the companies we back, example Storehub, they look to serve this big market need of SMEs?

Then we also saw the democratization in the access to financial opportunities. So from building FinTech rails to providing productive loans to consolidating streamlining financial operations, opportunities abound. Not to mention that FinTech also touches many of us many times of the day, just like WhatsApp. However, what used to be traditional and was once old school is now mostly digital, and has also been democratized. Wealth tech used to be only for the rich and famous, the high net worth. But now we can also have access to wealth tech management products, even on wallets like and invest.

Then on healthcare, we know the three major chronic issues economies will face. They are the cancer issues, cardiac issues and dementia. And as our region improves economically, these healthcare issues will follow us very closely and they will challenge us in tandem. So how can technology improve our health span? Not just merely lifespan, they will cause us to desire also how to take ownership of our own health. And so at the same time, what are some of the innovations we can adopt in the early stage to bring about significant transformation, even in the healthcare arena. Then the other thing we looked at is in the FEM tech space. women choose to start families later, women want to take charge of their life. So what are some of these concerns that technology can solve?

So I will wrap up with agri tech sustainability and mobility. We do have many small footprint farmers and farming is necessary because it provides the food we eat. But farming is super backbreaking, farmers are getting older and older. So what can we do to ensure that the future of sustainable farming and food is maintained? Is it just merely about novel food? Or is it how food is grown? When the climate tech piece is how do we see through so that we can move from fad to what is being sustainable and happy changing.

And our mobility is tied to consumers right, our aspiration to decide when we want to travel on our schedule on our time in the way we want. So and going forward, the youths will also be looking at options that are less environmentally damaging. So we think that these are all very interesting options or opportunities that we have at hand.

Host: Some very comprehensive stuff, some really interesting places that you're looking at, for sure, but I do want to touch on something. You kind of briefly mentioned common but the one corpus also includes a dedicated co-investment envelope of 50 million US dollars for co- investing in startups led by women founders. Can you talk us through the rationale behind this co- investment envelope or parallel fund?

Carmen: Yes, yes. So, we call it the envelope like when you correctly said and we will tap into this fund whenever there is a female co-founder or founder, but the way we have chosen to do it is that all investment decisions will still be carried out at the main fund level. So the Investment Committee of the main fund will have to make the decision. But in the event that the main fund decides to invest into a startup, and there is actually a female founder minimally. We will then tap into this envelope to draw on additional capital and this will be based on some ratio. So for a start, we decided to use like maybe three is to one. $3 from the main fund and one from this woman fund. And this picture will be reviewed over time, depending on how quickly or slowly we are deploying the fund. And so just to give you a rationale of why this fund was even started right. So we believe in investing into the best founders regardless of gender. And I joined the firm since 2014. And I noticed that this is the case, we have always been investing in the best founders and we started backing women founders even before it was in fashion. So in our most recent fund, we have more than 30% of our founders being female. So our LPs have noticed that since early on, we started investing to some women founders and we have done a lot more. So they felt that hey, maybe it will be apt to allocate like $50 million for us just to focus on female founders. And we share with them our model which is that the main fund will make the decision and then when that there's a female founder that will draw on a certain ratio. So they thought our explanation was very reasonable. And so that's why they are very, very supportive.

Host: Now, you mentioned a lot of that also touched on the investment decisions, right. So following up on that, talk to us about the strategies that you've put in place to identify promising startups in Southeast Asia and India that will fit the they'll fit into the funds mandate.

Carmen: Yes, yes. So we do look to invest in market and segment leading companies in our regions. And to get this outcome. There are some key traits that we will definitely have to focus on right. So our hit rate unfortunately is less than 1%. So this means to say that we will have to interact with more than 2,000 companies. And we may invest in about 12, 13, 14 of them. So how do we find them? It's like  finding a diamond in the rough. Needle in the haystack itself, hard work, lots of caffeine, a lot of food, hard work. And then after that we have to exercise, of course. Yeah, but we believe in having chemistry and a relationship with the founders. And also that the founders have to see value in working with us. So some of the people who have worked with us that we are not the easiest investors. We don't just merely invest and we disappear and return up at annual general meetings. We don't, we are actually active investors and this sets us apart. So we speak very regularly with our founders– sometimes even on a weekly basis, if there's more trouble then is every day, right? So we hope not to see them every day. And we do expect and we tell them we expect monthly financials. So we will sort of like use a stick and carrot method to get them into shape. Some of them need a little bit more time. But this is our expectation. We will be following this very closely. And we worked them hard, especially if they slip timelines, so our founders have actually aged faster when they work with us. I've seen young men looking way older than me after we have invested.

Host: I mean, we weren't we were gonna ask you you know how involved you get but you kind of just answered that. You making people older before their time, but a good way.

Carmen: In a good way. Yeah. So we hope that they will use some of the other DTC Products that we invest in as well.

Host: Creating a little bit of an ecosystem there. You mentioned the 1% hit rate. And you know, earlier on we talked about some of your portfolio companies including there's also Storehub as well as Beepkart. Are there any other success stories that you can highlight to give us a sense for Vertex investment strategy and how that's succeeded?

Carmen: Yes, yes, I'll be happy to share with you why that is very close to your heart. It was formerly known as Mytaxi and now known as Grab right. And I've got another actually we have invested into 5 wonderful Malaysian founders, but I will just highlight maybe one or two of them. So for grab, when we first met Anthony, he came across as somebody who's smart, he's from Harvard, right? And he's inquisitive, but he has the ability to listen. So that humility to listen, despite where he is, I think that's what sets him apart. He fits into our vision of finding outlier founders. Very driven he was taking budget airlines for quite a while walking around with a pillow to support his lower back. So even though he is who he is. It's startup - startup lifestyle, right? Yeah. Love that. And Grab started out as MyTaxi in Malaysia, but eventually the outran their global competitors. We saw the opportunity in this space. So we were the first institutional investor in the company. And when I joined it was shortly after we invested and I keep seeing this man in green walking around the office. You know who that is, right? So we work very closely with them on building out the team in Singapore, in speaking to regulators making sure that our taxi companies know that Grab is not there to take market share, but to work with the taxi companies to ensure that the consumers at large can actually enjoy a better commuting experience. So that's how we work with Grab. Then on Patsnap, it is a lesser known company because it is not a consumer facing company. It is more of a B2B company that's focusing on business intelligence on this thing called the intellectual property area where most companies in Southeast Asia don't really care about. So similarly for Patsnap, the founder, the founder himself is from Saba. He's extremely driven and very focused on making sure that your proposition is executed well. And one of the key criteria that we need to fulfill is that we need to know we can actually help this company and over the years, Patsnap has spoken to us many times, whenever there's any decision, any challenges. We are one of the first people that they will get on call with us. And this is despite them having raised a lot more money and they are now a unicorn and they operate at a global level. So whenever Jeffrey is back in town, he will make time to catch up with us. So this speaks about how we drive him hard but (we’re) the first number to dial on.

Host: All right, Carmen, we got to go into a few messages. But we will be back in just a bit. So don't run away just yet. Folks, the back of early stage venture capital firm vertex ventures, Southeast Asia and India, closing their fundraising round for that fund five, we've been speaking with their general partner, Carmen Yuan, on how the $541 million could be deployed, as well as what they're watching in the region and how they're going to be finding a balance between deploying funds quickly yet ensuring the quality of deals. Keep it, we'll be back in just a bit. So keep it here to Entreprise Biz Bytes on BFM 89.9.

Host: With Fund five, tell us abit about the plans you have to put money to work here in Malaysia.

Carmen: Malaysia is one of our key countries, right, that we want to focus on in Southeast Asia. And I mentioned that we have had five very good working relationships with five wonderful founders from Malaysia. So yes, it is going to be our hunting ground. And just last week, in Penang, we were attending the MyStartup NXT event organised by Cradle, so shout out to ash and his team. It was great. We had fun, the food was good. The company was great. Ash met us and he brought us to lunch. He ate with his hands but I had fork and spoon, but anyway.

Host: No judgment here Carmen.

Carmen: And so other than Ash we also speak a lot with Edwin from Endeavour, so Edwin is also a hustler. I love the spirit of Malaysians, Param and his team at MavCap. Casey and her team and Khazanah, Dr. Siva’s We Scale Up Malaysia, just to name a few of the folks that we will be (meeting) every time we go over to Malaysia. They do know our commitment to be serious about Malaysia. And so some of them have actually offered the office spaces for us to spend more time with portfolio companies as well as just to meet just to be present and be ready for people to just drop by and catch up with us.

Host: So early on when you spoke about some of the areas that you were looking at, you know, Enterprise tech, FinTech, consumer internet, digital health, sustainability, mobility. When it comes to looking at Malaysia, what do you see as the most promising startup areas or promising sectors I guess here in Malaysia?

Carmen: You know, this is gonna be very hard to tell. I will continue to rattle off some more names, right. So in our portfolio companies, just the Malaysian founders, we've got Grab, Mytaxi. So what is this? This is consumer, this is mobility. We’ve got Storehub, what is this? It is between enterprise solution, FinTech, SME enablement. We’ve got RPG, what is this? This is a brand building company - multiple threads. And we’ve got Sunday insurance although they operate in Thailand, founded by a Malaysian, this is a full stack digital insurer. And of course we have got a Patsnap, which is a B2B enterprise software company. So this is just the mix we have in our portfolio. But in Malaysia, you also have Carsome, what is that? That is an auto marketplace. You have got Property guru, Aerodyne, EasyParcel. I mean, I could just go on the list. So and these are great companies as well. So what it means is that actually Malaysia can have startups that become world contenders regardless of which segment they choose to be in. So it's really how they define their moat. How big is that problem statement that they want to address? And then how do they build the team up to address the moat as well as to fix the problems of their customers? So that'll be what I see. But personally, I like things that are difficult. If not, I wouldn't have chosen this life. I like to do challenging stuff where people will say - no, not possible, how can it be possible that you have such a company. So that’s why we invested into Patsnap, nobody would have thought that a software as a service company can come out in Southeast Asia that provides global solutions. Nobody, nobody would have thought that a company, that will focus and waste time focusing on intellectual property. Where the region does not really give two cents to the place. But yet, Patsnap has gotten fantastic users, users such as the NASA and in China, they have got other branded companies like Huawei. Those are all their users, and more to be added to the platform. So, as a result, because of their die-hard spirit, the way they added in the correct team members, this is how they are able to become the unicorn that they are right now.

Host: Yeah, they are dealing with some huge clients, Paypal, Dyson the Dow. Yeah. Carmen, you mentioned some names earlier. Ash from Cradle of course and MYstartup, Endeavor’s Dr Siva who's a friend of the show as well. So you're working closely with the early stage or at least the pre-seed ecosystem here in Malaysia. I mean, how closely do you work with these folks? In terms of sourcing deals? For example, could you share anything from that? On that front?

Carmen: Yes, so we are going to be long term squatters. Dr Siwa has been very gracious, he has been inviting us to speak on the different events that he organizes by founders for founders. So that gives us the opportunity to interact with many of the founders who are looking at fundraising at different junctures of their life. And we have also gone to visit some of them in their offices, have a lot more conversations. But it doesn't mean that just because we see a lot, we will definitely invest a lot. We still need time to evaluate, to watch the companies and also for the founders to get to know us to see whether this is the jokers that they don't mind having on their share cap table. So it's a lot of dialogues. But that's just from having the interactions that we have with the ecosystem players, early stage ecosystem players.

Host: I want to skip ahead a little bit Carmen, you know, obviously, the Southeast Asia region

now if we look at some of the publicness to Southeast Asian unicorns, if we look at Grab and we look at here in Southeast Asia, it doesnt always paint a pretty picture. Lot of investors who got in at certain IPOs are likely sitting on some fairly big losses now. What does this say about the future of Southeast Asian startups and venture investment in this particular region?

Carmen: Yeah, so honestly, right, there's quite a number of large tech companies  stocks that are also trading below their highs in 2022. So Grab and SEA, they are not the only ones. They're just part of the big number of them who are overvalued. Right. So at that point in time, I believe they're multiples were just too rich and if I may say this, I will just say that investors at that time, were a little bit less discerning. So, so therefore,  somewhere down the line, somebody were to pay the price, and unfortunately, it's showing itself now where the market cap of those companies are quite way below what they were during 2022. Having said that, there’s more than 3.7 billion dollars of funds within Southeast Asia waiting to be deployed. So for sure, capital is not a problem. But what we probably need and when we actually not just probably what we need is actually for founders, to find a spot of an emerging trend and to execute like mad, or to find a problem statement and to develop a solution that will address it. And we also need founders and investors, so my peers to exercise lots of discipline in the way they value companies so that everybody in the ecosystem stand to benefit, right rather than along the way somebody gets a massive hair cut, and in the end, our investors will say “Oh, this asset class doesn't work for us.” And we will all suffer right, the whole ecosystem will suffer.

Host: While we're on this note, so Vertex Ventures Southeast Asia raised 541 million US dollars for fund five, as we mentioned earlier. And given the current macro environment, the funding landscape, give us a sense of the conversations you’ve had with investors and LPs to raise this fund, right given the high interest rate environment for example and the challenging funding landscape.

Carmen: Yeah, so it's true, the funding landscape is is tough. But having said that, we are able to raise fund five which is 80% larger than fund four, which was raised in 2019, which was when COVID happened right. And yet despite the challenging market we have been able to raise - so this means that there must be something that we have done correct and it's something that we have done correctly is actually because we have got a strong Distribution to Paid-In ratio and our investors actually could see money being returned to them. So for investors, LPs, this is just one of the allocation that they will look at, early stage investments is a small pocket. Many of them have shifted to fixed income investments where they just get dividends, but those who are aggressive, and most of them will want to have outsize return this will be when they allocate to early stage and when they look at early stage, they will have to look at people who have got some levels of track record and DPI is one of those indications so that's why we are very blessed, very lucky to have to be able to number one achieve some because and number two to have them backing us again. So we have investors who have been backing us for a couple of funds. Of course we also have got new investors at this fund.

Host: I'm curious Carmen, you know, in this environment, and we've briefly touched on it, finding that balance between deploying funds quickly, and whilst ensuring the quality of the deals made is crucial, right? How do you guys navigate this balance especially with fund five in mind?

Carmen: So actually, when we look at our investment pays, it is not by coincidence that we actually invest about 12 or 13 companies a year- good times, bad times. So in 2020, 2017 and 2018, we were doing that number. In 2020 to 2022 when everybody was like investing very quickly after they meet the company, but we're also doing it at our own pace 12 to 13 companies a year. We suspect this will also be the pace that we will do this in this fund. And we are able to do that because we do have quite strong bench strength. So that allows us to have enough time to evaluate deals. We do tell companies right from the get go - If you're expecting me to close this deal in two weeks, it's not going to happen. We probably need to three months if not six sometimes. So it's very well paced. And then we do a lot of understanding the company, landscaping their their proposition, speaking a lot to the users, to their competitors before we make a call.

Host: Just to follow up a little bit further on that Carmen, is there anything else that you could tell us about Vertex’s approach to risk management when deploying capital? As with fund five or with the rest of the funds as well?

Carmen: Yeah, so so we are actually very high risk right because we are investing into the early stage series A Series B and C. So as a category we are already very high risk. However within this very high risk, how to read and risk diversify, we risk diversify in the geographies we invest in. So we have got about 30-35% in India, 30-35% In Indonesia, given that both of these geographies have got huge local markets, then the rest of the 30-35% will be across the rest of Southeast Asia to Singapore, Malaysia, Thailand, Vietnam, we suspect that that will be where we take the bulk of the remaining this country. In terms of sectors we also have mentioned six sectors that we look at. So again, this is how we think we will diversify across consumer economy, to the enterprises to FinTech, which is an overlay, to health care, digital healthcare, sustainability agri-tech and mobility so we think we will be conscientious of looking at opportunities across geographies across verticals and in terms of stages. Probably the bulk will be in series A but we will occasionally try to get a quicker return via Series B but if we have got an appetite, we’ll do C. That will that should give us the highest return.

Host: Carmen, thank you so much for your time today. It's been an absolute pleasure speaking with you. The next time you're in town, please do let us know, we'd love to have you over to the office.

Carmen: Thank you. Thank you. I will take you up on that. Thanks a lot, Richard. Thanks Roshan.

Host: Thanks Carmen, folks we were speaking to Carmen Yuan - she's the general partner at Vertex Ventures Southeast Asia and India. And she was talking about that they’ve recently raised fund five 541 million US dollars in that fund to be deployed in the region and India. Rich, fascinating conversation, absolutely interesting themes at play.

There’s a part of me that you know, the human element - of traveling around and raising funds heading up to Penang and eating with her knives and forks and spoons up there in Penang while the rest of us will be dishing and eating with our hands. Great stuff though a very, very enlightening stuff. I'm looking forward to meeting Carmen in person when she comes into town, certainly and seeing how their portfolios continue to develop.

Folks, if you miss any part of that conversation, you can catch the podcast on our website at BFM.my or download the BFM app that's available on the Apple App Store or Google Play. Also our shows are available on Spotify, Apple podcasts and other major podcast players. Just look up enterprise biz bytes. And this is definitely an episode you're gonna want to share with any friends, family, acquaintances that you know in the startup and funding ecosystem.

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