Startups Need to be Adaptable to Grow Global Businesses | General Partner Carmen Yuen

General Partner Carmen Yuen, speaks to Brian Fernandez on Biztech’s investor conversation show in partnership with Wild Digital Southeast Asia 2022. She shares insights on Southeast Asia’s thriving startup ecosystem, her thoughts on the funding winter and its impact on firms including key trends that are hot in the venture space.

Brian Fernandez:

Welcome to BizTech Investor Conversation Show! This show is part of our media partnership with Wild Digital Southeast Asia 2022. Our guest today is Carmen Yuen. She is a General Partner at Vertex Ventures Southeast Asia & India. Vertex Ventures is a global network of operator investors who manage portfolios in China, Israel, Southeast Asia, India and the US. Now, to tell us more, Carmen, welcome to the show.

Carmen Yuen:

Hi, good morning, welcome Brian! Thanks for having me.

Brian Fernandez:

Thanks for coming on the show. Carmen, for a start, could you give us an overview of Vertex Ventures and what's your footprint like globally?

Carmen Yuen:

Right, Vertex Ventures Southeast Asia & India is one of the six networks of separately managed funds across the world. For the Southeast Asia & India team, as the name implies, we look at startup opportunities in our backyard - across the six key ASEAN countries plus India. The amount of funds that we have under management is more than $1 billion, and so far, we have been able to journey with more than 70 companies across this region.

Brian Fernandez:

In terms of the size of your current fund, you raised the fourth fund in September 2019 for about $305 million, where are you at in terms of that fund? And, are you raising more funds to follow on that?

Carmen Yuen:

Yes, it's a 2019 fund that was finally raised, but we started deploying only in 2020, so it really is a Covid fund. Our deals were primarily done without seeing the teams on the ground. It was very much a lockdown period. We have deployed almost 60-70% of it, and we are looking to continue to invest until Q1 2023. As a result, we are in the midst of raising our Fund V, which we think we will start deploying in the second quarter next year.

Brian Fernandez:

Now Carmen, typically, what is the typical ticket size for an investment and a follow-on investment?

Carmen Yuen:

We normally start our first check, which is generally for Series A companies, at between $2-8 million USD, depending on the needs of the company. And we will have no problems following on for companies that are performing really well - we want to double down as much as we can so that we can return as much as possible to our investors. I think, for the upper bound, it depends on whether the companies are really going to be the leaders in their space.

Brian Fernandez:

What sort of verticals do you focus on in this fund?

Carmen Yuen:

It's still the five verticals that we are doing in Fund IV - the first being B2B opportunities. This is what we call the enterprise model, with generally SaaS-based revenue. The second one will be more consumer internet spaces, and overlaying these two verticals will be Fintech, Healthcare IT, and Sustainability. These are the five factors that we will focus on.

Brian Fernandez:

Zooming in on your personal portfolio itself - which markets do you personally cover?

Carmen Yuen:

I do look at companies in all five areas, but I have a special preference. My heart speaks to Healthtech IT and also to some extent, Sustainability if not Fintech. It's as good as almost everything.

As for the places I cover - I did swing by KL and Penang before lockdown pretty regularly. But I have also covered Bangkok and Thailand. So between Singapore, Malaysia, Thailand - that's where I hunt more often. We have colleagues who are based in Jakarta - they will handle everything in Indonesia, and we've got colleagues who cover Vietnam and the Philippines. And of course, we have another team sitting in Bangalore and they are the experts in all things India.

Brian Fernandez:

Carmen, Vertex made its name in Southeast Asia particularly because in recent years you funded Grab. What are some of the current star companies that you're excited about in your portfolio?

Carmen Yuen:

So we actually have got six unicorns in our portfolio - Grab is one of them. We've got a few that are based in India, but the other one that is also a unicorn from Malaysia - or by a Malaysian founder is a company called Patsnap.

Patsnap is in the intellectual property space, business management, where it allows businesses, for eg. those with R&D departments, intellectual property officers, to have a peek into where innovation stands, where patterns are concerned. This is another company that is a unicorn - and who are their clients? Sadly, Southeast Asia doesn't really move a needle for them in terms of revenue, but the bulk of their clients are from the US, Europe and China. We’d love to see this company making a homecoming to Southeast Asia, hopefully in time to come.

I will just make a comment about Malaysian founders. We have five companies that are founded by Malaysian founders and they are great companies. This is where I feel Malaysian founders can have more ambition in terms of what they are looking for in growing their business.

Carsome is not our portfolio, but Carsome is one of the recent (Malaysian) unicorns. And if you were to follow the journey of Carsome, Eric did a great job because he focused on Southeast Asia and Australia, but he decided that, yeah, pulling back, whatever. But his geography is really not just Malaysia only.

Similarly for Grab, I mean, Anthony, he started from KL and of course we are always reminded that we have taken one Malaysian company out of Malaysia's map. But you can't change the fact that he's Malaysian, right? And he started from Malaysia, but he has grown it to become the dominant player in Southeast Asia at the key markets. Maybe in Indonesia, we have got another name, right? But if not, what do you primarily use when you're in Vietnam? When you're in Thailand, what do you use? It's the same app. So he has done really well. Similarly, Patsnap. We have another company, Sunday Insurance, that was founded by a Malaysian lady, started in Thailand. And again, her site is not just in Thailand alone. We're in the process of expanding the whole Insurtech game into Indonesia. Storehub and RPG are the other two companies that we have invested into. and again, they are not just a single market player.

So I think that's the message for all companies. It shouldn't be a single market, single city focus. I think, in the Southeast Asian context, a lot of Indonesian companies can be single country focused and yet grow to a very substantial size because of their market size - that is correct. One of the comments I have shared with some friends was, in Southeast Asia, generally, people invest as a region, but the only country that you can actually afford to have a single market focus fund will be Indonesia, because of the sheer size of the population, 200+ million. You can actually have a single market focus fund, but not so much for the rest of the region because we just don't have enough people to support a single market focus fund. I mean - Malaysians are only thirty odd million. It's going to be a bit harder.

Brian Fernandez:

You sound like a fan of Malaysian startups. I also read when I was doing research for this interview, that one of the things that you talked about was Malaysian founders being adaptable. However, interestingly enough, Carmen, prior to this funding winter, Malaysian startups a lot of times had a discount on valuation compared to Indonesian and Singapore startups, even though they were assuming the same metrics. Why do you think that's the case?

Carmen Yuen:

It has got to do with whether or not there's enough funding, right? So I will say that I love founders who are adaptable. Most of them are trilingual and to me that sets you apart from many Singaporeans. Unfortunately, we are quite monolingual, but Malaysians, straight away, when they go to Indonesia, can kind of converse in the local language, although some vocabulary is different. When they go to speak to Chinese speaking founders or investors, they can just move over to Mandarin pretty quickly and not to mention English. So that's why they are pretty adaptable. Malaysians generally have got a lot more entrepreneurs, small, medium and large, and ‘large’ comes from ‘medium’ and ‘small’.

On valuation, why is it that Malaysian companies have got a lower valuation? It has got to do with the fact that there isn't that strong support for global funds investing into Malaysia. Because the other part is, for most of the Malaysian companies that we have spoken to, they want to look at city growth. They're quite happy if it is KL. Malacca. JB. Penang. That's why I keep emphasising that they have to look beyond one country, beyond some markets, beyond just single cities. General statement, right. But the ones I've seen, some of them just are looking at that. We want to see companies that have got ambition - not just words only, but actually have a plan on how they want to expand.

Brian Fernandez:

Now, Carmen, you're one of the pioneers in the VC space in the region from your days at EDB ventures. What's your assessment now on the maturity of the startup scene in Singapore? Because you've seen the whole genesis and growth of the startup team from the embryonic stage to what it is today.

Carmen Yuen:

Singapore is quite different because we have got a lot of strong government support and incentives. If we see that there is a gap in terms of logistics in the seaport front, then we will build an incubator accelerator just to nurture people, to shape them and shepherd them into that space.

In Singapore, most of the startups or opportunities are related to what is important to the country, which is great, but some of the things require time for VCs to be familiar with. Hence, for some of these frontier or early movers, sometimes it's a bit difficult and challenging for founders because they find challenges in raising funds, not because they are not doing a great job, but because I think investors sometimes are less familiar with the domain that they are in.

But generally across Southeast Asia, I would say that many opportunities are imitators of what we see in China and the US. If we see more the consumer side, whatever that seems to happen for China, we want to copy the same in Southeast Asia. Does it really work all the time? Yes and no, because dynamics are different.

So, for founders, sometimes I’d say it's okay to copy, but we have to look at adapting it to the Southeast Asia context - and again, every market, because Southeast Asia is such a complicated animal. When we cross the border, we have a different language, different styles, different policies, different large family offices - the styles are going to be different. But if we are really indeed able to be the leader in our six countries, key countries, we will be very spot on as a candidate for investments as well as M&A.

Brian Fernandez:

Carmen, one of the things that has changed quite rapidly in the last couple of years is the narrowing of the gap of what you just alluded to, the fact that what works in China used to take quite some time to translate to Southeast Asia, but that gap has reduced. How do you see that playing out, moving forward?

Carmen Yuen:

I think, when it comes to the Consumer Internet, it can continue. Because we see and the world is so well plugged in, we have many more people who are familiar with China who have come over to Southeast Asia and make Southeast Asia their home. So it's going to continue to be very quick in terms of business model adaptation. What is going to be a bit more challenging and difficult for Southeast Asia will be things that require more programming, more technology leanings, because we don't have enough people who are trained programmers who have done it a couple of times around.

We have also noticed that China has started to build itself into being a technology powerhouse - this is one area where Southeast Asia doesn't have that depth as yet. But we will get there. If not, currently, it's mainly business model innovation.

Brian Fernandez:

We are in the middle of a funding winter and that's hit startups across the landscape, whether you're a growth stage company or an early stage company. Tell us how you see this playing out.

Carmen Yuen:

Particularly as companies start to have a shorter and shorter runway, it's time for them to try to extend that runway, right? The winter has been quite good because I would say that since H2 2020, investments have taken place at quite a breakneck speed. And all of us - actually, the Southeast Asian region - is sitting on a lot of dry powder. Statistics, or rather some data has shown that we have committed or have raised close to $7 billion worth of VC funds. Some are in the process of raising, others have already raised $7 billion to feed our Southeast Asia region, there's a lot of dry powder.

When 2020 came along, people were just running at companies at a very quick pace, and so one of the conversations I had with one of the companies was something like this - I was looking at a company and within two weeks the founder texted me and said:

“Hey, are you coming in? Oh, by the way, the valuation has doubled because we've got more money coming into the company.”

To me, in two weeks, what has changed to render such a doubling of valuation? It didn't make sense, right? That was basically the momentum for last year as well.

And so, it's good that we have got a public market correction, which therefore causes investors to be a little bit more nervous. Valuation should be more normalized, which should have been the case since day one. Therefore, we are able to have better conversations with founders, we don't need to rush into investments, we are in a long term relationship. Once you're invested in the company, it's very hard to unwind. We need time to do due diligence, we need time to build up a case, to see the traction, etc.

A valuation winter is good, it also goes to show whether or not the founders are able to have ways and means to stretch their runway longer, just to show that they are the last man standing. For those who are able to raise funds - which happens for our companies - it's also because they have moderated their valuation expectation. All founders desire to have unicorn valuation, but realistically, they need time to build that. So don't hurry. We are in a long term journey of building great companies.

Brian Fernandez:

Carmen, from a Vertex context, typically, how long do you take from the time you engage a startup to the point where you're ready to deploy some capital?

Carmen Yuen:

So officially, it's probably three to six months, but unofficially we probably would have known this founder from some conversations some months or years back. That continued conversation and engagement by the founder is important because: A) it shows that they are able to pivot. B) We continue to have chats with them. Who knows, it could be the theme of the year, right? Because sometimes innovation comes and goes. So it could be that theme of the year that we happen to be looking at something in that space. But if they stop engaging us, then too bad, or if we are ignorant, then too bad on us. But ‘officially’, from the time we want to engage them, when we do the investment approval and legal documentation, it could be three to six months.

Brian Fernandez:

I suppose one of the key things that's good for I think the industry in general as well is the fact that there will be a flight to quality and the less robust business models and companies who are perhaps not long term sustainable will die out. Is that a view that you share?

Carmen Yuen:

That really that's really what it's all about. It's a Darwinian survival of the fittest. It should always have been that, right? So we are looking at a flight to quality and like I said earlier on, it's really the last man standing, the last company standing.

So how do you become the last company standing? Assuming things continue to be nervous and people are not really investing until much later, then you just have to prove that you can hold on to your cash flow or that you can try to quickly reach EBITDA positive so that at least people see the strength of the metrics. And that should always have been the case. It should never have been one where you're raising money to burn quicker than ever. It should always be raising money to burn with the intention of things dropping down to the bottom line.

Brian Fernandez:

Looking ahead, what are some key trends or sectors that are hot right now in the venture space?

Carmen Yuen:

I will say that metaverse and ‘whatever-it-is-verse’ seems to be still very hot. It's still very early, it's in the making, probably that will have some interesting stuff. The second one will be things, for example, climate tech or sustainability with whatever that is going on in the global scale where we see things are burning up, things are drying up, fishes are dying for no good reason, this will become one of the key topics going forward. So this is one we will continue to see and we will be excited to see how people provide real solutions for real problems.

The third one that I see is still something that I'm passionate about is in the Healthcare IT space. Simply because GDP expenditure on healthcare has always been below average, below what OECD countries are spending for our region? And is our region a sizable population? Yes, it is. Is health care - Despite the affluence, are people still getting sick? Big time. They're getting sick, right? And it's lifestyle diseases. So what is it that we need to change? What kind of things will motivate behavior changes? Is it merely an app? Is it an ‘app plus plus’? What is it? And how can we help people to be more focused on their own betterment of their own lifestyle? This actually kicks into Insurtech, which is part of Fintech, because at the end of the day, we are paying for sick people that are not us. Right? And why should that be the case? So I'm still very passionate on the Healthcare IT side.

Brian Fernandez:

What advice would you give to startups now who are looking to raise money at different stages that they are at?

Carmen Yuen:

So first of all, whether or not what they're trying to solve, is it a big enough problem that renders it to be VC backable? Or is this something that is more - they can fund it themselves? So, don't let VCs cloud their own map and therefore they live a different lifestyle. So first of all that.

Second of all, it will be more like we want to fund big ideas, we want to solve big problems, not feature size issues, right? But big problems. So what would that look like? And of course the team is important. We want to back teams that have demonstrated the ability or that can demonstrate the ability to execute well. So, you say what you want to do and you can execute well. Hence that's why that conversation of informal engagement is for us to also assess that: “Hey, this team has been executing based on what they say they will rather than to switch their plans every now and then”, right? That's why we do need time to get to know them. But once you get to know them, then that's how we can move forward a little bit quicker. So the ability to execute the team is critical to the business idea on what they really want to solve for.

Number three, whether or not they really need money from VCs, or is it something that they can execute just based on a few friends, based on family members who can fund them. And if they want VCs, then they must be prepared for hard conversations because at the end of the day, we will be accountable to our LPs. So if the founders don't really execute well, we sometimes will be less friendly because we also have to measure them based on metrics.

Brian Fernandez:

Now Carmen, it's been a fascinating conversation and very informative. But before you leave us, any final thoughts that you'd like to leave the audience with?

Carmen Yuen:

I feel that Southeast Asia is a hot spot for innovation and given what is happening in the global scene, money still has to find its way to some homes. Southeast Asia is presenting itself as a very solid opportunity because of the global political scenario. So we as a whole region, Southeast Asia region, ought to make sure that we have got, number one, great exits for our investors. So that the investors, the fund managers can now raise funds from people from the US, from Europe and direct their fund flow into Southeast Asia.

Number two, for us to make money, we have to make sure that our valuations are not over the top, right? So founders, please be moderate and adjust the valuation to what it is worth. Do not measure our value against what is happening in China, what is happening in the US - (albeit) Indonesia in and of itself can be a bit more ambitious. But, I think valuation for Indonesia is also adjusting down.

And, continue to build great companies so that we again can direct fund flows to Southeast Asia. We have got a group of very young emerging people who will be joining the workforce on average, our age is under 29. So very young. So please let us all make great use of our youths and ambition to make a difference such that we can be the destination for VC funds and be the destination for all things startups.

Brian Fernandez:

Thank you so much for coming on the show and sharing your insights with us.

Carmen Yuen:

My pleasure, thanks a lot. It's been great, Brian, for speaking with you.

Brian Fernandez:

Now, we've been speaking to Carmen Yuen, General Partner at Vertex Ventures Southeast Asia & India. I'm Brian Fernandez. This has been BizTech's Investor Conversation Show, in partnership with Wild Digital Southeast Asia 2022. This interview will be on our website, www.biztech.asia as well as our social media platforms. It will also be on our syndication partners' TV stations, radio stations and websites.

Thanks again for tuning in.

**For the latest news on Vertex Ventures SE Asia and India and our portfolio companies, follow us on Linkedin or** subscribe to our monthly newsletter.