When many small companies and startups build their business from scratch, they put together a stellar team, fine-tune their product or service and then wonder “where do I go from here?”. This “now what” question highlights a fundamental issue for many: the difficulty in raising funds in Southeast Asia. Thanks to a burgeoning investment scene, the region might be poised to see continued growth.
One of the fastest-growing fundraising sources is corporate venture capital (CVC). CVC is used to fund small and innovative companies, such as the growing startups in the region. Despite some potentially challenging predictions from the World Bank, fundraising in Southeast Asia looks poised to become more accessible and faster to obtain for small companies.
We cover the investment industry in the region. Here we look at the VC industry in Indonesia.
What does CVC mean?
In the corporate venture capital investment strategy, a larger corporation puts money into a business or startup which they consider to be showing potential. In return, the corporation acquires equity stakes, or ownership of a portion of the startup’s shares, with the expectation that its relationship with the startup will either attract customers to its own companies or that the investment will benefit its bottom line. It is appealing to both investors and startups because both entities can grow together.
According to Forbes, CVC has experienced a 100% growth in 2018, to over $60 billion USD, representing 23% of all capital invested by venture capital firms in that time period. Even with bleak predictions concerning COVID-19 by the World Bank, CVC remains a promising strategy for raising funds in Southeast Asia.
Strategic investments versus financial investments
One aspect of CVC to consider is the difference between strategic and financial investments.
Strategic investments are relationships between a corporate investor and a startup. The corporation sees similarities or potential within the startup and utilises a CVC to grow its products together. Financial investments, by contrast, are basically a lump sum of cash that can help startups to expand the business and its offerings. The objective of a strategic investment is for the CVC’s entity to bring more customers in and encourage rapid up-scaling, whereas a financial investment is strictly about garnering revenue.
As might be expected, strategic investments develop deeper, almost parallel, relationships with their partner-startups. The corporation is hoping to benefit long-term from the startup they are investing in, and, therefore, the startup might grow into and bring revenue for themselves. A corporation pursuing a strategic investment strategy might help incubate a startup, and, in the long run, acquire it if the founders want to sell.
A financial investment, by contrast, is one where the CVC partner focuses primarily on finance. In this venture, an investor is attracted to the style or balance sheet of the startup and lends cash with an expectation to make a return. The relationship between the startup and the investor might not be as close, but a large investment can motivate other CVC entities to invest in the same firm, giving the smaller company a higher profile and further financial security.
The key to finding the right CVC is to discern the motivations of potential investing partners. Negotiations should be thorough, and despite travel restrictions due to COVID-19, it is still crucial for the investors and founders to see if they are a good fit.
Each kind of investment has its potential benefits, although a firm interested in a strategic investment plan might offer a deeper relationship due to its interest in growing together. Founders need to vet investors as much as possible by asking questions about their vision for the partnership. They should also consider spending quality time, if possible, with potential investors, enabling the decision-makers at the startup to learn the long-term goals of the potential CVC.
The future of investments post-pandemic
The World Bank recently released a report focused on the COVID-19 pandemic and its effect on Asian economies. Southeast Asia, in particular, is projected to be deeply impacted by the global crisis. Countries that rely on tourism can expect to see their GDP collapse, with Thailand losing a striking 10.4% of its GDP. While the World Bank’s prediction is concerning, the hardships of the pandemic might be buffered by the rise of startups and capital in Southeast Asia within the last decade.
Even with financial hardships ahead, raising funds in Southeast Asia is not impossible. Nimble companies have made it this far by being smart, getting to know investors, and pivoting to attract consumers and investors to keep growing. Corporate venture capital can help startups to scale up and stay afloat in these uncertain times.