As overall fund size expand so does the pressure on venture capitals and private equities to secure quality investments, essentially making unicorns an unlikely sighting for now

“If any start-up or founder comes and says they are building a unicorn, I would say just get out,” Tapas Kuila, general partner of logistics tycoon Rithy Sear’s venture capital (VC) firm Ooctane, said.

He was talking about the idea of start-ups achieving over a billion-dollar valuation in Cambodia, which he found to be somewhat preposterous.

“I am not kidding because unicorns are not possible in Cambodia, not today unless you have a very good business model and you know how to replicate it in the region.

“And by region, I mean it has to at least be Myanmar or Vietnam, or there is no way you can become a unicorn,” he said.

Tapas has been sieving the market for over a year now looking for prospective start-ups with good business models because, at the end of the day, the objective is “not only to put money but to get back returns”.

He stressed that the present moment is not right because Cambodia is quite small.

“Whatever you do and if you are raising a company to become a unicorn for the sake of making it into a unicorn, yes I can do that but it is not sustainable and it is completely unfair.

“I can’t even convince myself that this is something of a unicorn. If the focus is only Cambodia, then it is not possible,” Tapas said.

As Cambodia is not ready, the ecosystem needs to be nurtured with various accelerators and venture builder programmes.

"Therefore, a lot more has to be done in terms of capacity building, skills development and public-private initiatives to reach there," he added.

Raising a company to be a unicorn is undoubtedly a tall order, not only in Cambodia. In Southeast Asia, there are only 13, all of them tech-related, and in the world, 501 with a cumulative valuation of $1.6 trillion as of November 2020, according to tech research CB Insights. And over 85 per cent of them are located in five countries.

Data by management consultant Bain & Company’s brief on Investing in Southeast Asia: What’s behind the boom in 2018 showed that 10 unicorns at the time had a total market value of $34 billion.

Till today, two-thirds of the figure is shared among Indonesia and Singapore.

They host ride-hailing apps Go-Jek by PT Aplikasi Karya Anak Bangsa, and Grab Holdings Inc, gaming hardware and software Razer Inc, e-commerce platforms Ali Baba Group’s Lazada, Sea Ltd, PT Tokopedia and PT, and online travel app PT Traveloka Indonesia.

Even the three new players, PT Visionet International’s payment system OVO, PT Jingdong Indonesia Pertama’s e-commerce platform JD.ID and Singapore-based retail tech company Trax Technology Solutions Pte Ltd are from these two countries.

Vietnam, which bred online gamer VNG Corp, and Philippines’ Revolution Precrafted Properties Inc are the only two non-conformists on the list.

One apparent point for their success is the scalability of business models, ensuring that the “use case” fits any market, and by that, it should be able to address the pain points in its operating sectors. Ultimately, it creates a need and solution, making them necessary applications in daily living such as Grab which operates in eight countries. Its current valuation stands around $14 billion as Jack Ma’s Ali Baba Group Holding Ltd mulls a $3 billion investment.

Of course, much of the spike in unicorn numbers is rooted in the backing of VCs and private equity (PE) firms in the region that have risen substantially over the decade. The latter having seduced by start-ups built by astounding talents who are visionaries. Together, funding growth and start-ups form a co-dependency, vaguely reflecting a chicken and egg scenario where one could not have emerged without the other.

In July, Nikkei Asia using data by Singapore-based startup information platform, wrote that the value of fundraising deals in the region had jumped 91 per cent to $2.7 billion between April and June this year compared to last year.

The number of transactions grew 59 per cent to 184 in the same period from 116 a year ago, it said.

This made for interesting revelation, seeing that Covid-19 was wreaking havoc during the period, yet regional investors were driven by an appetite to supply dry powder.

Nikkei Asia said the e-commerce sector led the funding rounds in the second quarter of 2020, raising $691 million, followed by logistics at $360 million, and financial technology (fintech) at $496 million.

“Which is the right strategy?”

In Cambodia, the dream of unicorns are as mythical as it comes. Nevertheless, VC and PE markets have trundled along with the changing investment landscape since the early 2000s. While overall investment figures are anyone’s guess as the firms keep them under wraps, it is understood that the fund size has steadily expanded in last 10 years, also partly due to the establishment of various start-up funds by the government and private sector.

“Those funds which invested in the early 2000s should be happy with their returns, especially in financial services, education and properties,” said Kem Bora, partner of investment firm Mekong Strategic Partners Co Ltd.

As time goes by, investments are expected to continue seeing a significant upside in the digital sectors, debt underlying quality assets, sustainable green investments and transitioning family businesses.

Although, he cautioned that timing was as important as picking the right companies to back, particularly funds with a typical period of seven to 10 years maturity.

“With 20/20 hindsight, anyone can make money anytime but the big question now is, which is the right strategy for the time?” he mused.

Up until Covid-19, the investment climate had been robust and on par with the highest growing neighbours like Vietnam, Indonesia and the Philippines.

This was because long-term attractiveness such as the growing and young middle class segment, export-driven manufacturing, and under-utilised agriculture potentials stayed intact.

“Unsurprisingly, much of these activities are concentrated on China-related foreign direct investments (FDIs) and in particular the real estate sector.

“Given the relative size between China and Cambodia, this growth trend can persist for quite some time,” Bora said.

Seemingly, it also reflects the core asset classes of a majority of Mekong Strategic’s retail and institutional investors which as Bora noted was “disproportionately” real estate. “It should continue to expand with particular growth in the affordable and industrial segments.”

However, as an asset class, the development of alternative structures like real estate investment trusts (REITs) is necessary to bring in additional liquidity and encourage the participation of smaller investors.

Separately though, he pointed out that a general cautiousness in the banking industry was sensed despite a healthy level of liquidity in the system, possibly a result of banks’ drop in deposit rates and overall lending to their clients.

However, due to the government’s effective response to Covid-19, he did not see a decline in system-wide valuation across the economy.

“The main exposures are directly tied to the travel and hospitality sectors with international travellers. On the contrary, increased domestic travels have given a boost to activities in provinces like Mondulkiri and Kampot,” he said.

Having said that, while there are some opportunities to acquire distressed assets at low prices, on the whole, the outcome has been less than expected at the height of the crisis in April.

Some companies in the digital space, including fintech, delivery and e-commerce, benefit from the accelerated adoption brought by Covid-19 and expect a relatively high valuation still, Bora said.

“$5 million is too much”

Ordinarily, companies in Cambodia are traditional and secretive in their investment approach, which can be damning at times.

One of the private equity pioneers Leopard Capital, established in 2008, quit the Cambodian market in 2016 after its initial $34 million fund expired that year, citing a non-conducive investment climate as one of its reasons.

Its CEO Douglas Clayton reportedly said that due to a lack of viable commercial opportunities, his firm was forced to operate on a risky venture capital model, which was tough business.

Leopard Capital which had 14 investments, also found it hard to screen companies properly and secure exit options, where investors stream out once liquidity is achieved, including via initial public offerings or mergers and acquisitions.

To date, some limitations exist as start-ups remain obscured by low levels of maturity, weak use case and unit economics that is not profitable, all of which put off investors.

“We need to remember that the VC space here is not what you would find in India, Singapore or the Silicon Valley. Indirectly, that means the options you have here are not that good in terms of maturity, so it will take time.

“It is growing, it is getting better but I still feel it [maturity] is two to three years [away], and now because of Covid-19, many of them [start-ups] have died as well. So it is going to take longer than expected,” Tapas told The Post.

His firm Ooctane has a $55 million fund, which has so far invested a six-figure sum in food delivery app Muuve Tech Co Ltd. And that has been the only investment it has made since being set up in 2018 to grow local tech start-ups.

Its somewhat conservative investment strategy only cements its decision not to raise the fund size for the moment. In fact, there are ideas to divest the sum to other avenues if investment opportunities stay low.

“I feel that if you look at Cambodian companies, not considering the Singaporean or Indian companies, I think $5 million is too much for just start-ups, let alone $55 million.

“This is why we are very agnostic in terms of the stage of the company and at the same time, what sort of maturity we have to seek in terms of the business model.

“Hence why we are okay to get other companies from outside ... so that the ticket size will be in millions, otherwise there is no way to deploy it,” Tapas said.

Presently, it is reviewing applications by a local mobility company, which could add value to Ooctane’s parent company Worldbridge Group where one of its core business is logistics, as well as a Singaporean fintech firm.

The move away from its objective of aiding local firms does not mean Ooctane is changing, he explained. Rather, it is adapting itself to market needs which is what the Singaporean firm’s “brokered model” was about.

In essence, the firm is solving a problem that is traditional in a sense. It is prepared to introduce the product in a population where over 30 per cent still owned brick phones.

“So, if you start asking people to use their app, some will work but you must handhold them … that is the proper brokered approach, which is why we like their model because it is catered towards these emerging markets.

“We are not expecting them to change people’s behaviour overnight as that is the most difficult thing to achieve. It cannot happen unless you keep burning cash,” Tapas said.

Early-stage market

Difficulty in identifying well-run and well-organised small medium enterprises (SMEs) is also an issue for Phnom Penh-based VC firm OBOR Capital Co Ltd.

As if that was not enough, there is a limited number of viable and scalable SMEs with a solid team that is willing to welcome professional investors, said its founder and chairman Christophe Forsinetti.

However, the firm tries to overcome it by building a relationship with entrepreneurs before it invests, mindful that it takes time.

“In the first two to three years, we purposely limit ourselves to a couple of projects in order to develop our monitoring and support tools, and build a team of professionals,” explained Forsinetti, who has been investing in SMEs since 2007.

The firm holds a fund manager licence, recently issued by the Securities Exchange Commission of Cambodia where it manages a $7.5 million fund as part of the collective investment scheme.

OBOR Capital raises funds privately every year through investors including high net worth individuals to invest in pre-identified projects, with ongoing discussions with keen-to-invest corporations.

“These investors like Cambodia, but they don’t know how to invest in Cambodian SMEs in a secure, transparent and professional manner,” he said.

Up to now, the firm has five investment portfolios ranging between $200,000 and $1 million but is bumping up the maximum investment sum it can make.

Two of them – GAEA Waste Management Co and Khmer Water Supply Holding Co Ltd – are in the infrastructure space.

The other three are tech start-ups featuring travel agent, logistics start-up Shoprunback and online supermarket Delishop.Asia.

Some of its initial investments have tripled in valuation since 2017.

Knowing what the challenges are in the market, he related that the firm was not a typical VC which invests small amounts in 30 projects while expecting only three or four to succeed.

Instead, it sees itself as a long-term partner focusing on a more limited number of investments and yet making sure a large percentage of those projects succeed.

“It makes sense to remain involved in these companies for the longer term after you have done all this work,” said Forsinetti.

He finds Cambodia to be at the “very early stage” of investment where the number of institutional investors and large financial institutions who view it as a potential country for investment as being “very limited”.

“The government has initiated many critical structural and regulatory reforms which are needed to change this but these things take time,” he said.

Echoing Forsinetti, Ooctane’s Tapas said although things are slower in Cambodia, it is on the right track and that is a positive sign.

“But somebody [once] remarked that the VC ecosystem is as good as Singapore. I am like, c’mon guys, I have been in Singapore [and] I know exactly how it is.

“Let’s not try to make such bombastic statements. We are way behind [but] we are getting there ... and it will take time. I am not being pessimistic but am being reasonable,” he said.

Unfortunately, it is this slowness which has created the perception by foreign investors that Cambodia is “decades behind” even though evidence suggested otherwise, Mekong Strategic’s Bora said. “Cambodia is still battling [this],” he said.

However, what is interesting, he said, is the emergence of investment groups within Cambodian corporates, conglomerates and family enterprises that can understand the market dynamics while providing direct values to their investees.

“I believe we should see healthy investment activities in this group. Most Cambodian SMEs are still hesitant on the value of bringing in professional investors beyond financial reasons.

“But the attitude is slowly changing as they recognise the need to corporatise, innovate and expand,” he said.