Corporates challenge VC's for deals

The number of deals involving a corporate investor rose to 28% in 2018 from 9% in 2016.

Traditional venture capital (VC) firms may feel the heat from their corporate counterparts who are snapping up deals in their bid to back the most promising companies in Southeast Asia. Alex Boulton, a principal at Bain & Company, talked to Singapore Business Review about the reception towards CVCs, their struggles against VCs, as well as the direction of the investment environment in Singapore and Southeast Asia.

What kind of impact do you see CVCs having in 2019? In which areas are they competing effectively against traditional VCs and in which are they not?
Strategic investors have been a staple of the private equity buyout ecosystem for years. Corporate investment is ramping up across the investing landscape; 28% of all deals in Southeast Asia involved a corporate investor in 2018, up from only 9% in 2016.

The reception of CVCs has been just as mixed; however, since many favour minority/growth stakes for their option value they have quickly become a coveted partner for traditional VCs during the investment hold period. CVCs compete well in sectors that provide natural synergies with their core business though, it should be noted, often struggle to go head-to-head with traditional VCs outside their synergy halo.

So far this year, have the financing gaps for different funding rounds and types eased or worsened? How do you see this particular challenge evolving in the near term?
Southeast Asia financing gaps are fast closing across the board, on the back of unprecedented levels of VC funding. In our 2018 Bain brief, we predicated 10 new unicorns by 2024, and it appears this projection was not optimistic enough.

According to DealStreetAsia, SE Asia-focused VCs raised new funds totalling US$1.5b in 1H2019 – it only takes one $100m check for a 10% stake to birth a unicorn. In past years, we have seen gaps at the series B funding level, but 1H2019 has offered a quick response to this with the close of a flurry of series B investments.

What are the most notable VC deals so far in 2019? What made these deals notable in terms of scale or structure?
It was particularly exciting to see Biofourmis raise US$35m in its series B round this year, after a US$5m series A in December 2017 with Openspace Ventures, Aviva Ventures, and SGInnovate. A Singapore-based health analytics startup that is building an AI-powered digital therapeutics platform, Biofourmis is a case study in the success of the Singapore VC ecosystem to spawn globally disruptive business models.

How is the Singapore VC environment evolving compared to the rest of the world?
Ambitious startups have needed to define their addressable markets more broadly, to include Southeast Asia, Asia Pacific and even global aspirations. This historic disadvantage is beginning to work in favour of SG-based startups as they prioritize global opportunities and design business models that work across borders from a much earlier stage. 2019 and 2020 will continue to be marked by the rise of globally competitive startups that have been incubated within Singapore’s VC ecosystem.