GGV Capital’s global managing partner Jixun Foo and vice president Dimitra Taslim recently joined an online Q&A session with a group of founders from East Ventures portfolio companies. Willson Cuaca, co-founder and managing partner of East Ventures, hosted the discussion covering various startup growth and fundraising topics.
This article shares some highlights from the dialogue.
Willson Cuaca: What are the criteria you focus on when deciding on an early-stage investment?
Jixun Foo: We start by asking two very basic questions: Why now? Why you? Why hasn’t this happened before? What is the opportunity available today? What is the impetus? What are the drivers? Why has it not happened three years ago? Why wouldn’t it happen in two years? There might be some underlying factors, such as technology. For example, when China went from 3G to 4G, short-form videos emerged, made possible by the evolution of phones. The development of a network made it possible for creative new ideas to flourish. There could also be regulatory or licensing factors at work. And then there’s the important question of how big this can be in the addressable market.
We also ask why you would be the one. After all, many people can launch a similar product, idea, or service. But why are you the winner? The answer might be a first-mover advantage – the fact that you are first doing it. But often, the execution factor is not easily differentiable.
The market also changes, so we have to evolve our assessment based on that.
Willson Cuaca: India has many more unicorns than Southeast Asia. How do you explain this?
Jixun Foo: While in terms of population, India is bigger than Indonesia, its GDP per capita is less than half of Indonesia. So, you should not look at India’s 1.4 billion people in total but at the addressable population with the purchasing power. That’s why we have to look at the depth and breadth of the market. The propensity to spend has to be there.
Infrastructure is also important. It’s not just the information, the structure, the internet infrastructure, but for eCommerce to take off, you have to have the basic logistics infrastructure to make those deliveries happen and for the service quality to be there.
Dimitra Taslim: Let’s take a look at the numbers in the case of e-commerce and the business model of Amazon/marketplace brand aggregators.
The e-commerce market size in Indonesia is about $50-60B GMV in 2021 and in India, it’s about $70-80B GMV, but India’s population is 6x of Indonesia’s. Why is this the case? I think we often understate the purchasing power of Southeast Asia’s metro cities and overstate the purchasing power of pan-India or Bharat. India is a country of many countries… In terms of GDP per capita, the top 10 million of the population is akin to South Korea, the top 100 million is akin to Mexico, the next 100 million is akin to the Philippines, and the bottom 1.1 billion is akin to sub-Saharan Africa.
Now let’s zoom in on the brand aggregator model that’s currently hot in both markets. Recently we met two startups… one in India and one in Indonesia, and both have been in the market operating for 6+ months. Both are run-rating at $50m+ revenue and are run by management teams of similar quality. The Indian one is raising at a sub-$1B valuation but the Indonesian one is raising at a $200m+ valuation. How does this make sense? Is the Indian one truly operating in a market that has 5x the potential of the Indonesian/SEA one? Can Indian metro cities catch up to SEA metro cities in purchasing power over a 4-5 year runway? I am skeptical of that. So, one must wonder – what are investors really paying for when investing in the Indian one at that price?
In India, when we look at consumers, we’ve primarily focused on essential categories like insurance, loans, and education, where you have to spend money and you have to study. But on the more discretionary spend, we have actually not looked at that many deals in India… we’re more focused on empowering the MSMBs to better serve their communities and identifying Indian founders who are building SaaS products for the world. I think these Indian unicorns are the most interesting ones.
What I have come to learn is that markets have an enduring impact on the opportunity set for founders, even for amazing founders with a reality-distortion field. In every market, there will be sectors with superior genetics compared to the rest. The question to ask ourselves is, which are these sectors with superior genetics?
So to answer your question, I think India has more unicorns because of a few reasons. Firstly, their market is “perceived” to be larger, more homogenous, and hence more exciting. Secondly, they undoubtedly have better tech talent at this point in time, many of whom can compete with Chinese and US engineers and beat them on productivity per unit of variable cost. Lastly, the venture gameplay in India is perceived to be more multifaceted and diversified – to my previous point on “genetics”, it means to say India is perceived to have more sectors that have better genetics than SEA. SaaS is one example. The question is, can the founders tap into these genetics to reach their full potential? And how aggressive can investors be with pricing before the rubber hits the road?
Jixun Foo: Another thing we consider when we look at valuations is that we want to see sustainable businesses – valuation is just one factor. Is this a sustainable, buildable business over a long period of time? That’s what we are trying to identify. Because over the last one or two years, we are seeing some unusual valuation hype. In the last few months, we have seen a pullback at a global level on all the tech stocks. There was a lot of liquidity because of Covid-19, but that liquidity will dry up, and the leverage factors will decrease. Against this backdrop, valuations are coming back down to earth. Some of these hyped valuations we have seen may not be real or sustainable.
Dimitra Taslim: Sometimes, when a founder raises too higher a valuation, it’s tough to live up to the expectation in the next round. You’re not tracking upwards, and that’s not a good thing to see. So, I like founders to think a bit more strategically. Compare it to a situation where you raise less money now at a lower valuation, but you can raise a little more at a higher valuation later on. If you break the big round into a series of smaller rounds, your weighted average dilution actually may not be that different compared to taking the first option, which is where you take the very high valuation now. It allows you to show progress over time, which is very important in a climate like this.
Jixun Foo: Valuation is both an art and science. For instance, why was the price to sales ratio in the past for companies 10:20 and considered expensive? And yet some of these tech companies can be trading a 50-100 times price to sales.
The important thing about valuation is, can you truly sustain the growth you are projecting? Usually, with higher growth, you have to burn more cash and build more capital. And you have to manage your capital in the right way. The other thing I would add is that whether your product or service is delivery or an application, product-market fit is essential. You must differentiate enough to sustain the growth.
So, we look at retention, user feedback, and a lot of other data to ensure that you’re not just acquiring users with capital. You can lose that very, very quickly when you stop spending those funds.