Murli Ravi is co-founder and general partner at Unicorn Venture Capital. He is a seasoned venture capital fund manager who has overseen investments in over 20 ventures across India, Singapore, Silicon Valley, New York, and Australia, from deal sourcing through to exit.
It’s that time of year when tech pundits everywhere emerge with prognoses for the year ahead. I’m jumping on the bandwagon too. Here goes (see TL;DR version below):
1. Early-stage startup valuations in India will continue to build towards a breaking point.
India is currently seeing quite a bit of excitement in the early-stage funding scene. By “early-stage” I mean companies raising (much) less than US$5 million in financing in their last round. There are sound reasons for the excitement — accelerating growth in smartphone usage, positive developments on the government and policy front, increased availability of early-stage capital, and a lot else. Yet at the same time, it is fair to say that valuations may be getting a little ahead of themselves.
I think there is still some room for valuations to build further, driven mostly by capital chasing high-quality entrepreneurs in attractive market segments, a combination that still remains scarce today. That is the bull case.
The bear case is that valuations will over-shoot and the trend will break — and this is what I think will happen. All it will then take is for a couple of leading venture capitalists, who have a lot of available capital in comparison to the size of these small early-stage rounds, to take a breather. I anticipate that this will happen in the second half of the year. These bigger funds will then retreat to their original focus on growth-stage investments and leave the early-stage scene to specialists and smaller funds.
2. Startup valuations in Singapore will continue rising unabated.
Although Singapore is very small and hasn’t produced big successes on a consistent basis, government support in one form or another — grants, equity funding, smart promotion of Singapore to entrepreneurs and financiers outside Singapore, assisting Singapore-based firms with commercialization and internationalization, educational resources, and more — has resulted in Singapore punching well above its weight in terms of the number of early-stage ventures at the top of the funnel. Even more so than in India, early-stage startups in Singapore have lots of sources of capital to choose from (and not just from the government). This implies that any decent early-stage startup can raise initial rounds of funding on attractive terms.
There’s nothing to prevent more such startups being founded and many more will continue to be. However, it will remain true for the foreseeable future (not just in 2015) that the amount of early-stage capital available will easily dwarf the number of companies that can absorb that capital. This underpins my prediction.
Whether this story will eventually have a happy ending — and who will be its beneficiaries — is something to think about.
Note however that this is only about early-stage startups as I defined earlier. Among startups that are at series B and beyond, attractive companies will continue to raise money at appropriate valuations while others may find themselves plateauing or worse turning into zombies. At that stage, it is difficult to talk about valuations in broad-brush language.
3. Facebook will make its first big Asian acquisition.
Social commerce in Asia
Facebook has made many acquisitions in the US and a few elsewhere. In contrast, their deal activity in Asia has been subdued. In Emerging Asia (loosely defined as India plus Southeast Asia), Facebook has made only two acquisitions – an Indian startup called Little Eye Labs and Malaysian company Octazen.
This will change.
I think Facebook will make its first big acquisition in Emerging Asia in 2015, where I define “big” in this context as anything valued at over US$50 million.
My reasoning is straightforward. The two biggest countries in Emerging Asia are also two of Facebook’s most important markets: India and Indonesia. Facebook’s India userbase is set to surpass its US userbase in the near future. Indonesia is not far behind.
As to what Facebook might buy, I think it’s very unlikely Facebook will purchase a company purely to bulk up its userbase. Facebook’s traction is already so large and has such strong in-built network effects that it doesn’t make sense to do this. They bought Whatsapp not (only) because it had a large userbase — of which a big proportion is in India and Indonesia — but because it brought them exposure to a new, parallel area. The same is true of Instagram, Oculus Rift, Internet.org, Little Eye Labs, and so on.
So what might Facebook buy in Emerging Asia that operates in a parallel domain and warrants a good-sized cheque? Moving away from prediction and towards speculation, here are some ideas:
Technologies that enable Facebook to acquire, service, and retain new kinds of users – the types who don’t fit the profile of the typical Facebook user today. This is a stated mid and long-term ambition for Mark Zuckerberg (Internet.org being one manifestation of this goal) and Emerging Asia would be the ideal place to run a large-scale experiment that could be rolled out to the rest of the world if it succeeds.
Companies that offer (access to) new kinds of content that Facebook doesn’t have familiarity with today. As an analogy: the biggest app stores in China aren’t Apple’s and Google’s official stores; they’re actually third-party marketplaces. People are trying the same thing in Indonesia and there’s no reason why the trend should stop there. Facebook is already a platform in more ways than one and this could be a way for them to become an even more comprehensive cross-OS platform. It would have the added benefit of helping with user retention as they traded up from feature phones to smartphones or from low-end smartphones to higher-end devices.
Infrastructure. As early as mid-2012, Facebook was far-sighted enough to invest in a submarine network cable in order to secure guaranteed capacity and the ability to better serve users in Emerging Asia. If I were them, I would look closely at doubling down on other similar bets.
On the customer (B2B) side, smaller companies that have the distribution capability to sign up advertisers or tools to help those advertisers achieve their goals more easily.
4. Google will continue to not make acquisitions in Asia.
Google is perhaps the most global Silicon Valley company I can think of in terms of its userbase. Yet, most of its commercial focus has continued to remain the US and Europe. With the majority of its revenue still coming from its core search advertising business, Google doesn’t gain much by aggressively pursuing users, new technologies, or even advertisers in Emerging Asia. This isn’t to say that they will not grow their business organically in Emerging Asia; just that M&A dollars are far more easily justified in their home market. I’d love to be proven wrong with this prediction.
5. Sovereign investors will follow GIC’s and Temasek’s lead into funding late-stage tech firms.
Singapore’s two government-backed investment companies GIC and Temasek Holdings have raced ahead of their peers in terms of getting exposure to technology titans in the US, China, India and elsewhere, seemingly as a result of putting a formal program in place rather than merely making opportunistic investments. Temasek-affiliated firms like Vertex Venture Holdings and Pavilion Capital have given Temasek further exposure to tomorrow’s potential titans. I don’t know of too many other sovereign investment firms that have done the same thing, barring the occasional one-off deal such as the Qatar Investment Authority’s recent investment in Uber. I think this will change this year, as other sovereign investors start to pursue large tech companies who continue to stay private well past the US$1 billion valuation mark.
See more: Recent activities of Temasek
6. Large Chinese tech firms will invest outside their home market.
Many Chinese tech companies are already quickly becoming household names outside China by virtue of organic expansion and some investment activity. We can expect investment and M&A activity by these large technology companies to substantially ramp up in 2015, and specifically in Emerging Asia and the US. The most active players will be ones like Alibaba, Tencent and Baidu, but several other less known players will also appear on the scene.
See more: Jack Ma’s shopping spree: Here’s everything Alibaba invested in or acquired in 2014
7. Southeast Asia will see its first US$500 million tech startup exit.
This is perhaps the one prediction I am least comfortable with. I am aware of Southeast Asian companies that have already reached this valuation level. What I am less sure of is whether they will achieve an exit this year.
8. Japanese firms’ investment activity in Emerging Asia will remain steady.
Over the past few years, Japanese investors have, for a variety of reasons — fall-out from Fukushima, contracting home market, desire to diversify away from China — looked at Emerging Asia as an attractive investment destination. Japanese firms generally make decisions in a careful and deliberate manner and thereafter tend to “stick with it” unless and until there are strong countervailing reasons to change course. Investments by Japanese firms in Vietnam, Indonesia, India and other countries in Emerging Asia have generally followed this pattern and I anticipate that this will continue in 2015.
The one exception to the steady-as-she-goes approach is SoftBank (of course), which has made big bang investments in Emerging Asia recently and is likely to follow these up with more such deals. A related investor is Visionnaire Ventures, a joint fund by Temasek Holdings and Taizo Son, brother of Softbank’s founder Masayoshi Son.
I focus in this post mostly on investment activity, not broader predictions about attractive new opportunities for startups and VCs because:
such predictions are easier to evaluate within a defined period, and
other trend predictions will either take longer than a year to play out or likely occur within a year but be so banal as to be meaningless.
So there you have it.
Early-stage valuations in India will continue to build towards a breaking point
Startup valuations in Singapore will continue rising unabated
Facebook will make its first big Asian acquisition
Google will continue to NOT make acquisitions in Asia
Sovereign investors will follow GIC’s and Temasek’s lead into funding late-stage tech firms
Large Chinese tech firms will invest outside their home market
Southeast Asia will see its first US$500 million tech startup exit
Japanese firms’ investment activity in Emerging Asia will remain steady (source)
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