Asia is racing ahead of Europe in the venture capital stakes, with some $10.1 billion flowing into the region in the second quarter of 2015, compared with $3.2 billion for Europe, new data show. But is it too much?
The flood of liquidity puts the region on pace for 45 percent year-on-year growth, according to a report by KPMG and global venture capital (VC) tracker CB Insights. While the region still lags behind the United States’ $19 billion worth of funding, Asia now attracts slightly over a third of the venture funding available globally, the report said.
“The past year’s been phenomenal,” said Vincent Lauria, managing partner at Golden Gate Ventures, a VC that specializes in early stage funding. “There’s a lot of opportunity here, and there’s a lot of what I would call innovation – people thinking differently because they have to solve problems that don’t make sense in the U.S., that don’t make sense in Europe.”
High-profile investments last year — including Softbank’s $250 million investment in transport app GrabTaxi and the $100 million Sequoia-led investment in Indonesian e-commerce site Tokopedia — drew investors’ attention to the region’s opportunities, and insiders say an avalanche of money quickly followed.
Asia has seen a number of mega funding rounds in the past year, with the top six deals in the region making up $4.2 billion, or 28 percent of all the VC money flowing in, the report said.
Solid interest in the region’s start-ups was reflected at June’s Echelon Asia Summit, which brought together start-ups and investors. The event saw a record 2,100 people in attendance, a 20 percent jump on 2014, with organizers shifting the conference to a bigger hall at the Singapore Expo.
Who’s afraid of the big, bad bubble?
But is there just too much money flowing into the Asian technology star-up scene? It depends who you ask.
Some are more concerned about the valuations some start-ups are fetching.
“China’s probably a little crazy and overpriced,” said Dave McClure, founder of Silicon Valley-based incubator 500 Startups. “India’s starting to look overpriced. It’s pretty different depending on geography to geography.”
Gree Ventures principal Kuan Hsu echoed some of those concerns, noting that valuations for Asian technology start-ups have doubled or even tripled in the past three years, often without an underlying improvement in key performance indicators or an increase in revenues.
While Hsu doesn’t think that there’s a bubble per se, he is expecting to see a “gentle correction” in the Asian start-up scene, especially among companies seeking Series B, or second round, funding.
While Gree, which focuses on early stage internet and mobile companies, has some $65 million earmarked for Southeast Asia and Japan, Hsu told CNBC that most of this money has already been spent.
“We’re starting to see companies reduce their valuation requests,” he said. “It’s not going to happen as a crash, but it’s going to happen gently over time.”
Seeking out opportunities
Some see signs of froth.
Asia is seeing a “returned exuberance to the marketplace,” said Saemin Ahn, managing partner at Rakuten Ventures, a $100 million corporate venture capital fund with roots in Asia, Israel and the U.S.
“There is a lot of unprecedented corporate and financial entity participation into the venture capital asset stack, and this is again leading to a lot of liquidity in the marketplace,” he said.
Many investors, especially in the e-commerce space, are unlikely to have the patience to see out their capital, Ahn said. He expects the increased liquidity to lead to a number of “micro-foldings.
“But he still sees opportunities in the region, particularly in big data and marketplaces for algorithms. He would like to see Asia-based players expand their reach to match that of their North American counterparts, a theme at this year’s Echelon, which devoted three plenary sessions to teaching Asian start-ups how to expand beyond the region.
Demographics are in Asia’s favor
Within the region, scale and demographics are favourable for start-ups, said Peng T. Ong, co-founder of dating website Match.com and managing director at Monk’s Hill Ventures, which mainly focuses on providing entrepreneurs with Series A, or first round, funding.
As economies hit $3,000 to $4,000 per capita gross domestic product (GDP), Internet consumption starts to crank up, and with the Internet sector making up some 5 percent of GDP growth, this is the sweet spot for investment, Ong said. Within the region, North Korea and Nepal may be the only countries that aren’t in that per capita-GDP club.
Companies able to dominate Internet consumption in their segment have a great deal of growth potential, he said. “You can create huge companies if you do it right. It’s all execution.”
A note of caution
But Edith Yeung, a Partner at 500 Mobile Collective, a $10 million spin-off from McClure’s 500 Start-ups that focuses on early stage mobile investments, is keen to sound a note of caution.
Yeung says that while tech start-ups might be the “hip thing” at the moment, investors in Asia need to be schooled in the art of patient capital. While “there’s definitely tonnes of talent” in Asia, most start-ups will fail, so investors should not put their money down unless they’re prepared to wait it out, she said.
“It’s highly risky,” she said. “If you want to get to a point where there’s a good exit, take an IPO, or there’s some sort of acquisition, it takes at least 5-10 years.”
written by Michelle Loh of CNBC. see more.