Overreaction, Dislocation & Confusion, 2023 vs. 2024 Investment Landscape and $9B Annual Capital Intake & Realistic Exit Expectations with Shiyan Koh and Dmitry Levit - E386

· VC and Angels,Southeast Asia,Middle East and Africa,Indonesia,Podcast Episodes English


“So the same dynamic we see in Southeast Asia, you have a collective of local investors of various tribes, your corporates, your sovereigns, your funds and a global investment ecosystem from seed funds all the way to late-stage crossovers. It's the same setup everywhere, LATAM and Africa included. There is interplay between these two everywhere. And it looks like if you completely remove global ecosystem and just leave local players, changes year to year are not extreme. As the ecosystem tells you that this new business model is available, seed guys go in, Series A guys go in, series B guys go in. Disruption comes when this thing interacts with the global ecosystem, when a massive incentive emerges for example, to drive GMV without any monetization, because late stage investors care about that. So when you remove that global disruption, then local ecosystem is pretty stable.” - Dmitry Levit


“I often ask founders what they’d do if investors didn't exist? Is the business totally impossible without investors? You need to build a rocket.You probably can't bootstrap your way to launching a rocket. That's one category of things, but that's not what a lot of people are building in Southeast Asia. So what’s the minimum amount of capital you could do to validate your next hypothesis, and what is your plan to get there? Founders should think about how much capital that would take. Don't think about what VCs want necessarily. You are the opportunity cost. You're the one whose life and hours are being spent to this, not the VC. So for you, is it worth it? Have you validated enough things that you should spend your life and time on this? Then answer the question about the capital required to do it. Iif you've decided it's worth your time and there is a market, you can find the capital to do it.” - Shiyan Ko

“The confusion is the one that there’s no clarity of what the consensus is. Is our consensus that Singapore is a technology hub that gives amazing cutting edge tech to the world? Is our narrative that Vietnam is going to take over China as the manufacturing hub of the world? Is our narrative that Indonesia is a vast consumer market somehow? It's unclear. It's all questioned. There isn’t going to be 80% of capital concntration in one theme that everybody happens to agree on. Although commodity traders, fish buyers, and coffee sellers seem to be getting close to that, but that, too, shall pass.” - Dmitry Levit

Dmitry Levit, General Partner of Cento Ventures, Shiyan Koh, Managing Partner of Hustle Fund, and Jeremy Au talked about three main themes:

1. 2023 vs. 2024 Investment Landscape: Dmitry, Shiyan and Jeremy discussed the Cento Southeast Asia Tech 2023H1 report and noted the discrepancy between the economic doom perception in the media and the reality of Southeast Asia’s funding numbers. Dmitry pointed out a "reset" in investment activity, with stable "core early funding stack" (Seed to Series A/B) maintaining momentum while later-stage growth deals significantly decreased. This bifurcation reflects a broader trend of cautious optimism among early-stage investors and a recalibration of expectations among late-stage financiers. They also underscored the importance of understanding these two parallel ecosystems for founders and investors alike, suggesting that strategies need to be adjusted depending on the stage of investment.

2. $9B Annual Capital Intake & Realistic Exit Expectations: Dmitry Levit observed that the long-term average capital intake for the region averages around $9 billion. He highlighted that prudent exit expectations in Southeast Asia should consider $100 million exits as very good, with exceptional cases potentially exceeding $250 million, and added further details on the growth rate. He emphasized the importance of disciplined fund strategies across IPO, trade sales, and secondaries.

3. Overreaction, Dislocation & Confusion: They discussed the fog of war in the region’s tech ecosystem driven by global economic pressures, media hype and doom cycles, and changing investment flows. Missed opportunities, strategy-market misalignments, and pressure on value-creation teams are currently being sorted out. They discussed how founders and investors need to urgently align their growth and exit strategies with the region’s market's realities. They also talked about the time lag of news absorption across the Vietnam ecosystem and how the search for the next "Indonesia" story is on pause.

Dmitry, Shiyan and Jeremy also talked about the role of perception vs. reality in shaping investment strategies, the challenges for the multi-country expansion narrative, and the "small-cap private equity without leverage" VC theme in play.

Supported by HDMall

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(01:33) Jeremy Au:

Morning, Dmitry. Morning, Shiyan.

(01:35) Dmitry Levit:

Good morning, all.

(01:36) Shiyan Koh:

Morning! Vietnam. Let's do it.

(01:38) Jeremy Au:

Yeah, well, Dmitry, thank you for dialing in from Bangkok and it's fantastic to hear about your latest report. You shared about 2023, the first half. Now we are in 2024. So we want to ask you about specific things about this report, but also, you know what, you know, you spy with your little quantitative and qualitative eye for the rest of 2023 and 2024 as well. So Dmitry, could you share a little bit more about this at a high level? You know, you've been publishing this report for several years now. I'm just kind of curious about how it came about and how it has evolved over the years.

(02:09) Dmitry Levit:

Certainly. Actually been doing this since 2010, but decided to share with the world in 2017. Well, we started the firm in 2011 and the first order of business was to explain to our limited partners what is that we are doing? Mapping the market was at first intended to be a 30, 40 slide deck, but then it kind of got out of control and we got excited about data crunching.

Over the years, it became a two-purpose thing and internal alignment device. So that each IC does not dive for three hours into what is a tech company, what is a tech-adjacent company. Let's get all the definitions out. And externally, it became a trust building device. When you advise the founders on the next five, seven years of their lives, on how to fundraise, what capital projectors should be, what liquidation event they should come for. You better be credible when you give such advice. So that's the genesis. And then over the years we tried to add a few things during the ICO boom, a couple of Easter eggs with videos of ICO rep artists and all that, just to keep it interesting. So that's in the background of the report.

The highlights are, it's one of those years when nothing happened. First half of 2023 was mostly interesting by what was not in the data. All the noise in the US of the world coming to an end. All the darkness emerging in the media coverage of Southeast Asia, I think, from probably late 2022, but the actual numbers in the core stack of Southeast Asia, at least, state actually business as usual. I'm sure once we're finished with crunching the second half of the year situation will change, but that was an interesting report to produce. It kind of, you feel the seismic power is moving underneath the surface, but the numbers are looking almost cheerful.

(03:39) Jeremy Au: Wow. I'm curious about that because there's a gap between what you're saying and how, you know, what the root mood is at the founder level and the VC level. So what, what explains the gap from your perspective?

(03:51) Dmitry Levit:

Are you speaking of the mood now, February 2024, or June, July 2023?

(03:57) Jeremy Au:

True. Let's talk about maybe the general arc, because I think the big one that you shared back in 2023 H1 and that you released you know, earlier a few months ago was about after double bubble investment activity is reset, the bottom is near. Have you hit the bottom?

(04:11) Dmitry Levit:

Okay. We'll, let's get back to the topic of gaps and perceptions in a bit, but for the, for the double bubble thing it's first of all fun to pronounce, so we decided to put it into the slide name. I think the important thing is to look past the top line numbers, which is obviously our first slide, but I strongly recommend skipping it entirely and going straight to the slide that breaks down the dynamics between what I call Core Funding Stack in Southeast Asia. All of us here, everybody who is based here, or who focuses mostly on Southeast Asia series A through C plus and the late stage mega round universe where decision makers sit far, far away from Southeast Asia mostly. So the dynamics between these two almost parallel ecosystems are complex. And what we saw in the first half of 2023, to unpack my previous comment, is the first ecosystem parted along ever more excitedly, while the second ecosystem, the mega deals, died out almost completely, down to 400 million plus deals, and two of them looked very much like announcements of something that was already baked in 2022.

So that got us thinking. So definitely we are looking at the reset, but the reset of what? Well, if we are looking at two different ecosystems coexisting, then actually there are two different resets. And it looks like the Core Stack is not resetting all that far back. 2019-ish, by the looks of it, while the mega deal ecosystem, well, numbers look like 2017, might be going back all the way to the, you know, good old Kauffman Foundation report about, "we've met the enemy and the enemy is us." That's a very old 2010 reference. So, that's the double bubble deep dive, if you like. Founders, I don't think we're paying much attention to this in the first half of 2023, if they were raising series A to C. Activity was actually going well and valuations were not even adjusting all that massively. Folks who needed to raise a big growth round, of course, would be thinking about that, but they were mostly loaded from 2022 anyway.

So not sure what the gap was in the first half of the year, but then the second year, oh, of course, completely different thing. But that's a bit of time travel we're doing now.

(06:02) Jeremy Au:

Shiyan, what are your thoughts?

(06:03) Shiyan Koh:

I mean, I agree, which is that there's always kind of a lag. It often feels like between what happens in the US and then when it's actually felt in the local markets. And so I think a lot of founders in this region actually consume media from the US market. And so, there's this sort of delayed reaction train where it's like, okay, I'm reading all this stuff that's happening. Is that going on right now? Not yet. Not yet. Oh, okay. Now it's happening. And so I think that's probably a little bit the contrast between the first half and the second half.

(06:31) Dmitry Levit:

Actually, 2022 was even more interesting in that regard because you would remember the spikes in interest rates. That stuff was buzzy in the US as early as late 2021. In 2022, our late stage US co-investors started getting on the call with some of our later stage founders saying the world is over, as we know it. And therefore sell, sell, sell, while the founders in Southeast Asia were like, huh? And in 2020, you remember that September, October 2022 was our first few big events in the region after all the COVID lockdowns, it was the big DealStreetAsia in Bali, I think that broke the long, dark period of no get together. So the levels of enthusiasm in Southeast Asia end of 2022, early 2023 were actually quite high. So that was very interesting time to observe the complete disconnect between what the world is talking about and what Southeast Asia is talking about. And then Southeast Asian ecosystems are all connected to the world differently. I think the party in Vietnam carried on until like November 2023.

(07:27) Jeremy Au:

Oh, wow. I always like a party that goes on longer. Uh, so I guess, right now that begs the question a little bit, which is that if you read the tech news in the US today, it feels like the bottom is in or the recovery is starting to start at least. That'd be one way to read it. So if you're implying that there's time lag, so are you saying that we're unnecessarily gloomy in Southeast Asia and that the green shoots will start to appear in six months to a year's time?

(07:49) Dmitry Levit:

Actually, if you assume the existence of a lag, I think it's pretty much proven, then I guess Southeast Asia is doomed to suffer for a year longer still. But conversely, it's always hard to make those predictions because Southeast Asia is not one thing. But one of my favorite thought experiments is to remember that Southeast Asia, in many ways, is not unique, is one of many developing emerging regions of the world as far as digital ecosystem is concerned.

So it's always educational to see what the neighbors are up to, and I don't speak of China and India, they have their own special dynamics. I'm in Middle East, I'm in Africa, I'm in LATAM. So we did a little bit of a numbers experiment for a couple of years there, just to see, okay, so what's the established baseline of each region, like how much capital goes into any one of these regions in a given year, or given half a year, and see how it evolves over time.

So the conclusion for this the first half of last year was Southeast Asia is already below the baseline for 12 months. The only other global region that we track is for obvious reasons, China. Everybody else again is cheerfully above baseline. So if we assume convergence to mean still applies to this world, then I would say everybody will fall, but Southeast Asia has a little bit less to fall, and the hard landing will be a little bit less hard. That's my optimism for you this fine morning.

(09:00) Shiyan Koh:

Wow, it must be a blue moon. We got an optimistic Dmitry.

(09:03) Dmitry Levit:

It's morning in Bangkok, and I just had coffee, yep, for five seconds.

(09:07) Jeremy Au:

Let's talk about the word convergence. What's the thesis behind that?

(09:10) Dmitry Levit:

Convergence to me, you mean?

(09:11) Jeremy Au:


(09:11) Dmitry Levit:

Well, it looks like we are again, not alone in this universe. So the same dynamic we see in Southeast Asia, you have a collective of local investors of various tribes, your corporates, your sovereigns, your funds, like the ones we run and a global investment ecosystem from seed funds all the way to late stage crossovers. It's the same setup everywhere, LATAM included, Africa included. So there is interplay between these two everywhere. And it looks like if you completely remove global ecosystem and just leave local players, changes year to year are not extreme. As the ecosystem tells you that this new business model is available, seed guys go in, series A guys go in, series B guys go in. Disruption comes when this thing interacts with the global ecosystem. When a massive incentive emerges, for example, to drive GMV without any monetization because late stage investors care about that. So when you remove that global disruption, distraction, whatever you call it, then local ecosystem is pretty stable. So my thesis is that if global investors currently have much to do at home, like explain the zero DPI's and whatnot then local ecosystems ecosystems go back to this normal state. So it's important to understand what the normal state is. Which is methodologically very hard, because what the hell is a normal state when everything shifts every three years fundamentally? So we took a period of four or five years and built a baseline out of that, hoping it will have predictive powers, but just for fun.

(10:26) Jeremy Au:

So what is the normal, and I'd love to hear.

(10:28) Dmitry Levit:

The normal.

(10:28) Jeremy Au:

For sure, you had what you think normal looks like now that we're back to normal.

(10:32) Dmitry Levit:

I will open my slide, because I don't remember it by heart, and I will tell you that according to Dmitry, according to Dmitry and some numbers carefully crunched, our house views currently that the normal capital intake for Southeast Asia in a given half a year is 4.5 billion USD. We are at 3.8 & 3.1 in the last two half a year periods. So that's what I mean by being below baseline. To give you some contrast, for example, normal for LATAM would be 1.5. And they're currently at 1.7, so they're slightly above baseline. Don't get me started on Middle East. Yep, so that's what I meant.

(11:04) Jeremy Au:

How about you, Shiyan? What do you think normal is?

(11:06) Shiyan Koh:

Well, I mean, I think there's, you can think about what are the flows, right? So how much money do funds that are focused on a region actually have to deploy and what is their normal pace that they've told people, right? And did anything perturb that in the period that you're looking at? And so, I think what we saw in the last couple of years was there's an acceleration of fundraising, cause as you saw the late stage money come in and people were able to push things off then that gave them a story to go back to LPs and be like look We're doing a great job. Look at these markups. Give us more money And then as the late stage dump off goes away Then people are like, oh, maybe I need to extend my investment period. Maybe I need to like slow down and you know Make this thing last longer before I go back to market because I don't actually have those markups to trumpet anymore.

And so I think to Dmitry's point about the 2 different ecosystems interacting with each other. I mean, I think there is some sort of like steady state amount of money that institutions are willing to deploy to emerging markets based on whatever their portfolio allocation is, and I think that's probably just a function of GDP growth and productivity and, maybe some additional marketing kicker, depending on how good that region is marketing that story. And so, I think we're kind of like back to normal-ish. And like, the punch bowl has been taken away in a sense. And so people are kind of back to talking about, okay, like what's the path to profitability? What are the unit economics? All the good sort of boring business building metrics that we know and love. So

(12:28) Dmitry Levit:

May I introduce additional complexity to this? With

(12:30) Shiyan Koh:

Please do.

(12:31) Dmitry Levit:

Because there is firepower and there is incentives to deploy, and they are two slightly different things. The first one, how much capital is there to be deployed? It builds over many years. So the rapid reaction of LPs to low DPI is in the last 12 months. It hasn't even started playing out yet in the amount of dry powder available based on everything I read from Prigpin. So, say we are not yet running out of capital and the ecosystem does have enough for the local core stack again to deploy 2.3, 2.5 billion every half a year. And that's what it's been doing, building up to steadily over the years so that parameter doesn't change all that much. But then there are moments of overreaction when on a purely emotional basis, oh, what am I going to do about my next fund? All this capital that is available stops going in. That point did not arrive first half of 2023, but by the feels and the vibes. That seems to have arrived in September, October, November, depending on the different countries and segments and stages of investment. But I would say that if you say remove emotions and switch mindsets of managers back to where they were a couple of quarters ago, the amount of capital sitting around still hasn't been damaged by this freezing in LP interaction. It's still there. Or so Prigpin guys tell me.

(13:36) Jeremy Au:

And, you know, if what you're saying is that the cost that, you think is stable. So that means that new founders looking to set up and relatively early stage companies looking to raise was to be able to find capital if they are a quality company. But if what you're saying is the latest stage has really kind of like taken that drop in volumes of funding, what does that mean for the exit pathing that you think founders should be working towards and that VCs should be working towards? Because you also mentioned in the presentation that liquidity window is shut. And also the late stage as well has been much more peaks and valleys, but also, you can say inconsistent or unreliable from a founder perspective. So how do you think about that?

(14:13) Dmitry Levit:

Oh, may I be annoying and parse your question into three different questions?

(14:16) Jeremy Au:

Of course, please.

(14:17) Dmitry Levit:

There are, there are many that live there together. There is a question of should the founder in the earliest stage that goes to market right now feel good about their chances? And I would say absolutely not, because that psychology of investors still prevails. And although they do have funds, they might be just sitting it out for a few more days, weeks, or however long it takes them to recover. Should they, however, feel bad about their chances of funding their company over the course of next five years? Not at all. Core stack is there. Incentives are what they are. Economics are what they are. Southeast Asia will no longer be abandoned by VC as an asset class and defunded. So that's very sketchy two answers to the first questions. The third question of the exit well, that's that's a sizable rabbit hole. Bunch of rabbits in it. So I don't expect any major change to Southeast Asia's fundamental dynamics of IPOs don't work, trade sales do, and secondaries do very well, but shouldn't.

And so in this wonderful triangle, I think all the planning for exits should be done for the next foreseeable. Let me unpack this a little bit. That IPOs don't work, I think we've already confirmed in CHOP, with a couple of visible exceptions in Singapore and Malaysia, notably not Indonesia. It might change, but hope springs eternal. I'm looking at you, Bangkok Stock Exchange, but will take years. Trade exits, as ever, the market does not clear very easily. Founders overpriced their companies slightly. Their VCs overpriced their companies a lot. Strategics, despite appearances, are not willing to part with hundreds of millions of dollars on their balance sheets. So it is a fight, it is a struggle, it is a dance over many years before a nice trade exit comes to pass.

(15:48) Dmitry Levit:

If you look at the charts in that report that show the sources of liquidity over the last 10 years, you will actually see years when one IPO actually worked for a while and then years when the normal state applies, when trade sales are the main source of liquidity. And then you will see two, three years that are special, when secondaries were the main source of liquidity. And those years also happened to be formative to some of the larger players in our ecosystem, right? Muscle memory has been built. That's the playbook for Southeast Asia. Pump the company and sell secondaries before people actually realize what it is you've just pumped, but that aside, that whole set of dynamics that you guys discussed over many episodes will not rapidly change after this year and last year's adjustment. We will still be looking at a bunch of hard won trade sales. We will still be looking at slow rise of IPOs and What we will not be seeing in the next couple of years will be the surge of secondaries. So folks who formed their investment model and portfolio construction around that are in for a rude awakening. And therefore, probably there is an answer to your original question there somewhere, but I lost my train of thought.

(16:44) Jeremy Au:

Well, I mean, before, I love the part about the rabbit hole in a tree rabbits, right? So we talked about IPOs, trade sales and secondaries for liquidity. Shiyan, what are your thoughts on these tree rabbits and hiding in the rabbit hole?

(16:57) Shiyan Koh:

I mean, fundamentals, right? IPOs and, I mean, trade sales are fundamentals. IPOs are a function of the depth of the capital markets, which are still in progress development for local stock exchanges, and secondaries are much more like momentum driven, right? The demand for that is cyclical and we're in a low part of that cycle. And so I think that goes away. But I think if you built a great company, and you had a chance to list on NASDAQ, why would you preferentially choose to list locally, given the lack of depth in the capital markets? But what does it take to actually go list on NASDAQ? You actually have to build a pretty scaled company to do that. And there's not so much capital in the market to get you to drive growth today. And so you have to do the hard yards, right? And so that's gonna take a while.

And so, I think I would agree with, with Dmitrys IPOs are a few and the more probable expected path for someone is a trade sale, but you still need to build something that someone wants to buy. And so back to fundamentals, right? Back to fundamentals.

(17:53) Dmitry Levit:

And I suddenly remembered there is another question that Jeremy asked that I did not address, which is also covered in the report, which is, what is actually a normal size of a very well built company in in Southeast Asia? What do the numbers tell us? The numbers tell us that top decile outcomes are half a bil, give or take. So if that is what the best outcome could be, and yes, there are outliers towards a bil, and again, we're talking real value as opposed to imaginary traded value. If that is the optimal scale of a winner in Southeast Asia to date, then there is no point going on the local exchange because not enough liquidity. There is no point going on a global exchange because nobody will notice you. Investment analysts would not bother with covering that stock. So, trade sales all the way?

(18:33) Shiyan Koh:

You're breaking, You're breaking ADB's heart, Dmitry.

(18:36) Dmitry Levit:

I don't think ADB should listen to me.

(18:38) Jeremy Au:

Okay. So, we started talking about what the implications would be for a VC fund strategy. So we started some parts of it, which was fundamentals, discipline which implies obviously thoughtfulness around valuations, control rights, being very selective, that's one. Other strategies that have been out there are index strategies, more on a portfolio basis. And then other ones like mentioned is maybe more, I think described as more momentum. So obviously looking to build momentum, cash out on secondaries. That's another approach that's been there. And then of course, there's a conversation between small funds, that allow for pre seed and seed. You know, those would be smaller funds that are targeting, and has more room to run versus kind of like, series A, series B that more, and have a higher requirement. And targeting perhaps a public exit. So let's talk about what we think the set of strategies that work based on what you're saying, Dmitry.

You do run a fund called Cento VC. So you do have a point of view on what this data means and how you are adjusting what your strategy is going to be, right? So perhaps we can talk about that as well.

(19:34) Dmitry Levit:

Back to the comment about ADB and me breaking their heart. What we must emphasize, and before we start using the insights from our report, is the underlying methodology basically says the following thing. I, the report, care about companies built around revenue derived from Southeast Asia. There are lovely companies all over Southeast Asia that sit in Southeast Asia and serve the world. There are also separately lovely companies that sit elsewhere, serve the world, and happen to be incorporated in Singapore. If we remove the buzz and the PR and the storylines of a Boston biotechnology company somehow being a Southeast Asian champion, if you just remove all of that, you get our report. So it kind of ignores quite a few interesting sparks, some interesting shoots of Southeast Asia building something that's suitable for the rest of the planet. It's intentional. There must be a bunch of strategies there. I just haven't looked into them at any level of depth.

For what we see in terms of revenue and traction derived from Southeast Asia, it would seem to be prudent to expect exits of $100 mil in a very good outcome. $250 mil in an excellent and exceptional outcome, and half a bil plus in once every half a decade scenario. Then, one should be hopeful and expect things to improve every year. If you look at the chart of the liquidity outcomes, you would see that things at inch up 25% every year was a few interruptions for the crisis pandemic, what have you.

So probably it's worth shifting these expectations upwards a little bit as time goes by, because funds started today, reaps the rewards 7 to 10 years from now. And then you work your valuation stack back from that expecting a 3X step up with two and a five, two and a half at most, at least between two different stages of funding and the very simple set of math emerges, which we internally call capital trajectory. That one should work towards and then adjust a few things here and there, depending on the velocity of the ecosystem or founders qualities or unnatural non market circumstances, say proximity to a newly elected government and some such. So that's the heart of how we develop our strategies. And then that you can festoon with all sorts of things concentrated versus diffuse. Focused on a specific playbook versus generalist. Country specific versus regional for that I think nobody can beat reports by Asia Partners. These guys mapped out the entire chess board.

(21:40) Jeremy Au:

Oh, for sure. They definitely have a great report. Shiyan, what are your thoughts? Because you also have a fund strategy as well, and you also look at multiple geographies as well, you know, with your other partners. So how do you think about Southeast Asia in terms of the strategy?

(21:53) Shiyan Koh:

Yeah. I mean, I think for companies as defined by Dmitry that derive the bulk of their revenue from Southeast Asia, I think the deals just look a lot more like small cap, private equity, and you kind of underwrite it accordingly. And there's a lot of work to do in Southeast Asia, a lot of infrastructure to be built. There's a lot of things that are suboptimal, right? That you're like, how come I can't do this and fill in the blank country? Someone should make this, right? So I think those opportunities still exist. I think you just have to be clear-eyed about what their actual TAM is. And maybe once in a while, you'll get someone who's going to come in and say, Hey, I can build a multi country thing, but it's actually very hard.

Multi-country is a hard problem. And I think people like to be like, Oh, we're just going to take this thing and copy and paste it all these places and like, tada, now our market is like 600 million people. And I think as all we know, like it's not that easy. And so then, you kind of go back to like, okay, in the core market that I launched, how big is the opportunity really? And how can I capitally efficiently execute against that? Because, I can't sell the story of this bigger TAM. I think there will be some percentage of companies that will address a global market out of Southeast Asia, but I think that will be the minority. Again, because that's actually a hard problem. And there has to be a reason why you should exist here versus like in India or in the Valley, where you might have a higher concentration of talent or larger sort of core home, domestic addressable market. But I, I think those things can be built and we will have a handful of those. And so I think in terms of our strategy, like we behave according to these principles, which is like, don't get over excited about stuff. Take what founders say with a grain of salt. And I think we have the benefit of seeing the same business model in multiple markets. And so we can say like, Oh yeah, I've seen a version of this company in Brazil or Argentina or Nigeria. And I know some of the pitfalls, but I also recognize some of the opportunities or dynamics that you're leveraging. And, you know, I think this is reasonable, but no, I'm not going to pay 20 post on a pre revenue company here, so I think that's kind of how we operate with these facts on the ground.

(23:47) Jeremy Au:

Well, I always love that slide in the PowerPoint deck, right? Where the next round is going to add a bunch of flags right across Southeast Asia. It is a market expansion. And I like the phrase that you said small cap private equity because I think that's something I'm hearing quite a bit as well when you have drinks and so forth because people are saying like, Hey, these are the kind of businesses because they look perhaps more tech enabled. They're probably targeting something a little bit more local. What are your thoughts around that framing of small cap private equity, Dmitry?

(24:12) Dmitry Levit:

What we see is private equity, and these are small caps, so I find nothing wrong with this framework, but it does have some connotations to it, such as what you've just mentioned, which is suddenly we are talking about tech adjacent or tech enabled. Nope, doesn't necessarily mean that you might still need to solve some issues and let's say financial systems and say Thailand require pretty high level of tech to solve them for exactly the reason that the issues that you're dealing with are so hoary and so well established and so entrenched with a bunch of stakeholders, this and that. So small cap private equity does seem to have a connotation of these actually not tech companies. They are balance sheet traders with IOT or they are, I don't know, coffee shops with an app. Not so. That's a wrong connotation, but otherwise I'm happy with that framing. Absolutely. It's honest and it's direct ah, small cap, private equity with no leverage. How about that?

(24:59) Jeremy Au:

Ooh. What does,

(25:00) Shiyan Koh:

Yes, yes, yes. Yeah, you can't put debt on these businesses, right? Which is the normal tool of when we say private equity, right? We have some cash flow business. We load it up, crank the wheel. So yeah, I would agree with that clarification that Dmitry offers.

(25:14) Dmitry Levit:

In any case, it sounds better than deep out of money put options. So,

(25:17) Jeremy Au:

So, one interesting thing that you also mentioned as well was, you started talking about different geographies. So you talk about Singapore and then you talk about, for example, Bangkok and Vietnam, the party took a while. But in the report, you also talked about that the search for the next Indonesia is over. So what does the next Indonesia mean, I guess, at one level? And of course, how do we look at the whole region as well, in terms of Vietnam, the Philippines, Malaysia as well.

(25:40) Dmitry Levit:

Well, the report does not dare say that the search for next Indonesia is over. I think we said it is on pause because the whole exercise collapsed into a state of temporary confusion. I mean the search, not Indonesia. Well, maybe it's worth unpacking first why we even care about figuring out which narrative goes where, because as you can see from the entire spirit of this report, we are a little bit more about data and actual reality on the ground rather than perceptions, but perceptions can become real, as in if Saudi Arabia gives enough money to a passionate Japanese investor, several years later, you have a bunch of really unnecessary pepper robots and all the Japanese hotel lobbies and nobody wanted them there. And yet, that's perception of what the future is becoming reality. So it's important to track it. And for better or for worse, the narrative in Southeast Asia for the last few years, probably before and during COVID, has been Indonesia, Indonesia, Indonesia. Has it already played out? Okay. 40, 60, 80 mil pre series B, perhaps a bit too much. 120, perhaps much too much. Okay. Maybe Indonesia played out. I'm not saying it's truth. I don't think I'm saying it's a majority view. It's a narrative. And so that then started trickling down into, okay, so what's next Indonesia without necessarily questioning whether there should be.

And there was a theory of Vietnam being young population was technocratic rulers and the ability to be the manufacturing hub of the world, one narrative comes up every 10 years. And there is another narrative of the Philippines young population, similar structure of the economy, similar business models, apply, large city in the middle, bunch of underdeveloped retail networks. Let's go replicate what worked quote unquote in Indonesia. And it's a favorite party game of the ecosystem as, coming up with those narratives and then destroying them and collecting, constructing new ones. I would say they have the users because they build cohesiveness between investors, right? If there is a clear narrative of what Malaysia is, let's say a flyover state that no global investors go to that is capital scarce. And if there is a narrative of Vietnam, which I just narrated, then the ecosystem arranges itself accordingly, right? The unicorn hunters of Tohono and Saigon, while folks in KL invest at reasonable valuations and quote Warren Buffett to each other. So there are two meetings of minds and the ecosystem works.

(27:44) Dmitry Levit:

When narratives break down, when people start asking questions like why Malaysia and Vietnam have such different perception, their GDP is identical and their growth rate is not that different. And one has lower population. Sure, but doesn't that mean that every consumer has more money? When people start asking dangerous questions like that, cohesion within the ecosystem falls and the usual syndicates of co investors who work with each other fall apart. And now it's much harder to build consortiums and actually find birds of feather in different parts of the region. So that's why it matters. But what will the next Indonesia be? I don't know, man. I only know the one truth that is the Philippines is next China because it's transitive property. You see the Philippines is next Indonesia. Indonesia is next India. And India is next China. So obviously, somebody should do a report about that.

(28:27) Jeremy Au:

Oh boy. I love that transitive property there. You know what's interesting is that we had previously discussed that you thought that the key themes from your perspective was overreaction, dislocation, and confusion. Can you share a little bit more about how you think about those three themes?

(28:44) Dmitry Levit:

They're my cop out, because I haven't yet crunched the numbers for the second half of last year. And I don't quite understand what's going on in reality, so instead I come up with qualitative summaries. The confusion bit is the one that we just talked about. There is no clarity of what the consensus is. Is our consensus that Singapore is a technology hub that gives amazing cutting edge tech to the world? Is our narrative that Vietnam is going to take over China as the manufacturing hub of the world? Is our narrative that Indonesia is a vast consumer market somehow? It's unclear. It's all questioned. So that's what I mean by confusion, that there is not going to be 80% of capital concentration in one theme that everybody happens to agree on. Although commodity traders and fish buyers and coffee sellers seem to be getting close to that, but that too shall pass.

The other one overreaction that's more of a VC inside baseball, as you guys have seen, actually, I've been out in the market hiring a little bit talking to people that I've been keeping an eye on for years just to see when we're in expansion mode, shall they come over. And having a bunch of really interesting conversations with folks doing portfolio growth or portfolio value at the portfolio services or portfolio ops, whatever you call it. They've mostly in some of the larger firms, especially been part of a sort of a red haired stepchild, not the dealmakers, no, no glory of closing a massive deal there. Just, you know, keep the cap tables right and keep the documents where they belong and do business development. And all of a sudden these folks are being thrust into limelight and asked, where is the DPI? Aren't you the guy who is supposed to sell everything? Go to Indonesia and sell things secondaries to small local family offices. or else. That's overreactional, right? That's what Shiyan was talking to in a couple of episodes ago when Shiyan, you said something like there used to be too much time given to companies to prove what they're building, and now there is no time given to them at all. So the same thing seems to be happening in quite a few VC firms. There were no questions asked about exit strategy, now exit must happen yesterday. Or the boss cannot tell a good story when they go to a Washington DC conference. So that's overreaction. So that means that resources are being reallocated, people burn out and leave suddenly to compensate for the previous exuberance, somehow series C folks are asking for 5 million pre. So that shall pass, but for the moment, it's quite acute and unpleasant and also quite hilarious.

(30:54) Jeremy Au:

Shiyan, what are your thoughts? Are you seeing any overreaction in the market? Shiyan, what are your reactions to Dmitry's themes of overreaction, dislocation, and confusion?

(31:02) Shiyan Koh:

I think in some sense, this is like our first 10-year cycle, right? I think, was it 2014 that NRF seeded a bunch of the initial funds in Singapore? I mean, Dmitry's a little bit earlier with 2011, right? But I think fund life is 10 years, and if you think a bunch of people showed up on stage in 2014, we're in that 10 year cycle right now. And so, just like people who've only existed in the zero interest rate environment think that is the natural state of affairs of the world and then have a shock when that no longer becomes the state of the world, I think everyone is kind of going through their first rep of what is happening. And so I think in the next decade, when you have people come back around and have their next business cycle of things happening, there'll be hopefully less overreaction. Of course you're going to have new players who will then overreact in that sort of cycle. But, I think this is part of the ecosystem maturing, is to learn when and when not to freak out. And so, I think this is probably Dmitry's hilariousness point right? If we all stopped and thought about it, we would be like, Oh yeah, that doesn't make any sense. We're venture capitalists. We actually need to invest in things that are taking risk and take time to develop. It doesn't make sense to say, Hey, we need to all freak out right now but I think this is part of the natural sort of growing up process.

(32:16) Dmitry Levit:

Fully agree, apart from measuring the history of Southeast Asia from the days of a few funds seeded in Singapore. I think many, many birth points have been there.

(32:24) Shiyan Koh:

Which, which would you pick?

(32:26) Dmitry Levit:

Let's talk about iGEM, iMHF 2010.

(32:28) Jeremy Au:

When Dmitry founded Cento, that is the birth point,

(32:31) Dmitry Levit:

Of course, that is the before Cento and after Cento. Sure. Uh, Yeah.

(32:36) Jeremy Au:

ABC, there we go.

(32:38) Dmitry Levit:

Certainly. No, I'm thinking about this as 2010 mostly because, first of all, that was the first year when folks recovered enough from 2008 in the global ecosystem to even find Southeast Asia on the map.

Secondly, that was the first wave of folks who went out of Singapore and into China. Coming back over to the US coming back and starting things because until then, Singapore was devoid of activity apart from a few very, very hard scrabble folks have been there since late nineties.

And there was a third dynamic, which is there were shifts at NRF and Singapore government started producing Block 71, iGem, iMatch, IDA, MDA, and I am not having a breakdown. I swear these were all abbreviations at the time. So that was the first spike. Plus, let's not forget the rocket arrival a couple of years later. And then, yes, of course, the constitutional wave of 2014 and then a few major late stage North Asian investors finding Jakarta on the map and saying, what a nice e-commerce platform you have here. How about instead of 10 million, I give you a hundred and the rest is history.

And that, by the way, produced the surge of new fund formation circa 2017, 18. So the folks with the biggest amount of capital deployed locally, their memories of secondaries in 17. And of muscle memory is of raising against 600 million strong population that is somehow amazingly growing in the steel has middle class in it, according to World Bank. So those folks are only going to see their reckoning in 2027. Now is the first jitters.

(34:04) Shiyan Koh:


(34:04) Jeremy Au:

So, you know, starting to wrap up here, looking into 2024, what are the thoughts? Because, you know, Dmitry, you're going to make that report every half a year, which I always use enough often, like screenshot, put a source and put in a slide. So great report, but looking ahead the next one year, what do you think is the, I don't know, keywords or key themes that you're thinking about? And I love that phrase also earlier to use the word VC insider baseball.

(34:29) Dmitry Levit:

Well, I'd say probably overreaction is nearly over. If we are talking about this openly on the public podcast, that means it's already well understood. So it will self correct folks will start asking themselves. Why am I not investing when I am supposed to be investing at the bottom? I would say confusion is being rapidly, I'm not sure how rapidly it will be resolved, but let's just put it this way.

There'll be a bunch of new ways to think about stuff and the TMT practice at Goldman will come up with the new story that everybody should invest into and everything will get back on track. It's all good. I think the next big one is the dislocation bit, which we haven't spoken off as much because VCs overreact quickly, corporates overreact slowly, but overreact they do. So there will be changes of strategy, withdrawals from secondary markets, spinoffs of subsidiaries that are not necessary, and therefore there will be complete shifts in direction of large companies, interesting ways to buy into valuable companies at a low valuation, and also plenty of opportunities to catch a bunch of falling knives and suffer greatly. So that, I think, is the theme of 2024 for me.

(35:28) Jeremy Au:

How about you, shiyan?

(35:29) Dmitry Levit:

Ducking falling sharp objects.

(35:30) Jeremy Au:

How about you Shiyan, what are your themes for 2024?

(35:32) Shiyan Koh:

I'm, I'm boring, right? I'm just like, fundamentals, fundamentals, fundamentals. You start a company to make money, not to raise money. You know, so what are you doing to make money? Who's paying you for what? Can you acquire them cost effectively? Yeah, I don't think that that should change year to year, right? Like, I think focus on the customer, focus on what you're delivering, but I'm an early stage investor, right? So that's kind of what I pay a lot of attention to.

(35:54) Jeremy Au:

If I was a founder, for example, who was listening to this podcast, how should I be thinking of maneuvering or taking away from this conversation?

(36:03) Shiyan Koh:

I often tell founders, what would you do if investors didn't exist? Like, if we pretended all these people did not exist, what would you do? Is your business totally impossible without investors? You need to build a rocket. Okay. You probably can't bootstrap your way to like launching a rocket. That's like one category of things but I think for a lot of things in Southeast Asia, that's not actually what people are building. And so what is the minimum amount of capital you could do to validate your next hypothesis and what is your plan to get there? And then what's the minimum amount of capital to get to the hypothesis 2, hypothesis 3, hypothesis 4? Think about how much capital that would take. Don't think about what VCs want necessarily. VCs want big outcomes, all that sort of stuff. But think about you. You are the opportunity cost. You're the one whose life and hours are being spent to this. Not the VC. The VC has a portfolio of 20, 30 companies that they're dealing with. And so for you, is it worth it? Have you validated enough things that you should spend your life and time on this? Then answer the question about, okay, what's the capital required to do it? Can I find it? And I think if you've decided it's worth your time, there is a market. I think you can probably find the capital to do it.

Is it always going to be VC capital? Maybe, maybe not. Maybe it's angel money. Maybe it's a grant that's going to get you started, but I feel like people contort themselves into all these unnatural things because of what they imagine an investor wants to see, but at the end of the day, is there a real business here? I think that's the question founders have to answer for themselves.

(37:18) Jeremy Au:

How about you, Dmitry?

(37:18) Dmitry Levit:

Shiyan's framework is too alluring, so I'll just comply with it. I would say that if you are the founder who builds the company to actually make money, there are a couple of small things you need to worry, but not too much. I'll unpack them in a moment. If you're the founder who builds the company to raise money, and if you've already been doing that in the last three years, be very worried.

(37:34) Jeremy Au:


(37:35) Dmitry Levit:

As for the first group, there are two things that we need to probably take care of in the current environment based on this report. One is you need to limit the amount of time you spend listening to your VCs. They might actually be running around with their hair on fire due to all of this internal confusion in the industry. That shall pass. But for the moment, they'll be giving you strange inputs and they will be talking about immediately selling companies. Try not to take it close to heart. They will settle. The more active ones will be fired and everything will be okay again.

And the second thing is just if you could possibly stay out of the market while this sharp part of correction is going through. It's probably last half a year and maybe next couple of quarters would be lovely if you are in the market, be careful but that's the usual recommendation, not adding much here. So Shiyan, a lovely framework. I'll follow.

(38:19) Jeremy Au:

Thank you so much. Well, on that note we'll see you next time and perhaps when the next Cento report comes out.

(38:23) Dmitry Levit:

I'll increase the frequency then. Cheers so much. Thank you so much for having me.

(38:27) Shiyan Koh:

Thanks, Dmitry.


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