#Asia Beware of the threat of undisciplined investors


The Southeast Asian startup scene is not trying the Silicon Valley and ballooning valuations inevitably lead to dissapointment


Over the past decade, there have been three buzzwords rocking the world: startup, disruption, and innovation. Such is the impact of these oft-misinterpreted terms that they have spawned multiple industries across various nations around the world.

It is that old tune: everyone wants to be Silicon Valley.

Our region, Southeast Asia, has also become a victim — or a hipster — but to think we want to be like the Bay Area is misguided. There is another model ecosystem closer to home.

In California’s shadow, China has slowly risen thanks to the grand powers of Baidu, Alibaba, and Tencent — with the fledgling powers of Xiaomi, Didi, Ctrip, and more in tow. And in China’s shadow is Southeast Asia.

With this juxtaposition, it is no wonder the founders and investors of the region are hoping Southeast Asia will be the next China. That’s the dirty secret of Southeast Asia.

Also Read: It’s all about execution: Chua Kee Lock, CEO, Vertex Venture Holdings

Although everyone knows we operate in a complex region — with multiple political and cultural issues along with economies that are oceans apart — everyone is holding out hope Southeast Asia will be the next China. Everyone wants us to produce an Alibaba.

And indeed, that is how investors and founders are subconsciously behaving. Southeast Asia certainly has potential, but does it have the explosive multi-billion dollar juggernauts incoming that justify the inflated valuations?

Repeating patterns

We are seeing a similar exuberance in the startup market that we saw six to seven years ago. Back then, there was a spike in interest and excitement for startups. As a result, valuations grew and promises were made. But Southeast Asia does not operate like Silicon Valley, where ballooning valuations lead to further ballooning.

Inflation inevitably leads to down rounds when startups are unable to produce the exits their exuberant investors wanted. Once in awhile, a resilient startup appears and can make an impressive exit or IPO.

The pattern is repeating itself today. Southeast Asia is again going through another hype-cycle in which young investors are chasing after deals rooted in overwatched trends and founders are inflating their prices because there are too many hot investors.

In tandem with this is the rise of accelerators, coworking spaces, and corporate innovation programs that underline a fervor and desperation around phraseology like startup, disruption, and innovation.

‘Startup’ is overheating and it is creating hot air balloons across the ecosystem.

Chasing deals or being disciplined about fundamentals

Of course, some of the chasing is warranted. Some deals are just so hot and the companies have such strong potential that it is irresistable. But it is important to stick to the fundamentals and be disciplined about investment.

But these are the basic boom and bust cycles of venture capital. In every cycle we see the same pattern repeating — investors rush to invest at high valuations, then they get burnt because the market becomes overheated and valuations plunge. I see the same pattern repeating today.

Also Read: Let’s make this cheaper: Overseas payment startup InstaReM raises US$5M from Vertex Ventures

The younger and less experienced investors have a hard time staying ‘sane’ when money is pouring into deals at inflated valuations and they miss the signs pointing to an oncoming bubble.

Take a step back

Unfortunately, it appears that being part of a high profile deal (albeit at a potentially inflated valuation) brings lots of media attention.

And some investors crave the visibility amidst all the media frenzy. We read in the media about which firm has completed the most number of deals and who are the most active investors. It is the wrong focus.

Ultimately, a good VC is able to give real returns in not one but several investments.

Venture capitalism is not about doing many deals in the quickest possible time, it is about investing and building great companies that can produce outstanding exits and returns.

Photo courtesy of Unsplash.

Mr. Chua Joo Hock is based in Singapore and heads the investment activities for Vertex Venture Holdings Ltd, in Singapore, Southeast Asia, India and Taiwan.

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