According to the Wall Street Journal, in 2018, Asian Venture Capital funds contributed 40% of the $154 billion invested globally in early-stage companies. And that was nearly two years ago, with a widespread acknowledgment that the Asian VC industry is still very much in its infancy. This growth has led to analytics and data provider firm, Preqin, to predict in their 2019 annual report that Asian VC capital might eclipse funds coming out of the USA in the not too distant future.
A & B Round companies across the world are wondering, “should I be raising money in Asia?”
The answer is a solid, emphatic, and compelling, ‘it depends.’
First, who are we talking about? China is by far the largest source of all Asian VC funding, totaling all the other Asian sources combined. But it is hard to discuss China VC activity without a large asterisk. While there are certainly excellent, high-quality, highly internationalized VC funds in China, a much larger portion of China VC is operating in a semi-captive cul-de-sac, where captive ¥ RMB seeks growth somewhere (anywhere!), meaning, making bets on early-stage companies can be one of the very few growth options for capital. These early-stage growth companies are positioned to accept investment and deploy Chinese RMB, which means they are generally singularly focused on the China market; adding risk by linking potential to Chinese Government macro-economic decisions, along with Shanghai Composite and Hang Seng Index performance. If you are one of those early-stage Sino-specialists, and plan to spend your rich retirement in China, the pickings can be very good. If you are one of the rest of us, wanting up-side payouts in Dollars, Pounds, Euros or Yen, and trying to operate globally… well, good luck.
That leaves us with a much smaller pool of available venture capital in China, combined with other VC sources coming out of (in order of size) Japan, South Korea, India, Hong Kong, Singapore, and Taiwan. The first thing to acknowledge about this pool is that Asian funds tend to stay close to home, backing tech and markets they know. The second thing to recognize is that Asian funds tend to be new (some 50% are first-time funds) and are generally very broadly defined in terms of mandate. That means the distinction between PE and VC is not clear cut, with even infrastructure funds taking small stakes in strategic start-ups. The same can be true on the distinction between GPs and LPs, where it can be hard to discern the difference between family offices, corporate investment arms, family conglomerates, and managers: they often bleed into one.
All this ambiguity means Asian VC Funds can be hard to pin down. While US and EU funds tend to have very specific investment theses, for example, next-generation renewable energy enabling tech (the focus of BCI Technology Investments), and with specific quantums in mind (i.e. a narrow, well defined, and objective processes for deploying capital), funds in Asia have broader approaches. There may be some general themes, but because funds are often connected to family-owned or corporate conglomerates looking for future ideas, they tend to be more opportunistic, and somewhat agnostic in terms of investment area, size or impact. ‘Does this start-up make sense in the context of our larger group?’ If yes, an early-stage company can enjoy a lot of flexibility in terms of investment approaches.
Another thing to keep in mind is that Asian VC funds looking internationally tend to shy away from being first out of the gate in terms of backing new ideas. There is a recognition that international tech, and its potential, can be hard for Asian funds to fully research, so they like to see a few well-known names in the Seed and Series A Rounds. They are happier to jump in once it is clear someone with street cred has started things off. That is of course true for VC funds everywhere, but the tendency is even more pronounced in Asia. Outside of China’s captive cul-de-sac, this is generally a bad region to start a science project in, unless it is specifically linked to a government-backed initiative aimed at strategically seeding a particular national business sector.
If you don’t have a link to a government-sponsored initiative, your next approach may be to see if your early-stage company pairs well with other companies in a fund’s portfolio. With very few exceptions, Asian start-up companies tend to need a lot of incubation and support. They need not only funds, but active advice on capital structure, fund-raising, finding and keeping talent, on supply chain and commercialization, and especially on internationalizing what may be very local approaches. If your start-up offers management clustering, deal sourcing, supply chain synergy, international market access, or other such infrastructure fortifying benefits to a Fund, an Asian Fund is more likely to pay attention and value that as opposed to US or EU Funds.
Finally, once you’ve finally arrived at making a deal, you should be prepared for Asian VC Funds to want a lot of management control and cap table protection. As Daniel Zimmerman, Co-Chair or Emerging Technology and Venture Capital Practice at WilmerHale, wrote in an article for TechCrunch “It’s typical to see term sheets that include full-ratchet anti-dilution protection and most-favored-nation clauses.” That doesn’t mean founders have to accept such terms, however. Daniel encourages founders to do their homework, and to counter heavy-handed term sheets with “deal point studies, which summarize the typical terms in recent deals.”
Yes, there are huge pools of capital in Asia looking for a high-growth home in early-stage companies outside of their home markets. As long as you are not too early stage, have some approving nods from well-known players in your industry, and can fit into the long-term strategic plan of a family or corporate conglomerate, fundraising in Asia might be a great way to go. It’s probably not where you get your $500,000 Seed Investment, but maybe your $5M A-Round Investment, and even more so your US$50 million Series B/C-Rounds.
Tim is a co-founder of BCI Engineering and also a Principal at BCI Technology Investments. Tim Brantingham is a lifelong resident of Taiwan, Hong Kong, and China. He has worked with Asian manufacturing and industrial supply chains for over 20 years and is a fluent Mandarin speaker whose career has been focused on bridging Eastern and Western management teams. Tim has worked with Silicon Valley rapid-growth startups, Chinese state-owned conglomerates, and pan-Asian family-owned businesses in the renewable energy, mining, power, oil & gas, and construction industries. Recently, Tim has focused on industrial VC investment and green-tech acceleration. Tim received his undergraduate degree from William and Mary in Virginia, his MA from the University of Hong Kong, and his MBA from Oxford University.
Tim can be reached at email@example.com