There aren’t many US or European venture capitalists investing in Southeast Asia’s startups. Aside from the fact that the landscape is still immature and undergoing a lot of changes, cultural and business differences also represent challenges for venture capital firms.

Nonetheless, after two years of planning and observation, Seattle-based Capria Ventures finally made its debut in the Southeast Asia region in June, when it invested in Singaporean private venture debt firm Genesis Alternative Ventures. With experience in Latin America, Africa, and India, Capria Ventures’s co-founder and managing partner Dave Richards is ready to take on the fast-growing yet challenging Southeast Asian market.

KrASIA recently talked to Richards about his investment plans in the region.

Co-founder and managing partner of Capria Ventures, Dave Richards. Photo courtesy of Capria Ventures.

The following interview was edited for brevity and clarity.

KrASIA (Kr): What drew you to invest in Southeast Asia in the first place?

Dave Richards (DR): For the last couple years, we’ve been spending a lot of time in the region, talking to fund managers and looking at portfolio companies. And I think in many ways, we are comfortable going into this new market.

There are not a lot of new investors from the US who have invested in Southeast Asia yet. They invested in India and China—that’s their initial focus. But we think India and Southeast Asia are both very interesting opportunities. Overall, the region’s developing ecosystem has grown a lot, with many changes still happening. That’s the kind of situation that we like. We see demand for innovation, talent, and a growing ecosystem of support for startups in the region.

Kr: Insiders used to compare Southeast Asia to India. What do you think about that, considering your experience in the Indian market?

DR: I’d say Southeast Asia is five years behind India. So, the ecosystem—which means talents, startups, capital, supporting resources, regulations, and others—are not as evolved as in India. There is a lot more development in India, particularly Bangalore, around startups.

However, I’m starting to see that also happening in the majority of Southeast Asia’s market, with Indonesia and Vietnam as the two largest markets. We think those two, in the short term, are the most promising markets.

Kr: What are the unique challenges when investing in Southeast Asia compared to other markets?

DR: One of the advantages of investing in the US, China, or India is that you get a large domestic single market. You have a huge market to go after as a startup. Basically, startups generally focus on the local business first.

Southeast Asia has less than half of the population of India, but it’s split up among multiple countries. What we’ve learned from lots of different examples, is that even if you start in Indonesia, you can’t easily expand into the Philippines or Vietnam, or other markets in the region. It’s a pretty big job. The fragmentation in Southeast Asia is more similar to Africa and Latin America. There are a few prominent economies and some smaller ones, so we tend to see regional strategy anchored in a single market.

One of the examples is the challenges with fintech firms, which we are very bullish about. It’s a very regulatory and country-specific industry. And generally, it’s hard to scale fintech companies across countries, because you have to deal with different regulations and incumbents.

Kr: How will Capria invest in Southeast Asia?

DR: We invest in two different ways, we set up partnerships with fund managers, and then we invest in funds those managers are developing. And we also look to invest in some of the best companies alongside them.

Generally, we focus on the venture capital world, firms that are doing seed investing. So this could be checks of up to USD 10 million or as small as USD 2.5 million. It’s considered early-stage to early-growth stage investment—that’s our sweet spot. We look at pan-Southeast Asia funds and single-country funds, predominantly in Indonesia and Vietnam at this point.

Kr: Your first venture in the region is Genesis Alternative Ventures, which runs a venture debt fund. Why is that?

DR: We think that venture debt is going to explode in Southeast Asia. If you look at the US, it is very developed. In India, it is also quite developed, while in Southeast Asia it’s very nascent. This is proven in the US, China, India, it’s a form of very important capital for fast-growing businesses.

We backed them [Genesis Alternative Ventures] because they are investing like a venture investor but providing growth capital to these businesses with less dilution, which is complementary to the VCs in the region. Since they’re the first of this kind, they have the opportunity to become a leader in this space. They have a big head start.

Kr: Why do you think venture debt is going to be a trend in Southeast Asia?

DR: If you have working capital needs, it’s way too expensive to use venture capital for that. Companies like Gojek and Grab have a lot of working capital needs, since they pay their drivers weekly, thus they have to collect money for that and other operational costs.

When you have to finance between different accounts, you have to see which accounts are payable. None of the banks will fund this, because they don’t want to provide risk capital—they are not set up to do that. So you have to bring along someone who provides a solid financial product and understands the risk and opportunities of investing alongside venture investors, but with a debt-oriented product.

Kr: So, more funding options indicate a maturing ecosystem?

DR: If we go back five or six years ago, there were almost no venture capital firms in Southeast Asia. There were pioneering funds, I call them Temasek Babies. Temasek backed four or five venture funds, put the anchor investment in them. These guys were seeding investors. At that point, there weren’t lots of startups in the region and these guys were all trying to find entrepreneurs, write them the first check, and those companies are now starting to really scale. The problem is that there wasn’t a follow-up on capital easily available. There were some, but mostly foreign funds.

The ecosystem is growing with startups as they need more capital, and venture debt is part of that equation. As it starts raising growth equity, there’s a huge demand and opportunity for them to take venture debt as well. This happens in other markets. If you look in India, six or seven years ago, there was no venture debt, but now we see three or four significant players doing venture debt there. And they follow the demands of startups, they want to have high growth and need to raise capital.

Kr: What qualities do you look for in fund managers?

DR: We’re looking for people that are very hands-on. Having startup experience is a big plus. If they have been through the entrepreneurial journey themselves, that gives them an edge over someone who doesn’t have that experience.

And then we look for teams, we are looking for complementary teams. We don’t invest and back fund managers who are just single leader teams, because it’s a long journey ahead and you need a team to do this kind of investment.

We’re really looking for people who have the staying power, commitment, and capability to run a firm for many decades. One of the biggest risks that fund investors have is for the fund to break up mid-cycle, when partners get into a fight and go in different directions. In Silicon Valley, which is the most developed ecosystem for venture capital, funds are set up with ten-year lifespan. But on average, those funds don’t close—don’t complete their investment—for 14 to 15 years. That’s in Silicon Valley. It takes even longer in a less developed market.

So we’re really looking for the right team, the right strategies, the right traction. Also, fund managers that are hungry and really want to learn.

Kr: The investment landscape in Southeast Asia is still quite young compared to other markets where you have experience. How do you define the investment style in this region?

DR: I describe the style as what you call in the US the “cowboy or cowgirl investors.” A lot of investors have been using the strategy of doing a high volume of investing with a small amount of money. Some people call this “spray and pray,” meaning you very quickly invest a small amount of money in a whole bunch of companies. You spray your capital around and once you do well, you try to put more money in those. If you talk to fund managers in the region who raise second and third funds, they’ve all done it because they got lucky—as the investors of Tokopedia, or Grab, or Gojek, or other unicorns in the region. They are usually one of around 40 people that invested. There are very few situations where they were the sole investors.

That actually worked quite well for many of them. But I think that what you’re going to start seeing is the differentiation between investors that continue to grow and professionalize, and those who just stick with “spraying and praying” and an unstructured approach to investing. Generally, investors who succeed are those able to professionalize and develop best practices and processes to deal with additional complexities when scaling your investing business.

It’s one thing to be lucky in making a couple of investments, but it is a very different thing to create a consistent investment result for your firm.

Kr: What can we expect next from Capria?

DR: We are still looking to partner with more fund managers. You will hear from us again in six months.

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‘Venture debt is going to explode in Southeast Asia’: Q&A with Dave Richards of Capria Ventures