Gobi Partners’ Kay-Mok Ku on Investing Smart in Southeast Asia

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Kay-Mok Ku has over 17 years’ experience investing in startups across Asia. Since 2010 he has been a partner at Gobi Partners, an early-stage fund established in Shanghai in 2002. Singapore-based Ku has overseen a period of heavy investment in the southeast Asia region, including the launch, this March, of a $14.5 million seed-stage fund in association with Malaysia Venture Capital Management Berhard (MAVCAP). And, as he told Red Herring this week, doing business in southeast Asia is a uniquely demanding task.

What areas is Gobi focused on in southeast Asia?

Here we focus on three areas: e-commerce, mobile internet and fintech. It’s a very market-driven approach. southeast Asia is a very fragmented market. If you see western markets—US, China—they tend to be very focused on technology. They’re mature markets so the only breakthroughs you can get are with technology.

Here it’s a distribution market: developing more homogenous content. Take gaming. They are developing gaming titles in developed markets like Korea, China and Japan. So when you develop a title you can scale it within that country. But in SE Asia it’s difficult. A lot of content gets localized. If you invest in a game here, you’re investing in a publisher. There are multiple languages and cultures here, so you have to ask how you will sell into the market.

What is the biggest recent driver of change in e-commerce here?

The chief reason is Chinese smartphones. Before the appearance of them it was very difficult to sell high-priced phones. A lot of the Chinese phones have the top range of features. But more importantly they are cheap enough to serve mass markets here.

In the West a lot of phones are almost free, because you sign up for a two-year service and the cost of the phone is almost irrelevant. But in this market, where you have to pre-pay for the phone card and the service, the price is important. There is an increasing smartphone penetration here—20%, heading towards 40%—so you see a lot of smartphone apps.

Fintech is also interesting for SE Asia because many locals don’t have a bank account. The opportunity here is smartphone-driven. You see a lot of financial habits kept on a smartphone. It’s like budget airlines, bringing the price point low enough to open up a whole new section of consumers. Fintech is going to be the same: once we have all these smartphones you’re going to be able to see the habits of all these new users. It’s a market that will become feasible.

What other major regional trends have you observed?

One trend that we’re seeing is Chinese money coming in. We are seeing a huge wave of Chinese capital coming up, headed towards the next big markets: India, Indonesia. It’s something you should watch out for, because it’s going to be a game-changing wave. A lot of Chinese business models fit the emerging markets well—just look at smartphones. Apple is only covering the top tier of consumers, but Chinese companies, and perhaps Samsung, are targeting everyone.

How has Gobi’s investiture here changed since 2010?

When we started in 2010, e-commerce wasn’t really viable and we tended to focus more on digital content—gaming, digital media, mobile apps—because they’re easier and there are no logistics involved. Travel is another easy market because people move themselves. As we started to move on we began to invest more in e-commerce companies. We have done e-commerce firms across the board, mostly travel e-commerce. And with fintech we’re invested in a lot of crowdfunding.

Is mobile heading in a particular direction in southeast Asia?

With this you can actually take a page from China. Even for gaming, if you look at the original model in the West you actually had to buy a console and buy a one-time game cartridge. That model didn’t work in Asia. So looking at how gaming evolved here is really looking at internet gaming. People don’t pay upfront for a console, so it’s pay-to-pay. And today you see a lot of freemium models. Free seems to be the way to go, and you’re trying to upsell.

Some markets can be better than others. The Philippines is a market where, in the short-term, we will see that upselling working well. But over time, having a young population whose incomes are increasing, we will at some point reach the threshold where some of these free-to-play models will kick in.

How does Gobi enter the southeast Asian market differently than in more developed economies?

In SE Asia we are a regional fund. We don’t cling to the idea of being a local fund: our business model is to work with local partners. Most of our investments are currently centralized in Indonesia, Singapore and Malaysia. For Indonesia, obviously it’s the biggest market in SE Asia, so that’s very clear. Singapore and Malaysia tend to produce fairly regional or international startups, because they are small domestic markets and the entrepreneurs are more universal: they speak English, they travel, they’re not trapped by the home market.

Then the other markets are Thailand, Vietnam, the Philippines, which have a lot of consumers. Typically in those places we don’t invest too early. We typically look at companies in which other local VCs have invested: either we co-invest or we follow on.

What are you looking for in entrepreneurs from this region? Does it differ from the attributes you value in more developed markets?

In this part of the world, the cost is lower. So you need local entrepreneurs who understand the cost structure here. It’s the main difference: that they’re very value-conscious. Entrepreneurs in the West may have a very strong technology focus—because there, that’s where the breakthroughs are. Over here the entrepreneurs we look for tend to be good at market execution. They may know about technology, but they know how to apply technology.

China is an extreme example: it’s hyper competitive and people will do all sorts of things to get ahead. SE Asia is probably somewhere in the middle. It’s not as competitive as China, but still there’s a certain amount of chaos that is not present in the West. So being street-smart and good at execution are key traits here.

Also, in the West you have a lot of Zero to One. Generally in SE Asia, it’s about scaling up. So you’ll be taking a business model or technology and localizing it for the markets here.

How will your approach to the market evolve in the coming months?

We have been aggressively investing. This period is a tricky one, because the market has a lot of uncertainty. Many funds have pulled back. We look at this as an opportunity for our approach. So a place where people are not investing heavily is actually a chance to do the opposite. We have a pipeline of deals soon to be announced, so there will be a lot of announcements soon.