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What RedMart’s Soft Landing Means for Southeast Asian Entrepreneurs

Is it beneficial?

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BY Ezra Ferraz - 06 Dec 2016

PHOTO CREDIT: Getty Images

Early last month, Lazada’s acquisition of online grocer RedMart was met with as much speculation as surprise: Analysts suggested that the size of the reported deal - some sources putting it at $30 million to 40 million - meant a loss for most early investors.

But are “soft landings” – a recourse for troubled start-ups to prevent them from going out of business --beneficial?

The good news is that RedMart’s soft landing, as Unicorn Venture Capital co-founder Murli Ravi describes it, may not necessarily even be bad for the tech ecosystem in Southeast Asia. Hugh Mason, the co-founder and CEO of JFDI.Asia, thinks Ravi’s analogy between a plane and a business is accurate.

“Clearly investors back a business to go the full distance but the reason their money is called 'venture capital' is because doing something new is a venture. If the only option for a business is to make that distance or crash and burn, that's going to put a lot of people off investing in innovative businesses or using their services,” Mason says.

He adds that as the market matures and more potential acquirers become active in the region, soft landings are only healthy – much in the same way that having additional airports on the ground offers safe haven for aircraft that meet trouble in the air.

Others believe that soft landings can cause investors to think twice about investing in the region, Philippine-based angel investor and serial entrepreneur Anderson Tan, notes.

“The angel will mark this investment as a failure and, thus, will learn from the error and be more cautious by investing in other regions like Israel, Chile, Silicon Valley or by being more picky in local investments,” he says, adding that the long-term impact on the investor’s perspective may come down to his level of open-mindedness.

Tan also explains that soft landings may make it difficult for the founders involved to raise funding for their venture, if they plan to remain in tech.

Igor Pesin, a partner and investment director at Life.SREDA Venture Capital, believes that certain industries – such e-commerce, food-tech, logistics, and marketplaces – are more prone to soft landings. In his view, “deep-tech” verticals, such as fin-tech, bio-tech, AI, and IOT, are less prone to soft landings.

Pesin also observes several challenges in Southeast Asia that may prevent start-ups from reaching the scale necessary to attracting the big acquirers integral to a successful exit. He notes that start-ups in the region tend to dominate only one geographical market, such as only Vietnam or only Malaysia, which is not enough for these acquirers.  

“They need SEA champions, not only local leaders,” he says.

Pesin also explains that regional start-ups can act with insularity, which affects their scale and prospects for acquisition.

“SEA start-ups are not open for M&A between each other and prefer to grow organically, which usually takes too much time to become attractive for big investors. M&A between start-ups are common thing in western countries, but currently not so popular in SEA,” he says.

He adds that some start-ups have industry-specific challenges that make it difficult to scale. In fin-tech, for example, SEA start-ups have not had the bank-as-a-service platforms that their counterparts in the United States, Europe, or China do, only recently getting the pan-Asian software platform BAASIS that can connect the two via an API.

 

Going the distance

For all the talk on soft landings, both entrepreneurs and investors can do much in their power to avoid them. Mason believes that investors must continue to embrace risk, but do so by banking on well-balanced teams.

“Investors are misnamed because they all hate writing cheques. The part they enjoy is divestment - getting a cheque back. Many in our region are attracted to venture capital but they like the word 'capital' more than the word 'venture'. Yet reward goes hand in hand with risk and, as the saying goes, 'nothing ventured, nothing gained'. Investors often do best when they take risks on businesses they understand led by balanced management teams with a deep insight into the domain in which they operate,” he says.

Tan claims that investors can find the scalable startup by making a concerted effort to improve the pool of companies that they initially look at. “Over one hundred for starters,” he recommends, noting that investors must learn to give the coveted yes on a proposed investment only rarely.

Start-up founders also have a big role to play. Though it may seem counter-intuitive if their goal is to eventually sell their start-up, Tan advises entrepreneurs against defaulting to a fund-raising mentality from the start and from looking too far into the horizon.

“Gain traction instead of seeking funding right then and there at Day One. One can get creative like Airbnb where they generated income through a cereal box campaign called Obama O's and Cap'n McCain's. Don't even think of an exit strategy and keep the company private,” he says.

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