Investor Eddy Lee of the Silicon Valley based venture capital firm Fenox Venture Capital uses his experience to bring value to startup companies in Southeast Asia. As one of the few Silicon Valley VC firms to take a serious look at Southeast Asia, Fenox is in a unique position to take a leading role in a growing market. In this interview, Eddy Lee talks about the differences between the investment ecosystems in the US and Southeast Asia, and he gives advice on how to bridge the gap.
Hello podcast listeners. Today my guest is Eddy Lee. Eddy, thanks for joining us on the show today.
Hi Edmund, glad to be here.
Can you introduce yourself, can you tell us a little bit more about yourself, how did you first start getting invested in private companies? Who are you? What’s your story?
Sure, I’m Eddy Lee, right now I’m a principal with a Silicon Valley investment firm called Fenox Venture Capital. It is based out of Silicon Valley and we’ve got a presence through joint venture offices in Singapore and also in Indonesia. And also a small office in Japan. So right now, I’m running the due diligence for this company. Looking into investment opportunities in IT companies, and also Medical Technology Companies, both in the US and also in Southeast Asia. And at the same time I’m a consulting assistant professor in Stanford University, where I’m helping the projects spin-off into viable businesses. So I’m doing this for the School of Medicine in Stanford.
So what type of companies would you be interested in at Fenox, and what round of investment typically are you deploying capital?
Fenox is an early round investor. So in the US, it is primarily investing into Series A. But they do consider seed investments, and also some B-round investments. But what they do is, after investments they will always do follow-on investments into all the rounds of the company after they get invested. No matter at what stage they get started. Whereas for Singapore, we have a focus on B-round companies or later. And this is very much because we see that in Southeast Asia it’s extremely difficult to raise a round size between two to five million dollars. This is a combination of various reasons. One, because there are Singapore incentives at the seed round funding. Secondly, because the late round investment structure is very mature with PE firms like Jafco, Vertex, and IPL picking up the late rounds. But there’s a huge gap—the between two to five million dollar round—that we are trying to address right now.
Since you have experience in both Silicon Valley and in Asia, can you talk to us a little bit more for entrepreneurs, maybe in Asia and don’t know what it’s like in the US, or US entrepreneurs who don’t know what it’s like in Asia? Can you talk more about the funding landscape, particularly comparing Singapore to Silicon Valley?
I’ll speak about it from investor’s point of view, and then I’ll try to address what it’s like from a fund raiser’s point of view. For investors in the US, there are 400 venture capital firms in Silicon Valley. And this is a huge number. And in Silicon Valley there’s no shortage of deals. They have multiple deals available all the time. And the potential for exit is huge. So in Silicon Valley, there is great potential for ‘triple’ exits, which means hundreds of millions of dollars. Or even in a billion dollar range, and most recently we had seen exits such as WhatsApp to Facebook, right? 19 billion dollars. So in the US, there are lots of deals and also there’s lots of noise as well. So one has to have the connections and also the resources to be able to analyze a huge number of deals and to see what is a good deal from a bad one.
And in comparison, in Southeast Asia, the environment is quieter. Which means from investor’s point of view is easier to set up your antenna and make sure not to miss any good deal. This is simply because the number of deals are fewer and it’s easy to capture all of them.
And from the fund raisers point of view in the US, we’re in no shortage of investors. It’s very typical that for a new entrepreneur, you can go out there and say that you are about to raise money to start a new venture. And you have backers. And the best entrepreneur can go out there and select who they want to have in their round. And they often kick out even VC firms from the seed round. So it’s not uncommon that best entrepreneurs choose their investors. Whereas in Southeast Asia, the funding mechanism is not so mature. And entrepreneurs, some of them are at the stage of preparing their pitch in order to convey their ideas within 30 seconds, within 2 minutes to the investors. This is not an easy skill to learn—to be able to sell your ideas within a short time frame. And this is a time where I think a lot of entrepreneurs in Southeast Asia may want to get exposure to the fund raising process in Silicon Valley by spending some time over here. And then to bring the mindset and skill back to Southeast Asia for fund raising reasons.
That’s fantastic advice. Would you say that—having looked at deals in both places—there’s a difference in quality between the companies in either place? Or is it kind of difficult to compare?
It’s difficult to compare. But I will look at it from the point of view of an investor—that investors look for return on investment, right? How many x’s they return? So I’ll say that in the US the potential for return can be 100x,1000x. But there are also a lot of companies which cause the investors to lose money. Whereas if you look at Southeast Asia in comparison, there is more stability, because of the fewer number of deals. The stability to get you returns. Although at the higher limit, the number of the return is less than 100x. So, on average, if one were to invest in multiple deals in the US as compared to multiple deals in Southeast Asia—from my experience, you’ll get similar returns. But the other advantage is that, in Southeast Asia there’s less competition. There are less international investors going to Southeast Asia, and for example from my knowledge we are the only Silicon Valley investors in Southeast Asia right now. So it gives us huge advantage to be able to bring value to the startups in Southeast Asia. So the value we bring is that we can help them in early stage financing. But because we have a larger capital, we can do every round of funding with them. And also because we have done many M&As. We have helped our portfolios exit. And even before forming this venture capital firm the founders of Fenox have done more than 40 M&A exits. So we have an experience of helping portfolio companies, all the way from seed level to M&A exits.
You mentioned something interesting there, that you might be one of the only Silicon Valley based venture capital firms that has a unique focus on both the US and Southeast Asia. Why do you think that is?
We have seen over the last 10-15 years that we have seen Silicon Valley firms starting to look at Asia. And when they look at Asia, they could see that the elephant in the room is China. Right? Because China has, since years ago, become a trillion dollar industry. Right? But a lot of Silicon Valley firms have moved into China—some got burned for various reasons. Because China is a totally different business environment compared to the US. And they have also tried some of the ideas to see whether what has worked in the US—does it work in China. What has worked in China—does it work in India? Same thing, we have seen firms going to India and some of them are not getting very good results.
Whereas when they look at Southeast Asia, it’s very clear to them that we are seeing a pattern of how ideas that worked in a developed country will one day work in a developing country. But they are concerned as well, that Southeast Asia looks extremely heterogeneous. Look at Singapore, we’ve got GDP Capita of 62 thousand dollars and you’ve got Myanmar, which is less than 1/10th of that. So how do you address a product that tries to serve this entire heterogeneous market? They do not have an idea of how to do that. So they are very afraid of a heterogeneity and how will startups scale to address the six hundred million people. Whereas for my firm, we look at how even in China it is a heterogeneous market. What works on the coastal cities may not work in the inland, rural cities. So China itself is heterogeneous. If you look at Southeast Asia, it is heterogeneous but there’s some similarity in user behavior—where there are some trends that what has worked in Malaysia seems to work in Indonesia. And if you look at the economy, the size of the economy in Southeast Asia is 2.3 billion dollars GDP combined. This is equivalent to the GDP of the UK, which is sixth in the world. So this is a huge market for us to tackle. It’s one of the fastest growing markets in the world. And my firm is in there to capture this opportunity.
It is one of the fastest growing markets in the world. And I think that it’s also a market where we’re seeing a dramatic rise in the middle class, where more people are coming online for the first time. These trends are combining and creating an interesting melting pot in Southeast Asia. But you’re also correct that it’s very fragmented. What are some things that entrepreneurs can look at in terms of best practices, in terms of advice from you in moving from one country where they’ve proven the concept to another market where they’re now looking for growth?
We have seen a number of companies, for example in the B2C platform, and this is a good time to talk about e-commerce because that is one of the most popular industries right now in Southeast Asia. And this is following in the footsteps of Amazon and Ebay in the US and Alibaba in China, right? So we are seeing the likes of Zolara, rocket internet companies, and also some other companies that are serving the fashion market or the cosmetic markets…that is rising right now. So a lot of companies have chosen to start in Singapore and proof itself in Singapore. They want to prove their model sufficiently, gain enough traction before moving to another country. But, we do feel that very often what works in Singapore does not work outside of Singapore. This is because the people have different purchasing power in Singapore. So, customers’ behavior is completely different. So I suggest for e-commerce players is to get government support, get incentives to get your feet on the ground in Singapore. But move out of Singapore and start tapping into Malaysia’s customers, Indonesian’s customers as soon as you can. You do not have to wait for too much traction before you try out a new market. Because the experience can be extremely different. This is part of the Lean Startup mentality to try out MVP in Malaysia as soon as you can. Because MVP in Singapore simply does not work elsewhere.
Singapore is also a comparatively small market in size—less than six million people—compared to Indonesia which is one of the top ten largest countries in the world in terms of number of people.
Exactly. Singapore has five million people, forty percent of them are expatriates. As compared to…now the population of Indonesia is, I think close to 250 million. That’s a quarter of a billion people—the fourth most populous in the world. And that’s a huge market that a lot of people in the US are not aware of. And there’s huge potential there.
Well, it’s interesting that some Silicon Valley startups have gotten a lot of users in Indonesia. Path is one startup that comes to mind. And they sort f brushed off the fact that they got those users. It wasn’t interesting to them because they’re not North American users. So, it’s interesting that, to a large extent, Southeast Asia is still ignored by most of Silicon Valley investors and by most of Silicon Valley entrepreneurs. So you think that trend will continue, or do you feel there will someday be a more internationally-minded outlook from Silicon Valley entrepreneurs and investors?
I think for businesses, there’s a trend that the business decision usually lies in a hidden behavior where you want to take a risk only if your peers around you are taking the same risk at the same time. And this works the same for B-round, C-round companies. They’ll move to Indonesia only when they see their peers doing the same. They will start tapping to China when their peers around the same size do the same. The same goes for the venture capital industry. So Fenox may be one of the earliest to go in there. But if we do report success, for example, with one or two good exits, I believe more and more firms will be coming in. And we do see some signs of it because I do work with some of my close friends, they are in talks about setting up a presence in Southeast Asia. We know that 500 Startups is there, funding startups. So we also see Vinnie Lauria, who is doing great work. He used to be from i/o Ventures and he’s setting up his own investment practice, and bringing his experience of Silicon Valley to Southeast Asia.
And these are great people that I enjoy working with right now as well. So it’s a matter of time that American companies and international companies will start paying attention to the growing influence of Indonesian consumers and as a whole, Southeast Asian consumers. It’s interesting that for Dave Morin, we noticed the results that Path is getting in Indonesia. And in private conversations with Path, we managed to inform them that Indonesia is one of the fastest growing markets. Will you be interested to go over there and perhaps give a talk at Startup Asia Jakarta? So full disclosure, I’m an investor in Tech in Asia, and Startup Asia Jakarta is their event. Right? So it’s very unfortunate that at that time, at first he was actually available but then, due to conflict of schedule he could not make the event.
But lo and behold, a few months later and an Indonesian conglomerate invested into Path. They took up the entire round. So people are taking notice of that. And I also had a chance to talk to Ashton Kutcher as well. To alert him about the opportunities in Southeast Asia. So on my part I’m doing my small part to inform the various stake holders in Silicon Valley to start paying attention to the region.
Well, I’m doing my part from over here, so together, Eddy, we’ll be a powerful force. So, moving on in the interview, what makes a deal investable for you specifically? What are you looking for? Are you doing a due diligence phase? How long is this phase? What specifically are you looking for during that due diligence?
So in terms of due diligence, I’m by-training an engineer. So I take a lot of value in the product. So by training, I’m an e-engineer who then went on to do medical devices. But I’m also very aware that a good product requires a market to sell well. So in the due diligence we look for two things. We look at the product market fit, and also the people behind the product/the company. And we do put a lot of weight on the people, and this is because the earlier the deal that we look into, the more emphasis we put on the people. If it’s a later state deal, we have numbers to crunch, we can look at the revenue expenses and so on, so forth. So, for me it’s extremely important that the product serves a need in the market. There could be a competitor right now, out there in the market, that’s fine. Because the presence of competition tells me that it’s a product that people want to use. It is the lack of competition that really worries me. And we’ve seen over time that the first product that reaches the market may not be the winner. Think about the Myspace, think about Friendster. Right? So, it’s okay to have competition but I would like to see the team behind it whether they can outgrow the competition with my investment. That is what can trigger me to put in an investment and back the team. It’s about the relationship with the entrepreneurs that the investment at the current round, is a beginning of the relationship. Because after investing I’ll support them in every round. I’ll hand-hold them to do business development. I’ll put them in front of M&A acquirers. And we have companies that are going IPO as well. And even after they exit the business, when they want to start a new business as a serial entrepreneur, I’ll be the first one to put money in them. So the first meeting I have with them and also the investment is only the beginning of a long journey ahead.
That’s fantastic. It seems like you have a relationship-based method where you are evaluating the character. And that’s as important we can say—and I don’t want to put words in your mouth—as the numbers, because as an early stage company you might not have those numbers and the metrics to go by. So you kind of have to make a character judgment on them.
Yeah, I would not say a character judgment because we try to limit our number of times we meet entrepreneurs to two times. And this is in respect of their time. Because entrepreneurs’ time is money for them. It’s their runway. And we’ve seen many investors who delay and wait for other investors to commit before coming in to buy time. But we have also a lot of investors who go on to give false hope to entrepreneurs. And because the later they do so…make a decision there is the advantage is to the investors. Right? So, but the fund raising process is extremely painful for entrepreneurs. Especially if they do not factor it as part of their business’s growth.
I encourage every entrepreneur to put…if you have a team, put one guy in charge of fund raising. This is a guy who uses Mail Chimp to update the potential investors about the latest progress. This is the guy who warms a relationship. It could be the CEO, it could be this guy who once in a while has a coffee with the investor. And fund raising should be part of your everyday business. Such that you can be collecting convertible notes along the way, and when you have a valued round, you know who to tap into. So a lot of entrepreneurs stop whatever they’re doing and for three months, four months just do fund raising. It’s extremely disruptive to the business. And for the point of view to the investors, we really want to minimize that kind of friction. After investing, investors should be part of the team.
I absolutely agree. I’d love to hear you say more about that. How in only two meetings with the investor, the entrepreneur is able to properly convey his business? Do you find they need to exceptional communicators in order to do so? Can you talk to us about how an entrepreneur looking to receive capital…he’s got the meeting with his investor, he feels the money is just around the corner. How can he convey to you here’s where we are, here’s where we want to be, and here’s how your money can help get us there. Or what else should they be trying to convey?
So as investors, we require only two face-to-face meetings. But there can be some other phone calls or it may be some Skype video calls as well at the request of the entrepreneur. So, during the time with the investor, it’s extremely important to be able to sell the idea, whether it’s in 30 seconds or it’s over in 5 minutes or half an hour. So the entrepreneur has to put themselves in the shoes of the investor to talk about the numbers, to talk about what’s in it for the investor. They have to start understanding that their business is about exit. There should be an endpoint. And there should be an idea about when is the endpoint? What kind of size is it? Who’s the likely acquirer? If it is an IPO, which stock exchange is it? And there should be an endpoint in the picture. And that would be thinking in the shoes of the investor.
In terms of the product, a lot of entrepreneurs face too much emphasis on the details of the product. Because I can share with you that I’m an engineer by training, but I cannot understand all types of engineering products. So they have to be able to speak in lay person terms. And they come down one level, and speak as though the VC is an ordinary audience like the man on the street. And if the VC happens to have the domain expertise, they will ask advanced questions which you can answer or ask your CTO to answer. So by doing that there will be better communication. The investors will be able to invest only in something they understand within the short time period. And it is a challenge, but the entrepreneurs can start practicing in front of their friends who are not in that business, in front of different audiences in order to nail the pitch.
So, can you tell us a story, or perhaps a story of a deal that comes to mind as particularly memorable throughout your career?
One of the deals would be Lark. Lark is run by Julia Hu, who was a part of Stanford and also MIT Sloan. She was named Marie Claire entrepreneur of the year and also named Inc. 30 Under 30. So it’s an interesting product. So it’s a wearable and it’s one of the wearables which hit the market in 2010. It’s a wearable wristband that improves your sleep quality. So it tracks your sleep pattern, and then there is a SaaS model to advice you on how to sleep better and become more energetic in the day. And then it moves into activity we’ve tracking, and what has evolved into the Fitbit and also the Jawbone and Nike FuelBand that you see these days everywhere.
This is a market where they have been the first player but right now they have a lot of competitors. And what’s interesting for us is that when they were released in the US only—it is a US company—they were in the Apple Store but because of our connection right after the first investment, we managed to bring them into brick and mortar stores in Japan. Even at series A. And this is extremely difficult for series A company to break into the Japan market. A lot companies have failed—have tried but failed. Because of our connection, we brought them to BIC Camera for example, and later on Apple in Japan picked them up. And they started selling in Japan Apple Stores. So much so that their revenue per month went multiple times. And we continue to invest four additional rounds after the first round investing into them. And in recognition of our efforts, they invited us into the board of directors. And along with the board of directors are notable people, for example Weili Dai from Marvell Semiconductors. She’s an Indonesian. Right, and then the Marvell story is very famous in Southeast Asia especially in Indonesia. So they are on the board of directors as well. Together we are helping a lot in big ways. For example in manufacturing, in sales, and also technical advisory. So this is a story about us using our connections to really improve the sales of the company. And also to connect them to various other Japanese players. I cannot review their names right now but these electronic giants in Japan, in order for them to get into product co-development dues, also for enterprise sales opportunities. And in return, in recognition in effort, they invited us into the board so this is a nice story for us.
That is a nice story, and we’ll see how that story ends up with an acquisition or an IPO. I’d love to keep an eye on Lark and see what happens.
I’m keeping my fingers crossed for now.
You started off the interview by telling us that you do have a focus on Silicon Valley, and also Southeast Asia, where do you see the future of startups and investments in Southeast Asia?
I see that in the near future you’ve got firms like Vertex and IPL coming from early stages to fill the gap that I mentioned earlier on. And I see that right now, there is a recent rise in valuation of some of the Indonesian startups. And I see that as various countries in the Southeast Asia ecosystem mature. There will be countries like Vietnam, or even Myanmar, coming out with more startups which are investable. So as a whole, I see the ecosystem growing, with the influx of more foreign investors, for example, like Fenox from Silicon Valley. And there will be a recycling of capital where entrepreneurs who exit become angel investors and re-invest in companies, take on board directorships, be advisers, and so on so forth. And that is a hallmark of a success in building an ecosystem. We’re seeing some early sings of that ready but we need more of that happen.
That would be fantastic. That’s a bright future…pretty exciting. So moving on, do you ever have a company that you wish you had invested in, but didn’t pull the trigger, and later on you had some regret and wish that you had?
There is a company that is worth mentioning. It’s a good company. There would be a company in Southeast Asia actually. To me, Carousel is a great company. Great entrepreneurs, great investors, and that was an early stage deal when they were raising. And because of our mandate, our focus on series B in the region. And because of the quality of the team, it came under our consideration as well. But at the end, because the deal was outside our focus area and they filled out the round very quickly, before we made an investment decision. But I will be happy to look at the company as it grows, and is raising series A and B later on.
Well, I hope Carousel is listening. And I know how much you like them. Moving on in the interview, now we’re coming up on our lightning round closing, where we ask you three questions, and you ire back and answer us. How does that sound?
Okay, sounds good.
What are you reading right now, what’s on your bookshelf?
I’m all the time reading the Economist. It is a magazine, but it’s my staple reading. I love the business section, and I love the technology quarterly update. And even when it’s in my domain area, such as in genetics, I still love the new information. And also the way that complex issues are explained in simple terms, amazes me every time how they do it.
What’s one piece of advice you would you give to entrepreneurs?
Never stop fund raising. It is part of the game.
Give us a business idea. What company would you like to see start up in this world?
I like to see more companies that start from mobile solution. This can be a marketplace, this could be an e-commerce platform. And I like to see more to-do apps that really changes, makes things convenient for everyday life. We have seen a lot of to-do apps for example Workflowy, but none of them is really integrating into our everyday schedule. And predictively telling us what we have to do. For example, buy milk, because the milk in the fridge is running out. So I like to see an app that can really do that. That will be a game changer.
That would be a game changer. That would be pretty cool. Is there a way that entrepreneurs can get in touch with you, or do you prefer an introduction? How can they reach out to you?
Sure, you can reach me at twitter, my twitter handle is @eddysmlee and you can also find me on my Gmail or my Fenox email. Those are not difficult to find.