Startup Investing is Not Pure Science, A Lot of Art is Involved Too

Monk's Hill Ventures is an old hand in the early-stage startup investing in Southeast Asia.

Over a decade-old VC fund, Monk’s Hill Ventures has backed 42 startups in Southeast Asia. It typically invests anywhere between USD 2 million to USD 10 million in pre-series A and series A rounds and is currently operating from its third fund.

With offices in Singapore, Jakarta, Ho Chi Minh, and an upcoming one in the Philippines, this VC keeps its finger on the pulse of the Southeast Asia startup ecosystem.?

Unlike most early-stage, sector-agnostic VCs, Monk’s Hill’s investing strategy is very concentrated. It just makes six to eight investments per year.?

What stands out more is its ethos: Entrepreneurs backing entrepreneurs.?

All 13 members of its investments team have been on the founder's side of the table at one point in time. As a team of ex-founders, they don’t just give money to founders and tell them to figure things out. They become a partner, who is knee-deep in the business along with the founders.

This also means they are party to solving problems that founders have taken responsibility for. And that gives them a clear view of what’s working and what’s not in the startup ecosystem as nuanced as Southeast Asia.

For this edition of Hedwig, we spoke to Arun Pai of?Monk’s Hill Ventures. An electrical engineer turned finance professional, who worked in investment banking for nearly a decade and then helped build two fintech startups, Arun has a deep understanding of what it takes to be an entrepreneur.?

In 2022, he made his way over to the investing side of the table, joining Monk’s Hill as a Principal in the investment team.?

We spoke to him about:

• The VC’s approach to investing in Southeast Asia?
• Tech trends that excite him this year?
• Why building companies is not easy
• Why your past experience as an entrepreneur may not solve your problems today

The Content House: How do you decide to invest in a company?

Arun Pai: Investing is not a pure science. There's a lot of art involved.?

For us, founders come first. They're the ones who are steering the ship. We over index on the strength and the quality of the founder slash founding team, the kind of problem they are solving and whether they're able to target a massive market.?

And then we see which business models are apt for VC funding. Investors need large outcomes that will drive returns on their portfolios. So we need startups that are in a market that is quite large or some very interesting business models like Uber or Airbnb.?

We are sector agnostic, looking at where technology can play a significant disruptive role in giving an advantage to a startup to win against incumbents. What also matters to us is how consumers look at the startup and how big the actual addressable market can be in 5 to 15 years.

You have those aspects and then you need to look at execution capabilities. Because you could have a great founding team solving a great problem on paper. But at the end of the day, you have to be able to execute them.

How do you strategically solve the pain points your customers are facing? How do you outdo your competition and widen your addressable market??

These things need to be aligned in the right direction to ensure you have some chance of success if you put in the effort and if luck is on your side. Because early-stage venture capital investing is a very high-risk business.

Investors have to peel through a lot of different layers: the right team, the right problem, the large enough addressable market, the right business model, execution capabilities, strategic thinking of the founders, the competitive landscape, and the tailwinds for the specific industry.

Once you have that right mix, set in place, you have a better chance to succeed.

The Content House: What are the takeaways from 2023 that you're bringing into 2024?

Arun Pai: I think one of the big learnings over the last two years has been that building a business is not easy, be it from the founder's side or on the investor's side.

This is not supposed to be an industry, where you can come up with an attractive-looking deck and raise millions of dollars at an obscene valuation. You truly need to build a business and that requires taking one step forward at a time and a lot of blood, sweat and tears.?

Thinking about it more from a slightly more nuanced perspective, the last two years have showcased that there were certain business models that were not suitable for venture capital funds.?

They were predicated on raising very large amounts of capital to attract users to their platform. Monetisation came much later. Companies have realised now that the next round of capital is not always going to be there.

When that happens, they better have the ability to quickly slam on the brakes and show their unit economics are still sound to be able to at least manage to survive, if not grow.

Investors who did not guide their founders toward that path of action, sadly, had to see such companies fall off a cliff. And I think in 2024, we're going to see a lot more bankruptcies.?

At the end of the day, when you're taking on venture capital, it's not permanent. This is something where returns need to be made in reality through exit options, within a relatively short time frame. And that's something, I think, many founders, at least in Southeast Asia, are still learning.

Building successful startups doesn't necessarily mean you have to be profitable, but you have to grow smartly. If you don't have a truly viable business model and you've bought growth without thinking about the costs, the spigot is going to run dry regardless of how many people you let go.?

I think it has made founders introspect and see what their execution capabilities are. How do you get your investors to believe in you? You just need to keep showing your execution capabilities, delivering on your KPIs, and even rebuilding your business in some cases.

Some of our portfolios had to take one step back, but that enabled them to take three steps forward. It's not always going to be a straight line (to success). It is a little bit of a zigzag and a wiggly line.?

The Content House: Which trends will play an important role in defining the Southeast Asian startup ecosystem in 2024?

Arun Pai: If you go by the numbers, e-commerce and fintech have been the two main verticals for the past 10 years. The business models in these verticals have become a little bit more nuanced because founders now have the benefit of hindsight. On one hand, they learned from past failures, and on the other hand, they could add layers on the infrastructure provided by the predecessors in their startup.

We're seeing a lot of interesting infrastructure plays and embedded finance plays like cross-border layering on e-commerce or providing the financial layer on top in certain industry verticals like EV.?

Governments in Southeast Asia have created new payment linkages and new e-commerce agreements across the ASEAN region to integrate the countries in this part of the world. This enables businesses to take advantage of the infrastructure layer that's spanning out. And we are starting to see that happen.

EV is another big trend that we're seeing in Southeast Asia, especially in Indonesia, although it is a couple of years behind what's happening in India. Nickel is one of the big, roaring reasons that are there in Indonesia. Across the value chain, we're starting to see startups being created to take advantage of that. For example, battery-swapping tech firms, two-wheeler EV makers, etc.

I think the ESG (Environmental, Social, and Governance) trends in terms of climate tech are becoming prominent. We're starting to see a lot more carbon trading credit platforms as well as SaaS startups that work with supply chains to see how much carbon emissions are taking place.?

Gen AI is another trend, but not so much in the foundational layer. That's something that's probably more suitable for Silicon Valley in terms of the depth of tech talent, coupled with the depth of capital there.?

That being said, we have seen some interesting wrapper companies in Southeast Asia. Some very loose wrappers, some are much more detailed and nuanced, with deeper penetration into the customer life cycle.?

We think GenAI is disrupting the engagement between a customer and a company, making it relationship-driven from pure transactional and thereby massively increasing the lifetime value of the customer. It is also being used by companies to enhance the productivity of their employees.

In the next 30 to 50 years, the top 10 companies by market cap would either be GenAI companies or incumbents who would have utilised this technology extensively. Because if you do not, your competitors will eat your lunch.

The Content House: What are the things that you are excited about in 2024?

Arun Pai: The startup ecosystem in Southeast Asia is very nascent. It's only been about 10 years, give or take. Like India, it hasn’t had a Flipkart moment—a very, very successful exit pouring billions of dollars into the ecosystem which flowed from the founders to five to seven layers down and got recycled within the startup ecosystem.

We've had some success stories in terms of a few tech companies going public. Even if their performance is not the most attractive at the moment, at least we are seeing some green shoots.

People from the founding team or the middle to senior management at these large tech companies are taking those lessons and coming up with new ideas to launch new startups. Southeast Asia needs serial entrepreneurs coming back to the market and tackling another problem with a new lens but with the learnings of the past.?

We're starting to see a lot of people coming back to the region from the US and Europe after hearing about the excitement here. We're also starting to see founders from China, being a little bit more disillusioned by what's happening onshore, coming back to set up shop over here and localising it by bringing in the local expertise.

From that perspective, I'm quite optimistic for the next five to ten years.

The Content House: Do you have any go-to approach to solving problems or making difficult decisions?

Arun Pai: While I have been in the entrepreneur’s shoes, my experiences are in the past. My learnings can’t necessarily be applied to current problems.

There are so many different variables that exist. It's not the same equation that you solved 10 years ago. Competitive landscape, economic environment, and teams, everything is going to be different. In this fast-paced evolutionary business world that we live in, you need to be able to adapt with the times.?

However, having this experience does give me a huge edge in terms of empathy. I know how difficult life is and I can be a very good sounding board for founders.

The power of the seat is something that I am very, very grateful for. Because where I'm sitting, it gives me an opportunity to talk to hundreds or thousands of founders dealing with their unique problems, figuring out solutions, and taking it as lessons learned. And I become like a semi-knowledge bank. I take that information, deconstruct it, rebuild it, and then make that as some kind of a solution set which could hopefully be useful for the next founder I talk to.?

Personally, I just do a lot of reading, books, articles and all sorts of digital content to make myself smarter daily. And hope that will keep compounding over time.

The Content House: Do you have any advice for startup founders for this year??

Arun Pai: Be it this year or any year, I think the advice is the same.

Know exactly what is the pain point you're trying to solve. If you're taking VC money or any other form of capital, figure out a business model with positive unit economics to truly monetise the business. Stay focused on business fundamentals and on out-executing your competition.

If you keep enhancing your relationship with your customer and truly solving their problem, capital and growth will come. Exits, money, fancy sports cars, all of that other good stuff will eventually come too.?

If you would like an overview of how things are shaping up in the Asian startup ecosystem, subscribe to Hedwig.

About The Content House

At The Content House, we offer research-based, analytical content that has a strong narrative quality to it. We put thinking into writing and distil complex ideas in a simplified and engaging way.?What makes us different in the crowded content market is our ability to convert institutional knowledge and expertise locked inside organisations into content that can be leveraged for branding and digital marketing.