Episode Twenty One
The Evolution of VC:
Adrian Li of AC Ventures
1 June 2021
I'm Alan Hellawell, founder of tech consultancy Gizmo Advisors and Venture Partner at Alpha JWC Ventures. Wonderful to have you join us today. Selamat datang semuanya di episode kelima puluh kami!. Today's guest has become one of Indonesia's foremost practitioners of venture investment. He's someone I've known since my years running strategy at Sea Limited. And I've also had the pleasure of working with him in my current role with Alpha JWC Ventures. An entrepreneur whose earlier startup journey runs through China, Adrian Li founded Jakarta-based Convergence Ventures nearly seven years ago. In 2019, he merged it with fellow VC Agaeti Venture to create AC Ventures. Adrian, wonderful to have you join us today.
ADRIAN LI 0:55
It's a great pleasure, Alan. Thanks so much for the opportunity. I'm a reat fan of your podcast,
You're very kind. Adrian, now you have a very impressively diverse background, whether it's by geography, by industry, and in terms of leadership roles. I wanted, however, to focus on the many dimensions of your involvement in Edutech, from cofounding Idapted in Beijing in 2006, to now investing in promising distance learning startups in Indonesia, as the managing partner of AC Ventures. Can you share with us this part of your journey?
ADRIAN LI 1:29
Certainly, Alan, and thanks for the question. So as a fellow Stanford GSB'er (Graduate School of Business), you'll be familiar with this question of "what's most important to you and why". And this is one of the classic questions that come up in the Stanford essay. And I think understanding that and going to the root is important and understanding my part of my journey, and why education was, and continues to be, important to me. So to me, one of the most important things is empowering people to create value, and empowering them with opportunity; giving them knowledge, skill sets and resources to achieve their goals, and ultimately create an impact. So for me, this is my life's purpose. And I believe that in order to be able to find scalable ways to create positive change in the world, we have to collectively empower in particular entrepreneurs. Now, while I was at the GSB; education was, in my belief, one of the most important things in helping to empower people. And hence, I had pursued a joint degree at the time, which I did not finish in order to pursue my startup. But knowing that in my life story and my history, what my parents taught me, the schools, I went to (Harrow, Cambridge, Stanford), and all the mentors that I've had, were extremely formative and instrumental to help me be in a position to support others. And so it was through this that I ended up starting my first company while I was at the GSB, to create a live on-demand English training service in China. And we had found that speaking English proficiently in China was a major barrier to career advancement, and higher education entrance. So we focused on building a technology platform that could scale live on-demand one-on-one training to 1'000s of students. In fact, when we started in 2006, we wouldn't know that six years later, a multi billion dollar company using the same model that we had pioneered called VIPKid would emerge in China. Now, as I think about what I'm doing today, yes, I've invested in education companies in Indonesia, such as CoLearn. But really, we think of venture investing more broadly as a way to empower people through our collective knowledge. And hence, you'll see that our motto at AC Ventures is also "empowering entrepreneurs with experience, network and capital".
Fantastic. I can see your sustained interest in supporting education. Now, Adrian, a lot of the superlatives that VC cite about Indonesia really relate to its size as the world's fourth most populous country. This obviously cannot be argued with. But one perennial question that many ask is: can this massive market actually be monetized? And what is your response to this question?
ADRIAN LI 4:14
I think it's important to understand that while technology companies often take some while to monetize, they are there often to disrupt traditional incumbents through their better and more efficient models. And so the potential revenue pie or the monetization potential, I think, can sometimes been seen in their traditional counterparts. So if you want to understand in the future how big that pie is and how big these technology companies can become, you can look no further, in fact, beyond some of the enormous businesses that exist in Indonesia today. If you look at banking, BCA is one of the most valuable businesses not just in Indonesia, but among Southeast Asia. If you look at consumer categories, companies like Indofood or Gundang Garam. For these companies, they become one of the largest multibillion dollar publicly listed businesses. And so we can see from the traditional counterparts, whether we're tackling FinTech or e-commerce, that it is possible to build companies of this size. However, like China, and many other markets, at the early stages of many technology-enabled businesses, their focus is on adoption and growth in lieu of monetization. And so I believe for the majority of businesses, certainly prior to Series C businesses, they're much more focused on their growth trajectory versus on their monetization.
Excellent. No, I can understand looking at it from more of an evolutionary perspective. And your point in comp'ing these opportunities, not against the China paradigm necessarily, but the offline Indonesian counterpart, is very well taken. So Adrian, which parts of the internet space in your mind are already monetizing well?
ADRIAN LI 6:00
So I think in looking at this question, we'd want to first define and understand what we mean by monetizing well. There are companies that have rather large revenues, or they could have healthy margins, unique economics; some even all the way down to profitability. But if I look across our portfolio, I can see a few examples of those that have shown strong monetization across each of those definitions before. We'll start with one of the hardest ones: profitability. Most companies will not be pursuing profitability at this stage of growth. However, in the business of FinTech and lending, we've seen in our portfolio companies that have been able to show tremendous monetization through great unit economics, and lean cost structures such that they can even get to cashflow profitability. And one of those companies that we see in our portfolio is a company called KoinWorks, which is an SME neobank. Moving into another sector, such as commerce and social commerce, we've seen that models in groceries, for example, and those that are able to drive efficiencies in the supply chain; these companies have been able to get really high gross margins in their business. And this is much higher than what we've seen in the marketplaces. They're often coming into the 10%-20%+ gross margin range. So this to me indicates some strong monetization on the revenue-plus-margin. And then lastly, I would look at another business, which historically has been difficult to monetize. But we've seen an ability to monetize once they achieve their required scale, and that is in payments. One of the businesses we invested in in our earlier fund Xendit has grown incredibly. It is the largest payments business in Indonesia, B2B payments business in Indonesia. And from there, we can see that through the payments volume, they've been able to layer on additional revenue streams, all contributing to a very healthy unit economics and margin on their business.
That's really gratifying. It's been an area that I've scrutinised a lot. And I think it's going to be crucial for these business models to start just not growing eyeballs, but to harvest meaningful revenue from their users. Good to hear that you have more than a handful of instances of that. Now, Adrian, which parts of the internet space have yet to demonstrate monetization, but are ones that you have confidence will eventually?
ADRIAN LI 8:21
One sector that we have a huge amount of confidence in our MSME's, or micro small and medium enterprises. And from what we've seen so far, it's quite hard to drive meaningful subscription revenue from these small medium enterprises on a SaaS (software-as-a-service) basis. And because of their small size, they also have low willingness to pay for software or tools that they may be using. So this is one area that's yet to see some solid monetization. Another area which we see that there are challenges in monetizing are digital media-based models. And as we know, in Indonesia, a lot of the digital ad market is dominated by global businesses such as Facebook, and Google. And on the consumer side, given the relative nascency of the e-commerce consumer, they still are early to have to pay for content. And so this translates to models which rely on paying for content or relying on ads to face challenges in being able to monetize in meaningful ways.
So Adrian, do you see Indonesian enterprise paying for services anywhere across the B2B SaaS spectrum?
ADRIAN LI 9:32
So as mentioned earlier, we believe that in Indonesia, the B2B SaaS-reliant models do have a low total revenue cap. However, we see that there's an even more promising model. And that is when these MSME's use software, platforms can acquire really quality data and create alternative business models on top of that. These could involve creating platforms for marketplaces, or it could also involve creating financial services for the MSME's who historically are severely under-banked. Having said all of that, we do have portfolio companies such as ESB, who have been able to make a lot of progress in additionally monetizing and charging for their subscription service. And I think that talks to the point that, if you do create a solid product and address some of the larger enterprises, they will pay for it.
Excellent. Makes sense. Now, Adrian, we began investing from our third fund a while ago. What are the most profound changes that have happened between funds I and III in your mind? Has our investment thesis changed a lot? Are we looking at very different target industries today?
ADRIAN LI 10:38
When we look at our fund, we're still very much focused on being an Indonesia-focused early stage technology investor. And in terms of our fundamental thesis, we're looking at business models which are riding off long term secular changes, such as the adoption of e-commerce, the infiltration and penetration of FinTech, tech-enabling MSME's, as well as looking at business models that can be disrupted through using digital media. So these are trends that will continue for the next 5-10+ years. And because of that, we are sector agnostic in the Indonesia market, but highly thematically driven and do a lot of detailed grounds-up research. Something I think you'll be familiar with, in your prior days are Deutschebank, to ascertain the right timing for digital models to emerge and disrupt their traditional counterparts. I think overall, however, we're a very founder-focused fund. And we seek purposeful, driven teams of founders looking to build huge disruptive businesses seeking the right long-term partners to support their ventures. And I think regardless of what decade we're operating in, we're always looking for this type of founder-and-partner fit.
Now, Adrian, what have been the changes in the ecosystem that you're investing in today, compared to Fund I?
ADRIAN LI 11:55
We've seen really quite some incredible changes since Fund I. Now, bear in mind that I started working on Fund I as early as the end of 2013. Some of the incredible challenges that we saw in investing and seeing the ecosystem and Fund I was talent. We did not see a lot of talent in Indonesia with regards to experienced founders building technology businesses. In addition to that we didn't see much capital. We were pioneering and starting venture capital as an asset class in Indonesia, along with the likes of yourselves and some other players in the market. And lastly, when you look at the infrastructure, there was very little infrastructure for payments and logistics. We were limited to the traditional companies, smartphone capabilities were far away from where they are, and certainly without the penetration of the Gojeks, the Grabs the Shopees, there was much, much lower consumer trust back then. Now if we fast forward to where we are today, I think you'll find the majority of consumers don't think twice about buying online. There's much higher consumer trust. The hardware that is being used on the smartphone is multiple times better, as well as all the supporting infrastructure for any e-commerce, payments and logistics. Then as we delve into the talent ecosystem, what we've seen now is a huge recycling of talent, not just returnees; Indonesians coming from top universities, coming back to Indonesia to start businesses; but also early team members who have graduated from the Tokopedias, the Gojeks, the Grabs, the Shopoes and decided to start their own businesses. And this has fueled the growth of new companies in the ecosystem. And alongside that, we've also seen much more capital. Now, while Indonesia still is some ways away from receiving the capital attention that a market like India has received; nonetheless, we've seen multiple funds raised successive funds, as well as global top tier investors plugging this gap in both Series B and Series C and onwards. So, the environment and ecosystem to be investing in venture businesses now is far more mature than it was several years ago.
I fully agree with you. Now, Adrian, what one specific form of value add, are you proudest of having delivered consistently across the ACV portfolio?
ADRIAN LI 14:22
I think when you look at the partnership that we formed across the three partners; Pandu (Sjahrir), Michael (Soerijadji) and myself; we really bring together a unique combination of partners who have scaled businesses starting in different markets, getting those companies acquired, as well as taking companies all the way to IPO. We bring many different networks, as well as different cultural considerations, as well as different regulatory and corporate networks together to bear and help our founders with. So one of the things I'm most proud of is that each of our partners is always accessible to our portfolio and very hands-on. And having been entrepreneurs, having been founders ourselves. And as we continue to be founders of our venture fund, we know that when we put a check into a company, we're standing there by our entrepreneurs and working with them to help them solve their challenges and help the growth of their business. Now, with our larger funds, we continue to also invest into our operations team and our platform so that we can scale specifically ways that we can help our entrepreneurs; be that through identifying critical talent to join their teams, delivering on business development requests, or making sure that we can expand our network and bring all those benefits of that network to our entrepreneurs. So this area of value-add, these areas of value-add, are the ones that we are most proud of.
Excellent. Now, Adrian, if I were to force you to isolate one investment opportunity that you currently feel is "out of this world", what would it be?
ADRIAN LI 15:58
We've had some great success in our earlier funds in the FinTech space. But having said that, we continue to believe that the opportunity for financial inclusion is so great, and that the impact on this broader population is so big, that this is the most interesting opportunity for this fund. And it continues to be. And especially when it relates to provision of financial services to the consumer and the MSME finance segment. So, if you think about how big this market is, presently if you look at reports, there are about 90 million adults in Indonesia who are underbanked. And that's more than half of the total adult population and really the core of the economy. On top of that MSME's employ over 120 million people, which is almost 97% of the total national workforce. There is a huge lending gap in here, as less than 15% of them have proper access to financing. And so despite all the growth in even just the P2P and the lending segment in the past few years, it only hit just over 5 billion in disbursements in 2020. And that's far from plugging this lending gap of 70 billion. But most importantly, I believe that in this sector, if we can push financial inclusion and enable productive lending to consumers, and also to these MSME's, the impact to the overall economy and GDP from Indonesia will be enormous. So this is the one opportunity that I think is "out of this world" in Indonesia
You make a very convincing argument for that. Now, Adrian, I see that AC Ventures also has a number of investments in e-commerce. What are your main assumptions around industry structure in this area? Could it evolve to a similar structure to China, where the top three are literally 85% to 90% of the market? And if so, what are the implications for your investment in e-commerce?
ADRIAN LI 17:56
So I think it's firstly important, despite the dominance already of some very large players in this segment, that e-commerce remains one of the largest opportunities in the market. Reports estimate that this will be a TAM (total addressable market) of over $150 billion by 2025. And it is supported by very favourable fundamentals with increased smartphone penetration as well as rising income levels across the consumers in Indonesia. And despite all of that, we're currently seeing that online retail penetration is still below 10%, around 7% to 8% at present. In addition, most recently, what we've seen is COVID-19 has driven the adoption of e-commerce into new verticals; categories such as fresh. Now, looking at the existing marketplace, giants- Tokopedia, Shopee, Bukalapak and so on, we can see they've already built significant economies of scale and network effects. And consolidation has already started to happen across these giants, with the GoTo (Gojek and Tokopedia) merger, partnerships between Ovo and Grab, common ownership across Lazada and Bukalapak. So I agree. I think it will follow China and you'll see consolidation happening over time. But despite that, we also continue to see e-commerce opportunities, because it's far from the majority of the total potential market share that these dominant players have obtained so far. And broadly speaking, we see these opportunities in three lenses. First, we see vertical plays. Some of these have already played out; vertical plays such as home-and-living, fashion, and now increasingly direct-to-consumer brands in e-commerce. We also see plays in new models. So you see opportunities in social commerce. In fact, you've seen social commerce, like Pinduoduo in China, even disrupt some of the incumbent players. And lastly, we also see new markets. Now, the majority of e-commerce is still driven by Tier One consumers in Tier One markets. And so frontier markets going from Tier Two to Three and Four, are areas that we can see e-commerce opportunities. As well as looking at the MSME as an e-commerce consumer, and looking into marketplaces that are focused on B2B. So these are the areas that we increasingly focus on in e-commerce.
So quite a large horizon of opportunity, and clearly not a winner-takes-all scenario, at least over the short to medium-term. Now, logistics plays a mission-critical role in the success of e-commerce, and has also seen some very healthy levels of private investment. How do you view market share evolution in the logistics space ,between the traditional offline players and some of the new business models?
ADRIAN LI 20:37
I think it's important to understand that in logistics, Indonesia is one of the most complex markets, which is also tackling some of the poorest infrastructure fulfilling logistics and deliveries across all the many 1'000s of islands in Indonesia. In fact, logistics was utilised in 24% of Indonesian GDP last year, and continues to exhibit extremely high growth over the next few years. And we expect that could be reaching $100 billion in value by 2025. And so, fueled by all of these tailwinds with e-commerce, with the pandemic, the competition within all of the players, there is a lot of space for logistics companies to meet that demand. And as I mentioned, because of that geographic complexity of Indonesia, it means at least right now, it won't be winner-takes-all. And in fact, if you look at some more mature markets like China, there continue to be several players who are dominant across the ecosystem. And so, what we'll see in Indonesia I imagine, is probably three-to-five players which reach really big scale. All players will have to utilise technology in some way or form. But we'll continue to also see a longer tail for the medium scale future on companies which are just far more efficient with lower cost bases, and able to do less frequently used routes. And there'll be alternative models like aggregators that will be able to bring all of the supply on line to create more efficient logistics for the increasing demand.
Makes eminent sense. Now, Adrian, your career has spanned a number of geographies, including China. What assumptions, learnings and experiences have you been able to graft directly into Indonesia from your China experience with great success?
ADRIAN LI 22:22
So I think from what we can see in China; firstly, when building large technology-enabled businesses, especially in emerging markets such as Indonesia, I'm really appreciating the importance of large, homogenous markets. And so that's why for us, we focus on Indonesia, and not ASEAN or Southeast Asia, but really on Indonesia. That's the way that we believe that founders can build the biggest businesses ultimately, if they want, across the region, but first to be starting in the largest market. The second thing is, again as we've seen in China, there's a huge importance of localization. Even though we're identifying disruptive; proven disruptive business models that we see in markets, such as India or China; it's not a simple "copy-paste". You very much have to see what are the nuances in the local market and ensure that local execution builds businesses in the way that meets the consumers or enterprises needs. And you can see some very obvious differences between Gojek and how Uber evolved.
Interesting. Well, indeed, on that flip side, where might the China-Indonesia comparison actually lead the investor to the wrong conclusions?
ADRIAN LI 23:32
So first, let's look at competition. In China, there is some amount of restriction for global players to be tackling areas such as search and social media. And so you see the emergence in China of companies like Baidu and Tencent, and so on. But in Indonesia, this is very difficult because of the open market. And you've seen the dominance of Facebook, TikTok and global players take dominant market share in these areas. The other thing I would say is that, from a local competition standpoint, in China competition is so intense. I remember when I was in China, and Groupon was the rage. There were some people said 1'000s of Groupon-style companies emerging all at once. And when I came to Indonesia and I saw what's happening here, there were barely a handful of such companies. So there's a big difference in terms of what is global competition, what is local competition, from China to Indonesia. The second thing is the role of government. I believe the Indonesian government has worked in a very inclusive and proactive manner to support the growth of the digital economy. They recognise its importance and have put in place important policies and engagement importantly, with digital players in order to craft regulations that help support the economy, the digital economy. You can see this very clearly in terms of how the Indonesian government has approached regulation in FinTech compared to how it happened in China.
Now Adrian, you serve in a number of mentorship roles. Which one are you currently most heavily involved in and why?
ADRIAN LI 25:05
So I've been involved in a number of organisations to support the broader ecosystem. Those include Antler, Endeavour, for example, Entrepreneurs' Organisation. However, my primary focus is on our own portfolio. And so when we invest in a company, we're not just investors. We're also coaches and mentors to help our founders. So really, I'm most heavily involved in our own portfolio, which now spans quite a number of companies.
Understood. Now, Adrian, can you tell us about CNYTrust?
ADRIAN LI 25:39
Certainly. So with CNYTrust, that was an organisation that I initially started while I was at Cambridge in my final year. And the whole idea around CNYTrust was how we could mobilise students at the university, organise events to raise money, and donate it to children in need of education back in China. And this relates all the way back to this idea and belief that education is one of the key things we can do to help empower people with a better future. Presently, my role as Chairman is not particularly active. The organisation supports itself with a society at Cambridge as well as counterparts in China to facilitate the raising of money from students and through events, and then the donation to charitable causes to support education in China.
Clearly a very admirable cause Adrian. And great to gain such an expansive account of your path to becoming a leading venture capitalist in Indonesia, and how you and your team stand out in your philosophy and basic investment approach. Super thoughtful insights. Thanks again, Adrian.
ADRIAN LI 26:41
Thank you so much, Alan, for having me on this show. And thank you also for this podcast and for telling the story to the world of all the very interesting advances that are happening in Indonesia's digital ecosystem.
Thank you for that feedback. Well, luckily, there's so much to work with on that. We hope our listeners have enjoyed today's episode. As always, please consider sharing any feedback that you have about the Indo Tekno Podcast with us. Terima kasih telah mendengarkan. Sampai jumpa lagi!