"For certain business models, multiple financial stakeholders collectively take the same leap of faith. When that leap of faith gets broken along that financial value chain, it becomes very difficult to invest. Sometimes, that break can literally happen overnight." - Chia Jeng Yang
Chia is a Principal at Saison Capital, a leading FinTech-focused venture capital fund, who has done especially well in emerging markets like Southeast Asia and India. Their direct investments include Grab, Southeast Asia's largest startup and super-app, as well as ShopBack, Southeast Asia's largest shopping and cashback rewards platform. Their limited partner investments include some of the top-performing funds in Southeast Asia, like East Ventures and Beenext, as well as global funds like Quona Capital and Antler.
Previously he was the fifth employee for Antler, the leading global pre-team venture builder. He also both invested and launched markets for them in Europe. He was also at Rocket Internet where he helped build out an eCommerce company in Pakistan and Sri Lanka that was bought by Alibaba. On the side, he is cofounder of Shaper Impact Capital, a 60-person platform that helps early stage startups with an impact connect with resources they need for the next stage of growth.
You can find our community discussions on this episode at https://club.jeremyau.com/c/podcasts/18-insider-s-guide-to-vc-building-venture-backable-startups-raising-capital-in-a-downturn-and-increasing-your-valuation
Jeremy Au: [00:02:20] Awesome. Chia, good to see you.
Chia Jeng Yang: [00:02:26] Good to see you too, Jeremy. Great to be here.
Jeremy Au: [00:02:30] Today you and I have prepared a point of view on what venture capital is and the value chain of finance. So, what is venture capital?
Chia Jeng Yang: [00:02:41] I think there's a lot of really exciting news and hype about what venture capital is and that it's obviously really exciting industry to be able to work with very intelligent founders who are building the next big thing. Being able to see how industries are disrupted, being able to see how new businesses are being created. One thing that that is a part of venture capital that really doesn't get talked a little bit about is, what are the inputs, what are the outputs, how has venture capital affected as an industry? What is it actually from a solid theoretical basis? One thing that we wanted to talk about here today is venture capital as a financial asset class and how that plays a role and how it's affected by the broader financial economy around it. So, the concept we want to talk about today is really about venture capital as a piece in the financial value chain and what that means and what you need to understand about other asset classes to really understand what affects venture capital.
Jeremy Au: [00:03:44] Yeah. I think that's such an underappreciated piece because we often think about venture capital from a founder perspective, as individual venture capitalists who are representing the fund and we're pitching to them and sharing our story and working over the business model together, pitch deck, and getting the yes' and nos' from people. What you're also sharing is all these people, representatives of the companies that they represent. Which are the funds and the financial forces that drive the incentives and outcomes for the industry. Really excited to get into this.
Chia Jeng Yang: [00:04:20] Yeah, absolutely. Hope this is helpful for aspiring VCs or current VCs or founders to really understand some of the incentives involved for VCs, et cetera. On a very high level, venture capitalists are investing into asset classes, which is companies, that they hope to sell on to other people down the road. They hope to sell those shares, of course. Buy low, sell high. What then affects them of course, is not just how do you buy in at a low price with good founders? There's a lot of material on that, but it's also, how do you sell high? A lot of VCs are affected by who and the attitudes of the people buying from them. Which typically can be growth equity investors, corporate sentimentalities or even the retail market.
Let's go at this sequentially. Of course, it can jump on the value chain, but essentially VCs invest into companies that they hope growth equity investors will then invest into. When growth equity investors are then investing to companies that they hope private equity companies will invest into. Those companies are investing in the companies that they hope the retail market will eventually buy in. Once you've established the fact that there is some level of connectivity between large public markets to early stage capital, then you start to see that, okay, there are certain things that might affect how VCs think that might happen really far away. So, I think the easiest and the most obvious ones would be sentiments about particular industries. If you're investing into a company with the hopes that it's a growth story, it's not really about where the company is at in terms of the economics, but really that there's a gigantic macro trend.
You also want to be able to have the confidence that retail investors, growth investors are also strong believers in that macro trend. Otherwise, you can invest in the company, but because of lack of understanding, no one wants to pick that up on the growth equity stage the public equity stage. Let's take a concrete example of if we were investing into co-living when WeWork was doing its meteoric fundraising rounds with SoftBank and the sentiment that growth equity investors or investors like SoftBank seem to be giving the remark was that, "Hey, this is a very interesting space." We also started to see a lot of VCs try to make small bets here and there and get exposure to the space. Of course, when the IPO didn't go through and it devolved into a fight on that side, VC interest quickly died down because they saw, okay, look, this is no longer true.
This space is no longer hot. We are no longer as confident that growth investors will invest into this space. We can really see that sentimentality and how people are thinking on the corporate public growth equity stage really affects how early stage VC sometimes think about what is investible, especially for more unpredictable business models for particular industries.
I'll make one last point here, which is thinking about exits. I think for early stage founders, early stage VC is sometimes not very reliable, and it really shouldn't be done, especially if you're building something truly very disruptive. But it is still a very relevant part of a lot of business models, especially business models, which have a very strong, more understandable, unique value proposition. A lot of VCs are great VCs because they really understand, okay, here's the product roadmap, an M&A roadmap for certain large tech companies or certain large traditional companies. This is the gaps they're filling, and we want to be able to invest in the companies that fulfil that need and there's a clear acquisition path. Being able to understand how different investors think across their value chain, having proprietary insights perhaps is very useful for early stage investing.
Jeremy Au: [00:08:20] Yeah. I think the interesting piece of that has been from the founder point of view. Seeing how news of great exits and great failures in the public domain kind of ripple through the value chain for the evaluations of companies that are climbing the same stack either in terms of business model or industry or approach and squeezing evaluations and the funding cycle for the companies building the business. That's something that's really true about it going all the way to the front, where people are making decisions about what businesses to build. Part of that has been about what's hot and what's not so hot and what looks like it's going to be a great exit and what's not going to be a great exit.
What's interesting as I hear you, there's a lot of deeper level thinking that has to happen all the time by operators, which is, “is this a business model that I understand the fundamentals of and isn't shaped by the overall public market exit path of the VC part of the business. But saying these are the models that I have. There's the profitability of growth that we see an opportunity on, and then kind of looking at capital.” The right form of capital to compliment that growth path, whether it's venture capital to other forms of capital like debts.
Chia Jeng Yang: [00:09:41] Yeah, absolutely. I think that one of the things I try to explain sometimes to first time founders is that sometimes they see that a particular industry is getting really hot and they want to build a business model around that because they read in TechCrunch or what have you, that this company founders are okay and somehow managed to raise a huge, massive seed round. They say, “Hey, I'm stronger than these guys. I can probably do something better.”
That comes from maybe not being aware that some of these rounds, for example, are really constructed by VCs who are trying to make very specific bets based on what they think on what growth equity investors are very interested in. You see these waves come and go, and its really VCs making specific bets rather than VCs, truly believing that this industry will be very sustainable. It's just something they want exposure into. Building another business, it doesn't work because actually the VCs already have the exposure. They know how to take multiple exposures into something they may not fully believe in. Some of the dynamics of why there's such a contradiction between business models that somehow get funded and really solid guys trying to build similar business models and sometimes struggling to get funding on that side.
A great example of that is WeWork as you mentioned, and how that impacted the appeal of co-living spaces. I think one way that we saw WeWork also have the appeal was that we saw so many, WeWork appear in other countries as well. Kind of like saying, “Oh, WeWork has been success it's a unicorn and therefore we should be able to be inspired by a business model, copy some core aspects of the business model and then localize that for the local market.” One of the tricky parts was that as people did that, we saw a lot of founders and talent work at building that out, but also saw some money also follow those bets as well, because that was the current understanding of it.
Even in America, people had raised strong concerns about a business model. Those concerns were not as easily understood from a market in like Vietnam or Indonesia, about why it wasn't working. I remember hearing some of the stories about local operators saying to themselves, similar to American operators, this business model doesn't seem to work for us either.
Does it work in America? And they called their friends in America and they're like, Oh, it doesn't work in America, either so they're not sure what's going on. But it does feel like the capital is fueling the ability to punch above their weight. That unfortunately shattered. When WeWork shattered and that became publicly known to everybody, it shattered the business model operating assumptions for a lot of the VC's, the employees at the startups and the founders of these, WeWork localized copies.
That was a such a painful experience for everybody. A lot of smart people in these local markets were also thinking to themselves like these are my business models. I'm also not seeing the numbers work out, but WeWork is doing well. We can be able to fundraise based on these numbers that we know ourselves don't really make full sense.
Another way of thinking about it is for certain business models, not all obviously, but for certain business models, it is about multiple financial stakeholders collectively taking the same leap of faith. When that leap of faith gets broken along that financial value chain, it becomes very difficult to invest. Sometimes that break can literally happen overnight. Maybe a certain company gets a really bad fundraising round or macro factors hit, for example COVID, and people are just no longer interested, and the entire sector loses confidence basically overnight. I've seen that literally happened over the course of a couple of weeks. Rumors pretty fast about certain things, certain sectors and the general sentiment will immediately shift to, okay, this space is no longer investible. That really sucks for founders who are maybe spending months or years building companies in the sector and all of a sudden financial sentiment changes and nothing has really changed on the unit economics or the operational capacity. Just sheer financial confidence.
Jeremy Au: [00:13:49] I agree with you. Sometimes founders can find it a bit unfair because they're like I've been building this business or this assumption, and suddenly it's changed from left to right. What I've come to understand working with other founders and talking to them is that, and also with VCs is, the market is trying to understand at the same point of time, what the full value of these things are. Investors, also discovering what the full economic value of these models and the information that's cascading is, not that they're being inconsistent or unfair, but it's more like the market is now pricing in that new information across the whole chain, which is what a market is supposed to do in aggregate, because we want to know what a true price of apples and oranges and oil in the public markets.
We want to know a fair price and the stores and the price for a startup that's opaque because of the fact that it's operating so much uncertainty around customer need and market size, now gets revalued with that new information. The reason why this is a good conversation is because you can feel like it's a personal conflict between founders and investors and the market versus the valuation, but it's actually a learning loop across all the various stakeholders to understand what the full potential value is of what was being created.
Chia Jeng Yang: [00:15:07] One thing I will say here is that some of the best founders that I've come across and some of the founders that I really enjoyed talking to are founders that really understand some of the nuances that have gone on and put in past previous deals. For example, being able to understand that hey, this is some of the reasons that the deal was done. Here were the rational ones, here were some of the irrational reasons that the deal was done. Helps you get a little bit of flavor on what is behind all of this hype. How particular business models might be funded, but maybe some of the reasons why they got funded were more personal reasons or more relationship reasons involved. It says nothing about the business model itself. Whereas here, some of the deals that were actually very exciting, no one talked about them.
It was really exciting because certain investors have figured out this particular piece about this business that very few people have yet to figure out. These are the business models that are going to be really, really exciting. I think the founders that I'm very impressed with and I think are the ones that do well, really have this understanding and background context for how all of these things happen. When they go out and they fundraise, they have a more precise understanding of not just what the early stage VC wants, but what's going on for up and down the value chain and what has happened previously.
Jeremy Au: [00:16:22] So true. As someone who's been coaching a lot of harvest startups, I think there's a big difference between those who have domain expertise or have the ability to go deep into the industry, versus people who have a more shallow understanding of the industry they're going after. Because they're able to, like what you said, understand the fair and honest reality of the operating dynamics and the fair and honest appreciation of the valuation/funds needed to make that next set of milestones de-risked and made into reality. A very common slide in many decks is, look at all our peers in other countries and they raise so much money and they raise at this valuation. Since our market is the same size, we should have the same valuation or the same dynamics. I think that's a helpful slide, in terms of at least saying that there is some sentiment, and I think it points the viewers of those slides to do more research and say, Oh, good, your comparables, company A and B and C, these different markets and the research process can happen.
It's just that I think the next level of that slide or presentation is to say, how are we different? How are we better? That's the easy one to say. But also, what's a more realistic take on what needs to be done. The depth of that conversation, the Q&A, in that sense is going to make the difference because it's going to ripple not just into whether you're funded or not, but also whether you have the right fundraising approach. Which also means that you have the right business strategy approach to get what's needed to be done.
Chia Jeng Yang: [00:18:03] Yeah, absolutely. Investors, again, treat companies very differently. Investors invest for multiple different reasons. For example, a conversation I recently had, we were talking about the viability of a particular business model and it was pointed out to me that a particular sovereign wealth fund had invested at seed stage into similar business models. If you weren't aware of the strategic nature of some of these investors and maybe some of the relationships that preexisted between the founders and investors before the investment was made, you might come away taking some of the wrong learning from that. This contextual knowledge is really important for teasing out some of the behaviors of how investors work. It's a vast universe. There's a lot to learn. I'm learning every day. It's obviously a tall order for founders, technical companies, I think that's constant dialogue, building yourself this engine, which allows you to maybe get that information from other parties aligned with you and really understand the scene in a better way. I think that's one of the ways to really build a company that can also get as much of the support that it needs.
Jeremy Au: [00:19:12] For many founders, balancing the operational reality of their business and how they can drive more profits and drive more growth. Obviously for VC, there's the investment and realizing the full potential of the business. We kind of talked about it, these are the pricing moments of the industry. These are the economic reality conditions like COVID, that's changing around the world. How should that conversation happen? How should a startup, or how would you want to hear a startup talk about the changes in the broader economy and how that impacts the business?
Chia Jeng Yang: [00:19:48] A couple of ways. I think the first one is, when there's large macros or economic downturn or pandemic, I think the amount of analysis out there as is fairly straightforward. You try to find out what everyone is doing. You try to find out how investors are thinking and take it forward from there. One of things which is also fairly important to know, and maybe you don't directly find out, but you try to have again, an engine or a network that figures that out for you, is what a lot of investors do, which is try to figure out why certain deals get done, what's the story behind them? What's the commonalities, what's the differences, what are the nuances that makes specific behavior and give you a more concrete insight into what the future looks like from that financing perspective.
So, I think all of those points are kind of very crucial and not to say that this is something that the founder needs to do. Again, it's something that you can build a support engine for typically with your existing investors or sometimes founder networks are pretty helpful for this also. I think that the point is that it is a fairly important thing to think about. Especially, if you are building a business model that does require quite a lot infusion of capital and you're burning a lot and you need to do that.
Jeremy Au: [00:21:03] A great example of that would be the COVID pandemic and everybody's scrambling to figure out the health ramifications, the economic ramifications, and then rippling out into the VC ramifications and then into the startup ecosystem. I remember during the pandemic, one big conversation I was reading about was the sovereign wealth funds and the hedge funds, what was their point of view about the various asset classes between the public stock markets, the private equity markets and the venture capital markets. And then there was the second order effect, which is if they are thinking that, what is everyone else thinking? Is it going to be a V shape, a W shape? How does it play out in different geographies? It was just really interesting to see all of that turbulence and having those webinars where it felt like VC's and founders were in the same room, brainstorming or discussing how it impacted the technology industry as a whole. Suddenly VCs and founders were part of the same boat called: "do LP's want to put money into our asset class and fund burn rates and employees." I don't know. What do you think?
Chia Jeng Yang: [00:22:11] VC's are probably as susceptible to LP sentiment as founders are susceptible to VC sentiment. And then VCs were suddenly in the position of, Oh, we also don't know what's going to go on. We are dependent on some inner mechanics of financial institution that we're trying to figure out what's going on, but no one wants to tell us anything because they might not have a firm view also. It was deeply uncomfortable. It's just that process.
And so, a lot of what VCs were doing at the time was keeping very strong, doing a lot of calls with other VCs, really trying to get a sense of the market, of what's going on, doing calls with a lot of LPs, trying to get their sense and trying to be among the first to figure out “okay, if sentiment changes, I'll be one of the first people to know because they finally made the decision on something and they told me.” That's the attitude that was going on. When LPs started being able to make fun of positions, where you had the knock-on effect with VCs starting to be slightly more comfortable fundraising building on new funds, et cetera. Or in some instances, VCs being able to say, okay, we kind of got the sense that we can do a mixed fund. We can start deploying a little bit faster than we want to because there's a lot of great opportunities right now.
Jeremy Au: [00:23:31] Yeah. Interesting to see that also from the founder perspective, which was that, all the founders are racing to call each other as well to be like, well, what are you seeing for your SEO and search engine marketing performance? Because we were seeing, depending on the vertical, very differing impacts on the performance of marketing acquisition, but also the conversion rates through the funnel. Some people were saying, okay, everybody's still clicking and seeing stuff and putting their name, but they're not converting in terms of signups. Or they're not converting during the sales process. That's more on a direct consumer side. Other enterprise people were like, I'm talking to these people, I'm still getting calls, but they're distracted. The key stakeholders are thinking about their business. They're thinking about their families.
This may be a number one, a number two procurement decision in a normal peacetime piece but doesn't seem to have that emotional reality today because people are worried for their jobs and their own personal safety. It was interesting to see that ripple up as well from the real economy, main street, and then founders scrambling to understand what it meant within the teams. But also discuss if those conversations were also happening for other companies in their space. A conversation was then also like, how do we start talking about this? Now that we suddenly understand that this is not just us, but more a broader trend and we're trying to understand health policy, how do we communicate this to our VC is not on our quarterly board conversations, but how do we get ahead of the news or stay on top of the news.
It was just interesting to see that weird mixing between, like you said, the financial markets uncertainty and lots of dialing was so much a parallel to founders doing a whole bunch of group dialing about the real economy and that giant mash to be like, okay, what could be the consensus by vertical? What could be the consensus by geography, to some extent? What are the scenarios for a better healthcare outcome versus a worse healthcare outcome? And then boil down to a bunch of really painful conversations for everybody, which is, how much cash do we have? How much runaway we have? What strategic decisions we need to make about acquisition, versus profitability, versus growth, just because something changed in the real economy, the economic economy and the health policy of each country.
Chia Jeng Yang: [00:25:57] So part of this value chain of faith, I think one interesting dimension about that is how investors think about what new business models VC backable. Let's take a step back. I think there are multiple categories of different business models that we look at. Trivially, let's say the three categories. The first one is a lifestyle business, and everyone knows what that is. The second one, private equity type business model. these are business models, traditionally categorized by stable cash flows, very understandable business model. Profitable and generating kind of slightly lower growth rates, and then the VC business models. The VC business models are ones that are traditionally associated with disruption, fast growth, maybe cash burning, but will get very large point, especially in terms of valuation very quickly. The interesting thing about this concept is that different business models can move around in terms of whether or not it's VC, backable, or only private equity backable.
If we take a step back and look at the history of venture capital and what venture capital traditionally used to invest in all the way back in the fifties and sixties, they were really investing into deep tech companies. This was really cutting edge protected by IP. Had the ability to transform the entire industry. All the semiconductors, hardware, et cetera. The value proposition was very clear. You produce a new piece of technology, it changes the industry, it becomes the leader. That's great. We're going to make a lot of money from that. It's only moved into things like software where the defensibility was probably less evident as compared to your hardware IP type companies, but clearly was able to show case, emote. Was also able to grow fast and spread fast and disrupt the industry in different ways.
SaaS companies were great. Cost of sales is extremely low, in practice software served as a really great moat because once you download one piece of software, you probably won't try to download another piece. It was a great business and VCs like that. Increasingly we started investing into other types of businesses. We started increasing the investing into businesses that were great but may not necessarily have a software moat. We started investing into other verticals and this idea of what was a moat became a lot bigger. Now, I think the one extreme of this and what we've seen in the current cycle is looking at direct consumer products. Direct consumer products and the CPG goods was very traditionally in the realm of private equity.
Why venture capitalists started thinking about D2C was they thought about what a moat meant and realized, Hey, brands can have very similar moats. It's obviously harder to tell sometimes if a particular early stage brand will have that moat, as compared to, again, IP back in the fifties where it's in the patent office. Some teams with the right strategy and the right industries can really grow very fast. That's good enough for us because again, our mission is to invest low and sell high just in a much faster period than private equity funds. Maybe if we invest X amount, we can get it there actually much quicker. You started to see VC funds have blurred the lines a little bit between what is the private equity type business model versus a VC type business model.
It seemed to imply that at the end of the day, it's more about how fast you want to execute a particular strategy rather than particular types of business models. I think one very interesting conversation linking the two concepts together of that financial value chain with what's a VC backable company is that, particular industries might be more exciting because more people are paying attention to it.
For example, in the sexual wellness space, there might be D2C companies that everyone is talking about and so it becomes immediately venture-backable because we all know that there are growth equity folks that are excited by that scene. But by the same measure, maybe D2C in vitamins, although that is actually hot, but D2C in vitamins may be less exciting because of the growth equity investors haven't really heard as much buzz about it. VCs think, okay, not yet. We'll wait until there's a lot of buzz before we try to make bets on that. A lot of that conversation and why the topic shift on what is VC backable is really based on what's going on in the broader market and how financial investors are thinking about particular types of things, rather than core fundamentals because this definition can and has shifted.
Jeremy Au: [00:30:48] Yeah. I think that's very spot on and a great articulation of the different categories and evolution of what is a moat and to some extent, what VC's want to back. One company we've discussed before has been Casper, which is the direct to consumer mattress brand, which has grown tremendously, has a tremendous valuation. I think we see a lot by the press about what they've done as a startup story and as well as their consumer goods. I also own a Casper mattress and pillows during my time in the US, so I've been a consumer for them. I've actually also had an opportunity to visit their offices and hear from the founders themselves about what their vision was. From their perspective what he said he wanted to do was they wanted to become the Nike of sleep. Which was a tremendously invigorating vision because we all know how huge Nike is. It's orders of magnitude larger than a Casper.
Thinking to themselves that nobody thought that the footwear industry, when it first started out was anything more than a commodity that could have a brand that could have a moat, that could have loyalty. Now to us, Nike is, loyalists are there, Adidas and Puma loyalists. The space for some great companies and everybody else is on the side. I think sometimes the conversation on the D2C side is if this consumer company or this company gets everything right. They can and are part of a large market. They can get a huge share and they can command a high loyalty from the customers, and they can execute well and have enough cash to make it through whatever life throws their way. Then that could be an incredibly huge company. I think that's the part that's hard. Everybody grasps how many hoops you have to jump through that are on fire and do that sequentially.
Well, to summarize, we've had opportunity to hear about what venture capital is. The industry factors that impact both venture capitalists and startups and how situations like pandemics and different business types are flowing through the entire calculus for everybody in the system. Don't forget to subscribe to our podcast so that you don't miss any new episodes. When you join as a member on our site, you'll be able to ask us questions that we'll be able to answer on the show. Thank you so much.