Venture Capital in Thailand

With worldwide financial markets imploding and private investors scurrying to look for answers, it may seem a strange time to set up a fund aimed at enticing new funds to Thailand. Coupled with the Stock Exchange of Thailand’s Market for Alternative Investments, there is one firm that believes the time to get into the market is ripe. Director’s Greg Lowe writes.

Thailand's venture capital potential is largely unexploited, according to locally based financial consultants MBMG International, which has set up the Peak XV fund to tap into the pool of local innovation. The firm's managing partner Paul Gambles explains how retail investors can add innovative Thai and Asian start-ups, predominantly from the Market for Alternative Investments (MAI), to their portfolios through micro-funds like MBMG's recently launched Peak XV.

Why did you call the fund Peak XV?

Peak XV was the codename the India-based British survey team gave a mountain in the Himalayas when they were mapping the range. When they realised it was the highest mountain in the world they renamed it Mt Everest, after the surveyor-general Major Sir George Everest.
Everest is the world's highest mountain and we regard venture capital as having the highest potential return. But the symbolism with our fund goes deeper that. Everest was not scaled for 100 years after it was discovered. The reason was not one of technical difficulty, but of access. It was difficult to get to it because of the political situations in Nepal and Tibet. 
That’s kind of our view of venture cap. It’s an investment that should be in most people's portfolios, as it typically has a very high return. But again, the difficulty is in accessing it. We know that from personal experience. It's been very difficult to find high quality VC funds for retail or non-institutional investors.

Why launch the fund now, at a time of global financial disarray?

The simple reason is that there's no better time to be a buyer than when there are no funders out there. The greater the shortage of potential investment capital the better it is. So if you’re a source of capital or liquidity now, when capital is freezing up, you can certainly negotiate far better terms than you could six months or a year ago.

Which market sectors and businesses will Peak XV invest in?

We're very interested in the MAI and its approval to set up its SME matching funds [funds that will be supplied in an amount matching the funds available from other sources]. They're at the point when they can turn that approval into meaningful funds right now – THB1 billion broken down into matching funds of THB 200 million a go.
Where this gets interesting for us is that we have the opportunity to invest into the MAI matching funds as an institutional investor, or to find an investment and partner it up with the MAI.

Why set up Peak XV in Thailand. What's the specific opportunity here?

If you look at commercial activity throughout the region Thailand is a very strong market with 60 million consumers. However, its venture capital capability is less efficient than in Singapore, Hong Kong and other more major markets. There is a much less developed capability here and that in itself creates a huge amount of opportunity.
But we’re not saying we’re only going to invest in Thailand. For example, the lack of liquidity in China has led to much more realistic investment valuations there. Our first main investment for Peak XV is mStream.

But, at the end of the day, we’re based in Thailand and we see a lot of possibilities here. The fact that the MAI has reached the same conclusion, and that it’s launching its own matching funds, shows there’s huge untapped venture capital potential here.
Also, if you look at amount of venture capital-funded companies in Thailand that go on to be listed on SET it's very limited. In SET/MAI the number is around 30 out of 530. Although this is a growing proportion, if you look at the recent IPOs the fact that it’s only around 5 % shows the order of the inefficiency in the market here, especially when you see that venture-backed listed companies in Taiwan represent around 32% of the total of 1200 listed companies. In Korea the ratio is 44%  of the 900 listed companies.

Aren't the risks of investing in Thailand considerably higher than in the region's more established markets?

There are transparency issues here, but every venture capital investment goes through similar due diligence processes. You have to do it on financials. You need to carry out operating risk due diligence, though this is an area which was underplayed in the venture capital feeding frenzy of the past few years, because the opportunity had often been missed by the time people had done it.
But one of the biggest factors in lowering risk is the universal opportunity that is available to us due to the lack of liquidity.
If you’re forced to chase the deals then it’s a lot harder. Risk reflects a whole bunch of things. Buying costs, the higher cost the greater the impact on potential losses or gains. Also if we look at Thailand its pretty clear in our view that there is going to be a global recession that carries through into 2010. If you want to avoid a direct correlation to that, micro-opportunities offer a much better risk profile.

What investment are people looking at to join Peak XV?

We're not looking for a big raise and we're generally aiming to provide Round One funding. We've tended to be fairly micro, positioning ourselves at the USD 5m-10m level. We see a lot more opportunity coming through at this level, especially at the time when raising capital externally is more difficult.
We’re sure of the opportunity, but we’re not sure of how long we’ve got before pricing starts to move against us.
For investors, there's a minimum USD 50,000 buy in, and the fund is set to mature in five years around 2014.

mStream Media

One of Peak XV's first investments will be in mStream Media, the brainchild of seasoned media experts mStream's chairman Eric Rosenkranz and CEO Patrick Pitcher.
The company aims to take the traditional magazine distribution model a step further by adding an LCD screen to custom made racks with the aim of delivering focused advertising to a niche target audience in China.

It seeks to mirror the success of Focus Media, a company Rosenkranz was instrumental in, which introduced in-lift advertising to the Chinese market  and which saw its value on NASDAQ surge to USD 7 billion, 10-times its IPO of USD 680 million.

mStream aims to connect local and international lifestyle businesses, which lack the multimillion dollar advertising budgets of the global brands, to niche markets – in this case, cash-rich young Chinese women.

"In China, most forms of advertising are mass. There's only one TV set per household, not the 2.3 per household as in the US, so you cannot reach niche groups through the TV," says Rosenkranz. "We started out by identifying the customer first – the upwardly mobile female consumer who's not married, probably lives at home. She has her own job, and a tremendous disposable income. But how do you reach her? Through beauty salons, hair salons, coffee shops, and so on. So we said if we could direct advertising to that audience then we can go after the brands trying to access that customer."

Through the acquisition of an existing local business, mStream has bought its way into the distribution network at high-end lifestyle stores in Shanghai, as well as the city's popular venues for chichi women.

"We found a company that distributes the Chinese equivalents of Cosmo and Elle etc, to the high-end outlets," says Pitcher. "It has an 80% share of the Shanghai market."

"Our next step was to identify and get to the target audience," he says. "The company has the racks in the right place. So we had the idea of putting a screen on top of the magazine rack. We've designed state-of-the-art racks, which hold 30 magazines, leaflets - which are a huge revenue opportunity - plus the screens."

The technological augmentation of the existing business will enable mStream to run 30 half minute commercials on each stand, providing penetration for more niche brands which are unable to utilise China's current mass-market advertising channels.