Staying focused on Indonesian investments: Convergence Ventures Q&A (Part 1)

Many venture capitalists believe that investing in Southeast Asia’s startups is still promising amidst global headwinds and China’s economic slowdown. This also applies to Convergence Ventures’ fundamental view, where the venture firm focuses wholly on the Indonesian market. Its portfolio includes premium co-working space GoWork, AI-powered chatbot solutions provider Kata.ai, fintech infrastructure player Xendit, and peer-to-peer lending firm Koinworks.

KrASIA had the chance to interview Convergence Ventures managing partner Adrian Li to cull his insights on operating co-working space GoWork, new sectors, and his views on tech company IPOs.

KrAsia (Kr): Do you think the WeWork fiasco has impacted the way investors view the co-working industry?

Adrian Li (AL): Co-working can deliver benefits that traditional offices cannot. For example, co-working can save costs and provide greater flexibility to companies as they grow, while providing a better designed and more comfortable office.

Our [GoWork] mobile app also helps members source like-minded people on the co-working platform to network with and find potential deals. Hence, in the same way app developers do not have to worry about building their own operating system to function and communicate with other applications, co-working as a platform can provide a faster and more efficient way for companies to focus on their core business.

From an investor perspective, returns are also driven by pricing and valuation. The core revenue streams from WeWork are still similar to IWG [International Workplace Group – virtual offices], a very proven flexible office provider. However, the last private valuation of WeWork was 18 times its 2018 revenue. And, IWG’s current valuation is only around 1.5 times last year’s revenue.

WeWork was growing much more rapidly and also held greater promises of new co-working revenue streams and future growth potential. However, our view is that while fast growing co-working spaces should be valued greater than IWG, the valuations should be lower than what WeWork’s was.

Kr: How are things different with GoWork?

AL: GoWork has always approached building the coworking space in an aggressive but sustainable way. GoWork has grown fast but maintains strong unit economics to ensure the fundamental business model works. In the last 24 months, we will have grown 20 times from 1,500 square metres (sqm) in two locations in January 2018 to 35,000 sqm in 20 locations by December 2019. We already have another 30,000 sqm in our pipeline which will all be online by Q2 2020, and we’ve achieved this while maintaining a strong occupancy of over 85% and being cash flow positive in the last quarter.

GoWork’s only focus currently is Indonesia, and we plan to break over 100,000 sqm by next year. Our goal is to become the largest operator of workspaces in all of Indonesia. We’re operating in three cities: Jakarta, Surabaya, and Bali. Medan is the fourth location for next year.

Kr: Have many property conglomerates entered this space to partner with GoWork?

AL: GoWork is fortunate to have great relationships with several leading local developers who have also invested in the company. We work very closely with them to build strategic and desirable locations. We’re very also very disciplined on taking on locations that will be in high demand, which also helps support our high occupancy rate.

A location type that we pioneered and are the only operator to offer are in-mall spaces. We have locations in Pacific Place, FX, Plaza Indonesia, and Senayan City [all big and popular malls in Jakarta]. All of which are highly attractive to SMEs because of their accessibility and convenience.

Kr: Why aren’t you expanding GoWork to other Southeast Asian countries?

AL: We generally advise all our portfolio businesses to focus on Indonesia. As a fund, our focus is on Indonesia because of the market size and its potential. Indonesia is expected to make up close to half of Southeast Asia’s USD 300 billion internet market by 2025, so there’s plenty of room for growth here.

For businesses like GoWork or e-commerce, even fintech, the business is so localized that you really need to be on the ground all the time and work with local partners. You also need to recruit and manage a strong local team to execute in the best way. By entering new markets so early you would dilute the attention and focus of the management team and also waste precious time traveling and managing distant locations. Therefore, entrepreneurs and teams based in Indonesia run most of our portfolio businesses. Even if you look at the unicorns such as Gojek, Traveloka, and Tokopedia, they are still largely focused on Indonesia.

Kr: Are there any industries that you’re focused on, or are you industry-agnostic for the fund? And what new sectors are you looking at?

AL: We look at many types of technology-enabled businesses across a variety of industries. In constructing our investment thesis, we take a bottom up approach looking at fundamentals, consumer, and SME habits; and learning how more digitally developed countries like China and India have evolved. From this we have identified several key trends that drive our high-level industry view. These trends are the increasing adoption of e-commerce, the growing consumption (and monetization of) digital media, the increase in financial technology usage, and the use of technology by SMEs.

For example, e-commerce is an obvious trend and Indonesia has experienced massive growth in this sector, but we have now reached an inflection point and growth will accelerate. A recent report [by Google, Temasek, and Bain& Co] forecasts that e-commerce will grow from USD 8 billion in 2018 to USD 64 billion in 2021, and hit over USD100 billion by 2025 in Southeast Asia. This will open up a lot of opportunities for investments. As consumers and markets mature digitally, more e-commerce verticals will open up.

In China, for example, after the maturity of horizontal platforms, we have seen vertical platforms in e-commerce such as fashion, beauty, and furniture, emerge. Lately, we have seen other models like single product consumer brands experiencing greater adoption as consumers become more discerning towards the products they buy online. We have also seen recent models that combine new buying behaviors like Meeshoo in India, as well as platforms like Pinduoduo that address emerging consumer markets by serving China’s rural areas.

The massive rise of e-commerce has also opened up opportunities to invest in industries that help enable e-commerce. Take for example, logistics. Hence, we have also looked at technology-enabled logistics companies.

Kr: What other sectors do you think hold great potential?

AL: Digital media has long had strong adoption in Indonesia, especially with foreign platforms like YouTube and Instagram. However, until now, we’ve still seen more audience share from traditional FTA TV networks. We’re now at a point where this is likely to change. Cheap and fast data and affordable and high quality smartphones, have enabled digital media to hit a tipping point. This will accelerate business opportunities in multiple sectors from distance education and medical care to more localized formats of entertainment.

This also has coincided with much less payment friction because of digital wallets, which allow faster and easier micro transactions. We’ve spent a lot of time looking at fintech and it is an area where we have had great success. This is one of the largest opportunities in Indonesia because of the low penetration of banking products and services.

In this sector, we’ve invested in B2B payments infrastructure companies like Xendit and Xfers. We’ve also invested in alternative lending platforms as we recognize one of the major obstacles to improving consumer quality of life and SME growth is access to credit. In this space, both our investments in Julo and Koinworks have grown multiple times since our initial investments. Most recently, with the rise of digital wallets and adoption of payments by consumers, we’ve looked at personal finance, investment, and insurtech businesses.

Last but not least, are micro and small medium enterprises (MSMEs). There are 60 million of these businesses in Indonesia and they power most of the local economy. In fact, if we look at the total retail including offline disorganized retail, and not just modern markets, estimates suggest this makes up 65% of total offline retail. It’s massive.

We think about the products and services that can enable these small business owners to be more efficient and grow their businesses. For example, we have invested in a digital point of sale solution for retail SMEs called Moka Pos.

Part 2 of the Convergence Ventures interview, which focuses on fintech in Indonesia and tech IPOs, will run tomorrow.