Herston Powers, Principal at tryb Group, recently joined Daniel Song on the Asia VC Podcast to share his view on how Southeast Asia is only 5-7 years behind China in fintech adoption, fintech valuations in the region and how start-ups taking a digital first approach will win.
Tell us about yourself and how you came to become a principal at Tryb.
I am from the US and moved to Asia from NY over 8 years ago have lived in mainly in Hong Kong and Singapore.
Prior to joining tryb, I worked in banking at the Bank of New York Mellon helping tech companies list and IPO on New York stock exchange and Nasdaq. I worked on a few tech deals in China working with major e-commerce, EdTech and other new economy companies. I then shifted my focus to Southeast and India, where I continued working with pre-IPO companies and worked on first Southeast Asian single-listed ADR listed on Nasdaq.
In 2014, like most people in finance I became interested in fintech and help found a fintech company and invested personally in other fintech companies.
After a decade working in banking with VCs and tech companies felt I wanted to move to the other side of the table and joined tryb. At tryb I focus on early stage investments, deal sourcing and execution and post-investment support.
tryb is a bit unique or different type of investor for Southeast Asia. Do you mind explaining how tryb operates as a fintech investor?
tryb Group operates by investing in fintech companies focused on Southeast Asia. Our mission is to become one of the most impactful fintech investors in Southeast Asia. We are one of the only pure-play fintech investors focused on early stage in the region. The group has invested companies across markets and fintech verticals with 1 exit in a SG payment processing company.
We approach this market with the view that Southeast Asia is about 5-7 years behind China with respect to fintech adoption and other metrics such as share of digital/mobile payments.
Considering that Indonesia’s GDP per capita is equal to China in 2009, but pace of urbanization and mobile penetration is stronger here now we believe fintech is truly just getting started in region and financial services in the region must catch up. Fintech is really the only answer with support of policy makers and the broader ecosystem.
We have put together a fit-for-purpose team to tackle the fintech investment opportunity. Fintech as an asset class is complex as it combines the both technology and financial services, the latter generally is a regulated space.
Our team is mix of a CTO, banker, finance, social entrepreneurship, fintech founder and banking technology.
With few pure fintech investors in the region we are generally able to partner with all other VC funds, corporate VCs, family offices, incubators and later stage funds.
One of your investment themes is around APIs becoming the way Southeast Asia communicates. Tell us how APIs will impact fintech and the growth of services in Southeast Asia.
When the principals of tryb sit-down, we debate various themes and found that APIs will have a transformative effect on all business in Southeast Asia. In the same way that your home screen on your smartphones has become the most valuable real estate in Southeast Asia. All tech and commerce in Southeast Asia is poised to be conducted via APIs with little to no human involvement in the processing of transactions. The lack of efficient and commonly used infrastructure in Southeast Asia and the need for financial services to catch-up to increasing digital commerce will force B2B and B2C traditional companies to begin developing and harnessing API infrastructure.
It is fair to say that most financial services companies are not ready, but this is less about disruption and in our view an inevitably. We see fintechs helping to provide that infrastructure for existing players to better serve the customers and helping to extend the reach of financial services. The last mile of providing financial services to those that need it.
For example, one topic of conversation continued to come up in our discussions with fintech and e-commerce companies. Outside of Cash on delivery, bank transfers were how many consumers transacted on their platform. With that said, the process in several Southeast Asia markets was extremely manual, burdensome and error-prone. From a market development stand-point, credit cards should be able to solve many of these issues but the credit card penetration in many of these markets is among the lowest in the world.
It’s not difficult to imagine a future where Southeast Asia credit card penetration stays low and the market adopting more seamless bank transfers and other e-money alternatives to fuel the digital economy. We see a market opportunity here on a few fronts from payment enablement systems, API layers, fintech lending for the next generation of consumers/SMEs that allows financial services to grow and continue to forge a new path that may not look exactly like fintech development or open banking of the West or China.
What are unique Fintech models in Southeast Asia that we haven’t seen in other developed markets?
That’s a tough question and I am hesitant to call anything unique especially around finance and financial services. From what I see the conditions on the ground in many of the Southeast Asia markets present unique challenges and opportunities for Fintechs.
The push and pull dynamic of extending financial services to the under-banked creates an environment where traditional players are extremely happy to partner with fintechs from a lead generation and qualification stand-point and channeling perspective. Which in stage 1 of fintech development are workable business models. For example, in Indonesia the government mandates that the larger FIs extend financing via a quota to certain difficult to service segments, like Agri-lending to small farmers, SMEs and the under-banked. With that said, it is difficult and costly to acquire and service these segments for these FIs without technology to scale their offering. But they are mandated to do so.
This is where fintechs focusing on specific and niche markets can capture market share and potentially move beyond channeling, so actually owning these customers. This where you could see potential for conflict in the future, however if the fintechs take a digital first approach these segments are huge and can be profitable. However, if we see fintechs using the tried and true strategy of leveraging lower labor costs to throw bodies at a problem or hiring low level staff to perform tasks that could and should be automated, than they are no different than the banks, cannot scale due to poor unit economics and forced to pivot and compete directly with the banks.
So, in our view, even in Southeast Asia, technology is cheaper than labor and fintechs that are truly taking a digital first approach will win, and this relates to the future of API adoption.
One thing that I do see as unique, is entrepreneurs taking traditional business models that are inefficient due to the low trust environment in their markets and using business model innovation to build trust in their ecosystem that allows them to scale. We are currently looking at company that is using their platform and understanding of the real estate market to connect all parties involved in a mortgage transaction to create enforceable contracts, mitigate risk for all parties and provide additional benefits to parties (e.g. not the borrower) that may not have been traditionally serviced by the traditional commercial bank.
Also, Southeast Asia is a region where SMEs in many instances behave closer to Consumers, so not truly B2B and this impacts how fintechs should engage and interact with this segment.
How have we seen evolution in both distribution and acquisition in the rising tide of new fintech start-ups?
Yes, there is an increasing level of awareness that owning the customers is becoming much more critical even in models where channeling is prevalent. Once a fintech passes on the client to another party the customer experience changes and not controlled by the fintech.
One of our portfolio companies, First Circle in the Philippines has become the leading digital SME lender by taking a modern approach to acquiring SMEs customers. SMEs in Southeast Asia in many cases behave more like individuals or consumers, so you have to treat them in a different way. While First Circle was able to build a platform to acquire customers in an efficient way while simultaneously providing a customer experience that is arguably better than working with traditional players. The beauty of their approach is that they did not run away from regulation. We believe regulation is a good thing for fintech. They applied and became a regulated entity and have now built a digital platform to capture the pent-up demand from very good SME borrowers. Their clients were hamstrung by working capital issues and unable to grow their business. First Circle has developed a business model to help these companies expand their own business, ability to access steady working capital and thus benefit the broader economy in the Philippines. We were recently with First Circle in Manila where you had the highest levels of government showing their support for their business model and their vision.
Is the excitement surrounding Fintech in Southeast Asia not driving up valuations of start-ups?
Yes, valuation can be a little high for fintech these days. But at the same time, I’m an early stage investor and looking for unicorns and the valuations here are still in reach and reasonable for companies that we believe will the future unicorns of the region. That takes high conviction, but we are comfortable with most prices in these markets. With that said, Indonesian valuations may have been a bit stretched over the past 12 months and the market is a bit more competitive with respect to getting deals done which has resulted in more investors looking at Manila and Ho Chi Minh.
At the same time, we have passed on deals where valuations have been an issue and 12 months later you see the same fintech sill fund raising and cut their valuation significantly.
One of the best things that I can do for a founder is help them understand VC investment and create a solid fund-raising plan. Before we invest, we ensure that the company’s KPIs and milestones match where the company is today and what the achievable next valuation should be. These are difficult conversations to have and we spend a lot time guiding our portfolio companies in the right direction so that the next fund-raising round is much easier due to ensuring that they are investible and justify their valuations.
What kind of team do you like to see when you invest? Founders with financial experience or founders with fintech passion?
That is a great question, we like when the founder has the relevant experience and have built a strong team around them that hopefully complements their expertise. But the fact is that many of the entrepreneurs that we are backing are first time founders themselves and that may be a bit different than Silicon Valley or china or other markets where entrepreneurship scene is a bit more mature. What we do need to find are founders that we want to work with for a long time. People that we trust that are going to be able to execute on a business that may have to change in 18 months. Going to back to your original question, the passion must be there and understanding their motivation for the start-up but the relevant experience and getting the right people and team is critical.
What to expect from you and tryb this year?
I am a new dad so more sleepless nights. Trying to avoid dad-bod but might be failing at that.
Professionally, I am keen to connect with more investors outside of Southeast Asia. Would like to make sure there is a fair amount of information flow coming out of the region and coming into the region as we can learn from other markets. Also, since we are on the ground, we can provide real insights into region.
This year is big year for me and tryb. We expect to announce more new investments very soon, supporting our portfolio companies raising capital this year and announce a few new partnerships.
This transcript is edited from the original interview.