Inside the Mind of a VC: In conversation with Vicknesh R Pillay

Vicknesh R Pillay is the Co-founder and Managing Partner of TNB Aura, where he heads up the group’s sell-side and buy-side initiatives.We spoke to him ahead of his session at SuperReturn Asia, about how he find the right companies to invest in, where the opportunities lie and much more.

What are you looking for when assessing investment opportunities?

We believe that opportunities in Southeast Asia are wide but shallow, and there are only specific business models which can give investors a unicorn outcome in Southeast Asia. The key is to evaluate global trends and precedents which have already played out successfully in markets with similar demographics to Southeast Asia, such as China and India. We then identify high potential sectors and winning business models through canvassing the market in Southeast Asia – which are relatively shallow in terms of the number of players – and back the best team able to execute this business model in the country / region.

What’s the most important question to ask a start-up in which you’re considering an investment?

It is impossible to have a single most important question, as multiple criteria need to be fulfilled before we decide on an investment. This begins from the analysis of the business model, the market, the management team, as well as the company’s ability to create defensibility in the long term.

Which regions and areas do you see the most opportunities and what strategies and regions are you actively investing in?

TNBA invests across Southeast Asia – and it is important to be a regional investor as Southeast Asia has multiple countries with its own local nuances and regulations – unlike countries such as China or India. Similar to how business models could be more applicable to one country over the other, the key markets in Southeast Asia such as Vietnam, Indonesia, Singapore and the Philippines are also in different stages of maturity in terms of the venture capital ecosystem.

For example, TNBA looks at the precedent models in China and India and applies these learnings to Southeast Asia as there are many trends and insights which can be gained. Under the E-Commerce category with B2C marketplaces being the first mover, the next vertical to emerge would be Social Commerce, based on what we have observed, with the emergence of Pinduoduo in China.

In Southeast Asia, we have seen the similar emergence of Social Commerce players who have hit critical scale such as Super after the emergence of Lazada, Shopee, and other B2C marketplaces. We have yet to witness any Social Commerce player truly executing the ‘Tier 2 and 3’ model in markets like Vietnam and Philippines. Therefore, we see many horizontal opportunities yet to be played out in markets such as Vietnam and Philippines, whereas we see new industries such as Energy and IoT, as well as many vertical plays in categories like FinTech and E-Commerce emerging in Indonesia.

How do you conduct due diligence to ensure minimal risk and high returns?

Minimal due diligence is usually done when a VC is investing at the Seed stage, as the focus is to achieve product-market fit, traction and many other elements of building a company at that stage. As a Series A investor, it gives VC funds an opportunity to minimise risk by conducting proper due diligence across Legals, Financials, Tax and Commercial. Risk and returns are naturally correlated, though as an investor, we try to mitigate any unforeseen red flags via stringent due diligence processes before investing. Here are some other tips we consider to de-risk many of our investments:

Sourcing: VCs adopt either an inbound approach (predominantly relying on network, events, inboxes for deal flow) or an outbound approach (where we pick a specific industry, sector and business model we like and proactively reach out to founders who are executing these business ideas).

Risks can be minimized by adopting an outbound approach as we will be able to conduct clearer competition analyses and approach the market in a methodological manner, as well as understanding business models better before making an investment decision.

Reporting and Portfolio Management: It is critical to set up the right reporting metrics and governance prior to investing in a company so that all expectations in terms of reporting are established in advance. It is also crucial to set up value creation activities to continually value add to the company in addition to quarterly and annual meet ups.

What are the biggest challenges the LPs and GPs alike are facing in venture capital?

Exits. Naturally, exits create a ‘refresh’ in capital to allow founders and investors to invest back in the ecosystem. Southeast Asia sits in an earlier stage of VC ecosystem where clear exit paths are not created, though they are in the works in the various Southeast Asian countries. As investors, we have seen this mature over the recent years with investors at different stages as well as secondaries offerings emerging.

We expect the exit climate to drastically improve over the next 12-18 months, in comparison with the past 6-9 months of slowdown in public as well as private markets. We received term sheets for a full trade sale for at least 20% of our portfolio companies in 2021 and early 2022, indicating a clear interest for global companies to enter the Southeast Asian market, as well as a clear uptrend for Southeast Asia as one of the most attractive investment destinations globally due to the strong fundamentals behind many of the Southeast Asian countries.

How are you expecting the market to evolve in 2023 regarding venture, fundraising and start ups?

Days of ‘exuberant investing’ are behind us, when fund managers with large portfolio companies adopting a ‘spray and pray’ approach had expectations for the market itself to create exits for their portfolio companies.

Naturally, with a more hands-on approach, exits can still be created in a deliberate manner. With public comps impacted by the macroeconomic environment, generating exits have taken a back seat for several companies with long enough runway. Similarly, founders have placed less focus on gaining market share and more focus on achieving profitability and getting their unit economics positive.

Moving forward, we expect the companies emerging out of this recent slowdown to come back even stronger than ever and attract top tier investors due to their strong fundamentals.

What advice would you give to a founder pitching to a VC?

At TNB Aura, we like founders who are thoughtful. Great ideas are a synthesis of science and passion. As much as founders should be passionate about their businesses, we look for leaders with an analytical mind and a strong focus on their short-term, mid-term and long-term goals on their key financial milestones. Lastly, we have a strict no bull**** and no ***hole policy for founders.