Elizabeth, or ‘Lizzie’, has held various leadership positions at Lazada in Southeast Asia, including CEO of Lazada Indonesia and MD of Lazada Malaysia.
Prior to joining Sequoia, Pieter, as the Principal of Amazon Web Services in APAC, managed its relationships with leading VC's & Accelerators, as well as the broader start-up ecosystem across Asia. At Sequoia Capital, Pieter focuses on early-stage investments, including prominent SEA start-ups Carousell, Tokopedia and Go-Jek.
Q: Google, with Temasek Holdings, recently released a research on the opportunities for e-commerce in Southeast Asia. It predicted that given the right level of investments, the size of the pie could grow sixfold over the next 10 years to reach $200 billion in revenue. What are your thoughts on this? Are you optimistic?
Pieter [Partner, Sequoia Capital]:
If you look at all the large Silicon Valley-based venture firms, only one of them is really on the ground here, and that’s Sequoia. It's a testament to our belief that there is a lot of interesting things happening in this region. When we speak with folks about the ecosystem here, you have some guys who say it's amazing, it's great, and then you have others who think the region is completely backwards and lacking in talent. I think both of those views are incorrect and not nuanced enough. Silicon Valley, China and India all went through a journey [with their digital e-commerce space]; now it’s the same in Southeast Asia. It’s at a point in that journey and there are certain strengths and weaknesses. There are certain things that still need to happen but some level of inflection point has been reached. If you see what's happening in Indonesia right now, with companies like Tokopedia and Go-Jek, there’s tremendous demand in the market. People are not just online, but they're transacting online, and with that, valuable companies can be created. So from that point of view, I’m very positive.
Q: Lizzie, you’ve had experiences both in Indonesia and in other parts of Southeast Asia. We often refer to Southeast Asia as a region but the markets are in fact quite different. How do you factor that in when doing your business planning and deciding where to invest in?
Lizzie [Executive Vice President, Lazada]:
That's a really important point. The markets are incredibly different and have very different life cycles. You have markets like Indonesia where the willingness to purchase online is actually much higher than in more developed markets like Malaysia, which has better internet access, more income, and more people with smartphones. We see very different behaviors that one wouldn't necessarily expect, so in terms of business planning, we have a very different business case for each country. A lot of it is just a function of how fast we think each market can grow and what kind of money we need to invest to get there. The hot market, as mentioned, is Indonesia so I think everyone's investing very heavily there at the moment, followed by Thailand. The Philippines is speeding up a lot, and then we have Vietnam and Malaysia. In terms of how much money we're investing in each of our companies, it will follow that order.
Q: Indonesia has been a hot market for several years now. Obviously we think about it as a big market with huge potential, not least of all due to the sheer number of people who live there. But it's also a market with a lot of difficulties, especially regarding regulatory issues and corruption. What are your considerations when you're looking at investing?
I think there are regulatory challenges in many markets, and when you invest in early stage businesses that disrupt other businesses, like we do, these problems will be even more prominent. We were one of the first investors not just in Google but also in Airbnb, where there have been a lot of regulatory issues. However, keep in mind that the first slide on an investor pitch deck is used to identify a problem. The more problems there are, the more there is to solve. In a very mature market in Europe or the US, where payment is easy, logistics are easy, there aren’t as many opportunities for start-ups to fix from the bottom up. So, it’s actually a positive thing.
That said, you have to think about the market timing. Your observation just now is very astute in terms of where the various countries in this region are. If we look at the Philippines, there are a lot of reasons to be excited but unfortunately, Filipinos hardly transact online. That means e-commerce is slower, logistics are slower, and payment is slower... so timing-wise, it’s not ideal. If Sequoia were a $30 million fund, you can make small bets and those can be 10X investments but that's still relatively small. We now invest out of a $900 million dollar fund, which means return expectations are higher and that we need to look at large markets, not just demographically, but vertical or horizontal-wise too.
Q: Lizzie, can you share a bit about HelloPay and what kind of problems it’s trying to address?
HelloPay is a digital payments business that is actually in the process of getting merged with Alipay. Basically it is designed as a funding layer that connects to all local payment options and is powered by a wallet. It’s an e-commerce platform, a digital media company, and is for anyone who needs to accept payments online. Consumers can use either a credit card and check out online using HelloPay, or they can go offline to a 7-11 and top up into the wallet or check out using pre-funded money.
HelloPay tries to address this problem of people not having credit cards or are not willing to use their credit cards, and the question of real-time payment. The Southeast Asian markets have bent over backwards trying to accommodate what we call “post-payment” options, i.e. cash on delivery, or OTC’s (post-purchase over-the-counter payments). What this means is that you buy something, within 24 hours you go to an ATM in Indonesia, type in a 17-digit number, make sure you have the amount exactly right. And you pray to God that the e-commerce company is able to reconcile that payment to your transaction. There are so many things that can go wrong... so HelloPay is designed to make digital payments easier.
One thing that we found in the payments business is that the regulatory hurdles in each of the markets are incredibly high. So while we would like to invest a lot and grow really quickly, and make sure that all the funding methods are attached to a wallet, we can't do that because we have to wait for the governing bodies to give their approvals.
One of the biggest things to consider in this market is that you need to adjust your timelines with a fair degree of buffer. You cannot rely on the Bank of Indonesia to get back to you with an e-money license within six months. They’ll tell you three months, then eight months, and it might be 10 months later, and you have to move forward with a joint venture with a local family with an existing e-money license. In certain industries, you are at the mercy of regulatory bodies.
Q: You recently received an investment from Alibaba. What do you think attracted Alibaba to invest, and how do you see the business growing from here on?
Alibaba very much sees themselves as a platform, and I think they were looking for someone within the region who could plug into that platform mentality. Us being largely a marketplace very much fits into that and our platform capabilities fit in nicely into how they view the digital ecosystem developing. E-commerce is the first and largest pillar with the highest average revenue per customer, and then they can go into other verticals of the digital life, be it digital media consumption or video streaming, etc. They view e-commerce as the point of entry and then built the platform up above that. That’s where Lazada makes sense because we’re an e-commerce platform.
To your previous point, Southeast Asia is incredibly complicated. Every country is very different, with its own requirements and [Alibaba] wanted to make a play in Southeast Asia as a whole, because the individual markets - perhaps with the exception of Indonesia - aren’t big enough to be that exciting to someone who's playing in China. So they wanted one management team, one platform, and one point of contact to address the entire region. I think that's what Lazada did - it reduced that complexity for them to address the entire Southeast Asia.
Q: Pieter, what is your perspective on investments by foreign companies, like Chinese investors, and how do you see that as different from the American investment that’s coming in?
First and foremost, it's awesome to see those types of investments coming into the region. The fact that Southeast Asia is now attracting that type of money is positive, whether it comes from the US or China.
What we see is China’s strategies are so much more aggressive. They come in not just to say “hey this is what we want from you” but “how can we make you and your business successful”. And they move so much faster. The US is still pretty dormant compared to China. One of the drivers behind the strategic interest for Tencent to lead the funding round for Practo, which is a company that we've been working on for a while, is that the China market itself is now more mature, so they're looking at the next venture; they're looking at India and Southeast Asia.
Capital investment is also coming from other parts of the world: Rakuten is running its investments from here and actively investing in Southeast Asia, as well as globally. Recruit is also investing in Southeast Asia and in India. Across the board, people are looking. Sequoia India also has funds investing in Southeast Asia.
Q: And what’s your take on the range of investments coming from across Southeast Asia to companies who are in existing verticals or going into new spaces?
For the longest time, people in the US looked at Asia [startups] as just clones. Now, the strongest product innovation in engineering still comes from the US but if you look at business model innovation, most of it comes from these parts of the world. Everyone in the US, including Facebook, is blatantly copying WeChat. Not that the technology is necessarily that different or innovative, but the business model and what they've done as a platform certainly is.
Some companies are pure clones, but we’d rather see them as “mutants.” If you look at Go-Jek, for example, many would say they’re just Uber for motorbikes. But when they launched their app, they launched immediately with four use cases, none of which the other guys have done before. They launched with transport, career, hyper-local food and hyper-local shopping. Each of those categories have created massive companies in China and India and Go-Jek was all of that in one app. Then they added three or four more, and then they launched payment, which has seen massive growth in the last month alone. So it's much more of a platform company where you start with a high-frequency use case - for WeChat it was messaging - and then add all these other services once they had demand liquidity. For Go-Jek, the liquidity on the demand side was the frequency of people taking rides, and right now, they're on 26% of all Android devices and 40% of all iOS devices. So that’s a “mutant”. We wouldn’t go for Grab or any of these guys that have the exact same model as Uber, for example, but these mutants are very interesting.
Q: As you look into investing in an up-and-coming company, perhaps reflecting on your experience as an angel investor in Pie, what role does marketing play in an early stage company?
At many start-ups, the focus is on growth. Some can achieve that growth really well and completely organically while spending very little on marketing, but those companies are far and few in between. If the product is amazing, then perhaps you can do without too much marketing expenditures, but very often it's not like that, so you need to balance organic and paid growth.
What's interesting with our portfolio is that we have several companies who, even when we tell them to spend more on growth, they are so scrappy that they struggle to spend. On the other end of the spectrum are folks who spend on marketing like crazy, and who need to spend smarter and be more disciplined. It's hard to find companies that can strike the balance. But marketing plays a very important role, specifically for high-growth companies. If you look at the P&L of these companies, the first line item is staff costs and the second is marketing costs. How can you help them be smarter with their marketing spend? Across the board, the level of sophistication [in marketing strategy] should go up.
Google: What is the best structure for marketing teams in expanding start-ups that ensure effectiveness and efficiency?
Separating scope and having focusses early on is very difficult at startups. On a marketing team, especially when you're hiring local talent that hasn't done performance marketing before, it's really important to to put people in the right places where they can focus on learning the tools. Start by creating a simple structure that can scale. First, start by having someone who runs online performance marketing first and then as you get bigger you can chart that out to managing various channels separately. Secondly, have a person that does offline/partnerships. It’s important to have someone focus on knowing all the key players in the ecosystem, be it a retailer or a bank, so you can align for campaigns. You can’t operate in a silo. I would start with performance marketing and partnerships, and then depending on your business, have someone focused on purely offline - but if it's a ecommerce start-up, that's probably not until later.
Q: How would you describe the state of talent in South East Asian markets?
It’s about how you think “big”. Having an Asia-play or global-play business idea that starts in Singapore is very different from the pitch decks that we’d see about businesses that are 100% focused on Singapore, which don’t really show the ability to think big.
What we started seeing in India a few years ago was that a lot of people were coming back from the US. If you look at the IITs in India, they’re second to none globally from an engineering capability point of view. People would go to the US and learn how to use these engineering skills at Amazon, Google or Facebook, high performing organizations, and afterwards come back to India. You see so many companies in India founded by ex-Google and ex-Amazon guys.
Here in Southeast Asia, they’re ex-Rocket guys. In general, there are a lot of folks who don’t have the guts to go from a big company, e.g. a consulting firm or a bank, and straight into a start-up. So you have consultants and bankers join Rocket, Uber, or Grab, and learn how to work in an environment that’s fast-paced, that’s about risk-taking. Then they go out on their own. Two out of three start-ups in Indonesia that we’ve invested in, the founders are Harvard Business School grads, so you see the international exposure being gained from both educational and professional experiences.
Q: How does Lazada approach marketing as a part of the mix and the P&L and what are you trying to achieve through marketing?
As an e-commerce platform, marketing is our single largest line item on the P&L. Performance marketing was how we scaled up, and the only marketing that we did in the first two years. Then from the second to third years, it was all about vouchers.
In the past year, we've been looking to diversify our marketing spend to other channels since we haven’t been seeing an increased return on our investment in the performance marketing space. Our view right now is that if we spend more on marketing, it wouldn’t mean very much. It's pretty saturated. So we optimize our marketing simply by customer acquisition costs. We have certain thresholds, and we'll spend until we get to the threshold that makes sense for our business, then we’ll slowly take the rest of our marketing budget and put it into other stuff. For instance, we launched our first big TV campaign in Indonesia about a year ago.
A local competitor, Tokopedia, was outspending us by about 2.5X on TV investments. You’re actually seeing a lot of e-commerce types of businesses spending outside of performance marketing. For the first three years, performance marketing was what everybody was doing, but it got to a point where we can't spend anymore without it making sense. I'm sure that equilibrium will change over time but that's where we are at at the moment.
Google: Pieter, when looking at evaluation and making decisions about what to invest in, Google famously started without any business model. There was no monetization model, and advertising only came a few years later. So now, 17 years later, when you guys look at these kind of farfetched ideas, how important is monetization?
I think that’s always a question in your mind, whether it can create value and become a valuable company. The question is when and how you see this happening. Twitter IPO’d with no revenue. Pinterest had no revenue for the longest time and no business model, but the sheer engagement and volume of usage was such that they could ultimately realize that they had an amazing insight into intent from people, and can start building a business. We invested in Carousell in Singapore. It was just before my time, but what I heard is that within 15 minutes of them pitching, we'd said, “Alright, we will invest”, purely because of engagement.
If you have 5% of Singaporeans using the app on a daily basis, a transaction every minute, and a hundred thousand items being added every week, you get liquidity of both demand and supply. So even for a company that is still not yet monetizing, you know that a strong platform is being created, and down the line, you’ll be able to monetize that. The question of when and how successfully you can do that remains to be seen. So do we think about monetization? Yes. But is it all about revenue from day one? No.
Google: What role does marketing play in driving awareness of and engagement with the products?
When people pitch, what we often see is that they just talk about how many downloads, how many customers acquired, or whatever one off on a certain date. They often fail to realize how important the rest is. Downloads is one thing, but your uninstall rate might be 95% in two days, so we look very strongly at retention rate and engagement rate. More focus is placed on how to drive those metrics.
You use marketing to get customers on the platform, but regarding how you use marketing to make people stay on the platform, you have to rely on third-parties, such as merchants, to make the platform succeed. Otherwise you’re just going back into the wild and acquiring new customers. We’re experimenting a lot with third-party seller marketing and brand marketing by merchants on the platform itself, and that’s starting to take off, but it’s still very early.
One thing to add is that, for example, with Carousell, they’ve integrated chat into the platform, and that’s been driving high engagement. Not just that, but it’s also building a community, which, in turn, is amazing at driving both growth and engagement. We have a marketplace startup for design goods in Taiwan which does offline events and include chat on the platform that supports a community around each of their product areas. That level of identification with a product or service versus a more transactional relationship where I simply buy something off a marketplace can be very powerful.
Google: Are there key areas of growth on the web that excites you more than others, for example gaming, fintech, messaging, etc.? Do you see some of these areas as more ready to take off than others?
Fintech or artificial intelligence are very generic terms. Every investor is looking at these. There’s a lot of stuff happening, most of which is hype, so the core of it is still finding who executes best. They often say that investing is about data. It’s not about data, or even insights, but rather about judgment. What do you see that others don’t?
Practo, for example, is the largest healthcare platform in India and is starting to do well in Southeast Asia. When we invested four to five years ago, many guys on our own investment committee thought it would never work. But one guy in the team had so much conviction, and now it’s a super valuable company. Even other investors often think that investment decision-making is about consensus. In the last year and a half, across 40-50 different investments, I don’t think I’ve ever seen consensus. It’s all about conviction. Imagine buying a 20% stake in a company that allows people to stay in your bedroom overnight. I’m sure most folks in the investment committee didn’t think it would be what Airbnb is today. Interestingly, you can still find entrepreneurs that are able to articulate gaps in the market and market inefficiencies. Find those, and solve a problem that’s large and unique. That’s the most important thing.