2014 was probably the most eventful year for Asia’s startups yet, at least in terms of funding. Japan, and Softbank in particular, has invested massively outside of the domestic market. The US is putting serious money into India. We also saw massive funding rounds for Lazada (US$1.2 billion in valuation, with an estimated gross merchandize volume of US$270 million, posits Rebright’s founding partner Takeshi Ebihara), Tokopedia, SingPost, and GrabTaxi.

Why partnerships will make or break Asia’s startup scene

“We haven’t seen this kind of fundraising until 2014. It’s phenomenal progress,” says Ebihara in a panel discussion at the Asia Leader’s Summit, an exclusive conference for investors and startups. It’ll probably get crazier this year: just a few days ago Indonesian conglomerate Lippo Group announced it will pour US$500 million into its own massive ecommerce venture. Signs of a massive bubble beginning to pop? We’ll see.

These investments underscore a reality for startups and investors in Asia: partnerships play an outsized role for regional expansion. China and Japan aside (these are relatively homogenous markets), the rest of Asia consist of countries with different infrastructural problems and consumer behaviors, even within borders. Intuitively, companies already know this. Ebihara highlights the cross-border nature of these investments: China’s Alibaba invested in Singapore’s SingPost, Japan’s Softbank invested everywhere, and Singapore’s Temasek backed Indonesia’s Tokopedia.

For the tech industry here, mastering the art of the partnership will likely make or break a company’s ambitions.

Strategic investors a last resort?

The panelists, consisting of 500 Startups managing partner Khailee Ng, Jungle Ventures founding partner Amit Anand, SMDV partner Mario Suntanu, and Gobi Partners’ Kay-Mok Ku, were asked to share examples of partnerships that worked out, and those that didn’t.

Conventional wisdom says that strategic investors, in other words the big corporations, are usually the last resort for startups when it comes to fundraising. By and large, the panel agrees.

According to Khailee Ng, strategic investors sometimes drag their feet when dealmaking. “Founders can get distracted by hope and big promises. But the deal can get cut off, or the board doesn’t approve of it. It actually happens very often,” he adds. But while a bad strategic investor can make a startup less investible, he cites some good examples, including Thai ebook startup Ookbee and its investor Transcosmos.

When evaluating a partnership, it makes sense to look at several indicators. Speed of dealmaking is one. Strategic alignment is another – the goals of both parties must match. In ventures involving unproven business models, the mentalities of both partners matter too.

Mario Suntanu recalls ecommerce giant eBay’s endeavors into Indonesia as a demonstration of partnerships that failed to reach their full potential. It entered the country in 2013 through joint ventures with Telkom Indonesia, the largest telco in the country.

“The local partners weren’t strong in what they wanted to do anyway. The execution capability was lacking. You can build a team with high cost, but lack the agility and drive to navigate on an unproven model,” he says. “A bureaucratic partner with another bureaucrat won’t work. You need a corporation driven by a founder working with a founder-driven startup.”

Ng chimes in: “That’s why it makes sense to acquire startups.”

Kay-Mok Ku points out another factor to look out for when evaluating partnerships: each party should bring something different and complementary to the table. The Garena-Tencent partnership was like that. Garena, a games distributor in Southeast Asia, knew how to get games into the hands of gamers. Tencent, meanwhile, had the money and the League of Legends license that made Garena the dominant publisher in the region.

Partnerships come in all flavors

The discussion turns towards the mechanics of partnerships. Ebihara says that partnerships come in many forms: minority stake investments, mergers and acquisitions, joint ventures, and more. How can you pick the right form of partnerships?

Ku notes that while Chinese and Japanese companies may do well in their homogenous domestic markets, they would struggle if they go solo when expanding to Southeast Asia due to distribution challenges. He advocates that more companies should take up the Tencent-Garena model of finding distributors in each of the Southeast Asian markets.

Ng says that the strategic intent of the foreign company should be a core consideration. Is it looking to bolster existing revenues or find new income streams as its business erodes? Or does it just want to do market research?

Consider a firm with a low-risk character and wants to learn as much about new markets and verticals. Fund of funds investing would allow it to spread risk and learn a bit about what it’s getting into. It can then decide if it wants to commit more and put its reputation on the line through starting a new venture.

Often the decision making won’t involve picking one partnership approach and sticking to it. Amit Anand advocates trying everything. “Having just one strategy isn’t going to be enough. Invest in a few funds to look at what innovation is happening at the grassroots level. Create distribution partnerships. Keep an eye open for great teams you want to acquire. I would advice somebody to do everything,” he says.

Ng agrees, adding that SingTel Innov8, the venture capital arm of Singapore’s largest telco, has benefited from such an approach.

He also points out that 500 Startups operates in such a way that it caters to investors with lower risk appetites. It runs different funds catering to different markets, such as 500 Durians for Southeast Asia, 500 Kimchi for Korea, and the rumored 500 TukTuks for Thailand, which he could neither confirm nor deny. It invests in a wide spread of companies that meets its investment thesis.

“We’re more like an index fund. Our money is widely distributed, catering to investors who want distributed risk. We launched various funds catering to specific needs of limited partners.”

Hidden dynamics

While joint ventures often make sense when entering new markets, exceptions exist. Suntanu says chat app Line has managed to win markets like Taiwan and Thailand by setting up subsidiaries in those countries. Of course, Line relied on partners for its ecommerce initiatives, but it retained control and ownership of the product, which is difficult with joint ventures.

“Joint ventures are the hardest. If your partner is located in another country, you’ll barely see them and won’t really know what’s happening on the ground. Are you going to risk your brand doing something like that? Even if you find a good partner, stay away from 50-50 arrangements. Someone needs to call the shots and take responsibility,” says Suntanu.

For some firms, partnerships are a matter of life or death, especially if the they’re in sunset industries. Yet public-listed firms face huge challenges in facing down profit-seeking shareholders or departments while they bet on the future, says Ku. This is especially true of industries (like print media) where the shift to digital is glacial.

He adds: “For media companies who invest in digital, they don’t get the money back since online advertising revenue hasn’t caught up. It’s hard to create new businesses if the firm is all about profits and losses. The sales guys still wants to sell TV ads. Who would want to sell online ads?”

Given recent developments in the tech scene, the VC-startup dynamic is the most interesting of all. Supply of venture capital money is increasing at a faster clip than the number of quality startups, driving up valuations. Venture capitalists now need to work harder to differentiate themselves from competitors.

For Anand, a good portfolio is the best sales tactic to attract startups to him. “You have to hack yourself into the first few good deals, and the rest will follow,” he says.

Ng offers another approach. Since venture capitalists hunt in packs, you need to ingratiate yourself with the pack you want to associate with.

“Build a value proposition for the core investors. Koichi Saito of IMJ Investment Partners is a good example. He’s a hardworking son of a bitch. He’s a honey badger that gets shit done. That makes me want to work with him more,” says Ng.

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