Paul Santos, a co-founder and managing partner of Singapore-based Wavemaker Partners, is taking his firm’s fifth flagship fund to market with a target of USD 150m. The fund is anchored by returning investor International Finance Corporation (IFC). 

Q: What’s your view on the state of the Southeast Asia start-up space?

A: When interest rates went up, the venture tourists had to leave because Southeast Asia is not their core. A lot of the businesses that have been funded are very consumer, growth-oriented, unit economics-be-damned type of investments. Nobody is willing to fund those anymore. We’ve done a couple of hundred early-stage deals since 2012, and 90% of them are in enterprise, deep-tech, and sustainability, which wasn’t so popular. So for us, it’s been kind of the same, maybe a little bit better in the sense that there’s less noise in the market. Deal flow is good. Pricing is reasonable.

Q: Have you adjusted your approach in the current environment?

A: Not much. If you watch Game of Thrones, we joke that in the funding winter, we’re from Winterfell. It’s always been winter for our kinds of companies, so we’ve always needed to be that much better. Can a company get to USD 100m in real revenue? Can it generate USD 40m-USD 50m in free cash flow at scale? That’s what a unicorn looks like to us. One of our investment tenets is opportunity equals actual value less perceived value. We acknowledge that the perceived value will be low, but if we can prove its actual value, that’s alpha. If you invest in what everybody else is investing in because it’s a popular theme, that’s beta.

Q: How are you differentiating yourself?

A: You have to start with an industry or technology that not too many people have. If everybody is saying the same thing, that’s not really an insight. That’s why people ask, what important truth do you believe that few people agree with you on? Those are the secrets. This is where the valuable companies are. We poke fun at our industry because today everyone is an AI [artificial intelligence] expert. Last week, they were web3 experts. Two weeks ago, they were fintech experts and three weeks before that, e-commerce. It’s the same people. They picked up some jargon, but what have they done?

Q: People say that about sustainability too…

A: Exactly. We define sustainability as the UN sustainable development goals, mostly No. 8, decent work and economic growth, which is SMEs [small and medium-sized enterprises], and No. 9, industry innovation and infrastructure, which is large enterprises and deep-tech. The 20%-25% of our portfolio that doesn’t qualify is just getting consumers to consume more. You can put lipstick on a pig but getting consumers to consume more than they need is not exactly sustainable. For Wavemaker Impact [USD 60m, 2021 vintage], we define a climate unicorn as generating USD 100m in revenue and abating 100m tonnes of carbon or more. You cannot just adhere to some standard and say you’re green. You have to measure it.

Q: What are you hearing from LPs in general?

A: When you ask who’s willing to take emerging market risk and who’s willing to take early-stage venture risk, and you add them together, it’s a perfect storm. People got risk-off with the interest rate hikes, especially in the US. That said, the overall economy in Southeast Asia is still going really well, so it’s fertile ground to build companies. Interest rates have begun to decrease so the risk is coming back on. For us, it’s easier to talk to family offices first, and institutions second because they will have different time horizons, risk appetite, strategic considerations, or just the interest of the principals. A lot of institutions held a lot of China, so they’re saying I’m happy with what I already have in Asia, I need to rebalance, or I’m quitting cold turkey.

Q: Have you had any LPs quitting Asia cold turkey?

A: All my major LPs are back. It’s the smaller family offices and high net worth individuals (HNWIs) that are more assessing when to go. For now, everyone continues to say nice things and preserve optionality until the final close, so I’ll know in January. I haven’t met anyone who said they’re leaving Asia, but if they’re talking to me, it means they still see Asia as the global growth engine. If you look at the macro and take the timing away, we don’t know when it will be up and down, but it will be long-term up. How you want to play that long-term depends on your strategy.

Q: What’s the outlook for exits?

A: Our first attempt at a real fund was Fund II [USD 66m], which is a 2016 vintage. So now we’re on year eight, and we’re early stage, so we need the full 10-12 years for our biggest hits. When LPs tease me about distributions, I feel like I’m a kid in the first or second year of college, and I’m being told I’m stupid because I haven’t graduated yet. The biggest companies take time. Right now, I’m focused on our fund drivers and telling LPs to give me two to four years. Not a lot of money was put into these companies, so an exit in the USD 500m to USD 1bn range will really move the needle.

Q: What have you been able to point to lately?

A: One of our deep-tech companies is US-based Serve Robotics, which does autonomous food delivery. They got hit in terms of the funding winter, but they had a lot of corporate interest and went public on NASDAQ [in April] as a very small cap. The fear is that being small cap on NASDAQ is a disaster because you’ll never be able to sell, but sometimes it’s better to be lucky and good. Nvidia invested in the stock [in July], and it ran up. We made 2x our money, 30% IRR, and still have some shares. That’s a Fund IV company, our 2021 vintage [USD 136m], which is probably the worst vintage for many of my peers. So, stuff like that gives a little DPI [distributions to paid-in]. It’s not the biggest, but it gives LPs hope.

Q: Regional IPOs have been disappointing for start-ups. How can that turn around?

A: You need good companies, developmental capital, probably from Singapore, interested small-cap and mid-cap investors, and people with research capability to create insights saying, “This is very different from what you might expect in the West but it doesn’t mean it’s less valuable. Small can be beautiful.” You need a handful, call it four, companies focused on emerging market innovation and sustainability – where Singapore could lead the world – to succeed and get the wheels rolling.

Q: One homerun won’t do it. You need several to establish emerging markets…

A: Exactly. The question is can it work for companies with market capitalisations of USD 300 to USD 3bn or USD 500m to USD 5bn, because when GPs raise bigger and bigger funds, it’s an arms race. If you want alpha, this is the way to get it. People get too lazy and just want the big ones. Fine, but anything of significant long-term value has to be difficult. I like to remind people that the market cap of Amazon when it listed was USD 400m. You have to start somewhere.

Q: Will you encourage your portfolio companies to list regionally?

A: My only request is that they be serious about being IPO-ready by 2026 and meet with me once a month to talk about it. The more options you create, the better your chances of finding an outcome. M&A is always an option. Is it best to list in a local market because they understand you better? Is it better to list in Singapore, Australia, Japan, or London? We have to recognise that the stuff we come up with doesn’t look like the stuff that’s promoted in Silicon Valley, and that’s okay. If we do the hard work of educating people and actually build a real business, somebody will want it. We just need to create options for ourselves.