For this bonus episode, we have Jixun Foo, managing partner of GGV Capital. Jixun recently led GGV’s investment in Telio’s Series A.
Jixun shared with us why he chose to invest in the B2B eCommerce model vs B2C, his advice for founders who are solving the fragmentation of supply chain in different markets, the metrics he tracks for startups in that space and his outlook for Vietnam as a startup ecosystem.
Telio is essentially solving the fragmentation and inefficiency in Vietnam’s retail economy. The same problem was solved by Alibaba in a slightly different way. The end customers of Telio are small retailers, the mom and pop shops. Why did you choose this model over the other b2c ecommerce startups in Vietnam?
One significant difference Southeast Asia market, in comparison to China, is the fragmentation of the market with 10 different countries. Another factor is the infrastructure readiness, the logistic infrastructure, the roads are not as developed as China. The whole payment infrastructure, how merchants get paid is also not as developed. 80% of the eCommerce in Southeast Asia is still cash on delivery. That in itself is a problem because when the infrastructure is not ready, last mile delivery is very expensive, so is the cost of delivery and returns.
For China’s eCommerce, there’s a 10 to 20% return rate. And that requires infrastructure to support the returns of goods. For mom and pops shops, the so-called provision shops, small retailers in the market, they serve the purpose beyond selling things. They serve a community, and therein lies a trust element, a credit element. We believe that powering the mom and pop shops is a very good way of solving their supply chain problems. Through the mom and pop shops to better serve the end consumers, because the community trust and the community effect is already available.
The narrative feels similar to our other portfolio Udaan, which is an Indian company that’s solving the same problem. Yet if you look at the size of the economy for Vietnam and India, Vietnam is actually significantly smaller. Can you share what gives you the confidence to go in investing in the equivalent of that for the lack of a better words for Vietnam?
The Vietnam market is the size of one province in China, Henan Province, with close to 100 million people. It’s not a small market. It’s sizable enough. It’s small relative to China and India. But that means Telio could go deep.
Telio is solving the B2B supply chain problem for the small retailers. They could also help to transform these small retailers and businesses to do more stuff over time, including powering their front to acquire users, and later on potentially even providing them with the right form of financing. When the market is smaller, what makes sense is to go deeper and try to provide more value to the whole ecosystem, the retail ecosystem in Vietnam. One thing India and Vietnam have in common is that the cost of delivery and the cost of last mile is still very high. And as a result, your cost of last mile delivery as a ratio to the average order value may not make much sense. So, going through these mom and pop shops and small retailers and not having to pay for the last mile to us makes a lot of sense. It will help generate better value and create better unit economies for the platforms.
The valuation of the B2B eCommerce companies can be quite high given the potential providing financial services to the small business owners. And as an investor, you must have heard the pitch over and over again. How do you know that a startup has what it takes to realize that potential versus they’re just telling a story to the investors?
I think the potential is always there. To execute on that potential, however, takes the right talent, the right people, the right sort of licenses depending on the jurisdiction you are in. FinTech is not a given, just a potential. Whether you can realize that potential lies in your ability to serve the small retailers. You need to serve them well and capture as much wallet share as possible, which is the percentage of purchases of their supplies done through the platform versus their traditional sources. If you can support them to build up their business and help them grow their business and become more profitable, they will stick with you over time. What you capture in the process is data. Only when you understand their business well enough, how they have done in their business, you will be able to assess that credit worthiness far better than many other independent financial services or institution.
The idea of having data as the backend and output of this service will help translate into credit understanding, and then the potential for providing financial services. That’s a step by step process. The first order is you can serve these retailers well, and they are willing to run their business on your platform. That’s the first thing. And if you cannot serve them well, and they don’t run their business on a continuous basis on your platform, then it’s very hard for you to capture the right amount of data, it’s very hard for you to fully assess their credit worthiness, that’s the prerequisite to financial services.
For founders who are trying to collapse the supply chain in other industries, how would you suggest them to go about one acquiring new users, two building a network of suppliers?
These users are essentially merchants. There are two different types of user acquisition approaches. We invested in Udaan, Khatabook and now Telio. All three of them follow a common thesis, which is to power the small retailers. Having said that, Udaan and Khatabook are different. Udaan is a B2B marketplace model, similar to Telio. Khatabook is a light bookkeeping application for the small retailers. For light product like Khatabook, the user acquisition is more driven by online and through referral. The marketing approach or the user acquisition approach is largely through referral incentives in online channels. So that’s the for light product.
For the Udaan and Telio model, given the complexity of the product, the conversion you need to get them to use your product, or be on your marketplace, you probably need ground troops in the forms of salesforce and business development to go acquire these users.
Similarly, for supply chain you will need a separate team to cover that. This essentially is a fairly labor-intensive model, as we have seen that movie in Meicai and Full Truck Alliance. What you really want to do is to drive the adoption and retention as high as possible with the sales force. And over time, they go on a more maintenance mode. This is going to be labor intensive model initially. Fortunately, the cost of labor is still low in Southeast Asia and India.
You just mentioned the last mile cost of fulfillment is still very high for markets like Vietnam and India. Can you name a few other metrics you look at when you know talking to companies similar to Telio or Udaan?
When I say the last mile delivery cost is high. It is relative to the average order value. If you look at this is from a macro level, China’s logistics as a component of a GDP is about 15%; the US is less than 10%; Indonesia is around 25%. I don’t have the number for Vietnam. But the point here is the cost is relative to your spending power or average order value. When the relative cost is high, you end up squeezing out the margin.
So other metrics that I look at are user acquisition costs and lifetime value of your users. In that sense, I look at the unit economics of your business, how much does it take to acquire one customer or one user. And you have to factor in all costs, including marketing, salesforce, and add that to your user acquisition cost at a per unit level, meaning per merchant, or per user. On the other end of the equation is the lifetime value, how much value would this merchant or this user create for you in terms of gross profit over time. There are users who come one time and gone. So, there’s a retention factor. When customers continue to use your product and generate profit for you, the cumulative of that number is what we call lifetime value. The lifetime value should be higher than your user acquisition costs. If that equation is positive, that’s a good business. If that equation is negative, that’s a bad business. So that’s how I would simply look at it.
Now obviously, there are cases where the equation is negative initially, but it turns positive over time, or the trend lines towards positive so that’s a bet, right. So, we do look at these numbers and we look at the trend behind Those numbers as well.
Telio is GGV’s first investment in Vietnam. Are you looking to do more in this market? What about the market that excites you? And what are your concerns?
Yeah, we are excited about it. We have this big thesis around the next billion users. We have seen that movie in China and the US, similar transformation will happen because mobile internet is transforming the way people consume content, merchandise and even pay for services. So that’s a huge migration that we are seeing. Southeast Asia and India have a combined population of 2 billion. Big part of that population is going to convert into internet users. So that’s the exciting part.
Now obviously these markets have its own challenges. There are various frictions with fragmentation of the markets, the logistic infrastructure which I talked about earlier, all these are frictions in the market. Payment infrastructure is still underdeveloped. These are going to limit the speed of adoption. This is where we watch for at a macro level, how governments are shaping the infrastructure and minimizing the friction over time. If they do more of that, we will be even more excited.
Overall, we probably need more engineer talent in Southeast Asia, but Vietnam has a great engineering talent base. There’s no lack of entrepreneurial talent here. And that gets us excited to spend more time and interest in Vietnam.