Investing in Cambodia’s future: when startups meet angel investors

Cambodia’s startup scene receives a promising boost as more angel investors look to fund the nation’s growing army of innovative entrepreneurs.
Traffic on a street in central Phnom Penh on November 10, 2021. Picture: stringer
Traffic on a street in central Phnom Penh on November 10, 2021. Picture: stringer
“If you’re thinking about starting a startup, now is the golden age. Old people cannot tell you how to build an app. But you can tell them,” Bora Kem, a partner at Mekong Strategic Partners (MSP), said at a crowded tech event in 2017 in Phnom Penh.

As digital innovation is a catalyst to drive the Cambodian economy, startups are engines of growth. There are more than 300 technology startups at various stages operating nationwide. Fintech, digital media, e-commerce and logistics presently dominate the startup scene.

Seed funding for Cambodia’s early-stage startups

All tech companies have to start somewhere, either from home offices or co-working spaces. Besides family, friends and commercial banks, an Angel Investor Network (AIN) plays a pivotal role in the startup ecosystem and the digital economy as a whole as it increases the survival rate from the “valley of death” of startups.

Before investing in startups, investors usually look into “the team, a business that is scalable, large growing markets and traction.”

“But a particular startup may fail for any number of reasons, and the time it takes to register a business is probably relatively unimportant – a startup will more likely fail because they misunderstood the market, can't find staff or appropriate finance etc. In some cases, simple bad luck,” David Totten, Managing Director at Emerging Markets Consulting (EMC), told Kiripost via email.

“Streamlined business registration is one of a number of things the government can do to remove barriers to entrepreneurs and encourage more business formation.”

By facilitating early-stage deals, AIN develops the potential of fearless founders and provides mentorship to the entrepreneurial ecosystem.

“The challenge in Cambodia (and elsewhere) to strong angel investing network, has not been lack of capital per se – after there are many wealthy individuals who could afford $10K, $50K, $100K,” wrote David Totten.

He added that “the bigger problem has been lack of familiarity with ‘the business of angel investing’, and the relative ease with which a potential angel investor, can generate big returns in the real estate sector. Simply put, a wealthy investor is much more comfortable investing $100K in real estate than $10K in a startup. Another factor might have been that there have been too few startups and therefore difficult for an angel to diversify.”

For Cambodia’s growth stage startups, it’s another story. Founders may find it easier to get funding for scaling and expansion from venture capital firms than when they began building their market fit products.

Yet, a big challenge facing early-stage startups is getting seed capital. Like Myanmar, which is still in the emerging stage, Cambodia-based AINs play a minor yet pivotal role in seed funding for early-stage startups. Some informal angel investors prefer to invest in new startups based on their personal contacts.

From the investor’s point of view, investing in early startups is risky and challenging as Bora said. “Investing in startups is very different from other asset classes, like public equity, bonds and real estate given the relative stages. What makes it challenging is that early-stage startups are continually refining their product market fit, building their teams, face competition – under limited resource and cash runway. Practically these are the main risks – not so much administrative items like business registration etc.”

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On the one hand, with early investment, startups can validate a business model and accelerate development. On the other hand, for founders to select the right angel investor is vital. Angel investors become partial owners of a startup business and receive a return on equity if they succeed.

Echoing Bora’s claim, David also believes that “investing in startups will always be more risky than other forms of investment. Aside from exposure to business environment in general, a startup has to manage many other challenges with limited resources – market, product, staffing, financing etc”.

Bora recently told Kiripost via email that

“in many ways, building a start-up now is different than what it was in 2017, but I still believe the opportunity is there for entrepreneurs to launch a successful tech start up”.

He added, “While you see a few leading players in e-commerce, payments, fintech and transport, I cannot say we have an undisputed dominant tech company yet – and that is still the opportunity that is up for grab.”

The MSP firm described in a 2019 ‘Startup Kingdom: Cambodia’s Vibrant Tech Startups Ecosystem’ insight report that, “Increasing local interest in startup investment is stimulating the establishment of Cambodian-owned venture capital and considerably more angel investments. Between 2015 to 2018, the number of publicly-disclosed startup investments doubled to over 10, as well as increased diversity of funding sources.”

Headquartered in Cambodia’s Phnom Penh, MSP also operates in Thailand, Laos, and Myanmar.

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The rise of Cambodia’s angel investor networks is just the beginning

Since 2013, Cambodia Investor Club (CIC) has provided equity and debt financing to small business enterprises. But the local investment club doesn’t invest in startups. As “nine out of 10 startups fail,” the most popular statistic in startup investment, traditional investment management companies see high risks for its members to invest in new startups.

But the past years have seen successes of home-grown startups that have moved on to raise Series A funds from international venture capital firms. For example, Agribuddy, an agritech startup, raised an undisclosed amount of Series A from FORTE Insurance and six other investors, reported Crunchbase.

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Cambodia’s first formal angel investor network

The lack of investing in startups in Cambodia prompted the first formal angel investor network to form. In 2020, CIC launched Cambodian Angel Investors Network (CAIN), an initiative for some of its CIC members to provide early seed funding to new startups.

Early this year, the first Cambodian angel investor network announced its latest CAIN Fund Syndicates of $5 million to invest in emerging, potential startups by also collaborating with Techo Startup Center and Global Entrepreneurial Network.

“CAIN is a great example of how to address these issues – educating themselves in the ‘business of angel investing’ and crowding in more investors and startups to spread risk. The team behind CAIN has an exceptional track record, and I am sure they will be successful,” said EMC’s David, who has led strategic consulting work in both Cambodia and Laos for more than 10 years.

Not unique to Cambodia, experience in the lower Mekong countries “demonstrates this takes a long time to develop a robust angel investing scene”.

Open to all startups in any sectors, founders can pitch and raise funds of $10,000 to $250,000 from CAIN. The AIN will also mentor startup teams on strategy and growth.

In addition to funding, funded startups will go through the CIC’s business accelerator BIO program for access to capacity improvement, mentorship, consultation, and business opportunities. As most emerging entrepreneurs lack financial skills, the six-month BIO program is not just a necessity but ideal for most startup founders.

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The first startup funded early this year by CAIN is zoomsdesign, a digital platform for graphic and advertising design. Founded by a team of experienced and skilled digital designers, its business model is based on monthly subscriptions from those who need outsourced graphic and advertising design work, which is a growing demand among small and medium businesses.

Investing in a startup can happen through either the network’s individuals or syndicated investment, confirmed San Laty, head of business strategy at CAIN.

When operating as syndicate, AINs collects a fixed annual sum from all investor members that is pooled and deployed or deals selected by the network’s investment committee.

In 2010, modeled after Silicon Valley’s Band of Angels, Singapore’s Business Angel Network of Southeast Asia (BANSEA) became the first formal angel investment network in the region. The tech innovation hub also leads the way with more active AINs than any other ASEAN countries.

Popularizing the concept of startup angel investment network

Back in 2016, Mekong Angel Investment Network (MAIN), a group of international, seasoned angel investors landed in Phnom Penh, one of several cities in the region they visited.

A startup pitching session at a co-working space in Phnom Penh (photo: Tharum)
A startup pitching session at a co-working space in Phnom Penh (photo: Tharum)

The regional AIN was part of the joint Mekong Business Initiative (MBI), launched by Asian Development Bank (ADB) and the Australian Government’s Department of Foreign Affairs and Trade (DFAT), from 2015 to 2020, with a total investment fund of $12.3 million.

The early days of the conceived angel investment concept began as “an angel investor in Phnom Penh commented that MAIN helped business people like himself, investors, and managers of larger enterprises to understand the concept of angels. To date, former participants of MAIN who are local angel investors are planning to collaborate to look for startups to fund, independent of MBI,” said MBI in its 2017 report.

MBI also promoted entrepreneurship in ASEAN economies through its accelerator program that connects Agritech, Cleantech, and Fintech startups with corporates to pilot technology solutions.

Corco Angel

Formed by a dozen of Cambodian caliber business-people, Corco Angel (named after Cambodian national soup with any meat of choice and a variety of more or less vegetables), is an informal AIN established as a chapter of MAIN.

In “The Emergence of Angel Investment Networks in Southeast Asia,” the report said Corco “comprises 10 angel investors and operates in a semi-informal structure. It has made fewer investments than its total number of members combined to date, though exact figures were not available.”

Recommended in this Sasaka Peace Foundation’s country report, “Incubate technology-led startups focusing on solutions for more traditional sectors that novice angel investors have business interests and expertise in, to increase their willingness to participate and mentor actively.”

Cambodia Internet Startup Association

In 2022, vibrant Phnom Penh also welcomed Cambodia Internet Startup Association (CISA), the first Cambodia-based community of Chinese tech investors. Strategically, the association’s purpose is to connect Cambodian startups with Venture Capital Firms in China and Singapore.

Mak Chamroeun, chairman of Agribee, an agritech value chain, who was present at the CISA launch this month, told Kiripost the challenges facing early startups are

“how to find right investor to trust you even the business project is not clear. At early stage, the investor needs to trust the founder and the team more than the business.”

"CISA will help to build the bridge for statups to connect with the potential Chinese investors in Cambodia," said Mak Chamroeun.
"CISA will help to build the bridge for statups to connect with the potential Chinese investors in Cambodia," said Mak Chamroeun.

Other than angel investors, the Ministry of Economy and Finance’s Khmer Enterprise and Smart Axiata are the leading the investment in startups in Cambodia. Seed funding for Cambodian startups is one of the core programs in the government’s Entrepreneurship Development Fund (EDF), a public trust fund of Ministry of Economy and Finance.

Smart Axiata Digital Innovation Fund (SADIF), a venture capital fund managed by MSP’s Bora, aims to transform the digital ecosystem. Current SADIF’s portfolio includes Morakot Technology, Joonaak Delivery, Nham24, GoGames, Sala Tech, Agribuddy, Banhji, and DRVR among others.

ID Investors Association

In early 2022, a new addition to the Cambodian investment community is Innovation & Development Investors Association. Its investment arm ID Capital PLC focuses on Cambodia’s three backbone sectors, real estates, services, and agriculture.

When startups meet angel investors

A 2021 Credit Suisse’s research, “Connecting the Phnom Penh entrepreneurial ecosystem,” report described the startup scene as “nascent and yet it has strong potential, given the aspirations of the younger generation and the significant efforts being made by all the stakeholders involved in building the ecosystem.”

The 38-page findings, conducted by Swisscontact and Impact Hub Phnom Penh, also called for “support for angel investors and angel investor networks is being prioritized, as Cambodia now has an emerging class of local, high-net-worth individuals who could, with the right training and incentives, evolve into an important group of investors.”

Delivery worker brings food to customers in Phnom Penh on November 4, 2021. Picture: stringer
Delivery worker brings food to customers in Phnom Penh on November 4, 2021. Picture: stringer

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The global startup economy remains large, creating nearly $3 trillion in value, said research firm Startup Genome in its 2021 State of the Global Startup Economy. While there is no estimated value for the Cambodian startup ecosystem yet (or it remains small), the potential of going global, if not regional, and how it will spur economy growth is like to kill two birds with one stone.

To attract more early investments from AIN, Bora advised,

“From an investment perspective, I think achieving a few successful exits for investors and raising the profile of Cambodian companies would do a lot to attract more capital and provide further interests for talent to be in Cambodia.”

Foreign direct investment in Cambodia

A view of Cambodia's Phnom Penh by Bun Tharum
A view of Cambodia's Phnom Penh by Bun Tharum

Cambodia’s open investment environment for foreign investors is encouraging as the nation allows 100% foreign ownership in most sectors.

Data from the Council for the Development of Cambodia (CDC) said in 2021 Cambodia attracted fixed-asset investments of $4.35 billion.

There are four trends that have shaped the Cambodian economy. Foreign investment trend by sector, tourism, energy, industry, and services top the list from 2016 to 2020, said a report from Ministry of Foreign Affairs and International Cooperation. Other stimulus growth factors are access to the European Union and United States’ markets and the flow of international development assistance.

Between 1995 and 2018, pre-pandemic period, Cambodia was one of the world’s fastest-growing economies with its average growth rate of 7.7%.

However, “Cambodia’s growth slowdown in 2020 due to the Covid-19 pandemic was among the most pronounced in the East Asia region. Growth fell by an estimated 10.1 percentage points from its pre-pandemic average growth rate,” reported the World Bank’s main findings of the Cambodia Country Economic Memorandum (CEM).

The CEM’s in-depth analysis, though, advised “Harnessing domestic investment can help finance the next phase of growth.” It also urged that “An ambitious reform agenda is needed—one that focuses on improving capabilities, strengthening regulations, and investing in infrastructure.”

Investment laws to make Cambodia more competitive and attract more investors

Promulgated in late 2021, the New Law on Investment (“New Investment Law”) provides a comprehensive, transparent and predictable legal framework to attract both domestic and foreign investment.

The new legal framework comes with “an important incentive scheme for 19 investment sectors and activities, including investment in digital infrastructure, environmental management and protection, energy efficiency, tourism, training and upskilling, logistics, research and development, infrastructure, and many others,” according to a Special Briefing on Law on Investment published by the CDC in cooperation with European Chamber of Commerce in Cambodia.

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