Fresh on the heels of a $200 million round of fundraising, Tel Aviv’s Red Dot Capital is straying from its bread-and-butter focus on homegrown Israeli technology and security startups to find opportunity half a world away in Southeast Asia.
As Red Dot Managing Partner Yaniv Stern told Karen Webster in a recent interview, the venture capital firm’s new eastern outlook is all about post-pandemic recovery and growth.
“Asia is growing quite quickly, and I think that now, under COVID, we see a different trajectory,” Stern said. He added that Red Dot’s ties with Temasek, the Singaporean government’s investment fund, also gives the company unique access and insight on a range of regional businesses.
But Stern said the strategy shift isn’t just based on the need to fuel growth. While the United States will remain Red Dot’s largest market and focal point, looking east will help diversify revenue and risk.
“Fortunately for us, I think the winds are shifting in that direction [of Asia] for two reasons,” he said.
First, “when you look at the trajectory for recovery, something different is happening in Asia,” Stern said. He noted that the region’s relatively successful response to COVID-19 has been more disciplined.
The second catalyst has to do with improved Israeli diplomatic relations with Gulf Arab countries, which improves access to Asian emerging markets – something Stern said was completely unexpected.
“What we see right now with [Israel’s] new relations with the Emirates and with the Gulf countries and potentially other normalization is that it shortens the flight times to Asia,” he said. That makes a shift to an Asian focal point a lot more feasible for Red Dot.
And as far as dealing with China specifically, Stern said that while Israel has commercial relations with Asia’s economic superpower, most of Red Dot’s Asian investment has been elsewhere.
“We see the Chinese market as a big potential, but I think the majority of the business still happens with Japan and Southeast Asia and other areas where you see a lot of growth,” he said.
Planning for a Post-Pandemic World
Like many investors, Stern spends a lot of time thinking about what the post-COVID “normal” will look like, and how that will impact companies and industries.
For example, he said companies that are reliant upon generating leads through conferences and face-to-face meetings will have to make a much greater shift than their digitally native peers who were born and raised selling online.
At the same time, Stern said the pandemic’s turmoil has also revealed many surprising realizations.
For instance, he said that Red Dot “expected the airline industry to be completely dormant during this period. But when you think about it, [the pandemic] is a unique opportunity for them to actually upgrade their IT systems” – which they normally couldn’t do when operating at scale.
Stern added that for airlines used to spending millions of dollars a month on airplane leases, the opportunity to invest some of that money into systems that will help them for the next 20 or 30 years “may not be such a bad idea.”
Other strategies Red Dot is deploying are more straightforward, such as playing to a global uptick in digitalization and eCommerce via tech infrastructure and security investments.
“Cybersecurity has also become a very interesting area, because cybercrime has grown quite a bit,” Stern said.
For instance, Red Dot recently took a stake in EverC, which deals with fraud detection and compliance on the merchant side. “We think this is going to be an area of bigger focus, which until today has been neglected globally,” Stern said.
Red Dot also owns a stake in digital log analysis firm Coralogix, which Stern called “really cool and fast-growing,” while also offering significant cost-cutting and efficiency.
What’s Out of Favor
Naturally, Stern and Red Dot also have plenty of sectors and themes they’re avoiding right now.
Stern noted that not only does he look at growth differently in the COVID-19 era, but that the “growth bar” is a lot higher than it used to be.
“You try to understand if growth is really driven by COVID or if it’s more of a ‘real growth,’ where the company has hit the sweet spot rather than a knee-jerk reaction by the market one way or another,” Stern said.
But at a time when some pundits have said “flat is the new growth,” Stern said he’d be happy with that scenario if he already owned a business. However, if he was simply assessing it as an outsider, that’s a different story.
“I really cannot be 100 percent sure whether that flat growth is COVID-induced or not,” he said. “There are many companies that have used COVID as an excuse to cover for challenges they’ve had on other fronts.”
“Growth is an abused term,” Stern added. “Almost as much as disruption.”