Interview with Dominic Mellor, SE Asian Venture Capitalist
I interviewed Dominic Mellor on January 8, 2023 in Phnom Penh, Cambodia. Dominic co-founded ADB Ventures, a venture capital arm of the Asian Development Bank.
Q: Describe for me generally what you do as a venture capitalist.
A: First, we have to make sure the owner wants to scale. Some owners do not want to give up control of their business. They'd rather hire family members or close friends and keep everything close and familiar. In order to scale, you've got to attract investment, and in order to attract investment, you've got to be willing to give up some percentage of ownership. Some people aren't willing to do that.
A lot of finance is just structuring things the right way. For example, corporate governance. Corporate governance can be a very sensitive subject, but if you want to raise more capital later, then you've got to manage the board and implement various processes promoting best practices in hiring and labor. Not every business wants to adopt those standards.
Take environmental standards or digitization of the business. Some businesses are more comfortable doing things manually, whether accounting, payments, etc. We can help them to digitize. Sometimes we partner with another entity to help them digitize, but we start with the owner's mindset: "Do you want to scale?" Then we sit down and draft a tailored plan on how to get there. The plan could involve access to technology, it could involve proper governance or something else entirely, so it's not specific to one company... it's not one-size-fits-all. We do provide capital, but often what's more useful is the package of other support to realize their growth ambitions.
A: I majored in mathematics and minored in theatre at Warwick University in England. I also have a degree in economics from Oxford University.
Q: You don't usually hear about someone studying both math and theatre. What was your favorite Shakespeare play?
A: [Chuckles] Romeo and Juliet, but I was not a theatre actor. I did impromptu performances and improvised skits, where you would take a word out of a hat and do a riff on it. It was about learning how to be spontaneous, think on your feet, and communicate publicly...
The reason I chose theatre is because I grew up in Hong Kong, where everyone cares about finance. [Editor's note: Dominic is Eurasian and calls himself a "third culture kid."] Growing up, everyone studied business. But when I was sixteen years old, I went back to the U.K. I'm from a small town in West England. No one there was talking about finance or economics. Everyone was doing English literature, social sciences... suddenly I went from mainstream to the outlier. One day, I was sitting in the canteen [aka cafeteria] alone at the end of the school day, and a friend came up to me and asked me, "What are you doing?" I told him, "I'm going back to my house," and he said, "Why don't you join me in my theatre club? It's starting in 30 minutes." I said, "Sure, why not?" I loved it very much and ended up doing that as my minor. The "soft skills" I learned have been very useful in my life and my work.
Q: How did you end up on a cacao farm in Papua New Guinea?
A: After I graduated in the 2000s, I did not do a "gap year" and instead worked for the central bank. I was interested in anthropology and different cultures, and when I saw a job opportunity to go to Papua New Guinea, which has hundreds of ethnic groups and even more languages, I applied. The programme was called the Overseas Development Institute Fellowship, which places young people in Africa and the Pacific Islands to build capacity. It was by chance that Papua New Guinea was assigned to me, and I ended up working for the central bank for two years. After that, I stayed on for another two and a half years to set up a cacao plantation with my friend, a local, with the central bank's involvement. We got a loan from the World Bank, and I put in some of my savings as well. [Editor's Note: Dominic was in his early 20s at the time.] I helped him on the business side, the financial side, trying to get export contracts, and so on. I wasn't so much involved in the fieldwork--I was focused on setting up the village cooperative and mobilizing farmers, while my friend was more working the soil.
Q: How did you gain the farmers' trust?
A: I was very close to someone [my business partner, Robert] who was a respected member of their community. Their communities tend to be quite small, so Robert had more to lose than me in terms of reputation.
Q: What is ADB Ventures?
A: We're the investment arm of the Asian Development Bank, and we specialize in climate change technology, i.e., anything that reduces carbon dioxide emissions. Agriculture is a big part of it because agriculture is a big part of carbon dioxide emissions, and people who work the soil are also vulnerable to changing weather patterns and other issues affecting harvests.
Q: Is it really true that cows are responsible for major carbon dioxide issues?
A: Methane is an issue when cows are involved, but any land development presents environmental issues because of fertilizer and water.
Q: What are you working on now?
A: This year, we're launching "Frontier," a VC fund specializing in smaller markets such as Cambodia, Laos, and Papua New Guinea. Smaller markets lack the competition present in larger markets, so there are huge opportunities for funds that can show a successful track record. Before ADB, I was in Vietnam for eight years working with startups through Mekong Business Initiative. MBI would match corporations wanting to innovate with startups.
A: Depends on what sector you're reviewing. At a high level, Vietnam has a larger market size, a fast-growing market--I think they recorded 9% growth last year, which is the highest in the region and higher than China--its value chain is integrated with China, so many Japanese, Korean, and other investors can diversify using a "China plus one" strategy... I don't like to generalize, but the Vietnamese are known as very entrepreneurial. Also, the government is stable, and some businesses like knowing they're going to be dealing with one government for a long time.
Q: So predictability, diversification, and political stability?
A: Yes.
Q: What's your favorite memory of Vietnam?
A: I have to say getting married to my wife, who's Vietnamese. My wife left Vietnam at fifteen to study in the U.K. When I met her, she'd been away from Vietnam almost ten years and was working in Singapore and U.K. She was getting tired of the mainstream corporate world and wanted to do something on the development side, something that could give back and contribute to Vietnam's growth. Someone connected her to me, thinking I might have some skills to offer, an introduction was made, and one thing led to another...
Q: What do you do directly for ADB Frontier?
A: We don’t typically engage directly with the farmer directly, it’s not our strength… the cost of training them, it’s time and capital intensive, so we tend to work with intermediaries. We invest in companies providing technology that can improve the entire industry or companies that add value through a cash crop. With cash crops, we look for crops that can be exported, whereas with domestic operations, we look to replace current imports. We mentioned cows earlier. Most dairy in Cambodia is imported. Meiji from Japan, from Thailand, Vietnam… Why not Cambodia? There are a few up and coming dairy farmers here, and they need support.
Q: What are your thoughts regarding import replacement within the context of food security?
A: Even though its own market is relatively small, a lot of corporates are coming into the market, including restaurants, hotels, and grocery stores. [Editor’s note: here we see a link between agribusiness and tourism, which isn’t immediately obvious to most tourists.] A lot of corporates are interested in buying local if they can guarantee quality and the integrity of their supply chain. Many corporates won’t openly admit it, but they are concerned about the true origin of their agricultural products. Buying domestic through easily audited certification programs is a clear advantage in terms of authenticity.
Also, the Chinese produce a lot of their own agricultural products in China, but increasingly, they’re looking abroad to diversify. There’s huge potential to export to them, particularly in the consumer organic space.
Q: You mentioned certifications and the authenticity of the supply chain. How do you guarantee those here in Cambodia?
A: I think technology is a part of that. Looking at Cambodia and Laos, they have introduced technology allowing them to trace and record data… how much feed is being provided to the animals, the feeding schedule… it’s IoT [Internet of Things], where they put a device on the animal/livestock and gather the data in real-time.
Q: What are the specific issues or hurdles in introducing these kinds of innovations within Cambodia’s supply chain?
A: If you’re sourcing from local farmers, they have very little incentive to change, or they’re already wedded to their way of doing it. The best way to change their behavior is to create incentives. We use the concept of “push.” You push through the value chain from the buyer. The buyer could be Starbucks, which creates a standard, and then sells based on the advertised standard to consumers willing to pay a premium. The ability to buy in bulk and also to pass along some of the premium collected to the farmer can incentivize changes at the operational level.
Q: So farming changes can be incentivized through the purchasing power of international corporations plus the end user’s desire for a certain kind of product?
A: Not only the premium, but also the fact that corporates can provide two to three year contracts that provide enough time for the farmer to implement upgrades or changes … guaranteed contracts. We can also help through the way the finance is structured. Often there’s a lag between the time the produce is harvested and the time of sale to the buyer. Some corporates are able to bridge that gap through advance payments. [Editor’s note: Dominic’s earlier comment about giving up control is relevant here. A corporate or outside investor is unlikely to provide advance payments unless s/he is a part-owner or a shareholder of the business receiving the advance. Interestingly, Dominic is describing a feature of sharia or Islamic finance.] There are now financing options, supply chain finance, where the buyer can pay in advance to the farmer, who then uses the capital to implement upgrades or processes meeting the buyer’s certification requirements.
Q: The IMF and World Bank have been criticized for coming into developing countries, including Indonesia, and implementing standards meant to stabilize markets but instead drive out local producers in favor of international or foreign ones. Do you have any thoughts on this issue?
A: Perhaps you are referring to when a market like Cambodia wants to export, the importing market often has measures to protect their internal players. Japan, for example, has measures protecting their rice farmers, including direct and indirect subsidies. It’s notoriously challenging to export into some of those markets.
Q: You’re talking about domestic entrenched interests using the political system to harm competition against foreign competitors.
A: Yes. We’ve spoken to grocery store chains here who also operate in other countries. They’ve told us if they can buy the right product here at the right quality, then they will do it. [However] Many businesses in Cambodia are family-owned, and they don’t always want to scale.
Q: Is that because of ASEAN and the ASEAN economic framework, or something else?
A: It’s a combination of, “There’s an existing ASEAN framework,” and also some countries have less protectionism and are more open. If you’re exporting to [developed] Japan or the EU, it might be more challenging than exporting to [developing] Malaysia. Basically, to make it worthwhile to export to a highly regulated country, you’ve got to reach critical mass first. But having said that, if you consider Laos, it has favorable free trade agreements with China in agriculture, so if you’re Laotian, it’s not easy, but it’s relatively easier to export to China than other markets. And China is a huge market.
Q: What are your thoughts on development finance’s ability to balance the interests of local farmers with multinationals?
A: I think--and I know it sounds cheesy--the ultimate client should be the end beneficiary, i.e., the people in poverty. The goal of developmental finance is to reduce poverty and raise the general welfare of the producing country, so if you’re putting the welfare of farmers first, every action one takes, whether policy, investment, or otherwise, helps meet that goal. Having said that, regarding MNCs [multinational corporations], it’s not a competition. In fact, MNCs can play a role in bringing the welfare of these farmers up [such as buying in bulk and paying a premium]. Money alone isn’t going to solve the problem. You have to consider the entire value chain. A product has to be processed, sold to retail, wholesale, etc. before it reaches the end consumer. Large MNCs–I mentioned Starbucks earlier–and supermarkets can play a role by buying local. Premiums paid by MNCs within domestic markets aren’t done out of benevolence, but a desire to strengthen the integrity of the supply chain and drive down costs. At the same time, MNCs have to be willing to invest and work with local SMEs [small to medium enterprises], and it takes time to grow to the point where they become a reliable producer.
Q: How long does it usually take?
A: It depends on the SME. Sometimes, it can be 1, 2, 3 years. You just need to prove yourself. Are you willing to put that company’s product on your shelves and test it, and then if the feedback is good, are you willing to take a little bit of risk in giving them a contract for the next 6 months, including an advance payment?
Q: Harvests are notorious for being unreliable in part because of climate change. Are inconsistent harvests a problem in building relationships with MNCs, or has technology helped mitigate risks to the point where a bad harvest is no longer a major issue for small farmers?
A: Well, it’s very specific to the cash crop. If a weather condition wipes out an entire year’s harvest, then that’s a major problem. You can’t completely mitigate such risks, but there are technologies helping to manage risk. Some technologies use satellite imagery to gather data on productivity and the soil, and that data can be used by banks to decide whether to lend. And if you work with a contractor that is multi-year, then you can tolerate one bad harvest, but the next year, maybe there’s a bumper crop, so it balances out.
As for the technology, a lot of it is robotics-based. There are robotics that can analyze the cash crop, the soil quality, the amount of water needed to optimize input… A lot of the technology already exists, but the issue for small farmers is the ability to pay for the technology. Is the price point reasonable? Can it be adapted and scaled and replicated? Though [high] prices limit options for smaller enterprises, compared to 5, 10 years ago, the cost of AI and machine learning has dropped dramatically. In the end, it’s about deployment and market risks. The market in Cambodia is relatively small, and technology companies aren’t going to rush in and adapt their tech to local farmers here. At the same time, a smaller market also means fewer competitors. If you’re a potential competitor, are you willing to jump into a smaller market like Cambodia, or are your accountants going to steer you towards a more predictable ROI?
Some of the technological shifts are more basic. For example, potatoes are a widely consumed staple here in Cambodia and worldwide, but there have been shortages, and the situation in Ukraine and Russia has reduced the supply of potatoes even more. One of the problems for the potato industry is that potatoes are very intensive in terms of land and water. Potatoes are also heavy, so the logistics of transport are expensive. To counter huge supply chain issues in the industry, we’re seeing a lot of companies growing in labs or a greenhouse environment.
Q: Is there a particular technology you’re excited about?
A: EarthSense. It produces a micro-robotic that goes under the canopy and uses sensors to automate a lot of the data analysis, including soil quality, disease monitoring, all in real time. It just makes the process a lot more efficient. Before everything would be done manually, or worse, you might not know until it’s too late. The key is that the price point now makes that kind of technology feasible for these [developing] markets.
Q: I know we’ve focused on agribusiness, but are there other areas you’re excited about as a venture capitalist in a developing country?
A: We’re agnostic in the sense that we’re open to supporting any industry. You never know what’s around the corner or what surprises there may be. Where we see potential, we try to invest. The complexity involves formulating an ESG analysis that accurately measures both environmental impact and environmental safeguards.
Apart from agriculture, the tourism supply chain is not just about food, it’s about waste management, training employees, maybe even light manufacturing [e.g., interior decor]. With respect to human resources, the hotel industry is huge in Cambodia, but there are issues with training workers. In some cases, the workers are training each other, so if there was an entity or platform that could train workers, it would be helpful.
Q: Tell me about your typical day. Do you go an office?
A: [Laughs uproariously] I’m one of the hardest people to find at ADB Ventures. I’m almost never in the office. I don’t really see the benefit of going to an office unless there are other people who are stimulating your mindset. At the moment, I’m building a team in Cambodia and Laos. That could involve meeting in a coffeeshop, being on a Zoom call, or meeting someone in-person. Not all of the good stuff is happening in Phnom Penh. Some of it is happening in Siem Riep or Battambang. I also meet other investors and discuss how they see the market. Occasionally, I might travel to other countries like Japan to raise funds.
Q: What’s the most fun part of your job?
A: Being able to work with entrepreneurs and help them. For example, take building a high quality team in a developing market. Where are you going to find a great team, especially if you can’t sell them based on salary? It’s a challenge, but it’s fun. Often the team could earn a lot more, but they’re out there getting their hands dirty and passionate about what they’re doing. You’re constantly working with highly energized people.
Q: Does Cambodia’s de facto USD peg make it harder or easier to do business here?
A: It’s a double-edged sword. At the current stage of Cambodia’s development, there are more pros than cons. The pro as an investor is that you’re eliminating exchange rate risk. If your company does well, you know you will do well, whereas if you invest in a Laotian company, even if it does well, you may not earn what you expected once you convert earnings into your own currency. On the other hand, there might be some disadvantages in terms of export. The USD is quite strong now, so other countries may benefit from their depreciating currencies whereas Cambodia is becoming comparatively more expensive.
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| From David P. Chandler's A History of Cambodia |
Q: What do you like most about Cambodia?
A: I’ve been coming back and forth here since 2015, and I really do love the people. Despite their difficult history, I like their attitude towards life. It’s very optimistic. Cambodia is also at the heart of the Mekong region, so it’s geographically integrated into the greater China market. Regionally, it has huge potential.
© Matthew Mehdi Rafat (2023)
Note: This interview has been edited for length and clarity. It is not a verbatim transcript.
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