Is an IPO just a fundraising event for Southeast Asian startups?
Founders need to understand the exit landscape from the perspective of financial investors, i.e., Venture Capital (VC) or Private Equity (PE) Fund. Recently, Garena, SEA’s most valuable tech startup, was reported to appoint Goldman Sachs for a US$ 1billion IPO in the US, the largest ever IPO ever from a SEA-based tech startup.
SEA vs Global Tech Public Market
According to the TechInAsia, there have only been 13 tech IPOs (consumer facing, web 2.0 type) since 2001 from SEA startups. However, these are all mainly bootstrapped other than Migme, which unfortunately has been facing much criticism from the media so far for its poor performance. In other words, there haven’t been any home run style exits for financial investors so far in the region. In most cases, IPO in SEA is just a fundraising event.
Snapshot from “State of SEA Technology Ecosystem Scene”
Snapshot from “EY Global IPO Trend 2016“
As shown above, it has been challenging for SEA startups in the Technology, Media and Telecommunications (TMT) sector to raise funds. A report by Deloitte showed that the TMT sector is ranked second lowest in both deal value (US$371M) and IPO count (29) from 2014 to 2016 in the region. This is in contrast with how TMT performed globally in comparison to its peers in other sectors in 2016. On the other hand, according to EY, tech IPO scored 185 deals (US$12.7B) against 171 deals (US$18.4B) in Industrials and 132 deals (US$13.5B) in Healthcare. This is a very telling sign SEA investors have considerably less appetite for the technology businesses in comparison to their European and American counterparts.
Therefore, a huge tech IPO is unlikely to happen in the near term as investors’ confidence in the tech business is still relatively low compared to more traditional sectors such as Real Estate and Energy & Resources. As Vincent Lauria, a managing partner at Golden Gate Ventures, eloquently described in the Q1 2016 Bamboo Report:
“In the US, a successful exit involves going public. The financial returns generated from listing on NASDAQ or the LSE usually mean that both investors and entrepreneurs alike have generated a pretty healthy return on their investment. In SEA, it’s the opposite: A trade sale will often result in larger financial returns than going public, especially if the acquirer has a strong strategic interest in the region.”
However, it’s possible for things to change as tech private market continue to prove its worth.
A flourishing private tech market in SEA
Rather than taking the IPO route, SEA tech startups have been to raise funds in the private market more aggressively. In 2016 alone, we saw SEA tech startups cumulatively raised an impressive US$2.2 billion in private funding, with a staggering compounded annual growth rate (CAGR) of 58 per cent from 2013 as outlined in the State of SEA Technology Ecosystem.
It is worth noting that this happens while the performance of SEA stock exchange has been low, moderate at best with less than 10 per cent CAGR in Thailand, Philippines and Indonesia and negative growth for Singapore and Malaysia. Grab, Go-Jek, and Garena had set the scene for the private tech market in 2016. As these grown-up class of SEA tech companies come of age, they will play a larger role in the economy. Investors in SEA need to recognise tech investment is a worthwhile risk – it takes a precedent to set the narrative and build investors’ confidence. At the moment, Garena is leading the pack with their potential IPO in the US.
A company, once funded, is expected to go into a liquidity event, a.k.a. exit in the future. With an ever-increasing sum of private funding going into the SEA Tech Scene, financial investors’ exit expectations will be higher. Therefore, before founders start their fundraising round, they will need to have a game plan in place to understand how the business is going to generate financial return for the investors in the future. Which liquidity event will take place? An Initial Public Offering (IPO), Mergers & Acquisition (M&A), or will they stay as a profitable private company?
Swing for homerun
An IPO is essentially the first sale of shares to public investors by a previously private company. It is a double-edged sword. The advantages include opening the business to a bigger and more diverse pool of capital, triggering a liquidity event that allows the existing investor to cash out (in the VC/PE fashion) and generating publicity. On the flipside, it involves pre-IPO disclosure/reporting requirement pre-IPO, post-IPO compliance cost (investor relations and financial reporting etc), and a constant battle to align shareholder-founder incentives (short term profitability or long term strategic growth).
Where should you launch your IPO? In the foreseeable future, SEA stock exchanges are not the ideal destinations for a home-run exit judging from their development in 2016. However, that should not stop you from planning ahead. Founders need to understand that some form of liquidity events would have to take place in the future for financial investors to cash out.
So, if IPO is a homerun destination, then founders need to be aware of the challenges to launch a tech IPO in SEA and seek for alternatives. Australia Securities Exchange (ASX) used to be an attractive destination for IPO, not for exits but a fundraising event. Even so, ASX has reportedly been trying to clamp down on overvalued listings of tech startups and is considering a number of changes to admission requirements to stop the number of low-revenue companies from listing.
Singapore, Malaysia, and Thailand arguably have the more stable exchange, but is far from ready to be homerun exit destinations for investors. So, tech-ready exchanges such as NYSE and NASDAQ in the US and LSE in the UK are very attractive for the time being. This is exactly why Garena’s IPO is such a great deal (pun intended). “This is an extremely significant deal. Once you have a success story coming out of the region, it becomes easier for others to emulate. An IPO of this magnitude will galvanize and serve as a beacon to all the startups in Southeast Asia,” said Vishal Harnal, a partner at 500 Startups in Singapore.
It’s for sale!
There are two types of M&A, mainly: strategic acquisition and acqui-hire sale. A strategic M&A is often lauded in the press. Microsoft acquired LinkedIn for US$26 billion to tap into their professional network as a distribution channel to sell its enterprise software. Facebook acquired Instagram for US$1 billion to tap into the data of its user base and behaviour.
These acquisitions are often done for strategic reasons such as research & development, user base expansion, and synergistic product offering. In hindsight, the Facebook-Instagram acquisition turned out to be a super powerful tool to compete against Snap Inc. (Facebook failed to acquire Snapchat a year after buying Instagram). A B2B cloud software startup will very likely stand a good chance to be acquired as part of large incumbents’ (Oracle and SAP) expansion strategy. Think about who will potentially be interested in buying your company if IPO is not part of your exit roadmap. In an emerging market, strategic acquisition will be especially useful for larger incumbents to acquire customers and introduce product to a new market.
An acqui-hire is a type of acquisition used to recruit coveted employees rather than add a new line of business. An acqui-hire typically occurs when a startup fails to build a business and has run out of money. The founders willingly join the acquirer to save face, find a soft landing for their employees and earn a reasonable amount of money over a short period of time.
Except for occasional acqui-hires such as Carousell’s acquisition of WatchOverMe and Duriana, this practice of “buying talent” is still not very common within SEA as compared to Europe and the US. Though I expect to see more acqui-hires as talents in tech are getting more highly valued in the SEA. Google’s acquisition of Singapore-based enterprise chat app, Pie is potentially the first of many more to come by foreign tech companies.
Tim Cook publicly stated that Apple is always on the lookout for companies with great technology, talent, and strategic fit. Apple, Google, Facebook and Twitter have been the most prolific acquirers in the tech market with more than 450 acquisitions combined. (this is not even including undisclosed acquisitions!) Bear in mind that these companies were once startups – I foresee that one hugely successful startup can help drive a healthy M&A story within SEA.
Milking the cash cow
Investors eventually need to see a clear path to financial returns before they place a bet on you. If IPO and M&A are not suitable options for various reasons (market reality, timing, or preference), staying private could be the optimal move. Although less conventional for VC/PE, which often have specific fund life for all their funds, in which they need to cash out to fulfill their fiduciary duties of generating returns to their Limited Partners, staying as a private company is possible.
If the business is very profitable and founders decided not to go IPO to avoid all the compliance obligations/costs, it will be possible to execute a private placement for financial investors to cash out. After all, who doesn’t want to invest in a proven business model with strong management?
At the end of the day, before signing the termsheet, founders should convey their long-term visions to their investors and lay out their ideal exit plan. With solid vision alignment and expectation setting done right at the beginning, the entrepreneurial journey will be ever so slightly smoother.
This is a snapshot of findings from “State of SEA Tech Startups Landscape”. We collaborate with founders/investors/journalists in SEA tech sector for advisory work and sector deep dive, please feel free to reach out.
To Garena: GGWPGLHF
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