Moving the goalposts: How exits are changing across SEA
By Justin Hall June 12, 2015
- Most exit activity in the region will be acquisitions, not public listings
- But approaching point where IPOs are exits, not fund-raising exercises
SAY what you will about ‘value investing’ and ‘building a sustainable company,’ both founder and investor alike would be lying if they said they didn’t care about making a meaningful financial return from their time and effort.
To be sure, a venture capitalist wouldn’t be long for this world if he or she said otherwise.
By that measure, venture capital funds base their survival on profitable exits. When a company exits, after the dust has settled, the investors will distribute the profits from their investors to their own limited partners.
If the returns are good, the investors live to fund another day. If they are not, then investors will be hard pressed to raise another fund, and will slip into the ether.
In the United States, it’s not hard to see what the ideal exit is for technology companies: Ringing the bell on the floor of the Nasdaq makes for a nice fairytale.
While available only to the very select few – the Facebooks, Alibabas, and Amazons of the world – these companies represent an unimaginable amount of capital and are hugely valuable as a result.
For those extraordinarily successful companies that are just shy of going public, a meaty acquisition is always a possibility.
These can range anywhere from large strategic purchases – like Google’s purchase of Nest Labs for US$3.2 billion or Apple’s acquisition of Beats Electronics for US$3 billion – to less-publicised ‘acquihires’ like Yahoo’s arguably baffling acquisition of Summly or Facebook's steals for Storylane and Threadsy.
While it’s certainly not a public listing, a profitable acquisition can still provide material, life-changing outcomes.
Things are a little different here in our neck of the jungle.
Here in South-East Asia, when considering exits, acquisitions are the bread-and-butter of both investor and founder alike. This is where most exit activity will occur.
Indeed, this has been the case for the last 15 years, and will likely remain the case for the next 15.
The most notable exits here have all been acquisitions: Rakuten’s earth-shaking purchase of Viki for US$200 million in 2013, Zendesk’s US$30-million acquisition of Zopim in 2014, even McAfee’s landmark venture in acquiring serial entrepreneur Darius Cheung’s tenCube back in 2009.
And of the public exit? Whereas a publicly listed company might the ideal in the West, such an opportunity doesn’t exist here.
Indeed, while listing on Nasdaq is appropriately considered the ultimate capstone, listing on its equivalent in the Australian, Singaporean, or Filipino Exchanges is most assuredly not.
Indeed, many entrepreneurs treat it as simply another way to fund their company in a long journey to profitability.
In South-East Asia, like elsewhere, the goal is still to score that huge win. And for the last 15 years, the path to it has been pretty clear.
But entrepreneurs and investors, take note: Exits – and what exactly constitutes an exit – are changing, in size, scope, and frequency.
In short, the goalposts are moving.
First, and perhaps most obviously, South-East Asia has reached an inflection point in terms of accelerated growth: More people are consuming content; more people are shopping online; more people are buying mobile phones.
As the markets become larger and more mature, so too do the number of high-value startups. As a result, regional and global acquirers are starting to see the potential of South-East Asia as a real growth market and are more willing to acquire companies here.
Second, funding rounds are increasing in size and frequency, thanks in large part to the sheer number of new funds starting. When they invest, funds essentially put a floor on the lowest possible bid an acquirer may offer a company.
In other words, if investor and entrepreneur agree on a price of US$10 million, then an acquirer will need do better than that to get a deal done.
Thanks to the growing demand for investable startups – and the supply not keeping up with new fund formation – there has been a consequential increase in valuations, and acquisitions are necessarily growing to meet the elevated prices.
Third, the Australian, Singaporean, and Filipino Stock Exchanges are aggressively incentivising technology companies to list.
This is much more difficult than it sounds: Restrictions need to be changed or loosened, investors need to be educated, and the markets need to provide startups with enough capital to meet their goals.
This will take them years, and their success largely hinges on their respective ability to corral enough educated investors to support a public offering.
But if they succeed, in combination with the aforementioned points, listing on these exchanges will be seen less as a stepping stone to further funding rounds and more as a bona fide exit.
The goalposts are already moving, and it’s only a matter of time before someone scores a tremendous win. There are more funds, there are more startups, and the market is getting more exciting.
The only thing still missing en masse? The acquirers, regional and overseas, that are looking to expand into South-East Asia, be it in e-commerce, software, payments, human resources, or any other lucrative industry.
And to them, I offer a warning: Valuations are only going to rise from here on out. So if you start acquiring companies in South-East Asia, now’s the time. These discounts won’t last.
Justin Hall is a principal at Golden Gate Ventures, an early-stage fund based in Singapore. A former Rakuten Network manager and scholar at NUS, he sources investable early-stage technology companies from South-East Asia. You can reach him via Twitter at @JVinnyHall.
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