Startup consolidation and the recipe for regional success
By Justin Hall November 7, 2014
- Everything you needed to know to create a regional powerhouse, and then some
- Expect more consolidation across SEA, will accelerate next year as more funds come
TO bake your very own regional powerhouse, please obtain the following ingredients:
1) At least two (2) companies: Consumer-facing verticals are just fine, and no worries if they’re locally-focused. If done correctly, these companies will expand beautifully.
2) One (1) holding company, preferably incorporated in Singapore, though this is generally up to preference and the skill of the consolidator.
3) Mature company founder, at least one (1) per company; this is especially important if they have a significant shareholding.
4) One (1) mature CEO (chief executive officer): Deep market knowledge and previous experience is critical; if a CEO can’t be found, one company founder can serve as interim (or even permanent) CEO.
5) At least one (1) law firm, with operating and legal experience in the same country as the holding company.
6) Significant and predictable traction for said companies, of at least six (6) months; a company that is too raw is unappetising to investors and is liable to collapse.
7) Enough funding capable of supporting the companies for at least six months while they set.
Optional: At least one (1) board member or advisor with regional experience and networks; at least one (1) venture capital fund capable of leading the consolidation.
Preparation (three to six months)
1) Before you begin, please ensure the capitalisation table is clean and removed of any undesirable elements, such as pre-existing holding companies or predatory investors.
2) Ensure that sufficient due diligence into the finances, capitalisation, shareholders, and other relevant factors has been accounted for.
3) Most importantly, ensure that all company founders understand explicitly what their new roles will be; the consolidated company will likely mean that they are abdicating much of their executive authority to determine the strategic direction of their company.
Cooking Time (six to nine months, depending on quality of ingredients).
1) Set up the holding company: Be sure not to forget to elect the CEO as director.
2) Begin the transfer of shares of the companies to the holding company: Whole transfers may not be necessary, so long as the type and number of shares being transferred is enough to give control to the holding company.
3) Install the acting CEO: If using a board member and/ or venture capital fund, begin leveraging the networks now to establish a healthy base upon which to expand.
4) Ensure that the company founders are managing their new responsibilities and corporate structure well: If using a board member and/ or venture capital fund, leveraging information rights and authority is tremendously helpful.
5) Allow the ingredients to set for at least six (6) months: Stir in investment, new introductions, guidance, and business development as necessary.
Voila! You have the makings of a regional powerhouse. Investors and customers will now be rushing to taste your wares, so be sure to manage the demand well.
In my last column, I wrote extensively on the phenomenon of the ‘Goldilocks’ company: Their markets are not too big, nor too small; they are companies that are geographically close to their initial customers, but provide a value that is immediately recognisable to multiple markets in the region. They do not share the same burdens of quality of global startups, nor the market constraints of local ones.
I also noted that given their ubiquity, these companies need to consolidate across markets, or die.
The funny thing is, we’re actually starting to see this consolidation occurring now. Love Out Loud Asia was recently acquired by Lunch Actually, and LoveByte was snatched up by MigMe.
And I have a feeling that this trend is only going to accelerate in the coming months.
Why? Because a majority of exits in South-East Asia will involve trade sales (versus IPOs or initial public offerings), and a consolidated entity operating across multiple markets is significantly more valuable than three or four companies operating separately.
Indeed, a consolidated company is more valuable than the sum of its parts, as it benefits from additional exposure to investors, easier access to markets, more economical marketing budgets, etc.
And as the number of exits increases, so too will the push for company consolidation. Consolidation will come in three forms:
- Company-led consolidation: A company will identify a direct or non-direct competitor, and lead the consolidation.
- Investor-led consolidation: A fund will leverage its capital and value-add to help lead a consolidation for a potential or existing portfolio company; funding might even be set as a condition for consolidation.
- Acquisition-led consolidation: A well-financed investor or corporate will literally acquire separate entities for the sole purpose of consolidating them at some later date. Catcha Group CEO Patrick Grove’s acquisitions of deal sites across Asia leading into an iBuy IPO exemplifies this strategy.
READ ALSO: Grove-backed Frontier Digital Ventures goes into ‘aggressive’ mode
We’re going to start seeing more and more consolidation across South-East Asia, and it will accelerate beginning next year. The reason being, there are more funds coming online.
Company-led consolidation makes the most sense, but it’s the hardest to do and is the most difficult to financially sustain. There is zero room for error.
Acquisition-led consolidation would be simplest, but there is only one Patrick Grove in South-East Asia.
However, there is up to one billion dollars of money flowing into the region over the next two years in the form of Series A funds, and once these funds close their raises next year, that’s a tremendous amount of capital that is also strategically aligned with the need to profitably exit its companies.
So be on the lookout. There will be more and more consolidations happening in the future … because consolidated entities make for the tastiest (and biggest) acquisitions.
Justin Hall is an associate 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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