The runaway train of startup valuations stops in SEA
By Justin Hall July 3, 2015
- In South-East Asia, valuation creep is still a long way off
- But rest assured, acquisitions will begin taking off this year
EVERY other week there is a new funding round, and every other week, valuations are breaking records.
Readers can take their pick: Uber and Airbnb are both rumoured to be raising new rounds of funding valuing them at US$50 billion and US$24 billion, respectively; Xiaomi is conservatively valued by private investors at US$45 billion; and Snapchat still turns heads with its almost US$20-billion price.
These are only a handful of the most expensive private tech companies; at last count, there were some 100-odd startups valued at least US$1 billion.
These outlandish prices have been written about ad nauseum, but to paraphrase: Much of the valuation increases are being driven by a combination of late-stage money, such as private equity and non-traditional investors.
This, in turn, is a consequence of an abundance of cheap capital thanks to low interest rates in the United States; and a higher barrier to entry for a typical public offering when compared with a decade ago, symbolised best by the need for significantly higher annual revenues.
Andreessen Horowitz’s Benedict Evans presentation US Tech Funding –What’s Going On? is a very insightful look at the situation, and should be required reading on the subject.
This is significant because traditionally, public markets were how companies generated the majority of returns for their investors.
But as valuations grow higher and higher in private funding rounds, there is a fear that if these extraordinarily expensive companies finally go public, the markets will be unwilling or unable to support the price tag and the value of these companies – and their investments – will plummet.
By the same token, companies too rich for the public markets will eventually become too rich for the private: There aren’t many companies capable of buying a company with a US$50-billion price tag, and investors become more risk-averse the higher valuations become.
Meteorically-priced startups will suddenly become unable to raise any more funds, at which point they’re forced to become self-sustaining or, Fab.com being a perfect example, they implode.
To put it simply, if startups are vehicles, destinations the exits, and venture capital financing the fuel, non-traditional late-stage financing is the equivalent of strapping a rocket on the hood of a car and overshooting your exit by a hundred miles.
What now constitutes a financial exit is certainly changing, but people don’t fully appreciate – or even understand – what that exit will look like.
But in South-East Asia, valuation creep is still a long way off.
For one, prices are orders of magnitude lower here. Investment rounds are smaller, valuations are smaller, and consequently, exits are smaller.
The multiple benchmarks remain the same: Investors absorb returns of 1x or less on failed investments, consider 3-5x reasonably successful, and see the 10x to 15x multiple a home run, and anything beyond that a potential fund-maker.
Moreover, unlike the race to IPO (initial public offering) you might find elsewhere, going public isn’t the most viable path to exit in South-East Asia.
Indeed, the most common exits are trade sales and acquisitions. JobStreet, Viki, Zopim, Voyagin, and Detik are just a small sample of successful acquisitions in the region.
But valuations are growing. GrabTaxi just raised US$200 million at a valuation of US$1.5 billion; Lazada and Zalora are billion-dollar companies in their own right; Tokopedia raised US$100 million and is still going from strength to strength; and regional favourites like iCarsClub, Luxola, RedMart, and Carousell all have the potential to be incredibly valuable companies.
But compare them against startups in the West, and these companies are coming in at veritable bargains.
Especially when you consider that some of the world’s fastest growing economies are here, in Vietnam, Indonesia, and the Philippines; the region is a huge, 600-million person market that, thanks to its homogeneity, lends itself to acquisition by companies looking to enter.
And there is tremendous potential upside given the positive growth rates in Internet penetration, online spending, and digital consumption.
And the buyers are finally starting to come in, and they’ve shown they’re comfortable investing and acquiring at these elevated price tags: SoftBank, Rakuten, Alibaba, Garena, and Indian companies flush with cash and looking to expand into the region either already have a track record or are poised to do so.
Rest assured, acquisitions will begin taking off this year as investments made within the last three to four years finally starting reaching maturity.
A US$20-billion company might seem a lot to bite off, but US$2 billion is far more appetising to make a meal out of. And as companies in Silicon Valley become unsustainably expensive, investors looking for more reasonable opportunities need look no further than our backyard.
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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