CompassList : Southeast Asian startups to keep riding digitalization, IPO boom, investors say

CompassList.com — E-commerce and related verticals like payments and logistics will continue to net the bulk of funding in Southeast Asia for at least the next two years, VCs say, as more local consumers go online and businesses digitalize. Sectors that boomed during the Covid-19 pandemic, such as edtech and healthtech, are also seen gaining further traction.

Adrian Li, Managing Partner and founder of AC Ventures, expects more “exciting companies” to emerge in those sectors. “There are companies [in the verticals] that are small now, but will reach centaur status soon,” he said in an interview, referring to startups valued at $100m or higher. In particular, business models that interact with or support micro, small and medium enterprises (MSMEs) will become mainstream in the next 24 months, he added.

Southeast Asian startups attracted $4.4bn in funding via 393 deals tracked in the first half of 2021, according to a Cento Ventures report. Retail and financial services bagged the lion’s share, about $1.1bn each, followed by business automation, logistics and education. Indonesia and Singapore were the top funded ecosystems, absorbing more than 70% of the region’s investment in the six-month period.

However, the amount invested was lower than the $5.8bn total in the first half of 2020, and reflected a continued decline from 2019 and 2018 periods. Southeast Asia currently has 25 unicorns. Some recent unicorns include rival used-car marketplaces Carsome and Carro, based in Malaysia and Singapore, respectively; Singapore secondhand goods marketplace Carousell; as well as payment gateway Xendit and investment platform Ajaib, both based in Indonesia. 

Success stories such as Grab’s coming $40bn US SPAC, the IPO of Indonesian e-commerce unicorn Bukalapak, as well as the merger of ride-hailing decacorn Gojek and Bukalapak rival Tokopedia to form GoTo, valued about $35bn, also boosted interest in the region. These milestones “substantially” answered investors’ “gnawing question” about exit opportunities, Amit Anand, Founding Partner of Jungle Ventures, said.

Global VC investments rose to a record high this year, driven by greater liquidity, stronger stock markets and optimism about sectors that have benefited from the pandemic. Refinitiv data in July 2021 showed that global VC funds invested $268.7bn so far in 2021, more than $251.2bn a year earlier, also a record high.

Offline to online, and back

The adoption of digital lifestyles and workflows is inevitable, but the pandemic accelerated transformations that normally would have taken years to a matter of months. The 2020 edition of Google’s Southeast Asia digital economy report found that the region added 40m new internet users last year alone. Companies in e-commerce grocery, as well as in lending and education, gained the biggest share of new users. The report also said that 94% of these new users intend to continue using online services after the pandemic.

Li noted that Covid restrictions have given tech companies ample time to attract new users and make their user experience more habit-forming: “Tech companies have remarkable ways to lock in habits through reward systems, targeted discounts, and gamification that reinforces these habits.” 

Some investors anticipate a return to offline habits though. For that reason, Intudo Ventures avoids investing in business models that are purely online or purely offline. “Every business model that we back tends to have an O2O (offline-to-online) exposure, and they find a good marriage between offline and online modes,” the firm’s Founding Partner Patrick Yip told CompassList.

“Every business model that we back tends to have an O2O exposure”

One of the O2O businesses Intudo has backed is Wahyoo, an Indonesian startup that provides online deliveries and operational support to small restaurants and neighborhood shops. “Without the ability to order stocks online, these shops are spending more time at work but earning less,” Yip said. “By having an online solution to this problem, they can spend more time marketing the business.” Wahyoo, he added, also connects these restaurants with brands looking for advertising opportunities, giving these microbusinesses additional streams of income.

Other offline opportunities are manifesting in hospitality and real estate. Artotel Group, an Indonesian hospitality and events group in the Intudo portfolio, raised an undisclosed amount of funding in a Series B round in October. Singapore-based co-living startup Cove also raised S$4.6m ($1 = S$1.34)in a Series A round led by local conglomerate Keppel Corporation last year. In July 2021, Malaysian property rental startup Speedhome raised MYR 7m ($1=MYR4.17) from Gobi Partners and Allianz Malaysia for its expansion to Thailand.

“It’s very difficult even for thriving young professionals to buy a home in countries like Indonesia and Singapore,” said Raditya Pramana, Partner of Venturra Discovery, an investor in Cove’s Series A round. “There’s a big enough segment of people who rely on [rental property] services, and the business is thriving.” Cove, which started in Singapore, expanded into Indonesia, and Pramana said the firm plans to enter other Southeast Asian markets.

IPO expectations

Bukalapak’s 4X oversubscribed IPO – which helped the company raise $1.5bn in Indonesia’s largest public listing so far – represents growing interest in tech listings, so far a tiny percentage, that is backed by a surge in retail investors adding liquidity to the Indonesia Stock Exchange (IDX). Such success will give local tech companies more reason to consider listing at home. “Indonesia is becoming a more viable option [for IPOs] because of this increase in activity and participation from retail investors,” Pramana said.

Bukalapak’s shares are currently trading below its listing price of IDR 850 apiece, but institutional investors like Pramana and Li do not see this as a deterrent for future tech IPOs. Pramana said: “Bukalapak’s share performance now, only a few months after listing, is not a perfect picture of the true potential that the company can achieve. I think there needs to be a shift in mindset among investors.”

Li cited the example of Singaporean tech group Sea Limited, which runs e-commerce heavyweight Shopee and global game distributor Garena. “Sea, which is the largest digital company in Southeast Asia by a mile, had its share price hover around listing price for a while, but now you can see how fast it’s grown in the last 24 to 36 months,” he said. Sea listed on Nasdaq in 2017 and had its share price stagnate for almost two years, before gaining from 2019. As of October 8, 2021, SEA shares were trading at $323 apiece, more than 20 times the IPO price of $15.

In Indonesia, GoTo is expected to list in the local exchange in 2022. Online travel aggregator Traveloka previously pursued a US listing via SPAC, but the deal reportedly fell through and the company will be pursuing a conventional IPO. Regional logistics unicorn Ninja Van and Thai e-commerce enabler aCommerce are also reportedly considering IPOs.

The Indonesian and Singaporean stock exchanges are actively courting tech IPOs, whether through conventional listings or through SPACs. IDX will soon launch new rules focusing on dual-class shares, with SPAC rules soon to follow. Meanwhile in Singapore, SGX has reduced the market capitalization threshold for SPAC companies to S$150m, while also providing funding support for pre-IPO companies through a new unit managed by state investor Temasek.

Despite the moves by local exchanges, US-based exchanges remain some of the most popular choices for Southeast Asian tech IPOs. Grab’s SPAC deal, for example will see the ride-hailing-turned-super-app unicorn list on Nasdaq. Newly minted unicorns Carro and Carsome are both considering US listings too, while regional real estate tech firm PropertyGuru has agreed to a US listing, two years after cancelling their Australian IPO. Vietnamese startups Loship, which provides logistics services, as well as e-commerce platform builder Society Pass are also aiming to list in the US.

ESG considerations

More investors and startups have also begun considering impact and ESG (environmental, social and governance) metrics. This is partly driven by government regulations and changing priorities. Singapore, for example, has an extensive Green Plan to increase the use of renewable energy while reducing greenhouse gas emissions by 2030.

ESG-themed investments also perform well in the market. Financial institutions are observing that ESG investments outperform even during the Covid-19 downturn, and shareholders are growing intolerant of companies that do not manage externalities or behave irresponsibly.

In a market like Indonesia, if you invest in a company that makes a strong positive impact, we will also make strong financial returns

Accelerating Asia Managing Partner and co-founder Amra Naidoo told CompassList that her company is currently developing a framework to measure ESG metrics. She acknowledged that this approach is a departure from the VC’s previous position that impact should not be measured with “checkboxes.” 

“For early-stage companies, we need to figure out the kinds of metrics that aren’t overkill, but can be tracked over a long period of time,” Naidoo said.

AC Ventures is also tracking more specific impact metrics. “Especially in a market like Indonesia, if you invest in a company that makes a strong positive impact, we will also make strong financial returns,” AC Ventures’s Li said. Technology, he added, allows companies to empower a broad range of audiences, especially by giving access to services that were previously difficult to provide to them, such as banking and online commerce.

Asked about how AC Ventures measures impact, Li says their assessment varies from one company to another. “There is some negative screening, so we do not invest in companies related to tobacco or vice, for example,” he said. “But generally, it’s about understanding each company’s end goal, or the sectors in which they have impact.” 

For example, when it comes to SME financing companies in their portfolio, like KoinWorks and Julo, AC Ventures can measure how much each loan helps the merchants increase their sales or create new jobs.

However, imposing ESG metrics on other early-stage companies in the region has its challenges. Hence some investors prefer to trust founders to develop their businesses responsibly. Pramana said that Venturra has not added ESG standards to its evaluations, but tries to select conscientious founders.

“A lot of our companies are still too small for us to set an ESG framework as part of the investment process,” Pramana said. “There’s still a lot of work to be done for tech platforms, but I believe that investing in great founders would ensure that the business would conduct responsible businesses.”

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