M&As seen as main exit route for S-E Asia startups

MERGERS and acquisitions (M&As), and less initial public offers (IPOs), will drive tech startup exits in South-east Asia in the next five years, Singapore-based venture capital firm Golden Gate Ventures (GGV) has predicted.

In a report released on Tuesday, GGV projects M&As in the region to grow over 500 per cent from 2015 to 2020, and at least 250 exits - most of which will be acquisitions - to occur each year beginning 2020, due in part to the growth of institutional funds and global players looking to expand their footprint in the region.

Said Vinnie Lauria, GGV managing partner: "In the United States, the ideal exit for tech companies is immortalised in one iconic image: a chief executive ringing the bell on the floor of the Nasdaq on the day of the company's IPO."

But the opposite is true in South-east Asia. "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," Mr Lauria noted.

A case in point is French luxury group LVMH, which last July bagged Singapore cosmetics e-commerce site Luxola for an eight-figure sum, in what is believed to be one of the Republic's largest Internet startup exits in 2015.

Alexis Horowitz Burdick, founder of Luxola, said: "Acquiring a company with existing customers and a strong operational foundation (in South-east Asia) is useful for international companies looking to expand here. This is a really difficult region to do business, especially for outsiders that aren't too familiar with the different markets."

There have only been 11 tech IPOs, compared to 127 acquisitions, in South-east Asia since 2005, the GGV report reveals. The most notable exits in Singapore, the report adds, have all been acquisitions - that of video platform Viki for US$200 million by Rakuten in 2012, live chat software Zopim for US$30 million by Zendesk in 2014, and mobile security firm tenCube by McAfee for an undisclosed amount in 2009.

Darius Cheung, founder of tenCube, agreed that M&A will be the predominant startup exit route in the next five years. He told BT: "Startups are working on nascent fragmented markets which, while having great growth potential, will not see the full extent of revenue monetisation, making it unfavourable for them to go public."

Public markets such as Singapore Exchange (SGX) and Australian Securities Exchange, added the now-chief executive of property startup 99.co, are not familiar with South-east Asian tech companies and "would not know" how to value them.

In response, Mohamed Nasser Ismail, SGX head of equity capital market for small and medium enterprises, said Singapore's vision to build a Smart Nation has created a vibrant and supportive tech ecosystem, making it a "natural and attractive" listing venue.

IPOs on SGX attract "strong valuations"; in the last two years, digital companies have raised over US$600 million through IPOs and secondary fund-raising on SGX, he added.

"We recognise that digital companies, many of which are early-stage companies, may not be ready to go public yet. To better serve their funding needs, SGX has been supporting CapBridge, a new private fundraising platform designed to serve the growing funding needs for such companies." CapBridge is an equity crowdfunding platform to be launched by SGX and Clearbridge Accelerator.

SGX's initiatives appear to be making inroads with tech companies, the GGV report says. Trendlines, an Israeli tech incubator, listed on SGX's Catalist board in November 2015; security firm Secura in January 2016; and cloud-based software provider Deskera is likely to list sometime in 2016.

The year is set to be an exciting one for startup investments, after as much as US$2 billion were held by South-east Asia-focused funds in the last year, according to GGV's Mr Lauria.

"Several venture capital firms have been raising their funds from 2015, with many opting to do so quietly so as to not set expectations. In 2016, we expect many of these funds to be ready to deploy investment into tech companies in the region," he told BT.

Meanwhile, companies that will benefit from GGV's forecasted uptick in M&A activity in the next half decade are those that have raised the "first generation" venture capital around 2013, Mr Lauria suggested.

One such company is Carousell, which in November 2013 snagged seed funding of US$800,000 for its mobile marketplace app. An exit, however, is not on its cards, said co-founder Quek Siu Rui. "We take a very long term view and are currently laser-focused on product improvements and on growth internationally."

He added: "That said, hypothetically, say in 10 years, if we had to think about an exit, we'd consider all options, be it M&A or IPO, that would best serve our mission of inspiring the world to start selling."