The term “unicorn”, used to describe start-ups worth more than US$1 billion (S$1.3 billion), had not even been coined in 2009, when Stanford MBA graduate Forrest Li began working on his new gaming company with nearly a dozen employees – all cramped in a tiny shophouse in Singapore’s central business district.
Garena, his fledgling gaming company, kept a low-key profile, though its almost immediate success meant investment rounds and expansion plans came thick and fast.
Soon Garena outgrew its small outfit on Maxwell Road, then a move to a two-storey penthouse office beckoned.
A decade on, Garena is now one limb of the gargantuan Sea Group.
With a market capitalisation of an eye-watering US$137 billion, Sea is bigger than Singapore’s biggest bank DBS, employs 3,000 people in the island republic – its global headquarters – and has operations from China to Japan and Latin America.
Its arrival as not just a unicorn, but as one of Southeast Asia’s pre-eminent technology companies is exemplified by the real estate it now occupies: in 2019, Li opened the doors to a sprawling 244,000 sq ft complex to house staff from Shopee, now the region’s biggest e-commerce platform.
Intrigue over Sea and Li, the group’s China-born Singaporean founder, has heightened alongside a dramatic surge in Sea stocks, which have increased fivefold over the past 10 months. In recent days shares were trading near US$265 – a stratospheric rise from when they went for US$15 at the time of the firm’s 2017 IPO.
On Thursday it completed the purchase of Indonesia’s Bank Kesejahteraan Ekonomi (BKE), with officials saying the firm is preparing to convert the bank into a digital institution. Last year it was awarded one of Singapore’s two full digital banking licences.
With the breakneck pace of expansion showing no sign of slowing – even in the midst of the Covid-19 fuelled global recession – venture capitalists and analysts say intrigue, awe and in some quarters concern about the company’s future will be the subject of much water-cooler talk this year.
While some have criticised Li and his company for growing “too hastily”, others say Sea’s growth has been natural and informed, rather than forced.
A gaming begining
Much of the optimism surrounding Sea stems from bullishness about its gaming arm, Garena. Despite its outsize present-day influence, the story of its meteoric rise is little known outside gaming and investor circles.
A gamer at heart, Li – educated at Shanghai’s Jiao Tong University before his Stanford MBA – has gone on the record saying that Garena’s success was down to recognising “unmet needs” in the gaming scene at the turn of the 2010s.
For example, blockbuster games widely available in bigger markets like the United States and China were not available in Southeast Asia, and some gamers in the region could not understand English-language games.
Li in an interview that year said the inspiration behind the company was to connect world gamers, pointing to how interactive games had evolved into an important entertainment format for the younger generations especially, soon surpassing radio, television, and even films.
“We believe interactive games are something that all human beings understand and enjoy, across countries, races, languages and religions,” he said.
From there, the company scoured the region’s cities, towns and internet cafes to better understand gamers’ needs, the kinds of games they were most interested in, and how it could bring games from around the world to these people.
Yet Li has said Garena did not have an easy start.
He briefly recalled this during a forum last November, saying it was difficult to raise capital after the Global Financial Crisis : “Basically, nobody was really looking at Southeast Asia as a promising investment opportunity,” he said.
“We pretty much just used our own money, and some money from our family and friends. That is how we got started.”
As a games publisher, Garena initially brought to Southeast Asia games that had until then been available only in other regions, but in 2014, the rapid acceleration of smartphone adoption and the increase in internet access in Southeast Asia gave it the idea of developing its own games.
At that point, Li decided to set up a gaming studio in Shanghai, and shift from PC-centric games to ones catering specifically to mobile phone users. A couple of years later, Garena released its hit-game Free Fire , which analysts see as a catalyst of its success.
Free Fire emerged as the most downloaded video game in the region in 2019, partly because it could run on almost every device, even on the low-end phones prevalent in developing Southeast Asian nations. Garena said the game hit a record of 80 million daily active users last year, and was played in 130 countries.
On top of its game development, publishing and gaming platforms, Garena also became a leading esports organiser. Its esports tournament in 2019 was watched by an audience of 130 million.
The start-up’s successful run in the gaming space was met with much fanfare, attracting big-ticket investors from all over the world. Among its early investors was the Chinese tech conglomerate Tencent Holdings, which now owns slightly more than a 20 per cent stake in Sea Group.
Li would in 2017 rename Garena as Sea, in part to reflect the company’s regional ambitions, but kept Garena as the name for its games and digital entertainment arm.
A behemoth in the making
At around the same time Garena noticed that smartphone adoption was rocketing, it began thinking about branching out into e-commerce and in 2015, launched its e-commerce platform Shopee.
In an interview with the South China Morning Post in 2019, Shopee’s chief commercial officer Zhou Junjie said that most e-commerce players at the time were focused on websites, while Shopee wanted to provide a mobile, app-centric platform.
“That’s one of the advantages of being late [to the industry], because you can see what’s out there, what the trends are and see what you can do differently or better,” he said.
Zhou said another key strategy Shopee had was to conquer local markets by localising and customising the app to specific regions. In Indonesia, for example, it launched a dedicated section of Islamic products and services to cater to the majority Muslim market.
He added: “We talk about Southeast Asia as a region, but every country is very different – from the language they speak and the currencies they use, and even in terms of purchasing power.”
Shopee would eventually rise to be a fierce competitor, with more than 200 million downloads as of 2019, and be seen by many as on par with bigger e-commerce firms in the region, including Indonesia’s Tokopedia and Lazada, which is now owned by China’s Alibaba Group (which also owns the South China Morning Post ).
Even so, the e-commerce arm of Sea is yet to make a profit.
According to last year’s third-quarter figures published in November, even though e-commerce revenue was up 173.3 per cent to about US$618 million, the adjusted earnings before interest, tax, depreciation and amortisation (or Ebitda) loss was US$301.6 million. This compares to a loss of US$253.7 million the previous year.
In contrast, revenue from its digital entertainment division, responsible for mobile games, rose by 72.9 per cent to US$569 million, as quarterly active users reached 572.4 million, a 78 per cent year-on-year increase.
But analysts saw Shopee as Sea’s “long-term game”, said Jason Davis, an associate professor of entrepreneurship at Insead.
This was especially so as there were no dominant players in the Southeast Asian e-commerce market, he said, meaning that global investors would continue to pour money into businesses there.
“It’s worth it to bleed a little now if you can become a dominant player later with a stable user base and eventually make money off it,” added Davis. “It’s not surprising to me and they still might be the most promising e-commerce [outfit] even though they are not showing growth margin profits.”
Other factors, such as low margins in the e-commerce industry and strong competition in the region, were also behind the lower revenue, said Tan Yinglan, founding managing partner of venture capital firm Insignia Ventures Partners. This meant that entering – and staying in – the e-commerce game was not necessarily about immediate profits, he said.
Wang Yanbo, an assistant professor of strategy and policy at the National University of Singapore (NUS) Business School, compared Shopee’s situation to that of American e-commerce giant Amazon , which was not profitable for many years as it grew its user base.
“In such a business, short-term profit matters much less than your capability to grow your user base and revenue channels sustainably,” said Wang. “For Sea, as long as the company is building up its tech infrastructure, organisational capability and key partnerships to grow its ecosystem, it is totally fine for the e-commerce arm not to make money at the moment.”
Besides its digital entertainment and e-commerce arms, Sea has in recent years launched its third business pillar, SeaMoney, as it tries to gain a foothold in the digital payments arena.
Still unprofitable, it is viewed by experts as a relatively new exploration by the company but its recent win of the digital bank licence in Singapore could boost its prospects on this front, along with its plans for the recently acquired BKE.
The 2017 IPO is seen as one of the highlights of Sea’s stellar decade.
It raised some US$884 million from the move, and made history as the first major Southeast Asian tech firm to list on the New York Stock Exchange .
Li Jianggan, founder and CEO of Singapore-headquartered venture outfit Momentum Works, said it “made a lot of sense” for Sea to list on the New York Stock Exchange rather than on Singapore’s bourse.
“The market there is much more liquid, with investors that were much more willing to back tech companies that focused on growth instead of profitability,” he said. In comparison, Singapore pales in comparison in terms of liquidity, transaction volume and investor base.
Too fast, too soon?
Wang, the assistant professor, said expanding too fast was a “legitimate concern” for Sea but added that two factors needed to be considered. One was if the expansion was a natural extension of the firm’s core activities, and the other was whether it had learned the ropes in different markets before sinking investments there.
“We have to keep in mind that essentially Sea is a platform company specialised in operating in emerging markets,” he said. “Because it is a digital marketplace, it is well positioned to utilise the large amount of data collected on its users to expand to many online economic activities.”
Wang felt it was “natural” for Sea to venture from its e-commerce and gaming branches into digital payments. However, he added that the success of Sea in the financial sector remained to be seen as the industry had unique features that required distinct expertise.
Wang also said that by growing its expansion in Latin America, for example, Sea could establish itself as a global rather than a regional player. This could have enormous implications for the firm’s valuation in the financial market, though Wang added it would be difficult to replicate Sea’s success in such different markets.
Similarly, Tan of Insignia Ventures Partners said Sea’s “fast and exploratory” growth was part of its DNA, and was one of the reasons why it has achieved success. Sea’s growth pattern was not particularly novel for a tech company, he said, pointing to similar trajectories for firms in China and Silicon Valley.
“Sea saw the digitalisation bus for emerging markets coming from a mile away just when it had gained massive capitalisation from its gaming business, and decided it would not miss this ride,” he said.
Davis, the Insead professor, said Sea had accumulated experience in different sectors along the way, and its venture into the e-commerce and digital payments sectors was a “sustainable path”. This was because it was not easy for gaming companies to keep coming up with popular games all the time.
He said: “Sea probably realised gaming is a bit of a risky bet because it is highly dependent on having worldwide hits and continuing to churn out these hits, something that even much longer-storied companies like EA rarely do. We can think of diversification as a bit of a risk mitigator.”
Li of Momentum Works agreed, adding that Sea’s expansion was a case of the right opportunity at the right time for a company that had the right resources and organisational capabilities.
He said Shopee’s expansion into Brazil was a natural step as Garena’s games were already popular there, and would give the company experience in marketing, growth, operations, and payments. Sea’s growth was also “quite measured”, he added, as it was not mindlessly going into sectors such as ride-hailing or content-streaming.
Against the giants
Tan said heated competition was expected, especially among peers of Sea’s size in a region that was becoming a hotspot for tech investors and internet companies.
But he felt that compared to its peers, Sea had developed a level of localisation that a foreign competitor would find difficult to attain. “At the same time, Sea has also grown its breadth or market reach in a way that more local champions would find difficult to compete with,” said Tan.
Another advantage for Sea was its gaming business, said Tan. Gaming, social media, and entertainment were increasingly seen as entry points into e-commerce and financial services and there were untapped possibilities for cross-pollination, Tan said.
Li said Sea had a good window of time to solidify its lead in the e-commerce market as Alibaba, for example, had internal cultural and organisational issues which prevented it from operating effectively outside China.
The biggest competitor to Sea in Southeast Asia, he said, was ride-hailing company Grab. Grab had ventured into the payments and digital financial sector and had the operational discipline, funding and resources needed to succeed, he said.
Insead professor Davis saw Sea as a “small but very focused, nimble digital company”, and this meant that it could adapt to changes more quickly than bigger tech companies.
“It’s hard to keep up this pace but I think there is evidence that they have been able to do it and in three different markets that show you that they have growth capabilities,” he said. “We might be surprised that they can just continue to grow for a long period of time. I honestly think they are ready for competition.”
This article was first published in South China Morning Post.