.png@webp){kind=logo}
FC Insights | November 2021
Webinar Review - Exit Trends: What It Means for SEA Tech Players
Speakers:- Mr. Dimas Harry Priawan, Co-founder of Dekoruma- Mr. William Gozali, Chief Investment Officer of BRI Ventures- Mr. Eric Fang, Founding Partner of Favour Capital
Moderator:- Mr. Rama Mamuaya, Founder & Chief Executive Officer of DailySocial
Moderator:- Mr. Rama Mamuaya, Founder & Chief Executive Officer of DailySocial
10 Key Takeaways
- As funding becomes more commoditized, investment thesis adapts to strengthen the value-add.
- New founders are starting to consider the steps beyond receiving funds, which is to think about how they can provide exit to the VC fund.
- More public listings and secondary transactions are creating more millionaire angel investors that recycle capital back into the ecosystem, in turn strengthening the cycle for the next generation of entrepreneurs.
- With the rising number of unicorns, more talents will fill the market gap as the people working for these unicorns can become founders in the future.
- When going public, it’s important to determine your aim & understand the public perception to achieve optimum valuation.
- In certain cases, M&A can yield more return since acquirers usually pay a premium for their strategic value. IPO takes time, and the outcome can be uncertain, but it provides pricing flexibility for startups. Going public is about performance, narratives, and market sentiment. SPAC is a hybrid of both M&A and IPO.
- With the public market, communication of the company’s positioning, investment horizon, and consistent progress is important.
- E-commerce, fintech, and logistics are expected to keep their prominence in the next few years.
- The media plays an important role to inform retail investors on different business models & potential risks/returns of their investments.
- Retail investors can create more hype, which can be good or bad depending on the investors’ perception of the startup. Positive hype can generate a better valuation for the company.
01. What are the current landscape of fundraising in SEA and its changes in the last 5 years?
Eric: Drawing patterns and observations from China, the following trends will likely pick up pace in SEA in the coming years:1. Accelerated growth of market size Acceleration of digitalization in society boosting growth in market size.2. Pre-IPO M&ACommercial mergers between companies enable faster growth into a regional player.3. Supportive policy changesAs more regional players emerge, governments would come up with attractive policies that encourage fundraising activities.
Rama: With the maturing of tech-driven startups in SEA and supportive policies, more startups would be interested in pursuing public listing in their local market. More SEA tech players would also be interested in global listing in the US or Hong Kong.
William: 5 years ago, funding options were limited with only a small number of players. Exit strategy was also limited to M&A. Today, the ecosystem is more open with more players, and IPO as an exit strategy is starting to grow. As funding becomes more commoditized, the investment thesis also needs to be adjusted to strengthen the value-add and support that the founders need, such as exit guidance, liquidity management, and hiring.
Dimas: IPO has become an alternative way of getting funds from venture capital. The typical startup back then focused on growth to receive the next funding round. Nowadays, founders are starting to consider the steps beyond receiving funds, which is to think about how they can provide an exit to the VC fund.
02. What are the impacts of recent tech IPOs in the region?
Dimas: 1. Revenue becoming a key metricPast metrics used by tech companies such as GMV and GTV are becoming less relevant as the public is more interested in the company’s revenue and profitability.2. ESOP holders of other tech companiesBukalapak’s IPO shows to other peer tech companies that IPO in Indonesia is possible, energizing the ESOP holders of other tech companies & indicating that their holdings will become more valuable in the future public listing.
William:The trend of unicorns going public and secondary transactions are minting new millionaires, not just the founders but also ESOP holders and the executive team. These people tend to invest their capital back via angel investment, helping to increase the pool of capital in the ecosystem as a whole and ultimately strengthen the cycle for the next generation of entrepreneurs.
Rama:Beyond capital, these experienced individuals who have ‘graduated’ and learned the ropes from the unicorn companies can benefit the ecosystem and build more successful startups with new talents.
Eric:1. Increase of local talentsOne common issue in SEA startup ecosystem is the lack of talents. With rising number of unicorns, more talents will fill the market gap as the people working for these unicorns can become founders in the future. This is complemented by rapid digitalization, which will create market opportunities for entrepreneurship in the region.2. Better IRR and DPI* for local fundExpectations from LPs shift alongside IPO trends, we expect this to lead to increased inflows of funds and bigger deals in SEA.* Distribution to Paid-In (DPI): cumulative investment returned to the investor relative to invested capital 03. What is the best public listing strategy?
Eric:IPO will be the best choice for large companies. Otherwise, M&A can also be attractive as a transition stage towards IPO. Shanghai Stock Exchange’s new tech-focused board, STAR, can be an example for SEA countries to accommodate different standards of IPO. For exiting through SPAC, valuation can be challenging as potential valuation references and benchmarks are still limited in SEA. Ultimately, the key focus in SEA should be on the company’s business strategy and goals.
William: It depends on the considerations of speed and practicality. M&A can yield more return since acquirers usually pay a premium due to their strategic angle. On the other hand, IPO takes time, and the outcome can be uncertain, but it provides pricing flexibility for startups. Going public is about performance, narratives, and market sentiment. SPAC is a hybrid of both M&A and IPO.
Dimas: From an operational perspective, IPO enables cheaper and faster capital. For Dekoruma, the company aims to IPO in 2023, but will need to be sensitive on the timing and observe the market sentiment of other tech IPOs from Indonesia before making the move.
04. What is the rule of thumb for going public?
Dimas: 1. Determine the aim of IPOWhether as exit strategy or capital access, IPO should be a means toward achieving your aim and not be the aim by itself.2. Aim for optimum valuation Understand the public market perception in company valuation to create a fitting story.3. Find the multiplierThe discrepancy between VC and public market can be huge as the multiplier used by VC (e.g. GMV multiplier) and the public (e.g. revenue multiplier) are different.
05. Difference or similarity between convincing institutional investors vs. convincing public market
Dimas: Growth potential is important when convincing the public market. Growth can be demonstrated through actual numbers or perceptions. While perception depends on market maturity, growth potential is all about how the company can create unique and inimitable value, which warrants a higher multiplier.
Eric: Valuation for the two sides is different. For the public market, information is widely available, and we can use valuation methodologies like DCF. The investment horizon is also flexible depending on the investor’s judgment. For VC/PE, valuation is benchmarked on past deals in other countries and metrics like GMV, revenue, take rate. Since the investment horizon is less flexible due to lack of liquidity, the timing of investment will decide how easily it can be liquidated in the future.
Rama: For both institutional investors & the public market, the story can sometimes be more important than fundamentals when it comes to tech companies. Future expectations and reasonable assumptions of the company’s growth are important factors.
William: For VC, the investment horizon can last up to 10 years, so the feedback cycle is long. In contrast, the public market evaluates on a quarterly basis with earning reports, hence the higher pressure. However, business model risk is an important factor for both markets. With the public market, communication on the company’s positioning, investment horizon, and consistent progress is important.
06. How would the rise of retail investors impact SEA markets?
Eric: For retail investors, possessing investing know-how is important for a healthy market. Even media companies play an important role by helping to inform retail investors on different business models & potential risks/returns of their investments. In China, investors’ qualification is a basic requirement as they need to understand the market and the risk before investing. For example, compared to traditional stock investors, investors in the STAR board are subject to stricter entry requirements such as investment threshold. William:Indonesia’s stock market is institutional-driven, although there has been a surge of retail investors in the past 2-3 years. Stability will be affected as investment horizons and risk appetites change over time, with the X factor being the younger generation segment possessing higher risk appetites.
Dimas: Retail investors can create more hype, which can be good or bad depending on the investors’ perception of the startup. Positive hype can bring better valuation for the company.
07. Which sectors have the most growth potential in the next 2-3 years and what are their driving factors?
William: Sectors related to the consumer market possess high potential due to familiarity. Particularly, the three sectors of e-commerce, fintech, and logistics are expected to keep their prominence in the next few years.
Eric: SEA generally follows the global trend of growth in the fintech and e-commerce sectors. Although we expect B2C to lead with more IPOs for now, some B2B sectors like SaaS are also attractive owing to their stable business models.
Rama: Policy change can be a game-changer and can encourage new business models, as seen in many fintech and edtech disruptions in the region.
Eric: Drawing patterns and observations from China, the following trends will likely pick up pace in SEA in the coming years:1. Accelerated growth of market size Acceleration of digitalization in society boosting growth in market size.2. Pre-IPO M&ACommercial mergers between companies enable faster growth into a regional player.3. Supportive policy changesAs more regional players emerge, governments would come up with attractive policies that encourage fundraising activities.
Rama: With the maturing of tech-driven startups in SEA and supportive policies, more startups would be interested in pursuing public listing in their local market. More SEA tech players would also be interested in global listing in the US or Hong Kong.
William: 5 years ago, funding options were limited with only a small number of players. Exit strategy was also limited to M&A. Today, the ecosystem is more open with more players, and IPO as an exit strategy is starting to grow. As funding becomes more commoditized, the investment thesis also needs to be adjusted to strengthen the value-add and support that the founders need, such as exit guidance, liquidity management, and hiring.
Dimas: IPO has become an alternative way of getting funds from venture capital. The typical startup back then focused on growth to receive the next funding round. Nowadays, founders are starting to consider the steps beyond receiving funds, which is to think about how they can provide an exit to the VC fund.
02. What are the impacts of recent tech IPOs in the region?
Dimas: 1. Revenue becoming a key metricPast metrics used by tech companies such as GMV and GTV are becoming less relevant as the public is more interested in the company’s revenue and profitability.2. ESOP holders of other tech companiesBukalapak’s IPO shows to other peer tech companies that IPO in Indonesia is possible, energizing the ESOP holders of other tech companies & indicating that their holdings will become more valuable in the future public listing.
William:The trend of unicorns going public and secondary transactions are minting new millionaires, not just the founders but also ESOP holders and the executive team. These people tend to invest their capital back via angel investment, helping to increase the pool of capital in the ecosystem as a whole and ultimately strengthen the cycle for the next generation of entrepreneurs.
Rama:Beyond capital, these experienced individuals who have ‘graduated’ and learned the ropes from the unicorn companies can benefit the ecosystem and build more successful startups with new talents.
Eric:1. Increase of local talentsOne common issue in SEA startup ecosystem is the lack of talents. With rising number of unicorns, more talents will fill the market gap as the people working for these unicorns can become founders in the future. This is complemented by rapid digitalization, which will create market opportunities for entrepreneurship in the region.2. Better IRR and DPI* for local fundExpectations from LPs shift alongside IPO trends, we expect this to lead to increased inflows of funds and bigger deals in SEA.* Distribution to Paid-In (DPI): cumulative investment returned to the investor relative to invested capital 03. What is the best public listing strategy?
Eric:IPO will be the best choice for large companies. Otherwise, M&A can also be attractive as a transition stage towards IPO. Shanghai Stock Exchange’s new tech-focused board, STAR, can be an example for SEA countries to accommodate different standards of IPO. For exiting through SPAC, valuation can be challenging as potential valuation references and benchmarks are still limited in SEA. Ultimately, the key focus in SEA should be on the company’s business strategy and goals.
William: It depends on the considerations of speed and practicality. M&A can yield more return since acquirers usually pay a premium due to their strategic angle. On the other hand, IPO takes time, and the outcome can be uncertain, but it provides pricing flexibility for startups. Going public is about performance, narratives, and market sentiment. SPAC is a hybrid of both M&A and IPO.
Dimas: From an operational perspective, IPO enables cheaper and faster capital. For Dekoruma, the company aims to IPO in 2023, but will need to be sensitive on the timing and observe the market sentiment of other tech IPOs from Indonesia before making the move.
04. What is the rule of thumb for going public?
Dimas: 1. Determine the aim of IPOWhether as exit strategy or capital access, IPO should be a means toward achieving your aim and not be the aim by itself.2. Aim for optimum valuation Understand the public market perception in company valuation to create a fitting story.3. Find the multiplierThe discrepancy between VC and public market can be huge as the multiplier used by VC (e.g. GMV multiplier) and the public (e.g. revenue multiplier) are different.
05. Difference or similarity between convincing institutional investors vs. convincing public market
Dimas: Growth potential is important when convincing the public market. Growth can be demonstrated through actual numbers or perceptions. While perception depends on market maturity, growth potential is all about how the company can create unique and inimitable value, which warrants a higher multiplier.
Eric: Valuation for the two sides is different. For the public market, information is widely available, and we can use valuation methodologies like DCF. The investment horizon is also flexible depending on the investor’s judgment. For VC/PE, valuation is benchmarked on past deals in other countries and metrics like GMV, revenue, take rate. Since the investment horizon is less flexible due to lack of liquidity, the timing of investment will decide how easily it can be liquidated in the future.
Rama: For both institutional investors & the public market, the story can sometimes be more important than fundamentals when it comes to tech companies. Future expectations and reasonable assumptions of the company’s growth are important factors.
William: For VC, the investment horizon can last up to 10 years, so the feedback cycle is long. In contrast, the public market evaluates on a quarterly basis with earning reports, hence the higher pressure. However, business model risk is an important factor for both markets. With the public market, communication on the company’s positioning, investment horizon, and consistent progress is important.
06. How would the rise of retail investors impact SEA markets?
Eric: For retail investors, possessing investing know-how is important for a healthy market. Even media companies play an important role by helping to inform retail investors on different business models & potential risks/returns of their investments. In China, investors’ qualification is a basic requirement as they need to understand the market and the risk before investing. For example, compared to traditional stock investors, investors in the STAR board are subject to stricter entry requirements such as investment threshold. William:Indonesia’s stock market is institutional-driven, although there has been a surge of retail investors in the past 2-3 years. Stability will be affected as investment horizons and risk appetites change over time, with the X factor being the younger generation segment possessing higher risk appetites.
Dimas: Retail investors can create more hype, which can be good or bad depending on the investors’ perception of the startup. Positive hype can bring better valuation for the company.
07. Which sectors have the most growth potential in the next 2-3 years and what are their driving factors?
William: Sectors related to the consumer market possess high potential due to familiarity. Particularly, the three sectors of e-commerce, fintech, and logistics are expected to keep their prominence in the next few years.
Eric: SEA generally follows the global trend of growth in the fintech and e-commerce sectors. Although we expect B2C to lead with more IPOs for now, some B2B sectors like SaaS are also attractive owing to their stable business models.
Rama: Policy change can be a game-changer and can encourage new business models, as seen in many fintech and edtech disruptions in the region.
Disclaimer:This report only expresses the views of Favour Capital, which does not offer any investment advice. If you would like to further discuss any of the information mentioned above, please feel free to contact us via admin.sea@favour-capital.com