Golden Gate Ventures | Venture Capital for Southeast Asia

Southeast Asia Offers Big Exits (Just Not Through IPOs) – The Bamboo Report, March 2016

Southeast Asia Offers Big Exits (Just Not IPOs)

Southeast Asia Offers Big Exits (Just Not Through IPOs)

In the United States, the ideal exit for technology companies is immortalized in one iconic image: a CEO ringing the bell on the floor of the NASDAQ on the day of the company’s IPO. With the explosion of startup cultures in China and India, that image has gone international, though with a slight change of scene to Shanghai, Mumbai, and Hong Kong.

But an IPO isn’t necessarily the greatest fairytale ending for tech companies on that side of the globe. In Southeast Asia, which investors look to more and more as a potential asset, the question of how tech startups will exit is more pressing than ever.

In this paper, we will analyze data on the past fifteen years of M&As and IPOs to identify growth trends for each. By projecting these trends into the future, we estimate the number of M&As and IPOs that are likely to take place in 2020, and identify which type of exit will be dominant. We also review the context for these predictions in terms of general economic and investment trends for SEA.

Whereas a publicly listed company might be the ideal in China, India, or the West, such an opportunity rarely appears here. Acquisitions are the bread and butter of both investor and founder alike in Southeast Asia. The most notable exits here have all been acquisitions: Rakuten’s earth-shaking purchase of Viki for US$200M in 2012, Zendesk’s US$30M acquisition of Zopim in 2014, and even McAfee’s landmark acquisition of Darius Cheung’s tenCube back in 2009. In fact, there have only been 11 tech IPOs in SEA since 2005, while there have been 127 acquisitions during the same time period. (See Appendices 1 and 2).

Vincent Lauria, managing partner at Golden Gate Ventures, explains, “In the United States, a successful exit involves going public. The financial returns generated from listing on NASDAQ or the LSE usually mean that both investors and entrepreneurs alike have generated a pretty healthy return on their investment. In Southeast Asia, it’s the opposite: 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.”

It’s always possible, however, that old patterns will change. Like China a decade ago, Southeast Asia is now an emerging market on the brink of something big. Five of the ten member countries of the Association of Southeast Asian Nations (ASEAN) are among the top 25 countries globally in terms of GDP growth . The ASEAN Economic Community (AEC) had a nominal GDP of $2.4 1 trillion in 2013, placing it seventh overall in the world. Given current growth patterns, the AEC is predicted to rise to the fourth spot by 2050 . The region 2 has already passed an inflection point in terms of digital growth; more people are consuming digital content, more people are paying for goods and shopping online, and more people are buying mobile phones.

The creation of the AEC and a more cohesive economic environment in SEA also represents a collective shift towards facilitating access to SEA markets that is only now getting underway. The aforementioned effects are compounded by the fact that China’s economic growth has been slowing over the years , leading foreign companies and investors to look towards SEA as a 3 region of economic interest. And as the markets become larger and more mature, so too do the number of high-value startups. An explosion of new funds in the region has given startups the ability to scale up. In 2015 alone, firms including Golden Gate Ventures, Northstar Group, Venturra Capital, Sequoia, and KKR have launched or backed SEA-focused new funds, with a total capitalization of as much as US$2 billion. Overall, capital invested in emerging Asia has increased by 47% since 2013, according to a recent EMPEA Data report . To compound this growth, funding 4 rounds are increasing in size and frequency, driving an increase in startup valuations . Though valuations are not officially disclosed, as of March 2015, 5 thirteen companies in SEA had raised US$20 million or more in funding, implying valuations in the hundreds of millions. In another positive sign, private equity firms are increasingly making smaller early-stage investments in SEA startups instead of writing larger growth-stage checks—a sure sign that they expect to make Uber- or Facebook-level returns on such deals. With all this in mind, it seems possible that SEA could be on the cusp of a China-like explosion of IPO exits.

 

Download the full report at Asia VC Investment Report II.