Let’s start with the question, “Are Southeast Asia technology companies under-valued? Different people will have different perspectives depending whether you sit in Singapore or in Jakarta or Bangkok. Recently, Terence from Tech In Asia published an interesting post on the investment activity around Southeast Asia. Two important observations came out from the article: (a) the investment in e-commerce, fashion and online retail constituted where most of the money were channeled to and (b) the amount of investment that Rocket Internet amassed against local investors is 5 to 1. Taking this further with the data from Techlist Asia, we can draw some interesting insights about the value of Southeast Asia technology companies. One interesting insight is that the asymmetry of information about the Southeast Asia leads to different perceived values of startup companies in the market.
Every piece of data from an investment tells a story. By collating the data and drawing out some observations despite the nuances of accuracy, it paint a picture that one can think about the Southeast Asia companies. In simplicity, by drawing different hypotheses on the investment and where they are channeled to, you see one interesting fact pop up. There is an asymmetry of information on the entire Southeast market because the investments made by the investors on Rocket Internet companies and local Southeast Asia companies differ by a big margin along the lines of 5 to 1. Think about it from another way, even if the valuations in Silicon Valley are over heated, the investment on companies will not differ so much. So, it can mean two extreme situations, and here’s how you might want to break it down:
- The Rocket Internet investors put a high valuation on Southeast Asia markets: If you cut out the chunks of investment from the investors of Rocket Internet: Russian billionaire Leonard Blavatnik, Swedish investment firm Kinnevik, and J.P. Morgan, you discover that the amount of investments placed on Southeast Asia is very significant. This is contrarian to what US venture capitalists have looked at the Southeast Asia market. Believe it or not, a lot of investors from the US come to Southeast Asia and seek opportunity, but often decide not to do anything. The way they decide why Southeast Asia is not the market of choice, because you have to fight the homogenous market of choices: China, India, US, Russia and Brazil. It does not matter to them if you add up the markets to them because they believed that fragmentation is a weakness. Even if the entire Southeast Asia has a population almost reaching the same number to the United States, they clearly avoided it. The second reason that they often state is that the exits are limiting. This is also changed in the past year with we are getting valuations of US$50-200M for companies such as Reebonz and Viki whether they are raising for a new round or being acquired. So, if you believe that the investors of Rocket Internet must have some level of intelligence, the investments on the Southeast Asia Rocket Internet companies do not make sense. Even if the Samwer brothers have a track record with their previous companies, the failure to scale companies in Southeast Asia must be a concern or risk to them. Yet, they persist on their approach. Even if the valuations on Rocket Internet are overhyped on Southeast Asia companies, they must have convinced the investors that there is a story for Southeast Asia. So, they have sold that vision and market size much better than the entrepreneurs and investors of Southeast Asia.
- The local investors in Southeast Asia are undervaluing the companies: What if I flip the argument the other way round and argue that the situation for this five-fold difference between Rocket Internet companies and local companies is that the local companies are valued far lesser. That can be true. We don’t see companies in Southeast Asia have common market access. We can sell the vision that company X can go out of Indonesia to elsewhere, and company Y in Singapore can move to Malaysia. The real issue which we all don’t want to admit is that it’s hard to scale into another market. You tend to get companies being hot for their domestic markets and not able to cross the borders. This problem is not just for startups but also for conglomerates as well. Very few companies are able to make that crossing. That entrenched local companies situation is probably why the companies are under-valued as well. You can’t fault the local investors for being pessimistic and value the company lower because it’s extremely difficult to get market access into another country, or they don’t even believe the local story.
Clearly, the answer must be somewhere in-between, but the question is which side can we work on? For the entrepreneurs, you have the unfortunate disadvantage that you can only win in one market first, and decide for yourself which other Southeast Asia country you might want to target. It does not help for mobile and digital trends, the behaviour can be varied greatly between feature and smart phones. For the local investors, your risk is really whether the company can scale but local domination means that you have no choice but to minimise your expectations on the exit.
That comes to my final thought on the whole issue. Rocket Internet is able to paint a great picture of Southeast Asia market better than anyone in the region. If someone is able to paint the same picture almost as good as them, isn’t there an opportunity for a brand name venture capital firm to seize the market and match the valuation somewhere in-between? Coming back to the question, are southeast asian companies under-valued? That, I leave you, the reader to decide the answer for yourself.
Update: Lim Der Shing, partner of Jungle Ventures, gave an interesting comment and argued that it might be interesting to match each company of the vertical from Rocket Internet against the local competitor. I did indicate that I have collated various sources of data from Rocket Internet on their valuations of the companies which received vast investment. Without specifics, the valuations of the subsidiary Rocket Internet companies are averaging about 2.5 to 3x against their investment for the series A round.
Acknowledgments: I acknowledge my wife Yuying Deng for bring an interesting intellectual discussion to this question during our date night after reading Terence’s article. In that discussion, there is another article on the ecosystem and successful companies that can be written but I will do so some other time. Similarly, I have discussed my thoughts on this article with Terence Lee and Isaac Tay over the weekends at my place. Photo credits: Data from Techlist.Asia