Exit-ing times: Investors eye the Southeast Asian tech startup space

There's widespread anticipation that Southeast Asian tech startups are set for a surge of exits in coming years. What's behind the optimism? Or is it actually pessimism?

Southeast Asia is set to see a significant increase in tech startup exit activity over coming years, according to predictions from industry figures. The exodus of tech founders is expected to be driven by the pull from an influx of investors looking to make big gains in the early-stage sector, combined with the push factor resulting from the Asian economic slowdown, softening currencies, slowing stock markets and a generation of tech founders now ready to retire or seek new opportunities.

A minimum of 700 startups across the region are forecast to exit across the years 2023-25 according to a new report entitled "Southeast Asia Exit Landscape: A New Frontier" from Singapore-based Golden Gate Ventures, a VC outfit specialising in early-stage investment, and business school INSEAD.

The joint forecast starts by examining Crunchbase data from the 2015-2018 period. Combining this with forecast future funding, the authors produce figures for probability and average time to exit for startups across Southeast Asia. The report also contains insights drawn from a survey of ten regional partner organisations.

The authors point to steadily increasing investment from corporate VCs and global private equity firms, as well as the growing number of acquisitions by fast-growing startups that have achieved unicorn status and initiatives by stock exchanges to facilitate tech listings. All these factors bring funds into the marketplace looking for startups in which to invest, which naturally tends to boost the attractiveness and accessibility of exits for founders.

Golden Gate partner Justin Hall goes so far as to suggest that a "pipeline to exit" has emerged in the region. Hall says that the pipeline is now well developed in the first stage - smaller acquisitions - and the second stage where established startups merge into a major regional player.

"It will be interesting to see how the third stage - the exit of the regional entity itself - will take shape in coming years," he comments.

Unicorns are gobbling up tomorrow's unicorns

The report goes into depth to illustrate the phenomenon of unicorns having become acquirers of smaller startups. A total of 28 startup acquisitions were made by Southeast Asia's nine unicorns in the period covered by the authors. Gojek made the most buys with 11 acquisitions since 2016. The largest deal was by Singapore-based imagery specialist Trax, acquiring US startup Shopkick for US$200m in June. The following month, Trax achieved unicorn status with a $100m funding round.

The report also notes the emergence of more funds from South Korea and Japan, joining those set up by Chinese tech giants such as Tencent and Alibaba. The new funds are joining long-established global investors such as Warburg Pincus, which recently announced a new US$4.25bn fund specifically targeting Southeast Asia and China.

Meanwhile stock exchanges have not been idle in seeking their share of the coming investment surge. America's tech-friendly NASDAQ and Singapore's SGX, for instance, have teamed up to help startups in the region with a funding pathway under which they can list and raise capital on SGX first before heading to NASDAQ.

The Golden Gate forecast of increased Southeast Asian investment and exits is certainly in line with recent events. According to EY, VC investment in the region increased substantially in 2018 with 311 deals totalling US$5.2bn compared to 230 deals worth US$4.1bn the year before.

A separate survey recently carried out by law firm Baker McKenzie gives a similar picture. The legal researchers say that investment destinations such as Europe, Britain and the United States have been overtaken by Thailand, Vietnam and other Southeast Asian nations, according to the survey, which polled 600 executives across the Asia-Pacific region. No less than 63 per cent of the executives based in mainland China, 200 of whom were included, said they expected to increase international investments by more than 10 per cent over the next two years. Across all firms surveyed, 88 per cent of respondents said their firms were interested in international expansion, be that acquisitions, investments or listings, over the next two years.

Chinese firms reduced foreign direct investment into the US by 83 per cent in 2018 year on year, while Chinese investment into the European Union was down 70 per cent during the period, according to an earlier report by Baker McKenzie and Rhodium Group.

The authors noted that Southeast Asia offers good economic growth rates and substantial market size, as well as a degree of cultural affinity for Chinese companies that may not exist in the US or Europe. The survey also found that gaining access to new markets was a major draw for international companies, whereas low production or labour costs was relatively less important. Asset valuation was also deemed more reasonable in Southeast Asia than in China or developed economies.

Big Capital has ‘VC envy'

Against this background it comes as no surprise that the Financial Times reported in September that KKR, a major investor which has long specialised in buyouts, is now planning to move into early-stage tech investing. The FT reports that KKR plans a US$300m Technology, Media and Telecommunications fund for Asia, which will join its US$9.3bn Asia buyout fund.

Paul Yang, who leads on KKR transactions in Greater China, will reportedly oversee the project. Early hires apparently include Karen Zhang, formerly responsible for General Atlantic's tech investments in mainland China. Ms Zhang recently supervised General Atlantic's acquisition of a stake in ByteDance, China's biggest unlisted start-up, now valued at more than $70bn and expected to go public next year.

Joji Philip, founder of Deal Street Asia in Singapore, commented to the paper that "many of the largest international private equity firms have had venture capital envy" caused by watching their smaller counterparts amass fortunes by investing in young tech companies on both sides of the Pacific. Visible signs of this envy have included public speculation by David Rubenstein, co-founder of Carlyle, regarding the purchase of a venture capital company in Silicon Valley. Warburg Pincus for its part has put its two heads of China tech in charge of the group's overall business there.

KKR's diversification into tech is also led, according to the FT analysis, by "a new receptivity to selling control". Tech startup chiefs are worried by the economic slowdown in Asia, stock markets losing momentum and weakening currencies. KKR insiders also believe that many startup founders are willing to step aside from their creations and hand over the reins - particularly in the price is right and the deal can be done to their personal advantage.

Chief executives "are especially open to the idea of being bought out when the proceeds are delivered to them offshore in foreign currencies", according to the paper's sources among the investment firms.

The new KKR tech fund is expected to start raising money in coming months, in the same time frame as the completion of investments by the massive Asia buyout fund - which is KKR's third, and the second-largest fund now active in the region.

While the scope of KKR's VC tech activity remains small compared to its traditional private equity dealings, the move - coupled with rumblings from other giants like Carlyle and Warburg - is probably a sign of things to come. Combined with the reports from Golden Gate and Baker McKenzie, and moves across the spectrum of investment activity from unicorns to stock markets, it does appear that a lot of exits may be ahead for Southeast Asian startup founders.