Singapore start-ups: Touching greatness

Home search site PropertyGuru is a source of inspiration for Singapore tech start-ups. Eight years after its launch, the company is expected to become the first VC-backed business to go public in nearly a decade. Hong Kong, Australia and the US are all being considered as locations for the listing, which is expected to value PropertyGuru at more than $500 million.

The site - now expanding into Malaysia, Thailand and Indonesia - has built a strong presence in Singapore after receiving three rounds of funding between 2008 and 2012. The first two came from local angel investors. PropertyGuru won international recognition in the Series C round as Germany-based property portal ImmobilienScout24, a subsidiary of The Blackstone Group's Scout24, put in $47 million.

"Southeast Asia is probably seven years behind matured online markets such as Europe, US or Australia. Close to $1 billion is spent annually on property advertising in our markets and this is moving online rapidly. So we're just at the start of an exciting journey," says Steve Melhuish, co-founder and CEO of PropertyGuru. "In the next 2-3 years, there will be a handful of tech IPOs coming from the region."

Two other, relatively recent exits in Singapore's technology, media and telecom (TMT) space came via trade sales: online job site Jobstreet was acquired by Australian peer Seek for A$545 million a few months ago; and last year Japanese-commerce giant Rakuten paid $200 million for Viki, a video streaming site characterized by community-generated subtitling.

Burden of proof

With PropertyGuru being primed for an IPO within seven months, the questions for Singapore venture capitalists as follows: First, are we now being presented with proof that local start-ups can achieve true scale? And second, does this confirm Singapore's status as a tech hub for Southeast Asia?

"No, there is no complete proof, at least not yet," says Peng T. Ong, a serial entrepreneur and then turned a venture investor in Singapore. "The definition of ‘proof' is simple, it means you have shown you are able to generate a huge return from significant exits. We have a number of nine-digit exits, but we haven't got results at the ‘unicorn' - or $1 billion levels yet from Southeast Asia. If you want to see this proven before investing, then you don't invest in Southeast Asia yet."

But Ong is doing just that. Two months ago, he launched Monk's Hill Ventures, which is raising a S$100 million ($80 million) Southeast Asia-focused fund. It is estimated that $100-200 million in seed funding has entered the start-up ecosystem across 1,000 deals in past few years. Ong reasons that some interesting ideas and capabilities should have emerged.

There are at least four Singapore-headquartered start-ups that are now four years old and valued $100 million or more. They include Redmart, an online grocery site that operates purely in Singapore, online luxury retailer Reebonz, and PropertyGuru.

Singapore has aspired to become a tech hub for more than a decade. In the late 1990s, the government created the Technopreneruship Investment Fund (TIF), a $1 billion vehicle that was intended to attract companies and venture capital firms to Asia from the US. Unfortunately, the timing wasn't right. After the dotcom bubble burst in 2001, the entrepreneur community thinned out. Global investors shifted focus to China and India, drawn by the market size.

The Singapore government, however, continued to launch incentives - including a handful of incubator and accelerators programs - to nurture local tech start-ups. Over the past five years, Infocomm Investments, a government-backed accelerator program, has pumped S$16 billion into university and commercial research to inspire business ideas.

Gradually, a start-up ecosystem has emerged. This has brought in the likes of Google, Facebook and LinkedIn from the US and Alibaba Group from China. European incubation program Rocket Internet identified Southeast Asia as a region in which to invest.

Economic structures are also changing, making Southeast Asia a more viable proposition for venture capitalists. According to AVCJ Research, VC investment in Singapore reached $743.4 million in 2013, roughly equal to the total for the previous nine years combined. Twice as many deals were done in 2013 compared to 2011.

"With the evolution of mobile internet, the barriers facing online firms that want to penetrate into different countries and regions are being broken down. Southeast Asia is becoming more interesting," says Jixun Foo, managing partner at GGV Capital. "But my question is: Will Southeast Asia be able to attract talented individuals to launch new businesses here? It's very important that entrepreneurs recognize the market opportunity."

The Sino-US VC firm led a $15 million Series B round for Malaysian-based cab-booking app GrabTaxi, which was set up by two Harvard Business School graduates in 2012. Existing investors Temasek Holdings-owned Vertex Ventures and Chinese online travel platform Qunar also participated in the round.

Although the start-up is still at a nascent stage, growth has been rapid. One year after launching in Kuala Lumpur - where it is known as MyTeksi - GrabTaxi entered Manila. Twelve months on from that, it is present in 15 cities across Southeast Asia with a staff of 200. GrabTaxi is regarded as a young company with big things ahead of it.

"I'm not trying to bring GrabTaxi into China but it has the potential to be a multi-billion-dollar company in Southeast Asia, which won't be capped at $500 million," Foo says.

Fragmentation factor

Southeast Asia, including Singapore, usually sees a handful of sub-$100 million trade sale exits in the TMT space each year, in part because the lack of Series A and B funding prevents companies from achieving greater scale and value. The gap is being filled by local VC firms. Monk's Hill is one of several firms to receive capital from the government, which it must now match with private sector commitments. The aim is to guide start-ups further down the development path, which will likely involve expansion across Asia.

"The highly likely exit option for tech start-ups in this region would be trade sales rather than IPOs as most would not be able to achieve sufficient scale and market valuation for an IPO, particularly on NASDAQ where you probably need at least $500 million valuation before it makes sense there. It also does not help that the regional stock market here would not know to value technology start-ups," says Leslie Loh, founder of Red Dot Ventures.

Scaling up regionally isn't easy, given the fragmented nature of the market with different languages and cultures. Tito Costa, managing director for Southeast Asia in Rocket Internet, says the firm responded by adopting a localized structure for its e-commerce site Zalora, providing brands and styles that are relevant to local markets.

"Mobile technology has made a huge impact on online consumption, but the market is still fragmented so we need to adapt to it," he says.

Fragmentation also means e-commerce is less competitive than in markets like China. This leaves space for leaders to establish themselves in different verticals. Redmart, for example, is the most prominent player online grocery player in Singapore. Founder Roger Egan is trying to carve out a meaningful online chunk of an offline market that is worth $6 billion, and is already seeing average month-on-month revenue growth of 20-30% for his trouble.

"When we launched the business in Singapore, everyone told us buying groceries is very convenient, so people won't buy online. Actually convenience is relative. In New York City, there are many supermarkets and it's much more convenient than Singapore, but people are still buying groceries online that are delivered to their doors," Egan says. "Since we've started, clearly many people have realized that actually Singapore isn't that convenient."

Logistics is in itself an impediment to building scale. The infrastructure in much of Southeast Asia is underdeveloped so many e-commerce operators have to build their own warehouse and hire employees to deliver goods. Redmart itself has built a 100,000-square-foot warehouse, with 25 trucks and a staff of 200. Egan thinks he can get to $1 billion in Singapore, then enter new markets - and not necessarily just Southeast Asia.

PropertyGuru is also looking to consolidate its existing positon and explore international expansion. "If we look at where our business is today, versus our global peers in US, Europe or Australia, there is no reason why we shouldn't be worth $2 billion in next five to six years," says Melhuish. "The leading property portal in Australia has close to a $6 billion market capitalisation today."

The next generation

Once early-movers become entrenched in certain categories, it becomes that much harder for other players to enter. Higher valuations will therefore only come to start-ups in Southeast Asia with viable plans for achieving scale, whether it involves branching out into new untapped areas of demand or focusing on a global customer base from the outset.

"It is only logical that tech start-ups in this region which target the smaller Asean market will unlikely be able to raise significant funding comparable to those target larger market like the US and China," says Red Dot's Loh.

One of Red Dot's portfolio companies - Singapore-based iCarsClub, a peer-to-peer car lending site - raised $10 million last month from Sequoia China just three months after launching in the country. "iCarsclub started out by using Singapore as a test bed before moving on to launch in China. It would not have been possible to raise the significant if our target was in Southesat Asia," Loh says.

Unique and creative technology is another means of achieving higher valuations without addressing the challenges of scale. A decade ago entrepreneurs would have to build businesses to several hundred million dollars in revenue before the buyers came in. Now larger technology firms are more willing to snap up assets at an earlier stage in order to diversify revenue streams, cutting years of the timeframe had they sought to enter new areas organically. Pick the right segment and the strategics will come to you.

"Given the significant investment in research by Singapore over the years, I believe it has an advantage over others in Asia in incubating start-ups that emerge as technology spin-offs from our research institutes. The likes of medical technology and environmental technology will be our next growth drivers beyond the Information and communications technology (ICT) and interactive digital media (IDM) sectors, where we got the ball rolling despite our small market," adds Loh.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Venture
• Southeast Asia
• Technology
• Consumer
• Exits
• Consumer
• TMT
• Singapore
• Southeast Asia
• Venture
• Exit
• Red Dot Ventures
• GGV Capital