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Why the tech IPO market in Southeast Asia may soon heat up

Published on November 28, 2023

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As it is still the early days for the tech ecosystem in emerging markets like Southeast Asia, it is a fact that venture capital funds focusing on the region have seen lower returns compared to other regions, according to the latest e-Conomy SEA 2023 report from Google, Temasek, and Bain & Company. The largest returns to date are concentrated on a select few high-profile initial public offerings (IPOs), primarily on US exchanges.

The report suggests that this scenario might be a consequence of the prevailing interest rate climate, leading to a decrease in IPO enthusiasm and a dip in the number of listings on regional exchanges.

However, Leighton Cosseboom and Adrian Li of AC Ventures discussed in a recent episode of Indonesia Digital Deconstructed that change is not only highly likely, but imminent.

Adrian pointed out that in the prior cycle of VC investment in Southeast Asia, investors tended to start at the earliest stages. As such, there was always a question of when the next stage of financing, such as series B and series C, would materialize, as well as the possibility of an exit on the public market further down the line.

However, the situation today has shifted, as many later-stage venture capitalists are increasingly setting their sights on the region. Some tech companies have also proven that they can raise meaningful capital via IPO.

In Indonesia, GoTo Group, Bukalapak, and Blibli raised over US$3.5 billion on the local stock exchange in the past 18 months, showcasing a growing investor appetite for publicly traded tech companies.

While some criticize these companies for failing to retain their performance post-IPO, Adrian argued that over time, they would be able to prove that they can generate the kinds of positive cash flow and profits expected from mature companies.

He explained, “I think this is the first time the region can really say that we have ample capital to support entrepreneurs in our part of the world through every stage of financing, from seed, probably up to series C and pre-IPO.”

The situation becomes even more hopeful as, during this period, companies are being grown in a far leaner manner. They are seeking monetization earlier and being far more efficient, added Adrian.

He said, “We can expect if this continues and they get to scale, they will be able to approach an IPO even with profits in place. And I think those will then make very compelling IPOs in the public market.”

An analysis from Redseer Strategy Consultants echoes this sentiment. The firm states that the focus of Southeast Asian startups on profitability will result in a sizable pipeline of IPO-ready companies in the next five years.

The forecast is supported by the fact that there are around 50 unicorns and over 100 ‘soonicorns’ – startups with a valuation exceeding $100 million – in the region.

“Despite uncertainties like high interest rates, subdued funding, and limited capital raising activities, the region’s startups still hold significant growth potential. The new-age tech IPO listings may see a rebound, drawing parallels to the 3x growth in tech IPOs observed in the US post the dot-com bubble,” the report stated.

Redseer forecasts that there will be around 40 digital businesses in the region ready to go public by 2027. Most of them are coming from fintech, direct-to-consumer, and e-commerce-related verticals, especially those with over US$100 million in annual revenue, positive EBITDA, and a resilient business model.

However, not all companies will reap the rewards.

“Around 20% of the unicorns will likely struggle under regulatory challenges, unclear business models, and plummeting demand,” the research noted. “Some of these are expected to close, pivot to new models, or get acquired.”

More funding, fewer startups

The e-Conomy SEA report revealed that dry powder that could be disbursed to Southeast Asian startups had risen to US$15.7 billion at the end of last year, up from US$12.4 billion in the previous year.

Leighton noted, “This money is going to need somewhere to go. If tech companies are focusing on monetization and profitability right now, maybe we’ll be able to see a light at the end of this funding tunnel in Southeast Asia.”

However, Adrian said the data must be looked at with a grain of salt, as it may not reflect the actual conditions at those specific periods. The data is most likely pulled from publicized fundraising releases or mandatory filings made by companies in some countries, making it difficult to correlate how much money is ready to be deployed at specific times.

“Nonetheless, there is at least a significant portion, maybe at least 50%, that was raised and with general partners who are looking to deploy,” Adrian said.

Considering this context, investors find themselves in an advantageous position in the current investment climate. This is because they have the opportunity to capitalize on attractive deals in the market, thanks to the reduced presence of low-quality startups following the period of determining profitability or failure.

Leighton said, “So, essentially, you now have better companies that are closer to profit and they’re currently on sale for early-stage investors. Then you have dry powder that needs to go somewhere.” He added that all these elements mixed together could signal a tech funding upswing in 2024, followed by a fresh raft of IPO activity in Southeast Asia.