Southeast Asia’s prospects for generating more unicorns may struggle if their forebears don’t start making money. Public market and venture capital investors don’t have infinite patience and need to see signs that the promise of a rising middle-class and technologically savvy population can result in profitable business models.
Two of the biggest names, Singapore’s Grab Holdings and Jakarta-based GoTo Group, were once lauded as the pioneers in a wave of billion-dollar start-ups that would finally put the region on the global technology map. They remain chronic losers with little sign that a sustained earnings turnaround is coming. Both started in ride-sharing, mimicking Uber Technologies and Lyft and later pivoted to fintech and online commerce.
But their inability to reap the rewards of first-mover advantage and access to a population of almost 700 million people could scare away investors. One VC I spoke to recently noted that Southeast Asia, on paper, looks like a great place to invest.
But it lacks China’s size and cohesion and the US’s sheer spending power. Suppose you accept that only a handful of investments in a portfolio will be profitable. In that case, a venture capitalist needs to ensure enough economies of scale to ensure that the few winners will bring outsized returns.
Alibaba Group Holding serves as a good example. It was already profitable when it debuted on the New York Stock Exchange in 2014, as was Tencent Holdings ahead of its 2004 Hong Kong listing.
So far, Grab, GoTo, Indonesian e-commerce provider Bukalapak.com and Singaporean internet player Sea collectively don’t inspire much confidence. Only Sea has delivered earnings from operations — and even then, just once (Bukalapak posted gains from an investment in the first quarter of 2022, which it filed under operating profit).
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In February, GoTo — an amalgam of motorbike-hailing provider Gojek and e-commerce start-up Tokopedia — said it expects its adjusted ebitda to be positive in the fourth quarter. But that is not a true measure of profit since it strips out some of the most important business costs, including share-based compensation, depreciation on equipment purchase and changes in the value of investments in other companies.
Grab’s outlook looks similarly murky. It, too, sees adjusted ebitda hitting breakeven in the final quarter of 2023. Although still underwater for the full year, that figure also removes similar line items.
Management at both companies has become more acutely focused on profits over the past year as early growth and pandemic-driven changes in demand (more deliveries, less rideshare) forced them to make tough decisions. GoTo cut at least 1,900 jobs since the start of 2022, helping it trim losses. Grab, which reports first-quarter earnings next week, is on track to deliver its narrowest net loss since it listed in 2021. Bukalapak.com is struggling in its march toward profitability.
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Sea could stand out, allowing optimistic investors to justify continued bets on Southeast Asia. In the December 2022 quarter, it posted a net income of US$423 million ($560.6 million) after slashing expenses, halving its sales and marketing budget. This belt-tightening bodes well for the future since such measures ought to be sustainable if management can resist the temptation to offer incentives to onboard merchants and consumers for its e-commerce business, Shopee, and stem a decline at its gaming unit Garena.
Yet even Sea’s challenges are similar to those faced by its peers across the region. While most tech unicorns are nominally international, cross-border trade and commerce remain a key barriers to profitable growth.
Unlike China, which has over one billion internet users all within the borders of a single nation, Southeast Asia is spread across multiple jurisdictions. Indonesia, the largest population of almost 280 million, remains a focus for VCs and startups. Merchants hoping to sell to or from the country must still deal with customs, logistics and payments that add enough friction to remove the benefits of scale.
As a result, these regional players get most of their business in just one or two countries. Grab garnered 57% of its revenue from Singapore and Malaysia last year, and GoTo got 99% from Indonesia. Sea does not offer a breakdown by country but is more diverse, counting Brazil among its non-Asia markets.
When venture investors do return, ready to write checks for a stake in the next big thing, founders will need to offer more than just access to one of the world’s most promising regions. At the very least, start-ups must see a clear path to profit because market size alone is no longer a compelling tale. — Bloomberg Opinion
