- A pathway to growth has emerged for smaller start-ups with overly localised or fragmented business models misunderstood by US investors or those without a clear internationalisation strategy
Kendrick Wong and Kai C. Chng
Published: 7:45am, 11 Oct, 2021
From cryptocurrency exchanges to health tech platforms, the number of start-ups seeking to make it big on the global stage has hit a high over the past year. The SPAC craze has arrived.
Special purpose acquisition companies accounted for 79 per cent of all initial public offerings in the United States in the first three months of this year alone. The numbers are promising, pointing to a change in market sentiment after the number of US public companies hit new lows in the past two decades.
Though the SPAC phenomenon has largely been restricted to US markets, the Singapore Exchange recently made waves as the first major Asian bourse to welcome SPAC listings. This move is especially significant against the backdrop of a flourishing Southeast Asian start-up ecosystem.
Southeast Asia has shown its investment potential in recent years. Funding trends in the region saw venture capital firms hit a new record of 393 investments in start-ups in the first half of the year, concentrated across early-stage start-ups.
The emphasis on early-stage deals exemplifies not only the healthy entrepreneurial environment offered by the region but also recognition of its long-term potential.
One of the strongest growth drivers has been the coronavirus pandemic, which forced a radical shift in consumer behaviour and preferences, resulting in the need to digitise operations and customer engagement channels for the very first time.
Hardly deterred by legacy infrastructure, these players have excelled at enabling communities to leapfrog in digital transformation. Without pre-established ecosystems in certain industries, the speed of innovation and change has freely accelerated.
Giulio Xiloyannis, an angel investor in Southeast Asian start-ups, points to Indonesia as a good example. The lack of large infrastructure investment in farm-to-large-distribution-fisheries made it possible for the industry to leapfrog into a direct farm-to-table model with agritech start-up eFishery.
Similarly, the extreme fragmentation of the second-hand car sales market has functioned as a “need catalyst” for unicorns Carro and CarSome, rather than as a deterrent as the established infrastructure often does in developed markets.
The rate of financial innovation in the West reflects the opposite. The strength of banking institutions, for one, has slowed down the acceptance of e-payments and digital wallets, putting countries such as Germany far behind the likes of Singapore and China.
Meanwhile, taxi associations in Europe, such as in Italy, have threatened the long-term viability of ride-hailing giants such as Uber to freely operate in the country. As the saying goes, it’s much easier to build on bare land.
Yet in spite of its promise, Southeast Asia has largely flown under the radar for most Western investors and audiences – at least until Grab took the title of one of the biggest SPAC deals to date with a valuation of about US$40 billion.
However, its business model and regional reach remain largely misunderstood by US investors. In a fragmented market, not having the right people at the helm of a deal to articulate a target company’s true investment potential may very well be a merger’s downfall.
Meanwhile, other start-ups have emerged with even greater ambitions. In Indonesia, the merger between ride-hailing and payments firm Gojek and e-commerce player Tokopedia to form GoTo is the country’s largest business deal to date.
Though the group intends to pursue a traditional IPO, its dominant position in a singular market communicates a clearer value proposition.
A man reads a newspaper with an advertisement showing the merger between Gojek and Tokopedia in Medan, North Sumatra, Indonesia, on May 18. Photo: EPA-EFE
As target companies gain a better understanding of the type of sponsors they need, the SPAC space is likely to see greater consolidation. That said, investors in the West continue to bring their share of non-financial assets of value to a SPAC deal.
For one, the liquidity that its financial markets can offer – be it from secondary public offerings or convertible notes – will continue to appeal to larger players in Southeast Asia.
With Singapore Exchange making its entry into the SPAC space, the implications for Southeast Asia’s upcoming tech players can only be positive.
For smaller businesses with overly localised or fragmented business models that are misunderstood by US investors or those without a clear internationalisation strategy, finding regional sponsors and a Singapore Exchange listing may be a more viable pathway to growth. With Singapore Exchange in the fray, things in Southeast Asia have certainly taken an interesting turn.
Kendrick Wong is CEO and co-founder of Omnilytics, a retail analytics platform that delivers real-time market intelligence to retailers and financial market clients worldwide. Kai C. Chng is CEO and co-founder of Digix, an asset tokenisation platform built on ethereum. They co-run a private equity firm