Southeast Asia Exits Forecast to Hit Record High

Southeast Asia's Startup Resilience and Projected Exits

The economic challenges presented by the pandemic have not significantly hindered the growth of the startup ecosystem in Southeast Asia. Instead, the region has demonstrated considerable resilience.

A recent analysis by Golden Gate Ventures, a prominent investment firm, forecasts a surge in exits within the next two years. This positive outlook is driven by a combination of factors.

Key Drivers of Increased Exits

A more developed and maturing ecosystem is fostering greater opportunities.
An expanding pool of secondary buyers is increasing demand.
The growing prevalence of SPACs (Special Purpose Acquisition Companies) is providing alternative exit routes.

Report Findings and Methodology

The firm’s report, titled “Southeast Asia Exit Landscape Report 2.0,” builds upon earlier research initially released in 2019. It represents a continuation of their ongoing analysis of the regional startup landscape.

Golden Gate Ventures collaborated with INSEAD, a leading business school, to gather insights from both general and limited partners operating within the region. This collaboration ensured a comprehensive perspective.

Data Sources and Analysis

The report leverages Golden Gate Ventures’ extensive proprietary database, which contains data collected since 2012. This database tracks crucial metrics such as the intervals between funding rounds and the success rates of fundraising efforts.

Furthermore, the analysis incorporates information from publicly available databases, industry reports, and expert opinions sourced from the New York Stock Exchange. This multi-faceted approach provides a robust foundation for the report’s conclusions.

Michael Lints, a partner at Golden Gate Ventures and the lead author of the report, contributed significant additional insight to the findings.

The Broader Exit Environment

Despite the economic challenges presented by the pandemic, the technology sector demonstrated global resilience. Notably, the United States witnessed a surge in initial public offerings, reaching record valuations. While Southeast Asia’s tech landscape is comparatively nascent, Justin Lints of TechCrunch explained that its stability stemmed from established companies experiencing heightened demand as a direct result of the pandemic.

“Over the preceding eight to nine years, we have been developing crucial infrastructure in areas like e-commerce, logistics, and even healthcare,” Lints stated. He further elaborated, “When the pandemic enforced stay-at-home orders, a significant shift occurred.”

He noted that many e-commerce companies experienced at least a doubling of their revenue. Similarly, last-mile logistics providers saw substantial growth, and the digital healthcare sector also benefited from increased adoption.

Although the tech industry outperformed many others, the COVID-19 pandemic did contribute to a decrease in overall global venture capital investment. Southeast Asia’s startup ecosystem was also affected, experiencing fewer exits. However, it still maintained a relatively strong performance, attracting $8.2 billion in investment during 2020, as detailed in a report by Cento Ventures and Tech In Asia.

It is crucial to recognize that a substantial portion of this funding—over 50%—was secured through large investment rounds by established unicorns such as Grab, Go-jek, and Traveloka. Nevertheless, Cento Ventures also identified a rise in investments ranging from $50 million to $100 million for other startups.

These investments typically represent Series B and C funding rounds, which, according to Golden Gate Ventures, establish a robust foundation for potential exits within the next three to four years.

“The volume of Series B rounds currently occurring is unprecedented, even when compared to the recent past,” Lints observed. “This represents a clear and significant increase.”

Investment activity continues to be directed towards Southeast Asia. The report indicates that $6 billion in funding was secured in the first quarter of 2021 alone (data sourced from DealStreet Asia, PWC, and Genesis Ventures). This marks the strongest start to a year in the region’s history.

This positive trend suggests a promising outlook for mergers and acquisitions in 2021. The report revealed a decline in exits during 2019 and 2020 compared to 2018. This wasn’t solely attributable to the pandemic; many startups opted to remain venture-backed for an extended period.

Golden Gate Ventures anticipates a resurgence in M&A activity. Their forecast for 2021 includes acquisition deals exceeding $30 million in value, significant mergers, and an increase in the utilization of SPACs (Special Purpose Acquisition Companies).

Southeast Asian Startup Exits: A Growing Trend

According to projections from Golden Gate Ventures, the period between 2020 and 2022 is anticipated to witness a total of 468 startup exits. This figure represents an increase from the 412 exits previously estimated in an earlier report.

The rise in predicted exits is largely attributed to increased involvement from late-stage private equity firms, alongside the growing presence of secondary purchasers and Special Purpose Acquisition Companies (SPACs), coupled with favorable public market conditions.

The Role of Secondary Buyers

Lints highlighted that secondary buyers will encompass a diverse range of entities. These include family offices, large conglomerates, and venture capital funds seeking increased ownership stakes or aiming to secure positions ahead of future funding rounds.

He noted a recent shift in investor behavior, stating, “A noteworthy development is the interest shown by later-stage funds, including private equity firms – both within and outside Southeast Asia – in acquiring positions in companies expected to secure Series D or Series E funding in the coming years. This is a relatively new phenomenon in the market.”

Exit Strategy Breakdown

Golden Gate Ventures forecasts that Mergers and Acquisitions (M&A) will remain the dominant exit route for Southeast Asian startups. They predict M&A activity could account for as much as 80% of all deals.

Secondary sales are expected to contribute around 15% of exits, while Initial Public Offerings (IPOs) are projected to represent approximately 5%.

M&A Activity During the Pandemic

Despite the challenges presented by the 2020 pandemic, a record number of M&A transactions occurred. Golden Gate Ventures estimates that 45 such deals were completed.

These acquisitions were particularly prevalent in sectors like e-commerce, fintech, media, adtech, and social networking, with larger corporations strategically acquiring startups to enhance their technological capabilities.

The IPO Effect

An increase in the number of companies going public is expected to have a ripple effect throughout the Southeast Asian startup ecosystem.

The report suggests that companies such as Gojek and Trax, having already engaged in significant acquisitions, are likely to continue acquiring startups should they successfully list publicly and gain access to greater liquidity.

Series B and C Funding Trends

According to Lints, despite continued exits, there's a growing trend of companies securing substantial late-stage funding to remain independent, indicating a more developed Southeast Asian startup landscape.

The emergence of the pandemic in 2020 led to a decrease in the volume of pre-seed and seed investments. Conversely, the report highlights that the timeframe for startups to obtain Series B or C funding has shortened, averaging less than 21 months.

Evolution of Exit Strategies

Lints observed that exits between 2015 and 2017 may have occurred prematurely for some companies. These businesses, still experiencing growth, lacked sufficient follow-on funding to facilitate expansion into new markets or the development of new products.

Consequently, acquisition by larger entities often represented the sole avenue for continued product development. He stated that the ability to secure Series C funding now empowers companies to expand and maintain their independence, rather than being compelled to pursue an exit.

This shift demonstrates the ecosystem’s increasing maturity, providing founders with the necessary capital to realize their visions and effectively compete. This represents a significant change in the regional startup environment.

Impact on Early-Stage Funding

Notably, the rise in later-stage funding hasn't resulted in a scarcity of pre-seed and seed investments. This is partially attributable to the fact that former employees of well-funded, mature companies frequently establish their own startups.

These founders possess valuable experience with fundraising processes and benefit from established professional networks. A considerable number of individuals who previously worked at Grab, Gojek, and Lazada have subsequently launched their own ventures.

“These new founders appear to be securing funding more rapidly,” Lints explained. “Furthermore, we are witnessing an increase in the number of scouts making initial investments in companies.”

He further suggests that the robust Series A pipeline necessitates a substantial volume of pre-seed and seed deals to sustain it.

Key Takeaway: The Southeast Asian ecosystem is maturing, allowing companies to stay private longer.

Investor Desire for Liquidity

A significant driver potentially boosting exit activity – particularly mergers and acquisitions – stems from investment funds seeking to realize returns. A 2019 report by Golden Gate Ventures predicted that the initial wave of institutional venture funds established between 2010 and 2012 would begin approaching the conclusion of their investment periods around 2020.

Consequently, the general partners overseeing these funds are actively investigating exit strategies for their respective portfolio companies, which is expected to generate more secondary transactions and M&A activity.

This trend will likely contribute to the expansion of secondary markets, which have historically been underdeveloped within Southeast Asia. While initial investors may not directly compel portfolio companies to pursue sales, they will explore opportunities with secondary purchasers interested in mergers and acquisitions.

Growth in Secondary Market Activity

“Over the past year and a half, we’ve observed a notable increase in secondary market participation,” explained Lints. “Later-stage investors, including family-owned enterprises and family offices, are seeking access to investment opportunities originating eight, nine, or ten years prior.”

This shift results in alterations to the cap tables of these companies, meaning founders will encounter a revised shareholder base.

“These transactions generally involve companies demonstrating strong performance, with a clear path to securing further funding within the next year. However, those facing greater challenges may encounter difficulties,” he clarified.

“Funds managing a diverse portfolio of companies won’t necessarily be able to divest all holdings. Therefore, some founders may be faced with a choice: either repurchase shares from their investors to maintain control, or consider business liquidation or a strategic trade sale.”

Secondary Markets: Platforms for trading existing shares in private companies.
Cap Tables: A record of a company’s equity ownership.
M&A: Mergers and Acquisitions, representing the consolidation of companies.

Special Purpose Acquisition Companies (SPACs) in Southeast Asia

A significant development in the financial landscape of Southeast Asia has been Grab’s decision to become a publicly listed company in the United States via a SPAC deal valued at $40 billion. Experts, such as Lints, anticipate a growing trend of Southeast Asian firms utilizing SPACs as a pathway to public markets.

This method offers increased operational adaptability, particularly for startups aiming for a U.S. listing. It presents a viable alternative to conventional initial public offerings (IPOs).

“It is predicted that as New York facilitates direct listings, a greater number of companies will move away from traditional IPOs,” Lints stated. “They will instead explore the quickest and most adaptable methods for listing on a stock exchange.”

For Southeast Asian businesses, accessing public markets has historically presented challenges. Therefore, SPACs are expected to significantly broaden access to capital.

These challenges encompass not only regulatory compliance, extensive roadshows, and substantial expenses, but also doubts regarding the comprehension of these companies by international investors. A robust SPAC sponsor team can effectively address these concerns.

Such a team can play a crucial role in strategically positioning the company, executing marketing initiatives, and generating market interest.

In response to this trend, both the Singapore Exchange and the Indonesian Stock Exchange are actively preparing to permit SPAC listings. This move is intended to attract a greater volume of technology-focused companies.

Lints suggests that this development will enable companies to contemplate a dual listing strategy, simultaneously in Southeast Asia and the U.S., potentially maximizing investor returns.

“A dual listing represents a compelling opportunity, and SPACs provide a logical avenue for achieving this,” he explained.