In August 2017, WeWork acquired Singapore’s Spacemob and announced a USD 500 million expansion into Southeast Asia and Korea. Real estate services company Cushman & Wakefield subsequently described the region as “the new battleground for co-working clout.”
Despite plenty of competition from both local and international competitors, WeWork seemed to believe that, with the help of its sizeable check book, it would be able to win a relevant share in the region’s co-working sector. The fast-growing economies and tech-savvy populations of Southeast Asia offered promised plenty of opportunity. And WeWork grew presences in Singapore, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam within less than two years.
Now, its valuation implosion and failed IPO has given investors in the region much food for thought. For this week’s “Venture Voices,” KrASIA spoke with Southeast Asian investors about lessons learned, if any, from the WeWork debacle.
For all of the negative publicity about WeWork’s alcohol-fueled work culture, internal strife and messy leadership, Liu Gengping, a partner at Vertex Ventures, which had participated in the USD 5,5 million seed round for Spacemob’s in 2016 and found itself a quick exit one year later, credited WeWork for building a community-based culture for members Gengping is still confident about WeWork’s business premise:
Spacemob and WeWork have real products, and they have proven through acquiring lots of members and generating revenue. WeWork may have pushed the sharing concept a little too far with gimmicks like free beer etc, but it is fundamentally a very good business with a lot of upside potential when viewed from the “community” lens. “Community” may sound like a pitch, but some friends who chose WeWork have rejected offers of free space from other providers. Anecdotally, I have heard that they love the culture there and have generated many business leads from their community.
According to Liu, loss-making can be acceptable when it’s part of the long-term strategy to succeed.
We can argue that [WeWork’s] founder and investors made bad decisions along the way which led to its current state, but I still find it hard to question their decision to be ambitious and accept loss-making as part of [the company’s] longer-term strategy to succeed. We lament that public listed company CEOs are often under pressure to focus on next quarter’s profitability, and unable to think about long-term strategy. We applaud the team for pursuing their long-term grand vision, though each VC firm may have a different take on valuations or execution paths of the company.
However, Liu acknowledged that WeWork, fiasco or not, does signal a change of heart in the capital markets – switching their interests away from an aggressive growth story to a profitability story, at least for now.
The real reason behind the switch can be complicated by the rising risks – a prolonged trade war, increasing probability that the world is sliding into an economic recession, the end of a low-interest rate era, or investors that simply wish to take a break from the hype in growth narratives out there.
Yinglan Tan, founding managing partner at Insignia Ventures Partners, said that risk is always part of the equation when it comes to investing in fast-growing technology companies. Insignia has interests in the co-working sector through its seed stage investment in CoHive, a prominent co-working chain in Indonesia.
There is the uncertainty that comes with scaling a presumably innovative business model or product, the volatility of disrupting often entrenched markets or industries, and the unpredictability of human behaviour that comes with managing a fast-growing company.
For all the due diligence, analysis, and even intuition that goes into dealmaking, mistakes remain part-and-parcel of the VC industry, be it as a result of a missed opportunity or a misplaced bet. From that perspective, WeWork’s fiasco and the subsequent entrenchment of SoftBank doesn’t deviate from the spectrum of possible investment scenarios.
However, Sebastian Togelang, founding partner of Southeast Asian VC Kejora Ventures, said that the WeWork’s IPO delay does serve as a wake-up call to investors.
It is no longer the era of investing in startups that do not have strong fundamentals. For me, it is good because we are always looking for a path to profitability or profitable startups. It is better to pick startups which build real value. Startups that grow due to the product quality, instead of burning too much money and relying on the next founding rounds. I think it will be healthier and better.
However, it doesn’t mean that every investor should look only for profitable companies. The WeWork case becomes a lesson for us to shift our focus. We should notice the balance between growth and profitability.
Joshua Agusta, vice president of investments at MDI Ventures also based in Jakarta, said that every VC will have a different appetite on investment. With the WeWork debacle, it will slightly impact that appetite especially for investors in the growth stage or late stage.
For us, are we going to invest in Uber or WeWork? The answer is no, because in the prospectus, they have no path to profitability. Therefore, we will not take the risk. But if you wear on other VC’s hat’s there are multiple ways to liquidate the money and different reasons to invest in those kinds of startups.
What comes next in Southeast Asia’s venture capital boom?
Southeast Asia’s digital economy is now forecasted to reach USD 300 billion by 2025. The region has seen an influx of investment capital, with close to USD 6 billion flowing into the region during the first half of 2019, according to Cento Ventures’ recent report on Southeast Asia tech investment.
Mark Suckling, partner at Cento Ventures and one of the report’s authors, noted that there are only a handful of cases where Southeast Asian startups have been acquired for more than USD 100 million while a growing crop of startups raised money at valuations well in excess of USD 100 million.
The WeWork story is not yet over, so conclusions drawn right now may well be proved wrong even by the time they get published. It does perhaps illustrate a mismatch between the expectations of VCs and buyers of startups.
In Southeast Asia, the relative scarcity of exits for tech startups means we have yet to see definitive proof that the valuations being paid by VCs in recent years conform to buyer’s expectations. Since their investors clearly expect a return on their capital, it will be interesting to see how this plays out in the next few years and whether the exit landscape in Southeast Asia will mature quickly enough for these later stage investors to make money.
Tan from Insignia Ventures Partners, however, remains optimistic that the unicorns here are also focusing on creating value that cater to the diversity of localities and needs across the region instead of solely betting on market share domination.
The recent influx of investments into Southeast Asia is largely motivated by the potential value of capitalizing on technological niches. It’s not just about finding the next billion dollar company that disrupts an industry, but the next multi-billion dollar industry or ecosystem that caters to the diversity of localities and needs across the region. It’s not just about producing exits, but exits that can support these industries long-term. This means a good balance of growth and profitability, which is becoming more attainable with smarter money in the region.
This Southeast Asia perspective does not take away the risk that comes with investing, nor does it take away the potential losses to be had. Even with theses, not all are proven right in the end. Ultimately the difference lies in the process. Bets are in the momentary roll of the dice, while testing thesis are in the day-in and day-out support of startups’ growth. Achieving unicorn status should be less the miracle that everyone marvels at but no one understands, and more catalysts of long-term value across the region.
Liu Genping joined Vertex Ventures in 2010 and is now a partner at the firm. At Vertex, Liu is responsible for Series A/B investments in Southeast Asia. His current focus is on fintech, consumer internet and SaaS enabling small and medium-sized enterprises, among others.
Yinglan Tan is the CEO and Founding Managing Partner at Insignia Ventures Partners. Insignia Ventures Partners is an early stage technology venture fund focusing on Southeast Asia started in 2017.
Sebastian Togelang is a serial entrepreneur since early the year of 2000 with over 15 years of operational experience in digital & startups in Europe and Asia. He is the Founding Partner of Kejora Ventures, a venture capital firm for early and growth stage with a focus in Southeast Asia.
Joshua Agusta joined MDI Ventures, the investment arm of Indonesia’s Telkom Group in 2015. He now leads MDI Ventures’ multi-stage investments starting from seed stage up to pre-IPO and is highly involved in advising digital M&A activities of Telkom Group.
Mark Suckling is a co-founder at Cento Ventures, overseeing investments and portfolio management. He helps companies accelerate their growth through strategy development, planned fundraising, talent acquisition, business development and publicity.
This article is part of “Venture Voices”, a series where KrASIA speaks with venture capitalists based in Southeast Asia to get their takes on topics of interest.