Clouds loom over Asia’s tech valuations

Most people in the startup world connect the term “unicorn” with Silicon Valley, which is home to some of the globe’s largest billion-dollar startups. Even so, the true hub in terms of numerical concentration is Asia.

Global interest rates that are ebbing near historical lows, changing demographic trends, and an emerging tech scene have all contributed to the massive fundraising expansion across China and Southeast Asia over the last few years.

Chasing strong yields in a low interest-bearing environment has become a norm for investors, helping the region’s startup scene raise its profile and attractiveness. However, the chasm between high-flying tech valuations and traditional appraisal methods continues to widen, highlighting a shift from valuing fundamental analysis to different metrics like user growth and community value. But despite the widespread application of these metrics, they often fail to provide an adequate picture of a company’s intrinsic value.

Lofty goals and flowery language that accompany fundraising documents and listing prospectuses have replaced projections rooted in realistic and objective points of view. Instead of highlighting financials, companies tout their “disruptive” nature in presentations filled with buzzwords designed to dazzle but not inform.

As such, this mania for valuations threatens investors, who now must be more diligent than ever, particularly as unicorns continue to bleed cash to acquire new users while hoping to attract other investors for further financing.

Picturing the valuation excess

Asia is one of the hottest global destinations for startup capital, and much of this momentum is predicated on an expanding middle-class demographic across Southeast Asia and China.

Nevertheless, like how the investors who focused on Brazil, Russia, India, China, and South Africa (BRICS) discovered that boom is often accompanied by bust, Asia’s startup investors may be learning similar lessons.

The common denominator for most of these storied unicorns is that little if any public information about revenues or expenses is available. Consequently, using traditional valuation methods designed for public companies fails to account for startup owners’ non-liquid positions and confuses valuation positions. Indeed, public companies add value through capital appreciation and dividends, while startups only create big value for investors when they are acquired or go public.

Just like their US and European counterparts that are bumping up against the limits of valuation – especially given the recent decision to shelf WeWork’s initial public offering – Asian startups are similarly overvalued. But that hasn’t stopped capital from pouring into these companies, which raised approximately US$6 billion during the first half of 2019. Though lower than the comparable 2018 figure of US$8.3 billion, most industry insiders expect the 2019 figure to match last year’s level.

Nevertheless, there are sizeable concerns that capital is becoming increasingly concentrated in a few big-name startups like Indonesia’s Gojek.

In many cases, this latest wave of financial activity is based on the idea of gaining exposure to the changing Southeast Asian demographic, particularly in terms of the rapidly expanding middle class. Startup acquisitions by bigger counterparts are also forming a considerable portion of the latest industry deal flow, more than doubling in the first half of 2019. Even so, despite the turnover, Southeast Asia’s technology ecosystem is significantly less mature than its US counterpart.

This results in fewer IPOs as corporations and private equity funds push into the space to capitalize on the community’s potential. Exits are few and far between, largely occurring in company-to-company acquisitions instead of public listings. Therefore, applying traditional valuation methods is not only challenging, but also fails to account for geographical disparities that are often used for comparable analysis.

Valuing a Southeast Asian startup which is very private about releasing figures against a Silicon Valley firm with more public numbers is not only disingenuous, but outright deceptive.

Shouldering the risk of zero profitability

Public markets in Southeast Asia are less developed than their Western peers, highlighting just one of the valuation variables that is often given little consideration. The result is that startups must depend on the latest fundraising round to determine valuation, instead of other, more fundamental measures.

The biggest momentum behind this aggressive approach to funding comes from Masayoshi Son. The Japanese billionaire, who serves as the CEO and chairman of SoftBank, made a big splash in the venture capital space when he launched his flagship US$100 billion Vision Fund in 2016.

Consolidation increases complexity

Survival of the fittest