Unicorns or ponies? Overvaluation in the ASEAN startup landscape

Photo Credit: Jimmy McIntyre/Flickr

Flush with funds, ASEAN unicorns are going on a spending spree, but just how accurate are their shiny market valuations?

By Preetam Kaushik

Back in 2013 when venture capitalist (VC) investor Aileen Lee coined the term “unicorns” for tech startups that had reached the coveted US$1 billion valuation mark, it held an exclusive, almost mythical meaning. Firms that qualified for the tag were extremely rare – less than 0.7% of all VC-backed startups.

Today, the term unicorn is losing its exclusive status and raising potential red flags in the process. For a mythical beast that is supposed to be elusive and almost impossible to catch, unicorns have become all too common.

By January 2019, their numbers had swelled to over 300, up from 200 just a year earlier. The US and China account for a vast majority of these startups, with the latter in particular pumping out billion-dollar valuations roughly every three days.

From mythical beasts to mythical valuations

Photo Credit: Pearson Scott Foresman/Wikimedia

Ever since 2015, when the number of unicorns skyrocketed, there has been growing scepticism among industry-watchers and VCs alike regarding the high valuations secured by many of these firms.

A 2017 Stanford study confirmed what industry insiders had long suspected – overvaluation is an endemic problem in the startup universe, actively aiding in the creation of unicorns before their initial public offerings (IPOs).

The application of standard models of market valuation on startups has led to grossly inflated valuations. Shares in a privately held startup do not all have equal value, unlike publicly traded shares. VCs who want in on a startup in its later stages of funding have to fork out more cash. Startups often offer special privileges and preferential rights to these late-stage VCs. These rights drive up the value of those shares in comparison to the regular ones distributed in earlier rounds.

Early series investors and employees with stock options suffer as a result, as the post-money valuation is tied to the value of the shares bought in the latter series of funding. The condition is so endemic, one out of every ten unicorns are overvalued by at least 100%, and nearly half of them (48%) would lose the coveted unicorn status if a more accurate valuation model was adopted.

The potential for overvaluation is higher in the later stages of funding. It would be unusual to see overvaluation enter the picture at the seed-funding stage. The deeper a firm forays into Series A, B, C rounds and so on, the higher the chances of unequal share valuation.

What does the ASEAN startup scene look like?  

The startup scene in Southeast Asia is younger than its Chinese and American counterparts. In early 2019, the region was home to ten unicorns, with four of them hailing from Indonesia – Bukalapak, Gojek, Tokopedia, and Traveloka. The rest are from Singapore – Grab, Lazada, Razer, Sea; the Philippines – Revolution Precrafted; and Vietnam – VNG Corporation.

Together, they have a combined market value of US$34 billion. Funding to the tune of US$11 billion poured into these unicorns and other smaller startups in the ASEAN in 2018, nearly double the previous year’s figure. Gojek, Grab, Lazada, Tokopedia, and Sea garnered nearly 70% of that 11 billion.


Source: Cento

Compared to the global startup scene, these are small numbers that do not reflect ASEAN’s future potential. Home to 10% of the global population, with a young, internet-savvy public, an expanding middle class, and a glut of international funding (especially from China), ASEAN is on the cusp of a startup boom.

According to Bain & Co, the number of unicorns in the region is expected to double by 2024, with the total deal value also doubling to US$70 billion. Startups from smaller nations like Malaysia, Thailand, and Vietnam are expected to join the unicorn club in the near future.

A quick look at the finances of the Southeast Asian startups all portrays a similar picture – multiple rounds of funding beyond the early growth stage, with aggressive marketing, burning mountains of cash, and no profitability.

ASEAN’s ride-hailing battle is a case in point

Take Grab and Go-jek for instance. Both started as ride-hailing apps before entering the fintech and e-wallet landscape. Their rivalry has taken centre stage in the Southeast Asian startup scene.

Both have billions of dollars in funding, from backers like Tencent, Google, Toyota Microsoft, and Softbank Vision Fund. Those investors have ploughed almost US$12 billion into both startups, over the course of a combined 33 funding rounds (24 for Grab and 9 for Go-jek). Both companies have made it a habit of holding multiple funding rounds and neither company is showing any intention of slowing down or going public any time soon.

One is in Series F, while the other has an open Series H at the moment. Every time they delve deeper into the English alphabet with these funding rounds, their valuation gets a shot of adrenaline. For instance, Grab was valued at US$11 billion before their latest funding round. When they raised $4.5billion, their valuation also increased to US$14 billion.  

As a result, these valuations appear more closely linked to the unicorn’s ability to inspire confidence in late-stage investors and attract funding, than concrete profitability metrics. It is unsurprising that neither startup has publicly disclosed operating costs or losses.

Unsustainable models beget future market corrections

The fight for dominance among super apps is a race to the bottom, characterized by aggressive marketing, extensive discounts, and cashback offers to attract and retain customers. These price wars are brutal and require cash, lots of it.

We only need to look to the West to see what this model leads to. The unfolding IPO sagas of Lyft and Uber have demonstrated that rapid expansion does not necessarily lead to profitability. Despite global expansion, both companies are still haemorrhaging billions of dollars every year. Lyft’s valuation has tumbled by 20%, and Uber is expected to face a similar fate when it goes public sometime in May 2019.

Though they may not be overvalued ponies like many other startups identified in the Stanford study, Grab and Go-jek are overvalued unicorns.

Their situation is not unique. A long-awaited reality check awaits many of ASEAN’s unicorns should they decide to go public. When losses and operating costs become available, the ASEAN unicorn will go back to the elusive beast of myth.