From Grab to Sea, ASEAN tech confronts end of golden decade


SINGAPORE — A 10-minute drive from the central financial district in Singapore, Grab’s new nine-story headquarters that houses 3,000 employees shows how far the company has risen since its early days working from a small rental car office storeroom. “We would just grind it through,” said CEO Anthony Tan at the opening of the building in August.

In line with its 10th anniversary, the event was joined by dozens of drivers — now five million strong in eight Southeast Asian markets — honking and circling the entrance in their ride-hailing cars. Also present as confetti flew was Singapore’s prime minister-in-waiting Lawrence Wong, waving a large green flag bearing the company’s logo.

While 2022 was supposed to be a time of celebration for Grab, long considered one of Southeast Asia’s symbols of innovation, there was no such fanfare in the stock market as investors have become increasingly impatient with the company’s performance. Grab shares have cratered since the company went public last December, with market cap falling 80%.

Grab is one of a number of regional tech companies worried about shareholders as it tries to reverse years of losses. Another Singaporean company founded the same year, e-commerce operator Lazada, still relies on funding from its Chinese parent Alibaba. Older peers like Sea, whose stock price has plunged over 80% from its peak, are quickly downsizing as losses mount.

The birth and growth of these businesses have become the very symbol of the meteoric rise of Southeast Asia’s tech ecosystem. “Many corners of society have been digitally transformed thanks to them,” said Ryu Muramatsu, founding partner of GMO VenturePartners, a leading Japanese venture capital company in the region.

As more startups emerged, so did investors hunting for returns in an ultralow interest rate environment. Venture capital funding in the region ballooned to $24.8 billion in 2021 — more than 120 times in 10 years — while funding deals rose 16 times, according to analytics company Preqin.

“When investors were first expressing interest [in the region], the general belief was that there could never be a $100 million company [even for venture capital funds],” said Chris Kaptein, managing partner of Integra Partners, a Singapore-based early-stage venture capital.

But since last December, rising interest rates, inflation and a stronger prospect of economic recession in developed markets have extended to private startups the effects of the brutal tech sell-off, dampening once-high valuations.

So far this year, venture capital deals in Southeast Asia stood at 1,030 through September — up 24% over the same period a year ago — bucking a global 5% decline, according to Preqin. But the region’s total deal value was mostly unchanged at $16 billion, showing the average deal size has decreased.

Growth-stage companies are focusing on limiting cash burn and survival until the market returns. Whether Southeast Asia’s first-generation startups like Grab and Sea can meet their targets and validate business models will be a crucial test for the region’s ecosystem amid its first-ever market downturn.

Shane Chesson, founding partner of Openspace Ventures, an early investor in Indonesia’s Gojek, the ride-hailing and food delivery arm of GoTo, said the region’s ecosystem is “on a path of evolution when it comes to profitability and sustainability.”

“We’re seeing great talent being developed within the industry, advances into new sectors, and increased innovation, but we’ve still got a lot to prove,” he said. “We’re not yet profitable. We’re not yet sustainable. So we have to get to a point where we can say that there are many success stories.”

Grab began its journey in Malaysia first as a ride-hailing platform for taxis and private cars. After becoming a unicorn in just two years, the startup launched an ambitious yet costly foray into other businesses, including the crowded food delivery and fintech sectors.

Its superapp covering one of the world’s fastest-growing regions demonstrated vision and was successful in acquiring users but led to years of huge losses. Though improving its bottom line, Grab still posted a net loss of $1 billion for the first half of the year.

On Sept. 27, Grab held its first investor day at the headquarters it had opened a month earlier, joined by dozens of investors and analysts from around the region eager to hear the company’s plans.

For the first time, the loss-making company pledged to break even on a group level by the second half of 2024, though on an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis.

Grab’s Chief Operating Officer Alex Hungate — who joined in January after heading Singapore’s airport service provider SATS and HSBC Singapore — outlined a series of new initiatives, the key of which is renewed focus on GrabUnlimited, a monthly subscription program.

For a monthly fee of a few dollars, the program provides benefits and deals across services on the superapp, from free deliveries to calling only drivers with high ratings.

“The idea is that it’s an umbrella that can embrace all of the spend that the customer has with us across all the verticals,” Hungate told Nikkei Asia.

The focus on the program highlights the change in Grab: deepening relations with current users over signing up new ones, thereby lessening reliance on its many incentives. For the April-June quarter, Grab’s incentive payouts to consumers amounted to $311 million, one of the main reasons for its $572 million loss for the period.

“[GrabUnlimited] is more effective … than having separate promotional activity in each vertical stand-alone,” Hungate noted, saying it is better from a competitive perspective as well “because we are the only cross-vertical player that operates across all of Southeast Asia.”

The logistics and finance veteran noted that the average gross merchandise value — the total value of a transaction made through a service — for food delivery from GrabUnlimited subscribers was 2.4 times higher than that of nonsubscribers, while transactions were twice as much on average.

Grab has already achieved positive EBITDA for its main mobility business, which accounts for around half its total group revenue. But the subscription program would help its promising delivery business, which is expected to break even by the second quarter of 2023.

This renewed focus is particularly crucial, as Grab launched a digital banking business in Singapore this September with plans to enter Malaysia and Indonesia next year. The company’s investment in online lending is expected to peak in 2023 and take another three years to break even.

Hungate noted that it has been a tough market for growth companies still trying to turn positive, with higher discounts impacting their valuation. Though the superapp operator still has over $6 billion on its balance sheet, “Grab is obviously included in that category,” he said.

“If you’re a startup that doesn’t have a strong value proposition, and maybe therefore has a weaker competitive position, you may not be able to raise funding,” Hungate said. “We believe there will be a consolidation of the market in favor of those that really have a stronger customer proposition and a stronger balance sheet.”

Southeast Asia’s tech space began to blossom in the early 2010s — around five to 10 years behind China — in tandem with the rise in mobile phone penetration across the region. Investors and governments at the time were looking at leading tech ecosystems like Silicon Valley, trying to foster a similar scene at home.

“It came about from the lessons our Chinese team learned,” said Chua Kee Lock, CEO of Vertex Holdings, the venture capital arm of Singapore state investor Temasek and an early investor in Grab.

As the ride-hailing wave of America’s Uber Technologies and Lyft hit China, mobility became the next growth sector with the rise of startups like Didi and Kuadi Dache. By the time Vertex tried to enter, however, Chua said the valuation of these companies had already swelled.

“When you miss it, it’s too late. We told ourselves, this time, let’s not miss it,” Chua said. After searching for similar companies across the region, Vertex invested in Grab and helped the company relocate to Singapore, where the prospect of additional funding was higher with the government actively promoting startups.

For years, however, regional startups were derided as “cloners” or “copycats” of Silicon Valley and China. A notable example was Germany’s Rocket Internet in the region, a startup incubator that gained notoriety for imitating successful businesses in one market to set up copycats in another.

“It’s very easy to say that. But in reality, it’s very different,” said Magnus Grimeland, CEO of Antler, a Singapore-based early-stage venture capital company. He originally worked with Rocket Internet as the co-founder of Singapore’s e-commerce company Zalora Group in 2012.

Companies would have to build networks of logistics and partners, all in a region with a complex mix of business cultures, languages and people. “You have to do a lot of local innovation. It’s a lot of blood, sweat and tears to make that work here,” Grimeland said.

Many startups and talent that Rocket nurtured would later become some of the biggest names in the region. Gojek’s founder Nadiem Makarim helped Rocket set up its Indonesian base until he returned to focus on the ride-hailing company he founded in 2010. Singapore’s food delivery service Foodpanda and Lazada were both backed by Rocket from the beginning.

Eventually, these new local entrants gained traction. In 2016, Alibaba acquired Lazada to expand its overseas business, with the latter now a leading e-commerce player. Grab’s acquisition of Uber Technologies’ regional business in 2018 cemented the view that localization was key to success in the complex region.

“People said American companies like Facebook, Amazon and Uber are going to dominate [Southeast Asia]. Funnily enough, it wasn’t really the way it necessarily emerged,” said Chesson of Openspace. Most importantly, Chesson added, these deals “built a certain confidence and a certain talent base.”

As the market grew, however, so did investors’ fear of missing out. The meme “spray and pray” guided them as they threw money at multiple startups in the hope that one or two would eventually reap a hefty return.

Non-traditional investors like SoftBank Group’s Vision Fund — which also invested in Grab and Tokopedia, the e-commerce arm of GoTo — and Tiger Global Management poured millions into the region’s unicorns.

Even untested startups saw seed-stage funds like Silicon Valley’s Y Combinator, often referred to as an accelerator, pumping in money to increase valuation and set the new companies up for future funding.

The abundance of cash allowed startups to stay private longer and continue receiving additional funds despite heavy losses. These cash-rich fledglings focused on expanding market share, as the huge investor pool meant a bigger chance that rivals could step in and challenge them.

In hindsight, the startups should have focused more on profitability. But back then, gaining market share was a rational move, almost a “rule of the game,” said Muramatsu of GMO VenturePartners. “It was clear they would eventually have to become profitable. But they couldn’t steer the ship because everyone else was doing the same.”

“In the old days, you only needed to get there fast. So what you do is prioritize speed over capital efficiency,” said Chua of Vertex. “But they cannot do fifty things anymore. They have to do five things well, and then get there faster and become more profitable. This is a natural evolution.”

During the pandemic lockdowns, investors continued making deals via video conferences without doing the necessary boots-on-the-ground basics. “Many people say it was efficient. But I think it’s lack of discipline. It created a tremendous bubble,” Chua said.

Still, aiming at a population of 680 million with digital adoption nascent, investors remain bullish on the long-term prospects for Southeast Asia and fundraising continues to be strong. Investors are also shifting from China, alarmed by Beijing’s crackdown on tech companies and prolonged zero-COVID curbs that have shaken the economy.

“If anything, I’m more excited,” said Kaptein of Integra Partners. “The rate of growth that we see in companies, the willingness of clients and governments to help support the digital ecosystem has only increased.”

In late September, SuperReturn Asia — the world’s largest private equity and venture capital conference — was held for the first time in Singapore instead of Hong Kong. A record 1,000 executives from over 40 countries participated in the five-day confab.

Even this year, the region is seeing more cash coming in, with many region-focused funds oversubscribed. In the first six months, local venture capital companies closed 23 funds with proceeds of over $3 billion, comparable with full-year performance in 2021, according to DealStreetAsia.

The strong data suggests “the full-year performance [of 2022] is likely to surpass pre-pandemic levels, which peaked in 2019,” the report noted.

Still, the rubber hit the road this year. As exits need to start performing, investors are placing much greater focus on short-term profit. Just like the tech companies that won the region through localization, investors will need to be on the ground.

“This is a good time. Some people, unfortunately, may not survive this downturn,” said Chua. “But I think it’s a lesson to be learned.”