SINGAPORE - There will be a significant rise in the number of South-east Asian start-ups sold because of institutional funds and global companies seeking to expand, said a report from Singapore-based venture capital firm Golden Gate Ventures.
A minimum of 250 start-ups in South-east Asia will be acquired each year beginning 2020, said the VC firm's The Bamboo Report, which focuses on the state of start-ups in South-east Asia.
The report, released on Tuesday (March 1), suggests that while the option to go public is a possibility, acquisitions will likely continue to be the ideal way for both investors and entrepreneurs to cash out of their start-ups.
Protectionist legislation in some South-east Asian countries such as foreign ownership restrictions and difficulty in navigating various local regulations make it difficult for global companies to expand into this region.
Ms Alexis Horowitz-Burdick, founder of cosmetics start-up Luxola, pointed out in the report that start-up acquisitions offer global companies a good way of expanding into South-east Asia as it is a "difficult region to do business especially for outsiders who aren't too familiar with the different markets".
Luxola was acquired in 2015 by French cosmetics giant LVMH for an undisclosed amount.
Larger companies like Chinese tech giant Alibaba and Japanese investment firm Credit Saison have also made large investments in the region's start-ups, said the report. Often these investments are a prelude to acquisition as they are an opportunity for investors to monitor the start-up closely and learn more about its market and business.
Of late, private equity firms have also begun to make smaller early-stage investments in South-east Asian start-ups in the hope that their bets will strike a gold vein, allowing them to cash out many times their original investment.
Global start-ups are also acquiring regional start-ups not only for their market knowledge but also for their engineering talent. Singapore-based business communication start-up Pie was gobbled up by Google for an undisclosed sum last month for its engineering talent.
Said Mr Juha Paanen, founder of Non-Stop Games, believes that acquisitions over the last five years are only the beginning and it will quickly increase in the next three years.
Global Internet and mobile companies, he said, recognise the talent in Singapore start-ups and the opportunity in South-east Asia and so will acquire more start-ups for both the engineering talent and market expertise.
Non-Stop Games, which was based in Singapore, was sold to game developer King in 2014 for nearly US$100 million (S$140 million).
The biggest purchase since 2010 has been Malaysian online jobs portal Jobstreet, which was acquired in 2014 by a similar company called Seek Asia for US$586 million. Last year, Malaysian e-property classifieds iProperty was sold to Australian property company REA Group for US$534 million. In Singapore, the largest exit was in 2013 when Japanese e-commerce giant Rakuten bought online video streaming start-up Viki for US$200 million.
The start-ups are also giving public listing a miss primarily because the regional capital markets and institutional investors have difficulty undertanding their new business models.
If they do list, many turn to the Australian Stock Exchange where the capital market has a better understanding of tech stocks.
Nonetheless, the report said the Singapore Exchange is wooing start-ups to list on its junior board, Catalist. Trendlines an Israeli tech incubator and cyber security firm Secura was listed on Catalist in November last year and January 2016 respectively.
It can do more, said the report because only 7 per cent of the 170 companies listed on it are in the information technology sector.