From Warung to Wall Street:
Indo Tech IPO Prospects with
Andy Tai of Goldman Sachs
IndoTekno Podcast, 23 June 2020
Welcome back everyone to our fifth instalment of Indo Tekno. Indo Tekno is a weekly podcast in which we invite guests on to discuss all matters Indonesia and technology related. We also offer a transcript in Bahasa Indonesia. Kami akan memberikan transkrip podcast Bahasa Indonesia di situs web kami. My name is Alan Hellawell. I'm the host of Indo Tekno. I'm also the founder of Gizmo Advisors and I serve as Venture Partner at Alpha JWC Ventures. Well, today is the first day of Phase Two of the "Circuit Breaker" here in Singapore, whereby retail outlets, restaurants and other establishments have begun to reopen. There are in fact many parallels between the reopening of the Singaporean economy today, and the topic of our podcast, being whether the pathway to the initial public offering, or IPO, will reopen to Southeast Asian and specifically Indonesian tech companies, after having remained dormant for a few years. In order to examine where Indonesia tech is along the pathway to delivering an IPO onto the foreign exchanges, we've brought in one of the best and the brightest, and most experienced in the business, Andy Tai of Goldman Sachs. I worked with Andy and the Goldman Sachs team when I was Chief Strategy Officer at Sea Group in the run up to our October 2017 IPO on the New York Stock Exchange, or NYSE. Goldman Sachs also assisted us at Sea Group with a number of other post-IPO fundraising exercises throughout 2018. Andy, thanks a bunch for joining us. Would you mind sharing with us your background?
ANDY, GOLDMAN SACHS 1:48
Sure Alan, and thanks for the invite to join the podcast. Hello, everyone. By way of background, I'm a Managing Director with Goldman Sachs. I've been with Goldman for about four 14 years now. Today, I spend most of my time running our technology business for Southeast Asia. And what that entails covering and advising all the large and important technology companies within Southeast Asia.
So you're an investment banker. For non-practitioners, can you spend another minute or two describing what exactly you do as an investment banker?
ANDY, GOLDMAN SACHS 2:27
Sure Alan. As an investment banker, there are really two parts of the business. On one side is the advisory part of the business, that involves advising our clients around potential mergers and acquisitions, particularly for companies that want to sell themselves, or in the future are looking to acquire other companies. That is I think, half of the business that we actually do. The other half of the business that we focus on is capital raising. And it could be in multiple forms, such as equity offerings, debt offerings, convertible bonds. That's the other half where I spend most of my time advising high growth tech companies about their plans to raise capital, and how that dovetails into their growth plans as well.
Fantastic. Well, that's exactly the topic we're hoping to discuss today with you, Andy. Now, I know Goldman Sachs to be an active investor in technology. Can you speak more to that?
ANDY, GOLDMAN SACHS 3:28
Sure. I'm glad you raised that because not a lot of people know this. But everyone thinks of Goldman Sachs as a large global investment bank. We also have another part of our business where, to the extent that we like high growth tech businesses, we actively deploy capital and invest in those businesses as well. Some examples: we were a very early investor in Alibaba. Today globally as well, we are shareholders in Uber. We own a stake in Spotify as well. Closer to home in Southeast Asia, we are actually shareholders in Momo Wallet. We are a shareholder in Spark Systems in Singapore as well, and multiple other kinds of high growth tech investments within Southeast Asia.
As I mentioned before, I got to know you when working with you on the IPO of Sea Group in late-2017. Can you share with us other examples of work you've done here in the region in the tech space?
ANDY, GOLDMAN SACHS 4:30
A lot of our time has been spent doing capital raising advisory in the private markets. Some recent fundraisings we've done for Ninja Van, Q Express. Even for Sea Group before the company when public, we advised on two rounds of private financing for Sea Group.
A big picture question for you, Andy. The global economy is clearly facing problems unknown in our lifetime, and yet indices such as the tech-heavy NASDAQ are near all time highs. What do you read into this, particularly as it relates to the tech sector?
ANDY, GOLDMAN SACHS 5:05
It's largely very positive for the tech sector. But more importantly, it highlights the digital and technology disruption that we see quite often in the tech space. Public investors recognise that, and in some ways COVID, while obviously creating an overhang for the whole macro economic environment, has in many ways accelerated the digital adoption of a lot of the day-to-day services and products that we use. And so the all-time highs that you alluded to on the NASDAQ is a reflection of that. People know of the acceleration of digital adoption. Tech companies in our region are very well placed to benefit from that. And there is an expectation that while investors are paying high valuations today for stocks, particularly around tech, they are strong believers that technology companies will be high generators of growth and will have long term profitability as well,
...at the very least a silver lining, if not a full gold lining, to an otherwise challenging situation. Now, Andy, as you and I know, the market on this side of the world that has delivered far-and-away the largest number of IPO's onto the NASDAQ and the NYSE in the US, is clearly China. I think as we speak, there are more than 160 Chinese companies listed in the US. Most of them are internet and e-commerce names. By my count, they represent roughly 1.5 trillion US dollars in value, or what we call "market cap". From Southeast Asia we have exactly one single solitary internet company listed in the US, Sea Group, with a market cap of 50 billion US dollars. Why the absolutely massive disparity here between China and Southeast Asia?
ANDY, GOLDMAN SACHS 7:00
Today where we sit, obviously there's only one Southeast Asia company that is public, as you alluded to. But do I think in the future will there be many other companies that are listed in the US from Southeast Asia? I think the answer is yes. In my mind, it's just a matter of timing. If we sat here and we had these conversations, 20 or 30 years ago, what you would be asking me is "Why are there no real Chinese tech companies listed in the US?" In my mind, it is just an evolution of the market. Naturally, the US has been the most mature and developed in terms of technology evolution, and China has followed that. We as a firm are obviously very bullish around Southeast Asia because Asia is probably the next key area of growth and technology adoption as well. So whilst we only have one Southeast Asia representative in the US capital markets, I think it's actually just a matter of time as markets develop, that we will have many more Southeast Asian companies listed in the US.
That's encouraging to hear Andy. Let's tighten the focus to Indonesia. What important milestones to Indonesia's tech companies need to achieve in order for the IPO pipeline to begin flowing?
ANDY, GOLDMAN SACHS 8:20
I think Indonesia has always been at the top of investors lists from a market standpoint, one of the largest economies in the world, very large population size as well. So the total addressable market from Day One, I think, has been highly attractive to investors. Where investors need to understand more from the tech companies is really around execution, and how they drive the consumer into a very digital environment. So what do I mean by that? I think, to answer your question more specifically, tech companies have in Indonesia, obviously will need to focus on maintaining high top line revenue growth, maintaining strong user engagement, and I think these are all things that we typically focus on with high growth tech companies. But more important (and I feel like it's a matter of time) is a pivot to real profitability as well. And I think that will be crucial as companies think about their business plan to IPO is: when is the right time to start monetizing their user base? When is the right time to focus less on growth, by really pivoting to that mindset about generating profitability? I think, to the extent that they can, it will give them a very strong premium valuation in the public markets.
That's crystal clear advice. Thanks for that. I'm currently working with a number of companies as they prepare for IPO's, but probably over the next two to three years. Andy, how do you conventionally define a successful IPO?
ANDY, GOLDMAN SACHS 10:01
We always start from a position of trying to create a win-win situation. From the Sea Group standpoint, obviously they were the first public company to be listed in the US from Southeast Asia. And so there was a key milestone, and it was a successful IPO in the sense that we got investors very excited about the business, and they ultimately came in and invested through the IPO. When we listed Sea Group as well, it had a market cap of high single digit billions. And today, as you mentioned, it's a $45 billion to $50 billion company. Our shareholders have been very happy with their investment and I think that actually defines a successful IPO.
Andy, by last count, there were more than 60 major stock exchanges across the world. In your mind, what are the most viable places for Indonesia companies to list?
ANDY, GOLDMAN SACHS 10:54
As we think about the right locations or venues for Indonesian companies to list, we factor in a combination of: 1) where are the most savvy and well-educated tech investors based, 2) which markets have strong liquidity, 3) which markets have regulations and government frameworks there are very helpful to the Indonesian tech companies? I would say that the natural listing venue would be actually in the US. Indonesian tech companies can also consider listing in Indonesia as well.
Well, that brings up my next question, Andy. Will a dual Indonesia-US listing become a popular strategy in your mind? And if so, why?
ANDY, GOLDMAN SACHS 11:38
I think it will. And I think it makes a lot of sense for Indonesian companies as well. It creates a unique situation where, on the Indonesian side, as everyone knows, there are certain tax benefits for the Indonesian companies by listing and Indonesia. I think secondly, a lot of these tech companies also have very strong brand recognition in Indonesia. So that will also help, I think, drive and accelerate a lot of the investor demand and valuation. In terms of adding a US component to it; as everyone knows, the US markets probably have the deepest pool of capital and investors that are probably also the most savvy around technology. And I think lastly, is there is also a very strong liquidity in the US markets as well.
Andy you talked about, just a couple minutes ago, what makes for a successful IPO. I'm just wondering, are there any fundamental investor questions that need to be answered for them to buy into an Indonesian tech IPO?
ANDY, GOLDMAN SACHS 12:44
That's a good question, Alan, and we get that all the time. A simple framework to think about it: a lot of investors think of it from a tops-down approach. The first question that most investors will have will be: what is the total addressable market that companies are really addressing? Secondly is, what is the market competition? How do they actually compete and have a sustainable competitive advantage over time? Third, I think will be around driving growth. And it's quite easy to have, in this environment, a track record of strong revenue growth. I do think that the ones that differentiate themselves over the long run is, like I mentioned before, being able to demonstrate very strong user economics, being able to demonstrate that in terms of branding and user retention, they have very strong numbers. And ultimately, this leads to a very clear path to profitability. I think that third point may be early for a lot of companies in Indonesia today, but to the extent that they have the track record or data points to demonstrate the third piece around path-to-profitability, it will set them apart vis-a-vis a lot of the other players in the market.
Very helpful Andy. I want to address this bizzare asymmetry one more time. So, Southeast Asia has 600 million in population and 3 trillion plus in GDP. Indonesia alone has a population of maybe 270 million and over 1 trillion US dollars in GDP. And, again, one listed company which, very notably, Sea Group, is up 165% just since the beginning of this year making it, I think, one of the very best performing stocks in the world. As we know Sea Group encompasses e-commerce, gaming and fintech. Assuming that the share price performance is a reflection of investor sentiment in these big areas, why isn't investor enthusiasm spreading for other IPOs from this region?
ANDY, GOLDMAN SACHS 14:56
I think investors are actually finally excited about Southeast Asia IPO's, Alan. I actually would debate: the question is whether are companies in Southeast Asia actually ready to list in the US? Have they set themselves up internally for IPO? It feels like a lot of the companies in Southeast Asia are still very focused, and rightly so, around building up their businesses, gaining more market share, trying to increase the digital penetration of their businesses. And the IPO is something that they will consider over the next two or three years. The other thing I would highlight too is, the private capital markets continue to be very robust, and that is a good substitute in my mind for public capital. When companies are ready to IPO, I think they will, but to the extent that today the private markets are there to fund them, they would obviously want to push back the IPO is as late as possible.
Well, you've preempted my next question, which is indeed, one could say that over the past 10 years, we've seen a very interesting experiment by which tech companies have been kept private longer, and instead of IPOs, being the means to raise billions of dollars, they've done so privately. How do you see this "experiment" being modified, if at all, as we go forward?
ANDY, GOLDMAN SACHS 16:21
I think you're right. For a lot of the tech companies we have seen an increased desire to stay private as long as possible. As you alluded to as wel going public gives most companies additional access to larger pools of capital. But going public obviously has its hurdles or barriers for a lot of tech companies; like additional governance, public scrutiny, and things like that. And so a lot of high growth tech companies globally have chosen to stay private as long as possible. On your question about the experiment being modified, I do think that today, we're going the other way, where a lot of companies are looking to IPO as well, much earlier, because I think their shareholders, in terms of private capital, while always being there, want their portfolio companies to go public and allow them to crystallise their gains as early as possible. And so I think the shareholder pressure, or shareholder focus, on crystallising returns will push them to IPO as soon as possible,
As you mentioned earlier, Andy, it's common for new business models to burn cash as their services getting wider adoption. And as you also referenced earlier, an important milestone on the path of a company in really gaining command of its own destiny is to start making profits. Is this one of the things that investors are waiting for before welcoming IPOs from this part of the world?
ANDY, GOLDMAN SACHS 17:52
Do companies need to actually be profitable at the time of IPO? I think the answer is no. I think what investors care about is making sure that there are sufficient data points, whether it be through traffic, user engagement, monetization, reduction of sales and marketing over time. These are all good data points that when you consolidate and package them up as a story for investors, they get a sense that going forward, it could be even post-IPO, that the company itself has a path to profitability. I think that's the most important.
Gotcha. Now, Andy, a lot of Indonesian internet is "to C": such as "B to C" and "C to C". "C" represents being consumer-focused. Are you confident that areas such as online video, ride hailing and various parts of fintech will monetize well? Because we still seem to be giving away a lot of services on the internet, or at least subsidising them heavily.
ANDY, GOLDMAN SACHS 18:56
I do think that over the long run, if you look at the US as a good example, a lot of the services that you talked about will be able to monetize. The question is (and maybe to be clear is) when you mean monetize, at what level? I think for services that have very strong consumer demand, they are a consumer staple in some ways, and have, I think, strong user adoption. I think those will probably monetize at very attractive take-rates: online video and ride hailing are maybe good examples. And there are certain parts of the tech business, there are consumer-focused, that may be just more of "rails" to do other things. In my mind payments may be something that's interesting. I think it's a very strong technology platform for all companies to get user engagement. But in the long run, is payments going to be something that will generate high monetization? I'm more sceptical about it, but this is a very critical part of the infrastructure for a lot of the tech companies in order to do other things.
Gotcha. So in this case, payments may look like a loss-leader, but it's also in many ways, a likely onramp to much more profitable, and even larger, markets and financial services. Is that what you're saying?
ANDY, GOLDMAN SACHS 20:20
That's correct. And in my mind, the most important thing is that it shapes user behaviour. In Indonesia, especially, as we all know, a lot of transactions are still using cash or bank transfer. To the extent that we, as a whole ecosystem, encourage users to do online payments; it shapes user behaviour and gets everyone more comfortable about going online.
Gotcha. Andy, I know you've been at least up until the pandemic flying around the region constantly. Do you have any thoughts as to whether an internet company focused on one single large market, such as Indonesia, will be preferred by investors, or whather It will be important to offer a multi-market regional solution or platform through an IPO?
ANDY, GOLDMAN SACHS 21:07
I think there is the flexibility to do both. The practical part is companies themselves should really take a look internally at what their strengths are. Do they actually have the bandwidth to operate across regions? Everyone always thinks of Southeast Asia as one market. But we are multiple countries in one. And even in the same country, there are multiple languages and cultural behaviours, for example. And so that actually creates a lot of pressure and unnecessary overhead for companies if they really want to do a regional business. On the flip side, if you look at just Indonesia, for example: it's a large single market. A single market is always easier, I think, to execute and penetrate. But Indonesia itself is also a very large and disperse country with multiple islands. There are also a lot of high barriers as well. So I think the overlying summary to most companies is: do what you think is best for you. What are your strengths? And ultimately the results will show for themselves, from a market share standpoint, from a market leadership standpoint, and from revenue growth and ultimately profitability standpoint. To the extent that you check the box in all these key data points for investors, they will invest in you regardless of whether you are in a large single market or regional across Southeast Asia.
Some really useful insights and advice, Andy. Thanks for that. Any other specific advice that you would give an Indonesian entrepreneur with aspirations of taking his or her company to IPO?
ANDY, GOLDMAN SACHS 22:50
Based on my experience, Alan, I think most founders appreciate that probably only once in their life will they will take a company public. But they should not find the IPO process itself daunting or very scary. I think the practical part is that there are very strong global precedents. There are experienced advisors like yourself, who can guide companies on the right steps and processes to the IPO. The entrepreneur should obviously think of the IPO as an end goal, but very achievable for the company. The other thing I would think most founders do is, most founders underappreciate the amount of effort and time that need to be dedicated to the IPO process. Founders should really start early, get as much information as possible, and then think of starting to plan the IPO, which will take some time.
Gotcha. So in conclusion, it is not an insurmountable process, but definitely one that requires a lot of forethought and preparation. And luckily, it is a process that is surrounded by a very sophisticated ecosystem of advisors and various other service providers. That's great.
All right, well we've now completed our fifth instalment of Indo Tekno. It's always great talking to Andy, and thanks so much for joining us today. As always, we welcome any and all other feedback, good listener, on the show. My email is Alan@gizmo-advisors.com. Please also visit our website at indo-tekno.com if you would like to be put on our mailing list for new episodes. The podcast was translated from English to Bahasa Indonesia by Alpha JWC Ventures. Terima kasih untuk mendengarkan. Sampai jumpa lagi!