Interesting conversation with David Halpert on Alan Hellawell’s Indo Tekno podcast. Link is here. Some notes below just for personal reference (paraphrased and any mistakes are my own).
Outlook – he is still bullish on Indonesia, including tech and the rest of the stock market. He thinks that the problems troubling the Nasdaq and US equity market in general are not as dramatic in the Indonesian context. In particular, the government of Indonesia is able to take steps to control inflation, which is really the fundamental challenge for the US market. He thinks the capital market in Indonesia is not as crowded, expensive or frothy as the capital market in the US.
On Go-To – still very bullish long-term, perhaps even more excited about Tokopedia than the ride sharing business. But, as always, valuation does matter. Do need to see the stock price consolidate a little more before he would go and outright buy it. In general, for all these tech companies, US inflation and Fed policy does force them to move up their business plans and look to achieve EBITDA, free cash flow positive sooner than had previously been assumed. That is a challenge for Go-Jek, Tokopedia, Grab, SEA etc. Longer term, however, the upside for all these companies is quite compelling, in particular compared to the Chinese and US comparables.
On the share price performance of recent ASEAN tech IPOs – the equity markets are not that efficient and underwriters can sometimes get over their skis in terms of their valuation assumptions, which has certainly been a factor in many of the tech listings of the last 18 months. Important not to look back at where stocks were trading a year ago as much as where they today, what the valuations are and what the reality of their businesses is. Some of these companies are still expensive, some perhaps need to raise more capital and some are already discounting a substantial amount of misery. He is a buyer of the ones that are discounting misery, while holding off and waiting on the ones that still have a lot of market cap and good news in their share prices.
On investing through previous cycles – he was a tech investor in 2000/01, and one of the most important investments of his career was buying Amazon at US$8 per share. None of these companies are as cheap relative to the opportunity set as Amazon was at US$8 a share; everyone knows ecommerce is a thing now, there is both more competition and still more market cap. But more generally, being ready to buy when there is real distress is an important way to generate returns. In an Indonesian context, if you remember 1998, you had Telkom and BCA trading at what is in retrospect less than 1x current earnings. The Jakarta market is prone, like all other markets, to a certain amount of hysteria both on the upside and downside and if he can buy a major tech franchise at 1x cash, ongoing business plan and several million customers, he is pretty interested in doing that. None of the companies they have been discussing are down to 1x cash, but some are getting close to 2x cash.
On what strategies he thinks these companies need to embrace until the public markets become more welcoming – two letters that have come out in recent weeks, one was from Dara of Uber and the other was from YC. Both of these groups told their portfolio companies and employees that they needed to change their business plans. He thinks they are extremely relevant for company management and entrepreneurs in Indonesia. When capital is incredibly cheap, it incentivizes management to go for growth at all costs and to ignore short- to medium-term cash flow. As capital becomes more expensive, company managements have to adjust their business plan and stop going for growth to the same extent and be more mindful of the cost of capital.
As Dara points out, he was targeting EBITDA and has been told he now has to target free cash flow. All these ASEAN tech companies are quite far from free cash flow at the moment. So that strategy change needs to get factored in to the market before we can see a short-term bottom in ASEAN tech pricing. That said, it doesn’t take much for any of them to actually generate free cash flow. They have to perhaps accept slower growth, exit some businesses that aren’t viable and cut costs more aggressively than they previously had. This is where management proves their capacity. He thinks a really good manager can unlock a huge amount of value in the current situation. But if you don’t get the memo, and keep downspending your cash and run out of money, you are going to wind up working for someone else.
On any evidence of a disciplining effect so far – still incredibly early. He would not expect to see a change in, for example, subsidy pricing for ride sharing and e-commerce to be reflected that quickly. But what he can see is how companies are talking to the capital market. In recent sessions, some of these shares have recovered slightly, and he thinks that is the market looking forward to an Uber-like strategy shift from those companies. Of course, there is plenty of room for them to disappoint and they may well continue to subsidize super aggressively or their might be a spoiler who will continue with a burn-to-grow business plan for another couple of months. But what they are seeing in the equity market is very interesting. If you double and triple down on burn-to-grow, your stock continues to plunge. If you signal you are going into an austerity phase, your stock quickly goes up. Part of that is short sellers have very little patience for pain after what happened with Game Stop. Part of that is so much attention on these companies. Capital market discipline is starting to work its way through the Indo tech landscape and that makes him bullish.
Thoughts on the private side – YC email is more relevant to the private side, Uber email is more relevant to the public side. YC email was very clear. It basically said run your business as if you are not going to get any more money. That would be his recommendation to every startup in Indonesia, you have to assume capital will be much more difficult to come by going forward. Adjust your business plan to reflect that you’re not going to get money poured on top of your head the way it used to be. For him as an investor, that’s good news because when he does deploy capital, he can expect a less competitive business landscape. Best example here is digital banking – there are more than 10, maybe 15 licenses flapping around, but unlikely to him there will be 15 profitable digital banks in Indonesia. There might well be 3 or 4, but that’s an excellent example of how a breakdown in discipline in the capital market created a too competitive landscape for what is fundamentally a revolutionary and very compelling business plan.
Advice to entrepreneurs looking to raise money – tell your investors how you are going to make money. Don’t talk about TAM, GMV or even revenue. Try talking about profit and back up from there towards these other indicators like revenue and GMV. If you can’t do that, you are probably not going to get the money. He is excited if someone has a profitable business plan, valuations should be a bit lower but most importantly the competitive landscape should be less intense.
On whether he is seeing more down rounds – seen some of that in his book, but also a few companies that have managed to raise at higher rounds. Mostly a question of how high the previous round was financed at. In particular, anyone who did a financing round in Q3 or Q4 of 2021, if they need to raise money again, you have to assume it is going to be a down round.
Would he rather be a public markets investor or a VC investor in Indo tech right now – he think there is plenty of opportunity left in both of those asset classes. It is still early days for Indonesia’s development, less market cap relative to GDP than you have in other countries. Indonesia’s best years of relative GDP growth are likely ahead. Indonesia has underperformed China on a GDP basis for an entire generation, since 1997. Grown has been slower than China, raised less money than China, seen the stock market lag China and so forth. Believes we are at an inflection point in that. Going forward, China will grow more slowly, in which case both Indonesia and India are going to get a lot of the capital that has previously gone into China. He reminds that Ant Financial alone in the venture market has raised more money than the entire Indonesian ecosystem. And Paytm in the Indian IPO market raised more money than all the Indonesian tech IPOs combined. So we are still fundamentally less overcapitalized than the US, China, India etc.
On sectors he is investing in now – not buying digital banks. Lot of opportunity in the agtech space and in energy transition globally. Taking lot of meetings with fertiliser and seed companies. Still early days in the Indonesia context, but deserve more attention than the market is giving them. He is not selling his Indonesian ecommerce and fintech exposures. But with what is going on with the Ukraine war, it makes sense for investors to respond to this challenge by helping Indonesia become self-sufficient in food and Europe become more self-sufficient in energy.
On how his digital decolonisation thesis has evolved – for them, it has evolved with the launch of a fund. But increasingly seems to be a consensus that this is going to happen. One recent example was when SEA Limited pulled out from France. The market treated that decision favorably, because it was just a bit too far away, too much money, too foreign culturally for the company to compete and win in that market. That is an example of the same trend we observed when Uber sold out of ASEAN. He sees cross border empire building tech companies retreating, and instead taking minority positions in strong local tech companies. Also sees local companies gaining market share against these cross border competitors. Doesn’t mean Google or Amazon aren’t still going to make a lot of money in ASEAN, just that he sees an incremental change in how digitisation (but also energy transition and agriculture) are going to be expressed in the next few years.