Uber, Lyft IPOs could bring healthy dose of reality to South-east Asian tech valuations

Singapore

THE conservative pricing in the Initial Public Offering (IPO) of Uber, coupled with the lacklustre stock market performance of rival Lyft, could bring sky-high unicorn valuations back to earth as more head for the public markets, including in South-east Asia.

But recent macroeconomic uncertainty, prompted by fresh trade tensions, could hasten the rush for unicorns to list, industry watchers caution. More broadly, this could also prompt a rethink of the traditional eight to 12-year lifespan of venture funds.

On Friday, Uber priced its IPO shares at US$45 apiece, the lower end of the expected range of US$44 to US$50. This values the company at US$82.4 billion, close to a third lower than the US$120 billion valuation predicted last year.

Uber's lower-than-expected valuation comes as shares of Lyft have tumbled over 20 per cent since its market debut, while short positions on the counter increase. Lyft posted a loss of US$1.14 billion for the first quarter, a sharp escalation from a loss of US$234.3 million a year ago.

The developments at Uber and Lyft have been a good reality check of sorts for the IPO market for unicorns, reckon some observers. In South-east Asia, this could prompt investors to pay more attention to unicorns' fundamentals.

"In general, startup valuations have been stretched, especially at the early stage. This is a good reflection on how valuations normalise as money becomes more scarce," said Rachel Lau, managing partner at Malaysian investment firm RHL Ventures.

Ms Lau does not see the exit potential of South-east Asian unicorns such as Grab and Gojek being diminished by the developments. However, the market will likely be more cautious about froth.

"What people will be more concerned about is startups' performance versus valuation; and whether their performance is consistent... There is likely to be a pullback once the market becomes fatigued with companies without strong profit fundamentals," she said.

The tempering of Uber's valuation could also help regional unicorns realise the importance of attracting stable, long-term investors when they go public.

"It also seems that Uber wants to... bring mutual funds into their ownership structure; as they tend to hold assets longer and provide greater stability as opposed to hedge funds which, on average, were some of the larger initial owners of the Lyft IPO," said Christopher Aw, managing partner at Pandan Ventures.

Besides the "Lyft effect", Uber's decision to "play safe" with its IPO pricing likely stems from market volatility following the United States' decision to raise tariffs on Chinese goods, said Lawrence Loh, an associate professor at the National University of Singapore Business School.

"These few days in particular, the global economy, especially the stock market, has been in a tailspin... Uber just needed to be realistic; if they priced high now, their shares may not sustain (their price) beyond a day," said Prof Loh.

While the reality check may be a positive development, soft sentiment could also could spur pre-IPO investors to look for an exit before conditions worsen.

"I suspect that a lot of (investors) want to cash out before... the stock market may go down in the next one or two years... If you miss that (window), then you are stuck. (Startups) might burn out before they cash out," he said.

Meanwhile, the second inversion of the US Treasury yield curve this year on Friday has amplified fears of a recession and could add to the rush to exit, he added.

But moving forward, the ecosystem may benefit from some valuable lessons. For one, future venture funds may come with longer time horizons to avoid a premature rush to listing.

"To be absolutely practical, a lot of these (startups) are not going to start making money within a 10-year period. You need a longer run. I think that's what the funds are going to try and do... Instead of 10 years, I think they are going to have to change their strategy a little, and change the period of the fund to a longer period," said Sze-Hui Goh, a partner at Eversheds Harry Elias.

Nevertheless, observers such as Max Loh, Asean and Singapore managing partner at EY, remain confident in the long-term resilience of the listing landscape for regional tech startups. "There is a robust ecosystem and supply of liquidity in South-east Asia for innovative startup firms with strong fundamentals that are looking to list," he said.

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