PropertyGuru unfazed by exit of strategic investor

Singapore

IT is little-known, but investors can and do withdraw their support for startups, in what is usually a sign of lost faith. Rough as this sounds to companies just starting out, it may not be entirely ruinous - PropertyGuru is one example, said its co-founder and chief Steve Melhuish.

Despite the departure of a strategic investor just three years after it had put money in, the 10-year-old Singapore-based property-search startup has found new investors, and is now a leader in all four of its South-east Asian markets.

It even hopes to be profitable next year, he said.

Mr Melhuish told The Business Times that ImmobilienScout24, a Berlin-based property portal group and Deutsche Telekom unit, exited the PropertyGuru business a year ago, as "visions were no longer aligned".

In June 2012, Scout24 had invested a double-digit million Singapore dollar amount - in one of Asia's largest online deals - in PropertyGuru to capitalise on the potential in high-growth Asia.

Mr Melhuish said: "But it was clear towards end-2014 that we no longer had a supportive shareholder in them ... There were increasingly tense conversations."

This was after Deutsche Telekom in November 2013 sold a 70 per cent stake in Scout24 to private-equity firm Hellman & Friedman, for 1.5 billion euros (S$2.3 billion). Mr Melhuish said the sale was a cost-cutting move for Deutsche Telekom, which needed funds to support its core telecommunications business. It was also an effort to consolidate Scout24's classifieds business, he said. "South-east Asia was a non-core market for them."

At about the same time Scout24 exited, PropertyGuru's chief financial officer (CFO) Michael Karb quit, Mr Melhuish added. The former Scout24 executive had joined PropertyGuru in 2012 on Scout24's recommendation. Mr Melhuish said that Scout24's investment had been contingent on the hiring of a CFO to build a finance team to prepare PropertyGuru for an initial public offering.

But due diligence by Scout24 found the startup's "finance processes a mess", said Mr Melhuish. Mr Karb, as PropertyGuru's CFO, was key in building a finance team and securing S$175 million in Series D funding from TPG, Emtek Group and Square Peg Capital in June 2015.

Mr Karb is now CFO at e-commerce site Lazada; the CFO position at PropertyGuru has not been filled, BT has learnt.

Mr Melhuish indicated that PropertyGuru's latest fundraising round last year was aimed at raising capital and finding supportive shareholders for the next three to five years. None of the members of the new consortium of investors buying over Scout24's stake in PropertyGuru owns a controlling stake, but their combined shareholding is over 50 per cent.

TPG, a global private investment firm with over US$67 billion of assets under management, will bring the capital and "relationships on the ground". Emtek, a major media business in Indonesia, will do brand building and media outreach, and Square Peg Capital, an Australia-founded investor of Internet companies, will provide the digital classifieds expertise, he said.

"Scout24 made a nice profit on our business in that short space of time," he added.

Vinnie Lauria, managing partner of venture capital firm Golden Gate Ventures, noted that while the end goal of investors is to make money off their investments, they usually stay invested for the mid to long term.

For corporate investors, a premature departure may reflect a shift in focus to other areas or markets, or a consolidation of efforts somewhere else; for venture capitalists, withdrawal of support in under four years may mean that they have "lost faith in the business", which can be bad if the startup is still in its early days. Such withdrawals also send a "big signal" to other investors.

Mr Lauria said: "It takes perhaps a minimum of six years for a startup to build value. Anything less than that, they haven't realised their full value. The best entrepreneurs will usually ask how long the investment time horizon is." Though rare, there have been cases of venture capitalists backpedalling - such as when they go back on the agreements setting forth the terms and conditions of the investment after having agreed to invest.

One reason is that they did not have full approval initially, said Mr Lauria. "Nonetheless, it's a reputation thing; it kills their brand. Such venture capitalists usually find it hard to raise funds after that."

Last week, SoftBank said it would sell some US$10 billion of its shares in Alibaba, marking its first sale of shares in the Jack Ma-founded company since it began investing in Alibaba in 2000. Both companies will maintain a strategic partnership.

Mr Lauria said the Softbank-Alibaba storyline is decidedly different from that of Scout24-PropertyGuru - Softbank held its stake for 16 years, and Alibaba was listed on Nasdaq in 2014.

Asked about exit strategy, Mr Melhuish said: "PropertyGuru's focus is on extending depth in current markets - this is a winner-takes-all space - and to return to profitability next year."

The startup, which operates in Singapore, Malaysia, Indonesia and Thailand, was last profitable in 2008.