How long can Carousell go without monetisation breakthrough?

Singapore

AS it enters its eighth year, Singapore's marquee startup, Carousell, could face pressure to show that its monetisation strategy is actually getting somewhere instead of being stuck on a merry-go-round of losses.

The popularity of Carousell's consumer-to-consumer online classifieds platform made the startup a darling in the early days of the current funding cycle. Since its founding in 2012, Carousell has raised at least US$182 million from four rounds of funding and a strategic investment, according to published numbers.

The company's focus on acquiring users meant that it was "pre-revenue" for the first five years, not charging for most of the listings on its platform. It was only in 2017 that Carousell began to focus on generating topline revenue, and the company's monetisation strategy now has three prongs - advertising and partnerships, premium visibility services Bumps and Spotlight, and Carousell Pro, a subscription-based platform for property agents and car dealers.

There is little visibility on how these efforts have fared, but Carousell appears to have been in the red as it kicked off monetisation. According to regulatory filings of Carousell Pte Ltd - which may not fully reflect all aspects of the business - the company made a loss after tax of US$29.8 million on revenue of US$1.72 million for the financial year ended December 2017. Carousell's platform is available in seven markets in Asia and Australia.

The company declined to share its financial results, but it appears to still be prioritising growth over profit. Turning profitable is not the top priority compared to scaling up, chief executive Quek Siu Rui told The Business Times in April.

When asked more recently about the adherence to that strategy, a Carousell spokesperson said: "The classifieds industry tends to have high margins, and we are fortunate to be operating as one of the leading players in this sector globally."

Carousell's investors remain supportive.

Khailee Ng, managing partner of 500 Startups, which cut its largest Asian cheque to invest US$20 million in Carousell, said: "The online classifieds marketplace business is one of the rare business models that produces massive margins and profitability... as much as 65 per cent Ebitda. We have delved very deeply into the applicability of this in South-east Asia."

Carousell's early focus on regional growth over monetisation works for the classifieds business model as it needs scale, said Vinnie Lauria, managing partner of Golden Gate Ventures. "By being the number one player in every market, your ability to then capture revenue with a traditional business model is much easier," he said.

A spokesman for EDBI, the investment arm of the Singapore Economic Development Board, said: "We have supported them with growth capital and our extensive network... to guide them in the difficult journey of scaling beyond the general classifieds marketplace."

Fellow investors DBS and entrepreneur Darius Cheung similarly expressed support. Sequoia India declined to comment, while Rakuten Ventures could not be reached.

But investors have to answer to their own stakeholders, and their patience might not last forever.

Raja Hamzah, managing partner of venture firm RHL Ventures, which is not a Carousell backer, said: "Given that (Carousell) is approaching unicorn status, it will face a bit more scrutiny... I would think that the markets may tighten towards the later part of this year, and that's when companies like Carousell will have to think about monetisation a bit more."

Indeed, investors appear to be more demanding these days.

Consider the case of Japanese used-goods online marketplace Mercari, which listed in June 2018. After a 77 per cent surge on its trading debut, the value of Mercari's shares has fallen over 40 per cent since, as the company struggles with US expansion.

Carousell's overall strategy also faces challenges of its own. One prominent venture investor, who declined to be named, said the classifieds business is intrinsically hyperlocal, and this could make it difficult to scale across widely distinct markets.

The investor had considered backing Carousell in its early days, but decided not to because of its business model. "We actually liked the founders... But we couldn't figure out how they are going to make money," the investor said.

On the issue of profitability, the investor added: "If you can continue to raise money and the party never ends, then that's fine. But if you are not going to make money and then you are going to lose a lot of money, the question is, who will continue to fund the company?"

The "freemium" online classifieds model is relevant but has yet to be proven, said Joongshik Wang, Asean digital leader at EY, albeit declining to comment specifically on Carousell.

"Free online classified platforms focus on a niche that has yet to demonstrate the ability to compete with the large paid platforms... Many have begun by prioritising customer acquisition, keeping the core service free while only monetising advertising and product placement revenue," he said.

However, staying completely free may not be tenable, with many of these companies already adding paid services such as escrow and delivery, Mr Wang noted.

"Significant learnings have come from previous failed startup business models... Some are already spinning off product-specific apps where charging is the norm. However the challenge remains in creating profit from their core, general service," he said.

The big wild card is Naspers-owned OLX Group, which in April announced a US$56 million acquisition of a 10 per cent stake in Carousell to value the company at over US$550 million.

OLX is in fact a classifieds business that has figured out how to be profitable. For the year ended March 2018, OLX broke even, registering US$63 million in trading profits on US$624 million of revenue. Naspers plans to list a new consumer Internet company holding its Internet assets, including OLX, on the Euronext Amsterdam exchange in July.

Perhaps Carousell will be able to ride its new investor to success.

An OLX spokesman said: "What attracted us to Carousell is the company's ability to provide products and services users love, which is the basis for a solid monetisation strategy. We are also happy to share our own experience in running successful operations in high-growth markets."