An Investment Strategy Targeting Tech Startups Ready to Expand
Sometimes the company you seek for investment is a rhino. It’s never a unicorn.
When it comes to investing in promising technology companies, one private equity firm looks for startup standouts.
Specifically, Asia Partners looks for rhinos – a term they have coined to describe tech startups eventually valued at more than USD1 billion on a price-to-earnings ratio.
Here’s why a rhino is a good analogy.
These companies are thick-skinned. They’re fighters – low to the ground and operationally focused. Rhinos have established business models that are very close to breaking even and generating a profit. They’re in at least two markets and are entering a third or fourth. They might have anywhere from 100 to 1,000 employees.
“[These companies] don’t follow the latest fad,” says Oliver Rippel, a YPO member and co-founding partner with Asia Partners. “They’re focused on the long-term opportunities. We catch those companies at a stage when they’re in need of growth equity.”
Based in Singapore and founded in early 2019, Asia Partners focuses exclusively on growth equity, watching closely for the right tech and tech-enabled companies for investment.
The company expects Southeast Asia will produce 20 of these USDbillion-value tech companies over the next decade. At least half of these likely will pursue IPOs.
What’s helping to drive this? Consumers. Southeast Asia is entering the “golden age” of disposable income. So, rhinos. In other words, unicorns need not apply.
Why not a unicorn? No one’s ever seen one.
The home court advantage
In August, Asia Partners made its first deal with a USD40 million investment in RedDoorz, a Singapore-based online platform for budget hotels. RedDoorz has a large collection of hotels that it works with in Indonesia, the Philippines and Vietnam. It’s about to enter Thailand.
“RedDoorz is scaling beautifully,” says Rippel, mentioning that the company is adding hotels daily.
Asia Partners is being extremely selective in its investment strategy of companies. Planting itself in Singapore was deliberate: Southeast Asia is a fertile ground for great business models, and, subsequently, great businesses.
It’s casting a wide net for startup investing, identifying 20 business models that it finds interesting and ripe for potential investment, with proven success in other emerging markets that are just a few years ahead in their development.
These startup business models include next-generation e-commerce companies (for example, fashion and other verticals), e-commerce services (like logistics), specialized online travel players, providers with a focus on a particular industry (like real estate), education companies (like those focused on tutoring or vocational training), and health tech companies that provide support to patients, doctors and pharmacies.
And once these companies scale, there will be clear interest by large strategic partners focusing on global growth. As Nick Nash, a member of YPO and co-partner with Asia Partners told CNBC Global Squawk Box in November: “Great companies don’t get sold, they get bought.”
Emerging from corporate retirement
At 43, Rippel is a tech veteran.
He spent almost a decade with eBay, and then for the past 10 years, he worked with South African investment company Naspers, which allowed for the deployment of a lot of capital and investment in companies around the world.
This culminated in Rippel’s retirement from his corporate career.
Then came the idea to form Asia Partners with professionals just like him: all with similar backgrounds and who possess an operator-investor mindset when they look at deals. These business partners are young, they’ve served at the helm of these companies, and they have investing experience.
Startup Investing: Three investment tips
According to Rippel, there are three things to look for when studying businesses for investment purposes:
- The right business model in the right region. Rhinos come in many shapes and sizes, but these companies are building institutions. If you apply a business model in a region that is not ready for it, the business will not work. Investors should look for a business that’s established, with good economics such as two-sided marketplaces with lots of suppliers on one side and customers on the other.
- Team and execution. Is this the right group of people? Do they have the right culture and execution ability? You must look at the team and what the business has accomplished. “This is not an idea game, it’s an execution game,” Rippel says. It’s about executing locally on the ground – how do customers behave? Is retention high on the company’s platform?
- Business valuation. We’re talking risk-to-reward. No pie-in-the-sky profiles. This is very much an investor-centric approach.
There’s more – especially for companies looking to get into startup investing. If you write smaller checks at an earlier lifecycle stage of the company, the execution risk is very high. It could be a bad gamble because there’s more volatility involved.
After all, the company still is establishing itself at that stage. Rippel encourages investors to proceed with caution here.
“As an early stage investor – the risk is much higher,” Rippel says. “The business is unproven. You are betting on an idea as an early stage investor.”