Highlights

• Going on the public markets capitalizes on structurally lower cost of capital
• Choosing where and how to list should align with scope and capabilities 
• Speed becomes all the more important post-IPO.  
• Fast growth does not exist in a vacuum. 
• The importance of balancing breadth and depth for Southeast Asia’s local champions in the next decade, with tougher competition in the region. 

Insights from the article are also shared on South China Morning Post’s piece on Sea. 

With a host of billion-dollar tech companies from Southeast Asia heading towards the public markets, many are also looking to the one company from the region that has made the most out of its time on Wall Street: Sea Group. 

Since its IPO in 2017, Sea has gone on to dominate the ecommerce race in Southeast Asia with Shopee, push forward a significant fintech presence in the region with winning a Singapore digital banking license, growing ShopeePay, and acquiring BKE, and become the world’s best performing stock last year. More recently Sea went into the regional VC business with Sea Ventures, a sign of maturity and development in Southeast Asia’s tech ecosystem. 

This growth landed Sea’s spot in our top ten companies to watch list for 2021, but this time around we delve deeper into this performance, and what lessons tech companies approaching the public markets can learn from Sea. 

(1) Going on the public markets capitalizes on structurally lower cost of capital.

This goes back to an idea we’ve mentioned a few times on the blog: that IPOs are a means to an end, and not the other way around, despite how the conventional startup narrative paints them to be. Sea proved to great effect that capital raised on the public markets can be an efficient tool to build the business, given the structurally lower cost of capital. 

(2) Choosing where and how to list should align with scope and capabilities. 

One of the interesting aspects of Sea’s decision to list was its choice of Wall Street over SGX, Hong Kong, or China, somewhere geographically closer to home. And this choice is rooted back in the idea that IPOs should be aligned with what the company wants to achieve from raising capital, and what expectations it can meet by doing so. 

When going public, it’s all about maximizing exposure to match the scope of the company’s ambitions and their capability to capture this scope. Even if Sea’s headquarters are in Asia, given their positioning and even market reach as a global company, especially in gaming, it made sense to list on NYSE. 

It’s also important to note that while NYSE offered a greater volume of fuel for Sea, it came with greater pressure to meet investor demands. And managing these expectations is critical for any company fresh to the public markets. As we’ve written before, it’s always better to set the bar slightly lower and overperform for the first few quarters to gain the trust of public market investors, than overselling and underperforming. 

And from an ecosystem perspective, Sea’s monopoly of Wall Street when it came to Southeast Asia tech companies also made it a channel for public investors to invest in the region as well. 

(3) Speed becomes all the more important post-IPO.  

In the book Navigating ASEANnovation, we talk often about the importance of speed in the early stages of a startup’s growth. And as the company grows and even graduates into the public markets, the speed advantage never really goes out of style, especially if it is part of the company’s DNA, as it is for Sea. 

Sea’s fast and exploratory growth has been part of its DNA since day one, and is one of the reasons it has achieved the kind of growth it has since. While some critics have voiced concerns over this speed, Sea’s trajectory is not a new narrative for tech companies — this flywheel-ing has also been part of many of its peers’ growth stories from China and the Valley. Of course that doesn’t mean that this expansion across markets and verticals doesn’t come with its risks and challenges. At the same time, Sea saw the digitalization bus for emerging markets coming from a mile away just when it had gained massive capitalization from its gaming business, and decided it would not miss this ride. 

At the same time, Sea saw the digitalization bus for emerging markets coming from a mile away just when it had gained massive capitalization from its gaming business, and decided it would not miss this ride. 

(4) Fast growth does not exist in a vacuum. 

Even if speed is important to remain competitive, fast growth does not exist in a vacuum — it needs to play into developing profitability and a sustainable business model. Given the thin margins of ecommerce, cut down even further by intense competition in the region, entering into and staying in the ecommerce game for Sea was not necessarily a move to generate immediate profitability but a rapid scale that their gaming business could not have easily achieved on its own. 

That said, the expansion into financial services can also be seen now as a move to stabilize the volatility that comes with ecommerce in the region, in terms of improving overall margins and cross-pollinating the engagement of the customers Sea managed to secure with ecommerce. Ultimately scale can’t be achieved for the sake of growth, but long-term sustainability where all the pieces and business decisions made by the company tie into the bigger picture. 

(5) The importance of balancing breadth and depth for Southeast Asia’s local champions in the next decade.  

This level of competition for Sea (vs Alibaba, Gojek-Tokopedia once the merger deal is done) is expected, especially among peers its size in a region that is becoming increasingly a hotspot for tech investors and internet companies. What is interesting about Sea versus its peers in ASEAN is that it has developed the depth or level of localization that a foreign competitor would find difficult to acquire. At the same time, Sea has also grown its breadth or market reach in a way that more local champions would find difficult to compete with. For example, it is likely that part of the motivation for the Gojek-Tokopedia merger at this point in time has been Sea’s moves in the space. 

This two-pronged advantage is largely thanks to its startup-like mobility even as a multinational company. On the other hand, this same breakneck speed also makes it susceptible to tripping over local issues and opening up space for competition in areas it misses. This makes company management, especially from a division and country level, quite important to maintain its pace amidst the competitive landscape. 

Another advantage that Sea could also put into play in its bid for Southeast Asia’s internet is its gaming business. Given how gaming, social media, and entertainment are making more headway into ecommerce and financial services as points for adoption, there are more possibilities for cross-pollination that remain untapped. 

Finally Sea’s expansion (and possibly future) draws parallels to one of Sea’s biggest investors: Tencent. Sea is often compared to Tencent, given their similar roots in gaming and media. Tencent also likely sees Sea as its ASEAN counterpart with its considerable stake in the company. In the same way that it engineered WeChat to become the platform that put China’s internet into hyperdrive, Tencent has seen Sea’s progress over the years as a leader in Southeast Asia’s tech ecosystem, and likely expects Sea to be a driving force in the region’s internet economy that not only develops its own apps and products but also becomes the platform for new kinds of tech businesses (e.g. Pinduoduo getting its start on WhatsApp).