ASEAN tech IPOs, ICOs to gain traction: Kin-Wai Lau, Fatfish Internet Group

Kin-Wai Lau, CEO of Fatfish Internet Group. Credit: DEALSTREETASIA

Kin-Wau Lau, the CEO of Internet venture builder Fatfish Internet Group, has overseen the growth of the firms’ international footprint. With a presence in Singapore, Australia and Sweden, the Internet venture builder predicts that ASEAN technology IPOs and ICOs will gain traction as regulators and investors deepen their understanding of the sector.

The firm, which has been operational since September 2010, listed on the Australian Securities Exchange (ASX) in July 2014. It maintains dual headquarters in Singapore and Melbourne.

In October 2017, the firm conducted a restructuring exercise that saw relevant core assets transferred to company’s Swedish subsidiary Fatfish Global Ventures Ab. While the firm is still evaluating European stock exchanges, the NASDAQ Nordic OMX – and the Nasdaq First North in particular – are prime candidates, according to Lau.

Lau explains: “We are looking at Stockholm for two reasons. Stockholm fits the bill in terms of the innovation and the technology space. The number of companies and startups we are seeing in the Swedish startup ecosystem is very encouraging.”

“Hence, we decided to set it up as our global HQ. Of course, we would also like to be able to assess the talent and innovation pool from Sweden.”

Lau is also of the opinion that while there is “some saturation in terms of deal flow and recent investments in the region”, which has driven ASEAN venture funds to seek deal flow opportunities abroad, he argues that the growth of the region’s consumer Internet market is robust and will continue to generate opportunities for investors.

In an interview with DEALSTREETASIA, Lau shares his views on ASEAN equity capital markets and the IPO space, developments involving the SGX and IDX and the impact of ICOs on venture capital and startup dynamics.

Edited excerpts:-

The e-commerce market in ASEAN is seeing a shift from e-commerce towards consumer Internet space as the digital economy matures. How do you see Fatfish’s strategy evolving in the medium term?

We will move with the trend. For us, our strategy has always been to follow where consumers spend time online. I have no doubt that consumers will continue to buy things online, so I don’t think e-commerce will stop for that matter. Because of competition, the industry will mature and move towards the next level. For now, we are still very focused on e-commerce, online entertainment, and feel those are two clearly major trends that we see moving forward the next three years.

We are uniquely positioned as a venture broker that will invest and work with entrepreneurs from very early on. We seek to invest from the start with an exit approach, so we are usually investing and in fact, most of time, almost acting as a corporate co-founder. We invest anywhere from $100,000 all the way to $1,000,000 depending on which stage companies are in.

In September 2017, you announced the iCandy ICO at the Asia PE-VC Summit 2017. However, the ASX required that you spin it off as a separate company, so can you perhaps go more into detail about this case?

Nitro, the game economy digital token project, is now run as an independent with iCandy acting as the main publisher of the games that Nitro will fund. We find that’s a structure that works. The cryptocurrency space is still relatively new. As various regulators across the globe are starting to study it more, the frameworks will evolve in the fast-moving space.

In Singapore, I think the Monetary Authority of Singapore (MAS) is developing the regulatory framework very nicely. So for us as a publicly traded company, we will continue to get involved and update our relevant resources and try and advocate for a balanced regulatory approach to this matter.

You are looking at the NASDAQ First North of the NASDAQ OMX Nordic. In 2016, one of the few companies with an Asian footprint there, The Marketing Group (TMG), conducted an agglomeration initial public offer (IPO) there. This has performed poorly. In terms of Asian enterprises looking to list on the NASDAQ First North as an exit destination, can you comment on that? 

It’s a very well designed marketplace that is friendly to startups and technology companies. There are not that many stock exchanges we have seen that are friendly to startups of all sizes. The NASDAQ First North is a superior product compared to most of the bourses that I’ve seen.

The Marketing Group did very well for the first six months of their IPO. But then, for various reasons and as with any other company, there were ups and downs. I think Asian companies looking at Nasdaq First North would need to convince the investor base of that market that they’re an international company with a global presence. That’s the challenge for Asian companies when they look at that destination for IPO.

Fatfish has argued that the high valuations seen in technology startups in ASEAN –  supported by private capital markets – won’t find those same valuations in the equity capital markets of Southeast Asia. In 2017, we saw the IDX host it’s first e-commerce listing while the SGX announced a collaborative partnership with NASDAQ with regard to IPOs. How do you assess the impact of these developments? 

These developments will pave the way for more tech startups seeking public capital, which is a very good thing. I think that will balance up the valuation matrices.

The high valuations supported by private funding – or more accurately venture capital funding – is largely due to supply and demand. And this is because there is inadequate deal flow from the supply side; there is strong demand for startup investments because the amount of capital coming into the region is substantial and growing.

That drives up the valuations. and as a result of this surge in the appetite for technology enterprises and both investors and entrepreneurs seeking an exit,  it is natural that they are going into engineer a pathway to seek an IPO at some of these stock exchanges.

There has to be moderation in how both investors and entrepreneurs approach valuations. Once you start dealing with the public capital markets, it has to be within a range that the world recognises. It’s just not one or two VC partners they’re trying to convince but a huge ecosystem of retail investors, investment bankers, institutional capital providers, pension funds and other players.

The SGX, which is currently the largest stock exchange by market capitalisation in Southeast Asia, saw a strong rebound in its IPO pipeline. They’ve launched a partnership with Investor-One to augment investor education for its Catalist stocks and secured a partnership with NASDAQ. What’s the medium and long-term impact of these developments?   

Generally, the more investors’ education SGX does, the better for the market. The shortage of IPOs is twofold: On one hand, it was basically a lack of companies that could meet the IPO criteria while on the other hand, there was insufficient investor interest.

As for the NASDAQ partnership? it’s a very powerful brand and one of the most recognised brands among the capital markets of the world. That will help create the brand refreshment the SGX needs. The NASDAQ brand is certainly very exciting and, hopefully, that can translate into excitement about the SGX as well.

From my perspective, what’s very interesting is that the NASDAQ has been traditionally the home ground for technology-based IPOs. That partnership could also mean the SGX will try to drive more technology listings on its boards.

With the e-commerce listings on the IDX, how do you see this progressing? Indonesia has a highly competitive e-commerce space at the moment. Can we expect more public listings or are the exits going to be through M&A transactions?

There’ll certainly be a lot more IPOs, but outside of the stock exchange, there is going to be more M&A activities as well. Both IPOs and M&A will take off in Indonesia largely because these exit routes are two different parts of the equation. M&A deals are happening because it’s not easy to build up interesting startups in Indonesia. Players from outside the ecosystem want to acquire and start at a level that is sizeable.

Meanwhile, the IPO market will be buoyed by interest from Indonesian population who in general are very interested in startups and technology investments.

Does the Singapore bourse need a third market board, given there’s always a concern over pre-profit tech stocks being offered to investors in equity capital markets? 

There’s a very present, urgent need for a third market board in Singapore. This is especially with regards to SMEs, entrepreneurial ventures and technology companies. All emerging enterprises require time to reach profitability, and while profitability isn’t the only criterion that investors are looking at, many other bourses like the NASDAQ, NYSE and HKEx have more lenient profitability requirements compared to SGX.

That’s one of the reasons the SGX has been suffering a shortage of IPOs. In the non-technology space, if you look at all the companies listed on SGX, technology enterprises account for a very small component relative to other exchanges in the world.

There are hardly any Internet companies listed on the SGX today. Why would that be the case, since a big part of everyone’s life now revolves around technology? That’s largely a debate that the SGX is going to have to engage in, and particularly about their terms for a profit requirement of those companies seeking to be listed on SGX.

There’s been discussion regarding the development of private secondary exchanges (e.g. Funderbeam) as a means of enhancing the exit dimension of the venture ecosystem in Singapore and the broader ASEAN environment. How do you see private secondary exchanges operating in this space, and what do you feel the regulatory reaction to them will be? Do you think they serve a purpose, especially with regards to M&A transactions?

It’s almost inevitable that the private secondary market will continue to grow but it is a domain that operates with a very different objective. The stock exchanges operate in a highly regulated business environment; this protects the investors and aid in moderating the behaviour of public companies.

However, private enterprises which are not ready to be publicly listed may seek the route of going to list on a private secondary market. This is great for investors as it now adds an additional path for a potential exit. For a while more, the stock exchanges will be the main pathway to exits for those companies seeking liquidity.

As an investor, how do you seeing initial coin offers (ICOs) impacting venture capital? You have startups like TenX that can raise substantial amounts of capital via their ICO, but they also run the risk of overcapitalisation. 

The ICO space is moving very fast and has reached a maturity now seen two to three quarters ago. ICO investors are now more cautious and they will only invest in credible ICO projects. That’s a positive development and one that’s good for the ecosystem. The ICO trend will disrupt the VC industry to an extent.

Most of the startups that we come across would certainly have it in their mind to explore an ICO as a potential means to raise funds compared to the traditional VC funding route.

The VC industry as we know needs a bit of disruption. To a certain extent, they are proxies for investors. Democratising that value chain of venture capital funding is crucial for the ecosystem. We saw this with equity crowdfunding and ICOs are not much different. But of course, it’s a far superior technology platform given the integration and use of crypto-tokens. I think it will be very important for the ecosystem.

Any take on the use of ICOs to raise capital for funds by fund managers? We’ve seen the use of ICOs to facilitate by the likes of Starta Accelerator and Finshi Capital. How do you see this evolving?

In November, the MAS issued guidelines on digital token offerings and its very clear on what it sees as tokens that have features of securities, which is based on the Singapore Securities and Future Act. Those offerings will clearly need to be managed and conducted in accordance with the existing law. Additionally, the MAS is also looking to come up with a new policy called the New Payment Systems Guideline.

Singapore as a financial hub will always have a very clear definition of securities law, and that is what is taking place. The earlier ICOs that happened in Singapore were not fully compliant with the regulatory requirements. Now, it’s very clear what is required in terms of the regulations you have to abide by if you conduct an ICO from Singapore.

For a company conducting an ICO, how does it affect their exit potential, say through an M&A transaction where it is a target firm? Will the ICO impact their ability to secure further venture funding? 

In most instances, startups who are raising funds through ICOs structure it so that there is a parallel project operated as a foundation where the cryptocurrencies issued through the ICO entitle the token holders to specific rights – potentially to parts of that specific parallel foundation – while the equity structure of the core business entity is unaffected. That’s the case of iCandy, which spun off the Nitro Token ICO

It definitely poses challenges for M&A activities. An acquirer could now look at a startup that conducted an ICO and sees that there are two parts of the business. One component is built on the blockchain and that part of the business is something that they can never acquire because there are digital tokens in the hands of the crowd.

The acquirer would just need to be contented to look at the core business that has not been spun off, if that’s the structure that they have taken. ICOs can pose a great challenge for exits via acquisition.

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