Cover Story: How to catch a unicorn

This article first appeared in Digital Edge, The Edge Malaysia Weekly, on September 6, 2021 - September 12, 2021.
Cover Story: How to catch a unicorn
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Malaysia finally saw its first unicorn, which refers to a start-up valued at more than US$1  billion (RM4.2 billion), emerge in July when Carsome obtained the coveted status. 

Finally, Malaysia can take its eyes off Grab, the one that famously got away when it moved across the Causeway in 2014. But this is just the beginning. The Digital Economy Blueprint, which was released last year, aims to attract five Malaysia-based unicorns by 2030. 

It is worthwhile, therefore, to trace how Carsome achieved its current success and consider whether it can be replicated. 

To do this, Digital Edge looked at Carsome’s history and spoke to well-known individuals in the ecosystem to understand what it did right. 

 

All about Carsome

In 2015, Eric Cheng teamed up with Teoh Jiun Ee to set up Carsome. The young and enterprising duo had observed the fragmented used car market in Malaysia and were determined to improve it with technology. 

Their growth was rapid. By 2016, they had launched Carsome Singapore and sold more than 1,000 cars annually. A year later, Carsome expanded to Indonesia and Thailand. 

It struck up partnerships with the likes of CIMB Bank Bhd and Funding Societies, expanding its services to cover car inspections, ownership transfer and financing. Now, the company is transacting 100,000 cars, at an annualised revenue of US$800 million (RM3.3 billion) as at July. In the last year, it invested in PT Universal Collection, an offline car and motorcycle auction services company in Indonesia, and acquired iCar Asia, a listing platform in Australia.

The latter, which elevated Carsome to unicorn status, was done with Catcha Group, which is now a shareholder of the Carsome Group. Today, Carsome refers to itself as Southeast Asia’s largest integrated car e-commerce platform.

“The used car industry has traditionally been fragmented and marred with distrust, owing to the lack of information and a single systemised platform. We saw an opportunity to change the way the game was played. We never made becoming a unicorn a key metric. While we are glad to reach this interesting milestone, we see it as part of a long journey in our growth story,” says Cheng, who is CEO of the company.

He advises entrepreneurs to be true to themselves, set realistic goals and tap into their innate strengths. Endurance and resilience are critical, he adds, as is unplugging and getting adequate rest. 

“Listening to others and continually seeking to learn are also key attributes I try to apply when interacting with people. While there is no one quick solution to success, I’ve found that applying these principles over the long run will certainly help you get there,” says Cheng. 

 

How did Carsome succeed?

A few things stand out in Carsome’s history. A key point is that the company is a beneficiary of government funding via Mavcap (Malaysia Venture Capital Management), whose funds were invested in the start-up during the early stages via Gobi Ventures, 500 Startups and Vynn Capital. 

This highlights the importance of government funding in supporting early-stage local start-ups. Mavcap was set up in 2001 to accelerate the local technology ecosystem. Over the years, its funds have supported the development of several generations of local entrepreneurs.

“Mavcap invested in venture capital (VC) firm Teak Capital many years ago, and Teak Capital backed me when I was an entrepreneur. When I succeeded in exiting my companies, I became a VC investor with 500 Startups, with backing from Mavcap,” says Khailee Ng, managing partner of the famous US-based VC.

Prior to joining 500 Startups, Ng co-founded Groupsmore, which was acquired by Groupon, and Says.com, which was acquired by Media Prima, in Malaysia.

“Its backing [in 500 Startups] allowed me to back close to 40 Malaysian companies and 200 Southeast Asian tech companies, including Bukalapak, Grab and, now, Carsome. You can conclude that, if Mavcap had never existed, Malaysia may not have had the Carsome unicorn. This is evidence that some Malaysian government initiatives are effective and do pay off,” says Ng. 

Another long-time supporter of Carsome — also equipped with Mavcap funds — is Victor Chua, former vice-president of investments at Gobi Ventures. The VC, originally from China, has launched several funds in partnership with Mavcap. After Chua left Gobi Ventures, he set up Vynn Capital and continued to invest in Carsome.

“Malaysian companies that want to raise funds need local supporters. If you don’t even have local guys supporting you, why would an international investor want to take on the risk?” says Chua. He decided to back Carsome because he was drawn to the personality of the co-founders. 

He says: “[Carsome co-founder and CEO Eric Cheng] is a very humble person, which means he is willing to learn. A successful entrepreneur doesn’t have to be the smartest person in the room, but he or she must learn, adapt and rally support from partners, stakeholders and customers.”

It is important to note, however, that the way in which the government’s funds are deployed is crucial. Instead of investing in start-ups directly, Mavcap collaborates with experienced VCs. 

Dr Sivapalan Vivekarajah, a well-known figure in the start-up ecosystem, was part of the taskforce enlisted by the government to study ways of developing the local funding ecosystem. The team looked at how countries such as the UK, Singapore and South Korea did it, and realised that this kind of structure beats having governmental agencies act as VCs themselves. 

“This is the model that works. Singapore didn’t set up an agency to do the investment. It merely provided the funds for VCs and matched it 7:1. Look where it is today,” says Sivapalan, who runs the accelerators Proficeo Ventures and Scaleup Malaysia.

Another interesting observation is that Carsome benefitted from a network of local entrepreneurs who are giving back to the ecosystem. 500 Startups’ Ng is a prime example. 

There is also the local VC firm IdeaRiverRun, set up by Tan Sri Vincent Lee, founder of Foetus International, a specialist in advertising and marketing. The VC led Carsome’s Series A funding round. Meanwhile, Catcha Group is founded by Patrick Grove,  who also co-founded several well-known companies in Malaysia, including iflix and Rev Asia. 

Having an ecosystem in which former founders can actively participate could inspire new entrepreneurs and spark collaborations. 

“Having this local network is very important. If you look at more developed markets such as the US, Japan and China, many of the angel investors and VCs are former founders. They’ve exited and come back to invest in start-ups, with the intention to make money and nurture the entrepreneurs,” says Chua.

Picking the right strategy for expansion

One often hears that it is difficult for Malaysian start-ups to become unicorns because the market is too small. Therefore, going regional is almost a must if they want to achieve that status.

The interviewees agree that Carsome played that card right. Not only did it expand regionally early and rapidly, it also tackled the huge and traditional used car market, which was ripe for disruption. 

“If Carsome had hesitated, others might have taken those markets. Carsome didn’t allow that to happen. If something is new or unfamiliar, it only means you need to spend more time to make it work,” says Ng. 

“Carsome has a business model that has been proven in multiple parts of the world to produce unicorn outcomes. When Carsome invited 500 Startups to invest in its first round of funding, we had a benchmark of a German auto e-commerce company that was already a unicorn. We also invested in an Indian version that showed the same success. This gave Carsome a clearer shot at building a unicorn, which it took.”

From his years in the industry, Sivapalan has noticed that companies that operate only in a single country, especially if it is Malaysia, tend to get lower valuations from investors. Companies in countries such as Indonesia and India command higher valuations because they have huge domestic markets. 

Below that would be companies in Singapore, which does not have a huge market but is seen as an international hub. Vietnam belongs in this category as well, owing to its fast-growing market, Sivapalan adds. 

“That’s why if Carsome wants a higher valuation, it has to go regional. Of course, it’s all about the results as well. You must show good numbers.”

Carsome made the right choice to move beyond just being the intermediary between used car dealers and sellers, adds Sivapalan. It also buys used cars itself and has now ventured into selling directly to consumers. The former model allows the company to make only a small margin from listing or transaction fees. 

“But now that [Cheng] buys the cars and sells them, he can attribute that value as his revenue. Tech companies tend to get their valuations from a multiple of their revenues,” says Sivapalan.

In the same vein, Carsome grew to offer services beyond just buying and selling used cars. That is attractive to Chua. 

“Its business model is fantastic and expandable. It went into financing and now it has its own [automotive training] academy. That’s a key thing that I look at when I invest. It’s really about how you can scale your business and create an ecosystem internally,” he says. 

How to replicate this success?

More support should be given to local start-ups, whose achievements must be celebrated. There should also be more synchronised strategies from all stakeholders in charge of growing local start-ups, say the interviewees.

Most importantly, more local funds must flow into local start-ups. This means not just governmental but also private sector funds. 

“We have an abundance of funding from Series B onwards. Large institutional investors are starting to look at those stages. But there still isn’t enough funding at the seed and Series A stages. If you want to keep more companies in Malaysia, we need to make sure that the early-stage gap is filled so they can continue on to the later stages,” says Chua.

Typically, angel investors begin supporting companies at the very early seed stage. The government’s Cradle Fund grants also assist companies at this stage. VCs typically begin to come in at the Series A stage funding.

Sivapalan believes the matching fund structure, which the government has used with Penjana Kapital, will be crucial in plugging any funding gap. 

But should the ecosystem be so reliant on government funding? He argues that this is needed for at least the next few years through the matching fund structure. 

“There is a lot of money available in Malaysia but it’s residing with corporations, which are cash-rich. We need to bring them into the ecosystem. They are the missing link now,” says Sivapalan.

In 2018, Sivapalan and the late Cradle Fund CEO Nazrin Hassan lobbied the government to implement a corporate investment tax incentive to enable corporations to invest in start-ups. This effort never came to fruition.

Now, the Malaysian Business Angel Network, which Sivapalan used to head, is pushing for a corporate angel tax incentive. “If we can bring corporate money into the ecosystem, the government can slow down on its investment over time and let the private sector take over. Right now, the private sector is not ready for it yet,” says Sivapalan.

Ng concurs. He believes Malaysian corporations, pension funds, sovereign wealth funds and taxpayers can benefit from Malaysia’s own entrepreneurial successes by investing in them.

“Some are still standing by the wayside as foreign investors reap the rewards,” he says. Fortunately, some of these local institutional investors and corporations have hopped on the bandwagon. 

“This is not entirely due to patriotic motivations. Malaysian investors are now getting greedy about investing in start-ups via equity crowdfunding, angel investing or investing in VCs. We have seen a lot more inbound Malaysian interest in backing our VC funds,” says Ng.

“The dream here is simple, which is for Malaysians to be the largest beneficiary of Malaysian unicorns. It begins with increasing the mandate to invest in the first place.”

 

Should every start-up be a unicorn?

Critics of unicorns tend to highlight these companies’ aggressive methods of expansion that cause some to get caught in the crosshairs of regulators. Many also question whether these companies’ growth is sustainable, given their lack of profitability. 

In contrast, there are tech start-ups in the market that are steadily growing and making profits, but they do not command valuations as high as those of unicorns nor as much attention. 

In our rush to search for unicorns, are we preaching one type of growth model over another? Why should we care so much about unicorns? 

“The unicorn game is highly dependent on growing your market share and numbers. This is done while raising funds until you reach a point where you can list the company and become profitable down the line. But, if, at some point, your numbers don’t grow as much and you cannot raise funds, then you are in serious trouble,” says Dr Sivapalan Vivekarajah, co-founder of accelerators Proficeo Ventures and Scaleup Malaysia. 

Unicorns generally have to sacrifice profitability in the beginning as they set out to capture market share. Once they have succeeded, however, there should be a path to profitability set in place.

“Not everyone has to do this. It’s perfectly fine to build a US$500 million company that is profitable. Then you can sleep better at night and you don’t have to worry about funding. In Scaleup Malaysia, we advocate that companies have a path to profitability in four to five years. We don’t push them to be a unicorn,” says Sivapalan. 

This sentiment is echoed by Victor Chua. “My approach is to invest in companies that can be large and sustainable, rather than looking for unicorns. We’re looking for mammoths that can be strong and survive tough environments. I don’t think we should drive everyone to become a unicorn. It’s a bonus to achieve that status and a milestone that we should celebrate to inspire others.”

It is also important for start-ups to be capital-efficient, which Carsome is, says Chua. Carsome used its funds to expand effectively, find strategic partners and grow rapidly. 

For the country, having unicorns is something worth celebrating, as it draws the attention of international investors to Malaysia, thus benefitting other local start-ups. 

Sivapalan experienced this after Grab announced its intentions to list via a special-purpose acquisition company. Even though Grab is not technically a Malaysian company, its local roots are known. 

“Big investors from the US began reaching out to Scaleup Malaysia because they wanted to understand our ecosystem. It was still a little early for them to invest but they were starting to look at the Southeast Asia ecosystem and Malaysia. Before, Malaysia wasn’t completely on the map,” says Sivapalan. 

He is confident that Malaysia will see another unicorn soon. Penjana Kapital has also managed to attract foreign investors. The government will match RM600 million (1:1 basis) on funds raised by eight local VC fund managers from local and foreign investors. 

“People are starting to talk more about Malaysia. Having success stories and these investors based in Malaysia will put us on the map.”