Howard Schultz’s trip to Italy in 1983 changed the way coffee was consumed. 

Visiting the different coffee bars in Milan showed that the Europeans knew better than Americans how the beverage should be taken: a piping hot espresso served in a rustic cafe that made customers linger just to see a friendly face. Coffee was more than just a drink – it was an experience. The café was a third place beyond home and work where people could gather, relax, and talk. 

Since Schultz brought the concept back to America and popularised it with Starbucks, sipping a coffee leisurely at a cafe has now become the way we drink it. Want a 1-on-1 conversation with someone at work? Do a coffee chat. A low commitment date? Grab coffee with someone. Somewhere with WiFi to get some work done? Hang out at the local cafe. 

But things are starting to change. Coffee has become more of a necessity, although it still remains more than just a beverage that delivers a shot of caffeine into your body. Jokes about writers turning coffee into words and programmers turning coffee into code illustrate this best: it’s an acknowledgement that coffee is consumed daily, and just as importantly, publicly as well. There’s still a cultural element involved: where you get your coffee and how you drink it matters. 

Kopi Kenangan has led this trend. In a region like Southeast Asia where median incomes are lower and consumers more price sensitive, they’ve managed to pioneer a grab-and-go model which makes drinking coffee as efficient as it gets. You still get a great cup of coffee, but without the idle chit-chat and the 7-dollar price tag that comes with it.  

Investors have caught on as well. In December 2021, Kopi Kenangan raised a US$96 million Series C led by Tybourne Capital Management, bringing their valuation over the billion dollar mark. Including previous rounds, that’s US$333 million they’ve raised, from investors such as Sequoia Capital, B Capital, Alpha JWC, Horizon Ventures, and GIC to celebrities like Jay Z and Serena Williams. That’s a lot of interest and money in coffee. 

When you see something like this, it makes you wonder what’s going on. This, coincidentally, is also a good sign that there’s something to be uncovered, which is why Kopi Kenangan is the subject of this breakdown. In this edition, we’ll cover: 

• Founding Story: Edward Tirtanata is no stranger to the F&B business. Before starting Kopi Kenangan, he ran Indonesia’s most successful artisanal tea lounge, but after realising coffee’s unique position in the F&B world, he switched his beverage of choice. 

• Product: Between Starbucks and sachet coffee, there was an opportunity in the medium market for premium coffee – a good product that was affordable, but not luxurious. Kopi Kenangan seized that opportunity and etched itself in that segment. 

• Business Model: Margins are low in the F&B industry, but Kenangan has managed to stay ahead of the competition by differentiating itself with a digital-first approach and keeping costs low with small storefronts.  

• Future: Tiranata is building a company that’s more than just kopi. With new food brands and Kenangan’s entry into FMCG, there are signs that we’re witnessing the beginning of a new F&B conglomerate.

Let’s jump right in. 

Subscribe now

Founding Story

Coffee might be Edward Tirtanata’s obsession now, but it wasn’t always the case. 

After graduating from Northeastern University in 2010, Tirtanata spent a few years in Ernst & Young and other consultancies as a tax adviser. Inspired by his favourite teahouse in Boston, where he studied, he established Lewis & Caroll in 2015, an artisanal tea lounge that served premium tea which couldn’t be found in Indonesia.This made sense: Indonesia was the fourth largest tea leaf exporter in the world but did not have its own tea brand yet. 

A few months after launching Lewis & Caroll, however, Tirtanata realised why this gap existed in the market: it was too difficult to attract customers. Premium tea was too upscale, and the way he branded his tea lounge - derived from English authors and tea lovers C.S. Lewis and Lewis Caroll -  didn’t help as well. Sure, there were customers, but it was also clear that the concept was not resonating with the masses. Its product was better, but its price was not affordable to most. 

Fortunately, Tirtanata didn’t have to look far. Although it was first and foremost a teahouse, Lewis & Caroll sold coffee as well, and it dawned on Tirtanata that this might be a better bet than tea. Most Indonesians were already drinking instant coffee, which was really just over-roasted coffee packed with flavouring and sugar. A decent cup of coffee at cafes went for Rp 40,000 (US$2.65), and if someone drank a cup everyday, that would add up to Rp 1.2 million (US$80), which was about 30% of the monthly minimum wage then. 

Tirtana bet that people wanted an affordable and good cup of coffee, something between Starbucks and the sachets they drank from every day. This was also likely to be a better business than tea or any other F&B product. Consumers might not want to eat the same burger or pasta every day, but they’d happily drink the same cup of coffee. Plus, coffee has some addictive properties, which means that they could expect frequent repeat business.   

In August 2018, he opened his first coffee shop outlet in South Jakarta with high school friend James Prananto. There was a twist to their business model: their store would be a grab-and-go offering with no seats available. The two of them had seen bubble tea chains explode into the scene with such a setup, and they reasoned that there was no reason this wouldn’t work as well. Smaller storefronts meant lower rents, and they hoped that this would offset the higher cost of ingredients that they were using for their coffee. 

Kopi Kenangan - translated as coffee of memories - sold 700 cups of coffee in its first day. The name of their brand attracted eyeballs, and with each drink priced at an average of US$1.20 a cup, queues started to form outside their outlet as customers were curious to learn about this upstart brand. As Tirtanata remarked in an interview:  

“I’m not sure why, but ‘kitschy’ branding works really well in Indonesia. Even on our first day of sales, we were able to sell 700 cups with hardly any marketing. People see the name, they are amused, and then they try. Because of that ‘lowbrow’ branding, people aren’t afraid that it will end up to be an expensive drink.”

A further burst of public awareness was created when some people started posting photos of their drink and tagging their exes on Instagram. Kopi Kenangan went mini-viral on social media, and sales increased accordingly. Within three months, the company was in the black, and Tirtanata and Prananto opened a second outlet. By then, they were convinced that the grab-and-go concept worked, and they followed this up by launching 14 more outlets in the next nine months. 

Investors took note. Usage of apps like Grab and GoJek for food delivery had also become popular, which not only created additional distribution channels, but also normalised ordering food through apps. This created additional distribution channels, and it showed in Kopi Kenangan’s growth. Alpha JWC invested US$8 million in the company’s seed round in October 2018, and less than a year later, Sequoia India led Kopi Kenangan’s US$20 million Series A round. By then, the coffee startup had over 80 outlets.  

The Rise of Tech-Enabled Coffee

Let’s start with what Kopi Kenangan offers: a fresh brew of coffee made from high quality Arabica beans sold at affordable prices. This sounds mundane now, but it was a novelty when Kopi Kenangan first started. 

Unlike Starbucks or similar Western coffee shops, Kopi Kenangan’s offering is unabashedly local. Instead of hot Americanos with a dash of milk, they serve mostly iced drinks for customers to cool off from the hot Indonesian weather, and their drinks are all on the sweeter side due to local tastebuds. Each type of coffee is also given a creative name that evokes connotations of romance. Their signature drink, Kopi Kenangan Mantan, for example, translates to “memories of an ex-lover” in Bahasa Indonesia. It’s the kind of thing that gets people talking. 

Novelty aside, Kopi Kenangan also promises a frictionless experience for customers. At the core of Kopi Kenangan’s “tech-enabled” offering is its mobile app, which allows for a completely paperless transaction. Customers can order their coffee in advance, saving the time they would normally spend queueing and waiting for the drink to be ready. Past transactions are analysed to recognise the customer’s coffee preferences, with the app aiming to become a personal barista that can make future recommendations. And of course, promotions and loyalty rewards are also broadcasted through the app to entice users to visit Kopi Kenangan again. 

Order, pay, and collect your coffee. That sounds simple enough. But what if there isn’t an outlet within walking or delivery distance? 

That’s the problem that Tirtanata and Prananto faced when Covid-19 hit. As lockdowns were imposed, the entire F&B industry came screeching to a halt and Kopi Kenangan was no exception. Transactions fell by 40%, and the company had to temporarily close outlets and shorten operating hours. The only silver lining was that customers still wanted their cup of Kenangan coffee, and delivery-friendly outlets saw orders increase by 50%.

This marked a paradigm shift in how Kopi Kenangan operated. Since customers couldn’t come to them, Tirtanata and Prananto figured that they would go to the customers instead. From the time working from home became a default, the data showed that residential areas performed better than those in the CBD, with outlets near suburban shophouses and gas stations standing out in particular. 

The duo followed the trail. Using the US$109 million they had just raised in their Series B round, Kopi Kenangan focused on expanding in the heartlands. Locations for new outlets were chosen not for the amount of foot traffic it got, but also in a way that maximised delivery coverage. This was crucial. Food delivery on apps like Grab and Gojek would not be possible if a shop outlet was located too far away from the user, and so such customers would effectively be lost.

Kopi Kenangan set out to fix this and gradually turned this into a science. From 2019 to 2022, residential stores as a percentage of total outlets grew from 17% to 52% even as it expanded to over 600 stores in 45 different cities in Indonesia. And as Kopi Kenangan figures out to maximise its delivery footprint, it plans to eventually roll out cloud kitchens as well that serve only online orders. All to make getting a cup of coffee easy. 

Subscribe now

Business Model

The story wouldn't be complete without examining what goes on behind the scenes. Kopi Kenangan’s products might sell, but there’s still the question of profit. How does the company make money in an industry where profit margins are so thin?

In Shein: The TikTok of Commerce, Packy McCormick says that the reason Shein has grown so quickly is because they’ve taken China’s strength in manufacturing and applied it to the global market. He goes on to explain: 

“This situation [Shein] holds parallels to TikTok which was able to take very standard China playbook UGC platform practices (e.g. directly paying creators) and apply them to Western markets. Selling fast-fashion through an app allows Shein to lean into its advantages to compete on three vectors it’s uniquely suited to win:

• Price: “affordability”

• Selection: “choice” 

• Retention: “addictiveness”

Shein’s ability to deliver on those three pillars are based on its advantages on the back-end (affordability and choice), front-end (addictiveness), and in the connection between the two. To win, it treats atoms like bits, and builds a system that connects supply and demand, in real-time.”

This might sound crazy, but I think Shein is a good comparison for Kopi Kenangan. 

Like Shein, Kopi Kenangan is a direct-to-consumer and digital first company. They both sell consumer products that don’t seem differentiated in any particular way; you can easily find substitutes for the clothing and coffee that Shein and Kopi Kenangan sell respectively. And finally, both have somehow found a way to outflank the incumbents in their respective spaces despite their product not being far superior to their competition.

To be clear, Kopi Kenangan is playing a far easier game than Shein. It doesn’t have to do as much to score well across the same three vectors. 

Addictiveness comes easily since caffeine is a substance that creates dependence, and Kopi Kenangan’s marketing efforts have made it the most popular coffee brand in Indonesia. Choice is another simple one since Kopi Kenangan has a much smaller base to cover; there are only so many ways you can have coffee. That just leaves affordability, which I think is the most interesting piece. 

Low prices are possible only when costs are low, and Shein’s costs are low only in relation to what it would cost to manufacture something in another part of the world. That’s why they sell only to an international audience. Kopi Kenangan, on the other hand, enjoys no such advantage. They sell domestically, which means that low labour costs don’t benefit them in relation to the competition. That’s why they’ve had to keep costs low by setting up their own coffee roastery, and among other things, optimise on rent. 

How do they do that? Well, Kopi Kenangan outlets take up 10 to 20% of the space that their competitors generally do. By having a grab-and-go concept and not having any seating space, Kopi Kenangan saves on rent since they take up less square footage. Plus, they are able to set up shop more easily in a variety of locations since it doesn’t take much to accommodate a kiosk. This is a big help given that rent is typically the largest line expense for most brick and mortar stores. 

It gets better. Since customers don’t dine in at Kopi Kenangan outlets, there isn’t a need for it to compete for leases in locations with the highest footfall. In trying to attract customers, restaurants and shops naturally end up clustered due to Hotelling’s Model of Spatial Competition, which drives up rents. Kopi Kenangan, on the other hand, has no such need for physical storefronts to get customer attention. Because all it aims to do is maximise its collection and delivery footprint, they can open outlets in more obscure locations so long as customers can still physically reach them. That significantly improves profitability. 

Shein defined what people now expect from online fashion retailers, and Kopi Kenangan is now defining what no-frills coffee should be like. But if that’s all there is to Kopi Kenangan’s business model, why doesn’t everyone just copy this? 

If you're starting a new coffee chain, it wouldn’t be the hardest thing to do. Rocket Internet-backed Flash Coffee, for example, has taken this model and executed it in many countries including Singapore, South Korea, and Japan. But if you’re Starbucks, you can’t just remove seating in your stores because that’s why people customers visit you. And even if you decided a complete overhaul was necessary, it’s just not possible to get all your franchisees to change how they operate overnight. 

In  7 Powers: The Foundations of Business Strategy, Hamilton Helmer lists counter-positioning as one of the conditions that creates the potential for persistent significant differential returns even with sigtnificant competition. As he explains, counter-positioning occurs when “​​a newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business.” This is exactly what Kopi Kenangan has done with Starbucks and every other coffee chain which acts as a third place between home and the office. There’s not much the incumbents can do. 

Of course, counter-positioning alone isn’t enough. It works well against incumbents, but doesn’t help with new up-and-comers who replicate the same model. What keeps Kopi Kenangan ahead of the competition is its flywheel which it has developed over the years, which only helps them become more efficient over time. 

Branding - coincidentally another one of Helmer’s 7 Powers - has undeniably been instrumental in helping Kopi Kenangan fend off the competition at home, but it’s not clear if this will be the case when they expand overseas. If they want to avoid costly price wars, they’ll need a wedge  (more on that later) to distribute their product since they’ll no longer have this flywheel. For now however, Kopi Kenangan’s model has been enough to keep it ahead of the pack and afloat - they reported being profitable in 2022 even after taking on heavy losses in the pandemic years.  

The Making of A Conglomerate

“It’s so wild that we have tech-enabled coffee now.”

An ex-VC friend of mine said this to me recently, and I think it captures how most people feel about this space. Tech does create efficiencies, but it’s not clear how much value there is to be unlocked from selling coffee. There are only so many coffee variants you can sell, and there’s no chance you’ll ever have software margins. 

Tirtanata and Prananto appear to have thought about that as well. After raising their Series C round, Kopi Kenangan has branched off into food items. This might sound normal; after all, lots of cafes have food on their menu as well, since this increases the average order value of a customer. But what most coffee shops don’t do is start new food brands that operate outside of their business. 

It started with a piece of bread that customers could buy with their coffee. After hearing from customers that they enjoyed it, Tirtanata and Prananto decided it might be a good idea to attach a brand to it, calling it Cerita Roti. As brand awareness grew, the duo spun it out of Kopi Kenangan into a bakery chain. This process was repeated for other food items, creating brands such as Chigo (fried chicken), Kenangan Manis (soft-baked cookies), and Kenangan Heritage (a premium coffee mixologist and purist bar). They even launched their own bottled ready-to-drink early last year, becoming the first coffee chain to enter the world of FMCG. 

This is not an obvious move. As Mario Gabriele highlights in his Starbucks analysis, coffee companies are growing by either improving efficiencies with the use of robots and automation, or building payments and reward programs in the hopes of building a super app. Integrating tech is the focus, not increasing the number of verticals that they are in. 

All of this leads to one conclusion: Kopi Kenangan is an F&B conglomerate disguised as a coffee company. A company which has found a winning format typically expands quickly to capture market share, but Kopi Kenangan has not done this. Despite having a large warchest, its only overseas presence is in Malaysia, where they opened their first outlet in October last year. In comparison, Flash Coffee has locations in Singapore, Hong Kong, South Korea, Thailand, Taiwan, and Indonesia, despite being founded only in 2020 and having less money in its coffers.

This is confounding, but makes sense if you consider that Kopi Kenangan is playing a different game. Instead of selling one product to a wide audience, they are focused on selling a wide variety of products to one audience: Indonesians. There’s no dogma as to what product they sell, or how they distribute it, so long as it remains profitable. If coffee and food products don’t have high margins, they’ll make up for it in volume. 

So far, it’s looking promising. In FMCG, there are three things that really matter: selecting the right product, marketing it, and then distributing it. Kopi Kenangan has proven itself up to the first two tasks, but it’s not clear if it can handle the latter. Tirtanata and Prananto seem to have recognised this however; their selection of investors and strategic partners suggests that they are likely to get some help on this front. 

Will they succeed? It’s too early to tell. But if history is any guide, it’s hard to bet against them. They stole a match on Starbucks, and they just might do the same to the Nestlés of the world. 

Thanks to Trevor, Yohanes, and Joyce for reading drafts of this.

Liked this breakdown?

Thanks for reading! If you liked this, drop your email below and get posts sent directly to your inbox when they are published.

Subscribe now

And if you loved it, share this with someone else. It’ll make my day.

In 1970, George Akerloff wrote a paper called The Market for Lemons. 

Using the market for used cars as an example, he observed that markets with asymmetric information would degrade and eventually collapse. 

Because buyers couldn’t differentiate between quality products and defective products (“lemons”), they would have to price in the chance that they would receive the latter to ensure that they were properly protected. As a result, honest sellers were less likely to sell their goods in the market since they would always be getting a worse price than they would elsewhere. Buyers would then have to price in the higher probability that they would receive a lemon, therefore starting a new feedback loop with more sellers in the market. This continues until the market is left only with lemons and eventually collapses. 

Akerloff would later be awarded the Nobel Prize in Economic Sciences for his work on asymmetric information (that one paper alone earned him 41,500 citations). More importantly, governments around the world started passing consumer protection laws in all sorts of industries, requiring companies to provide warranties on certain consumer products. That allayed some of the problems caused by asymmetric information.  

But the used automotive market - Akerloff’s example - remains unchanged. Consumer protection laws don’t address transactions where a consumer sells to another consumer, and in less developed countries, you have even fewer protections since it becomes too costly to enforce such regulations. It’s a huge problem, especially since cars are big ticket purchases. 

That’s where Carro comes in.

Founded in 2015 by Aaron Tan, Aditya Lesmana, and Kelvin Chng, the end-to-end used car marketplace aims to make buying and selling a second hand car seamless and convenient. Using AI, Carro is able to do a 160-point inspection of a car in a fraction of the time it takes humans to do so. It then arrives at an optimal price based on identified defects and wear-and-tear as well as current demand for that model. And if someone is interested in making a purchase, Carro can provide financing as well. 

The potential is huge, and investors have taken note. In June 2021, Carro became a unicorn after raising a US$360 million Series C led by Softbank. They followed that up with a US$100 million Series D led by Temasek later in December. That takes its total funding to over US$520 million from regional name investors such as Singapore’s EDBI, B Capital, Insignia Ventures, Golden Gate Ventures, and Alpha JWC. 

All this is a lot of money, but as we’ll see, not excessive for an industry with such a massive TAM. In this piece, we’ll cover:

• Origins: TAM was top of mind when Aaron Tan founded Carro. This has paid off as the company has avoided the slowing growth that plagues so many start-ups in SEA. 

• Product: Unlike some of its competitors, Carro has built out enough products to serve consumers in the entire purchasing cycle. This puts it in a great position to scale in the region and grab market share with its end-to-end solutions.

• Business Model: Carro started off as a marketplace, but has evolved into a retailer. This has allowed it to infuse data into all of its operations, although it also creates new risks for the business.

• Future: Unlike other car marketplaces which are doing terribly in this business environment, Carro has been profitable for a few years. This puts it in a great position to seize future growth opportunities as interest rates stabilise. 

Let’s jump in. 

Starting in Overdrive

Before Carro, Aaron had already built two businesses. None of them were at the same scale but it’s hard to blame him for that: Aaron was just a teenager. 

At 13 years old, he started a network hosting company as the Internet was taking off. And at 16, he built a small search engine that made advertising dollars on a pay-per-click model. That was a time long before Google - Yahoo was just a direct feedback platform then, and there were other search engines such as Lycos, Excite and AltaVista. 

Business was good but Aaron eventually sold his companies so he could focus on his studies. This would be an incredible experience in itself. Like Justin Kan and his co-founders, Aaron sold his first start-up on eBay. Unlike the eventual co-founder of Twitch, however, Aaron faced an additional legal problem: 

“When I sold my first company, the buyer actually flew into Singapore and basically told the lawyers, ‘this guy is underage’ and that whatever had been signed would not be legally binding, which almost collapsed the deal, but it worked out in the end.”

Aaron went on to study computer science at the Singapore Management University and followed that with a Master’s at Carnegie Mellon under a government scholarship. After finishing his studies in 2010, he returned to serve his five-year bond with Singtel Innov8, the corporate VC arm of state-owned Singapore Telecommunications. But because there were so little investable deals in Southeast Asia, Aaron would spend most of his time in the US. The only time he spent back home was working on an initiative called Block 71 to build centralised office spaces for startups - an initiative that has since helped companies such as Shopback, Carousell, and Glints. 

VC might be a dream job for many, but it wasn’t enough for Aaron. He didn’t want to just support entrepreneurs; he wanted to be in the driver’s seat. Nothing thrilled him as much as owning and running his own business and he wanted to recapture that feeling from his teenage years.

With technical skills and VC experience, the possibilities were endless. But Aaron knew right from the start that there were only two verticals that he would ever consider: property and cars. Both were huge markets and Aaron knew from his experience as a VC that a large TAM was crucial for building a large company. And then there was his Singaporean upbringing as well - property and cars were top of mind for anyone who lived in the island nation.

The tiebreaker came down to market momentum and competition. Grab was just taking off in 2016 and used car marketplaces were doing well in the US and China. Property on the other hand moved at a slower place. Beyond Airbnb, it didn’t seem like there was any innovation in the space. Portals such as PropertyGuru also existed and it was clear that any new entrant would be late to the game. It made more sense for Aaron to work on something that facilitated automotive transactions - it was an age-old problem and the timing was perfect. 

Aaron called up two of his schoolmates and sold them on his idea. Both of them had spent time with Aaron at SMU and Carnegie Mellon, and they signed on. There was also something serendipitous about this team: Aditya Presmana had ties to Indonesia while Kelvin Chng had ties to Thailand - and between the three of them, they could cover the largest automotive markets in Southeast Asia. It was go-time.

The Road Taken

Carro initially launched as a consumer marketplace for cars. 

Positioning themselves as an online marketplace that would disrupt how transactions were done, an explicit goal was to cut out the middleman and have consumers transact directly. Instead of selling your car directly to a dealership, Carro would send someone to inspect your car and provide a pricing estimate immediately before marketing your car through various channels. And if no one bought your car within 30 days, Carro would take it off your hands at the price they provided. 

This worked, and Carro had over 100 transactions on their platform within four months of launching. It was an innovation on the business model, with lower costs across the board, including in storefront overheads and operational costs. Machine learning was also introduced, with algorithms trained on photos of cars that the company had serviced, with the goal of reducing the amount of time it took to carry out inspections. Off the back of such traction, they raised a US$712K seed round from a number of angel investors. 

Growth continued to be impressive. At 30% month-on-month, they raised a US$5.3 million Series A round led by Venturra Capital, with participation from other investors such as Aaron’s alma mater Singtel Innov8, Golden Gate Ventures, and Alpha JWC. Singapore had been a great market with car values in the six figures due to Certificate of Entitlement (COE) prices, but they needed to expand regionally to continue growing. 

But they soon encountered a problem: car dealerships were turning hostile towards them. In an industry which was opaque and where relationships mattered, the backlash started to obstruct growth. “Looking back, positioning ourselves as an anti-dealer brand to start was a bad idea”, Aaron admitted.

So they pivoted. Instead of cutting out car dealerships entirely, Carro would now buy used cars from consumers and then sell them to dealers through an action. This was a win-win. Dealers would get a new pipeline of inventory that they could flip without the hassle of having to conduct their own inspections. And on Carro’s end, it allowed them to buy vehicles directly from consumers and reduce the time it took for transactions to close since there was greater assurance that they could offload the cars that they had bought, even if other consumers didn’t purchase it on their platform. 

Although it was meant to be an additional service called Carro Express, this new model was so successful that it would replace the C2C marketplace that Carro had been using. The team had initially been hesitant to make this switch and for a good reason: doing so would significantly increase capital and operating expenditure and create new risks for the business. But Carro’s (improving) AI-powered inspection capability meant that it was able to better price cars, which potentially translated to better margins on each car that they bought and sold. Managed well, the move would improve the economics of the business. 

But that wasn't all. Aaron and his team also realised that it was difficult for some of their customers to get loans in a quick manner, and without the financing, it was impossible for most consumers to purchase their cars. So they did something that any good entrepreneur would do - turn that problem into an opportunity by launching their own financial services arm. 

With the data gathered by Carro, they were able to more accurately price cars and loans, factoring in information that banks couldn't, such as the trade-in value of cars. “We built our own credit engine that allows us to underwrite loans in a different way than banks”, says Aaron. To fund the development of their credit operations, they raised US$12 million from existing and new investors. 

The switch in business model, coupled with the launch of a financial services arm, would let the company cruise through the next couple of years. Growth never stopped, in terms of market expansion and product development:

• Lending had become profitable with over US$100 million in loans processed

• Partnerships with insurance underwriters meant that Carro could now directly offer car insurance to consumers

• After-sale care, including roadside assistance, maintenance and purchase of gadgets, was now readily available through Carro branded workshops

• They launched in Indonesia and Thailand, the two countries Aaron had initially identified as key markets they had to conquer

Investors took note, and in 2018, Carro raised US$60 million in a Series B round co-led by B Capital, Softbank Ventures Korea, and Insignia Ventures. Carro started experimenting with leases and a subscription product, which allowed users to swap out vehicles within a certain price tier, but phased it out after some time. They did however arrive at a new usage-based pricing offering, which adjusted the monthly payable on a car. More mileage on a car meant more wear-and-tear as well as a greater chance of accidents (and insurance payouts), and Carro’s analytics had become advanced enough that they could price these in as well. Product innovation never stopped. 

Then Covid hit. People stayed indoors because of the pandemic, and no one was buying any new cars. And since no one was trading-in their cars, Carro’s wholesale business nosedived, and revenues from that segment dried up. 

But Carro Leap, the company’s short term flexi-lease product, unexpectedly showed up as the bright spot. As the pandemic wore on and lockdowns became gradually lifted, more and more consumers wanted their own form of private transport and were willing to fork out the money for car leases. The demand was so strong that the company didn’t have enough inventory to fulfil demand and had to reach out to car dealerships for inventory to list on their platform. In the end, the additional revenue from Leap was large enough to negate the drop-off in its wholesale business during this period. 

As markets recovered in 2021, Carro finally reached unicorn status with its US$360 million Series C round led by Softbank Vision Fund 2. In a sign of its future ambitions, it then took in another US$100 million later that year from a variety of large corporates and state-linked funds, including Singapore-based Temasek Holdings, Malaysian state-backed manager PNB, Japan-based Shinhan Financial Group, and Indonesia-based Emtek Group. 

Big money, from established institutional investors. The kind of money that says something is legit. And it’s not hard to see why.

First, Carro’s revenue growth was strong, with earnings of US$225 million in 2021 and double that in 2022 at US$460 million. Second, in a time when startups were burning cash in the name of growth, Carro was profitable, proving that the unit economics worked. Lastly - and perhaps most importantly - the opportunity was still huge with tailwinds behind it.

All of this - along with the then-cheap capital - justified the valuation. But as we’ll see, there is a strong proven business model here as well which justifies the premium paid at this stage.

Carro’s Business Model

Carro’s business is split into three main verticals: retail, wholesale, and financing. 

At the core, however, Carro’s revenue comes from the spread between the purchase price and sale price. This is then augmented by the various warranties that Carro provides based on the defects that it has identified and rectified, and through refurbishment of the vehicle. Finally, it then layers on various financial products such as car loans and auto insurance.

What makes all of this possible is Carro’s computer-vision inspection capability, which has been expanding since day one. Carro doesn’t make any money off this, although it does provide some operational cost savings. Its main utility, instead, is to provide a reason for consumers to pick Carro over other methods of buying or selling a car. By ensuring that no defect goes unnoticed, and then convincing everyone that this is the case, consumers and dealers alike come to Carro because they know they’re dealing with an honest broker. Put another way, solving the lemon problem is what allowed Carro to wedge into the larger automotive market. 

But for the wedge to be effective, you need more than tech. Carro knows this as well, and is not just enhancing its AI/ML capabilities, but also communicating this. They launched Carro Certified in 2022, which is basically a report with Carro’s stamp of assurance on it. I don’t know how many of the 160 points that they look out for are vital, but as a consumer, I know that I’m being taken care of and nothing is missed. Others know that as well. This, uncoincidentally, is also what prevents a lemon market from being produced.

Beyond AI/ML, data analytics comes into play as well. Each time a buyer or seller transacts on the platform, Carro learns a little more about that individual and their transactional behaviour. This is the other piece of the puzzle that makes the Carro machine turn. 

On one hand, Carro is able to identify what an individual might need based on the type of service they purchase. Financial products such as loans and insurance are obvious opportunities to increase customer LTV and capture more information, but things like frequency of car repairs and the mileage on a vehicle also help to paint a clearer picture of what kind of driver someone is. 

On the other hand, all this information provided allows Carro to improve its operational efficiency. How should they price their warranty? Can they still sell a car at the same price with dampening consumer demand? What happens if an entire quarter’s worth of cars is stuck in the Suez Canal? Answering these questions improves the product that Carro puts in front of consumers and dealerships, which leads to more transactions and data. I’m probably missing a few things here, but the result is a flywheel that looks something like this: 

Of course, this hasn’t come without a cost. Purchasing cars directly from consumers and then selling them, whether wholesale or back to consumers on its platform, means that Carro has significantly greater capital expenditure than if they were to allow buyer and seller to transact directly. Plus, there is also the risk that Carro isn’t able to unload their inventory profitably if demand weakens - it’s one of the reasons Carvana has seen its market cap fall by over 90% since its peak in 2021.   

So far, Carro has done well to manage these challenges - cars typically stay in its inventory for less than 60 days. Its unit economics, however, reflects the reality of such capital expenditure. Gross margins on the retail side hover around 15%, although that might dip closer to the 10% mark after factoring in its wholesale business. While this is higher than competitors such as Carsome (5.6%), it's nowhere close to the software margins that VCs have come to love and expect. 

Still, a vertical play appears to be the right move. Pure listing platforms don’t do a good enough job of attracting users, and horizontal marketplaces are untenable given the trend of unbundling such platforms. In contrast, margins will likely continue to improve as Carro’s flywheel takes off and it finds a way to expand into adjacent services.

Future

As with all startups, Carro’s plan is to continue expanding. 

This makes sense: the used car market is large, fragmented, and generally a terrible experience for most users. There’s no reason to believe that such features are unique to any one country; after all, the lemon problem is not constrained by geography or culture. 

Carro has acted accordingly. Acquisitions become more common as a company matures, but perhaps the most noteworthy so far has been Carro’s acquisition of Jualo in 2019, an Indonesian listing platform which derives 40% of its traffic from motorcycle searches. This reveals a deeper ambition: Carro not only plans to expand into more countries but also into new verticals as well. 

The possibilities are endless. Motorcycles make sense because they are the most common form of transport in countries like Vietnam and Indonesia, which means that speedboats are likely on the horizon as well since Indonesia and the Philippines are archipelagos which comprise thousands of islands. But if we go back to the core problem that Carro solves (and use a great deal of imagination), it’s possible that Carro will facilitate any vehicle-based transaction that has an opaque market. Trucks, lorries, yachts, bicycles, e-scooters - these are all fair game. 

Of course, not all of these will materialise, and those which do will have to operate on a tweaked business model. But if this is any sign of Carro’s ultimate potential, we’re in for a ride.

Thanks to Trevor for reading drafts of this.

Liked This Post?

Thanks for reading! If you liked this, drop your email below and get posts sent directly to your inbox when they are published.

Subscribe now

And if you really love it, share this with someone else. It’ll make my day.

“If you look at the history of sports in Asia, we’ve always only imported. It’s time for Asia to have its own sports league.”

When I showed my friends this quote, nobody was sure what sport it referred to. Was it soccer, the most popular game in the world? Or table tennis, which China has dominated since it became an Olympic sport in 1988? Maybe badminton? There wasn’t a consensus.

 To Chatri Sityodtong, however, the answer couldn’t be clearer.

Asia has been the home of martial arts for the last 5,000 years, with forms such as Wushu, Taekwondo, Karate, Muay Thai, and Silat. It has formed part of the history, culture, and tradition of almost every Asian country. And when you look at how Asian stars have broken into Hollywood and popular culture, martial artists have (always) led the way: from Bruce Lee putting kung fu in the spotlight in Enter the Dragon, to more contemporary movie stars such as Jackie Chan, Donnie Yen, and Michelle Yeoh starring in the latest action films.

Sityodtong knows this at a deep level. He lives and breathes martial arts.

As a child, he spent his time training in Muay Thai. He went on to have a short but intense professional career, notching 30 fights under his belt. When Sityodtong swapped his career in the ring for one in finance, he never stopped training, even opening his own chain of MMA gyms. The biggest move would come in 2011 when he left finance completely to start ONE Championship, a sports promotion company.

This hasn’t been easy. Where sports like football and basketball may enjoy universal popularity, combat sports like MMA have a small audience. It’s harder to find skilled athletes, and needless to say, the violence doesn’t make it family-friendly. That makes the business of combat sports a lot more complicated since there are fewer sources of revenue.

But Sityodtong has made it work. Since its founding in 2011, ONE Championship has organised over 100 cards (events with headline matches and other less anticipated matches). More significantly, it has grown to become the second most watched sports league on social media, coming behind only the NBA. 

There’s a lot of firepower behind ONE as well. It started off with a little seed money from Sityodtong and his friends at Harvard Business School but has since gone on to raise a whopping US$515 million. Investors include Sequoia Capital, Singapore sovereign wealth fund Temasek Holdings, Greenoaks Capital, and the Qatar Investment Authority. You couldn’t ask for a better cast.

But betting on what is essentially a media business isn’t something that investors typically do, especially when it isn’t already producing cash. What do they see in ONE? That’s what we’ll be looking at today. In this piece, we’ll cover: 

1. The Warrior Founder: lots of founder CEOs have strong personalities, but few are like Chatri Sityodtong. The CEO of ONE Championship seems almost larger than life and his story lends itself to a degree of founder-product-market fit that you don’t see very often. 

2. The Business of MMA: sports teams are fundamentally in the media and entertainment business, but they can have very different challenges. Unlike basketball or football, MMA remains a very niche sport, which means that monetisation is trickier since there aren’t billion-dollar TV deals lying around. 

3. Distribution: ONE owes its explosive growth to social media and live streaming, which is something that wasn’t available to many sporting leagues in their early years. Social media impressions and views are usually seen as vanity metrics, but if you’re in the media business, that counts for a lot. 

4. The Opportunity: There’s a lot of money in entertainment, but ONE will need to last long enough in the ring before it can reach profitability. A focused push might be what the company needs to gain market share. 

The Warrior Founder

Chatri Sityodtong wasn’t always the man we know. 

Born Chatri Trisirpisal, Sityodtong grew up in Pattaya, Thailand. He trained extensively in Muay Thai, and it was at the famous Sityodtong gym that his master gave him the ring name Yodchatri Sityodtong, or “Extraordinary Warrior”. Chatri loved Muay Thai. But he realised early on he wasn’t good enough to compete at the highest levels. 

Finance, however, was on the cards. After finishing his undergraduate studies at Tufts, Sityodtong began his career as an analyst at Fidelity Investments. This didn’t last long. When Harvard Business School (HBS) offered him a place in their MBA programme, Sitoydtong took that chance, although not without hesitation. This was during the Asian Financial Crisis, and his family had just lost everything. HBS would open up many doors but it would also be terribly expensive.

At HBS, Sityodtong lived on ramen and $1.50 microwave meals. Between keeping up with his studies, networking, and tutoring students for daily expenses, Sityodtong managed to start a software company called Nextdoor Networks with his classmate Soon Loo in his second year. The two worked long hours to make things work, and this period would inform Sityodtong on the sort of people to hire. “I look for people who have the PHD factor – poor, hungry, and determined”, he would later say.

Over the next two years, Sityodtong and Loo would graduate from HBS and raise over US$37 million in VC funding for Nextdoor Networks. Investors included Sprint as well as Trinity Ventures, which had invested in Starbucks. Things were looking up and Nextdoor Networks even received a US$200 million acquisition which the duo turned down. Unfortunately, this was at the height of the dot-com bubble and the markets crashed shortly after. With cash running low and no further funding coming in, the duo were forced to sell the company in 2001 at a much lower valuation.

Sityodtong’s HBS credentials came in handy as he looked for his new gig. He first landed a job at JLF Asset Management, a New York hedge fund. Then, he moved on to Maverick Capital, a long/short equity hedge fund founded by Tiger Cub Lee Ainslie. After building a reputation in the business, he launched his own US$500 million hedge fund, Izara Capital Management. It was a hell of a ride, but 10 years in the business taught Sityodtong that this wasn’t what he was looking for. By his own account, he was a multi-millionaire and was set for life at age 37. 

The financial crisis of 2008 was the trigger that made Sityodtong do a 180-degree turn. 

In 2009, he moved to Singapore and started Evolve, an MMA gym that has since developed a name in the local arena. This let him practise the sport he loved while also providing for many Muay Thai martial artists he had known personally. His first trainer, Papa Daorung, for example, had been responsible for moulding several Muay Thai world champions but was still steeped in hardship and poverty. Working as an instructor at a commercial gym in Singapore increased his standard of living considerably. 

A core problem was that MMA wasn’t popular enough for anyone to have a viable career. Scratch that – no sport was popular enough in Asia. This was perplexing for Sityodtong. 

“Every region of the world has several multibillion-dollar sports properties. The US has the NBA, NFL and Nascar, and Europe has F1, BPL, Bundesliga and Spanish La Liga. All these properties are worth a few billion, up to US$40 billion to US$50 billion a piece. Asia has nothing on a Pan-Asian scale. So, there is no reason why this cannot rival the EPL, NBA or NFL, there’s no reason.”

It was a strong thesis, one that ESPN Asia senior executive Victor Cui believed in as well. Cui had been tasked to look for the next multi-billion-dollar opportunity and had turned over just about every rock in his search, from football, darts, to cheerleading. He finally arrived at his answer – MMA – when he met Sityodtong, whom Cui knew then as a former hedge fund manager turned gym owner. This would develop into something more.

The Business of MMA

In sports, there are but a few ways to make money. You can sell seats to fans, get sponsors to advertise at your event, and licence broadcasting rights to media publishers, with each more profitable than the last. Each segment, however, is important to ensure that revenue sources are diversified - ticket sales, for example, plummeted to near-zero during the initial Covid outbreak.

It’s a simple business model and one that has delivered a track record of healthy cash flows along with rising team values. Private equity firms have noticed and invested accordingly – the Golden State Warriors and Manchester City are some of the biggest names which are co-owned by investment funds. There’s a lot of money pouring into sports, especially into teams which have emerged from Covid relatively unscathed.

But those in the business of MMA haven’t had it this easy. In a sport where a fight is won by knockout or submission, athletes get injured often and severely. Where you might see a sprained ankle or a torn meniscus in most sports, it’s not uncommon in MMA to see a fractured skull or broken arm in one night. This creates several unique challenges.

First, running regular events is operationally difficult. Because of the high rate of injuries, athletes fight less, which makes it impossible to have a regular season. Where NBA teams might play 82 games and EPL teams 38 games in a season, the average MMA athlete fights only 2-3 times in a year, with fight promoters such as the Ultimate Fighting Championship (UFC) hosting around 40 live events.

This means matchmaking fighters and putting together an exciting fight card can be a nightmare in itself. Plus, fighter promoters have to pay upfront costs and sell their own pay-per-view (PPV) packages and ringsides, something which other sporting leagues rely on their media partners for. The irregularity of this all means that companies like the UFC and One Championship are structured as fight promotion companies instead of sports leagues - they cannot afford to look too far beyond one night at a time. 

Second, sponsorships are difficult to come by. Not all fights are created equal, and sponsors know that as well. But the very nature of the sport means that it’s impossible for a fight promotion company to guarantee or forecast what the returns on a potential sponsorship might look like. A fighter might be injured and unable to compete, or a lucky KO ends the entire match in two minutes. There isn’t much in the way of media assets that fight promoters can leverage, which means that fight promoters really have to squeeze as much as they can out of any limited real estate . As Jonathan Snowden writes: 

“When you're a fighter, everything is for sale. Whether it's a patch on your crotch or the shirt on your back, every piece of visible real estate has value for a fighter who is about to appear on television. The agent's job is to fill that space, maximizing income and building relationships for the future. [...]

Fight shorts aren't a commercial product that companies are able to sell to the general public. What they are is a billboard for advertising that could appear in front of a television audience for up to 25 minutes. Short space is sold in four pieces: the crotch, the butt, and both thighs. The top agents have been able to score more than $30,000 per patch, but that's rare. For a television fighter who isn't a major star, the crotch and butt space are worth from $500-$2,000. Each thigh ranges from $250-1,500. Savvy agents can sell these spaces at a premium if they pitch it right.”

Whereas other sporting leagues might be able to stick a Nike or Emirates logo on an athlete’s jersey or sell 30 seconds of airtime during their half-time show for 5 million dollars, those in MMA are stuck fighting for scraps. The fight promotion companies can’t count on sponsorships as a source of reliable income, and the fortunes of the athletes depend heavily on the skill of the agents who represent them. It’s a tough racket. 

Third, most people don’t have a natural affinity for MMA. Unlike sports such as boxing, wrestling or Taekwondo, there aren’t kids who grow up competing in MMA. This creates several problems, most importantly that there isn’t a pipeline of student athletes who turn pro, and consequently a lack of established organisations to facilitate development and accreditation. And when you consider that MMA is a full contact activity that viewers need a strong stomach to sit through, it becomes an incredible challenge to grow the sport. 

Back to One Championship. Sityodtong and Cui had built a small but growing fight promotion company that hosted its first event in Singapore. From there, they slowly expanded to fight nights in neighbouring Southeast Asian countries, holding 11 events in 2014 to 14 in 2017. It was a slow and unprofitable grind. 

“No broadcaster wanted to show our content, fans did not want to watch our show, athletes did not want to be part of the company and brands were not keen to invest. Governments also did not want us in their countries,” Sityodtong recalled. 

Their growth trajectory would soon change. An investment banker that Sityodtong was working with for their Series C round - their Series A and B rounds were not publicly reported - shared an escalator ride with Sequoia India’s Shailendra Singh and made a literal escalator pitch. Singh bit, and within eight weeks, the US$100m round was closed with Sequoia and Mission Holdings as co-lead investors. 

Subscribe now

Content is King, Distribution is Queen

Sequoia's core thesis was that One Championship wouldn’t have difficulty generating revenue through licensing once it had reached a critical mass of viewers. 

This makes sense. As we’ve covered earlier, broadcasting rights are the crown jewel of many major sports. They make up the lion’s share of total revenue, and the numbers are eye-popping:

• The NFL generates US$12 billion a year from TV revenue, making it the most lucrative sport in the US (more on this from this fantastic Acquired episode Acquired)

• The NBA makes US$2.6 billion a year from TV revenue, but that will likely triple in 2025 after their current media deal expires

• Total broadcasting revenue for European football clubs topped €4.5 billion in 2021, making up 44% of total revenue

It’s crazy, especially when you consider that media has traditionally been thought of as a business with bad economics. And these figures are only set to rise as tech giants such as Netflix, Apple, and Tencent join in the bidding for these rights as they continue to expand the media properties they own. Sityodtong puts it this way: “If you have the three pillars of content, community, and transactions, then you are truly a part of somebody’s life, you have a very deep relationship with that customer.” 

This explains why Sequoia wanted One Championship to build a great mobile app - and then give access away for free. Charging users a PPV streaming fee or subscription fee might allow a fighting promotion to generate revenue and be profitable early on in its business, but this would come at the cost of growth. Case in point: the UFC raked in over US$1 billion in 2022, but took 29 years to get there, with its first 8 years unprofitable. If One Championship could shorten that process by spending more upfront, they should definitely do it. 

While this might sound like VCs letting their start-ups burn money for growth – ride hailing comes to mind - growth through a streaming app was particularly suitable for One Championship. For starters, there were still tailwinds in mobile adoption that the company could benefit from in 2017, especially as the market had not been overly saturated with apps. Moreover, MMA fights were perfect for mobile viewing. “72 percent of our matches end within a few minutes,” Sityodtong explains. “This is perfect for short-form content on a mobile device. You’re not going to watch a 90-minute soccer game on [a phone].” 

Then, there’s the psychological aspect of things that comes with social media sharing. There is just something primal about violence that draws people in, and a mobile app facilitates its spread on social media. As Dana White, president of the UFC, wrote in an email:

"Everyone loves a fight. It's in our DNA. The example I like to use is that if you're in an intersection and there's a basketball game on one corner, a soccer game on another, a baseball game on the third, and a fight on the fourth, everyone will go watch the fight. And that's not only true, but it's something that cuts across all demographic and geographic barriers."

The numbers back that up. 

Nielsen’s statistics showed that One Championship grew its total social media impressions from 352 million in 2014 to 8.3 billion in 2017, with total video views growing from 312,000 to 1.5 billion. more recently in 2021, total video views of ONE topped 13.8 billion, making One Championship the second most digitally viewed sports media property in 2021, just behind the NBA. For context, that’s double the 6.6 billion video views which the UFC garnered in the same period.

Covid-19 and the popularity of Tik Tok have obviously helped to boost these numbers, but it’s hard to deny that One Championship has been particularly effective at driving social media engagement. The quick bursts of action in MMA fit hand in glove with the shorter video formats that social media has been pivoting towards (Facebook/YouTube shorts, Instagram reels, TikTok, etc.), which means that it’s a safe bet that One Championship’s social media numbers are only going to grow.

This penchant for marketing might come from the founder-CEO himself. Since ONE’s founding, Sityodtong has not been afraid to step into the limelight and field media requests. In 2020, Sityodtong hosted The Apprentice: ONE Championship Edition, in which 16 contestants competed to join One Championship as a member of the CEO’s office. It’s exactly the kind of thing that helps with international branding, but also the type of thing that would lead to not always favourable comparisons with other larger-than-life personalities such as Elon Musk and Tan Min-Liang. 

But in the media business, being able to get media attention is a good thing. As they say, there’s no such thing as bad publicity, and this has certainly been the case for One Championship.

Sequoia followed-up on its investment in 2018, leading One Championship’s US$166 million Series D round, with Temasek Holdings and Greenoak Capital joining in. And in December 2021, One Championship raised another US$150 million from the Qatar Investment Authority and Guggenheim Investments, bringing its valuation above the billion dollar mark.

So far, it looks like these VC dollars will return. One Championship has been executing Sityodtong’s licensing strategy, and they’ve inked deals with partners, including:

• Amazon Prime in the US and Canada (>200 million subscribers)

• FanDuel, an online gaming company, on its newly launched TV network

• Star Sports, a division of Disney, to broadcast content in India

• Beijing TV in China

• Globo, to broadcast ONE fights to over 200 million viewers in Brazil

• Clarosports, a multimedia sports information platform, to deliver live ONE events across Latin America (excluding Brazil)

• beIN Sports, a Qatari state-owned media group, to broadcast ONE events in 24 countries in the MENA region

• Seven Network, to broadcast live ONE events in Australia

These deals aren’t necessarily lucrative, but it shows that there is appetite for One Championship content. More importantly, the company’s expansion into the US has been through a deal with big tech (Amazon) instead of traditional TV networks, which underscores how much optionality sports properties such as ONE have gained as a result of competition in the streaming business. It’s not hard to imagine something like this being replicated for the UK, Europe, and China.

Subscribe now

Knockout Opportunity

With all that talk about distribution, it’s easy to forget that One Championship, like every other business, needs a product. At the core of that product are its athletes.

Since its founding, One Championship has differentiated itself from other promotions by emphasising what Sityodtong calls “a culture of respect”. In comparison to the trash talking and blatant display of wealth epitomised by the likes of McGregor and Mayweather, ONE athletes have not been as loud, whether in the boxing ring or media room. This might have been a strategic decision instead of one driven by a purely moral imperative - the lack of humility would have been frowned upon by its predominantly Asian audience. 

The athletes who have signed with ONE have also vastly improved when compared to its hatchling days. Rodtang “The Iron Man” Jitmungnon has become one of its most popular athletes with his ability to withstand damage in the ring, and ONE’s brilliant social media team has capitalised on this, whether with their explosive knockout videos or meme marketing.

Just take a look at the video below:

Athletes from other fighting promotions have also joined ONE, with the most notable being flyweight champion Demetrious “Mighty Mouse” Johnson from the UFC. It’s a sign that ONE has entered the wider MMA consciousness and that it isn’t just a niche Asian product. 

Beyond what goes out on fight night, One Championship has also diversified and launched new offerings to expand its reach: 

• ONE Studios: a TV and film division that produces programs and films starring ONE athletes

• ONE Esports: a gaming division that produces content with titles such as Dota 2, League of Legends, Counterstrike, and Overwatch

• ONE Fantasy: a mobile fantasy fighting game that features ONE athletes

Some of these are great. Studios, for example, represents a continued investment in content revolving around its core product. Storytelling is at the heart of every enduring franchise, and crafting an arc for its athletes makes it easier for viewers to be emotionally invested in each fight. Documentaries such as All or Nothing, The Last Dance, and Drive to Survive have all helped to ignite interest in their sports, and this is a model that One Championship can easily follow. 

Others are less so. Its mobile game has graphics that are reminiscent of the Street Fighter series and are a long way from comparable martial arts-based games such as the WWE and UFC series. And while Esports is the next huge consumer market, it’s hard to see how it synergises well with One Championship’s core offering. If digital sporting entertainment is the ultimate category that it’s going for, it’s going to take years before this effort bears any fruit. 

Time isn’t something that One Championship necessarily has. Critics are quick to point to the company’s financials: the company has accumulated over US$383 million in total losses since its founding, with US$110 million coming in FY2021 alone. Sityodtong might be one of the most charismatic founders in the region, but even he will find it hard to raise cash in this macro environment. 

In this respect, it might make more sense for the company to leverage its existing IP through licensing instead of building them up from the ground. Gaming, collectibles, and potentially digital assets come to mind as key growth levers but are unlikely to yield a return on investment in the short term. 

What sets One Championship apart is the tech DNA that VCs have injected into the company. In particular, its partnership with Facebook to produce VR content exclusive to the Oculus platform is something that’s pushing the edge of sporting entertainment and isn’t something you’d expect other fight promotions to try. And when you consider that it is the viewing experience, and not just the fight, that matters, this is product innovation at its finest. 

But if that’s not enough, perhaps an entire continent’s support is. “I’ll just say it’s tribal,” Sityodtong remarked. “People want to root for people who look like them, eat like them, think like them, live life like them — and that’s resonating.” 

Liked This Post?

Thanks for reading! If you liked this, subscribe to get posts sent directly to your inbox the moment it’s published.

And if you really love it, share this with someone else. It’ll make my day.

Thanks to Trevor and Yohanes for reading drafts of this.

How would you like some free money? 

That’s what ShopBack is offering. It’s a discovery and rewards platform for shopping that helps consumers compare discounts across different merchants. Each time you use the app before making a purchase, you get up to 25% cashback on what you spent. All this, on top of your usual credit card rewards. 

It’s little wonder that the app has soared in popularity. Since Henry Chan and Joel Leong founded it in 2014, ShopBack has expanded from Singapore to nine other countries, including Indonesia, Australia and South Korea. It now has more than 35 million users. And as of 2020, it has returned more than $100 million to users.

Investors have taken notice as well. In February this year, Asia Partners led ShopBack’s US$80 million Series F, bringing the total amount raised to US$230 million. Joining earlier investors such as January Capital, East Ventures, Credit Saison, and Singapore sovereign wealth fund Temasek, the round appears to be a stepping stone for ShopBack’s IPO bid. 

All this progress is exciting, so it’s a shame that ShopBack has largely flown under the radar of SEA companies to watch. In this piece, we’ll take a look at the following: 

1. Affiliate Marketing: The economics of modern-day advertising has been changed by a shift from a pay-per-view (CPM) model to a pay-per-sale model. This is what powers ShopBack and allows it to deliver value to merchants and consumers alike. 

2. Product: Like many of SEA’s great companies, the idea for ShopBack wasn’t original. What made the difference was how its founders hyper-localised the idea and adapted it for the heterogeneous region. 

3. The Opportunity: ShopBack started as a discovery platform, but has slowly expanded into different stages of the customer’s purchase journey, especially with their new buy now pay later (BNPL) feature. 

4. Future: ShopBack might still be small when compared to other e-commerce platforms, but there’s a chance they’re the dark horse that benefits the most from the rise of e-commerce in SEA. 

Let’s get into it. 

Affiliate Marketing 101

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” - John Wanamaker

To understand ShopBack, we first have to understand affiliate marketing. 

For the longest time, if you wanted to advertise a product, you’d have to pay a fixed fee to the publisher for the ad placement. This was true no matter the medium. Whether it was Mad Men-styled ads in the classifieds section or a 30 second commercial after the 9pm news, advertisement inventory was valued and sold based on the size of the audience the publisher commanded. If consumers didn’t buy the product, there was nothing you could do about it. 

Affiliate marketing flipped that model on its head. 

Instead of paying for views, marketers realised that they could pay publishers a commission for driving sales instead. This leads to an alignment between the advertiser and publisher, where both are incentivised to make sure that the ad drives sales. In return for taking on this risk, publishers get a bigger slice of the pie than they would otherwise have if they took a fixed fee. It’s a win-win situation. 

It sounds simple, but this had an enormous impact on the digital advertising landscape. Since businesses didn’t have to worry about ads flopping, they were happy for anyone to promote their product. Businesses jumped on this trend in the 1990s, and the first affiliate commission networks were borned. But the most significant affiliate program that would be created during this period was from a little known online bookstore - Amazon. 

Just look at how many categories the program covers. 

It’s why we have thousands of niche sites writing about “the top ten cameras to purchase in 2022” or “the most essential things you should have when you do XYZ”, all with affiliate links sprinkled within that point you to a product on Amazon. And it’s not just small-time creators who rely on affiliate revenue. Most media publications do so as well; The New York Times even has an entire newsletter that consists of nothing but product recommendations. 

I go through all this to show that affiliate marketing has become a big thing. Most of this can be attributed to the win-win partnership between publishers and advertisers. 

But what about consumers? Sometimes they get an honest recommendation from an expert in the field who’s making an affiliate commission as a bonus for their tips. That’s helpful. But other times it’s just spam, whether it’s from a generic listicle or an Instagram post from an account with barely over a thousand followers. 

That’s where ShopBack comes in. 

Building a Platform

Instead of selling products for its partners through content, ShopBack offers would-be purchasers a cut of the affiliate commission. 

Whenever a user hops on ShopBack and decides to make a purchase, ShopBack directs him to the merchant’s site. If a purchase is made, ShopBack gets credited with driving the sale and earns a commission, much in the same way that affiliate marketers do. ShopBack takes a small cut, but the majority of that commission is then returned to the customer in the form of a cash back. 

This is essentially affiliate marketing on steroids. Merchants are always on the lookout for new customer acquisition channels, and they’re happy to participate so long as customer acquisition costs (CAC) are lower than their lifetime value (LTV). With ShopBack, they can be sure that their margins are positive on every sale since they do payouts on a commission basis. It’s a no-brainer. 

The value proposition is just as clear for consumers. Since ShopBack doesn’t make money through interchange fees, users can still choose their own mode of payment and earn the accompanying rewards. And when you can stack ShopBack’s cashback on top of your credit card rebates or airline miles, the question isn’t so much why you’d use it. It’s “why not?”

Subscribe now

Origin Story

To be fair, ShopBack’s idea wasn’t original or unique. Lots of companies had operated with this model with a fair degree of success, although none of them were in Southeast Asia. 

There was Ebates, the pioneer of the cashback model, which had been operating profitably in the United States before Rakuten acquired it in 2014 for a billion dollars. In China, there was Fanli, which reached unicorn status in 2015. And in the United Kingdom, upstarts such as Quidco and TopCashback have emerged and reached valuations of  nine figures in just a couple of years. 

Chan and Leong spotted this opportunity and their timing couldn’t have been better.  E-commerce was starting to grow rapidly in the region; the duo witnessed this first-hand at Zalora, a Rocket Internet-backed company that aimed to be the Zappos of SEA. Indeed, the early 2010s would be a golden age for e-commerce marketplaces - regional giants such as Tokopedia, Bukalapak, Lazada, and Shopee would be founded then. 

Market aside, the team and the idea were also compelling to investors. Leong recalls: 

“I think there were two factors that convinced them to invest. The first was the team, which had e-commerce experience. At that time, there were not many e-commerce professionals in the market, and we were one of them.

The second was the fact that we weren’t jumping on some crazy bandwagon. We had a proven model that has worked in different markets for many years, and it was just a matter of time before somebody tried it in Southeast Asia. So we told them, “Either you bet on us or someone else is going to do it.””

Accel-X led their US$500K pre-seed round in April 2014, and this round was followed quickly by East Ventures less than a month later. With that money, Chan and Leong left their jobs to work on the idea full time, bringing four of their colleagues at Zalora with them to round off the founding team. Since then, they’ve been on a tear.

• 2015: Launched in Malaysia and Philippines

• 2016: Launched in Indonesia and Taiwan

• 2017: Launched in Thailand; announced US$25M raised total at Series C

• 2018: Launched in Australia

• 2019: Launch in Vietnam

• 2020: Closed US$75m extended Series D; Launched in Korea

• 2021: Closed US$40m Series E

• 2022: Closed US$80m Series F

A lot of this has happened quietly. When I dug into Crunchbase to check how much ShopBack had raised, I was surprised to find that a lot of information was either incorrect or incomplete. For example, you’ll see that there’s no mention of any Series C or D, and that CB thinks ShopBack had a US$14.4m seed round. And since Crunchbase gets its data from scraping the internet, we can tell that ShopBack spent most of its early years in full building mode, doing nothing but making a better product and signing up users. 

That effort has paid off.

Between 2014 and 2017, ShopBack signed up more than 3.5 million users and 1,300 merchant partners. That grew to 19 million users and 2,500 merchants at the end of 2019, and to 35 million users and 10,000 merchants at the time of their latest fund raise. It’s little wonder that there’s strong investor interest. 

The simple explanation for ShopBack’s growth is network effects. Each time a new user joins the platform, it makes more sense for a merchant to use ShopBack since they can reach more customers. And when more merchants join ShopBack, the platform becomes more valuable to users since it can be used at more retailers. That’s the beauty of two-sided marketplaces - once you get past the cold start, momentum will take care of the rest. 

The Product

So what exactly does ShopBack do? The answer to this question has changed over the years. 

When they first launched, their product was a simple webpage that highlighted the different merchants which offered cashback. All it did was highlight the highest cash rebates that a user could get and provide buttons that the user could click on to visit the merchant. The hope was that free money would be enticing enough. 

ShopBack then launched its mobile app in 2016 on both Android and iOS. This caught on more quickly than expected. Within 24 hours of its launch , ShopBack’s iOS app became the most popular shopping app in Singapore. And as ShopBack expanded into new markets, its app evolved to meet the needs of each local market, from making sure that it appeared in the local language to showcasing the most popular shopping categories. 

This proved to be one of the company’s inflection points. In Grab: One App To Rule Southeast Asia, I wrote that “any VC backed business which is based in SEA must win regionally, and not just in any one single market.” But because SEA is a heterogeneous region that comprises several countries, companies must grapple with different languages, cultures, business environments, and regulators. 

ShopBack navigated that complexity with mobile. Although most consumers still preferred the web towards the late 2010s, it became clear from the growth numbers that mobile was the future in countries such as Taiwan and Australia. In fact, ShopBack faced resistance from incumbents in more mature markets, but was able to gain a beachhead because its competitors focused only on the web, but not their mobile app. 

Of course it’s not as simple as going mobile first. Payments is a complicated space, and ShopBack had to localise its product for each market they were in. Would customers use bank transfers or credit cards to make in-app purchases? How would they receive their cashback? How much would they need to offer to entice new users, and would the economics work? Those were just some of the questions that ShopBack had to answer. 

The team also didn’t stop building new features. In 2019 alone, ShopBack would launch: 

• ShopBack Button - a browser extension that automatically applies discount codes for users when checking out on a merchant site

• Product Comparison - a feature that allows a user to search for a product within the app and compare prices between different merchants

• In-Store - a product that enables users to earn cashback even when they make physical purchases in offline locations

That last one is significant. 

By expanding cashback to the offline space, ShopBack effectively opened up new verticals that were previously closed off to its business. Getting things delivered to your doorstep is nice, but there are certain things that you need to get out of your house to do for the best experience. Dining sits right on top of that list, but there’s also beauty and entertainment, all of which meaningfully expand ShopBack’s TAM. 

It’s not just consumers and ShopBack who benefit; merchants derive value from this too. Through In-Store, traditional brick and mortar stores are able to get themselves in front of more eyeballs. In fact, ShopBack offers merchants the ability to sell their own vouchers on the app - at a discount - thereby providing an additional customer acquisition channel. 

This might not sound like much, but the whole suite of services solves a lot of problems for offline businesses who want to go online. If you look at the journey of how a customer might buy a voucher and use it in a store, ShopBack is effectively handling marketing, payments, and a rewards program for the merchant. It’s the perfect solution for business owners who want a digital presence but not a full fledged online store. 

ShopBack’s Next Act

As it turns out, providing such solutions to merchants is the big opportunity for ShopBack. 

While ShopBack might have started as just a new customer acquisition channel for merchants, its cashback program has become the perfect wedge for it to layer on more services. From marketing to payments to inventory management, ShopBack is in the perfect position to become the all-in-one solution that can replace all the other vendors that merchants use. Think Shopify, but for both online and offline commerce. 

Already, ShopBack has made significant progress. In January this year, it launched ShopBack Pay, its own mobile wallet that allows users to make QR code payments while still earning cashback. Last month, ShopBack rolled out ShopBack PayLater, its buy now pay later (BNPL) product that is available at over 4,000 online and offline merchants. The result is clear - ShopBack is entrenching itself in another part of the customer journey. 

None of this should be surprising. Payments is a low margin, high volume business, which makes it the perfect vertical for ShopBack to expand into since its core competency lies in grabbing eyeballs and driving traffic. It’s good business sense, but crucially, also adds tremendous value to both consumers and merchants. 

Take PayLater. Different BNPL providers have different models, but they essentially increase sales for merchants by making it more likely for consumers to purchase products by lowering the upfront cost. When the purchase is made, the BNPL provider underwrites that transaction and pays the entire sum to the merchant, less a percentage of the transaction, which they keep as a fee. And for consumers, they not only get to avoid paying the ridiculous fees charged by credit cards for late payments, but also effectively get a three month interest free loan. It’s a win for all parties.

Lots of companies talk about putting their users first, but few actually do it. In ShopBack’s case however, entering the payments space actually enhances the customer buying experience, and also helps the merchants whom they actually serve. To say that they’ve done so out of altruism goes too far - after all, they do need to make profits - but what’s clear is that ShopBack has created a lot more value than what they’ve captured. 

Competition

So, where does ShopBack go from here? 

On one hand, they’ve become the undisputed leaders in product discovery, and it’s safe to say that their affiliate marketing model has worked. Given the recent fundraise, ShopBack also has the war chest to scale up their marketing efforts and capture new markets on top of the ones they’re already in. 

On the other hand, the road ahead is tough. BNPL is a huge opportunity, and existing BNPL providers know that. Beyond getting retailers to offer them as a payment method, they have also begun working on the consumer front, making BNPL the default method of purchase. In The Checkout as a Territory, Mario Gabrielle writes:  

“How do you win the checkout? Increasingly, the answer is to move upstream. BNPL companies are engaging in a range of tactics to ensure that customers have already made their selection when it comes time to pay.

The primary method BNPL companies use is to make their site a destination in and of itself. The positioning of Affirm, Afterpay, Klarna, Quadpay, and Sezzle, per their websites, is remarkably similar. They present as a shopping website, allowing customers to browse by category before redirecting to a merchant page. Whether they realize it or not, the consumer has selected their method of purchase. When it comes time to pay, the site defaults to offering the BNPL provider-in-question.”

Does this sound like someone we know? You bet. 

While ShopBack has gone downstream with payments, BNPL providers have gone the other way, putting the two in direct conflict with each other. Although BNPL providers don’t generate revenues with affiliate marketing, the fact that they’re becoming a shopping destination threatens ShopBack’s core business, even without accounting for payments. Already, we see this with Atome, one of the region’s fastest growing BNPL providers. 

Then, there’s Grab. By entering financial services, ShopBack is competing with GrabPay and Grab Paylater, the super app’s mobile wallet and BNPL solution respectively. This is obvious; consumer focused payment solutions tend to be industry agnostic, and the two solutions are interchangeable to consumers. All it comes down to is who offers better terms and rewards. 

But there’s still the merchant side. Grab offers loans and cash advances to its merchant partners, and it is here on the business solutions front that ShopBack and Grab could come into conflict. Through its BNPL offering, ShopBack will gradually gain competency in underwriting loans, and it’s not a stretch to imagine that they will eventually offer financing solutions to merchants as well. That’s just one example - there are just as many opportunities with inventory management, supply chain, advertising, and other areas that I’m not smart enough to come up with. 

Future

In many ways, you can argue that ShopBack is an index on commerce in SEA. 

ShopBack facilitates consumer spending by driving sales to merchants; in turn, it takes a percentage of the transaction as a commission. It then takes another small amount when the user transacts using its mobile wallet or BNPL solution. But for all of that to happen, a transaction needs to be completed, and ShopBack’s best bet is to make sure that the user gets the right product at the best price possible. 

Sure, users could skip the product discovery phase and use ShopBack solely for its BNPL solution. But given ShopBack’s origins, this is unlikely to happen. If you’re using ShopBack at all, you’re probably drawn in by its cashback product. This creates an alignment between a platform and its users and merchants that you rarely see, and the result is that everyone who uses ShopBack benefits. Win-win-win. 

Businesses are supposed to make money by creating value for others, but unfortunately, this doesn’t usually happen. ShopBack, however, is the rare exception.

When you see a company like that, you want to root for them. I certainly do.

Liked This Post?

Thanks for reading! If you liked this, subscribe to get posts sent directly to your inbox the moment it’s published.

And if you really love it, share this with someone else. It’ll make my day.

Subscribe now

Thanks to Trevor and Yohanes for reading drafts of this.

“People will tell you that more than 90% of startups fail. That is true, but the majority fail for the wrong reasons. We root out the reasons that cause startups to fail.” 

When it comes to building startups, no accelerator is as disciplined as Antler. 

It believes that startups are more art than science, and the entire process is something that can be optimised. By looking at how some companies succeed and why some fail, Antler believes that it can help founders reverse engineer outcomes and build the defining companies of tomorrow. So long as you are exceptional, everything else can be fixed. 

This is best seen in how it runs its programs. Like other accelerators, Antler provides guidance to founders as a cohort, offering masterclasses and office hours on matters ranging from product to fundraising. Those whose ideas pass muster receive a check from Antler, and have an opportunity to raise more money on demo day. 

Unlike other accelerators however, founders don’t need a product or even an idea to apply to Antler. Antler admits individuals on the basis of their skills and experiences, much in the same way that companies might hire someone.  Once the individual joins an Antler cohort as a founder, Antler helps him or her to find other co-founders. Further guidance is also given, whether it be coming up with an idea or making a pitch to an investor. 

This format is why Antler’s co-founder and CEO, Magnus Grimeland, says that they aren’t an accelerator or incubator, but a startup generator. By helping founders with the most common obstacles, Antler hopes to make starting companies easier. In return, they get the opportunity to be the first investor in the companies that these individuals build. 

It seems to be working. After only five years, Antler has already made 354 investments, and they don’t appear to be slowing down. Last year, Antler announced that it raised a US$300 million fund that lets them invest up to Series C. And earlier this year, they closed a small East Africa fund, signalling that Antler has further aspirations in the region. 

This is the type of naked ambition that you see in the best founders, and it’s clear that Antler’s founding team possesses this quality as well. In this post we’ll take a look at: 

1. Origins: Antler’s founding team is seemingly made up of a single archetype: the ambitious overachiever who wants to walk a less conventional route. This spills over into the type of founders they attract and has shaped the company’s DNA. 

2. Antler’s Program: startups can be awfully risky, especially at the earliest stages. Antler seems to have figured out how to reduce risk at every stage, from the people they recruit to the ideas that they fund. 

3. The Business of Incubation: Antler might spend most of its time helping founders, but people forget that they have to generate returns as a fund too. Fortunately, there is money to be made here, although the economics may sometimes be tricky.

4. Future: Antler isn’t the only one who has noticed the early stage opportunity. Accelerators have existed since the early 2000s, and VC funds are now moving in. Can Antler win? It depends on whether they can keep innovating. 

Let’s see how Grimeland and team built this machine. 

Magnus Grimeland

Early Life

Growing up on a farm in a small Norwegian town, Grimeland didn’t have the most exciting or unusual childhood. At 16, he left home for the first time and attended a boarding school called Atlantic College in Wales, a United World College institution. 

While his peers headed off to university after graduation, Grimeland joined the Royal Norwegian Navy Special Forces. This was an unusual decision but it made sense for Grimeland. His family had served in the military for generations, and Grimeland loved the water.  Unlike other tech founders who tinkered with computers, he spent his summers conducting rescues in the Bristol channel with the Royal National Lifeboat Institution. 

While in the Navy, he heard all kinds of stories about college life from his Atlantic College peers, and Grimeland knew that he needed to be where the smartest people were. He had the grades, and with special forces on his resume, Harvard had little trouble admitting him.  

Harvard

Harvard would be a life-changing experience for him. Although he didn’t know it yet, 2003 was a good time to be on campus. 

He rowed on the varsity crew team alongside Cameron and Tyler Winklevoss, who would go on to become the co-founders of crypto exchange Gemini. Outside of the water, Grimeland would write for the Crimson. And in the classroom, he befriended a person by the name of Eduardo Saverin. Saverin would later become one of Antler’s earlier investors. 

But knowing the folks who were antagonists in The Social Network was as close as Grimeland got to the Zuckerberg phenomenon. Meta – then known as TheFacebook – had just taken off, and was the hottest thing on campus at that time. Although Mark Zuckerberg was hiring interns from Harvard as fast as he could, Grimeland didn’t have the time to sign up: he was juggling classes and athletics and had to care for his infant son. "I was close to applying for one of their internships. They more or less hired anyone in the early days," said Grimeland in an interview earlier this year with Forbes. "I think anyone who took those internships is incredibly well off right now". 

In his last year, McKinsey came knocking, and Grimeland accepted a job with them. It was a no-brainer for him: it came with prestige, a nice salary to pay off tuition loans, and a chance to work with some of the smartest people in the world. His next five years would be spent covering the TMT sector, working on projects ranging from semiconductors in Taiwan to consumer electronics in Europe and telecoms in India. 

This was a formative experience for Grimeland. At Harvard, he had cultivated an interest in high growth tech companies and wanted nothing more than to study them. McKinsey provided him this opportunity. But advising executives on how to manage their companies started to become dull - Grimeland wanted to build his own. 

Rocket Internet

That opportunity would come as Grimeland began searching for his next career move. 

Through conversations with investors at Rocket Internet and Kinnevik, Grimeland learned of the opportunity in e-commerce. Zalando, the European version of Zappos, had grown rapidly, and the common belief was that a similar model would work in Southeast Asia. A launch team was needed, and Grimeland was offered the chance to sign on. 

It was a perfect match. In Rocket Internet, Grimeland found an organisation that treated business operations as a science that could be perfected. As Mario Gabriele writes in one of his best pieces:

“It’s as if McKinsey competed in the porn industry.” That’s reportedly how Oliver Samwer described Rocket’s goals in the fashion industry to one of the firm’s early founders. The point he sought to make was that Rocket could win by out-analyzing its competitors. Industries like fashion were dominated by artists, not business people. […] 

This anecdote gets to the heart of Rocket’s playbook: great companies are built analytically, systematically, from the top-down.”

And in Grimeland, Oliver Samwer and Rocket found an ambitious overachiever who was looking for something new. From the same piece by Mario over at The Generalist:

“The typical profile was a young business school graduate, fresh off of a two-year stint at McKinsey. Looking for greater responsibility, these “insecure overachievers” flocked to Rocket, enticed by the chance to have a project of their own and be a “founder”.

It was a running joke: if you were a young consultant or investment banker in Europe, chances were you received a LinkedIn message from one of the Samwers’ lieutenants, extolling the virtues of working at Rocket. That was the first step in a masterful recruiting operation that ensured that the incubator's leaky bucket was constantly refilled.” 

Grimeland joined Rocket Internet as Co-founder and Managing Director of the entity known as Zalora. He would be in charge of launching the platform in new markets, and spent most of his time shuttering from one country to another. This was more difficult than expected. Unexpected challenges such as the lack of an existing logistics network and low credit card penetration in the region made growth difficult. Fortunately for the Zalora team, they managed to ride the mobile wave and were able to command a sizable market share by 2016.  

When the company was restructured and rolled into Rocket’s holding company Global Fashion Group in 2015, Grimeland became Group COO and oversaw other regional companies such as Dafiti (operating in Latam) and Lamoda (operating in CIS). Unlike other co-founders and MDs who effectively got a demotion, this was a step up. Yet, Grimeland wasn’t content enough to stay within the Rocket ecosystem. 

Something had been bugging him for a while. Many of the executives he worked with didn’t have enough skin in the game and acted more like employees than owners. As an incubator, Rocket typically took 80-90% of the company and split the rest between the co-founders. It became clear to Grimeland that these individuals were better off starting a new company (as several of his colleagues had gone on to do) and that their talents were severely underutilised. 

Antler would become this vehicle for enabling entrepreneurship. Although capital was the common ingredient that entrepreneurs seemed to always lack, Grimeland also identified the lack of a network as the other shortage in startup ecosystems, especially in developing ones. Without potential co-founders and access to capital, it was too risky for exceptional individuals to even try their hand at starting a company. 

The founding team that Grimeland put together seemed to reflect this belief. “The biggest competition for us wasn’t other investors in the venture space, but the big corporations that were attracting and retaining talent with really high compensation”, said Medbo. 

With impressive banking and consulting backgrounds, it’s not hard to imagine that Medbo and his team understood what that was like. Take a look: 

1. Magnus Grimeland (CEO): 2 years with the Norwegian Navy SEALs > Harvard > 6 years at McKinsey > 4 years with Rocket/Zalora

2. Fridtjof Berge (Chief Business Officer) - 3 years at McKinsey > Harvard MBA

3. Dilan Mizrakli Landgraff (first CFO, now Chief Strategy/People Officer) - 4 years doing investment banking with JPMorgan > 6 years in private equity

4. Vegard Medbo (first Chief Commercial Officer, now COO) - 2 years with the Norwegian Coastal Rangers > 5 years at McKinsey

5. Jussi Salovaara (Managing Partner, Asia) - 5 years at McKinsey > 4 years at Nokia running a variety of business units

The team is impressive on paper. And impress aspiring founders it did.

Over 1,500 applications came in for the first Antler Singapore cohort in 2018, even though the team was expecting no more than 300. 62 founders would be selected from this applicant pool, who would then go on to form 13 companies. This was the pent-up entrepreneurial energy that the team had been counting on, and they would never look back. 

Program

Antler’s promise to founders is simple: if you get in, you’ll join a 3-6 month program that’s divided into two phases. In phase one, you get a stipend. And if your pitch is good, Antler will invest so you can continue building in phase two. Exact details vary from location to location, but they generally follow a similar structure. 

Subscribe now

Sourcing

For Antler, everything starts with ensuring that there’s a pipeline of individuals who could be formidable founders.

This means identifying those who have 7-10 years of work experience, with some of that preferably spent at startups. Credentials from elite institutions are looked upon favourably, and so are advanced degrees in STEM fields. Where non-technical founders are concerned, backgrounds in consulting and investment banking are advantageous.

It’s oddly specific, but as with everything at Antler, recruiting is more science than art. These filters are a result of extensive research on successful startup founders, whether from academic literature or Antler’s own data. By sticking to what has been proven, Antler hopes to ride the law of averages and gain an advantage over time. 

The most qualified applicants typically come through referrals, but Antler also keeps its own lookout for talent. From LinkedIn cold outreach to organising network events, Antler's scouting team does its best to identify talent. “We spent a lot of time trying to get the right people to apply. We had a few very efficient tests early on to reduce the volume [of applicants] in the later stages", said Berge. 

Selection

At the selection stage, Antler looks for individuals with a ‘spike ’– deep expertise in their fields of work or a specialised skill that sets them apart from the rest. This happens through several stages, although it varies based on location: 

1. General application: an indication of motivation in the candidate’s  CV 

2. General aptitude test: a series of logical puzzles and common questions to establish baseline competence

3. Competency interview: the same one used by HR teams to determine if an applicant has the traits the company is looking out for; here Antler looks for evidence of drive and creativity in problem solving

4. Case study: an interview with a partner designed to tease out the candidate’s ‘spike’, from technical ability, business acumen, to domain expertise

5. Final interview: a catch-all interview for local Antler program partners to determine if the candidate is a fit

Some have commented that the business domain questions resemble the type you’d get in consulting interviews, which would be quite in character, since the founding team is composed of consultants, bankers and MBAs. Others note that there seems to be little focus on software engineering, even though most of the companies started are software-based. It’s a point that we’ll come back to later, but suffice to say, the filters used for candidates don’t seem to be appropriate for founders from technical backgrounds. 

By the time selection is done, only approximately 3% of applicants will be selected, comprising a good mix of technical and non-technical talent. 

Building

Once applicants are admitted, they go through a two-phase program that spans three months each. A small stipend is given during this period to relieve any existing financial pressures so that founders have the time to explore. 

In the first phase, founders meet potential co-founders and explore different business ideas.

Antler facilitates this process by organising “sprints”, where participants work with others in a group to identify solutions to a given problem statement. The goal is not just for founders to flex their entrepreneurial muscles, but also to figure out quickly who they can and cannot work with. Founders are encouraged to form teams where they have similar interests and complementary skills; in an ideal world, an MBA/consultant/banker would team up with a FAANG engineer. This, however, can be quite difficult, since the interests of financiers and builders can often vary significantly. 

Additionally, founders also attend masterclasses. These can be eye-opening for those who have no financial or investment knowledge.

How does a company scale? How can it be less CapEx heavy? Is there a large enough TAM for a venture business? These are some of the questions commonly posed to founders. Antler’s role here is to steer founders away from potential pitfalls rather than provide any silver bullets, which is an arguably wise operating philosophy. As Charlie Munger once quipped, “avoiding stupidity is easier than seeking brilliance”.

It is also revealing of Antler’s investment philosophy. 

Unlike YCombinator, which has funded companies building supersonic jets and fusion power plants, Antler doesn’t leave much room for the crazy and implausible. Anecdotally, the ideas which are most likely to get funded are those which have business proven models (think Grab as the SEA version of Uber). Of the 400-odd companies that Antler has funded, the most funded verticals (as described by Antler) are SaaS (51), FinTech (46), and health tech (30).

This makes sense. Because pre-seed investments are already so risky, Antler has to remove every other unknown in order to allocate funds responsibly. Asset-light plays and “hot” sectors such as fintech and web3 give founders more room for error, and assures investors that every dollar they put in goes a long way. Founders who have formed teams and settled on an idea go before an investment committee, which decides whether they will receive funding and move to the second phase. The cohort culminates in a demo day, where founders pitch to investors and hopefully close their seed round. Not all are successful, but this is as good as it gets for a founder who wants guidance from the inception of their company to receiving their first check from VCs. 

In the end, it’s all down to a numbers game. And the funnel is how Antler makes it work. 

Subscribe now

The Model

Markups and Returns

Antler might be a partner to founders, but it’s first and foremost a venture fund that needs to earn returns for LPs. Running cohorts at the pre-idea stage is merely a form of proprietary deal sourcing and a way for Antler to get a first look at a company (however little and thin that might be) before other investors. 

This can be a great business, and there’s no better evidence of this than YC. In Thirty Minutes or Less, Mario Gabrielle writes:  

“A favorite pastime of VCs at Y Combinator is to complain about Y Combinator. Perhaps it’s because YC has built a top-3 fund, without even playing the game. What other investor is able, not only to back active competitors, but to do so in the same class? How many get to dictate terms, and in some cases, have startups lining up for the privilege of a round that undervalues them? Who else so reliably secures mark-ups within a mere 3-month period? How many funds turn portfolio founders into zealots? There are other accelerators and incubators, but YC is in a league of its own.” 

Antler obviously isn’t like YC. For starters, the two host startups at different stages of their lifecycle, with Antler typically being first check-in and overseeing the formation of the company. YC, on the other hand, receives applications from founders who typically already have a working product and raised some seed or angel funding. Then there’s the elephant in the room, which is how YC has a gigantic lead over Antler, with its portfolio of companies worth over a staggering US$400 billion. 

Yet Antler has already seen some substantial mark-ups amongst its portfolio companies after running cohorts for four years. For example: 

• Xanpool, a peer-to-peer payments infrastructure provider that was part of Antler’s SG2 cohort, raised US$27 million last year in its Series A round

• Homebase (SG3), a Vietnam-based proptech startup that makes home ownership more accessible, raised a mix of US$30 million in debt and equity

• Reebelo (SG3), a refurbished electronics marketplace, raised US$20 million in their Series A earlier this year

• Volopay (SG4), a payments and card issuance provider, raised US$29 million in their Series A, taking their combined funding raised to US$31 million

These numbers aren’t eye-popping considering that 2021 has been a record year for venture. But it’s important to note two things. First, these startups aren’t based in the US, which significantly dents their valuation multiple. Second, Antler’s standard terms are 100K for 10% of the company. If we assume that the investment is made out of a small seed fund, each of these companies would have returned the fund entirely. That’s outstanding. 

Since raising its new fund this year, Antler has also gone ahead to invest in companies that have not been part of its cohorts. This is a tad unusual for accelerators, but perhaps demonstrates that Antler aspires to eventually become a global VC firm which includes running cohorts as one of the many ways it sees deals. 

In March, it co-led UK roll-up firm Wholesum Brands’ US$50 million Series A (35 million in debt). And two months ago in May, it participated in Dubai-based spend management platform Pemo’s US$12 million seed round. If Antler continues deploying at this pace, it might mean that they’re experimenting with a different fund strategy. It’s anyone’s guess what this means for their pre-seed cohort investments. 

Operating Structure

A key reason why Antler has been able to scale so quickly is because of its decentralised structure. The program in each Antler location moves independently of the others, which means that there are cohorts constantly running and portfolio companies emerging all the time. 

Antler achieves this by hiring local partners to run operations. In contrast to programs like YC and On Deck, which have group partners that offer general advice, Antler is able to tap on a partner who typically has experience as an operator or investor in that specific geography. This can be extremely helpful in geographies where the startup ecosystem is underdeveloped. Having a local partner as a mentor makes it easier for founders to put frameworks that have been refined in Silicon Valley into practice. 

But operating in such a manner means that Antler’s back office can be a little complicated with multiple regulatory structures to contend with. To smoothen this process, Antler operates multiple funds, with each fund typically having a local mandate. This makes the US$300 million raised last year seem small since it’s spread over several funds, but given Antler’s small check size, it’s likely that each program will have enough runway to demonstrate to LPs that they’re worth the investment. 

One challenge that Antler hasn’t seem to have figured out yet is to ensure that each and every one of their programs delivers sufficient value to founders. In many locations, Antler requires that the companies it invests in pay a program fee to cover the operating cost of the cohort. This sum can often be significant, and represent several months of runway for a lean team. In other locations, however, the terms are more generous. 

Unlike YC, which offers a standard YCombinator deal, the complexity of Antler’s terms means that founders who apply to Antler must decide for themselves if a certain program is worth the equity they’re giving up. Some of these terms can be particularly onerous: a founder in Vietnam will not like his deal when he sees what he can get in the US. It remains to be seen whether the best founders are willing to accept that.

Subscribe now

Future of Antler

So far, the Antler experiment seems to be working. Indeed, it’s even the subject of a HBS case study. But will this model work at scale? Can it generate superior returns over the long term? These are the questions we must answer. 

Founders 

Any analysis must begin and end with the founders who join Antler. They are the company builders and ultimately the ones who determine how successful portfolio companies become. To generate superior returns for their LPs, Antler must be able to continuously attract the most talented individuals and partner them on their startup journey. 

Why would founders join Antler? We can start with the obvious. Like other accelerators and incubators, Antler provides guidance on company building, ranging from designing a minimum viable product (MVP) to go-to-market strategies. The network that founders can tap into also solves two other crucial needs when going from zero to one: (1) finding another co-founder and (2) getting early interest from investors through demo day. Founders aren’t guaranteed success by going through Antler’s program – many fail to form teams, much less secure investments – but they get substantially better odds than going it alone. 

Founders also get an ecosystem to connect with others. Being part of a common portfolio makes them more likely to share information, trade tips, and  make introductions to other partners in the ecosystem. Venture firms have long fostered collaboration between their portfolio companies, with John Doerr of Kleiner Perkins even going as far as to call their network a keiretsu, a nod to how Japanese companies are often networked together with a sense of mutual obligation. For B2B companies who sell to SMEs and other startups, this can be a godsend. 

But perhaps Antler’s most significant contribution to enabling entrepreneurship is derisking the founding of startups, and not necessarily in a financial sense. Antler might provide a stipend, but this amount has come down over time. Founders that are part of the Singapore cohort used to receive S$12,000 over the 3-month exploratory phase of the program, but now only get S$3,000 spread over 2 months. It wasn’t much for a professional then, and it’s even less now. 

What being part of an Antler cohort does is to allow exceptional individuals to take a crack at startups while being on a “tracked path”. For professionals who are used to climbing corporate ladders and scientists who are used to academia, this structure creates a psychological safety net for them to become founders. Being an entrepreneur shifts from “trying something crazy for the next 6-12 months” to “working with a global VC firm to build a new venture”. That makes it a lot easier to take the plunge in countries where risk-taking and failure are not well tolerated. 

As Antler continues to grow, each of these reasons for joining Antler will only get stronger. There’ll be more Antler partners to run office hours, more investors interested in Antler companies, more startups in the Antler ecosystem to sell to, and more prestige in being part of the cohort. In turn, more exceptional individuals will want to build a startup with Antler and so on. There’s a flywheel here, and it’s starting to spin quickly. 

Terms

It’s not all a bed of roses. In an article last year that reported on Antler’s new fund raise, Mike Butcher wrote on TechCrunch that several have called Antler’s terms for startups “less than founder friendly”. Grimeland acknowledged that it might have been the case “in the early days”, but argued that they’ve now gotten “very good feedback” and they’re “very competitive in all the markets that [they’re] in”. 

It’s hard to know what those terms are and whether they are indeed competitive but price might be a good indicator. At US$150,000 for 7% of the company, Antler’s US program offers the best standard deal, giving a startup an implied valuation of US$2.1 million. Yet, this is far below market.

Data from Cendana Capital, a fund-of-funds manager, shows that the median pre-seed valuation is close to US$6 million. Granted, this data is drawn from companies which are primarily based in the US, which doesn’t make for the best comparison against Antler’s more international profile. Still, we can make a number of observations. 

First, Antler’s deal for US founders is at a 65% discount to the median valuation. Some allowance should be given since there are costs for running a cohort, but even if we value operational expenses at an additional US$50,000, that’s still more than a 50% discount to the valuation it invests at. 

Second, founders outside the US face even tougher terms. Antler’s Vietnam program, for example, gives its startups an implied valuation of US$417,000. Even if we slash Cendana’s 6 million figure by half (thus setting it at US$3 million) to account for the poorer market conditions in Vietnam and tag on another US$50,000 (thus totalling US$100,000) to Antler’s investment to account for operational costs, Antler’s still investing at a 70% discount to median pre-seed valuations. 

To be fair, Antler isn’t the only one which has caught flak for such terms. Earlier this year, Bolt CEO Ryan Breslow started a conversation around YC’s standard deal, which now sits at US$125,000 for 7%. This is worse than Antler’s US deal, especially when you consider that Antler takes a lot more risk by investing at the earliest stage possible. YC however, can afford to do that because of immense influence and prestige; Antler on the other hand still has some ways to go.

Perhaps a more reasonable expectation would be for Antler to match YC’s price terms as a baseline. This seems roughly fair; while Antler comes in at an earlier stage and takes on more risk, YC creates more value for founders in terms of valuation uplifts and talent acquisition. It’s certainly preferable to benchmarking against angels in less developed ecosystems which offer more onerous terms, and not just in a moral sense. As Paul Graham says:     

“Don't spend much time worrying about the details of deal terms, especially when you first start angel investing. That's not how you win at this game. When you hear people talking about a successful angel investor, they're not saying "He got a 4x liquidation preference." They're saying "He invested in Google." [...] 

When angels make a lot of money from a deal, it's not because they invested at a valuation of $1.5 million instead of $3 million. It's because the company was really successful.”

Antler might benefit from taking Graham’s advice. As a firm which invests pre-product, Antler is arguably more like an angel than the traditional VC firm it seeks to become. Building a successful company requires great founders, and great founders will only partner with institutions who offer them good terms. 

The last thing Antler wants is to have an adverse selection problem where only founders without better options come to them. If that happens, we can expect a death spiral: 

1. Less companies succeed; in response, 

2. Antler gives more onerous terms to make the economics work; thus

3. Attracting less talented founders; which in turn

4. Causes less companies to succeed.  

That would be a shame. 

Culture

I once asked an Antler founder the best way to get selected. He replied that the best way was to first work at a startup and gain domain knowledge. “Otherwise, you’ll end up with a consultant leading your company”, he concluded. 

This focus on founders with business backgrounds is something that is frequently mentioned. Of the 38 partners listed on Antler’s site, only seven have a technical background, with the majority having worked in consulting or banking, with some operational experience. There’s nothing wrong with this – after all, startup advice is more business than engineering - but it does suggest that Antler’s culture will draw in more founders from certain backgrounds. 

You can see this in YC, whose founding team was composed mainly of hackers who were deeply technical. Other technical founders noticed this and were drawn to them, which in turn further attracted other technical founders. Today, it’s hard to miss that YC has a culture that focuses on builders. Almost everyone who has been through YC has a “build something people want” sticker stuck on their laptop. 

Does Antler need a culture more focused on builders? I don’t have the answer. But tech talent has never been scarcer, and they are the ones who are likely to benefit more from Antler’s guidance. Sentiment is a hard thing to track, but my guess is that this could determine whether Antler’s model remains sustainable. 

Competition

Antler isn’t the first accelerator, and it most certainly won’t be the last. Many have tried and failed; of those who remain, each has a unique edge to them. 

The Predecessor

Founded in 2011 by Matt Clifford and Alice Bentinck, Entrepreneur First (EF) is Antler’s true predecessor. It runs 3-month long cohorts and gives founders a stipend for attending. Precise terms vary based on location, but EF invests between $54,000 and $98,500 for 10% equity. Clifford summarised the firm’s thesis as follows: 

“We think you should start a company with a stranger. When we look around the world and ask, “Why aren’t there more great companies?”, we think the obvious answer is: because many of the world’s best potential founders don’t have a world-class cofounder in their personal network.”

This model was a lot more foreign a decade ago, but it has proven to work. EF’s portfolio is now worth over US$10 billion, and the Antler team is no doubt using this as a benchmark for what they could do. In this regard, EF might be more of an inspiration than competition. After all, EF has its roots in Europe and remains concentrated there while Antler started first in emerging markets and has now gone global. 

Community for top talent

A newer challenger is On Deck. It has two main offerings for founders, namely, On Deck Founders (ODF) and On Deck Accelerator (ODX). 

In ODF, founders get a remote-first program centered around community and support. Through fireside chats, workshops, and Slack channels, founders get to build a network that spans the entire tech ecosystem. And in ODX, founders get a traditional accelerator style program which offers US$125,000 for 7% equity. This, however, appears to be discontinued as a result of the economic downturn. 

Given that On Deck is still refining its business model, it's hard to count it as a direct Antler competitor. But its community-first approach is worth a second look. Since the inception of ODF and ODX, 2,500 individuals have participated, leading to the founding of 650 new companies. This has created a total of US$9 billion in company value, which is remarkable given that On Deck is itself a Series A startup. It'll be interesting to see what happens if ODX becomes active once again.

The OG

Then, there’s YC. A lot has been said about them, but what’s worth emphasising is that they’re not done evolving. Earlier this year, they started offering a new standard deal. Besides investing US$125,000 for 7% equity, YC now offers founders an optional $375,000 on an uncapped SAFE with a “Most Favoured Nation” (MFN) clause. 

YC has said that they did this for two reasons. First, founders can spend less time fundraising and more time building their companies. Second, founders now have more leverage since they now have a longer runway. And while the new deal does help founders, some investors have commented that it's also a means for YC to take a bigger piece of its portfolio companies. 

Antler can learn something from this. Raising funding at the pre-seed stage is hard, and its founders often struggle. Companies like Volopay and Homebase have gone on to take part in YC after going through the Antler program even though it meant diluting their founders. It's not clear whether they did it voluntarily but it underscores the difficulties that founders face. If founders still need to go through another accelerator program to raise capital, it raises the question of how useful Antler is. 

That said, Antler may yet find an edge in the emerging markets. When would-be founders don’t speak English, it’s difficult to access all the various institutions within the startup ecosystem. Going directly to them, as Antler has, may be the answer. 

The Big Boys

Last but not least, there are the mega venture funds. As winning deals have become more difficult, certain firms have responded by moving upstream in search of deal flow. 

Sequoia, for example, runs Surge and Arc. Surge is an accelerator program targeted at Southeast Asian and Indian founders, while Arc is meant for European and American founders. Companies apply to a program, and if they’re accepted, receive between US$1 to US$1.5 million in investment. Similarly, a16z and Accel have also hopped on this trend with START and Atoms. Although these programs don't involve cohorts, they do offer mentoring and investments of up to US$1 million and US$250K respectively. 

This trend is unlikely to pose a threat to Antler. Although Sequoia and a16z might be brand name investors offering  better terms, it’s likely that their programs will remain small and exclusive. When you manage billions of dollars, there are easier ways to generate market-leading returns. 

Subscribe now

Antler is still in its early days. Despite opening its doors in over 17 countries, many of its cohorts are still in its first or second iterations. We’ll have to see if this model can be replicated in every geography. 

What Antler has done is to provide a structure for entrepreneurship. There is no myth or magic to starting a company, only data and refined SOPs. And if someone decides to join Antler, there’ll be handrails for him to hold onto as he begins the journey of building a company.

Liked This Post?

Thanks for reading! If you liked this, subscribe to get posts sent directly to your inbox the moment it’s published.

And if you really love it, share this with someone else. It’ll make my day.

Subscribe now

Thanks to Trevor and Kristofer for reading drafts of this.

“Cabs suck.” 

That’s the two-word deal memo that Jason Calacanis wrote as a Sequoia scout. Although written as a joke to protest how Roelof was making him do homework on his investments, this observation has been spot on. It’s a thesis that has resulted in the founding of Uber, and the transformation of the mobility industry. 

It’s also a thesis that has led to the founding of Grab, which was originally conceptualised as the Uber of Southeast Asia (SEA). Almost a decade later however, Grab has morphed into a super app where mobility is but just one product that is frequently used by consumers. 

In this respect, you can argue that the student has surpassed the master. The best way to explain how this has happened is that Grab has drawn its inspiration from the west, but applied the lessons learned in the east. Today we’re going to look at this evolution through five sections: 

1. Founding Story: Career transitions are a top reason why people enrol in B-School. By this metric, Harvard Business School has been a fantastic spawning ground for many startups, including Grab. 

2. The Ride Hailing Wars: Grab is described as a super app now, but it wasn’t always clear that they would be the market leader. Winning a land grab requires speed and surgical execution, and Grab showed that it had both.

3. Grab Financial Group: When people talk about Grab, they’re typically referring to its mobility and delivery services. Yet what really cements the company as the dominant force in the region is its financial services arm.

4. Grab’s Playbook: Southeast Asia is a remarkably heterogeneous geography, with its population of 650M spread across 10 countries. In winning SEA, Grab wrote the playbook on how startups should expand in this region.

5. What’s next for Grab?: How concerned should investors be about Grab’s disastrous SPAC listing? A look at a Chinese super app might offer a clue.  

Let’s get down to it. 

Founding Story

“We all believe that if we get this right, we can literally go into the history books.”

When your opportunity cost is this high, the only thing you’d do is shoot for the stars. This is what Anthony Tan did. 

Born into the family behind Tan Chong Motor Holdings, Anthony’s life was set. Tan Chong Motors was one of Malaysia’s largest automobile distributors, and at a young age, he was already Head of Supply Chain and Marketing. The plan for the son of a Malaysian Chinese tycoon was simple: go to Harvard Business School, earn a MBA, and take on a more senior position within the company. 

But life had a different path in store for him. At HBS, he met Hooi Ling, a fellow Malaysian who would change his life. Ling (as she is commonly known) had spent her early professional life as an consultant, and was at B-school courtesy of a sponsorship from McKinsey. Unlike Anthony who spent most of his time focusing on the big picture, Ling was the meticulous operator who made sure that every detail was correct. 

At a 2011 HBS competition, the two of them pitched a mobile app that would connect passengers directly with taxi drivers closest to their location. While Kalanick & Co started Uber as a black cab service which focused on convenience, Anthony and Ling thought that they should focus on trust and safety. Cabs in Malaysia were then (in)famous for ripping tourists off, and there were even reports of robberies by cabbies. Ling was one of those people who felt the problem acutely: each time she took a cab home after working late, she would pretend to be on the phone as a precaution. 

The judges were apprehensive. They thought that SEA had too small a TAM for their venture, but clearly felt that Anthony and Ling had carefully considered how an existing model could be adapted for a new market since they crowned them runner-ups and awarded 25K USD in prize money. 

This sum would be used to launch MyTeksi (before it rebranded to Grab) in 2012 even as each of them had their own personal difficulties. Ling had to honour her bond with McKinsey, and could only join full-time in May 2015 after returning to the consulting firm and then spending a brief time with Salesforce. As for Anthony, there was a little more drama: his father was unsupportive of the venture and threatened to disinherit him. His mother however, made an angel investment to support him even though she confessed that she didn’t understand the business model. This faith would be rewarded. 

A Brief History of the Ride Hailing Wars

A key reason Anthony and Ling were willing to abandon their original career paths was because they had a window of opportunity that was closing.  Uber had proven that its business model was viable, and it was only a matter of time before they expanded internationally. Being the first mover was the sole advantage they had, and they needed whatever head start they could get. 

But many others had the same realisation as well, and competitors sprung up quickly. One such example was EasyTaxi. 

Founded by Tallis Gomes and Daniel Cohen in early 2011, EasyTaxi was a fast growing and well capitalised company. Based in Brazil, the company was backed by Rocket Internet and had raised a Series A in late 2012, and then a 15 million Series B in June 2013 to venture into Latam and SEA. But beyond the capital they had raised, EasyTaxi had clearly absorbed some of Rocket Internet’s DNA, and it showed in the aggressiveness with which they acquired drivers for their platform. 

For example, EasyTaxi’s staff would directly approach cabs with MyTeksi decals and get them to switch over. And when taxi drivers were confused as to how to install an app on their phone, EasyTaxi’s staff would not only help them install their app, but delete the MyTeksi app as well. Management did little to deny these allegations as well, with one EasyTaxi MD unapologetically remarking that “drivers are free to use any app they want on their phones.” 

The early team would retaliate with the same strategies, showing that they weren’t afraid to roll in the mud with their competitors. These skirmishes would help them build operational muscle that would allow them to later take on the likes of Uber. But perhaps more importantly, the competitiveness that they showed would also give them the resource that they sorely needed - capital. 

2014 was the first year that Grab really made its mark. Anthony was clearly busy all year, raising a 15M Series B led by GGV Capital in May, and a 65M Series C led by Tiger Global in October.

Yet this was barely enough. Uber had just closed a mammoth 1.2B round in June, and while most of that warchest would be used for markets such as China, it was inevitable that some of that cash would flow to their SEA operations as well. 

Enter Softbank. Like other VCs who had backed regional competitors to Uber, Masa was on the hunt for someone to back, and he found that person in Anthony. 

The Grab-Softbank relationship would begin in a manner that looked like a scene straight out from The Godfather. Masa had summoned Anthony to Softbank’s Tokyo offices and made Anthony an offer he couldn’t refuse: “If you take my money, good for me, good for you. If you don’t take my money, not so good for you.” There was no beating around the bush. 

It was also a move that Masa had pulled earlier with Cheng Wei of Didi. But unlike Cheng who wasn’t actively looking to take on more money, Anthony did, and saying yes wasn’t an unpleasant experience. Softbank would invest 250M in Grab at the end of 2014, marking Grab 3rd’s round closed that year. Grab would pour those resources into growing by any means necessary - developing new products, entering new markets, and (mainly) engaging in a price war with Uber.  

Another turning point would come in 2018. Softbank invested 7 billion in Uber in a round that many dubbed Uber’s “mini IPO”. This meant that Masa was now in the same position that DST Global’s Yuri Milner was in just years ago with Didi and Kuaiche - deeply invested in two competing companies. 

Events unfolded as everyone expected: Grab and Uber announced a 6 billion dollar deal that would see Grab acquiring all of Uber’s SEA operations in exchange for 27.5% of stock. 

This not only made Grab the dominant player in most of the markets it operated in (excluding Indonesia, which we’ll get to later), but also paved the way for Grab’s expansion into food delivery with the acquisition of UberEats (which rebranded to GrabFood). It would also mark the start of Grab’s expansion into other O2O services such as groceries (GrabMart) and package deliveries (GrabExpress) as well as the launch of partnerships in less obvious verticals like travel booking and gift cards. 

Grab Financial Group

If you hang around VC twitter long enough, you’ll see two cliches thrown around: 

1. Every company is is a FinTech company; 

2. All FinTech companies eventually become banks. 

This has been true for Grab. Shortly after leading Grab’s Series B, Jixun Foo of GGV Capital started prodding Anthony to add payments to the app. 

Foo had spent most of his time in China and had witnessed how mobile wallets increased the usage of WeChat and Alipay by removing the friction that typically came with beginning on a new platform. Instead, users could now try new services with a click of a button, leading to more time spent in-app and more products being used. The icing on the cake was that the platform would also have more data to work with when it came to product development. 

To Foo’s mind, there was no reason Grab couldn’t do this since SEA shared the same conditions that enabled the mobile wallet boom in China: 

1. 90% mobile internet penetration;

2. rapid urbanisation; and

3. a traditionally cash-heavy society that was underbanked.  

But there were also other concrete push factors. Because most transactions in SEA were cash based, Grab didn’t bother building a means to take credit cards up until 2016. This meant that cabbies (and regular drivers on GrabCar) had to deal with the hassle of handling change and making top-ups to pay Grab its platform commission. Fixing payments was thus the next biggest priority, and this showed in Grab’s rollout of its mobile wallet. 

In 2016, GrabPay launched as a store of value. Depending on which country they were in, customers could top this up with ATM networks, online bank transfers, credit and debit cards, or at convenience stores. 

It was antiquated, but GrabPay would improve rapidly over the next three years. Not only did it gain increased functionality through partnerships with Mastercard and Stripe, GrabPay also became a widely accepted payment method by third party merchants, whether it was a hawker stall selling chicken rice or a regional ecommerce giant like Zalora. If you came from the US, you’d think that a SEA version of Square had just sprung up overnight. 

Grab would follow up on this momentum by spinning off its financial services arm to form Grab Financial Group. It would also offer new services in quick succession, going after virtually every consumer fintech category: 

• GrabInvest: a robo advisory investment service that allows users to invest small sums of money periodically or with every purchase

• GrabInsure: microinsurance products with low premiums that provide coverage ranging from personal accident (which Grab already offered to drivers and passengers) to e-hailing and critical illness

• PayLater: a BNPL service in partnership with Adyen 

• Credit: microloans disbursed to drivers and SMEs so that they can continue growing (while at the same time using Grab’s services)

The result? Grab has a budding financial services arm that might grow to become the Ant Financial Group of SEA. Financial services might be a low margin business, but by situating it in a high volume app, there’s a good chance that it shapes up to become the most profitable business unit in this decade. 

To that end, Grab has arguably made significant headway by removing some of the obstacles that continue to plague other fintech players today, and in particular, regulatory risk.  In 2020, it was one of two consortiums (the other being Sea Group) awarded a digital banking licence by the Singapore government after partnering with Singtel, a state-linked telecommunications company. 

This is the kind of warm reception that other fintech players can only dream of, and its significance cannot be understated. While Chime has to deal with a prohibition against referring to itself as a bank and Ant Financial Group has to find another window of opportunity to IPO (if ever), Grab has been able to raise capital to expand its financial services arm and earn the trust of consumers by flexing its regulatory licences. In this respect, Grab has done as well a job as anybody in laying down a solid foundation for providing financial services. 

The Grab Playbook

Grab has grown into the region’s most recognisable company. In doing so, it has developed a playbook that will come in handy for anyone who seeks to become a dominant force, regardless of whether it’s a B2C or B2B company. 

Hyperlocalisation

For anyone who’s new to the region, there are two things to understand about SEA: 

1. SEA is not just one market, but several heterogeneous markets;   

2. Any VC backed business which is based in SEA must win regionally, and not just in any one single market. 

SEA might have a population of over 650 million, but average GDP per capita (PPP) comes in at just over US$14,000. This means lower customer LTVs, which also means that any person who raises VC money must be able to conceivably become a regional winner since no country can single handedly support a venture scale business (with the possible exception of Indonesia which has a population of over 270 million). 

That comes with it a huge set of problems. A product must not only work in English, but in nine other official languages. It also means having to deal with several different heterogeneous sets of cultures, business environments, and regulators. For comparison, Latam has close to 650 million people as well, but only has Spanish, Portuguese, and French as its predominantly spoken languages.

Grab didn’t lose sight of this. While Uber launched in SEA and started onboarding the traditional four-wheel taxi, Grab made sure to include the predominant type of transportation in each country. With services such as Grab TukTuk and GrabBike, Grab could not only onboard conventional taxi drivers and car owners with its GrabTaxi and GrabCar product lines, but also operators of other modes of transportation. What was considered “alternative” to a company with Western roots was conventional in this part of the world. 

This thinking made its way to how Grab acquired riders and drivers as well, and it was clear from the early days that they were the consummate insider in the region. 

When Uber expanded its Ice Cream Day campaign to SEA in 2015, Grab responded by offering the same promotion with durian, a local delicacy. This was a logistical challenge. Because durians have such an overpowering smell to the point that it is banned in airports and hotels, Grab had to come up with their own special packaging. 

It worked. GrabDurian was such a hit that it sold out in Malaysia immediately, and it was clear that Grab was the people’s champion. “No foreigner would have thought to do that”, remarked Anthony.

Optimise for frequency

“At Grab, we have a saying that high frequency will always kill low frequency, and being very deliberate about the types of high frequency services that you provide is very core to how we think about designing the super app, and then the specific portfolio of services in each and every country.” 

If there’s one sentence that can sum up Grab’s overarching product strategy, it’s the above by Grab’s President, Ming Maa. 

Frequency of usage creates a habit, and a habit of using the app makes it easy for Grab to layer additional services on top of existing ones. Grab has added one product after another in the hopes of increasing time spent in-app, which correlates to the amount of revenue generated from each user. A look from their investor relations slide deck tells us as much: 

This illustration of course isn’t perfect, but it provides a basis for building non-obvious product lines like video streaming (which didn’t do that well) and hotel booking (which did well enough it remains on the app). It also helps when consumers in each country have different needs from those in another. The core question that Grab needs to ask before deciding whether to add a new business line is quite simply “is this something that the customer will use often?”

Partnerships

Management teams have three choices when they want to build a new business line - they can buy, build, or acquire. 

Grab has been spectacular at executing on partnerships. Although they have been able to attract some of the region’s best engineers and capital allocators (Ming was formerly at Goldman and Softbank), Grab has used partnerships to expand quickly while taking on less risk. These have been applied in several categories: 

1. Grocery delivery: Grab partnered with Jakarta-based e-grocer HelloFresh to offer users fresh and frozen produce. This helped them compete better with Go-jek, a player with deeper roots and greater focus in Indonesia. 

2. Live streaming: Hooq (now defunct) allowed Grab to offer video streaming, which increased time spent in-app even though it was not core to Grab’s business model. 

3. Travel planning: Agoda and Booking.com allowed Grab to launch GrabHotels quickly, thus increasing the time spent in-app. This was particularly helpful since travel planning was already a saturated space, and building a product in this space would’ve yielded a negative ROI. 

4. Payments: Stripe allowed Grab to offer GrabPay as a payments option for consumers outside the app for all sorts of ecommerce transactions

In cases where the partnership lies in a core business, Grab has gone further to acquire them after getting a sense of the synergies they can expect. This makes partnerships a useful tool for moving forward when the company doesn’t have enough conviction to make one-way door decisions: instead of committing early, Grab can take a wait-and-see approach without stalling product development entirely. 

Work with regulators

“Hatred of bureaucracy alone isn’t enough to keep bureaucracy away.” 

The above sounds like something Anthony might have said, but it was actually said by Flexport CEO Ryan Petersen in a recent podcast. 

It’s also something that I think Western companies such as Uber have missed. In contrast to the aggressive language of disruption that Travis Kalanick has used, Grab’s management team has always emphasised that they are here to improve the lives of Southeast Asians. Their tone is collaborative, not competitive. 

In a region where there is a deficit of trust, consumers look to regulators for guidance, and regulators have no qualms stepping in with measures that would be considered heavy-handed elsewhere. This means that B2C companies must tread carefully, and especially when your company not only offers financial services, but has a business model which might fundamentally redefine the future of work. 

Grab has performed this balancing act extremely well, toggling between being conservative, opportunistic, and aggressive depending on the circumstances. 

On one end of the spectrum, it has worked hard at establishing relations with different governments across SEA. On the other, Grab has shown that it is willing to defy regulators if necessary, having been fined by the Competition Commission of Singapore and Philippine Competition Commission during its merger with Uber. 

Most of the time however, Grab has sidestepped regulatory concerns by buying companies which hold the requisite operating licences. Acquisitions such as Bento (which became GrabInvest), Kudo (which was folded into GrabPay), and Ovo (an e-wallet) allowed Grab to jumpstart its entry into new business verticals. In a region where regulatory approvals can take anywhere from a year up to three, strategic acquisitions can be the difference between being a market leader and being hopelessly behind. 

Overcapitalise in a land grab

Without enough capital, none of the above strategies would have worked. 

This is stating the obvious, but I think it’s worth mentioning. Founders who started ride-hailing startups in 2013 weren’t wrong about the size or obviousness of the opportunity, but just weren’t the right people to lead the company in a space that’s essentially a land grab. 

In this respect, there might be no better person for the job than Anthony. 

Many of Grab’s former employees have stated that Anthony’s superpower was fundraising, and in particular, his ability to sell a vision. VCs who invested early spoke of Anthony’s “fierce determination to succeed and prove his worth beyond the family he was born into” and how “the way he spoke to his mum” showed his personality and character. All this is highly subjective, but here Anthony seems to have cracked the code. 

Of all the factors here, convincing Masa to give you money might ultimately be the most important thing you can do. There are brand name VCs, and then there are absolute whales. As EasyTaxi found out the hard way, having the former just isn’t enough sometimes. 

Decoding Grab

Bear Case

The most important question remains: how much is Grab worth?

The market’s answer hasn’t been pretty. Grab went public via a SPAC combination with Altimeter in December last year, valuing it at US$40 billion. It was the largest SPAC listing ever, but shares fell from US$10 to US$7.15 by the end of the year, and then to the US$3 range after Grab reported its 2022Q1 earnings. That’s a 70% fall in valuation 3 months after going public. 

Most of that has been a reaction to Grab posting US$3.6b in losses in 2021, the very same year it claims as its strongest yet. Even after removing one-off costs such as a US$1.6 billion convertible note and US$350 million in SPAC listing fees, Grab’s P&L column still doesn’t look good. For a company that raised US$4 billion in PIPE financing, there’s only so much more bleeding that can go on. 

To make things worse, even with the unsustainable driver and passenger incentives that Grab continues to pay out, its user base has actually shrunk from 2020 to 2021. You can attribute this to Covid-19 which has created a whole new world of anomalies but this raises two fundamental concerns: 

1. Product stickiness: is the app sticky enough that users will come back even after Grab scales back its driver and rider incentives? 

2. Total number of users: Grab might be the regional consumer leader, but can it grow further without winning in Indonesia? GoTo has adopted an Indonesia-first strategy and it’s unlikely that they’ll be losing their lead anytime soon. 

It’s anyone’s bet what happens, but I think we’ll get the answers soon. Ming has stated that he doesn’t see profitability and growth as mutually exclusive, but public markets have a way of forcing discipline when it comes to expenditure, and it’s hard to believe that Grab can continue bleeding cash at this pace.

At the same time, Indonesia is clearly a top priority for Grab, with Indonesia being the only country who has its managing director featured on Grab’s SPAC listing presentation. GoTo has been a thorn at Grab’s side ever since Anthony’s HBS classmate Nadiem Makarim founded Gojek, to the point that Masa has been rumoured to press the two to merge. If the bears are right, growth will slow significantly and it’s possible that Grab will never be profitable at all without serious cost cutting measures. 

Bull Case

But I don’t think the situation is that dire. Lyft and Uber turned in their first profitable quarter in Q42021 after struggling for years, and it shows that mobility can be profitable. This will take some time, but will become clearer as mobility becomes a stable oligopoly where every player cuts back on riding and driving incentives.

What’s more interesting is Grab’s food delivery business. Restaurants still use GrabFood even though Grab’s take rate goes up to a whopping 30%. Unlike software companies who can afford to pay Apple and Google their 30% fee for using the App Store/Play Store, it’s difficult to see merchants do that in the F&B space since their margins are way smaller. The fact that GrabFood is Grab’s strongest business is perhaps the clearest sign that Grab has built up significant network effects and has a sticky enough product. It’s what happens when you become an aggregator.

Looking into the future, it’s also not hard to see that Grab will eventually build up moats in significant verticals. Ming has stated that beyond food delivery, Grab will be prioritising an expansion into ecommerce fulfilment and financial services. These are sectors that Grab is positioned well in, with Grab’s O2O infrastructure, as well as the array of licences and partnerships that it has entered into. In this case, it also helps that these are capital intensive, which creates another barrier to entry for others who are eyeing a slice of the pie. 

I’m speculating at this point, but there are also a number of Grab products that are full of potential even if they haven't translated well to the balance sheet yet. Each of these are levers that could potentially become significant business units that transform how we think about the company.

1. PayLater: BNPL has proven to be a profitable business, and Grab will likely be able to roll out its BNPL offering easily through GrabPay (the very synergy that made Square acquire Afterpay for US$29 billion). This alone might unlock a large chunk of revenue for Grab.  

2. GrabAds: Amazon used to shun ads in its early days, but ads have become a US$31 billion dollar business as Amazon grew, and it’s not a stretch to imagine that the same could happen for Grab. Network effects are a wonderful thing, and I think we might be underestimating how big this might get as Grab becomes a stickier app.

3. GrabDefence: When you have internal anti-fraud software that’s good enough to sell as a SaaS product, it’s a clear sign that you’re eating your own dog food and solving a real problem. This is more of an intuition about how Grab will likely be successful with product development, but it’s also possible that security becomes a huge P&L driver as SEA digitalises. 

This isn’t to say that Grab’s valuation is justified. 

Even if we used Grab’s numbers prepared in March 2021 (which looks rosy on hindsight), its SPAC listing valuation is on the higher side when compared to Meituan, a Chinese O2O super app which has probably inspired Grab’s strategy (recall how early investors wanted Grab to offer payments). A more reasonable valuation in line with Meituan’s numbers would value Grab closer to US$26 billion, 35% less than what it listed at. 

But to say that Grab’s stock has grossly underperformed would be unfair. Tech stocks have taken a huge beating with the new macroeconomic environment. Netflix is down almost 70%, Snowflake down 55%, and even the money printer that is Meta is down 40%. Grab might be trading under $3 and down almost 70%, but that’s only in line with prevailing tech valuations. If you want to criticise Grab’s valuation, you’ll have to do the same for the wider Nasdaq index as a whole. And if you do that, you’ll also need to have predicted in December last year that we would see a Covid-19 resurgence in China, a looming food shortage, and a Russian invasion that might lead to WWIII. 

Ultimately, Grab does have a path forward, and I think that purchasing Grab’s stock might be one of the easiest ways to buy a call option on SEA’s growing middle class. Grab alumni are already at the helm of many tech startups and companies, and in this regard, it’s possible that Grab is an example of the Peter Thiel line that the value created and value captured by a company are two independent variables. 

Whichever the case, it’s undeniable that Anthony has delivered on the Grab vision to drive SEA forward.