Investors are accustomed to market cycles and bubbles. The best investors are those who are able to anticipate, or at a minimum insulate themselves from the turmoil these cycles create. I witnessed my first internet bubble in the late 90s as a young analyst on Wall Street. In hindsight, the signs were all around as an abundance of liquidity was flowing into technology start-ups with little scrutiny and real analysis conducted on the underlying business models. Perhaps most importantly, the enablers of the technology, of which one at the time was physical hardware, physical infrastructure and internet penetration rates were nowhere near the standard required for these businesses to reach full potential. Like most bubbles throughout history, this one crashed; and it crashed hard. Recently, we have seen the markets get frothy and tech valuations come under question once again though there is some general stabilisation. We hear that “this time is different” yet many of the investing parties in this segment are aligned to ensure the music doesn’t stop. How does one prudently play this space?
Venture capital funding
We recently made a $50 million (Dh183.5 million) investment in Souq.com the Middle East’s leading online retailer. The journey towards obtaining the requisite comfort level to invest this amount into an e-commerce company was not an easy one; especially given the amount of noise around record levels of venture capital funding, valuations coming down globally, and our track record of investing in traditional companies. However, subsequent to extensive due diligence, we felt comfortable that our region is in the early stages of real disruptive change, particularly as it relates to shifting consumer behaviour, organised retail and mobile technology. In the end, we asked ourselves three main questions: (1) is e-commerce here to stay? (2) what makes an e-commerce winner? and (3) what is the right price to pay for such businesses? Let us look at each of these in some greater detail.
Is e-commerce here to stay?
Most people now interact with e-commerce daily. If you have bought an airline ticket online, booked an Uber or Careem or bought something off the Apple Store, you have performed an e-commerce transaction. E-commerce is transforming how we shop and how we interact with brands on a day-to-day basis. The trends in the region are fascinating. We are seeing 30 per cent top-line year on year growth and a majorly underpenetrated market. Some of our markets in the Mena region are expected to be the fastest growing e-commerce markets globally and there are some intriguing stories taking shape. Uber in Cairo, for example, has shaken the local taxi market and is now one of the leading Uber markets globally. On the retail side, we are a region that loves to shop and which has been spoiled by very well organised retail but those shoppers are increasingly looking for convenience, better pricing and a wider variety of options. Some parts of the region will completely bypass organised retail and move towards e-commerce much like mobile phones bypassed landlines in Egypt and more broadly in Africa; which leads us to the next question.
What makes an e-commerce winner?
Simply put, it comes down to three factors: scale, fulfilment capability, and breadth of product offering. Scale cannot be underestimated. It is a major value driver in any e-commerce business as scale allows a company to attract better product offerings onto its platform, reduce the marginal cost of fulfilment and reduce the cost of customer acquisition. Furthermore, “last mile fulfilment” is becoming even more important to companies as they look to ensure they control the customer experience; an area which third party logistics providers have typically not shown as much appreciation. Achieving scale and mastering fulfilment capability enables an e-retailer to turn into a marketplace which transforms the business from cash burning to cash producing.
This brings us to our final question.
How do you value such companies?
Just like most valuation debates, there is no right or wrong answer to this and it comes down to the “eye of the beholder” while keeping in mind the history of bubbles. Let’s look back at Amazon which went public in 1997. At the time, it raised $54 million at its IPO for a market capitalisation of $438 million. What you are paying for today in no way reflects what the business is capable of doing now but for what it will be capable of doing in the future. This is what makes valuation an “eye of the beholder” exercise. The key is finding the companies and trends that are able to withstand the constant changing markets, great management teams and those that have truly created a “moat” around their customers by providing more efficient solutions to daily consumer needs. Did the world need Pets.com in the late 90s, or numerous precursors to Facebook like theglobe.com? Being too early is just as painful as being too late.
The most gratifying part, we feel, of investing in this space is the underlying notion that we are helping self-made entrepreneurs evolve in a space where large-scale funding is scarce and in a region where many investors are hesitant to deploy capital in this sector.
Taimoor Labib, Regional Head of Mena Private Equity & Head of Global Private Equity Portfolio Management, Standard Chartered
