This article first appeared in Digital Edge, The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

“Turbulent” best describes the global economy in the past two years. First, there was the Covid-19 pandemic, then a war following Russia’s invasion of Ukraine and rapidly rising interest rates not seen in over a decade. As the era of cheap money has gone, how are local tech start-ups, especially the forerunners, faring?

After all, it is during tough times that the fundamentals of companies are most tested. As legendary US investor Warren Buffett once said: “Only when the tides go out do you discover who’s been swimming naked.”

The shuttering of pioneer online home-services marketplace Kaodim in June seemed to have set off alarm bells that trouble was afoot in the tech start-up world. Carsome Sdn Bhd — the e-commerce car platform that attained much-coveted unicorn status with a valuation of more than US$1 billion (RM4.4 billion) just over a year ago — delayed its initial public offering (IPO) plans as more bad news continued to riddle the economy. Aerodyne Systems Sdn Bhd, a leading drone-based enterprise solutions provider and soon-to-be unicorn, also postponed its listing schedule.

Are things as bad as they appear? Digital Edge speaks to Eric Cheng and Kamarul A Muhamed, respective founders of Carsome and Aerodyne, to get the low-down on whether the situation is as grave as it is being projected, their current situation and plans for their respective companies.

Some might think that start-ups, in their hunger for growth, have the tendency to “burn money” to gain market share and would have fared badly in recent years, but that is not the case, stresses Carsome’s Cheng. For large tech start-ups such as Carsome, he says some have grown their revenues significantly and remain financially sound. These companies were beneficiaries of the global lockdown when physical business activities came to an abrupt halt and went online. It is also because start-up founders in this region are more prudent in managing their business and finances than those in the developed markets. Venture capitalists in these parts too are relatively conservative in their expectations of growth for their investee companies.

It is no secret that fundraising activities are less vibrant in Southeast Asia than in the West and the total amount raised by start-ups, though still sizeable, is far lower than those in the developed markets.

“Malaysian start-ups are doing fine. We are operating in a market where funding is not so accessible as compared to, you know, markets in the US and Europe.

“In this region, most start-ups are not burning all the way through their cash balance. They [know they] need to grow sustainably. This creates more execution-based founders and when they operate the companies, they focus more on growing their business [organically] than just burning whatever they have to capture the growth.

“How many start-ups do you see are burning that kind of money that Grab, for instance, does on a quarter-to-quarter basis? Not many in this region.”

Cheng says there is no denying that many new businesses and ventures have failed in the past two years, including start-ups like Kaodim, but the good news is that there are also start-ups that have done well and have not gained as much attention from the media and the public.

In June, local direct-to-consumers e-commerce company RPG Commerce raised US$28.3 million in its Series B funding round led by East Ventures, UOB Venture Management, Vertex Ventures SEA & India and RHL Ventures. Other renowned local start-ups such as point-of-sale software provider StoreHub, whose headquarters is in the same building as Carsome, have further cemented their position in their respective markets in recent years, he says.

“In general, we see a lot more companies coming through and performing better on a regional scale in recent years. Like RPG Commerce is really having a good time at this juncture. These are start-ups that are less talked about,” he says.

Aerodyne’s Kamarul concurs. Given the volatility and economic uncertainty that have plagued the world, it comes as no surprise that many businesses, some tech start-ups notwithstanding, have collapsed in the last couple of years. But that has always been the norm, as only about 4% of all tech start-ups have survived and expanded in the past cycles, he points out.

Some local start-up founders may be very good and have the technical know-how, but lag in terms of managing their company’s finances well, which could have partly caused their business to fail during bad times, observes Kamarul.

It is also about building a team that will stick with the company through thick and thin. “The toughest part for start-ups is always the people. You need to build a team of people whom you can trust, and they trust you as well. Nobody can do this alone, especially during tough times. You need to build that strong team,” he stresses.

In Carsome’s case, Cheng says the company’s financials remain sound with a cash balance that is sufficient to sustain the company for the next 18 months.

Carsome hit an annual revenue of more than US$650 million last year, and is aiming for US$1.5 billion this year, says Cheng. While the start-up isn’t yet profitable, he is confident that it is on the path of breaking even by the third quarter of next year.

Geographically, 70% of Carsome’s market share comes from Malaysia while the rest is from the region, including Singapore, Thailand and Indonesia.

Business segment-wise, about 30% of its total revenue comes from its fast-growing retail business launched during the pandemic, which allows individuals to buy and sell used cars virtually through Carsome’s online platform — including its mobile app — that went live just this year. Close to 70% of its top line comes from its wholesale business, where the start-ups buy used cars nationwide and sell them to used-car dealers via online auctions. The auctions happen every day, making it accessible to used-car dealers throughout the country.

Carsome Capital, which provides funding for used-car buyers who are unable to obtain a bank loan, commands a “not-very-significant single-digit” percentage of its total revenues, says Cheng.

In February, Carsome acquired car listing and content automotive platform iCar Asia from the Catcha Group and its other shareholders. The acquisition contributed roughly 10% to its total annual revenue. But the rest of the company’s growth comes organically, adds Cheng.

The key catalyst for growth in the years to come would be from the retail segment of its business. Cheng expects the contribution of its retail business to eventually make up half of the company’s total revenues, up from about 30% now.

The success of Carsome’s retail business very much hinges on its new mobile app. Cheng wants it to reach the masses and provide them with the utmost convenience to trade used cars and conduct more related services.

Instead of calling it a “super app”, he terms it an “ownership app”. “Super app means you have different services here and there, which we would eventually have in our app. But what we really want to create is an ownership application. As you buy a car [from us], you want to naturally own the Carsome app,” he says.

The Carsome app not only informs users of the current market price of the car purchased, but also provides details of motor insurance and other content such as reviews of various car models and recommendations. This service was embedded in the app after Carsome’s acquisition of automotive content platforms, WapCar and AutoFun.

Another key driver for Carsome’s business comes from its tie-up with KAF Investment Bank Bhd to form a digital bank and launch new products targeting the underserved market. The digital bank consortium also includes financial technology start-ups Jirnexu and MoneyMatch. The proof of concept of an Islamic hire-purchase product, offered by the digital bank, is expected to kickstart in the next few months.

Currently, Carsome is valued at about US$1.7 billion after raising US$290 million in January from several investors, with the main ones being 65 Equity Partners and Seatown Private Capital Master Fund — both subsidiaries of the Singapore state investment firm Temasek Holdings — along with the Qatar Investment Authority. The company is not actively looking to raise funds at the moment, says Cheng.

“But we’ve been in talks with banks and partners, both on the debt and equity [financing] side. It’s not something we are doing actively. We are not actively out there looking for funds.”

Yet, why did Carsome lay off less than 10% of its staff in September if things are looking so bright? Cheng says it is to drive efficiencies on the back of persistent high inflation and fast-rising interest rates in the past year. He adds that many companies in the technology space, big or small, have implemented cost-cutting measures in preparation for a market slowdown. The measure allowed the unicorn to get rid of redundancies and incorporate more technology internally to drive business decision-making.

“Our business continues to do very well as compared to the year before. The [layoff] decision is more to bring in more efficiencies, especially from the P&L (profit and loss) perspective, to manage the cost base better. It is more of an optimisation exercise for us, and that we only do it one time.”

Cheng assures investors and the public there is no hidden risk in the company’s financials that would lead to implosion such as that experienced by the likes of Theranos, WeWork or, most recently, FTX.

“All these start-ups have a similar pattern. Their value proposition is not clear when it comes to monetisation strategy. And secondly, they mismanage their business in terms of cash flow. A lot of these companies run into cash flow problems due to the mismanagement of funds and with related-party transactions.

“These things don’t happen in Carsome. We have a cash balance that can last us through 18 months. In general, we don’t burn a lot of cash too, and are close to breaking even in a couple of quarters,” he says.

Soon-to-be unicorn in inorganic growth phase, targeting profitability before listing

Meanwhile, Aerodyne’s Kamarul is embarking on an inorganic growth phase as the company has acquired 16 companies around the world to expand its global footprint.

The global expansion phase allows the start-up to play ball with multinational corporations with business spanning across the globe, while letting it acquire talents in the niche drone technology industry.

“When we invest, we are also hiring. We acquire top talents in the drone industry for ourselves. Talent is actually the biggest challenge, especially when you are a tech start-up competing globally. You need top talent to deliver solutions on a global scale,” he says.

Out of its 16 acquisitions, Aerodyne has only exited two companies it has acquired, including one in Denmark. “We invested in them, and made money from the exit. It was due to cultural incompatibility and the numbers did not deliver. We had a put option over them, which allowed us to exit. But, in general, it is [a] good [investment]. The other company didn’t work out as well, so we moved on.”

Based on filings with the Companies Commission of Malaysia, Aerodyne hit a record revenue of RM64.22 million in its financial year 2021 (FY2021), tripling its revenue recorded in the previous financial year at RM24.3 million. However, the company also recorded a net loss of RM37.11 million and RM6.99 million in FY2021 and FY2020, respectively.

Asked about profitability, Kamarul admits he isn’t too troubled just yet, as Aerodyne is still continuing on its inorganic growth path and has gained good traction by breaking into different markets and sectors. Much of the money has also gone into research and development (R&D).

Despite that, he aims to steer the company back into the black before its IPO in 2024, if not later. “It can be profitable [by then]. But I’m not so concerned about it. I think this is the part that we Malaysians do not understand about tech start-ups in general. It is about building new solutions for the future. A lot of investments are going into R&D, building the market and seizing opportunities,” he says.

A company that owns more than 1,000 drones and is expecting to triple the number by next year, Aerodyne is looking to raise US$100 million to US$200 million next year in the upcoming funding round. If successful, it will become Malaysia’s second unicorn after Carsome. Its bevy of investors includes Petroliam Nasional Bhd (Petronas), Kumpulan Wang Persaraan (Diperbadankan) (KWAP), Axiata Group Bhd, Gobi Partners, China-based Summit Capital, Indonesia-based Kejora Capital and Japan-based Drone Fund.

Today, Kamarul says, Aerodyne has four business segments: infrastructure, security, agriculture and logistics. On the infrastructure front, the company provides drone services to energy and infrastructure companies to monitor buildings and assets for various purposes, including maintenance. It also deploys drones for security purposes, such as monitoring the country’s borders.

The agriculture segment, which involves using drones to monitor crops — mainly oil palm trees — and fertilise them to increase yields, was launched during the pandemic and is the fastest-growing segment in the past two years. The solution came in handy as plantation companies were facing acute labour shortage. The company had to take a loss at the beginning to let plantation companies try out its drone tech services, he says. That proved to be a right decision as drones are becoming a mainstay in agriculture, and that segment of its business has grown by leaps and bounds, Kamarul adds.

“Our agriculture segment is now on a large scale, with one-third of our employees here dedicated to that. We have 500 drones in Malaysia servicing that segment,” he says, adding that Sime Darby Plantation is one of its main customers.

The logistics segment, in which drones are deployed for the transport of cargoes, goods and people, has the largest potential among all with a market size of US$1 trillion based on projections by PricewaterhouseCoopers, says Kamarul. Sending goods from one place to another using a drone is 50% cheaper than deploying a helicopter, he claims. Aerodyne currently helps companies move cargoes between ships and offshore platforms. It also completed its first island delivery in the Caribbean.

While still loss-making as it continues to plough funds into R&D and capture market share, Kamarul says the company has secured various projects that justify the funds raised from investors and spent. “In the last five years, our top line has grown by 2,700%. And we have created a very strong order book and pipeline,” he says with pride.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.