Category: Think Pieces

Tech entrepreneurship has led to a winner-takes-it-all game, centralising wealth and power

The digitalisation of the 3Cs: Communication, Content, and Commerce has been the dominating force shaping the new ecosystem (new economy) for the last two decades and has also led to a concentration of power and wealth. This centralisation trend has led to an oligopolistic market with distant market leadership. Most market share will be owned by the leader with a significant gap to even the 2nd biggest player. Tech entrepreneurship trends have led to winner-takes-all game.

Case in point: According to eMarketer (2020), Amazon’s market share in the U.S. e-commerce retail sales was 38.7%, followed by Walmart at 5.3%. The four biggest players combined control 52.4% of the whole market.

 

 

The winners are getting stronger every day by gaining access to more data, enjoying network effects, and accessing financial resources through their generous market valuation. The tech leaders also enjoy exceptional free cash flows, adding to their moats.

Legislators and ex-insiders are now attempting to break the Big Tech as they see threats lurking

 

 

Abundant access to data, financial resources, and the ability to manipulate public opinion have instilled fear that tech firms would soon be more powerful than governments. Consequently, governments and ex-tech insiders have started to fight the Big Tech.

 

 

The three biggest issues that are being addressed are:

1.Anti-trust: More power and market share accumulated by the winners leave no room for other competitors.

2.Data privacy: Data tapping is everywhere and monetised for profit.

3.Tax: Leveraging their borderless presence, many firms exploit tax loopholes, creating an unfair advantage.

In addition of legal moves by governments and ex-tech insiders, the new tech forefronts have decentralisation attributes embedded to their framework, which is a solution of today’s problem.

Blockchain and edge computing emerge as a substitute ecosystem for the existing centralised system

In a centralised system, users depend on an authority to give a ‘blessing’ for transactions. This authority is almighty to dictate behaviour, set rules and regulations, and monitor our actions. Blockchain and edge computing emerge as enabling technologies who act as the foundation of a decentralised system.

Blockchain technology is an enabler of permissionless transactions by using a distributed ledger system where everyone in the network shares the database simultaneously. The data being shared through the network is represented by a ‘token’. Its core value proposition consists of user privacy, reliable records, and frictionless low-cost transactions.

Meanwhile, edge computing provides decentralised data processing by computing near the users. Its core value proposition are composed of: 1.) User’s absolute consent of data – Only relevant data need to be shared with the central network and  2) Faster computing – Lower latency due to closer proximity to the user instead of relying to a centralised system.

The wide adoption of blockchain technology and edge computing could imply that the Big Tech would be fed less data. Certain AI-optimized and machine learning programs could be adversely impacted by such trend.

With accelerating digitalisation and the rising prominence of decentralised network technology, decentralisation and democratisation will be the next forefront of tech for the coming decades

The rising efforts to curtail Big Tech’s power and the increasing prominence of decentralised network technology could reverse the centralisation trend. Therefore, we believe that in the upcoming decades, the innovation trends will shift from the digitalisation of the 3Cs towards the 3Ds. The 3Ds can be shortly explained as follows:

1.Digitalisation acceleration due to COVID-19 will be the background in the new normal.

2.Decentralisation will occur as blockchain and edge-computing emerge as a substitute for the current centralised system. Blockchain is going to be the backbone for decentralised finance. Meanwhile, edge computing will be the key for decentralised internet networks.

3. Democratisation is going to be the consequence of decentralisation. Also, accelerating decentralisation will cap the power of authority and distribute the power back to the users.

Investors should be more agile and have an open mindset

The era of high-velocity creative destruction provides opportunities and threats to investor’s wealth. In order to be able to grasp the emerging opportunities and avoid the vicissitudes (i.e- taking the wrong side in the game), today’s investors are required to be more open-minded and be on one’s guard. A life-changing investment opportunity might arise by surfing the tide of future winners since its early days.

“If you realize that all things change, there is nothing you will try to hold on to. If you are not afraid of dying, there is nothing you cannot achieve.” – Lao Tzu

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As we find ourselves at a critical juncture, where economic and political systems can be overturned, we turned to nature  for inspiration and learned what “species” of investors are most likely to thrive in this rapidly changing environment.

Lessons from nature

From: Essentials of Ecology, 5e, G. Tyler Millers and Scott E. Spoolman. (Brooks/Cole)

Scientists use the niches (pattern of living) of species to classify them broadly as generalists or specialists.

Generalist species have broad niches. They can live in many different places, eat a variety of foods, and often tolerate a wide range of environmental conditions. For example, mice, rats, and raccoons are generalist species. In contrast, specialist species occupy narrow niches. They may be able to live in only one type of habitat, use one or a few types of food, or tolerate a narrow range of climatic and other environmental conditions. This makes specialists more prone to extinction when environmental conditions change.

For example, tiger salamanders breed only in fishless ponds where their larvae will not be eaten. China’s giant panda is highly endangered because of a combination of habitat loss, low birth rate, and its specialised diet consisting mostly of bamboo.

Is it better to be a generalist or a specialist? It depends. When environmental conditions are fairly constant, as in a tropical rain forest, specialists have an advantage because they have fewer competitors. However, under rapidly changing environmental conditions, the generalist usually is better off than the specialist.

Kung Fu Panda vs. Rocket Raccoon
Double trouble: not only does Kung Fu panda Po belong to a specialist species at the brink of extinction, he is also a fanatic follower of a closed-minded martial art doctrine. Rocket Raccoon on the other hand is a fine example of a generalist survivor. The message? Don’t be like Po…
Source: Kapanlagi.com, Greenscene.co.id

How to invest? Diversify while maintaining flexibility
Just as generalist species are better able to adapt to sudden changes in their environment due to their diversified diet, we figure that generalist investors with a diversified investment diet should also be better positioned to adapt and thrive in the current socio-economic climate – as compared to their specialised counterparts.

For us, this means that diversification is now more important than ever. Second key success factor – in our opinion – is flexibility. The flexibility to move “habitats”, i.e., update your investment strategy if it is no longer working.

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What makes a better forecaster of future events? Well, if somebody can answer that question, it is Professor Philip Tetlock of the University of Pennsylvania.

Tetlock co-created The Good Judgement Project (GJP) which participated in a forecasting tournament held by IARPA, a U.S. government organisation.

IARPA supports research that has the potential to revolutionise intelligence analysis. The GJP won the tournament and its forecasters were 30% better than intelligence officers with access to classified info.

In his book “Superforecasting: the art and science of prediction”, he describes the portrait and methods of those top forecasters.

Besides concluding that foresight is real, Tetlock found that the key to forecasting is not what we think, but how we think:

• Foresight demands thinking that is open-minded, careful, curious, and—above all—self-critical;
• Good forecasters show a high degree of active open-mindedness, meaning that they are not merely open to reasons why a favoured possibility might be wrong but also actively look for them;
• The strongest predictor of rising into the ranks of forecasters is the degree to which one is committed to belief updating and self-improvement.

Factors most associated with foresight

• Belief updating
• Intelligence
• Knowledge
• Deliberation time
• Actively open minded
• Teams
• Training

Interestingly, Tetlock also noted in an earlier study that “subject matter expertise does not give a big boost to performance” and that “we reach the point of diminishing marginal predictive returns for knowledge disconcertingly quickly”. Investors can improve their forecasting skills by being actively open-minded and committed to self-improvement.

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Most of us are surprisingly wrong about the world. We must have a correct world view in order to make a judgment about where the world is headed. Unfortunately, this is where most of us already go wrong.

 

We are wrong! This, we found out while reading the eye-opening book Factfullness, in which author Hans Rosling exposes that when we are asked simple questions about global trends e.g., “where does the majority of the world population live?”, we systematically get the answers wrong.

So wrong that chimps choosing answers at random would consistently outguess teachers, journalists, Nobel laureates, and investment bankers. In particular: 12 multiple-choice questions with three options were asked to around 12,000 people in 14 countries. The results? About 80% scored worse than chimps would have.

Only 10% scored better. Rosling writes that most people think they are getting it kind of right – until they get tested (click here to test yourself). However, the contrary is true. In respect of some matters, it even seems that the more educated you are, the more ignorant you are.

 

Why? Rosling points to 10 human instincts (like fear and generalisation) that impact our “information filter” and judgement to explain why we are so ignorant.

At the same time, the media is exacerbating matters by painting a distorted and dramatised picture as their coverage is dominated by the negative and the exceptional. As such, positive changes don’t find you. You need to find them (in statistics or by traveling, for example).

To see the world as it is, we need to refresh our knowledge more regularly and change our attitude.

Rosling closes his book with some suggestions to obtain a more fact-based world view which have much to do with our attitude:

1. be humble enough to recognise that (1) knowledge does not have an unlimited shelf-life and needs to be updated regularly, (2) our instincts impact our information filter and judgement, (3) we should be prepared to change our opinion, and

2. be curious enough to (1) be open to new information and actively seek it out, (2) embrace facts that do not fit our world view and (3) let our mistakes trigger curiosity instead of embarrassment.

In short, by being actively open-minded and committed to self-improvement, investors will have a more factual view of the world, which will help them make better decisions.

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With the growing global internet penetration rate, the proliferation of smart devices, and the democratisation of knowledge, long-established barriers to business are lowering across industries around the globe. This is especially prevalent in developing markets, like Indonesia, where access to knowledge, skills, markets and funding have been limited. Let’s dive deeper into how this has improved.

Access to Knowledge

Technology has significantly improved the accessibility and affordability of information through (free) online content, ranging from simple how-to video’s on YouTube to courses on advanced topics like Machine Learning on platforms like Coursera, Audacity and Edx. Companies are opening up, too, with some sharing their learnings both online and offline, and even contribute to the coding community by publishing coding projects on online platforms like GitHub.

 

Indonesian ride-hailing firm Go-Jek publishes numerous videos on Youtube, covering a variety of topics from learning data science to surviving in the workplace.

Access to Talent

The rise of gig platforms like Upwork and GetCraft provide entrepreneurs access to highly skilled talents that may otherwise not be available to them locally, or for which they would not have a budget to hire on a full-time basis.

Large share of freelance work through platforms comprises higher-level skills
Source: BCG Future of Work 2018 worker survey.

Access to Markets Across the Globe

Tech has also levelled the playing field for small businesses by giving access to markets through online sales channels. Not only does online direct access to consumers reduce the dependency on distributors and retailers, but it also allows the seller to retain significantly higher margins.

Having an online presence has become very cheap nowadays – if not for free. Shopify, for instance, enables merchants to set-up and run their own customisable e-commerce platforms for only US$29 per month with no coding skills required.

Access to Business Infrastructure Without Capital

Major online marketplaces are evolving their ecosystems towards infrastructure-as-a-service, offering additional business services to their merchants such as logistics, fulfilment, payment and financial services. Examples are China’s Alibaba and Indonesia’s Tokopedia. These services cover areas that are normally capital intensive to perform in-house, lowering the barriers to doing business for many entrepreneurs.

Alibaba’s long-term vision is not to increase the number of merchants, but to make them more profitable.

Access to Funding

Limited access to funding has also been a critical barrier to growth for small businesses. In Indonesia for example there are estimates that about 51% of the adult population has now access to bank credit, resulting in a huge SME funding gap of $165 billion, according to SME Finance Forum.

But things are changing thanks to fintech ventures offering options for funding. Currently, Indonesia’s fintech industry has 88 registered platforms. In 2018, total loans allocated by Indonesia’s fintech industry in 2018 reached US$ 1.6 billion according to Indonesian Financial Services Authority.  It’s a small, but fast-growing number.

Welcome to the golden era of entrepreneurship

We at Heyokha are convinced that due to technology, we now live in a golden era of entrepreneurship. A time where anybody has the chance to pursue an idea and challenge the status quo. We can’t wait to see this creative potential be unleashed and are convinced that this Zeitgeist of entrepreneurship will drastically speed up innovation, especially in developing countries like Indonesia.

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Influenced by watching the tv-show Shark Tank every day, we have recently been writing a lot about “tech enabled” entrepreneurship and how we believe tech is lowering the barriers to doing business. However, we did not really substantiate the importance that entrepreneurship has. In this article we dig deeper.

Academics see entrepreneurs as the innovators, driving productivity and economic growth
Economic studies from around the world have linked entrepreneurship with rapid job creation, GDP growth, and long-term productivity increases. Indeed, in the academic explanation of modern growth – the period in which the per capita wealth generation went ballistic in the West after the 1700s – much weight is placed on the innovating role of the entrepreneur as the agent of “creative destruction” and “organiser” of capital and labour.

Many academics believe that such innovation on the back of entrepreneurship becomes especially more important as economies move from being resource-intensive to knowledge-intensive – a stage many developing markets currently find themselves in.

SME’s as vessel of entrepreneurial activity, play a major role in employment and productivity
In the study of economic development, SMEs are seen as the vessels for entrepreneurship. While their label may not signify great magnitude or prestige, one cannot overemphasize the importance that small and medium-sized enterprises (SMEs) play in the global economy.

They contribute up to 60% of total employment and up to 40% of national income (GDP) in emerging economies, according the World Bank. Seeing the essential role of SMEs in a nation’s development, the World Bank approved more than US$ 10 billion in SME support programmes over the period of 1998-2003.

The above stresses the important role entrepreneurs play in contributing to employment and adding to the greater well-being of society, especially in developing countries.

Emerging Markets Leapfrogging into the Future
In the book Why Nations Fail, the M.I.T. economist Daron Acemoglu and the Harvard political scientist James A. Robinson make a strong case for entrepreneurship. However, they also argue that in many developing countries, entry barriers are playing a crucial role for aspiring entrepreneurs. Powerful groups often stand against economic progress, in fear that their economic privileges will be lost.

With their history characterized by authoritarianism and cronyism, developing countries can benefit enormously from the equalizing power of entrepreneurship.

These nations are in an advantageous position to innovate. For example, leapfrogging – using the lack of existing infrastructure as an opportunity to adopt the most advanced methods – has been an effective approach for developing markets. Instead of developing their own technology from scratch, they can adopt technologies created elsewhere.

Often used examples are how low-income countries that never established a telecommunications landline infrastructure or a retail banking system, bypassed those development stages with the use of mobile phones and the innovative financial services now made readily available.
Some examples of technologies that are expected to be used in emerging markets to leapfrog are blockchain, cloud computing, and solar power.

Empower the entrepreneurs
History has shown that countries that allow the whole entrepreneurship process to happen – from having an idea, starting a firm, and getting a loan – tend to see more rapid growth. Emerging markets are well positioned to let technology drive their economies forward. In Indonesia we see things are starting to take off. We are excited to see how things will play out.

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The rise of ride-hailing applications has transformed the commuting habits of millions of citizens around the world. But its effects have been greater felt in developing countries where the amount of traffic has been increasing at an alarming rate; public transportation has become inefficient, inadequate, or too expensive; and populations continue to grow but public infrastructures remain lacking.

In Indonesia, ride-hailing company Go-Jek has partnered up with over a million of drivers. To compare, Astra International, the biggest Indonesian conglomerate, only has 226 thousand people working full time across its 226 subsidiaries. Within just a few years, the Go-Jek has created a super app with enormous economies of scope, offering numerous services such as food and parcel delivery, cleaning services, repair & maintenance services, etc.

The company’s digital wallet, Go-Pay is widely considered to be the biggest e-wallet in the country and is expected to play an important role in providing credit to Indonesia’s unbanked population.  The economic and social impact that Go-Jek is having in Indonesia is immense.

Looking at the success story of Go-Jek in Indonesia, we saw opportunities in ride-hailing apps in African countries and Bangladesh. These countries have similarities to Indonesia: such as cogested traffic, high population density, and an attractive economic backdrop.

Being Safe(boda) in Uganda

Safeboda started out in Kampala, the capital of Uganda, which has 1.4 million people and is plagued by heavy traffic. The city has 10 fatalities per day due to road traffic accidents – the highest level in East Africa. The solution for its heavy traffic, like Jakarta, exists in conventional motorcycle taxis called Boda-boda. According to Uber Africa’s General Manager Alon Lits, there are nearly 2 million weekly motorcycle taxi trips happening in Kampala per week.

Ricky Rapa Thomson, one of the co-founder of Safeboda who used to make a living as a motorcycle taxi driver.
Source: PC Tech Magazine

However, conventional motorcycle taxis are often unsafe, require the client to negotiate prices and drivers often (claim to) have no change. The emergence of digital ride-hailing services has created a massive opportunity in the city.

Safeboda started in 2018 with only 1,000 drivers. By end of the year, they had more than 8,000 drivers registering over 1 million rides a month. They’ve also expanded to neighbouring country Kenya, with plans to expand to East Africa.

Carving a Path(ao) in Bangladesh

Meanwhile, Bangladesh, home to 165 million people and the fifth largest mobile market globally, is another attractive market for a ride-hailing platform. In the past decade, the Bangladesh economy has consistently grown and beat most regional peers; their GDP growth averaged at 6.6% and is expected to record an impressive 7.8% growth in 2018.

Ride-hailing Pathao has had the first mover advantage in this area and has financial backing from a strong strategic partner.

Started by three graduates from a local university in 2015, Pathao’s journey wasn’t easy considering that before the company began, Bangladesh had no culture of motorcycle taxis. They went on the ground and pushed this concept to the market. Eventually, they found success.

Hussain M Elius, co-founder of Pathao spoke at TED. Click here to watch (left), Pathao’s drivers (right)
Source: tedxdhaka.com.bd, Thedailystar.net

In November 2017, Go-jek participated in their series A round which helped them expand to multiple services such as Pathao Food and Pathao Cars. According to Techcrunch, Pathao is valued at over US$ 100 million based on their pre-series B US$10 million round led by Go-Jek.

Aside from being in a good position to become the leading ride-hailing platform in the country, the company, has provided opportunities for millions of Bangladeshis. According to its founder and CEO, drivers on its platform are able to make more than twice the average salary in Bangladesh.

Jumping on the ride-hailing wagon

We wonder whether Pathao and Safeboda can change South Asia and Africa the way Go-Jek and Grab have changed Southeast Asia. So far things seems to be on the right track.

 

 

 

 

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There must be something in the water in Indonesia. Because in the span of just three years, the country managed to produce four unicorns – startups the have reached at least US $1 billion in valuation.

Young people creating new businesses at scale is relatively new in Indonesia, as for decades, Indonesia’s formal economy was dominated by few incumbents. After the country’s independence in 1945, cronyism ruled as the prosperity of individuals remained highly dependent on personal relations with leading members of the government.

The shift from oligarchy to unicorn maker is remarkable, driven by the unique combination of a supportive government, the public’s increased access to technology, and the youth’s growing desire to launch their own business ventures.

Power in the Hands of Few
During the era of President Soeharto, the South East Asian nation saw the rise of politically connected companies who, together, came to control most of the formal economy.

Despite deregulations that had monopolies and privileges revoked in the late nineties, the political and economic systems of Indonesia still have features of an oligarchy today.

In 2014, for example, the four largest privately-held Indonesian conglomerates that have assets listed on the Indonesia Stock Exchange (IDX) are the Astra Group, Salim Group, Lippo Group, and Sinar Mas Group. Combined, all listed companies controlled by these four groups accounted for 17.50% of total market capitalisation on the IDX.

In addition, with 25.84% of total market cap, state-controlled listed companies (SOEs) also remained dominant players in the country’s economy.

Because of all these factors, middle-class hopes for a stable income and secure future have typically rested on a job as civil servant, which guarantees life-long employment and an early pension – not exactly an environment that cultivates innovation. However, things are now changing in Indonesia.

Tech Offering Opportunities to Many
Not only is the country’s current president, Jokowi, the first president who doesn’t belong to the traditional political, religious, or military elite; Indonesia’s tech scene is also rapidly transforming the playing field for aspiring entrepreneurs.

Young entrepreneurs are breaking through barriers on the back of tech, connectivity, and a supportive government. The proliferation of smartphones and the creation of digital applications has enabled young entrepreneurs to by-pass the existing SOE- and conglomerate-dominated market structures and spawned four unicorns in just three years’ time.

We’re talking about ride-hailing company Go-jek, travel site Traveloka, and market places Bukalapak and Tokopedia. New unicorns are expected to rise in the underdeveloped education and healthcare sectors, with the potential to leapfrog Indonesia’s development.

With Help from The Government
This, of course, could not have happened without a supportive government. While governments in other countries like Hong Kong prohibited ride-hailing companies under the pressure of incumbents, the Indonesian government resisted such pressures and tried to balance the needs of both the public and the drivers.

To further support Indonesia’s digital ecosystem, the government also developed several programmes. These include SMEs Go Online; Farmers and Fisherman Go Online; and Nexticorn, which aims to provide start-up founders with access to suitable investors. The government also pledged to strengthen its e-commerce roadmap and digital certification this year.

76 year old muslim scholar, Jokowi’s Vice President-elect, Maruf Amin mentioned that Indonesia soon will have a decacorn (a start-up valuation with over US$ 10bn).
Source: Tribunnews

The role of Indonesia’s government has shifted from being just a regulator, to now more of a facilitator.

Looking to the Future
The success of tech in the country has inspired many, initiating a positive feedback loop. In economic literature, entrepreneurs not only bring new goods to the market, but also generate information about the profitability of new activities. And in Indonesia, the four mentioned unicorns have fueled optimism over the digital economy, inspiring the Indonesian youth and attracting investors in the process.

Mobile commerce start-ups now rank as the best companies to work for among millennials. In addition, according to a 2018 survey by IDN Research Institute, a staggering 69.1% of millennials want to be entrepreneurs. And according to the Ministry of Cooperatives and SMEs, Indonesia’s entrepreneurship ratio doubled from 1.55% in 2014 to 3.1% in 2017.

All of this means good news for aspiring entrepreneurs with innovative ideas looking to launch, as well as existing business owners hoping to expand. For us as investors this implies that we need to carefully consider the vulnerability of indonesia’s incumbent conglomerates and SOE’s, as well as the opportunities that Indonesia’s youth are bringing to the table.

Indonesian Millennial Superheroes: William Tanuwijaya (Tokopedia), Diajeng Lestari (HijUp), Jonathan Sudharta (Halodoc), and Nadiem Makarim (Go-jek)
Source: Kalimat.id, Moneysmart.id, Otcdigest.id, vbprofiles.com

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Counting our blessings
One day in San Francisco, a rare taxi trip took an interesting turn. If I had not spoken to the cab driver, a Russian man, I would not have heard his captivating story.

He was one of many who were attracted to the idea of moving to America, the land of opportunity. In the year 2000, he was so convinced that Russia was a lost cause, that he left his prestigious job as a pilot in Russia and took his wife and 14-year-old son to the USA to pursue his lifelong dream of becoming a computer programmer.

The second he stepped foot on ‘the land of the free’, he took a coding class at a local college. Because of his limited ability to speak English, he became a taxi driver to earn some money in the meantime.

Unfortunately for him, by the time he graduated college in 2001, the dot-com bubble had burst. Even if he had other skills, the prospects for a 40-year-old newly graduated programmer looked unattractive when other choices were abundant.

As the sole breadwinner, he had no choice but to continue driving taxis. To this day.

This man has every reason to feel as if the world is unfairly against him.

Firstly, because now, after experiencing first-hand the dot-com bubble burst, the taxi industry is being challenged by services such as Uber and Lyft. He estimated 40K Uber and Lyft cars compared to 2K taxis available in SF.

Secondly, he left his prestigious position as a pilot, and must work long hours driving a cab.

Thirdly, many of his friends who remained in Russia are doing very well. He probably felt guilt and regret leaving Russia just to face major changes in the industries that he has been working in.

But this man is a happy chatty one. Instead of focusing on what went wrong, he focuses on what went right in his life.

Apparently, his son inherited his interest in coding. His son graduated from a coding school and now works at a tech company in Palo Alto, as an engineer.

There is no trace of bitterness from this man, even when telling me about his successful friends in Russia. Rather he is grateful for his son’s opportunities.

We can choose to be happy or not by focusing on counting our blessings instead of focusing on the ‘mistakes we made in life’.

The choice is ours and I want to start counting my blessings again.

Tech start-up, prepared for a wild ride?
We recently attended two (separate) start-up events in Jakarta and were amazed by the enthusiasm and energy of the start-up participants.

In contrast to just a few years ago when Heyokha started, hope and optimism now abound. Simply hard not to share the buoyancy as the young (and not so young too) talents are encouraged by the success of Gojek, Traveloka, Tokopedia, and Bukalapak. Some brave souls even decided to sell their businesses to fund their start-ups’ dreams and ideas.

We are obviously very pleased to see the development on the ground in the tech space in Indonesia. Nevertheless, many start-up founders seem to have the idea that the tsunami of money to fund start-up ideas will go on forever.

At one of the events, we noticed a lack of enthusiasm at the ‘How to control your tech expenses” presentation and overwhelming enthusiasm at the “Road to IPO” presentation. While we respect many founders’ shoot-for-the-moon attitude, we also think the startup’s “less exciting” aspects, such as managing expenses, are just as important.

One obvious challenge for the start-up industry is the extreme volatility as described by the story of the Russian cab driver above. This volatility will only be exacerbated by the ongoing reversal of the wall of money from the world’s central banks.

One fine example of how liquidity factors affect tech valuations is the case of Sea Limited (SE US). Sea is the only listed tech play in Southeast Asia with two significant business arms: Garena, a game publisher/developer and Shopee, an e-commerce platform.

Sea’s market cap at the moment is only US$ 3.9bn, which is close to Garena’s (before they rebranded to Sea Limited and Shopee was only a tiny part of the total business) Series D in 2016 (US$3.75bn). This means that the market is not attaching any value to its e-commerce business, Shopee. If we were to value Garena at 15x EV/EBITDA (a slight discount to NetEase), Garena alone would be worth US$ 4.4bn which means Shopee valuation would be negative –US$300mn!

Meanwhile, Indonesia’s leading e-commerce company, Tokopedia recently raised funding at a US$ 7bn valuation. If we were to use the same multiple which is approximately 1x EV-to-GMV, Shopee alone would be valued at US$ 10bn. We are not advocating that one or the other is mispriced, rather highlighting that the huge difference in valuations is largely attributable to a difference in liquidity in the private and public market at this point in time.

We are also not forecasting a tech sector reckoning to follow in the private tech space, but simply want to remind ourselves that it is not always sunshine and rainbows in the tech start-up world. The life of the Russian taxi driver in San Francisco above bears testament to life in tech. Count our blessings but be prepared for the worst.

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Recently, the Indonesian seed maker BISI International (BISI), faced headwinds due to weather disruptions. With inadequate production and inventory levels, the company had little inventory to sell, almost entirely erasing net profit during the first half of 2018. Consequently, the stock price declined following the earnings result announcement.

“In the short run, the market is a voting machine; in the long run, however, it becomes a weighing machine.”
-Benjamin Graham-

As illustrated by the chart below, BISI has near-zero corn seed inventory since the past year as production capacity can’t keep up with the strong demand growth. This explains the company’s earnings volatility in recent quarters; sales volume has been entirely dependent on production, whereas production volume is highly dependent on weather.

Historically, quarterly earnings have always been volatile. However, seasonally adjusted growth is very consistent on an annual basis, as illustrated by the rolling 4 quarter earnings chart below. We are seeing the same scenario this year; net profit in the single quarter of 3Q18 alone has exceeded last year’s nine months profit, fully compensating for the disruption in the past two quarters. Also, 4Q18 earnings will be helped by an increase in pesticide sales as a lagging effect from strong seed sales in the previous quarter.

Going forward, earnings volatility will become less of a concern. BISI acquired a processing facility from Monsanto in November 2017, increasing its production capacity by 60%. This will allow the company to ramp up production to maintain a healthier inventory level for times of unfavorable weather conditions.

But this is just the beginning of the story. Not only the short-term concerns are addressed, but the more important global trend and long-term outlook are also promising.

Additional corn demand from ethanol mandates

Helped by rising oil prices, we are seeing an increasing number of countries imposing higher ethanol mandates. Global ethanol production has surged by more than five-fold between 2001 and 2016 and the trend is not slowing down; many countries have medium-term targets to increase ethanol blend rates in fuel as illustrated by the chart below.

More importantly, in the past year, the two biggest economies of the world, the US and China, have announced new mandates for higher ethanol fuel content. In 2017, China announced its plan to impose 10% minimum ethanol content in fuel. Moreover, the US recently announced the plan to lift the ban on fuel with 15% ethanol content during summer months.

In total, these two mandates alone create an enormous 80mn tons of additional corn demand per year as the likely feedstock for ethanol. As a comparison, the US, as the top global producer, produces 371mn tons of corn, and Indonesia only produced 28mn tons in 2017.

Upside optionality from climate change

In the past 22 years, the increase in food production came almost entirely from yield improvement instead of farm area, mainly driven by GM seed adoption. However, there is a limit on GM seed adoption and we are seeing this rate plateau. Furthermore, climate change is weighing down crop yield.

A study by the US Proceedings of the National Academy of Sciences (PNAS) shows that for each degree Celsius increase in global temperature, corn yields are expected to decrease by 7.4%, wheat by 6%, rice by 3.2%, and soybean by 3.2%.

The top three corn and soybean exporting countries’ GMO seed adoption has now maxed out. Yield is set to be plateauing?
Source: US Department of Agriculture

Assuming that yield improvement is no longer a viable way to really increase production, then the growth should come from increased farm area or number of plantings; both suggest higher seed demand. Climate change also increases the frequency of extreme weather and the risk of food inflation.

Although we are not advocating that Indonesia will be among the top global corn exporters (since GM seed is not permitted), Indonesia is still a good candidate to become a corn exporter in the Southeast Asia market owing to the proximity compared to major corn exporters. In fact, Indonesia’s corn export has surged to $72.8mn in 10M18, from less than $1mn in 10M17.

Despite the positive developments, BISI is still under-appreciated

As the biggest corn seed producer in Indonesia, BISI will be a major beneficiary in the fast-growing industry. The company has a robust growth outlook, strong balance sheet, cash flow, and dividend generation, as well as attractive valuation.

Dividend payout ratio for the fiscal year 2017 was 74%, translating to a lucrative 6.25% yield while still maintaining a solid double-digit earnings growth outlook in the coming years.

Yet, its stock price is still under-appreciated by the market. Even after addressing concerns on earnings volatility, the stock price has not recovered. Considering its growth potential, valuation is very attractive at only 9x P/E.

The ‘what if’ question on Indonesian 2019 election

We are soon entering the 2019 election year for Indonesia. Since government policies play an important role in Indonesia’s agriculture sector, it is important to study how the industry will be impacted.

If President Jokowi manages to secure a second term, it is obvious that he will continue the reform agenda and we might even see the efforts accelerating. The infrastructure development under Jokowi administration is not yet over and we have yet to realize the full effect that it will bring.

Assuming the opposition wins, we can also safely assume that the agriculture sector will continue to grow rapidly considering the pro-agriculture policies based on the vision and mission statements. One major initiative is the target to add 2 million hectares of farmland to create food self-sufficiency.

Also specified in their mission statement is the effort to promote Indonesia’s ethanol industry, with the goal to create jobs and reduce the dependency of oil imports. This initiative will provide additional upside for corn demand as the likely feedstock for ethanol.

Hence, we can remain assured that Indonesia’s agriculture sector will continue to grow regardless of the election outcome.

Admin heyokha

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