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The Co-Working Story Pre-COVID

Looking at pre-COVID statistics of the co-working sector is important in understanding its growth potential post-COVID. In a research report published in September 2019, Colliers International shared that flexible workspaces, comprising co-working spaces and serviced offices, had risen in prominence in recent years to become a mainstream real estate asset class globally. The number of co-working spaces globally had grown by a staggering compound annual growth rate of 121% between 2005 and 2018.

In Asia, as of Q1 2020, flexible workspaces had already accounted for more than 3% of net lettable area (NLA) in most markets compared to less than 2% in 2017.

Source: Colliers International Flexible Workspace 2020 APAC

Singapore represented the most mature co-working market in SE Asia. Singapore’s flexible workspaces accounted for 3.7 million sq ft of NLA of commercial space island-wide in 2018 – more than treble the 1.2 million sq ft available in 2015.

The Lockdown Begins

COVID-driven lockdowns started the world’s biggest work-from-home (WFH) experiment in early 2020. Armed with WiFi and a computer, the majority of office workers took to WFH with ease. It was clear that WFH offered a credible option – no time wasted commuting, increased productivity, no need to secure the large office long-term lease with high rental component. At the time, it was fair to also question the continued relevance of co-working spaces given WFH arrangements and social distancing.

Genesis’ portfolio company GoWork, Indonesia’s premier co-working space operator, had just turned EBITDA positive in December 2019. Expansion plans had to be frozen and the company acted swiftly to refine its operating SOP in order to cope with the new normal. Go-Rework (the parent company of GoWork) adapted quickly to mandated occupancy reduction, customers’ calls for split operations, social distancing, health checks etc. Taking a long-term view of the market, Go-Rework doubled efforts to sign-up enterprise clients that now required decentralized office spaces, and further leveraged their multilocation footprint in Jakarta allowing enterprises to split their teams across various GoWork locations for business continuity planning (BCP) purposes.

Key Observations Of Co-Working Spaces Globally During Covid

Demand from corporates is the biggest expansion driver – co-working is now a business solution, not just a real estate alternative.
Property developers are making co-working spaces a staple: for real estate owners, the presence of a co-working space in an office building or retail mall with 200-300 members has plenty of positive knock-on effects for retail and F&B in the same location.
Corporates increasingly use co-working spaces to house innovation teams. A deliberate strategy to locate innovation teams in a startup-like environment to promote independence and decentralised thinking.
Southeast Asia is a key battleground for dominance amongst operators with consolidation gaining momentum
Scale is important. Go-Rework itself, is the product of a merger between GoWork and ReWork in 2018. It is now the lead premium co-working space operator in Indonesia.

Looking ahead to 2021

Surveys have shown that extended WFH is not sustainable. A majority of employees (and employers) prefer a conducive office environment as it allows for greater focus and productivity, team collaboration, and human connection. In fact, Go-Rework has already reported a rebound to pre-COVID demand and revenues. Thus, while COVID has slowed the growth of co-working in the early phases of the pandemic, it has since proven to be a silver lining. It is expected that co-working spaces will play a key role as the traditional office model continues to get disrupted.

For the foreseeable future, corporates are expected to operate on a hybrid WFH /WFO model and co-working spaces are expected to be central to this evolution.

Source: JLL Human Performance Survey, May 2020

2020 has been a bear market for human folk. But on the other side of the fence, 2020 has also accelerated years of change in the way companies in all sectors and regions do business. Digital adoption has taken a quantum leap at both the organisational and industry levels.

When Sequoia Capital sent out the feared Black Swan warning in March 2020, the entire venture community took serious notice of what may lie ahead. Venture funds paused new investments in April and May 2020, and refocused on their portfolio companies. Companies of all sizes were impacted, and across the board, cost reductions were implemented in anticipation of a prolonged winter.

Billions of government stimulus dollars temporarily replaced venture dollars to ensure that all companies, including VC-backed ones, will survive the harsh(est) winter.

As the pandemic unfolded and the world became more isolated, turbulent times would seem to benefit technology companies, especially companies focused on the digital world. Adoption of cloud technology was ubiquitous. Zoom became a verb. It was no longer taboo to meet online versus having a coffee offline.

On the back of this, venture capital funds achieved record fundraising levels in 2020 amidst challenging new-normal conditions. Venture capital funds in the U.S. raised a record $69 billion in 2020, edging past a 2018 record and defying the odds amid a pandemic-rattled economy.

Southeast Asia VCs also kept a brisk pace: Sequoia India announced in July 2020 a fresh commitment of $1.35 billion in two new India/Southeast Asia funds – one is a $525 million venture fund and the other a $825 million growth fund. Vertex Ventures completed the final close of its Southeast Asia and India fund at $305 million. B Capital also sealed its $820 million second global fund targeted for B2B growth stage investments. Openspace Ventures completed a first close of its $200m Fund III. East Ventures announced the first close of its $88 million Fund VIII specifically designed for digital companies emerging in the post-lockdown aftermath of the Covid-19 pandemic. These funds will be hunting for exciting deals across Southeast Asia over the next 24 to 36 months, which will clearly pave the way for venture debt providers.

After a quiet March to May, resilience in venture investments was seen in the second half 2020 with $76.4 billion in venture funding worldwide. This represented an increase of 1% quarter over quarter and 9% year over year. The bulk of this funding went to growth-stage companies where rounds above $100 million accounted for 61% of funding. Angel and early investments were down as VCs sought to accelerate the growth of their existing portfolio companies and those nearer an IPO event.

In Southeast Asia, start-ups raised $5.6 billion in the first half of 2020, with most of these funds going to Series B and C rounds. While statistics for the final two quarters are not out yet, we expect numbers to be on par with previous years (if not better).

One of the contributory factors seems to be a flurry of exits via IPO. The red-hot technology IPO market saw big-name companies like Palantir, Asana and Snowflake, Airbnb and Doordash all making it to the gong. Airbnb garnered an enviable $86.5 billion valuation surpassing that of Marriot and Hilton combined. Zoom went from a $1 billion valuation to $116 billion in less than two years. Indonesia’s unicorn Tokopedia has announced its dual listing plan – domestic and US – to raise funding of $1 billion. This will certainly excite the entrepreneur community in Southeast Asia where the typical exit for a young company has traditionally been via the M&A route.

Heading into 2021, there is an even greater air of optimism that seems to be shaping the industry. We expect to see more healthcare companies funded, with Biotech and Pharma deals leading the charge. Digital transformation will continue to play a huge role in corporate development but also at the country level in moving the general population paper-less.

Fintechs in their respective silos, be it payment, remittance, advisory, will start to take shape and may see consolidation as digital banks emerge. We haven’t even talked about SPACs (Special Purpose Acquisition Vehicles) which may have an important part to play in the maturing ecosystem.

Most critically, from a purely venture debt perspective, PitchBook’s 2021 Venture Capital Outlook forecasts that venture debt in the US will continue a string of record years, surpassing 2,600 deals and $25 billion originated for the 4th consecutive year. This is a strong indication for Southeast Asia.

Given these meaningful developments, headwinds notwithstanding, Genesis believes that the broader tech ecosystem is certainly maturing in Southeast Asia, albeit more clearly in Singapore and Indonesia, the region’s current incumbents. In fact, we have observed that the result of the (unfortunate) pandemic, coupled with concerns regarding sustainability from the WeWork collapse, has reorientated entrepreneurs in Southeast Asia towards prudence and sustainable growth.

Genesis is in a strong position to continue its market leadership in the venture lending space in Southeast Asia and will look to capitalise on the strong funding wave that we expect in 2021/22.

Investor confidence is on the rise in Southeast Asia. Statistics indicate that VCs are again allocating additional resources and hunting for deals. According to a South China Morning Post (SCMP) report published recently, COVID-19 is unlikely to be a damper for Southeast Asian PE and VC firms which are flush with US$8.7 billion in unspent cash. However, the shift will come in the form of investing in later rounds where investors are expected to double down on their winning bets. This bodes well for venture debt and growth capital funding although this might be impacted by the recurrence of Covid infection waves around the world. Similarly, we observe various companies within the Genesis portfolio looking to raise additional capital to accelerate growth brought about by COVID-19 while putting in place bigger cash buffers. We expect to announce successful follow-on fund-raises of several of our portfolio companies in the next quarter.

Good companies get funded

COVID-19 has exposed how tenuous and fragile some business models are. In the first half of 2020, several notable start-ups such as iFlix (Malaysia), Sorabel (Indonesia), and Stoqo (Indonesia) ceased operations after struggling to raise additional capital. The demise of these companies may not be entirely attributed to the pandemic given that the business models and unit economics of such companies always pushed the boundaries of sustainability.

For example, some companies have consistently been struggling with managing a cash runway. Sorabel publicly declared that it has never had more than 6 months of cash since 2016; while others have seen a sharp decline in income as the pandemic barrelled across Asia.

Conversely, companies that are able to deliver growth continue to attract strong funding. NinjaVan added US$279 million new funding to scale E-commerce delivery logistics and boost B2B service. Waresix says it has closed its series B funding round, raising about US$100 million over the last year.

Payfazz is one of several tech start-ups focused on solving that problem by finding innovative ways to give more Indonesians access to financial services. The company announced that it raised a $53 million Series B led by B Capital and Insignia Ventures Partners. Taiger, a Singapore-backed artificial intelligence (AI) start-up whose clients include Bank of America, AIA Group and Banco Santander, has raised US$25 million of funding for its expansion.

Acquisition of start-ups by corporates accelerate

In the first 9 months of 2020, Southeast Asia has witnessed a flurry of acquisitions. TradeGecko was acquired by Intuit for US$80m, Synagie for US$62m by Gobi and Alibaba and Chilido for US$18m by Thailand’s CP Group. Mature start-ups like Grab and GoJek are also using consolidation as a strategy to expand into new services by acquiring smaller players. Rather than developing internally, they choose to leapfrog the cycle by buying existing companies that have been operating in the same or adjacent sectors. Gojek has acquired 13 start-ups thus far according to Crunchbase, including Vietnamese payments startup WePay and Indonesian point-of-sale platform Moka earlier this year. Grab and Traveloka have also been busy buying and integrating smaller players.

A harbinger of things to come? We certainly think so as private exits like these fuel the serial entrepreneurship cycle as well as offer an alternate exit channel apart from IPOs.

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