Indonesian ride-hailing major Gojek is open to spinning off certain business arms and may look at raising funding for these verticals separately as it attempts to extend its offerings across Southeast Asia, its president Andre Soelistyo said.
“… there will be a point in time where certain verticals may need to have their own sets of shareholders and governance as the business models get much more regulatory-related, or having a bigger ecosystem outside of our own platform,” he said during a fireside chat at our Asia PE-VC Summit 2019 held recently in Singapore.
Gojek, which started off offering solely ride-hailing services in Indonesia, now calls itself a user-focused super-app, boasting numerous features such as food delivery, payment, lending, medical, entertainment, e-commerce, on its platform which aims to “remove daily friction” for its user.
Soelistyo explained that, for the moment, it is important for Gojek to have “100 per cent ownership and control” on its various different business lines (or product groups as Gojek calls it) in order to maintain synergy to achieve group-level objectives. However, the idea of spinning off one of the more successful business arms is something Gojek will “never say never to”, he added.
According to Soelistyo, spinning off the group’s payments arm, in particular, may make the most sense, as such a business would benefit from having a bigger ecosystem. Such a move has also been proven successful by other global tech giants like eBay, which spun off PayPal, and Alibaba which took the same route with Ant Financial.
Interestingly, Gojek’s competitor Grab is reportedly in discussions with Ant Financial on spinning out Grab Financial Group.
For Gojek itself, payments is currently its largest vertical, Soelistyo confirmed. This is driven by the size of the opportunity in the industry where the number of people that transact with cash in still very large.
However, another vertical that has commanded attention and resource from Gojek is food delivery. The business offers not only a huge market for Gojek but also the highest potential of monetization.
“That’s why food has been our main focus. The size of the food business today is almost 2x of transport, because of the growth that we’ve seen. And I think that we’ve cracked the model but we want to go deeper into building larger and larger product features,” he said.
You are raising $2 billion in your current round – is that enough? [Gojek expects to close its Series F round at $2 billion before the end of the year].
To be fair, I think we have been consistently raising money for almost 12-18 months. So in some sense, it doesn’t mean that it’s the end of fundraising. Fundraising is kind of a basic tool to achieve our business objective so I think we should expect more and more to come. Having said that, I think we have shown how different we are in the approach to capital and capital raising. We don’t like to be dependent on one single source of funding, that why we have actually diversified the number of investors in our cap table, and obviously that comes with more execution, more processes to onboard maybe 20 investors in one go. But that strategy is actually unique to us so it means that whenever we approach fundraising, there are ample [number of] existing shareholders on the cap table that always follows on and becomes the base. It is also a process that justifies valuation in a much more rigorous way. So in some sense, our investors are more conservative investors. And whenever we take a valuation it’s actually much more rigorous work because of that strategy.
Does this mean that some of the existing investors on your cap table are coming back for this round?
They have. Early part of this year, Google, Tencent, and a few others have doubled up and many of those started investing about a year and a half ago.
And for the others on your cap table, are they also doubling up?
There are maybe seven to eight existing investors that have participated in this round, but obviously, in the last few months there have been multiple announcements of new investors as well and we are happy to get them on board.
We have been picking up that in the current round you are looking at not just $2 billion but may extend to $3-3.5 billion. Anything you can share on that?
I think in our business, if people want to give capital, sometimes you just cannot say no. When you need capital, usually liquidity dries up so, we’ll see. We have ample interest, but whether or not we are going to upsize the round is something we are thinking about at this moment.
Your primary competitor is reportedly raising far higher – so what is your moat? If it is not capital, is it efficiency, talent or execution?
It’s hard to always pin ourselves against competition because in reality our business is different, or at least originally our business was different. The way that we set out saying that we are not a ride-hailing company, we are a much bigger platform. That was said even four years ago when we started the journey at Gojek, and I think that comes as differentiation of business strategy.
The decision to actually build a platform that is uniquely Indonesian. So I guess the first moat is that we are in Indonesia, which is the crown jewel of Southeast Asia. The one that has the most amount of growth and us being local is one big moat, so we really understood what the consumer wants.
I think if you look at how the region is being shaped up, I think the successful super app strategy is really visible in Indonesia – hopefully in other countries as well. But I think Indonesia has been the success story. So one is being Indonesian. Second is, because of the know-how and how we can customize a lot of the digital innovation solutions to the Indonesian customers, our execution is much better.
Now, when you say execution, it is a big jargon; anyone can say I execute better, then the realization is probably also one of the biggest moat, at least from our perspective, and that’s because of our people. At the end of the day, we are an asset less company. Execution comes with the talent that is actually in Gojek, so I think we are very proud to say that we probably have one of the best management teams as a group in the industry.
It is not because Nadiem and myself or Kevin are great founders and can actually do everything ourselves, but people tend to forget that Gojek today is a combination of 14 different companies. We have acquired 14 different companies and all the founders they came from the acquisition, have stayed in the company and then become the leaders of every vertical and functional group in the organization.
So, in some sense, we are a much more partnership driven organization than a dynasty where the top guys call the shots. That has been a very successful strategy because everyone has a greater vision. In some sense, it’s like The Game of Thrones. We are fighting the great war, and all the houses come into one alliance and we are fighting the big war with the knight king, if you may.
But sticking to the execution, how hard or easy is it going to be to take this into other markets in Southeast Asia? Do you think you can replicate your Indonesia success in the other markets?
I think it needs to be approached country-by-country, because Southeast Asia is not a country, right? In Singapore, for example, everyone has a credit card here so launching a prepaid wallet is not a great idea. But having said that in certain countries that we have expanded into, for instance, Vietnam, there is already an indication that the strategy can be replicated in those markets. To give you an example, we launched two-wheeler transport at the beginning, nine weeks ago. And then we launched food about five months ago and now we are either number one or number two in food delivery in Vietnam, despite the market already having three or four big players. This is because we know how to build a food delivery business by relying on our two-wheeler transport supply side to create efficiency, to create density and being able to provide much better SLA to the customer. And then the layer on top of it: payments, merchant solutions, logistics, and stuff. So there’s that early indication that Vietnam has been a success story for us.
But when you say you’re the number one or number two player in Vietnam, is it the cities that you are in? Is the whole of Vietnam? Where do you benchmark your numbers?
It’s a classic case of he said she said perspective but using our own intel, it is nationwide. We were only in two cities, but if we combine the volume, it’s still large from a nationwide perspective.
There have recently been reports of Amazon wanting to pick up a stake in Gojek. You have a large cap table and between Grab and Gojek, there is a huge ecosystem (of investors) that has been split into two. It is interesting because Grab has Microsoft, does that mean that you get Amazon? So what’s going on?
So, first of all, it is speculation, I cannot comment more than that. But I can comment on the facts. Indonesia and Southeast Asia is a big market – the next market for big global giants. China was first, and then India, and now they look into Southeast Asia, and especially Indonesia. Google already has a big presence here, Facebook is doing multiple interesting ideas here, Alibaba is already a big investor in Lazada and Tokopedia, so everyone is already seeing this as a big market, so it is natural for companies like Amazon to think about Indonesia and Southeast Asia as well. So that’s pretty common.
The notion of a proxy war, if you may, it is probably not the right way to think about it. Again, we as a company don’t like to be the extension of a proxy war. For instance, we have Tencent on our cap table, does that mean we are fighting against Alibaba? The answer is no. We have Google on our cap table. Do we fight Facebook? The answer is no. We partner with everyone. That’s also why when we approach the fundraising strategy, we never like to depend on the big boys from an ownership perspective. No investors on our cap table own more than 10 per cent, so whatever agenda anyone has, the agenda that always gets prioritized is the agenda of Gojek.
With respect to your cap table, at some point, some of the early investors will want to see an exit. There have been reports on and off that you will look at an IPO. How far away is that?
It’s a classic question that always gets asked and the answer is always, some time away. Because I think at this stage we are not pressured to go public very quickly, and we have ample capital to continue our journey. But eventually, we will consider it. Probably maybe three years away. Its an easy answer, because three years away is still far away anyway. But I think the point is that we are progressing on preparing ourselves to get there, not just because of the IPO itself, but because governance needs to be much better. Our CFO used to be a public company CFO, so he’s putting a lot of measures to prepare us better. And from a business strategy standpoint, as we can all see in the public market, high-burning companies are seen negatively in public market today, so from a business strategy standpoint, sustainability is a big focus.
We are seeing what is happening to Uber and Lyft. What are you’re learnings at least from the global ride-hailing IPOs?
Firstly, the learning is very clear: without sustainability, this dream of high-growth, high-burn, winner takes all strategy that some investors and company is trying to implement hasn’t panned out the way that it should, because whenever there’s an interesting vertical that builds tens of billions of dollars of valuation, a company will always get competition. Even in China, DiDi was a single player in the market, but now there are three of four other players. So there is always going to be a competition. Winner takes all is not a strategy.
But there are also a lot of other interesting learnings as well, for instance, Meituan. Meituan turned profitable last quarter and its stock price soared significantly. And that is despite them fighting competition with Ele.me, backed by Alibaba. So there are examples that if you focus on operational efficiency, really good product, being disciplined on building sustainability, things will come.
The way we see it from our side is that we are a completely different company, because we are not a ride-hailing company. Ride-hailing is only less than 30 per cent of our gross transaction value. We are a user-first company. We see everything from the user’s perspective, because what we wanted to do is really to remove users’ daily life friction. And people are glorifying this word of super-app, but in reality, we want to become the best buddy of all of you on a daily basis.
You need anything, just tell us, we can get [it] efficiently and very timely. So our strategy is different because we are focused more on the user side. On a product-to-product basis, ride-hailing can be a completely continuously negative-burn business, but that’s fine because ride-hailing is the cheapest way for us to move a new customer into the platform and then we upsell them with food, payments, digital and lending, and monetize from it. And sometimes for stay-at-home moms, that never use transport that much, food delivery becomes our acquisition tool, and then we upsell them into groceries, paying bills using our platforms and so on. And for the times they do use transport, we can make money out of it. So from a strategy perspective, we do have a holistic view on how we actually move people into P&L positive but on a user-persona basis. Not on a ride-hailing or food delivery or payments perspective.
You have said in the past that food delivery could become the biggest part of your business, even bigger than ride-hailing. Do you see other verticals too becoming bigger than ride-hailing?
Payments is the largest today in our verticals of products, because not only do we do wallet – we are the largest payment processor for online and offline payment in Indonesia – debit, credit, you name it. We have the Stripe and the Square version in our collective products. And that naturally will become the largest from a transaction value perspective because the amount of people that still transact with cash in Indonesia is super large and the opportunity is very big.
But food is interesting because everyone likes to eat, so the amount by which food has grown has been tremendous. The business model is also one that has the highest potential of monetization because a lot of the merchants, their gross profit margin is about 50 per cent. To actually rent a place in a mall, the cost would be very high. So when we do things like cloud kitchen, allowing them to be delivery only, that reduces the cost significantly and therefore, we can actually monetize from the growth of their business.
That’s why food has been our main focus. The size of the food business today is almost 2x of transport. And I think that we’ve cracked the model but we want to go deeper into building larger and larger product features.
Payments is your largest vertical. There have been reports that your competitor Grab will buy out Dana to merge it with OVO, technically becoming probably the largest player if that happens. There is also now a state-owned player LinkAja. How do you see the competition?
Payments especially wallet penetration is still very, very low. So the opportunity is very large for everyone to actually grow 10x, 20x year on year. Competition is less of a problem because generally everyone is pushing and working to convert people to use wallets rather than cash. The whole industry will be better because you will be getting four balance sheets to educate the market really fast.
That’s why I think a merger this early seems weird for me because it is not like the market share has been stated with enough product stickiness, user stickiness, so I don’t know. I cannot comment on that speculation. But it will be good for them, and it will be easier for us, from two to become one, it is easier to compete with. But the general thought is that there is still a long way to go. Changing people’s behavior from cash to wallet is actually very, very difficult. Even China, it was not until maybe three years ago that offline payment – WeChat Pay and AliPay – became tremendously successful, and that requires many, many years of education and continuous investment. I think it’s way too early to say what will be the impact.
When you say it will take years to hit the inflection point that China came too, how far is Indonesia from reaching that stage? And will Indonesia be one of the markets, like India, where people use multiple wallets depending on what they’re buying?
Even in China, where wallet penetration has gone significantly big, there are at least three or four. Of course, WeChat Pay and AliPay are the dominant players but there are many wallets that exist and that people use. So, in reality, there will not be a case of winner takes all situation. India could be a lesson learnt as well, because when demonetization happened, people are rushing and converting to using the wallet, but if I ask you today, do you use a wallet for payment in Sari-Sari [a neighborhood sundry store] or something. No. Even when the regulation forces everyone to take out cash from the system, the stickiness of the habit has not been well-developed. You need a lot better innovation to get out a credit card and getting a wallet out, it’s the same friction. There needs to be more innovation that reduces the friction of how people think about using a wallet.
And to answer your other question, the answer is yes, it will be multiple that’s being used. It’s the same as when you open your wallet you would have at least four credit cards – it is going to be the same. There is no winner-takes-all.
You spoke about payments. There are reports that Grab is looking at raising capital for GrabPay as a separate entity. Will Gojek also look at raising capital for just your payments arm or maybe your food business could be spun off as a separate arm?
I think the philosophy that we have is that every product group, we call them product groups, work together for larger group-level metrics. So everyone is contributing. We already mentioned the user-focus approach. We see every product group playing a different role to support that strategy. In some sense, the synergy between all the product groups needs to be maintained to achieve the group level objective, and having 100 per cent ownership and control on those different product groups is important.
Having said that, there will be a point in time where certain verticals may need to have their own sets of shareholders and governance as the business models get much more regulatory-related, or having a bigger ecosystem outside of our own platform. So it might be the case. And naturally, for payments, that is the reason why Ant Financial was spun off from Alibaba, PayPal from eBay. It’s pretty common when they have a bigger ambition to build an ecosystem outside of the parent’s ecosystem, that might be the case. We don’t have any imminent discussions on this, but its probably one of the things which we will never say never to.
In the past, Gojek has not really spoken much about revenues or targets. Where are you overall at the group level?
I think that would get too deep into some data that we would like to preserve to ourselves. You know our gross transaction value and you can already kind of multiply that with the typical take rates that we have from the different businesses. You will get a good view of the revenue.
If I can rephrase it differently: In terms of the path to profitability, where are you today? How long will it be before you can see profitability? Will you see profitability from vertical levels first?
As I mention earlier, we don’t see profitability on a vertical basis. We do see it from a user-state perspective. I think what’s great about what happened in the recent years is that certain users that have used us every day, which means they are loyal users, the dependency on subsidy is really completely different versus the new users.
This says that the hypothesis of our mission is that once you remove someone’s friction, then they don’t see you as a promo place, but see you because of your reliability and because you can actually help to reduce their friction on a daily basis. And that has actually happened.
We have actually broken even on certain user-state as a result. But again, we don’t see it on a product basis because that user can consume food, transport, payment, and others. The component of which has made us profitable and notwithstanding we have build many many additional products that purely monetizes from those users. Things like financial services, we have what we call Pay Later, a virtual credit card, through which we charge subscription fee. These have been making a profit for us. We have enabled merchants to tap into a tool to be able to create different campaigns to grow their business by targeting our users, like and adtech proposition, which again monetizes from users. So I think from the users-state perspective there are few components of the user that is already profitable. I think we are pushing towards sustainability.
You have a very interesting play in Go-Ventures. We just want to understand what is your strategy because you have bought out a lot of companies and you have also picked up stakes in companies?
First of all, Go-Ventures is an independent arm. They are a MAS-licenced fund, and we are a cornerstone investor. We have a strategic tie-up to work closely with Go-Ventures. We never advertise Go-Ventures, it is under the radar. The strategy will be to allow us to participate in the ecosystem of interesting startups. The reason is that this strategy came about when we also decided to launch what we call a 3PP programme. You can think of it as a mini programme for WeChat, but it is curated, so not too many mini programmes can be created in the system.
We want to curate it to continue to preserve our mission statement, which is to reduce daily friction. So we have worked with 11 partners in 3PP and many of those we had invested in at the same time. So obviously the strategy is to participate in the success of those companies and those companies can actually get access to Gojek’s wealth of users, payment rails, logistics rails, and the collective know-how from the leadership as well, to help them scale up much faster.
If you see an interesting startup, at what stage do you decide Gojek wants to acquire it or Go-Ventures wants to pick up a stake in it? How do you decide these dynamics?
Again, Go-Ventures has its own decision making independence. So they’ll pick up many interesting companies according to their own objective and then obviously we as one of the strategic investors, we have the ability to see and work with those portfolios very closely. It doesn’t mean that the probability is we end up acquiring them. We like to think that the idea of continuously acquiring companies is probably not healthy for the ecosystem because a lot of very good founders want to be independent, so we don’t want to force an agenda of Gojek eventually acquiring you. That’s really bad to say. But if the chemistry is there, the synergy of how those companies can help our mission to be much more successful, then at least we have been able to work with them very closely, and they will build a relationship, and if the chemistry happens then maybe eventually there is an opportunity to acquire.
In terms of discounts and subsidies, at least in Singapore, you still seem to be offering a lot of discounts. But if you look at the larger strategy, when do you think you can wean off customers from discounts? because after a while everybody gets used to a lot of discounted stuff.
For mature products and mature countries like Indonesia, many of those doesn’t rely on subsidy much. Yes there is always going to be tactical (campaigns). Let’s say you consume food three times a month. We want to make you consume six times a month, then obviously we will offer you some cashbacks or discounts to take you up to higher frequency, so those are tactical campaigns.
But continuous 20 per cent cashback or 15 per cent cashback is all gone from the system in a mature market, mature product. Now having said that, when we come into a new country where the other guy has a dominant position like in Singapore, Vietnam, Malaysia, Thailand, of course when we come, we have to come with a proposition. The easiest [way to do this] is just discount your way up. And then once you build that reliability, and enough market share that we can actually maintain reliability, then the product speaks, and that is when discounts will actually get waived away. Its similar to our competitor. They started four years ago but really focused on food after they bought Uber’s Southeast Asia operation, so when they come into the market where we are, of course they are going to discount.
I think they do 50 per cent cashback or something. It will happen because its just a second player who wants to take market share, it’s natural to use subsidy. But for a market education standpoint, ride-hailing and food delivery, everyone has started to see the benefit of using it, versus the traditional way to transport or to eat. And that’s why people already appreciate it and it doesn’t require a lot of discounting.