Steve Melhuish, co-founder and vice chairman of PropertyGuru Group, is candid when he says does not believe in ‘Unicorns’, a term used to refer to a startup that reaches a valuation of $1 billion.
In fact, when it comes to the tech scene, Melhuish, who stepped down as chief executive of the realty portal late last year, handing over day-to-day operations to Hari V. Krishnan, says ‘Unicorn is among his least favourite words’ to describe successful startups.
Yet, the co-founder of the the region’s largest real estate portal admits that his company is not ‘far away from becoming an unicorn’.
But touching a billion dollar mark in valuation is the least of his worries, he explains, even as he adds context to what it really means for PropertyGuru or any other company to be on the ‘unicorn list’.
“Unicorn is about how much someone is willing to pay for it. A company that is a unicorn today could be a half-unicorn tomorrow. I think that when we formally hit a valuation of $1 billion-plus, then of course that is great, and our shareholders will be happy. But this is not what we talk about in our daily meetings at PropertyGuru…We never go about saying, ‘we need to become an unicorn’.”
Melhuish uses an illustration to show why the TPG Capital-backed PropertyGuru may be nearing the billion dollar valuation mark: “Our nearest competitor, iProperty was bought out at a $534-million valuation in 2015. Now, that was two years ago. Today, in all matrices we are considerably bigger than them and growing faster than them – so you can deduce your own conclusions.”
More than getting an ‘unicorn’ tag, it is PropertyGuru’s march towards another set of matrices, the first of which is to hit profitability as a group by the calendar-year end, that really excites Melhuish.
Incidentally, the company was profitable three years after its launch in 2010, but the last six years has seen it pump capital and hire talent to expand in the region.
“If you think about the organization in 2011, it was 100 per cent focused on Singapore. It was a Singapore business, and then we added Malaysia, Indonesia, and Thailand, and hired 30-50 people in each of these markets, and then invested in marketing, and getting the pricing right and building the brand – all of this took major investment.”
“And certainly, in the early days, we underestimated how hard it would be to replicate what we did in Singapore. For the first four years before we thought about expanding, we had built a really strong, reputable and fast growing business. We thought that we could just do the same thing, but realised that it would not be possible, and also that we had to invest very heavily in product tech,” he said.
This led the realty-focused portal to raise two significant funding rounds to expand operations in the region, the last being in 2015 when it bagged S$175 million ($124 million) from investors including TPG, Indonesia’s Emtek Group, and Asia Pacific-based tech venture capital firm Square Peg Capital.
It used the capital from both rounds to make a string of acquisitions including picking up a stake in Vietnam’s Batdongsan last year, making that country its fifth market in the region. Prior to that, in 2015, it had bought out Indonesian realty portals Rumah.com and RumahDijual.com.
“The losses peaked in 2014 and have been reducing ever since. The major investments have all been made. As we come into 2017, because the business model – and this is one of the things we talk too much about – is online, we are selling a virtual space essentially. The gross margins in the business are north of 80%. So once you reach a certain level of fixed costs – a leadership team, a board, a product and tech team – then to grow twenty, thirty, forty per cent, doesn’t require that same amount of capital expenditure. A small percentage of variable costs go up. We’ve been on that stretch for the last 2-3 years,” he explained.
Even as the group is slated to turn profitable by the year-end, this will largely be driven by surging revenues and its dominance in its home market. He expects the company to be profitable in two additional markets (on a standalone basis) by next year.
“So this year we will be profitable again as a group. And that has been driven not only by Singapore growing in profitability, but also by the other markets growing really fast. Last year Malaysia grew in excess of 60%. Indonesia was similar. Thailand grew as much as 50%. So the markets outside of Singapore are also contributing to the overall business in terms of growth. And 1-2 of those countries, in their own right, will turn profitable in 12-18 months or so,” Melhuish added.
With the company on the road to profitability, Melhuish said it would not have to raise another financing round for further expansion, enhancing its technologies and boosting its marketing capabilities.
In January 2016, DEALSTREETASIA had reported that PropertyGuru Group had deferred plans for an initial public offering (IPO) while adding that the company had initially planned to go public in 2016.
Melhuish shared the view that the company would explore a listing in the ‘next two to three years’ while adding that its investors were in no hurry to exit, and were confident of PropertyGuru’s long-term vision for its business.
“We are not under any fixed time scales. It has to be at the right time for the markets. It has to be the right timing for the business. The moment we enjoy having no scrutiny and tail wagging like systems.
“We have a long term business plan which we are executing. We don’t have the daily scrutiny that listed companies face where you have thousands of shareholders putting pressure on the company to perform…we are quite happy being where we are at the moment,” he added.
While discussing the listing options, Melhuish agreed that tech and internet companies faced challenges with regard to the Singapore exchange.
“The challenges with SGX have been widely reported. I’ve been quoted on this in the past and don’t want to get into this discussion. (Australia’s) ASX is attractive to tech companies in this region for a lot of reasons, because it is also relatively attractive to list there, and they’ve seen such kinds of companies over the last few years. Investors in Australia have made money from tech listings over the last 5 years – they appear to love digital, they see the growth prospects that Asia offers and they appear to understand the Asia story,” he said
He also pointed out that while Hong Kong was good in terms of valuations and liquidity, companies looking to do an IPO there required a north Asia or a China story to sustain investors’ appetite in the long run.
“The US is the most obvious choice for tech IPOs, especially in terms of valuations and liquidity. But you are under the billion (dollar) mark there, then you will be under the radar screen of analysts and liquidity,” Melhuish added.
He also declined to comment on market buzz that PropertyGuru plans to up its holdings in Vietnam’s Batdongsan. “All I can say is, they’ve built a great business, and have 8 million monthly users that is growing at about 40% annually. It is a profitable business. They are not a new business, and have been around for over 8 years to get to this position of being 4.5x bigger than their nearest competitor and having a market leadership position. They have a very strong pricing power.”
The PropertyGuru co-founder, while highlighting the company was not actively scouting new acquisitions currently, also pointed out that the funding slowdown which had intensified last year, had seen valuations becoming more rational. He was also of the view that this correction resulted in some of the players in this space having to cut costs, look at consolidation and also raise capital at reduced valuations.
While PropertyGuru is the market leader, new competitors continue to emerge, even as existing players ramp up their offerings. The Edge Property, a property portal launched two years ago by Malaysian serial entrepreneur Tong Kooi Ong, recently secured a $4 million investment from a number of individual investors.
In April, Singapore-headquartered digital property firm 99.co raised $7.9 million (S$11 million) in its latest round of financing, led by existing investors Sequoia Capital and Eduardo Saverin. East Ventures and 500 Startups had also participated in the round.
Melhuish welcomed competition and said this would push companies to innovate further, a step that would eventually benefit consumers. He also said the core of the business – property listings – would not see a slew of changes for both incumbents and new entrants.
“We haven’t seen anybody come in with completely radical game changing business models. It has always been how can we be more consistent, and how can we be better at what we are doing currently,” he said.
He also said that it would be inevitable that new competitors would continue to enter this space.
“Every time, we hear companies saying we are doing things differently, or have a different business model and a different approach to property listings – and then , within months or years they are either not around anymore, or they have reverted their model to what everyone else does. So I have not seen a new disruptive business model in this space yet – there are some changes taking place which are the rise of the digital real estate agencies. It is less disruptive to us but more disruptive to the real estate agencies,” he said.
According to Melhuish, building a successful business in this space would be a hard slog over several years.
“The first stage of our journey was around transparency. The biggest frustration for the consumer was no information, and we addressed that with about 600 articles a month – from property reviews to videos, to now doing drone videos of neighbourhoods so people can make a decision around the community they want to live in. We are making it more transparent and giving more control back in the hands of the consumer. The next stage is improving the visibility and the trust. How do you help the consumer with the last part of the process?”
“How do we make it as seamless and easy as possible? Look at how long Amazon and Alibaba have been around – 20+ years? Some people think they’ve only been around the last 2-3 years. It is a long game, it is a marathon, not a sprint. And so every year, 1-2 new players pop up. And we wish them good luck, and it’s what we have learned. We have learnt our lessons the hard way over the last nine years. In this business there is no easy route to success – it relies on building brand and brand preference,” he added.
Using the illustration of the company’s journey in Malaysia, where he claimed PropertyGuru now commanded a 40% market share, Melhuish said this required about six years of hard work with a large team on the ground, in addition to investments in technology.
“We had a five-year business plan for Malaysia, but we kind of blew through that within the first two years,” he said.