Carousell will have to clean up marketplace image as it eyes SPAC deal

Carousell, a Singapore-based online classifieds market operator, is considering listing in the United States through a merger with a blank check company, according to people with knowledge of the matter.

Carousell is a mobile marketplace app that makes selling your stuff as easy as taking a picture. Launched in 2012, investors include Telenor Group, Rakuten Ventures, Naver and Sequoia Capital India. It operates in Southeast Asia, Taiwan and Hong Kong.

The startup is working with an advisor on the potential transaction that could value the company up to $ 1.5 billion, said the people, who asked not to be named because the process is private. A listing through a Special Purpose Acquisition Company (SPAC) could take place as early as the end of this year, residents said.

The PSPC deal could happen as early as this year, according to insider knowledge / Image credit: Carousell

A blank check company or PSPC raises capital through an Initial Public Offering (IPO) for the purpose of acquiring an existing operating company. Subsequently, an operating company may merge with or be acquired by the listed PSPC and become a listed company instead of performing its own IPO.

Carousell is one of the world’s largest and fastest growing person-to-person mobile markets, according to technology site e27. Over 8 million ads have been created on Carousell, with millions of articles successfully processed.

The company has come a long way since its inception in 2012 / Image credit: Carousell

Millennials make up 70 percent of Carousell visitors and a third of their income comes from used vehicle sales.

As Carousell plans to enter the realm of public investment, Vulcan Post examines the various risks the company will need to manage to avoid potential public backlash, scrutiny, and a negative impact on stocks.

It must improve its image on the market

In order for the company to woo investors and get listed, it will need to rethink its image as a known marketplace for e-commerce scams.

In the Singapore Police Force (SPF) Annual Crime Report 2020, Carousell continued to have the largest share of e-commerce scams, with 1,319 cases, or 39.3%, of all commerce scams. electronics reported in the country. Common fraudulent transactions involved the sale of electronic gadgets, Covid-19 related items, and personal accessories.

1 in 3 S’pore e-commerce scams last year took place via the Carousell app / Image credit: Singapore Police Force

Carousell has been actively working to clean up its market. He said in a press release last year that there had been a drop in the fraud rate in 2020, with just 3 in 10,000 fraudulent transactions.

Carousell said it has reduced its overall share in the percentage of all ecommerce scams.

The company said the drop in fraud was achieved through Carousell’s continued investment in market security and a strong partnership with authorities. He claimed that it had been recognized by the SPF as the most favorable online marketplace to collaborate with its dedicated anti-scam center to fight fraud in Singapore.

Common fraudulent transactions include sales of electronic gadgets, Covid-19 related items / Image credit: SPF, Facebook users

The company added that it has a team of moderators who remove bloated ads and suspend users when necessary.

It has also invested heavily in improving its technological capabilities on this front. Since the start of 2020, it has nearly doubled the number of engineers dedicated to market security and improved the detection of scam patterns, with the percentage of suspicious accounts detected and suspended increasing automatically by over 20%.

Carousell app with safety messages / Image credit: Carousell

The company is also encouraging users to opt for Carousell Protection, its trusted escrow payment solution, which provides reassurance to users by suspending payment until a transaction is verified by both buyer and seller.

During Covid-19, he said it was mandatory that Carousell ads in certain high-risk categories, including masks and electronics, be enabled by Carousell Protection.

Burn rate risks

With the massive effort required to tackle e-commerce crimes among its millions of buy and sell ads, the company will need to hire large teams to handle this problem.

And with that, higher operating costs.

Looking at regulatory filings for the fiscal year ended December 2019 – or we can call it the pre-pandemic era – Carousell had more than doubled its revenue to $ 15.7 million, supported by its advertising strategy.

However, Carousell also worsened its net loss to $ 39.4 million from $ 25 million a year earlier. The main drag was US $ 28.8 million in personnel costs, up from US $ 17.7 million a year ago.

According to the Craft research site, Carousell has around 554 employees this month. In a Straits Times article published two weeks ago, he said Carousell employs around 250 people in Singapore and has more than 700 people in the region.

The Carousell Team / Image Credit: Carousell

When countries start to adjust to the new normal and live with endemic Covid-19, there will bound to be readjustments in online interest in some platforms.

To achieve its goals, Carousell will need to balance its growth with hiring rates. This means that he has to significantly increase his income to cover the expenses or may have to reduce his expenditure on labor.

The company has rewarded and hasn’t neglected its employees as it grew, which is not always seen in the startup world and is a laudable act. For example, it rewarded them via the Naver agreement, by repurchasing employee stock options.

We note that during the hay days of a business it is important to celebrate victories.

But businesses should also remember that these are uncertain times right now. Cost management has to be a big factor in the minds of every startup, no matter what growth spurt it is going through.

The repurchase of stock options must be balanced with prudent spending or spending in other business aspects.

12-fold increase in Series C shares over A shares

To understand Carousell’s growth and value proposition, we can look at the value of its stock over the years.

Just looking at the Naver deal in September of last year shows the growth in value of Carousell. The Naver deal was made with the goal of using technology to make selling and buying even easier and more efficient.

Of the US $ 80 million deal with Naver, it appears only part of it was in newly issued shares.

Growth in Carousell’s share over the years / Image credit: Vulcan Post, Carousell

Regulatory documents show that Naver and two other vehicles, Mirae Asset-Naver Asia Growth Investment and New Horizon Investment I, bought around US $ 23 million in new shares. They paid US $ 12.75 per common share and US $ 15.94 per “Sub-Class C” preferred share.

Naver and two other vehicles also purchased more than 4.3 million common and preferred shares from previous investors.

The vendors included Carousell co-founders Quek Siu Rui, Marcus Tan and Lucas Ngoo, angel investor Darius Cheung, as well as Rakuten, Sequoia India, 500 Startups, Golden Gate Ventures and Quest Ventures.

VentureCap Insights, an intelligence research platform, showed that Carousell’s Series A shares were issued at US $ 1.13 per share and Series B shares at US $ 11.05 per share.

Carousell’s valuation has grown over the years / Image Credit: Carousell

This represents a 12-fold return for investors who own Series A shares, if we were to assume that the Naver consortium purchased those shares at a 15 percent discount from the last issue price.

A Series B investor who sells his shares would earn a return of 1.2 times per share.

Ecommerce boom to prop up Carousell’s IPO path

2020 has been a banner year for e-commerce. Consumers in Singapore are shopping online more than ever before, whether they are buying retail products, groceries, or food for delivery.

Data analytics firm GlobalData said e-commerce sales in Singapore accelerated further due to Covid-19. The compound annual growth rate of the e-commerce market reached S $ 8.3 billion in 2019 and is expected to reach S $ 9.5 billion in 2020.

“The increase in consumer preference for online shopping during the epidemic will have a lasting effect on the country’s e-commerce market,” GlobalData said.

Carousell’s Market Position / Image Credit: Craft

As Carousell’s accelerated growth rate was well sustained even before the pandemic, it has allowed the company to embark on a growth sprint over the past three years.

In November 2019, Carousell merged with 701Search, a classifieds company and subsidiary of Norwegian telecommunications company Telenor Group which has stakes throughout Southeast Asia. At the time, Carousell was valued at over US $ 850 million.

Carousell Website Traffic / Image Credit: Craft

Then, in September 2020, Carousell landed an investment of US $ 80 million from South Korean tech company Naver to achieve a valuation of US $ 900 million, heading towards unicorn status.

In April, Carousell announced the launch of Carousell Auto Group, which includes its car classifieds platforms across the region.

If plans for Carousell’s PSPC deal come to fruition, the deal is expected to value the company up to US $ 1.5 billion.


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Featured Image Credit: Carousell

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