Carousell has to clean up marketplace image, manage burn rate risks as it eyes SPAC deal

Carousell, a Singapore-based online classifieds marketplace operator, is considering a US listing via a merger with a blank-cheque company, according to people with knowledge of the matter.

The startup is working with an adviser on the potential transaction that could value the company at as much as US$1.5 billion, said the people, who asked not to be named as the process is private.

A listing through a special purpose acquisition company (SPAC) could take place as soon as the end of this year, the people said.

A blank-cheque company or SPAC raises capital through an initial public offering (IPO) for the purpose of acquiring an existing operating company. Subsequently, an operating company can merge with or be acquired by the publicly traded SPAC and become a listed company in lieu of executing its own IPO.

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

Carousell is one of the world’s largest and fastest growing mobile person-to-person marketplaces, according to tech site e27. Over 8 million listings have been created on Carousell, with millions of items successfully transacted.

Millennials account for 70 per cent of Carousell’s visitors, and one-third of its revenue is from the sales of second-hand vehicles.

As Carousell looks towards entering the public investing domain, Vulcan Post takes a look at the various risks the firm will have to manage to prevent potential public backlash, scrutiny, and negative share impact.

It needs to clean up its marketplace image

For the company to woo investors and get listed, it will have to overhaul its image of being a marketplace known for e-commerce scams.

In the 2020 Singapore Police Force (SPF) annual crime brief, Carousell continued to have the highest portion of e-commerce scams with 1,319 cases ( or 39.3 per cent) of all reported e-commerce scams in the country.

Common scam transactions involved the sales of electronic gadgets, Covid-19-related items, and personal accessories.

Carousell has been actively working on cleaning up its marketplace. It said in a media release last year that there’s been a decline in fraud rate in 2020, with only three in every 10,000 transactions fraudulent.

Carousell said it had reduced its overall share in the percentage of all e-commerce scams.

The company commented that the decline in fraud was achieved through Carousell’s sustained investment in marketplace safety and strong partnership with the authorities.

It claimed that it has been recognised by the SPF as the most supportive online marketplace to collaborate with its dedicated Anti-Scam Centre to clamp down on fraud in Singapore.

The company added that it has a team of moderators that removes inflated listings and suspends users where necessary.

It also has been investing significantly in improving its tech capabilities on that front.

Since the start of 2020, it has almost doubled the number of engineers dedicated to marketplace safety and improved the detection of scam patterns, with the percentage of suspicious accounts detected and suspended automatically increasing by more than 20 per cent.

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

During Covid-19, the company said it’s mandatory for Carousell listings in selected high-risk categories, including masks and electronics, to be Carousell Protection-enabled.

Burn rate risks

With the massive efforts required to tackle e-commerce crimes among its millions of buy-and-sell postings, the company will have to hire large teams to manage that problem.

And with that, comes higher operating costs.

Taking a look at regulatory filings for the financial year ended December 2019 — or we can call it the pre-pandemic era — Carousell had more than doubled its revenue to US$15.7 million, supported by its advertising strategy.

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

According to research site Craft, Carousell has an estimated 554 employees as of this month. According to The Straits Times, Carousell employs about 250 people in Singapore and has more than 700 staff in the region.

When countries start adapting to the new normal and living with endemic Covid-19, there is bound to be some readjustments on online interest for some platforms.

To reach targets, Carousell will have to balance its growth with hiring rates. This means that it has to increase its revenue substantially to cover the expenses or may have to cut its labour spend.

The company has been rewarding and not neglecting its employees while it grows, which is a commendable act and not something always seen in the startup world. For example, it rewarded them via the Naver deal, by conducting a buyback of employee stock options.

We note that during a company’s hay days, it’s important to celebrate the wins.

But companies also have to remember that we are living in uncertain times now. Managing costs have to be a big factor in all startups’ minds, regardless of the growth spurt it experiences.

The buyback of stock options needs to strike a balance with conservative spending or expenses in other business aspects.

12-fold increase in Series C shares, compared to A shares

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

Just by observing the Naver deal in September last year, it shows the growth in value of Carousell. The Naver deal was made with the aim to use technology to make selling and buying even simpler and effective.

Out of the US$80 million in the Naver deal, it appears only a portion involved newly issued shares.

Regulatory filings show that Naver and two other vehicles, Mirae Asset-Naver Asia Growth Investment and New Horizon Investment I, bought about US$23 million in new shares. They paid US$12.75 per ordinary share and US$15.94 per “sub-class C” preference share.

Naver and two other vehicles also bought over 4.3 million ordinary and preference shares from earlier investors.

The sellers 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.

This represents a 12-time return for investors who hold Series A shares, if we were to take it that the Naver consortium bought these shares at a 15 per cent discount to the latest issue price.

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

Ecommerce boom to support Carousell’s IPO path

2020 was a banner year for e-commerce. In Singapore, consumers went online to shop more than ever before, whether they were buying retail goods, groceries, or food for delivery.

Data analytics firm GlobalData said that 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 hit S$9.5 billion in 2020.

“The rise in consumer preference for online purchases during the outbreak will have a long-lasting effect on the country’s e-commerce market,” said GlobalData.

As Carousell’s accelerated pace of growth has been well supported even before the pandemic, it has allowed the firm to get into a growth sprint over the past three years.

In November 2019, Carousell merged with 701Search, a classifieds firm and subsidiary of Norwegian telecom company Telenor Group that has business holdings across Southeast Asia. At the time, Carousell was valued at more than US$850 million.

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

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

If the plans for Carousell’s SPAC deal happens, the transaction is set to value the company at as much as US$1.5 billion.

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Featured Image Credit: Carousell