At the end of March, the AI startup company Appier received the green light to list on the Tokyo Stock Exchange (TSE), becoming Taiwan’s first digital unicorn startup. CommonWealth Magazine reveals the content of the “preliminary offering circular” being circulated among investor representatives, which offers a rare insight into the inner workings of this magnificent creature.
Appier Profile Founders: Yu Chih-han (CEO), Winnie Lee (COO), Joe Su (CTO) Founded: 2012 Headquarters: Taiwan Locations: 17 locations around the world, including Taipei, Hong Kong, Japan, Korea, Singapore, and Malaysia Number of employees: Over 400
Appier is about to be listed on the Tokyo Stock Exchange’s startup-focused Mothers (market of the high-growth and emerging stocks) board. A March 22nd report shows that Appier’s initial offering price will be 1,600 yen per share. Since Appier is offering 18.7% of its total shares, the initial public offering (IPO) is valued at approximately 30 billion yen, and 99,872,490 shares have been offered, which means that Appier’s net worth is about US$1.465 billion. That puts Appier above the threshold for unicorn startups, i.e. a private startup company with a valuation of US$1 billion or more.
This is a shot in the arm for Taiwan’s startup scene.
“For one thing, it proves that Taiwan has what it takes to make it big in the AI and SaaS markets. For another, it proves that Taiwanese startups can thrive on the world stage,” says former Minister of Science and Technology Chen Liang-Gee, who tapped Appier as the next Taiwanese unicorn when he was in office.
CommonWealth was able to acquire an English-language copy of the “preliminary offering circular”being circulated among investor representatives. The date on the document is February 24th, 2021. Disclaimers on the report proclaim the content as strictly confidential and subject to completion. The circular contains more details than the Japanese version of the bond pricing report published on the Tokyo Stock Exchange’s website. It includes a complete report of Appier’s financial numbers over a period of three years, from 2018 until the end of 2020.
Appier’s own report shows that its revenue grew by 24% year-over-year to reach US$84.21 million in 2020. Subtracting expenses and taxes will result in a net loss of 1.454 billion yen, which is a decrease of 38% year-over-year.
How does a company that is losing money pull off such an astounding market value? CommonWealth discovered four key points in the report.
Key No. 1:The Japanese and Korean markets make up 70% of total revenue; the potential for overseas success is propping up market value
One of Appier’s strongest suits is the fact that a great deal of its revenue comes from foreign markets.
During the three-year period ending in 2020, northern Asian markets like Japan and Korea contributed to 67.7% of Appier’s overall revenue. In contrast, the greater Chinese market (including Taiwan) contributed to only 22.4% of the revenue.
In other words, 80% of Appier’s revenue came from overseas. There is still a lot of room to grow, which is why the international capital market is receptive to the higher-than-average valuation.
This was always part of the plan, as envisioned by Appier cofounder Yu Chih-han.
KPMG Partner and Head of Advisory Vincent Chang was commissioned in 2014 by the international venture capital firm Sequoia Capital to conduct Series A due diligence on Appier. He recalls that Yu made it clear he would focus on the overseas markets, especially the United States and Japan. His reason was that he had spent many years in the United States, and because he saw the Japanese and Taiwanese markets as mutually complementary.
Shortly after that, Appier received an investment of US$6 million from Sequoia Capital. It was the first Taiwanese startup to secure funding from Sequoia Capital. In 2014 and 2015, Appier made headway into the Japanese and Korean markets.
Key No. 2: Core business demonstrates profitability with gross margin as high as 50%
By 2020, Appier had yet to make a profit, but its gross margin kept climbing. In the fourth quarter, it reached 50%.
“The gross margin is its crown jewel!” says an experienced venture capitalist who has declined to be named. Even if the revenue and profit numbers look less than stellar, the outstanding gross margin proves the profitability of Appier’s core business.
He goes on to explain that an SaaS company like Appier spends a lot of its operating budget on research and development. However, once the product is mature, this portion of its expenditure is unlikely to increase.
Key No. 3: Recurrent income is an industry-leading 95%
Appier’s business model fits the broad definition of SaaS--software as a service. SaaS is known for its propensity to “sink in its claws”. That is, once the customer is comfortable with the product, they are likely to continue using it. Therefore, to judge the success of such companies, the two most relevant indicators are the annual recurring revenue (ARR) and recurring revenue ratio (RRR).
ARR refers to how much revenue is coming from repeat customers. Appier’s ARR in 2020 was 9.4 billion yen, a year-over-year increase of 36.6%.
What’s more, in the period of six months ending on December 31 of 2020, Appier’s RRR was 95.8%. Compare this to similar SaaS companies like Salesforce, Plaid, and TTD, and you will see that the industry average falls between 90% and 95%.
Key No. 4: Abundant capital will help offset losses
It is interesting to note that for most startups, especially startups that are bleeding cash, the main reason to go public is to secure more capital. But the funny thing is, Appier is not hurting for money.
Let’s take a closer look at the cash flow, which is the lifeblood of any startup. Last year, the cash outflow that resulted from Appier’s business operations was 840 million yen. The cash outflow that resulted from its investments was 2.706 billion yen. The final tally of the remaining capital was 1.635 billion yen. But the real secret lies hidden in the company’s balance sheet.
The consolidated financial statement published in the circular shows that, by the end of 2020, Appier was sitting atop tens of billions of yen in capital. Around 6.6 billion were in fixed deposits.
Regarding this detail, PricewaterhouseCoopers accountant Patrick Hsu, who is in charge of certifying Appier’s financial statements, has this to say: When evaluating a company’s capital, it is standard practice to take both cash flow and fixed deposits into account, “because this is capital the company has ready access to.” Therefore, Appier’s actual usable capital is NT$2.146 billion, which is twice as much as what it had in the past three years combined.
“For the past few years, the cash outflow caused by Appier’s business operations has been steadily decreasing,” says another senior accountant familiar with the industry. “That means it is very possible that Appier’s negative cash flow will soon change to become positive.”
The beginning of a new wave of startups going public in Japan?
Despite the lockdowns imposed by governments during the global pandemic, Appier was still able to go public in a foreign stock exchange. It is likely to be the first Taiwanese company to get listed in Japan in 23 years.
Which begs the question: Why is Taiwan’s first hard-earned digital unicorn going public in Japan?
“It’s the cluster effect,” is the opinion of many in the industry. There are already scores of digital unicorns in the Japanese stock market, whereas there are none in Taiwan. It makes sense, then, for Appier to head to Japan.
The TSE’s Mothers board is similar to the Shanghai Stock Exchange STAR Market. It is a board created in 1999 by the TSE for a new breed of fast-growing stocks. Many startups have had their initial public offering on this board. Even companies that have yet to turn a profit are allowed to be listed. Most of the stocks here are software, internet, or biotech.
In recent years, Mothers has become a watering hole for Japanese unicorns. For example, in 2018, the secondhand goods ecommerce website Mercari broke new grounds as Japan’s biggest IPO of the year. The then-40-year-old founder Shintaro Yamada became a multi-billionaire overnight.
It is true that some larger investor representatives, such as pension funds, would not touch stocks on the Mothers board. But as the Financial Times has pointed out, a new generation of young stockowners have become the biggest supporters of these pioneering new stocks.
At the end of February this year, the total value of the Mothers board stood at nine trillion yen. That’s already half the value of all of Taiwan’s listed companies. The ten most valuable companies are nearly all digital startups.
This may only be the beginning of Taiwanese startups going to Japan to go public.
Richard Watanabe, PwC's head of operations for financial services, points out that the Japanese capital market has expressed a great deal of interest in Taiwan in recent years. Many trading companies and venture capital firms have had their eye on Taiwan for a long time. He predicts that in the next couple of years, we will see more Taiwanese startups have their IPO in Japan.