This week, Toyota came in big, investing US$1 billion into Grab, allegedly valuing Grab at more than US$10 billion.
“Early investors much have made a lot of money,” says the chatter in many of the Whatsapp and WeChat groups.
Well, probably yes for early investors, but for PE investors who began betting big on the ride-hailing firm in second half of 2015, the paper returns are yet to be ‘huge’.
Astronomical return is yet to come
Let’s do some maths.
To date, Grab has raised US$5.1 billion according to what has been successively announced in the public domain. Of course, the announced financing includes debt, and some of the PE investments have not been announced.
But let’s just assume US$5.1 billion is equity investment. Collectively the return will be about 100% – with the later investors accounting for less.
Do not forget that Uber now owns 27.5% of Grab, with no cash injection.
That said, Grab has reached an inflection point – there is no major competition in most of the markets in Southeast Asia, a chance for it to truly demonstrate (and increase) its value.
Profitability is not difficult – when you are dominating the market. Easy Taxi became profitable in Peru in 2015, where it occupied between 85%-90% of the market share. Many users, especially in Singapore, are complaining about Grab’s ‘surging’ prices.
Who would not test the profitability limit in this time window of no competition? This is a perfectly rational business decision. The good thing about ride-hailing is that you can always reverse the excesses if they do not work – all you need to do is offering vouchers and users will forgive you.
The real potential
In addition to profitability, this is also a good time for Grab to start focusing on building value, including GrabPay, insurance and maybe eventually driverless cars, leveraging the excellent use case of ride-hailing.
If any of the above becomes successful, Grab’s value will be far more than US$10 billion.
While this is a big ‘if’ from execution point of view, Grab is in a much better position than any of existing or potential rivals to realise this.