Message for Readers

If you find this blog post useful to your work or if you have interacted with me and have found my sharing helpful, you can pay it forward as follows :

1) Share what you know freely to all who are able to listen with no expectation of reward.

2) If you make big bucks, donate some of that to charity and give back to tech by becoming an angel investor or LP. You can learn more about AngelCentral at https://www.angelcentral.co/investors/membership


Monday, March 23, 2020

Startup Valuations in Recessionary Environment

Just 1+ mth ago back in early feb,  I was noticing that startup space esp early startup space, (Early meaning Series A , Seed space) seems largely living in lala land where valuations don’t seem affected by slowdown or is anyone worried about the spread of coronavirus.

Now the situation in my assessment should and will change  as the entire world economy is whacked big across the board and for the foreseeable future.

The funny thing is I still see startups thinking of valuing based on revenue or profit multiples that are totally out of whack with listed comparables. Here are some facts:

1) crazy guy in the room giving crazy valuations is in deep crap themselves having to sell prime assets now to redeem debt and show value. So no more crazy vision fund bets distorting market. And there is no one to replace them. 

2) loss making Uber is now worth about 6-8 times 2019 revenue high. i suspect if we use real revenue on grab and gojek they are really worth 40-50% less than last round which is validated by what secondary sales is showing. 

Slightly loss making grub hub is worth about 2-2.5 times it’s revenue. Saas which should benefit has also seen a rerating with profitable salesforce being valued at ps ratio of 7. The list goes on and the revaluation has happened and is not done.

So what to make of all this? Private Startup valuations should at least fall 20-30% just to follow market comparables. Add another 10-20% if you are not profitable or dominant in space. 

That brings us back to startup seed valuations at S$2m-4m or so. Or back to 2010-2013 levels which makes more sense. Series A should adjust accordingly. And maybe quick path to profit should be an indicator too. 

PE ratios back in 2002-2010 used to be 8-15 times for tech plays depending on strength of business. Go do the math..

This is not a sell serving article because I stand to lose a lot more if valuations go down than up having already invested in 31 startups and 7 VCs. We still intend to invest in 3-4 more startups this year and have already done 1 new investment and 3 follow on this year in engagerocket, worq and rara delivery.  For us it’s about backing founders. 

My goal is to tell founders to not live in lala land any more and don’t count on getting any easy outside money if this situation prolongs another quarter. And if you do survive, know that your business is probably worth a lot less than you think now. All this should generate actions on your part and behavioral change. I hope I am wrong and we get a V shape recovery 2nd half.. but we don’t plan on hope...

The only little silver lining is some VC at A and B rounds have dry powder. (Provided no pulling of LP capital. Not likely right now but we never know.) so this is a time to know if your VC really support you or not on cash infusion or loans.

Another positive note is that founders should also remember that many successful businesses grew out of tough recessions and were built with little or no early investor money. Building a profitable business in a recession strengthens your efficiency and mindset. And once you have a high quality profitable business, there will be lots of ways to monetize your hard work when the upturn comes!

Sunday, March 15, 2020

Staying financially alive in a crisis

(Shaoning has a great post on this topic and it inspired me to elaborate with more detail to help fellow founders.)

First post for the year and its against a backdrop of great uncertainty and fear in financial markets, business world and society in general. The COVID-19 coupled with the oil shock has as of today resulted in a paralyzed, shellshocked West and a winded East. What i have learned going through 2000 tech crash, 2003 SARs and 2008 GFC is that pendulums tend to swing to the extreme aided by self-reinforcing fears and panic. This does not mean that we should be cavalier about things and just work on a best case recovery assumption. Rather it means we recognize this crisis while large is not a world changer in any meaningful way. Yes some governments which are inept may be voted out, some people/companies will go bankrupt and most sadly, some people will die of the virus who could have been saved if we acted differently. But this will not change the world like the way democracy or religion or even the internet/iphone did.


FOR INVESTORS

So what should we do as investors and startup founders? First investors, take it easy and slow and have a plan as the market gyrates. Cash is king. Invest following whatever your personality fits best. Some people buy the way down, some buy the way up. Most important, do not Over-Leverage!. Never have to sell a financial asset due to margin calls or daily expenses. For our situation, we have a hard cap of 28%  on total leverage on all assets.  You need to figure out your own.

Second, keep to your asset allocation. A balanced portfolio or conservative portfolio would actually have only seen a 3-10% drop YTD. Its just part of last years gains. Compare this to stock market drop of 25% and  some individual stocks drop of 50-80%. 

Thirdly, keep the diversification. Don't own too much of one counter or industry. This means no single stock risk more than 5% of portfolio for me. Personally, i am prepared to buy 5 times of ETFs, dividend stocks and technology stocks all the way from S&P@3000 until S&P@1200 and STI@1200. This is below GFC levels substantially and at that level will involve some careful leverage (30% max) and selling bonds. It also involves being much picker. Why buy speculative loss making tech like EB or ZEN or Z when you can buy AAPL, BABA, FB, GOOG, AMZN at super discounted prices? This means at current S&P 2400, we have action plans for markets falling much more.

As for private equity investments like startups or VC funds, we have always espoused keeping to just 5-10% of net worth and to put them at book value. So these should continue on maybe at a slower and more careful pace. Esp if you are investing in early stage startups, i would argue valuations will get better and you can get better quality founders in times of crisis. No wantrepreneur would run a startup during bad times! 

FOR STARTUPS

You are in a much tougher situation. A few will be lucky and have huge demand due to your sector (healthcare, delivery, cleaning etc)  but most will  be in reverse situation.  The most important thing i can share is to take action and control of your destiny. Don't be passive and hide or be in denial. That will be worst attitude to take. You need to act on revenue , cost and cashflow to tide through this period.

Second, estimate your cashflow. Make sure you have enough cash to last at least 18 months. If you don't, cut costs and drive revenue until you can. Assume no more new investment money coming in. At the same time, apply and get credit facilities that will help you get cash in quickly. Now, some founders balk at personal guarantees required to get credit, all i have to say on this topic is do you have proper shareholding alignment and are you a wantrepreneur or the real deal? Don’t forget you raised capital convincing investors this is your do or die. 

And even if you do have the cash ( i know many more fortunate startups just raised capital), I suggest to still try to cut costs and extend it to 24-30mth.  Do a worst case scenario and an average case scenario planning. Then create trigger points where you take certain actions. 

Third, some actions you can take should cut across all functions and levels so that it is clear it is an all company effort. Mgmt lead by example.  So if you cut salary, cut your own the most first. It gives your moral authority.  If you don't agree (see the point earlier about personal guarantees). Areas to watch and change include :

Manpower Cost-  salary reductions/freezes (use the MVP component) , no bonuses declared, no pay leave, headcount reduction. For example, I just saw a early stage startup advertise for chief of staff role. What the hell?? The only Chief of Staff i know is in the US Cabinet. In bad times, founders need to roll up their sleeves even more so that the correct tone is set in office.

Marketing Cost - Cut marketing expenses to something commensurate to revenue. Don't try to grow ahead or just rely on LCV math. For example, if you normally spend $10K per month on conversions, try to spend $6 or $8K and just get the more profitable leads, dont bother with the expensive ones. And drop branding related advertising spend as much as possible,

Other Cost - Rent. See if you can make it 2% of your total expenses if you are a pure software play.  Do you really need downtown or coworking location? We had about 100 staff in 4500 sqft of space with meeting rooms and storage area and pantry. Be cheaper than us.

Other Cost - Staff welfare expenses. Do you really need to spend more than $200 per staff per year on welfare? A lot of team bonding activities can be free. This is not significant but it is setting the tone.

Cashflow Mgmt - Create packages that collect cash upfront. Chase AR religiously and don't be the bank for your clients.

Strategic - Stop overseas expansions and maybe close down new product lines or geographies that do not generate sufficient cash and which keep burning.

Talent - top performers should still get recognized, paid well and maybe even get some bonuses and increases.  Use the opportunity to remove bad performers. 

The above areas are all cost linked. Frequently, my experience is that cutting just helps you become more efficient and a downturn is a good reason to test your efficiency. I honestly feel most startups today behave like an MNC  in terms of perks but without the commensurate revenues and profits.  What is critical is that you comminicate the reasons for all the changes. This will be a good time to see if your staff trust you and whether you have built a good culture of teamwork and togetherness.

Next is revenue side.

Sales - If you are a startup with product market fit already, the one thing you don't cut is performing sales. If you can sell your way aggressively out of a recession, you tend to become very strong. For example during GFC, we created specially discounted packages to go after SMEs with a tagline that we are here to help them. At same time, we reminded MNCs and Govt that had recruitment freezes that even if not hiring they should spend a bit of money on employer branding so that when upturns comes, they have improved their employer brand. 

For sales, this is also an opportunity to fire bad paymaster clients and replace them with safer clients in terms of payment terms. Remember honestbee. They can always fold and don't pay. Then you need to write off the AR. That is even more painful and its usually better to not have that revenue in first place.

Sometimes, its just bad luck. You are in a sector that is really bad like travel or tourism. Then i would argue your leadership and strategy matters even more. As a small startup you have huge overhead and cost advantage over your big competitors who will be feeling even more low morale and burning even more cash. They will be pressuring their sales staff, cutting headcount and removing pantry benefits. This is the best time undercut and out sell them. If you have sufficient cash in bank, i would argue it is the best time to grow market share. This is exactly what happened from dot com crash in 2000 to 2006. The job portals basically stole SPH lunch in terms of recruitment advertising revenues.

One caveat though. If you find yourself mentally breaking down (much more than normal stress) or if clearly cash balance is not going to make it, there is no shame in calling it quits and shutting down. And pls assess risk properly, don’t wait until you owe employees and fellow sme owners lots of money before shutting down. That’s called self- denial, selfish and irresponsible!

Hope this sharing is useful. i may sound a bit extreme in my cost cutting thinking but it actually how most very profitable SME run. Its time our startups learn to do the same and who knows, maybe we will have a surge of profitable startups emerging once the winter ends. Imagine being so well run, you can fire your Vc and not need to raise anymore!





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Saturday, December 28, 2019

On Purpose - 2019 in Review

Another year passes so quickly. I have always been searching for the right framework to live and the picture seems slightly clearer this year. Previous posts have always been on stuff done and learning. I think i have enough to now take a step back and frame all the stuff. See if it makes sense and is useful to you.

Life is about having purpose. Purpose creates motivation and challenge which generates plans, execution and hopefully reward. It also acts as a time allocation device. Goals are what we set to achieve our purpose. One can have multiple purposes though it’s best to keep it to a few at best. Purposes can change after many years.

Life is also about pleasure or fun. Pleasure can be physical, mental or spiritual.  Exercise, beauty, learning new stuff, travel, eating etc.

Life needs connections with others. Can be family, friends, fellow workers, volunteers even animals etc. the mental need for social interaction should not be underestimated.

Life is about balance. The trick is to exist at the dynamic moving intersection of all the above and be happy with the current state and future trajectory state. This requires me to cultivate gratitude and contentment to handle the inevitable tension and trade offs between various purposes.

And what of happiness? Happiness happens easily when above is achieved. However, personally for me,  the issue of focus and the problem of drifting and feeling like a bystander is still there because this more multi-faceted life is still in vast contrast to the obsessive single purpose life I had previously in JobsCentral. Ning says it best when she remarked about how life was simpler but when we only just wanted JobsCentral to succeed.

So bearing above in mind, here goes:

Purpose 1 - help and be there for family. Extend to friends if i can.
Purpose 2 - be as healthy as I can
Purpose 3 - Be a good custodian of wealth. help grow startup ecosystem as angel investor.  Contribute to broader society as volunteer.

From the above, I generate goals and results as posted before. Below is an update.


Purpose 1 :  Good relations with Family & Friend & contribute to their lives

Goals: High level of family/wife/friend time. Share more learnings with kids.

2nd son had O levels. Very proud of the way he studied hard without much pressure from us. Our boys are a major focus for Ning & I. Number 3 also did well and seems to have matured. Likewise number 1 and 4 are growing up nicely. Perhaps a little too quickly for number 4. Goal is to bring up well adjusted, contributing and happy people.

Celebrated wedding 18 years anniversary. Love wife very much. Dad still going strong and traveled with us to Taiwan for 20 days. He also went to South America for almost 4 weeks with my sister earlier in the year! Still miss my mum and think of her every few days.

A very old friend of mine finally found a life partner and got married in 2018. This year became a father. Its actually hard to keep in touch with old friends and it requires a special effort to always organize group dinners. Still, my experience is that its worth it each time.


Purpose 2  : Be Healthy Mind and Body

GOALS: Keep lean, weight below 70kg. Pick up more outdoor sport. Control mood even better through exercise and mindfulness.

Body - improved with cholesterol dropping a bit. Weight maintained at 68-70kg range. Health screen all clear. 5-6 times exercise per week.

Mind- mentally up and down but not too dramatic. Regular contemplation of death helps keep perspective and having Gratitude. Mindfulness keeps my attention on right things. Boredom and bystander issue is still there.

Traveled 72 days. Less than last few years 80-90 days but it’s due to our commitment to stay at home for the various kids exams.

Purpose 3 :Portfolio mgmt & Work role in Society

Goals: min 6% long term annual growth on net worth.  hit 100 startups for angel investment doing well as a portfolio. Quality volunteer in any such work I take up.

Portfolio Work

Portfolio YTD gains of 17%. Tracking the 6+% annualized since 2011. Big mistake on baidu + overallocation to value funds + 1H delevering so took some money off a little early. Big wins on sea, fb, alibaba and shinvest help us to at least match index.

Still in progress to switch to even more etf index investing. Can’t significantly beat index so might as well don’t try. We also want to be more disciplined in giving. Will have more discussion with Ning on this. 

Startup Work 

Angel side very active. I think because we now see so many deals, we actually hit our upper limit and did 6 new investments. Also had 3 big up rounds from previous startups. Almost all grew by revenue. 30 startups now. Thats 30% of the way to the 100 startup goal. Portfolio doing well  if mark to market.

AngelCentral side ramp up a lot. 130 paying members and we ran angel education workshops for easily 200+ more. Also spent lots of time vetting and meeting the 700 startups that register with us.

Volunteer Work

Still volunteering with ITE, PEP, SWCDC. This year a bit less time due to AngelCentral but the education related projects are still very meaningful to me. Of note, spent 4-5 sessions on an  ITE project. It is a highlight as it involved helping plan continuous education pathways which is something I firmly believe in. 

So for next year, should be continuation of the same and reminder to self to focus on 
Purpose, Fun, Balance & Gratitude.




Wednesday, October 30, 2019

How Should Angels Think About WeWork?

There has a recent spurt of bad news coming out of startup world this year. Readers will know Ning & I are conservative angel investors - is there such a thing? We take calculated risk in angel and VC investing and worst case, are prepared to write off our money. Of course,  we are obviously doing it because we like the activity and believe we can generate returns worth our time.

Lets do a recap just for this years news alone. Locally we have :

- Honestbee on brink of bankruptcy.
- Carousell taking a less than ideal round with OLX
- Rotimatic losing $1 for every $1 they sell.
- Propertyguru shelving IPO due to poor valuation offered by retail investors

I also buy the ACRA reports of many startups at Series A and B and they are inevitably all loss making. And to make things worse, the losses are not narrowing but sometimes expanding faster than revenue!

On a global basis

- Wework failed IPO and subsequent writedown/bailout by Softbank
- Uber & Lyft poor post IPO performance
- Grubhub stock tanking 40+% in 1 day due to poor earnings guidance

So how do we read all this? Especially as an angel investor? Does this mean we should just stop investing? Wait & See? Every angel needs to make up their own mind. For us, these are some of our thoughts:

First the good, positive stuff.

1) The fact that Carousell & Honestbee can raise so much with such bad revenues and/or unit economics is actually a sign that the ASEAN ecosystem is really strong with liquidity and interest. It is also the reason why SEA has decided to go all in for Shoppee so as to really stake their claim as a major ecommerce player in the region.

So ecosystem is growing and doing well. Liquidity is there as we see more and more VC funds raise and so will deploy capital next 3-5 years. And this is across all stages. At AngelCentral, which is an angel investing club, we have seen amount funded for our pitches grow at least 50% YonY.

2) Market growth is real. ASEAN really is a strong demographic play. GDP growth is strong in Indo, Vietnam, PH etc and this growth will accrue to tech related plays.  Just see how fast revenues have grown in Shoppee or Grab or Gojek.

Now the not so good stuff.

3) However, because of (1), many founders have decided to go for revenue or even just metrics without the cost discipline and patience to grow revenue and cost in tandem. This has led to massively loss making entities who all claim that their ultimate market size will justify the losses. In industry speak, we hear founders talk about their unit economics and the LTV of each customer.  This all makes sense provided capital is sufficiently patient and that the unit economics assumptions are real and market growth assumptions are accurate. Unfortunately, asssumptions are often wrong and unit economics or market size sometimes does not bear out.  When this happens, valuations have to come down dramatically.

Eg. I suspect this will happen for all the coworking spaces. None of them have succeeded beyond being a property play with some ancillary services added on. This makes them a 1-3 times revenue multiple play which is exactly how softbank values wework now. Thats a 50-90% valuation haircut.

Will this play out in more verticals? Unfortunately the answer is yes. With softbank licking its wounds, IPO market rejecting expensive listings, the froth has been blown off somewhat.

4) So there will be more bad exits or failures coming. Where will they come from? My bet will be on those low gross margin or pure traffic plays. B2C and with loads of cost and who have raised loads of VC money. The pressure will be intense to deliver on actual revenues next 1-2 years and profits thereafter. Quite a few names come to mind but i will reserve my judgement and see what happens.

So what should angels do?

Personally, we are sticking to our investing thesis. Remember VC/Angel investing should be just 5-20% of your total portfolio. So you probably made that same 10%-20%  in public equities and bonds last 5 years. So it must be money you can lose. We cannot stress this enough.

Next, we invest base on the founders skills and ambition, business model, product and market sizing. We invest systematically on a portfolio approach with discipline.  We want our companies to become profitable with superior unit economies and branding. Then they have the luxury to decide to trade sale or IPO. We do not want to invest just because an area is hot or if there is a high valuation ascribed to the vertical overseas or if a famous VC is investing. That is called investing blindly and greedily.  You need luck to behave that way and do well.

And if the shit really hits the fan on the ecosystem, i would argue it will be the best time to fund great founders who make it work even without much funding. Talent also becomes easier to find and of course, round  valuations will adjust downwards to compensate for risk and capital scarcity.

What should startups do?

To me, founders should take a long hard look at just what your unit economics are. And have a plan if funding is less or dries up. Because I can tell you having gone through SARS in 2003 and GFC in 2008, operating a startup without any outside money requires a mindset and hunger and obsession that is very absent in many founders mindset today.

Capital efficiency should be your buzzword. So many local Series A//B b2c startups need to spend 5,10,15,20m over 5 years just to make 1-3m of gross profit. In lean times, this is a ridiculous sum and implies a lot of wasted dead ends and maybe just plain waste! It may take a few years longer but I suspect often it is possible to spend much less and achieve same results.

In Summary

We don't think things are so bad right now like back in 2008. In fact it is nowhere near. Our assessment is that the pendulum has merely swung back to more normal state and there is still much interest and liquidity. Of course, if the rest of economy swings into recession and more failures like wework appear, then all bets are off. But we do believe sticking to consistent disciplined investing will work through both good and bad times.

NB : if you are keen to learn and hear our sharing as rather prolific angel investors, come attend our next workshop for Angel Investors.






Monday, September 23, 2019

How Should Angels conduct Due Diligence?

Its been almost 2 years since we founded AngelCentral. We now have a  quality pool of angels who are investing with (hopefully) a considered portfolio strategy, selecting from a large pool of varied startups and who have a framework for evaluating founders, market and deal terms. The next question we get from more experienced angels is on how to conduct due diligence on the startups they wish to invest in. 

(For this article, i will assume the angel is not a lead investor and are still following a VC or syndicate lead)

Philosophy & Mindset
================
I will start by saying due diligence happens after you decide to invest in the round. In an ideal world, you complete DD then decide to invest. However, the real world does not usually allow you the luxury of telling a founder to share detailed datarooms before you at least soft commit. So the normal way nowadays is to evaluate the startup via a few meetings and within 1 month, decide to invest provided everything else in DD process works out. 

So i would encourage fellow angels to have a mindset of verifying key information when it comes to DD phase.  This is very different from the pre-commitment mindset of finding reasons to say no when evaluating the startup for investment.


How Deep Should Early Stage DD go?
============================
By definition, there isn't that much to DD for early stage startups. Less legal documents, simpler product and fewer years of financials to look at. Also, for angels, we must be prepared to sometimes be given a smaller dataroom. Eg, the lead investor will rightly want to see all salaries and even some client names, but angels probably don't have a business doing that. It really depends on how comfortable the founders are with you.


Areas to DD
========= 
So what do we find in a typical startup DD dataroom? In this folder (usually a cloud folder), you should have access to :

1) Corporate Structure & Shareholding Matters

Eg. ACRA filings in SG case. Shareholder tables pre and post investment, Past & Current Subscription Agreements, Latest & Proposed Shareholder agreements, Founder agreements etc. 

Verify - shareholdings, post/pre investment numbers, investing in holding company, ESOP contracts, rights of shareholders, founders agreement terms etc


2) Financials 

Eg. excel mgmt reports, audited previous year reports. Cash flow, balance sheet and P&L, AP/AR statements, Bank statements

Verify - key expenses like mgmt salaries, marketing costs etc, cash in hand, AR/AP etc


3) Asset Ownership

Eg. domain name registration, software contracts, property titles etc

Verify - ownership of domain names, apps, source code, databases collected. 


4) Contracts & Legal

Eg. employment contracts, client contracts, JV partnerships, MOUs etc

Verify - terms are in compliance with laws and same as shared pre DD


5) Product Development/ Traction 

Eg. analytics snapshots, login access to product demo, big picture milestones/Dev plans, customer interviews, production BOM etc

Verify - usage and milestones as shared during evaluation, key contracts, client renewals

6) Any Other Information

Eg. Investment Deck, Financial Projections etc



That's Way Too Much Work!!!
==========================
Truth be told, most angels don't do all the above. That is why we are not lead investors! For deals which Ning & I are not leading, we usually just pick a few key ones to verify and take about 1-2 days to complete DD. Usually i like to check on mgmt salaries, make sure traffic is real, check out product and customer feedback a bit more. I rely on the lead to make sure hygiene stuff like cash, shareholding, legal issues are all sound.


When Do I Cancel the Deal?
=====================
Shao Ning & I view DD as something we do to tick the boxes. We will only cancel the deal if something is very off or which gives us a feeling founders were not ethical/honest. Eg, if founders said they pay themselves $4K per month post round but in projections they say it will be $8K. And when asked, they say its because they are raising more money. That will be a sign for us to walk away!

But if it is last month sales reported at $10K, but in reality it was $9K. And mgmt has a good reason why they reported wrongly, we will usually give them the benefit of the doubt.

In summary, due dilligence is something angels should do just to make sure the key reasons we are investing are verified. The amount of information we go through and which the startup shares has to be commensurate to the stage of investment. We can and should rely on quality lead investors to do the full due diligence work but do remember if they make a mistake, all they will say is sorry. So end of the day, we have to feel comfortable.  Good luck and have fun!

Saturday, June 15, 2019

AngelCentral/Angel Portfolio Report Card

ANGELCENTRAL
=============
AC goal is to build effective angels by offering quality deal flow, investor education and syndication services. Our community manager zijie has written a wonderful summary of what AngelCentral has done in 2018. You can read it here. Some highlights:
  • Hit our goal of doubling investment commitments. From 3m in 2017 to 6m. Of that about 3.7m actually funded.
  • Signed up over 100 paying members from 0 in 2017. Lovely mix of entrepreneurs, corporate types and family/corporate funds. Best part? Almost 40% of them actually cut a cheque.
  • Trained more than 200 angels.
  • Successfully ran 3 syndicates. 
For 2019, Ning set more ambitious targets to grow everything and we are off to a good start already. Of note, we just launched our 2 sided online platform to facilitate discovery and dealflow.

PERSONAL ANGEL PORTFOLIO
=========================
As for own angel portfolio, we now have 24 investments as of 31st May 2019. Using the 24, it’s a TVPI of 2.6 since 2011. If it is over the 19 investments made since Jan 2015, we are at 3.3 TVPI.

In terms of IRR, it has been 23% since 2011 which includes all our early mistakes and 68% since 2015. Hopefully the numbers show we are getting good at our game and that all our fellow AngelCentral investors are working with a good formula. Hard to say because the high IRR also coincides with increasing liquidity in funding ecosystem. But I do feel we are picking better since retiring and focusing on angel investing.

A few observations
  • mostly paper gains based mark to market so really need to wait for exits to realize those gains
  • 80/20 rule definitely applies. The top 5 startups account for almost all the paper gains.  
  • Angel/vc/pe part of portfolio can act as a barbell to overall portfolio. It helps add 2-3% to overall returns which is very significant. 
  • Early exits are no good. We need 30x returns not 2-3x.
  • It’s really all about founders and depth and scope of their hunger.
PERSONAL THOUGHTS
===================
Personally, I want to share that helping to run AC has given more purpose to my life. So it really validates the point about having a meaty identity to sink my teeth into that takes up time, is intellectually challenging and also hopefully pays back.

Now Ning and I call ourselves full time angel investors who not only invest 4-5 startups a year but help hundreds more find angels via AC. We are now useful again in a concrete economic way. It’s also a lot more fun to co-invest with other likeminded investors. 

The tricky thing is how to balance it all so that I don’t end up getting obsessed.
It’s quite easy to get back to old mould. I got disproportionately frustrated over a failed syndicate and I had to remind myself that it’s just part and parcel of running an angel grouping.

Hopefully things will continue to balance well and our angel activities continue to grow and add value to the ecosystem. Key thing in my mind is monetization for existing startups and real exits that generate founders who can invest back to spur our ecosystem even higher! 

Tuesday, June 4, 2019

Thoughts on Strategic Direction for Carousell

(Wrote an entry on Carousell before.)

Friend sent me an article on BT about Carousell. It resonates with how I have been feeling but I have been refraining from commenting partly because I want to see how they executed last 2-3 years and partly because we do have a small indirect stake via a VC that’s now actually significant. 

Note : Latest OLX deal is 22.12m cash, the rest by injecting OLX Philippines outfit at a 30+m valuation if I recall right. So they bought another 8-9mth burn time. And OLX is of course potential buyer. 

Can Carousell become mobile Craigslist of ASEAN? 

Not many people are aware that Craigslist is very profitable on close to 1B of revenue annually. Thats what Carousell is selling to investors. That it can dominate ASEAN as a classifieds player which is a very large 0.5-1B (my estimate) revenue market. However, the dynamics that allowed Craigslist to charge for jobs, property, cars and personals back in early days no longer apply in ASEAN.

It will be tough for caurosell to become a profitable mobile classifieds following the trajectory of Craigslist. Reason is it is not a true first mover in the various classified verticals and each vertical is crowded. The property, jobs, cars, dating classifieds space all have very deep custom built web/mobile platforms and strong brands with significant resources that already are taking up the available online advertising revenue. 

So it would be a hard slog to win against the likes of propertyguru, jobstreet or even sgcarmart. Can slowly make headway like in cars (weakest group) but quickly will be very tough.  Ask yourself where you go to look for jobs, cars, dates or property? 

Can Carousell become a MarketPlace?

Back in 2015, I thought the logical strategy would be to be a mobile marketplace ala Lazada on web and that the whole classifieds was a deliberate strategy to get started with some mindshare and users. Unfortunately, they did not try to primarily earn off GMV and transactional revenues and build out a comprehensive marketplace platform. Now I would argue they have missed the boat and Lazada and shoppee are the regional leaders. There could be a niche as a c2c marketplace but that’s probably much smaller.

Growing into 500m valuation?

Based on 2017 1.7m usd in revenue (Expenses are an estimated 30m in 2017), my guess is if via ASEAN mobile classifieds as a business, they will be lucky to be doing 10m ish usd advertising/fee type revenues (not some funky gmv type topline) this year.

That’s not enough to justify the  500m valuation now. 500m requires to hit at least 50m revenues. And those revenues better be high gross margin type (>75%) type and growing rapidly year on year. Product wise, they need to have users preferring to use them to search and get property or jobs or cars across asean. I don’t think they are anywhere near that now. 

The other possibility is to that it’s not too late to switch into marketplace. I don’t know enough on the competitive dynamics of this space. But a good mark of success here will be an improved platform that somehow offers sufficient value for carousell to earn a cut off the transaction value and which a significant percentage of users are willing to pay for. 

So what’s next? 

Even if Carousell fails to deliver on revenues, it is still valuable to a buyer. Great brand and traffic means it can end up being like Redmart. Founders get decent package but early investors will probably lose most money with latest investors losing less. Redmart gets to continue and consumers and staff benefit. 

Ecosystem wise, that may not be a bad thing. Poster boy does not and cannot mean sure win for everyone. Anyway, we have other poster boys like Garena/Shopee, Patsnap, Ninjavan, Razer, Justco etc and I would argue they have much firmer revenue positions.

Of course, am happy to be wrong and if Carousell manages to crack how to beat the various classifieds players and/or become a dominant marketplace, then it will become a sizable, sustainable unicorn for sure and our small indirect stake will be worth many times more!

Tuesday, May 14, 2019

Honestbee thoughts

GMV of 132m. GMV is the latest number startups like to bandy around. The origin is for e-commerce sites and marketplaces but now everyone seems to think it applies to them! Why? Because it’s easiest to boost with coupons and marketing and getting a multiple of it for valuation usually means high valuation. I much prefer gross margin or even ebitda. Imagine if propertyguru or sgcarmart start to report the full real estate or car value as their top line metric...

Even gross margin can deceive the real picture if mgmt choose to classify discounts as marketing which falls under overhead and not cogs.

Honestbee is a case in point. Only selling 132m usd last 12 mths and probably barely at 5-10% real gross margin if we include marketing/discounting expenses. That’s essentially a deep loss making 10m usd business spread out across many countries. In the normal world, that’s called no big deal and probably no white knight will save it. But in our frothy tech world?

Who else fits this description? There are non marketplace/e-commerce poster boys that track gmv as if it’s revenue. Let’s see what happens...


Wednesday, September 26, 2018

Grab ruling by Competition Commission

My thoughts on the CCS ruling :

1) if laws are broken, then fines are needed to have the right signaling effect. Companies and people must know that we take our laws seriously and that we are committed to building an economy with competitive markets that keep innovating and improving products and services for our consumers.

2) anti competition laws are in place to ensure markets are competitive so that consumers benefit. This means new players can enter and compete fairly. It does not mean all big dominant entities must be regulated. 

A sign of unfair markets will be exclusive tieups with customers or with key production supply fa actors. Another sign will be increasing sustained profits due to price increases and accompanied by a lack of innovation or improvement in offering. Another sign is the successful use of mandatory bundling to enter new markets. 

3) under this lens, it is clear grab and uber have broken laws and so deserve to be fined. But it is less clear if they are anticompetitive yet. A few reasons for this statement. Using the 3 signals mentioned above: 

a) exclusive tieup with drivers. Grab did try to do this and this is unfair as it will prevent new entrants signing up drivers and it is right for ccs to regulate this.  So on this count, it seems grab was trying to be anti-competition.

b) raising prices. grab is not even profitable let alone consistently profitable. I would argue that the cheap prices offered previously is a loss marketing approach made possible by private venture capital. It is common for 2 sided network effect markets to make big losses and scale until reasonable share is achieved. Then the player changes pricing to make profits. This is the nature of many tech companies and it would be unfair to fixate on the discounts and old pricing.

In terms of innovation, I would argue grab is still innovative and constantly improving their product and adjacent products. It’s early days esp since they are not profitable to look for evidence of anti-competitiveness behavior.

So on this count, I would argue grab is far from anti competitive and is merely doing what is needed as a business. And they are still improving their product which benefits consumers.

c) as for mandatory bundling. Grab is trying to be a platform for many other markets. Epayment, food delivery etc. but all these areas have strong competitors. I would argue grab is nowhere near market dominance in these areas.

4) Finally, there is also the issue of definition of market. By defining the market as private car hire only, it excludes taxis and other forms of consumer transportation. I would argue grabs funding and vision is about the entire consumer transportation market and not just private car hire. 


All in, my view is that ccs is right to enforce our laws, is right to control exclusive arrangements by grab but should not try to read too much in pricing yet until multiyear, growing profits start appearing with little product improvement. CCS should also keep an open mind to possibly consider taxis and other forms of transport as grabs competitors.

Friday, September 21, 2018

How to handle investors on your cap table

Over the years, in addition to running our own businesses, we have also invested in about 24-25 startups where Shao Ning & I play different roles. Board member, Advisor, Angel Investor, Syndicate Lead Investor, Joint Venture Investor and even chairman type investor. Two main factors are at play - the shareholding we own and the role we play for the startup.

We have also realized that different founders handle non full time shareholders very differently and the standards vary. Below are some guidelines on what we would think founders should consider and do for the various types of shareholders.  

1) Key Mindset

The key mindset is that your shareholders are your supporters. Get to know each of their motivations for investing and also their strengths in terms of how they help you. Then make full use of it. Remember that most people prefer to be told what is happening and investors do expect startups to face lots of problems. So don't avoid updating bad stuff or problems. 

Of course, be prepared for all types of feedback and help. Some will be good, some not so good. But remember you are the boss. So don't be afraid to ignore advice given but of course, you better hopefully be right to ignore the advice.

2) Compliance with all legal requirements

Management should always be clear on the company constitution and shareholder agreement terms. Should also ensure that all shareholder rights are complied with. Eg. if a mgmt decision requires a Board or Shareholder approval, it should be sought. An email explaining the reason for the action and also giving enough time to ask questions and approve. It is also helpful if the board has already agreed to the decision. 

The other key factor here is information rights. AGMs, audited annual numbers are usually bare requirements which all shareholders should be privy to. Some shareholder agreements will require more regular updates and some state that board minutes must be shared. Make sure these are all done.

2) Regular updates (even if not legally required)

Depending on the role and shareholding, it is best practice to keep your shareholders updated on how the business is doing. It also depends on the understanding you have with each shareholder. By and large....

a) Monthly updates with commentary & P&L, Cash for all board members and lead investors in current round and maybe even past round lead. Likewise JV partners for sure will want this. Usually do not need to update individual smaller shareholders (own <5%) but you may want to send this update to shareholders who have demonstrated value to you via experience or contacts.

b) annual shareholder meetings and report. Does not hurt to write a longer commentary to summarise year and plans for next year and circulate to all shareholders. All shareholders will appreciate this rather than just a AGM and audited accounts. You can even host a simple gathering for shareholders annually.

3) Corporate Actions 

This is trickier to do well. Founders must remember you wear 2 hats. One as mgmt and board director, another as shareholder. There are many types of corporate actions that i have seen being handled less than ideally. The key problem is usually lack of information and notice given. Then some smaller shareholders may feel being pressured or rushed or worse still being taken advantage of!

a) Share transfers/sale to 3rd party. 
Once the company is notified of this, it should immediately act according to shareholder agreement and notify all shareholders of price and quantity if there are ROFR clauses.  Also check if tag alongs will be triggered, if so ssulders should be notified not just about ROFR and prices, identity of buyer and seller but also reminded of their rights.

As a founder, you usually are not allowed to sell or tag, and your role is more to facilitate. It is usually helpful to state reason for sale and identity and intentions of the buyer.

Eg. founder parents selling part of stake to new or existing shareholder because they were earliest money and now need to retire.

b) New round of investment

Board will usually discuss and approve this activity, so major shareholders will know about this. Smaller shareholders should also be informed once a term sheet is signed. They should be aware of terms and also of their rights. Usually is pro-rata. It is best practice to share the terms and then ask each shareholder to reply if they intend to keep pro-rata.

The trickier part is here is how to handle terms which require old investors losing board seat and new share class having much superior rights to old share classes. You need legal advice for sure but you should also keep your old investors updated on all the "asks" by the potential investor. Some key areas of contention usually revolve around those where founders/mgmt are not so affected but older investors are disadvantaged.

- board seats & composition
- Redemption clauses for new investor 
- Liquidity Preferences, Coupons which only accrue to new investor
- Any special rights  (ROFR, Drag, even information) that accrue only to new investor

Be sensitive and never try to make your old investor feel you are so eager to do the deal and happy to ignore their rights. This is not only bad move (as they can probably block the deal) but also quite ungrateful to not consider your oldest supporters. 

c) Sale of company
This is a happy event. Again once term sheet signed, all shareholders must be notified of price, buyer and intentions and timeline projected. Keep shareholders updated on the sale process. Eg. timelines, due dilligence etc. If you do close the sale, do remember to call each of them to thank them for support or hold a thank you session for everyone.

d) Closing down of company
Reverse of above point but it happens. Doing this well is also a mark of a good founder. If you have been updating shareholders, it will not come as a surprise. Share thinking, timeline and be open to shareholders suggesting ways to keep things afloat. Sometimes, a hail mary may appear and a shareholder finds a way to get more money in or even to sell the company. 

This is a very tough thing to do. I find most founder run away and avoid shareholders. This kind of behavior is doubly wrong. Investors understand startups fail, so handle this episode well and depending on why startup failed, investors may still continue to support you. And plan finances properly so that the company can be closed down without debt. This is only ethical. It is morally wrong to continue to incur large costs when it is clear you are closing down.
4) Entanglement with govt, lawsuit
If the company has broken a law or is being sued, there is a responsibility to notify your board and act to remedy right away if it is with govt. Commercial lawsuits are a bit different and more nuanced as it it depends on whether the suit was frivolous or has merit.

5) What about confidentiality? 

I know some startups are worried that their investors have similar investments or worse still are not ethical and share the data they send to competitors. This is very possible as there are all sorts of investors out there. There are a few ways to mitigate this.

a) Shareholders agreement should have confidentiality clause. So there is legal recourse if need be.

b) Send what they need to know. Its usually very top level financials and general commentary. You dont have to give any client names, contract sums or marketing/sales funnel details. 

c) Don't take money from possible competitors and don't take money from VC who support multiple startups in same space and geography.

If you really have doubts about a shareholder, just revert back whatever legally required and dont share more. 

I hope the above is useful to founders and management. There is a lot that can be improved in the area of communications and expectation setting. If you find this useful and want to join a community of serious angel investors and get good dealflow, come register at http://www.angelcentral.co/membershipdetails