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Sunday, November 6, 2022
Thursday, June 23, 2022
We recently exited one of our earliest angel investments in an animation company. Return was about 11-12% IRR over a period of 10 years. On a scale of things not a fantastic angel return but we feel its decent considering what we know of the industry now and current funding climate.
We met the team back in 2012 and were impressed by their experience in animation and also back then, there was a desire to build the animation industry in Singapore. The idea was to use state of the art in house software to improve animation studio productivity while at same time also develop a franchise of quality animation characters. As its one of our earliest investments, we were still quite green and invested a sizable bite (a few times our current first cheque) and also did not care whether the company had a lead external investor or whether shareholding was well aligned. I also did some initial research and actually could not find any recent listed comparables with the exception of Zinkia which owned Pocoyo. Anyway back in 2012, we just sold JobsCentral and so felt quite cash rich.
The company quickly managed to attract more funding at better valuation. However, as they executed, we quickly realized how hit driven the industry is and also how much cash it needs. And even if one creates a franchise with decent traction & feedback, its still a tough journey to sell to more broadcasters and even tougher to create sizable merchandising revenues. The company had to make ends meet by doing some production studio work for big brands. But just like software integrators, every resource spent on outsource work is a resource missing to build a good internal brand and product.
What changed things in my opinion is the rise of youtube and other free to stream platforms. By placing content on these platforms worldwide, the company managed to earn decent, high margin revenues from ads and also place their characters in front of millions of kids worldwide. The covid crisis helped further as more kids spent more time in front of screens. All this was not contemplated at all in the original business plan. So kudos to the team for not giving up and always looking for new ways to grow the business. With this new stable and growing revenue stream, the company managed to turn profitable.
Some takeaways & learnings.
1) Industry matters. Space like movies and animation very hit driven and distribution matters alot. Production talent alone is insufficient. And the fact that i could not find any strong independent studio back in 2012 probably was a big warning. I would not invest in movie or animation production now. Also its very unstable. Zinkia is not doing well at all now. Only franchises owned by giants like Disney or Sanrio have staying power.
2) Company ended up consuming quite a lot of capital. So that diluted returns. So initial valuation and bite size matters a lot. All this is no brainer in hindsight but it does mean having a founder who does not give up and good at financing deals is important.
3) Industry sometimes has huge shifts. In this case it is the free to stream segment. Catching it early to create ones channel and mindshare on youtube and like platforms matter a lot.
4) Profitable, own strong IP and growing is a great combination. Not only have much less funding pressure, such companies will be attractive to buyers in all markets. This deal was concluded in May 2022 at the depths of a 6mth down market on growth stocks.
5) It really does take 10 years to grow a business. I hear angels who speak of exiting in 5 years and seed VC funds whose fund life is 7 years. I dont think they factor in sufficient time for their portfolio companies and for VCs, that can cause problems for themselves at end of fund life.
6) Paying attention to Secondaries also matter. Company had a shareholder who had to exit for personal reasons. So the price per share was very good and we picked up a little more as part of pro rata and right of first refusal. That extra bit helped juice up returns a fair bit upon exit.
Overall, this sale together with some new up rounds this 1H2022 helped improve our overall angel portfolio since 2012 to 28+% IRR and 2.78 TVPI. And for the more active period from 2015 to 1h2022, it’s 39+% and 3.03 TVPI.
Hope this sharing is useful for fellow angels.
NB :Full bite size investment up front worked for us in this case. But i think more of luck and it does not change our current bite strategy.
Wednesday, April 27, 2022
A fellow angel asked us the above question. Ning and i discuss this a fair bit as we have both public and startup equity. I actually summarized some initial thoughts back in Jan article on Sea’s stock crash. Unfortunately the trend has not just continued but has deepened.
It should be pretty obvious for investors and founders who watch public markets that there has been a rerating of valuations in the tech space. Both stable profitable tech as expressed in QQQ (Nasdaq100) and loss making growth tech as best expressed by ARKK (Ark Innovation) have dropped 21% and 49% ytd respectively.
I think with interest rates scheduled to rise more to control inflation, it does look like this trend is good for a while until inflation shows clear signs of abating. That may take 6mths- 1 year.
So how does this affect our local and regional startups?
The most obvious hit will be for the late stage ones who are near IPO. SPACs are dead no thanks to dismal stock performance by Grab post SPAC. And don’t get me wrong, for grab mgmt and founders it’s a great timing move to raise the 5-6b at peak of bubble and dilute little. But for all investors who invested above 10b valuation, it’s losses all around. Same thing can be said for Buka and Goto. Interestingly, Goto raised only 1+b as investors can see what’s happening on grab front.
So what the above means is that no more easy Spac near term and IPO will be also be hard to bookbuild.
So if I am a late stage Vc or PE investors, I will be looking at the current public market valuations to value upcoming rounds. Cuz that’s the exit I get at best in near term. So at least 30-50% haircuts all round?
Eg carvana is now trading at 0.8 times revenue. How does that affect carro and carsome valuation who raised at 2-3 times gmv?
Or even profitable tech like tencent, baba, Google and fb are at 10-25 forward profit. So even if our local tech startups turn profitable, are they worth 50-100 times profit if growing at 30% per annum? Probably 30 times is fairer?
A barometer to watch will be if carousell and carsome can do their IPO or SPAC. If they delay or pull, it means public investors have drawn a conclusive recent lesson from Grab and like.
How about earlier stage startups? Those B round and earlier ones?
We don’t see any big impact on seed valuations yet. Though logically it should cascade to this area but maybe need to see the prolonged pain another 6 mths first. If I am a seed founder, I will quickly raise if I can and be more flexible on valuations. If i am an investor, I will continue investing this period as it’s good timing for the upcycle in a few years time. Companies formed during recessions and tough times tend to do well when the upswing comes.
But I will be more discerning and take my time. As a reminder, seed valuations before the rapid rise of last 5 years, used to be 2.5-4m sgd. A rounds used to be 8-12m sgd.
What if I am a startup founder
Of course fund raising is still a sales game, if as a late stage founders, you can sell a great story and convince investors to still pay more vis a vis public markets, kudos to you.
But if can’t convince, then the solution is to turn profitable or at least narrow losses and work with the cash on hand. And if cash not enough, then a down round dilution may be in the cards.
There is also another less obvious fallout. And that’s on the value of stock options across loss making tech industry. I am sure sea and grab employees who did not cash out will be feeling the pain of worthless options. So you may find esop less valuable as a retention tool.
Looking at our portfolio startups, many are focusing on profitable growth instead of revenue at all costs fueled by super cheap investor money. I strongly believe those that do it well, will reap great rewards when this cycle turns.
What does this all mean?
Actually I think this reversion to the mean is normal for markets and good for our ecosystem. It will flush out the excesses of the last few years and expose startups who are swimming naked and have no real sustainable business model. Investors who blindly chase the next hot story will also learn their lesson and be more discerning for the next deal.
And let’s not draw the wrong conclusions. Crashing valuations and stock prices is a reflection of the risk reward investors want. For profitable companies, valuation matters a lot less except in the area of esop and pressure by shareholders. Truth is, they have time on their side and perhaps opportunity too.
From what I can see, all the easy money whether in public or private markets has been made last 4-5 years. I won’t bet on a quick recovery any time soon unless inflation magically disappears.
Wednesday, January 26, 2022
Was discussing SE today with Shao-Ning Huang. We were lucky to spot it in 2017/8, and bought our usual bite. The position quickly grew to be our top holding by far. We sold on the way up and closed out position at 344 last year not due to any timing brilliance but because needed the funds.
When we spotted it, SE was trading at $10-20 or just 4-5 times sales, mostly profitable gaming and growing revenue 100+% per annum. we felt was a no brainer to buy! moreover, the gaming and e-commerce space are both huge. Sweetener is lots of Chinese high alumni working in SE.
So what do I think of SE now at 138? At 138, it’s trading at 7-8 times forward sales and the growth is slowing esp at gaming side. Gaming revenue also more fickle and hits can lose favor. Also now composition of revenue is a lot of loss making ecommerce. Add on the rising ir environment which bashes down all growth valuations and the picture is not rosy for stock price.
So we will correspondingly adjust our bite sizing and expectation. Recently sold some puts from 100-145. Aiming to build a normal sized position at anything below $120 blended. Won’t go crazy to buy beyond normal bite unless it plunges irrationally below $80. And If plunge for good reason also won’t add.
Bottom line: easy money made on SE for foreseeable future. Likewise for many loss making growth stocks. Be very careful everyone.
Side note: results coming out in Feb will say a lot on direction. Likewise for grab coming results must see before doing any big move on it. Also it’s not all rosy for us in this downdraft too. Caught by surprise by the depth of Chinese tech sell down. Easily lost 0.5m there since Jan 2021 to now. Lucky kept to bite sizing discipline and did not add. Falling knife can keep falling.
HOW ABOUT TECH STARTUPS?
So how about unlisted tech startups valuations. If listed side falls to 5-10 times forward sales, how much you think a much smaller and also loss making startup should be worth? Quite concerned here as we have big positions in tech startup space. Looks like we have to be even more disciplined to make sure don’t overpay for new and follow on funding.
A sure test ahead will be the various spac attempts and loss making unicorns trying to fund raise and/or create exits. Will they have large down rounds coming up or will they be able to still list or sell out at decent valuations?
And for founders, better build something profitable which gives you infinite runway or at least make sure you plan for poor funding climate where there may still be VC money or trade sales or IPOs but investors want much lower valuations.
Saturday, January 8, 2022
2021 has turned out to be a banner year in spite of Covid. As I mentioned in my life review of 2021, Covid has resulted in greater inequality and unfairness in the distribution of world resources. The reason is because govts have to inject lots of money into their economy and keep interest rates low in order to save jobs, certain industries and not cause a downward spiral. And while much of this money helped do just that, a lot of it also flowed to inflate financial assets and that means listed stocks, unlisted stocks and even crypto assets, properties and commodities.
We invested in 6 new startups in 2021 and did follow on rounds with 9 more. This is a new record for us in terms of amount invested. Add on our Vc investing, we have invested over S$7m into the ASEAN startup space. As of end 2021, 41 startups and 8 VC funds.
Generally 2021 has been a good year for the startup ecosystem and hence our diversified portfolio. Only the travel and events related startups continue to hurt badly and we do expect to maybe see 1-2 failures this year if they are unable to raise capital. However, almost all the rest grew significantly business wise with healthcare players like Homage and Alodokter growing a lot and raising large rounds at much higher valuations. We also had Patsnap that became an official unicorn.
We did have a execution specific problem with a centaur startup that resulted in a 1+m write down. It’s clear it’s execution specific because another startup we have from similar space just turned around to good numbers. As a result of this write down, our direct startup investments did not improve on IRR though it’s still a great performance. From 2015 till end 2021, IRR is sitting at 38.83% (drop from 40+% last year) and the portfolio has a 2.98 TVPI.
VC did very well as they did not suffer from any major winning startup write down. The 8 funds we invested are at 2.47 tvpi (from 1.98 last year) with IRR harder to calculate since all slightly different vintage and drawdowns. But we started investing in 2014-2015, so I would estimate IRR in mid to high 20s.
Here are some learnings and thoughts we have:
1) Investing in the same sector may not be such a bad idea provided we are clear not to share info across competitors. At least we still get to participate in the sectorial growth and have 2 shots at the goal instead of just one. But it’s important to make sure both founders know and to not reveal any sensitive info.
2) Diversification and bite sizing matters. Having 41 startups allow for portfolio to handle black swans like Covid. Similar bites also allow the winners to do the hard work of lifting up entire portfolio. Last thing we want is to have a 30 bagger on an undersized position. Furthermore by investing in 8 VC funds, we have another 100+ to 200 startups in the region. This adds to diversification and also adds on an indexing effect.
3) VCs are a good asset class if riding the cycle up. We started in 2014 on the thesis rising tech/startup tide will lift all boats. True enough, VC funds rode the upswing. If you study almost any of the Vc funds started back then, they all have 1,2,3 great winner that return so much that it should have returned entire fund. Vertex, Jungle, Monkshill, wavemaker, Goldengate, 500 all have their own unicorns and centaurs.
But it’s important to note fees really affect things. The current difference between our own startup portfolio and VC is almost entirely the fees and carry.
4) Startups will require a lot of follow on decision making. Our policy is to generally follow all bona fide next rounds up to a limit of about $200k. But we are beginning to wonder if it is worthwhile following less strong bridge rounds. On one hand we want to support founders but so far the data shows many bridges tend not to work out that well.
Looking ahead this year, we expect to continue investing in 5-6 startups and for sure there will be some follow on. The funding climate should continue to be strong as we know VC dry powder is still aplenty.
One big danger is the current rerating of high growth loss making listed stocks. Grab, Sea, Buka have all crashed anything from 40-50%. Likewise other nasdaq listed counterparts like crwd, OKTA, palantir etc. If this continues or worsens, there will be a rerating at PE level and hence startups will also be affected. An upcoming barometer will be if carousell/traveloka/carro etc SPACs can happen and if they happen, how they trades. Crashing like Grab for a prolonged period will make future SPACs fail. It’s telling why these startups are not IPOing normally like sea or razer did. I believe it’s because SPAC has biased price discovery and so they get better valuation and less oversight in a bubbly environment. Hope those we are vested in manage to squeeze in their SPAC in time!
Anyway, rerating of valuations and the subsequent liquidity squeeze need not be a bad thing as it will show who is swimming naked when valuations drop and profit margins come to fore.
So to fellow investors, do be thankful for your gains and remember to give back to the society that enabled it. For fellow founders, the easy valuations and fund raising could get harder, focus on building both a profitable and scaled up business. That way even if really funding gets tough to obtain, at least you just grow slower by reinvesting profits and not end up with a distressed situation.
Thursday, January 6, 2022
I had hoped that 2021 would be a year where life got back more to normal. But instead it just felt like a re-run of 2020. Quite tough year actually as I felt very stuck. In fact this year made it very clear that doing well at work or portfolio has a weakened link to happiness for me. The link was super strong when I was in early 30s for sure.
Being an internal scorecard person who enjoys experiencing old and new things, being restricted in movement, socialization and travel hit hard this year.
Purpose 1 : Good relations with Family & Friend & contribute to their lives
Purposes 2 : Be Healthy Mind and Body
Purpose 3 :Portfolio mgmt & Work role in Society
Angel portfolio side now at 41 startups in total. We invested in 6 more startups this year and a few of our startups had large uprounds. Likewise, the very tech heavy VC and PE funds we invested in also had large writeups. Combined, our PE side was up 20+% on mark to market basis. The only exception remains the L Capital Fund which has continued to write down. Really the saying that a dog will stay a dog holds true in this case. We also had a startup in the travel space that continues to be badly hit by COVID. See analysis of startup portfolio for 2021.
Continued volunteering with ITE, PEP and SWCDC. I don't believe in constantly seeking new titles and roles to do. I believe real value get created when one sticks to a commitment and role. Having said that, I may find a new commitment this year to do more for. Also need to catch up on charity giving since we want to give away 2% of profits/income made over time.
Tuesday, April 13, 2021
Frequent readers, friends who know us or fellow members of AngelCentral will know that Shao Ning & I are careful risk takers. We are deliberate and methodical when Angel investing and we also have parameters and systems set up for all our investments so that we achieve the right risk reward for us.
Recently, we had to write down an angel investment that was on paper a multi-bagger and which was worth >$1M if we sold it. Please don't ask us which startup as its not professional to reveal. The entire area which this startup operates obviously was badly hit by covid.
Anyway, the point of this post is not to gripe about the painful paper loss, rather it is to share that this setback actually validates what we have been teaching and practicing for angel investing.
So here is what this experience has validated for us:
1) Bite sizing matters.
We have a cap of about $200K per startup and have increasingly standardized first and follow on bite sizes. By not being greedy and following round after round on winners, we prevent any overly painful loss when there is a need to write down. Of course the bite must still hurt if lost but it should never kill you. The only time you invest all in for something is when its your startup.
2) Diversification matters.
We set a goal of 4-6 startups a year with a target of 25 every 5-6 years. Each set of 25 can be viewed like a VC portfolio and we hope for 1-2 big winners that pay for everything and account for the 3X return after 10 years. During the holding period, some will grow and die. But our thesis is to never sell until the founder sells. This last point does merit further debate since technically portfolio returns can be even better if we sold out and realized the 1+M profit. But then what if this is the startup that goes on to grow 5X or 10X from here?
On a broader portfolio level, diversification also means don't overinvest in any one asset class. Startup investing whether as an Angel or via VCs should not exceed 10% of what you have. If you are super on, then not more than 25%. And if you have a lot sitting in startups, please invest in blue chips, property, bonds and other much safer instruments for the rest of your portfolio.
3) Put it at book value always.
This is something quite different from others that we practice. So while we have to mark to market so that we can compare with VCs and also use for workshops, we actually always put the value of the startup in our overall portfolio spreadsheets at the value we invested in. We even write down if we know realistically not doing well and may die. We only write up if realized. This practice really showed its value this time as we did not have to really write down our portfolio value by 1+M, rather we just wrote down the value invested which is quite small. So psychology wise, this book value recording for startup investments helps keep us grounded and also ensures our leverage use is always based off conservative asset numbers.
And for completeness sake, we updated our angel portfolio to reflect this writedown and now our IRR since 2015 for the 31 startups we directly invested in is now 35% with a 2.4 TVPI. Still good for us as it matches top quartile VC and within our projected return goals.
Hope this is a useful read for fellow angel investors.
Tuesday, February 9, 2021
Temasek is getting a new leader to help grow our SG champions and invest strategically worldwide on the PE side. Let’s hope the new Mgmt shakes things up on the governance focused boards and also replace ceo who fail to deliver much faster and actually deliver on the next gen of SG Champions.
Temasek under mdm had a mixed performance in my opinion. Total shareholder return of 6% last 20 years. I think this compares badly against top quartile PE Fund blended with S&P or ACWI 60/40.
First half of tenure from 2004 to 2010/11 great performance riding the Sg/asia/oil&gas boom. Credit must be given. But 2nd half from 2012 to now, bad.
Mainly caused by TLC portfolio not growing well. Just look at Singtel, our TLC industrials, Mediacorp/SPH, SIA etc only capitaland, dbs are fine. As major shareholder, much should have been done to take board and Mgmt to task.
The other major contributor to relatively poor last 9-10 years is missing investing in strategic champions where we invest at PE stage (0.5b-2b) and which realize big gains when listed and they really scale. Obvious example will be SEA and to lesser extent Razer.
Moving forward I hope to see :
- Boards role include more of add business value
- Mgmt and board that are removed faster if not performing
- benchmarking to top PE funds with talent to run like top PE fund managers for the non TLC side of portfolio. This means picking new winners better and also helping them more.
-invest bigger chunks and drop the small size cheques. Or set up new entity with talent to do the smallish ones. And then make sure they get the bigger cheques based on the initial stake so that we own 10-30% of these giants ultimately and can really build the next gen of Sg champions with govt/people ownership.
This last point i think miss out right now. There are unicorns being created now with small Temasek indirect stakes via VCs and heliconia. But we somehow have not been able to follow on the later big rounds. Eg patsnap, ninjavan...
Tuesday, January 19, 2021
It has been a good 5 years since we started being a whole lot more active on angel investing. We now have now invested in 35 startups in our angel investing portfolio and 8 VC funds which probably have another 500 startups between them (skewed due to 500 startups large portfolio numbers).
Our 5 year ago thesis was that we enjoy meeting and helping founders, we have knowledge of the space, we think the startup space will boom in ASEAN and also since we made money as startup founders, lets give back to pay it forward. So we set aside the equivalent of a commercial shophouse to invest. I deliberately use this comparison because it shows very starkly the difference in the amount of activity and value which angel investing creates compared to if we passively invested in real estate. Of course the activity must be worth our risk and show up in the return numbers.
In late Feb to March, COVID was a big shock to startup founders. And because of GFC experience, many grey hair investors like Sequoia, some local VCs (and yes Ning & I had same experiences too) swung into crisis mode. We quickly advised founders to plan for doomsday type scenarios on the funding front and plan for various levels of revenue decline. The narrative being survival is key. Then watch for what your clients and sales is telling you. If you are not badly affected, then its a chance to grow through the recession and at expense of bigger, expense heavy competitors. Market sensing and willingness to take action is key. What world famous PE fund Silverlake did next is super instructive. They made big bold bets into Airbnb and others right at the peak of COVID confusion and despair. That takes some serious balls and also helped reinforce our decision to continue investing through the crisis. So in 2020, we actually added 6 startups to our portfolio.
Fast forward to end 2020, this ongoing COVID recession has been K shaped indeed. We did an assessment of the 25 older startups we have and here is what we found :
- 3 in bad trouble revenue <50% with 1 in process of closing down.
- 5 experienced flat to moderately negative performance
Above 2 categories obviously are operating in industries directly affected like travel, hospitality, office services, advertising, construction.
- 17 grew revenue from 2019. Of note, 5 are profitable and 10 net beneficiary of COVID. The categories are edtech, healthcare, digital media, saas and surprisingly recruitment.
On the VC front, it is a similar K shaped picture. They slowed down investing first 1H but resumed deal making in 2H. The data we see from the VCs we invested corroborate what we are seeing in our direct angel portfolio.
Our own rough performance calculations for those of you curious. Startup returns since 2015 is at 2.6+ TVPI or >40+% IRR. VC returns since 2014 about 1.98 TVPI. No IRR as hard to blend them together but definitely below 40%.
Most gains unrealized of course so while far exceeding a 4-5% unlevered return on shophouse, we are mindful of the volatility and risk.
Some learnings we have for fellow angels/investors.
- Diversification of portfolio really matters. Imagine if we invested in a pureplay travel VC or if we had heavy travel weightage in overall portfolio.
- We really don't know what will happen. So its best to have same bite sizes per startup. Winners can go to zero in a COVID event.
- A bad recession is a great time to see if you chose right founders. We are are incredibly proud of most of our startup founders. Most of them very quickly saw the first and second order of the crisis on their business and made changes quickly to adjust. Even right now, they are still making the adjustments and trying to capitalize on trends. Unfortunately, we also had 1-2 founders who chose to blame everyone and everything for their own lack of prudence and thoughtfulness. That's why diversification is key - we can't read founder minds.
- Rising tide really lifts all boats. Its key to get the macro thesis right. If we use VCs as a proxy for indexing the startup market, you can build a portfolio of VC funds and track it. Doubling your money in 6 years is not bad and IRR is much higher than 12% since drawdowns last 3 years. And the value is still adding as the J curve accelerates.
- Growth and Seed stage startups are less affected by recessions. They are already very lean and efficient most of the time. So usually recessions are a great time to retain and hire talent and also take market share from heavier competitors. I think this explains why our recruitment and manpower type startups grew well during COVID even though overall recruitment market clearly slowed down.
- Angel Investing is not easy and the reward must be more than just the returns. Looking at our VC and Angel returns, our angel portfolio is better than all of VC we invested in but not by a large magnitude. And if we factor in all the fees, our work and time, its probably easier to just pick a bunch of good VCs (have to be top quartile!) for someone who only wants the returns. I don't advocate just 1 VC fund as then you have managing agent risk in the VC manager itself.
In summary, we are quite happy with how our startup investments have performed during COVID year. It is indeed true that each crisis is different and so our playbook needs to adjust and be flexible always. Yet the basic principles of diversification, bite sizing, continuously investing etc must hold true.
nb : if anyone is keen on how we do angel investing, we are running our first class for the year on 23rd Jan 9am-12noon.
Thursday, January 14, 2021
Purposes 1 : Good relations with Family & Friend & contribute to their lives
Purposes 2 : Be Healthy Mind and Body
Purpose 3 :Portfolio mgmt & Work role in Society
Angel portfolio side now at 35 startups in total. We invested in 6 more startups. 4 without even meeting the founders face to face! Did our first Vietnamese and Thai startups.
Still volunteering with ITE, PEP and SWCDC. One project of note I did was to help ITE make use of crowdfunding platform giving.sg during COVID to raise funds to help with the expected increase in social assistance recipients. Ning & I donated 10K and the campaign raised over 200K (with dollar for dollar matching by govt) for this purpose.