Lessons from a $1+M write down of a startup investment

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.

Temasek under new CEO.

 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...

Startup Portfolio Report for 2020 - Impact of COVID

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.

  

 

Purposeful Life - 2020 in Review

This year was a tough year due to many many adjustments for COVID. But in terms of purpose and the philosophical breakthrough i had in 2019,  i think the mantra of being useful, focused, grateful and having fun still works very well. So hopefully after 5 years of retirement, I have hit on a good formula to lead my life.

To recap, below is what i came up with in the period from 2014 (retirement) to 2020.

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 and knowledge. help grow startup ecosystem via angel investing & AngelCentral.  Contribute to broader society as volunteer.

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

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

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

COVID circuit breaker definitely helped with family bonding time. For 2020, we already planned to stay home a lot more as 3rd son had PSLE and 1st son has A levels. So not traveling our usual 80-90 days in 2020 allowed us to do that. 

We continued our regular dinner discussions with boys on learning topics. As they mature, Ning & I are thinking about how to pass key learnings we have in the area of daily quality living, business  and personal finance. Continued routine with Dad and made good time for dinners with friends. My own feel is that zoom sessions to maintain relationships are better than nothing but very inadequate. 

Purposes 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.

Kept with regular exercise routine of 5-6 times a week. Mostly jogging, yoga with some swimming and a bit of tennis lately. Critical to keeping healthy and warding off depression. I did not cope well with circuit breaker initially. Felt cramped and locked up. Ning said i kept going to supermarkets every other day. Took me almost 5-6 months to adjust well. What helped was opening up in July and adjusting my own mindset to find joy in the small things and be grateful for what i have.

Eg. watching sunset daily during circuit breaker. consuming a whole lot more wine, heading out to local beaches to satisfy my inner beach bum, did a 17km walk with old friend etc.

Purpose 3 :Portfolio mgmt & Work role in Society

Goals: min 6% (change to 10%) long term annual growth on investable net worth.  hit 100 startups for angel investment doing well as a portfolio. Quality volunteer in any such work I take up.

Portfolio Work

Big wins this year include SEA (first 10 bagger), Baidu, BABA, Tencent, FB basically tech companies. Biggest mistake is buying into SG stocks too early in Feb. Overall did a decent teens returns which far exceeds our 6% annual target.

After 9+ years of running own funds, I now know myself better and feel more confident in asset allocation, analyzing of companies and markets. Read a great book called Masterclass for Investors by Martin Sosnoff in Dec and it reminded me on the power of compounding.  Learned that in USA,  besides entrepreneurs, the other big group of UHNWI (>50M usd) are wall street asset managers who made a pot of gold in late 30s or 40s and then compounded it at 8-15% for 30-40 years. 

Our original decade goal of growing investable net worth 6% annualized has been revised upwards to 10% as we managed to beat the 6% significantly last 9+ years. 10% is a stretch goal and will require me to treat portfolio like my main work next 10 years. Hope it works out well!

So next few months, will be spending time with Ning re-planning asset allocation and modeling returns and cash flow.  

Startup/AngelCentral Work 

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.

Interestingly and to my surprise, this downturn has not been a very big hit on our startup portfolio. The K shaped recovery is very clear. We have 4 startups badly hit (1 has closed down), 10 more hit but the majority all managed to grow in 2020 revenue compared to 2019. Deeper analysis here.

Ning & I are very proud of our startups and the AngelCentral team for navigating well through this downturn. Some founders took a month more back in April to watch first before acting, but most of them took our advice to act fast and make needed cost or product changes. And i think most of them are better off for it. 

As a portfolio, our private equity investments in 40+ startups, VCs and PE funds grew in value by almost 20% year on year thanks to it being very tech heavy. On the downside, one big drag was due to L Capital fund 2 which held lots of retail plays and which in my opinion was badly managed by previous owner.

On AngelCentral side, when COVID hit, Shao Ning reacted quickly and ran experience sharing sessions for AC/own startups. We also offered our experience about downturns with our startups and helped quite a few look over their revised business plans. We also had to switch completely to zoom based pitching and classes. 

While we see some weakening of appetite on angels part, more than half still continued investing like us and we still saw a good $4-5M being funded by AngelCentral angels in 2020. Valuations too are slightly more reasonable now with a good 10-20% drop in seed round valuations. 

Volunteer Work

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. 

I am beginning to realize that sticking to what one is good at matters a lot. So while $200K may sound a lot, its value is low compared to what we do for the startup ecosystem. So i am mindful that if we want to add good value, it must in the areas where we have an edge, have the brand and the people network. 

 

Hope 2021 is a much better year for everyone and that we can finally put COVID behind us and travel again!