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.
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