When Pref Stack Exceeds Market Value

In recent years, an interesting situation has unfolded and is unfolding in many of our later stage startups that raised large sums of money ( >100m usd and up) at high valuations back in 2020 to 2022 period.

The tough situation to navigate is when the pref stack value is similar or even lower than current market value of company.  Eg startup in 2022 raised another 100m at unicorn 1b valuation. At that time, everyone just dilutes about 10%. Total pref capital is $350m. But with rerating now, the startup is at best worth $300m based on comparables.

This means the entire ord share capital is essentially worth a lot less or zero now. Thats obvious. Whats less obvious is that the pref shareholders may realize their upside is gone/greatly diminished and switch mindset to capital preservation and worry about reporting large writedowns to their LPs. It also means it’s not a winner in their portfolio so they will understandably be unhappy. Also diff class of pref may also have diff terms and feel quite differently. Very early pref can be in same situation as ord.

As one can appreciate, there is a sizable number of factors, relationships for a good mgmt to consider in order to navigate well out of this.  Here’s what I think.

• Once mgmt sense this kind of situation unfolding in the macro environment, cut cost to become profitable. Conserve cash. This is the single most important thing to do. Ning & I pushed for this as early as 2022. You have to get your board to see this improves their outcome.

• Once real cash flow breakeven, resume growth in revenues.  This will show that business is one that survives in low or high IR , diverse macro environment.

• Keep your investors aligned to this plan by explaining it at least this ensures their capital preservation. For mgmt and ordinary, it’s trying to bring back the value of the ord shares. 

• If you can, take milestone esop for mgmt instead of cash to put your money where your mouth is.

• After 2-3 years, let’s say you managed to pull off the cash burn reduction and have runway whether profitable or not. Now have time to solution and negotiate a win win outcome.

Trade sale at right terms of course is best and straight forward. But at $300-400m and up, it’s hard to find buyers in any except a bullish climate.

IPO becomes possible. IPO may require your pref shareholders to still take some haircut but at least their public shares post ipo can offer possibility of profit down the road. For mgmt, it’s a great way to reset everyone. But it must be negotiated as I am sure most pref shareholders terms have anti dilution, vetoes etc. So it’s a need everyone ok with type of move, can’t force.

If scale is smaller, then perhaps finding a new shareholder or mgmt buyout to replace less patient pref shareholders is another solution. Imagine in 2028, your company is profitable but top line and growth still a bit smallish. You can try to find different type of backers to replace pref. Even pay to play type rounds where some existing or mgmt investing. Key is your hand holding of pref shareholders thru this process.

Under the IPO lens, the latest TIA article on Shopback actually showcases many of these actions in play between 2023-2026. Revenue didn’t grow significantly for 2 years but good cost cutting. Latest 2025 financials showing revaluation of pref stack down to $400+m. To me this possibly indicates that valuation or outcome of these shares has fallen as of 2025 and so need to accounting write down value of liabilities.  

Interestingly it shows up as an accounting profit but it’s not really a positive or negative thing. And company says resumed growth in 2026 with 30% rev growth which is very credible. Kudos to the team there.

Now if not already, mgmt should be envisioning and negotiating with investors and board on how to recreate value. 

A decent case will be revenue growth 30% per annum next 2 years, hit 200m+ revenue with a 20m+ net profit after tax. Then I think a asx or sgx is very possible. Exact valuation that moment is anyone’s guess but with those numbers, I think ord shares will have value again, mgmt definitely incentivized and pref shareholders will likely ok (not happy but ok) with outcome too.

What is described above is likely going on with many startups that have raised capital that is beyond that current market value.  We know of at least 3-4 more like this and if anyone just googles for those that raise more than 100m, there are many more. I hope many of these founders are executing as successfully or better than what Shopback is doing.

To summarize, it is cut costs, turn profitable, align your board on new reality and go for win win solution. Most important lever is to make your business attractive for public market investors in all climates. Think SE if really big, or Ifast if smaller or infotech systems or even Toku (though preferably net profitable) if even smaller scale.

Hope this sharing is useful to founders and investors alike. It does also highlight the complexity of having a big pref stack. So perhaps always controlling your board and being the biggest shareholder is the best model to navigate all types of markets. And if really need institutional capital, use as little as possible and negotiate terms contemplating down cycles.

A bit of 废话here, but I think in the exuberance of easy capital, sometimes this basic truth gets lost!

SGX listing - Starting to look like a real option (Founders take note)

Founders & friends will know we don't just invest in startups and VCs - the bulk of investable assets are in public markets, fixed income and cash. And since 2012, we've always had a big preference for USA growth names and China tech. And last 3 years, we have a good allocation to SG stocks. Investing in public markets also help us visualize how later stage investors and buyers view startups in terms of valuation and growth metrics. 

Hence in 2022, when we saw nasdaq rerate down on rising int rates, we made a call asking all founders to stop assuming money is easy to get from VCs and PE. This turned out to be true and is still true today. We told our founders to focus on cashflow, cut costs without mercy and turn profitable if they can. So for our 52 startups, after 3 years of funding winter, I am happy to see about 9-10 of them profitable, breakeven or at least on path to breakeven. The top 2-3 are doing >1m million in profit and still growing 40-50% and more. Many have revenues ranging from 10-30M.

At the same time, because we invested a fair bit into STI post 2022, we realize that in 2024 and 2025, there has been an upward rerating of SGX stocks. Its not just at STI level which are mainly GLCs, its also at mid cap level where many familiar names have rerated with 50-100+% valuation growth in the 2 years. We think this revaluation is driven by the stability of SG, EDQP scheme and also improvement in company financials generally speaking. For those who don't follow the local market, STI has grown 62% since start 2023. There is no ETF tracking mid caps, but I can see many local  names have doubled or tripled or at least grown 50% or more last 18 mths. Valuations of 100-300M companies used to be stuck at 5-8 PE. Now its 10-15 range. 

If the market continues being strong, valuations being offered will start to attract companies that traditionally only thought of the VC/PE route to fund raise esp since that option is now at an all time low.  Its already starting to happen.

For example, new sgx listings started appearing in good numbers last year. Infotech systems, metaoptics, ultragreen, coliwoo, Toku, assembly place all managed to list and their share prices and valuations are mostly stable. Many post listing raises have also happened. Eg meta optics, is a pure tech story that IPO with hardly any revenue. It has since raised another round at better valuation and stock price is about 3-4X. Infotech systems is HR saas company that IPO solidly profitable. Stock price is now about 30% above IPO amid improving financials. So the animals spirits seem to be creeping back into our market and with more govt funds coming in attracting even more interest, we think there is an opportunity here for our local startups to list locally in lieu of next round VC money which is now ever so elusive. 

So how should founders think about IPO? There are many aspects to consider and it is not all about the cost and process and timelines. Those a good sponsor/advisor can help and i won't cover the technical bits.

1) First aspect - Is your company ready now? or 1-2 years from now.

IPO candidates need to have a good story to get public investor interest. You can be deeply loss making but is your technology truly amazing so its worth the risk reward of your cornerstone investors? I think truly amazing tech with near zero revenue is probably a hard sell even today. Though Metaoptics is a great counter example. 

The more usual story is a profitable company (at least 2-3M) with a solid market position that wants to raise its profile and raise some money to execute even further.  A sweetener with be if this company has a growth rate above 25% and has some revenue scale (at least 20M revenue).

But because the process takes a  while and there is a checklist of things to do, we think the sweet spot to start learning about this option is when you are one year away from the financials. Internally too, there are things to prepare so that your finance and compliance are at the right level.

2) Second - What do Founding team/Mgmt want?

Is your goal to cash out next few years and retire? If so IPO is definitely not the right thing to do. Mgmt is expected to want to use the raised profile of being a listed company and the access to constant price discovery and public funds to build the company out much more. 

As for exiting stakes, its possible but the liquidity of your stock price post listing and the subsequent performance of the company will determine very much whether founders can sell small or large sums and at what price.

If the goal is to cash out mostly or fully and to stop working, then a trade sale is probably a much better option.

3)  Third -So what are the main benefits to an IPO?

IPO is a form of fund raising. So you will be able to raise capital that your firm needs to carry on growing. Having constant price discovery theoretically makes it easier for you to price any sale or issuance of more shares to raise more capital.

Second, being listed also signals to vendors, suppliers, investors, acquirers, partners, employees that your firm is of a certain standard and has more transparency. Hiring could be easier, bank loans easier to obtain etc

The third big benefit applies especially to companies that have investors on a timeline and with a preference stack. A successful IPO will reset everyone into ordinary shareholders and most shareholder agreements agree that an IPO of min X value is something that mgmt can pursue and which pref holders wont block.

This removal of pref stack will give back more control to founders and free founders up to re-appoint  a new board and also really have a much longer time frame to think about their business. I think this could be a big point and motivating factor for many founders. The investors won't mind too since an IPO will generate liquidity and an outcome for them to report back to their LPs.

The only group of investors who may be a bit unhappy will be those who invested at valuations that are still above what the IPO values at. Very possible since deals done in 2020/22 could have been at unjustified multiples. But I would think bearing the liquidity and possible future stock improvement in mind, even this group of investors should want the IPO. At least get back some money.

4) Fourth - Any good case studies locally? Or what needs to happen post IPO so i don't become one of the zombie catalist firms?

A successful IPO is just the start. There are many nightmare stories of post IPO poor performance and lack of liquidity. In the past, mgmt will always also blame on market conditions. But if the market conditions do improve as hoped by ecosystem players and govt, then it becomes incumbent on mgmt to ensure your IPO is a success.

Here's what's needed. Strong improving story showing up in financial performance. That's key. Deliver or outperform what you shared in the prospectus. Now your board is aligned on timeframe.  Strong regular engagement with fund managers and the public via a mgmt that can articulate the vision, story and performance.

Two names we have tracked over the years that we feel have done this well. And both have used their listing status to grow from relatively small listed firm many fold to today.

- iFAST Corporation

- LHN Ltd

Hope this article is useful to founders and ecosystem players who read it. Ning & I  have already been actively engaging our founders and correct ecosystem players so that this option is well explored and understood. Who knows maybe we will also get an IPO from our portfolio locally and that firm grows to be an iFast!

SG Market is too small !!

Had a chat with a founder lately where I again heard this phrase “Singapore is too small a market.”

Have heard this phrase many times before and investors and founders both love to say it and then push for overseas expansion.

It always makes me feel slightly uncomfortable because while from a gdp point of view, Singapore is indeed small relative to USA or China or Europe, it’s still the 2nd largest absolute GDP in ASEAN. SG is second only to Indonesia whose population is 50X of ours but is just 3 times as large by GDP.

I also feel uncomfortable because I know the P&L of many successful entrepreneurs who are worth 9,10 digits. A great number of them have an overseas story of course but sg can still be easily 30-80% of their revenue.

The main concern I have is that if founders at earlier stages start with this statement in mind when their first market is SG, they may subconsciously be giving themselves a wrong strategic focus or worst still, a wrong mindset with regards to sg or asean sales.

Things are nuanced as usual. For some businesses, their market is global from day 1. Eg.micro enterprise or consumer saas software subscriptions,  developer community tools/software, Amazon/ecommerce sellers targeting USA or Europe etc. 

The issue is I feel the majority of startups don’t fall into this category. For this majority, founders are probably are better off with the mindset that SG is not too small and there is a lot for me to achieve here. To me, founders should only start saying and acting on “sg market is too small” frame of mind when their startup has a decent traction in SG. 

Eg for job portals space, maybe at least >5m usd revenue and profitable before it’s useful to think that SG is too small. 

That’s why we have been advising most of our companies to prove they have a decent home market business first before talking about overseas. This strategy is now paying off as a handful of our startups have some scale in home market and now can indeed feel sg alone is too small since they need to continue growing past that 5-10m revenue and 1-2m profit. 

So here’s some food for thought. Often common wisdom frequently get repeated because there is some good truth to it. But the interpretation and right timing of when the common wisdom applies can make a huge difference in the outcome of a startup.