Volunteering with SG civil service

Time really passes in a flash. Have been volunteering with the Pro enterprise panel for 6+ years now and just stepped down.  I volunteer across 5-6 organizations related to business or education. It’s a good way to give back to society and make use of the learnings I have.

A few takeaways. 

1) Our civil service is very serious about doing its job well. Not only do they provide services and regulate society and industry, they go the extra step to constantly benchmark against world standards and push forward sg development across multiple facets.

2) The PEP focuses on helping the civil service be pro enterprise in its activities as regulator and service provider. The fact that chairman is head civil service shows how seriously this is taken. Over the years I have seen suggestions from industry get taken up seriously and changes made whenever it makes sense. And even if it does not make sense, proper answers are given to the suggesting firm. You can read more below.

https://www.mti.gov.sg/PEP/About-the-PEP

3) There is good clarity of thought on the role of the regulator when it comes to significant innovation. Industry naturally leads on many new services like ride hailing, ev ecosystem or even crypto exchanges etc. Many will push the boundaries of our laws. The approach is never a sledgehammer but a case by case, let the market show the nuances approach. Open sandboxes, engage industry and the answer frequently will reveal itself in terms of what regulators need to do.

4) The civil service is huge. So naturally it is not nimble and there is always a good reason for status quo. And many issues cut across multiple ministries and agencies so it’s easy to get bogged down. 

Hence it’s necessary to have encourage cross pollination of ideas and have cross agency task forces to look at things. Again, this is done in many cases. Quite heartening to see an entity so large try to be nimble and responsive to stakeholder feedback.

5) Finally, many of the civil servants we meet whether senior or not are engaged with their work. Maybe not at the startup team standard but they clearly have strong domain expertise and there is good  thoughtfulness of many replies. Hardly any lip service kind of talk.

6) If there is anything I feel can improve it’s that the sensing of what’s happening on the business ground and in future tech and business trends can be made even stronger not just at the top mgmt level but at the directors and officers who deal with industry. 

More mechanisms for regulators to interact with the businesses they regulate and learn and see what’s done in overseas jurisdictions. Maybe even more roles for secondment to private sector etc

Learnings from Portfolio Gains last 13 years.

The last post i wrote in July 2023 analyzing and summarizing lessons from key losses was well received with close to 5000 views and a good number of people contacting me to ask follow up questions. So here’s the other side of the coin -  sharing our portfolio learning when it comes to the wins and things we did right. I am using the same data set of all the trades over 13 years and the focus is on what we learned.

To set the context, our investing experience has been good but not great (own yardstick) over the last 13 years to end Apr 2024. 

1) Equity returns better than ACWI ETF 8+% total annual returns.

2) Fixed Income returns better than JNK ETF 3.5% total annual returns.  

3) PE investments (which are majority VC and startups) at  20+% IRR which is strong but a lot of unrealized gains and is still undergoing the effects of the funding winter and growth stock rerating. I won't be including this segment in the analysis below as I share about startup investing a lot already.

Why 13 years? Because that's from when we first sold the business and started serious investing.  

BIG PICTURE LEARNINGS

1) EVERYTHING MUST BE DELIBERATE & OWNED

Every buy or sell or allocation decision must be thought through and deliberate. Our best trades are based on small positions, build up to full size and held thru for multi years. Similarly, asset allocation must be deliberately planned and thoughtfully executed. We track all trades and returns monthly and have a sit down session to run through key happenings and decisions to make in the month ahead.

Finally, we own all decisions. We can listen to experts, read books etc, but if we make a buy or sell or investing decision, we own the outcome. This sense of ultimate responsibility is very important in ensuring good decision making.

2) ASSET ALLOCATION IS KEY

This is the key factor that drives returns for us. We made a decision back in 2011 to run our own version of balanced portfolio for 10 years. For us, that means to always have about 55% in equities, 35% in bonds and 10% in cash. I cannot stress enough how being fully vested all the time into equities makes a huge difference to returns. The reason why it works is that it allows us to capture the up days which a lot of data has shown before that if you miss the top days, your returns will be middling. 

And after the 10 years, we relooked at our data and experience and since 2022 decided to go an even more aggressive portfolio with 80% equity, 20% FI/Cash. Strangely we don’t feel any less safe allocating into so much equity.

And within the equity, we learn that bite sizes have to significant for single picks to drive returns. Otherwise might as well all in into index.  So now it’s about max of 5% as a cap per single stock.

3) GETTING THE MACRO THINKING & ASSET SELECTION RIGHT

First thing we got right is that business ownership or equity is the right place to be in. Equity risk is best option as businesses are dynamic and can adjust to almost all economic climates so long as environment is capitalistic and mgmt good.  Hence we allocated the 55% initially and the 80% now. It helps that we made first pot off our business sale and so have a visceral confidence that businesses always are best risk reward if one knows how to pick. 

That leads to the next question of what equities to pick. We made the usual mistakes of picking wrong businesses and markets. What worked well was to focus on growth/tech companies for single stock picks and broad indexes to just track world growth. For latter we ended up picking world index ACWI and later S&P 500 and QQQ. The latter 2 has now become the core holdings because we realized :

- The strongest economy in the world esp at private sector side is the american one. It has been like this since the 80s and it’s driven by their MNCs.

- the global tech revolution shows no sign of abating and american firms still dominate.

We do overlay tactically to China, SG banks/reits but these have been drags and we would have been better off just doing SPY/QQQ. But we never know. Last 3 weeks China / China tech has finally rebounded.

4) STICK TO WHAT WE KNOW

Our best moves revolve around sticking to what we know. So picking and tracking listed tech stocks, ASEAN tech stocks, these are our area of strength. More recently, getting the inflation impact on markets right and broader sense of where world economy is going. Getting macro trends largely right enabled us to get the property timing right and also catch some of the tech AI boom.

5) BENCHMARKING & TRACKING

We benchmark the funds we invest and our own picks against relevant benchmarks. I keep life simple, our benchmark is AGG/JNK blend for FI and now midpoint of ACWI/SPY for equities. And we adjust for usdsgd as we think in SGD terms as base currency. We find benchmarking and tracking portfolio returns across multi years, YTD and MTD helps us understand how we are truly performing and gives us the impetus to make changes if things are not working. No fooling ourselves that things are fine.

6) JUDICIOUS USE OF LEVERAGE/ NO HEDGING

We use leverage to juice returns but leverage is a doubled edged sword. We don't view leverage  against a particular asset but view leverage across entire invested portfolio.  Logic is money is fungible.

At current loan IR of 5-6+%, leverage is now zero. When it was just 0.7%, we lever up to 30% of portfolio. 

And because we decided not to hedge against usd, we have actually made sizable currency gains when mark to sgd. if we had hedged, returns would have fallen by 1% per annum which is very significant. But this does mean we need to pay attention to usdsgd pair. Taking our cue from GIC and other usd denominated giants is helpful here. The worry here is loss of usd status as reserve currency.

7) LETTING WINNERS RUN & HAVE AN IDEA OF FAIR VALUE 

This is self explanatory but it took me years to build the mental discipline to allow winners to run for many quarters and years. This is for single stocks only. Then when the stock exceeds fair value, it’s time to sell. Can sell in tranches no hurry. For growth stocks over valued status can last a long time. I remember back in 2018/19, people ask me how high can sea go, I told them 80 in a few years. Looks like I am not far off but I never expected it to hit 350 before coming back all the way down to current 65!

For indexes like SPY, the reallocation happens automatically. So for indexes, there is no need to ever sell everything unless we stop believing in american MNC top dog position and in capitalism.

SOME SPECIFICS

1) Making gains via single stocks. 

We have about 5 stocks over the 10 years that made more than $200k realized gains each. One made a solid 7 digits. Amount invested range from 80k to 200+k. They are SEA, SHINVEST, FB, GOOG, BABA. They add up to about 35% of all time net equity gains. We also have another larger group that made between 50k to 200k. Examples include BIDU, Foundation Medicine, IFast, LULU, GLP, DBS, air Asia etc

What they have in common is consumer familiarity, lots of research and later conviction as I track them, meet founders sometimes etc. So it’s a multi mth to even 1 year accumulation process. All are growth stocks and almost all solidly profitable companies. Holding period is 1 year to 5 years. Of these, only airasia crashed and burned badly but I got out way before Covid. Another 3 of winners got bought out. The rest are still doing very well as listed growth companies. 

Then the key thing is to let winners run for years if we can. Until growth finally slows. We bought SEA at avg price of 18, sold last tranche at 340+ and average out at 150 ish. Likewise for Shinvest which was a proxy for Espressif. We first entered early at 0.7 and held it until market discovered Espressif and its IPO. Got taken out during the private buyout, likewise Foundation Medicine/GLP. I would argue I sold out of Fb and Goog early but I told myself owning lots of QQQ and SPY also counts. And we do prefer not to duplicate big index components unless super bullish.

Single picks for us has the best return as capital used is much smaller than core and we also trade options on these. Do note the winners do follow the 80:20 rule where 20% of single stocks picks account for almost all our gains. That’s why we now focus on just 4-6 single stocks. Forces us to only hold the best choices and we don’t waste mental energy on no conviction stories. 

2) CORE - SPY & QQQ as proxy for best run companies + long term technification of the world.

SPY & QQQ are our core holdings and we don't sell them and are always vested. Logic is there is no better place to park since we believe in business ownership and these are the best run companies worldwide. The only time we sold out completely was to buy our home in 2021 and through that lucky move, missed out on part of the crash. And once we could, we bought back our SPY and QQQ positions in 2022/2023. A bit early but it’s always hard to time the market.

We do sell some call options on SPY/QQQ that out of money and if they get triggered we buy back in almost immediately. Having SPY/QQQ as core holdings account for another large chunk of gains.

3) FIXED INCOME 

We don't really like debt but have a little FI always that is slow and steady in generating some cash returns. Over the 13 years, in aggregate the return is significant like owning an investment prop over the same period but it’s still a drag on portfolio return and that's why we reduced it to just 20% with cash now.

4) SPECULATIVE ITEM - LONG CALLS & SHORT PUTS

Sometimes, the 10-15 compainies I track really get so beaten down due to macro. Eg. tech companies during the Oct 2022 crash. And we have maxed out cash to buy. Then we have been fortunate that we gain quite a fair bit buying calls at lows. Quite a few calls on tech names made us 50-100k profit by the time we closed them out in early 2023.

We also sell PUTs to collect premiums while trying to enter a stock at slightly better price. Please note the stocks are the same stocks we have conviction on above.  

5) One good fund manager - ASTRAL ASSET MGMT

Our experience with private bank discretionary products,mutual/hedge fund managers and many non broad based ETFs are not so great. Make some money but they usually fall short of ACWI/SPY and need good timing. More specifically,  Asian funds or stocks ones need good timing like single stocks. 

We subscribe to the view that in inefficient markets Asia, stock picking can generate alpha. Hence we invested in an old friend whom we know is very sharp. So far beating his benchmark by a distance and we have a decent profit at 6-7% annualized. However, it’s still way below SPY - again highlighting how important the big picture decision on asset allocation is.

Hope the above sharing is useful to fellow investors who are navigating this tricky road too. Remember it’s important to find a formula that works for you and to  find the framework that can adjust to multiple scenarios well into the future. And what I share is relevant for anyone with 6 figure or more portfolio. For the equity side, we don’t use any esoteric instruments and everything can be bought from IBKR, POEMS or iFast. 

 

A tough act - navigating distressed sales and winding down

My previous few blog posts have been about the ongoing funding winter, how later stage founders need to secure their company's future with a focus on cashflow and profits and more lately on how investor directors should behave esp in these tough times when new funding is hard to get.

Over the last15 mths, Ning & I have had 3 startups fold with another 4-5 in danger. The new funding climate and rerating of loss making growth stocks is finally hitting home. Our startup and VC portfolio took a small 5-10% hit last year and we expect another hit this year. Fortunately, still very much above water but its indicative of the sluggish economy and the funding winter.

So this article is focusing on what happens when startup is just burning too much cash and founders can't find new investors to join or convince existing investors to inject more capital. In very stressful times like these, it's important for both founder mgmt and investors to think clearly and ethically in order to navigate the issue well. And as i speak with more founders and investors and go thru such experiences myself, i realize there are many valid opposing views sometimes. Both have their logic. I use a few real examples to illustrate some issues.

Example 1 : Pre A business that raised 4-5M usd. Company area of business needs scale to work. So it is a classic VC funded model. However, mgmt couldn't make the traction strong enough and existing shareholders didn't have the stomach to continue funding subsequent rounds esp with no clear quality valuation being given in overseas stock markets. 

Some existing like us did offer pro-rata sums if a new investor can be secured. Also, various acquirers and potential new investors all pulled out despite some initial interest. In the end, we advised founder its ok to just tell stakeholders and wind down the business. Winding down not easy too as usually there will be sizable debt. In this case, founder did it well. Communicated, said sorry it didn't work out, triggered transfer of shares to himself for ease of closing down. Still on-going but largely cleaned up. Classy.

Example 2 : Series A business that raised almost 10M sgd. Company on the ropes in 2022 and lasted till 2024. Again multiple attempts to get new money failed, founders didn't take salaries to extend cashflow and borrowed from external party who was supposed to invest but didn't in the end. Situation dragged for months and towards the end, a hail mary distressed offer was made by unknown parties. Very little communicated to investors except a "please sign this or we will need to close down company". Logic is its worth nothing anyway, so something is better than nothing. 

We probed this deal more and as more was revealed the less comfortable we got. Bottom line, the deal was voted out in an all hands meeting and instead liquidation was pursued. 

Example 3 : Series A+ to B business that raised >$10M usd. Company had buyout offers but board investor rejected it. Investors also wanted secondary but it was not on offer.  Then funding winter came and it became distressed offer. We are not direct investors but we are vested. Bottom line, now founders blame investors for the sad situation.

I summarize some key learnings here from these and a few others.

1) Each wind down is unique. How mgmt and investors got to the point of wind down matters. What was done, communicated, promised,  how it was said matter a lot. A cohesive board that communicates clearly and transparently will have agreement on the history and reasons for wind down and will have much less acrimony when going thru the process. Other shareholders will take the cue and have less suspicions and questions too.

So if your board is at odds now, both parties should take the effort mend it asap.

2) Investor Directors must remember their fiduciary duty is to the company. Not your fund or your money or the founders. So if you can block a deal, blocking at the expense of company survival is not right. Though you can resign from the board and block as a note holder or shareholder if there are such rights.  Shareholders I believe have much less fiduciary duty and can vote based on what you feel. Likewise founder directors too have a similar duty. So if the distressed buyer offers you a worse deal personally but everyone is fine with it, you too are obligated to take it. This is ideal but seldom done I suspect.

3) Frequently from investor viewpoint, the founders hold the most responsibility for distress. After all, the founders are the ones who asked for the money, negotiated and agreed to terms, who ran the business daily and oversaw the falling short of projections that lead to this situation. Having been a founder too, I have to say I agree. It’s all my decisions - right or wrong that I make. So there is a greater moral responsibility for me because i  am the main actor every step of the way. 

Some founders do not feel this responsibility. And it shows up in their actions. For example, say the founders own 30% of company and there is a reset happening. To me, management should negotiate to allow old investors to also join the reset terms with some new cash and even if they don't join, perhaps some (10-20%) carry on any future exit can be given to incentivise them to want the deal. As for mgmt share, it should be the same 30% at most. A reset where mgmt ups their share to 40% or 50% while having existing dilute to near zero and no right to coinvest is too much. A bit of greed and opportunism is common and probably desired in founders, but there is a line where it rapidly crosses to being ungrateful & scheming against the people who backed you.

4) I have heard founders speak of their own opportunity cost and so in a reset want to up their stake. And they say new buyers only want them and hence no room for existing stakeholders. Then the issue becomes how you convince the stakeholders to back the deal. If its a note, its a debt. Noteholders can block your deal by refusing to convert or write off their debt. So the practical thing is to offer them something and say it nicely.

As for opportunity cost, i think founders really should drop this argument. No one forced you to startup and you know the market rate salaries for founders. You can pay yourself more if the company does well. But not before. That's how it always works. And don't forget you ran the company and watched the cash flow disappear monthly. Most business owners who don’t raise outside money pay themselves whatever their company can afford. We used to up our annual salaries based on what kind of profit we did. Not revenue, not fundraising - net profit. That’s the sustainable way.

5) Using cold economic logic and name calling or referencing other ecosystem norms is unhelpful when relationships are broken and there is little trust. Telling a noteholder or stakeholder to take scraps while you have chance to rebuild without them is insulting even though logically some chance of money is better than none. Similarly, referencing the capitalistic norms of the valley doesn't really help. Singapore isn't the valley and the actors are all different. Remember point 1. Its the nuances of  each actor and their actions and words that determines how the wind down or distressed sale can go.

So if I were a founder that has a buyout deal on hand that reduces existing to some small upside, I would sell the goal of keeping the company running, keeping the jobs etc. I would definitely agree its shitty deal for them and perhaps if they can block, I will offer some part of my upside to them as a side deal. I will also be very clear what’s my economic deal.  

Investors usually already come to terms mentally and may even have written it off in the minds. So the key thing is to not make them feel they are being shortchanged. That they not only back the wrong team and company, they also misread the ethics of the founders.

6) if the decision is to wind down. Then should appoint a proper liquidator. Esp if there are debts and assets to think about. Ideally the mgmt closes down with minimal debt and can find buyers for the assets remaining. But often there are debts to employees, govt, vendors etc. A liquidator will ensure fair process is followed and that all laws are complied with. 

7) Finally existing investors need to also be empathetic. You invested frequently on the back of your read of the founders and market. Its one of out many investments. So if it fails, your pain is truly less than what the founder experiences. So some empathy and generosity of spirit is in order. Of course, I understand the unhappiness frequently appear when investors actually feel the founders misused the money and executed very incompetently. Or perhaps, ignored what was repeated advice by investors. Ning & I have a few such cases. We try to be understanding and in our minds write it off. After all, we went in eyes open on the risks. The only times we push back is if we sense a lack of ethics and that the founder is trying to pull a fast one on us. Then we prefer the company to liquidate regardless of upside. Get out of each others hair.

Tough topic to write. I am sure there will be different and opposing viewpoints. Esp my view that because founders are the main actors and have the most to lose and gain, they need to be more thoughtful, exercise more restraint, make decisions and take the ultimate responsibility for what happens. 

Behavior of investor directors on startup boards

We have a front row seat watching the ongoing growth and trials of the asean tech ecosystem scene. Since 2013, we have personally invested $9-10m into startups both directly and via asean Vc funds. We have interacted with thousands of founders and met many GPs and Principals of VC funds. On the side of larger organizations, we have been or are board members for stat boards, private entities, non profits which are relatively large with hundreds to thousands of staff and generate 7-8 digit profits or surpluses.

Lately due to the effects of the funding winter and the rerating of many tech stock valuations, we have been hearing disturbing stories coming out of startup boardrooms. There are stories of board members aggressively badgering founder mgmt who have opted for a strategic move towards profits. There are also stories of board members changing their minds about supporting with more funds at last minute creating cash crisis. And of course big ego board observers/members who just don’t add value but somehow still always want to give ideas and suggestions.

So it’s timely to share our views on this issue. Founders, feel free to share. GPs, while it’s normal to focus your personal time on winners, do make sure the less experienced board members you appoint to other portfolio startups do justice to the ethos of being a good member. Many of the issues raised below are happening.

1) Board member has a fiduciary duty to the startup. This means you think from the startup pov. Not your own career path at the investor , not your own investment value pov, not even founders pov. So if mgmt has decided to change strategy towards profit and not chase growth at all cost, you can question and debate but if the board has been updated and the topic discussed and voted, you need to go along with the new direction.

It doesn’t mean you don’t think, or bargain or try to improve chance of success. You can help mgmt decide better with useful datapoints that tell them on they are on wrong track. You can ask for mgmt to peg their pay and esop to delivering the profit with penalties for falling short. You can remind them they promised growth when fund raising from your fund. Get some goodwill even as they override you. But the truth is the market has changed. Good founders like those at sea and grab have already cut and turned profitable. Positive cash flow and profits matter as much as growth now. 

2) Board members should be professional. Be punctual, don’t talk down to people. Prepare for board meeting. Read the agenda, minutes, updates. If you are suggesting something, prepare the arguments with data points. Even if out voted, remember for the founders it’s their one shot, so they rightly should have final say.  If you are like most investors, you backed the founders more than the business projections. So remember that.

Of course there are caveats. In cases where investors own majority share, control board and want to keep growing and can fire founders, or founder did or wants to do something illegal or grossly unfair, then investors need to remove or act against founders. That’s a totally different issue.

3) Do what you say. Never lead a founder on esp if it’s about funding. If you are not sure your side will follow on or will be a backstop investor, pls don’t say you will on something so important if you aren’t 100% sure and willing to stake your job on it. It’s a small blip on your career to have a failed startup but it can cost hundreds of jobs and 10 years of each founder life.

Pulling a backstop which you promise is one of the worst things you can do. In fact, it’s best if you are brutally honest to tell founders early what intentions are in terms of future funding and how you view distressed deals.

4) Finally Board members should be empathetic. Listen to what mgmt is saying and corroborate with outside data and internal data. Don’t forget the business is the founders life and death. It’s just a job and one of 15 investments for you. When cash and exits were easy, it made sense for founders to believe in grow at all costs. Now they are just reacting to the listed markets when they want to go after profits and cashflow. Are you so sure they are wrong? And from any entity pov, it’s right to secure profits so that the entity can survive.

Yes, it does mean your investment is stuck longer or even down rounds for you. But that’s the nature of the markets right. Win some lose some. Winner can become dog, dog can become winner but 5 years later. Patience matters a lot when we invest. 

5) Stay at the governance and strategic level. Don’t go into the weeds and try to talk about sales mgmt or product development unless you are really an expert at it. And even if you are, I would argue the board meeting is not the platform. It should be a separate sharing and the company can even pay you as a consultant to help. It’s cleaner and clearer that way.

6) Finally and this is optional but ning and I do it. Be cheerleaders for the company and for the founders. We find having this basic mindset helps us be more empathetic and get better results in terms of founder- Director relationship. We give more benefit of doubt.

So what happens if we get it wrong on the founders? Consistent bad dumb strategies and execution, and/ or worse ,unethical and mainly selfish behavior? Then we picked a wrong founder, should write investment  off, learn from what went wrong in our selection, and resign from the board. That’s why we invest in a portfolio. Do we then still support cheerlead and support such founders? I think very hard. And when you are no longer a director the fiduciary duty disappears.

Founders, while this article is about how board members and observers should behave, your interest in and effort needed to build a cohesive useful board is even bigger. Done well, boards are a great source of perspective, network and advice. So you have to play the role to take its composition, quarterly running and updates very seriously and do it best of class. Spend time to get to know them personally if it makes sense. They are at least as impt as a key client. Remember no ego, only business.

Is a good IPO on the cards for Carro?

Carro latest fy ended March 2023 numbers.. Essentially they are now a car dealer + car marketplace + financing company. With some extras thrown in like selling ads, insurance etc. it’s a nice synergistic business on the financing & marketplace side where 1+1 can be 3 or 4. 

The marketplace product has a high gross margin but can be at odds with in house dealer side as no sharp long term competitor dealer will want to work significantly with a marketplace that also owns one of their biggest competitor. It will be interesting to see how they navigate this issue. ASEAN Job portals mostly have up running employment agencies. Likewise property portals generally don’t run real estate agencies on the side. 

The car dealer side is lower margin as have to buy and sell the cars but it generates great gmv which  matters if revenue is the main goal.  Finally, the last product is financing side which has always been a good but not super scalable business as it requires access to cheap capital access. It’s telling how the older school financing companies in SG level out at certain loan book size. Only banks are different as they have access to deposits.

And based on the dealadvantage screen shots,  the financial numbers so far are showing it’s not strong synergies. I am not sure how well they run each component but the sum is loss making still even though each business by right should be profitable. I suspect it’s because they raised a lot of money and so hired aggressively and now their cost structure is not right sized for profit.

One recent quote substantiates my point, TIA article has their CFO saying that employee benefits as % of gross profit has fallen from 110% to 89% in 2023. To me 89% still ridiculously high! Profitable pure software tech companies have it at 30-50% for comparison. Also I see  revaluation of of investment assets affecting P&L. Investors evaluating must be careful here, non cash revaluation gains are usually once off and can also be written down in future if need to revalue. Moreover it does not help with cash generation.

Mgmt is saying ebitda in fy2023 is 5m and probably will be 30-40m in fy2024 and that’s a projection and off 1-3 mth annualized. And overall basis probably still loss making since they were down -98m  in fy 2023. It’s not quite possible to bring that to positive in one short year.

The saving grace is they raised at perfect timing and so still have 160+m cash. By the way 160m put in fd is already 8m profit there.

The other big saving grace is carvana stock has rebounded. One big difference is carvana is profitable and trading at 15-20 times ebitda. So carro if valued at 10-15 times ebitda (smaller size and loss making discount), then it’s probably worth $300m-600m at best? Still a lot of money but small for nasdaq. And it’s about right compared to how public markets have cut down asean tech stories. All about 60-80% off richly priced last round.

Let’s see what happens next 2 years as they try to get more money in. If I am a long term backer… I would back only if serious smart new money coming in to lead and to validate a new mark to market valuation. If as an earlier investor I paid a high valuation, I would be careful not to overpay another time.  Remember the lesson of grab, buka, Pgru, ipo! Latest few Investors all likely lose money including ipo investors.

The other smart thing the founder has done is it looks like he cashed out via secondary. It’s less said but quite a few of later stage tech founders have deftly navigated the bubble and cashed out for themselves anything from 1-5m to 20m usd. Willing buyer willing seller of course. And they don’t just buy a home but reinvest some as angels! Now that’s good for ecosystem and I think it’s fair up to 10m as it helps them derisk and at least provide for family. 

Nb: disclosure we are angel investors in motorist which is a car ecosystem platform competing with parts of carro. Previously were one shift investors too which is now owned by carousell. That’s why I am sure this space is fine but need great execution to create the synergies. 

Year of reckoning for later stage startups

( Read my older post for more context and detail but it looks like my prediction of cash crunch for middle to bigger startups is coming true.

http://limdershing.blogspot.com/2024/01/outlook-for-late-stage-asean-tech.html?m=1) 

What a week for our portfolio with both high and lowlights.

First the good side, 4 startups updated doing well. One refused to die and kept so lean and now finally seem to have some product market fit. The leanness and hence super low burn is key. Similarly, another one we thought in danger of dying as no product market fit, got a reprieve as a new investor came in on higher valuation no less.

Third one, continue growing well at scale but this time turning solidly profitable with 10% PAT on 8 digit revenues for 2023. Last one only small loss last year with this year breakeven on 8-10m revenue.

On the down side, two startups running out of funds. First due to product market fit problem. Not founders fault just too early on the product and market not moving to adopt.

Second one is a scaled up startup that is in bad situation due to overspending in spite of repeated warnings that’s it’s not a given new or existing investors will back.

Key learnings?

1) seed or preseed can always raise more money so long as tech and story interesting and costs are very lean. Lean means less than $20k per month. Also if lean enough can pivot until find a good fit.

2) it’s not normal to can’t turn profitable on 5-10m gross profit. Many any other unfunded entrepreneurs across various industries have done it. You may sacrifice growth for now but at least your firm is alive and you are not beholden to new or existing investors.

If you find you can’t breakeven, either you have a broken pricing/business model and/or your mindset is not hungry enough. Rightsize in terms of manpower, geography , product lines. Many non tech businesses with 5m gross profit are already generating 0.5-2m net profit for their founders. 

3) money is not in until it’s in your bank. Stop trusting investors. I already know of several pulled term sheets and even pulled tranches. So don’t be so trusting and optimistic for something so critical.

Very disappointed with the minority of founders who clearly intellectually understand there is funding winter but feel it doesn’t apply to them or their company. Their internal risk reward assessment is very poor. So their actions don’t show real drive to take pain to get profitable. There are continued expenses, slow to cut, continued illogical pursuit of bad revenue.

Likewise the investors who string founders along but leave them hanging last minute should examine their own communication and policies so that they don’t make things worse. Not willing to back say not willing, don’t create a distressed situation by your inability to decide or communicate. 

4) I will venture to project there will be many more distressed failures or sales this year. Shoikmeats is one recent distressed m&a, many many many more of that scale and much larger coming. 

It’s generally not a sustainable business if you make 50m revenues and lose even more than 10m annually.  And there are too many financials I see like this or worse even in 2022/3. Many famous names.

5) As an investor, we are continuing our go slow for angel and new investment. Half of peak sum allocated. we want to see good exits next 2 years first before changing our minds. The  down cases I share validate the key tenets of correct bite sizing and making sure we invest diversely in many startups. Also overall allocation into this space must be something you are very comfortable with.

Let’s see what happens in the year ahead. Good case is some major failures happen but at same time quality stories emerges and they get funding and IPO going. That will change things for 2025 onwards. Bad case will be many failures but no big successes. 

My base case is for the former as we have some startups at scale that are doing good stuff. Sea and Grab are examples. These need their ability to turn a profit to shine thru and will deserve to IPO and get more funding if they so require.  

But there will be much learning, much pain and what ifs all around as we get thru the process.

Positive win win deal for AsianParent/ParentINC

Recently more negative news from startup world than positive ones (Vizzio fraudulent founder, lomotif owner delisting/crashing, Live17 crashing etc), so it’s good to have a positive newsflow from a now considered old time entrepreneur tech Roshni who runs parentinc.

Met her way back in 2011-12, her Asianparent business just started not long. Got her involved in a founder peer group and I think her best takeaway besides hopefully some learning, is her now husband.

Long story short, she took some money from vertex and later from more investors and now just bought motherswork. Also expanded over the years to 12m usd revenue in 2021. Multiple countries and product now media and ecommerce. Only thing not so good is still very loss making at 6.9m usd losses. That’s 2 years ago during the crazy days, it seems like they got the memo to rightsize for profit and claims ebidta positive now. Time will show.

On surface looks like good buy if not too expensive. Some comments.

1) deal definitely accretive since AP still loss making. Gross margins may be worse in retail as online media is very high GP. Also helps revenue by boosting it 10-15m right away. I suspect that’s why can grow from 12m usd to 30m usd in 2 years.

2) Omnichannel as a strategy I am less sure. You can Omni.. but I think still must be either online or physical at scale first. And the skill sets to run either side are not the same. So need to build great mgmt depth for each side. So far retail Omni really strong one I can’t think of any… it’s either retail first like lulu, Charles and Keith and sell a good chunk profitably online or online first like neiwai, jd  with some offline stores for presence.

3) community always works if you can build it. Whether it’s for online media, e-commerce or retail. So this part I totally agree and they have a nice niche topic.

4) MW angle makes sense too. The 2 equal founders have taken it to this size over many years. Nearing retirement at late 50s. So probably negotiating some cash and upside in stock makes sense. Esp if no one to take over. 

5) 70+m usd target in 3 years is 24% growth rate on top line. I think it’s a good target and achievable if can integrate MW and expand Ecommerce sales. Issue is how do the margins look like? They are already experiencing the margin drag since starting to sell online in 2021 where revenue may have doubled due to ecommerce but the gross margins dropped further.

6) deal terms can’t tell. But can see MW Intl wing not big. 4-5m in sales and barely profitable. Local wing no filing est Sg probably similar size or slightly larger as just 2 stores. Price should be like retail valuation with maybe a slight bump as it’s not all in cash. My guess is <20m sgd depending on profitability. And likely below 10m. 

Nb: parent inc issued about 1+m usd in shares to motherswork owners. So likely deal was below 10m for sure. Using high valuation shares to buy is good move if you can convince the SME owner.

Outlook for late stage asean tech startups in 2024

Having ongoing discussions with Shao-Ning Huang on investment allocation and plans for the year ahead. 

For the startup and Vc side in this region, we also came to same conclusion as article below. Essentially :

https://www.businesstimes.com.sg/startups-tech/startups/tech-ipos-could-see-another-mild-year-bar-good-listings-raised

1) from 2016-2021 : ecosystem value growth way too much over cashflow sustainability. Investors and founders push towards ever higher valuation without any validation what public market will accept across in more normal times.

2) the various SPACS & IPO from 2020 to now - buka, Grab, Pgru, Moneyhero, Prenetics and most recently live17, proves that latest round private valuations went ahead by almost 50-80% to their current public valuation. Amazing!

3) so if you a late stage startup (last round above 500m valuation) like many many I know, you know markets are going cut you down unless you have great story. 

What’s a great story? To me it should be at least >50m revenue, growth of >25% forward and at least 5m net profit to be worth maybe $300-500m. And that’s a min bar and means local listing cuz too small for nasdaq. If loss making, then at least 100-200m revenue, growing at >30% and losses narrowing annually since 2022. And net losses must be less than 20% of revenue. This one depending on sector and potential can be nasdaq. And if Nasdaq valuation can still be 1+b.

4) so the options for founders and existing investors is to wait and let company grow more into right financials and/or for public markets to get more risk taking and frothy again. The latter is out of founder control and unlikely in 2024. The former is within control but I am shocked at how many startups still can lose more than 20% of their revenue per year. It’s shows cost is out of control and very bad decisions being made on sales side.

Ask yourself. Do you really need a PA or chief of staff?  Can a role be combined with another? Can you use a non pedigree grad or less experience grad to do? This product/market worth investing in or just because it helps revenue look good but actually barely viable?  If any answer is because it looks good for next round, it’s probably worth rethinking what if there is no easy next round.

Stop it with the moves to look good financially and actually be good financially. Role model after profitable players like sea, secret lab, charles&keith not Adam Neumann type and ARKK fund companies (except coin base, Tesla etc). If your thesis of capturing revenue is not working out, remove the product, don’t keep insisting on scaling something with bad unit economics.

5) another less desirable option is force a small IPO/spac/reverse listing. Most of these are 100-200m market cap, inject less than 10m and the underwriters earn a big chunk for the risk they take. 

Then company pay the price in terms of poor publicity, bad stock pricing and subsequent drop in valuation. Moratorium will be an issue. If not lucky, day traders punt your stock and plenty of strange price movements.To me this move is a bad one and is just slightly above distressed round or sale.

6) how about trade sales then? It’s possible but most trade sales are <150m usd. Any larger need a really big player to swallow. So for those unicorns and almost unicorns it’s a massive down round too. And that’s provided any buyer wants a loss making startup in this climate.

7) the same late stage issue will hit the mid stage startups who are doing 10-30m revenue too. So my advice for this group is the same. Chase good revenues and run a lean ship assuming no more or expensive minimal new money. 

8)  unfortunately, I do think those b,c,d onwards startups that run out of money this year without any compelling story are in big trouble. It’s either a big down round like 30-70% down to match listed comparables or distressed sale/closure.  It’s good for ecosystem but it’s painful for employees, suppliers, investors/founders. 

Those that have cash until 2025, things on exit and IPOs and even funding  should be better from 2h2024 onwards. But anything can happen. Eg bad usa recession or worse inflation coming back…. So again it’s back same story.. get cashflow positive and profitable to create good optionality. Let’s see how our founders and mgmt react.…..

As for our portfolio, we invest and count on private markets 20 mths to 120 mths lateer. So it’s not that affected by current listed sentiment. So it makes sense to always invest if have unlimited cash. But we do not obviously. So it’s like buying when crashing, we decided to invest still but at same slower pace (3-4 new startups and some follow on) as in 2023 which is a good 50% down from peak back in 2021. 

Barring big situation change of course. If we have a big exit, we will relook as it is a good time to invest into seed/A rounds due to more grounded valuations and founders. If a recession hits, then maybe can invest a bit more as its easier to build a new startup during a recession.  Read about our startup portfolio here.

Startup Portfolio Review for 2023 - Navigating the Funding Winter & Green Shoots

(Please read 2021 and 2022 reports for context. This post is my annual review of our startup portfolio, you can read my overall life review for 2023 here)

Navigating is truly the apt word. Because of the funding winter (and it was a real winter with 1H2023 funding falling off a cliff and listed loss making tech not rebounding until 2H2023), high interest rates and shaky tech demand of 2023. These factors affected our startups in very diverse ways. Some who rely on the domestic mainstream economy continued to grow revenues well, others were badly affected as they depend on tech firm budgets, still others were hit hard as they are too deeply loss making and need new funding which did not materialize etc. But there was one thing in common, every founder of ours finally got the message that if they were not profitable, or on path to profit quite soon, or growing super rapidly in a blue ocean space, they are now worth much much less than their last round raised. One silver lining is by end 2023, listed markets have stabilized and in fact profitable tech are near all time highs. Though with loss making tech still 60-70% below highs, it will interesting to see how 2024 plays out for our startup space. More on that later. But first our activity and performance.

We continued investing in 2023. But this time even more cautiously with a big portion of funds reserved for follow ons. In total, we invested in just 3 new startups. This is a low for us. And the thing all 3 have in common is they are all profitable in 2023. We also did 6 follow ons for our existing startups. Total new money committed into startup is 33% lower than 2022. Don’t forget 2022 is already 20% lower than 2021 which was our all time high of investing into startups. We made a conscious decision to not add anymore allocation to startups until we get a clearer picture ecosystem/portfolio wise.

The good news is we hit our 50 startups midway goal and the overall IRR since 2015 went up to 33.8% from 28% last year. TVPI stayed dropped marginally to 2.57 due to more capital added. These top level portfolio numbers hide so much variance inside. In 2023, the failures and down rounds came in significant  numbers as VCs pulled back on the founders who couldn't grow revenues and cut costs fast enough. We had one startup take a down round that resulted in our stake worth just 40% of last round. Sabo by an investor that kept putting off signing on the deal. In the end, existing investor save them but on a down round. Another one totally failed as cannot secure funding.  That resulted in a 400K writedown for us. And finally another 2 that we already wrote down in 2022, closed down in 2023.

On the positive side and boding well for 2024, 4Q saw a flurry of new A rounds where 4 of our startups had term sheets with 3 closing the deal before year end. It was these final uplifts that negated the 2 big negatives. The rest of the portfolio also had a lot of variance in performance internally but because no new round, it doesnt affect the IRR. But we are glad to see that almost all of our remaining 41 startups are alive and kicking and got the message that funding is no longer easy.  Hopefully they permanently have a mindset shift to rely more on sales and cost control rather than focusing on new funding to build  their business.

On the VC portfolio front, i commented last year that its amazing how there were no write downs and speculated on the reasons. I am glad to see realism come into play this year as the VC side suffered 10-15% writedown in value. Overall TVPI is at 2.34 vs 2.6 last year. This is much more realistic in my opinion. IRR hard to calculate but definitely down a fair bit to mid to high teens.

What's most positive and promising for 2023 and indeed even in 2022 is that our cash inflow from PE is positive each year. We are getting distributions that exceed the new cash we are investing. We need that to continue and grow even more next 2-3 years if we are to hit our 100 startup goal and stay active in ecosystem. We have been in investing mode from 2013 to 2021 and have hit our cap for this asset class already. So we need to be using recycled capital moving forward. 

And this is the biggest issue with our ecosystem - distribution for many startup portfolios is  bad. The data from one research report I read puts 2016-2018 vintage funds at just 0.04 dpi and 2013-2015 vintages at 0.4. Ours is at 0.3 and can be considered mostly a 2015/16 vintage. Anyway  even 0.3 is way too low to be attractive for 7-8 year portfolio. For comparison, our American side similar/younger vintage PE/VC funds are already at 0.4 to 1.2 dpi.

On AngelCentral side, the picture mirrors the larger market and our personal portfolio. AngelCentral also ran a behavioral survey of 100+ angels which shows a marked slowdown in funding activity. Our angels funded about 3.6m in 2023 which is a good 25% down from 2022 number. Membership stayed roughly the same but some angels are cutting smaller cheques or pausing/dropping out. One advice,  if you are an angel, do remember it’s a portfolio game. So you need to have at least 15-20 startups before stopping/pausing. If you are thinking of angel investing, this is a good time. Valuations are fairer now and there is much less competition.

Looking forward, macro picture looks like the fed will not be increasing IR any further and inflation seems under control. So capital markets side should stabilize but I think at least for this year, we won’t see a return of loss making growth stocks doing very well. Case in point, ARKK fund is still trading at 35% of all time high. Or closer to home - grab, buka, moneyhero,17live are all trading way below their most recent private rounds done and of course below their spac or IPO price. I don’t see any macro catalyst for them to rerate upwards. Consumer spending is not going to be strong with high IR weighing on household mortgages. Salaries also won’t grow much this year. There is also still a risk of recession happening in the USA and continued China weakness. These will definitely weigh on all ASEAN businesses.

So if I am a founder of a larger startup, I would continue to focus on getting profitable so that I have more options and don’t have to take big dilutive down or flat rounds. Being profitable consistently and maybe still

growing moderately will also give your company a valuation multiple pegged to QQQ rather than to ARKK. And if possible, don’t be in a position where you need funding and have big losses at the same time. 

On the topic of big losses, I have been monitoring the Acra reports of quite a few VC funded names that are in series B or C and I find their latest 2022/3 financials still ridiculous in terms of losses they are making. We are talking about quite famous startups that make X (where X>5 or 10) million revenues and lose 0.5Xto 1.5X.  I comment on them sometimes in my fb posts. I hope these companies financials improve this year and I truly wonder which investors are willing to back them in 2024/25 when they run out of cash. Maybe it’s better for them to shut down so that they don’t suck up capital and talent.

As an investor, we should continue investing if we can. Be more discerning and picky and walk away from founders who haven’t got the memo. Ning and I are quietly confident that our ecosystem will deliver next 2-3 years. One key thing to look out for will be successful IPO or large trade sale of companies like kredivo, ninja van, moglix, carsome etc. One caveat is that looking at current market conditions, the pricing multiple could be quite weak if they try for exit/IPO this year but at least they will generate some liquidity for many investors. Eg. live17 is now 33% of de spac price. To me that’s fair value. Likewise for moneyhero and many other asean startups. Anyway for angel and early investors, even exiting at 0.5-1b instead of 3b will probably give solid returns!

 

A Purposeful Life - 2023 in review

2023 has been a much better year than 2022 for me. 2022 was a year of waiting and limbo with house hunting/renovation, portfolios crashing and 2 older kids going thru NS. But in 2023 many of these things came to an end or resolved themselves and life got going well again.

Year started with a new addition to family- Kody our black dog adopted from SPCA. He has really changed our family life. Now Ning and I have to walk him daily for 1 hr each time, kids have to do the evening one. Nights now include saying goodnight to him and lots of time spent consoling him during thunderstorms!

We also resumed travel a lot more. Managed our first post Covid full family vacation to Taiwan. And year end managed to bring Dad and mother in law to  Australia for a pretty long drive. Also discovered Ning and I really love nature in Iceland. In total we traveled about 76 days this year which is more than in 2022 but less than the usual 80-90 days pre Covid

Main reason is we are a lot busier with angel work, volunteer work and also want to be around for the 4 boys. Number 1 finished NS and entered NUS. Number 2 finishing NS probably going to do law next year, number 3 took up badminton as a key sport and Number 4  continues to surprise us with his willingness to twist what we say and assert his personal reality distortion field.

To recap no change in life purposes, i have centered myself on the 3 purposes below.

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 a volunteer.

Purpose 1: Be there for family. Share and guide kids more. Maintain friendships.

Overall rate this purpose a 7.5.

It’s tough being parents to 4 kids aged 9 to 21. Every day we need to switch mindsets as we help each of them navigate school, sports, NS, university etc. What works well is to discuss with Ning and come to joint decisions on key strategic items and operational issues. Dad wise, he now comes to stay with us every alternate weekend but in time, he may want/need to stay with us more. Arrangement seems to work fine. He had a scare with his eye and it was quite worrying. Lucky it resolved itself and he was even able to resume traveling - to Iceland no less!

The most important relationship with wife is mostly good as we both practice being mindful of each others priorities and desires. She too is learning more each day about ourselves and the world we live in.  I must say I am very proud of all the 4 boys and my dearest wife. 

Friends harder to keep in regular touch. Still the same catch up over dinner or drinks every few mths. But it’s nice to see mostly everyone grow older happily.

It was a good move to move into current place as our older boys appreciate the privacy of having own room. We also at least now have a study of our own and dad has a room too.

Purpose 2 : Be as healthy as I can mind and body

Rate this 8.5

I lost weight more as walking the dog daily made Ning and I lose weight. Now weight range is 64-65 consistently. Diet wise is still eat anything I want but can’t eat too much and definitely can’t eat post 10pm. Also manage to tone down on wine consumption to about 3-4 bottles per month between 2 of us. Sleep is fine and have added magnesium pills before sleep as it helps sleep better. Fell sick only twice or thrice of which once was repeat Covid a few mths back. 

If I am honest, I do get mentally bored at times esp when everyone is up and about and I am alone at home. But filling up all the time with work just to keep busy also feels like a cop out and lack of imagination to me. So I try to exercise and meditate and entertain myself. Am toying with online courses in history or literature as a good use of spare time.

Purpose 3 : Preserve & Grow Wealth - 10% annualized net IRR on networth+ Quality startup angel work for 100 startups+ build AngelCentral + good volunteer 

I would rate this 7.5 this year. Much improved from 2022 as markets all rebounded and even our startup portfolio  thawed from the funding winter and started getting some investments in 4Q2023. But we made a major allocation mistake by keeping 30% of stock portfolio in sg and China stocks. This drag pulled down our overall stock performance to 20+% in sgd terms which is about acwi but below SPY. But it’s still a great rebound and we are almost fully allocated into equities all the time which is very important for long term investors. Cash is a drag, bonds marginally better and market timing is very very hard.

Will write more on startup side in a separate post as always but in summary - overall its down for PE side as the VC/PE funds we invested in write down their NAVs over the year. 

We also crossed 50 startup investments this year with clear green shoots appearing 4Q2023. Not just new uprounds for our startups but also some exits from our PE and VC funds.  Not a lot but at least this year it’s more cash in from PE than out to our startups investments. 

Couldn’t hit the 10% investment/networth IRR this year with PE not contributing and in fact negative. But we believe over time, PE will kick in strong again. Long term IRR since 2012 is now down to 9% or so if we mark to market all the PE.

AngelCentral also saw the same decline with our angels funding easily 25% less than year before. Membership is stable, though not growing. The good news is final quarter had 4 startups going into up rounds so it’s good vindication of our clubs selection ability. 

For startups, we also had 3 startups go into distress and still undergoing liquidation. What’s painful in these cases is when the founder doesn’t want to let go and close down and when the founder starts to plan only for themselves and obviously doesn’t care about investor fairness anymore. It’s mentally not fun to have to deal with the uglier side of human natures. Easy thing to do is write off and ignore them but Ning and I believe in fairness and things being done properly. So we push back sometimes if we feel treated unfairly even if there is no economic rationale. 

Anyway have made a in depth post on startup portfolio here.

Finally on volunteer work, I finally retired from my District councilor role with SWCDC after 14 years of volunteering. Reason is because the HwaChong volunteer role is quite involved. So to do a good job, something has to give. Rest of volunteer work with PEP, ITE, IPOS, NRF remain.

So overall, 2023 has been a good year. Kids all growing older and we think we are managing ok as parents. Spousal relationship is better than ever as we both settle into more synched expectations of life. Still get lots of mental and emotional challenge with the portfolio and startups so that’s good. But the interactions that expose the ugliness of human nature is quite draining.

I do think 2024 will be more of the same where our key challenge is parenting well. Startup side should rebound more and I expect more exits from the PE/Vc fund with later stage startups and maturity coming up. Valuations will be the issue. It seems like public markets no longer buy a story of high multiples because revenue growing well or market potential good. They also want profits or near profits and cashflow. See latest 17live, moneyhero spacs as examples. And rightly so.  As for listed portfolio, I don’t think there will be another 20% gain on equities or bonds…will be lucky if eke out a 7-10% return. Maybe China will surprise us all…