On Purpose - 2019 in Review

Another year passes so quickly. I have always been searching for the right framework to live and the picture seems slightly clearer this year. Previous posts have always been on stuff done and learning. I think i have enough to now take a step back and frame all the stuff. See if it makes sense and is useful to you.

Life is about having purpose. Purpose creates motivation and challenge which generates plans, execution and hopefully reward. It also acts as a time allocation device. Goals are what we set to achieve our purpose. One can have multiple purposes though it’s best to keep it to a few at best. Purposes can change after many years.

Life is also about pleasure or fun. Pleasure can be physical, mental or spiritual.  Exercise, beauty, learning new stuff, travel, eating etc.

Life needs connections with others. Can be family, friends, fellow workers, volunteers even animals etc. the mental need for social interaction should not be underestimated.

Life is about balance. The trick is to exist at the dynamic moving intersection of all the above and be happy with the current state and future trajectory state. This requires me to cultivate gratitude and contentment to handle the inevitable tension and trade offs between various purposes.

And what of happiness? Happiness happens easily when above is achieved. However, personally for me,  the issue of focus and the problem of drifting and feeling like a bystander is still there because this more multi-faceted life is still in vast contrast to the obsessive single purpose life I had previously in JobsCentral. Ning says it best when she remarked about how life was simpler but when we only just wanted JobsCentral to succeed.

So bearing above in mind, here goes:

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. help grow startup ecosystem as angel investor.  Contribute to broader society as volunteer.

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

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

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

2nd son had O levels. Very proud of the way he studied hard without much pressure from us. Our boys are a major focus for Ning & I. Number 3 also did well and seems to have matured. Likewise number 1 and 4 are growing up nicely. Perhaps a little too quickly for number 4. Goal is to bring up well adjusted, contributing and happy people.

Celebrated wedding 18 years anniversary. Love wife very much. Dad still going strong and traveled with us to Taiwan for 20 days. He also went to South America for almost 4 weeks with my sister earlier in the year! Still miss my mum and think of her every few days.

A very old friend of mine finally found a life partner and got married in 2018. This year became a father. Its actually hard to keep in touch with old friends and it requires a special effort to always organize group dinners. Still, my experience is that its worth it each time.

Purpose 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.

Body - improved with cholesterol dropping a bit. Weight maintained at 68-70kg range. Health screen all clear. 5-6 times exercise per week.

Mind- mentally up and down but not too dramatic. Regular contemplation of death helps keep perspective and having Gratitude. Mindfulness keeps my attention on right things. Boredom and bystander issue is still there.

Traveled 72 days. Less than last few years 80-90 days but it’s due to our commitment to stay at home for the various kids exams.

Purpose 3 :Portfolio mgmt & Work role in Society

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

Portfolio Work

Portfolio YTD gains of 17%. Tracking the 6+% annualized since 2011. Big mistake on baidu + overallocation to value funds + 1H delevering so took some money off a little early. Big wins on sea, fb, alibaba and shinvest help us to at least match index.

Still in progress to switch to even more etf index investing. Can’t significantly beat index so might as well don’t try. We also want to be more disciplined in giving. Will have more discussion with Ning on this. 

Startup Work 

Angel side very active. I think because we now see so many deals, we actually hit our upper limit and did 6 new investments. Also had 3 big up rounds from previous startups. Almost all grew by revenue. 30 startups now. Thats 30% of the way to the 100 startup goal. Portfolio doing well  if mark to market.

AngelCentral side ramp up a lot. 130 paying members and we ran angel education workshops for easily 200+ more. Also spent lots of time vetting and meeting the 700 startups that register with us.

Volunteer Work

Still volunteering with ITE, PEP, SWCDC. This year a bit less time due to AngelCentral but the education related projects are still very meaningful to me. Of note, spent 4-5 sessions on an  ITE project. It is a highlight as it involved helping plan continuous education pathways which is something I firmly believe in. 

So for next year, should be continuation of the same and reminder to self to focus on 

Purpose, Fun, Balance & Gratitude.

How Should Angels Think About WeWork?

There has a recent spurt of bad news coming out of startup world this year. Readers will know Ning & I are conservative angel investors - is there such a thing? We take calculated risk in angel and VC investing and worst case, are prepared to write off our money. Of course,  we are obviously doing it because we like the activity and believe we can generate returns worth our time.

Lets do a recap just for this years news alone. Locally we have :

- Honestbee on brink of bankruptcy.
- Carousell taking a less than ideal round with OLX
- Rotimatic losing $1 for every $1 they sell.
- Propertyguru shelving IPO due to poor valuation offered by retail investors

I also buy the ACRA reports of many startups at Series A and B and they are inevitably all loss making. And to make things worse, the losses are not narrowing but sometimes expanding faster than revenue!

On a global basis

- Wework failed IPO and subsequent writedown/bailout by Softbank
- Uber & Lyft poor post IPO performance
- Grubhub stock tanking 40+% in 1 day due to poor earnings guidance

So how do we read all this? Especially as an angel investor? Does this mean we should just stop investing? Wait & See? Every angel needs to make up their own mind. For us, these are some of our thoughts:

First the good, positive stuff.

1) The fact that Carousell & Honestbee can raise so much with such bad revenues and/or unit economics is actually a sign that the ASEAN ecosystem is really strong with liquidity and interest. It is also the reason why SEA has decided to go all in for Shoppee so as to really stake their claim as a major ecommerce player in the region.

So ecosystem is growing and doing well. Liquidity is there as we see more and more VC funds raise and so will deploy capital next 3-5 years. And this is across all stages. At AngelCentral, which is an angel investing club, we have seen amount funded for our pitches grow at least 50% YonY.

2) Market growth is real. ASEAN really is a strong demographic play. GDP growth is strong in Indo, Vietnam, PH etc and this growth will accrue to tech related plays.  Just see how fast revenues have grown in Shoppee or Grab or Gojek.

Now the not so good stuff.

3) However, because of (1), many founders have decided to go for revenue or even just metrics without the cost discipline and patience to grow revenue and cost in tandem. This has led to massively loss making entities who all claim that their ultimate market size will justify the losses. In industry speak, we hear founders talk about their unit economics and the LTV of each customer.  This all makes sense provided capital is sufficiently patient and that the unit economics assumptions are real and market growth assumptions are accurate. Unfortunately, asssumptions are often wrong and unit economics or market size sometimes does not bear out.  When this happens, valuations have to come down dramatically.

Eg. I suspect this will happen for all the coworking spaces. None of them have succeeded beyond being a property play with some ancillary services added on. This makes them a 1-3 times revenue multiple play which is exactly how softbank values wework now. Thats a 50-90% valuation haircut.

Will this play out in more verticals? Unfortunately the answer is yes. With softbank licking its wounds, IPO market rejecting expensive listings, the froth has been blown off somewhat.

4) So there will be more bad exits or failures coming. Where will they come from? My bet will be on those low gross margin or pure traffic plays. B2C and with loads of cost and who have raised loads of VC money. The pressure will be intense to deliver on actual revenues next 1-2 years and profits thereafter. Quite a few names come to mind but i will reserve my judgement and see what happens.

So what should angels do?

Personally, we are sticking to our investing thesis. Remember VC/Angel investing should be just 5-20% of your total portfolio. So you probably made that same 10%-20%  in public equities and bonds last 5 years. So it must be money you can lose. We cannot stress this enough.

Next, we invest base on the founders skills and ambition, business model, product and market sizing. We invest systematically on a portfolio approach with discipline.  We want our companies to become profitable with superior unit economies and branding. Then they have the luxury to decide to trade sale or IPO. We do not want to invest just because an area is hot or if there is a high valuation ascribed to the vertical overseas or if a famous VC is investing. That is called investing blindly and greedily.  You need luck to behave that way and do well.

And if the shit really hits the fan on the ecosystem, i would argue it will be the best time to fund great founders who make it work even without much funding. Talent also becomes easier to find and of course, round  valuations will adjust downwards to compensate for risk and capital scarcity.

What should startups do?

To me, founders should take a long hard look at just what your unit economics are. And have a plan if funding is less or dries up. Because I can tell you having gone through SARS in 2003 and GFC in 2008, operating a startup without any outside money requires a mindset and hunger and obsession that is very absent in many founders mindset today.

Capital efficiency should be your buzzword. So many local Series A//B b2c startups need to spend 5,10,15,20m over 5 years just to make 1-3m of gross profit. In lean times, this is a ridiculous sum and implies a lot of wasted dead ends and maybe just plain waste! It may take a few years longer but I suspect often it is possible to spend much less and achieve same results.

In Summary

We don't think things are so bad right now like back in 2008. In fact it is nowhere near. Our assessment is that the pendulum has merely swung back to more normal state and there is still much interest and liquidity. Of course, if the rest of economy swings into recession and more failures like wework appear, then all bets are off. But we do believe sticking to consistent disciplined investing will work through both good and bad times.

NB : if you are keen to learn and hear our sharing as rather prolific angel investors, come attend our next workshop for Angel Investors.

How Should Angels conduct Due Diligence?

Its been almost 2 years since we founded AngelCentral. We now have a  quality pool of angels who are investing with (hopefully) a considered portfolio strategy, selecting from a large pool of varied startups and who have a framework for evaluating founders, market and deal terms. The next question we get from more experienced angels is on how to conduct due diligence on the startups they wish to invest in. 

(For this article, i will assume the angel is not a lead investor and are still following a VC or syndicate lead)

Philosophy & Mindset

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I will start by saying due diligence happens after you decide to invest in the round. In an ideal world, you complete DD then decide to invest. However, the real world does not usually allow you the luxury of telling a founder to share detailed datarooms before you at least soft commit. So the normal way nowadays is to evaluate the startup via a few meetings and within 1 month, decide to invest provided everything else in DD process works out. 

So i would encourage fellow angels to have a mindset of verifying key information when it comes to DD phase.  This is very different from the pre-commitment mindset of finding reasons to say no when evaluating the startup for investment.

How Deep Should Early Stage DD go?

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By definition, there isn't that much to DD for early stage startups. Less legal documents, simpler product and fewer years of financials to look at. Also, for angels, we must be prepared to sometimes be given a smaller dataroom. Eg, the lead investor will rightly want to see all salaries and even some client names, but angels probably don't have a business doing that. It really depends on how comfortable the founders are with you.

Areas to DD

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So what do we find in a typical startup DD dataroom? In this folder (usually a cloud folder), you should have access to :

1) Corporate Structure & Shareholding Matters

Eg. ACRA filings in SG case. Shareholder tables pre and post investment, Past & Current Subscription Agreements, Latest & Proposed Shareholder agreements, Founder agreements etc. 

Verify - shareholdings, post/pre investment numbers, investing in holding company, ESOP contracts, rights of shareholders, founders agreement terms etc

2) Financials 

Eg. excel mgmt reports, audited previous year reports. Cash flow, balance sheet and P&L, AP/AR statements, Bank statements

Verify - key expenses like mgmt salaries, marketing costs etc, cash in hand, AR/AP etc

3) Asset Ownership

Eg. domain name registration, software contracts, property titles etc

Verify - ownership of domain names, apps, source code, databases collected. 

4) Contracts & Legal

Eg. employment contracts, client contracts, JV partnerships, MOUs etc

Verify - terms are in compliance with laws and same as shared pre DD

5) Product Development/ Traction 

Eg. analytics snapshots, login access to product demo, big picture milestones/Dev plans, customer interviews, production BOM etc

Verify - usage and milestones as shared during evaluation, key contracts, client renewals

6) Any Other Information

Eg. Investment Deck, Financial Projections etc

That's Way Too Much Work!!!

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Truth be told, most angels don't do all the above. That is why we are not lead investors! For deals which Ning & I are not leading, we usually just pick a few key ones to verify and take about 1-2 days to complete DD. Usually i like to check on mgmt salaries, make sure traffic is real, check out product and customer feedback a bit more. I rely on the lead to make sure hygiene stuff like cash, shareholding, legal issues are all sound.

When Do I Cancel the Deal?

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Shao Ning & I view DD as something we do to tick the boxes. We will only cancel the deal if something is very off or which gives us a feeling founders were not ethical/honest. Eg, if founders said they pay themselves $4K per month post round but in projections they say it will be $8K. And when asked, they say its because they are raising more money. That will be a sign for us to walk away!

But if it is last month sales reported at $10K, but in reality it was $9K. And mgmt has a good reason why they reported wrongly, we will usually give them the benefit of the doubt.

In summary, due dilligence is something angels should do just to make sure the key reasons we are investing are verified. The amount of information we go through and which the startup shares has to be commensurate to the stage of investment. We can and should rely on quality lead investors to do the full due diligence work but do remember if they make a mistake, all they will say is sorry. So end of the day, we have to feel comfortable.  Good luck and have fun!

AngelCentral/Angel Portfolio Report Card

ANGELCENTRAL

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AC goal is to build effective angels by offering quality deal flow, investor education and syndication services. Our community manager zijie has written a wonderful summary of what AngelCentral has done in 2018. You can read it here. Some highlights:

• Hit our goal of doubling investment commitments. From 3m in 2017 to 6m. Of that about 3.7m actually funded.
• Signed up over 100 paying members from 0 in 2017. Lovely mix of entrepreneurs, corporate types and family/corporate funds. Best part? Almost 40% of them actually cut a cheque.
• Trained more than 200 angels.
• Successfully ran 3 syndicates. 

For 2019, Ning set more ambitious targets to grow everything and we are off to a good start already. Of note, we just launched our 2 sided online platform to facilitate discovery and dealflow.

PERSONAL ANGEL PORTFOLIO

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As for own angel portfolio, we now have 24 investments as of 31st May 2019. Using the 24, it’s a TVPI of 2.6 since 2011. If it is over the 19 investments made since Jan 2015, we are at 3.3 TVPI.

In terms of IRR, it has been 23% since 2011 which includes all our early mistakes and 68% since 2015. Hopefully the numbers show we are getting good at our game and that all our fellow AngelCentral investors are working with a good formula. Hard to say because the high IRR also coincides with increasing liquidity in funding ecosystem. But I do feel we are picking better since retiring and focusing on angel investing.

A few observations

• mostly paper gains based mark to market so really need to wait for exits to realize those gains
• 80/20 rule definitely applies. The top 5 startups account for almost all the paper gains.  
• Angel/vc/pe part of portfolio can act as a barbell to overall portfolio. It helps add 2-3% to overall returns which is very significant. 
• Early exits are no good. We need 30x returns not 2-3x.
• It’s really all about founders and depth and scope of their hunger.

PERSONAL THOUGHTS

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Personally, I want to share that helping to run AC has given more purpose to my life. So it really validates the point about having a meaty identity to sink my teeth into that takes up time, is intellectually challenging and also hopefully pays back.

Now Ning and I call ourselves full time angel investors who not only invest 4-5 startups a year but help hundreds more find angels via AC. We are now useful again in a concrete economic way. It’s also a lot more fun to co-invest with other likeminded investors. 

The tricky thing is how to balance it all so that I don’t end up getting obsessed.

It’s quite easy to get back to old mould. I got disproportionately frustrated over a failed syndicate and I had to remind myself that it’s just part and parcel of running an angel grouping.

Hopefully things will continue to balance well and our angel activities continue to grow and add value to the ecosystem. Key thing in my mind is monetization for existing startups and real exits that generate founders who can invest back to spur our ecosystem even higher! 

Thoughts on Strategic Direction for Carousell

(Wrote an entry on Carousell before.)

Friend sent me an article on BT about Carousell. It resonates with how I have been feeling but I have been refraining from commenting partly because I want to see how they executed last 2-3 years and partly because we do have a small indirect stake via a VC that’s now actually significant. 

Note : Latest OLX deal is 22.12m cash, the rest by injecting OLX Philippines outfit at a 30+m valuation if I recall right. So they bought another 8-9mth burn time. And OLX is of course potential buyer. 

Can Carousell become mobile Craigslist of ASEAN? 

Not many people are aware that Craigslist is very profitable on close to 1B of revenue annually. Thats what Carousell is selling to investors. That it can dominate ASEAN as a classifieds player which is a very large 0.5-1B (my estimate) revenue market. However, the dynamics that allowed Craigslist to charge for jobs, property, cars and personals back in early days no longer apply in ASEAN.

It will be tough for caurosell to become a profitable mobile classifieds following the trajectory of Craigslist. Reason is it is not a true first mover in the various classified verticals and each vertical is crowded. The property, jobs, cars, dating classifieds space all have very deep custom built web/mobile platforms and strong brands with significant resources that already are taking up the available online advertising revenue. 

So it would be a hard slog to win against the likes of propertyguru, jobstreet or even sgcarmart. Can slowly make headway like in cars (weakest group) but quickly will be very tough.  Ask yourself where you go to look for jobs, cars, dates or property? 

Can Carousell become a MarketPlace?

Back in 2015, I thought the logical strategy would be to be a mobile marketplace ala Lazada on web and that the whole classifieds was a deliberate strategy to get started with some mindshare and users. Unfortunately, they did not try to primarily earn off GMV and transactional revenues and build out a comprehensive marketplace platform. Now I would argue they have missed the boat and Lazada and shoppee are the regional leaders. There could be a niche as a c2c marketplace but that’s probably much smaller.

Growing into 500m valuation?

Based on 2017 1.7m usd in revenue (Expenses are an estimated 30m in 2017), my guess is if via ASEAN mobile classifieds as a business, they will be lucky to be doing 10m ish usd advertising/fee type revenues (not some funky gmv type topline) this year.

That’s not enough to justify the  500m valuation now. 500m requires to hit at least 50m revenues. And those revenues better be high gross margin type (>75%) type and growing rapidly year on year. Product wise, they need to have users preferring to use them to search and get property or jobs or cars across asean. I don’t think they are anywhere near that now. 

The other possibility is to that it’s not too late to switch into marketplace. I don’t know enough on the competitive dynamics of this space. But a good mark of success here will be an improved platform that somehow offers sufficient value for carousell to earn a cut off the transaction value and which a significant percentage of users are willing to pay for. 

So what’s next? 

Even if Carousell fails to deliver on revenues, it is still valuable to a buyer. Great brand and traffic means it can end up being like Redmart. Founders get decent package but early investors will probably lose most money with latest investors losing less. Redmart gets to continue and consumers and staff benefit. 

Ecosystem wise, that may not be a bad thing. Poster boy does not and cannot mean sure win for everyone. Anyway, we have other poster boys like Garena/Shopee, Patsnap, Ninjavan, Razer, Justco etc and I would argue they have much firmer revenue positions.

Of course, am happy to be wrong and if Carousell manages to crack how to beat the various classifieds players and/or become a dominant marketplace, then it will become a sizable, sustainable unicorn for sure and our small indirect stake will be worth many times more!

Honestbee thoughts

GMV of 132m. GMV is the latest number startups like to bandy around. The origin is for e-commerce sites and marketplaces but now everyone seems to think it applies to them! Why? Because it’s easiest to boost with coupons and marketing and getting a multiple of it for valuation usually means high valuation. I much prefer gross margin or even ebitda. Imagine if propertyguru or sgcarmart start to report the full real estate or car value as their top line metric...

Even gross margin can deceive the real picture if mgmt choose to classify discounts as marketing which falls under overhead and not cogs.

Honestbee is a case in point. Only selling 132m usd last 12 mths and probably barely at 5-10% real gross margin if we include marketing/discounting expenses. That’s essentially a deep loss making 10m usd business spread out across many countries. In the normal world, that’s called no big deal and probably no white knight will save it. But in our frothy tech world?

Who else fits this description? There are non marketplace/e-commerce poster boys that track gmv as if it’s revenue. Let’s see what happens...