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!