(For context pls read 2023, 2022 & 2021 updates. Also this post is all about the startup side of things, I also post a review of life in 2024. Can also read my outlook post made early in 2024.)
The title summarizes 2024. Funding and valuations stabilized at a low for most of the year with some small signs of rebound esp in earlier stages. However it’s still far from a strong recovery as later stage funding and IPO/exits are still very weak. Investors prefer to wait and see to see how their later stage portfolio companies navigate the new environment which cares about profits, operating cashflow and gross margins.
The problem is that even by end 2024, it doesn't look like many of the later stage startups have convincingly improved their financial numbers like publicly listed SEA or Grab have. When I read the ACRA reports for FY2023 of a lot of the later stage startups, I can see there is effort to cut cost and lower cash burn. However, most are still very much loss making and consuming sizable amounts of cash. Of course most of these startups will claim that 2024 is even better in terms of cost control and cashflow. I certainly hope so! But this less than perfect financials coupled with still high cost of capital and weak public markets for loss making startups is why we are not seeing a big rebound.
On a personal portfolio front, Ning & I started the year with a reduced budget that is about 40-50% of the high invested back in 2021/22 or about the same as 2023 budget. This decision is partly a reflection of asset allocation choice as we are near the limit we want to invest in this asset class with little exits and is also a reflection that there are easier and quicker returns in the public markets. For context, 2024 listed stocks side we are up about 30% in sgd terms. In conjunction with tighter budget, we also decided to be stricter and not invest if we can't find a good prospect.
What unfolded in 2024 was that we made 5 added startup investments into existing portfolio rounds. We did find 4 new companies to invest in this year but 2 were found year end and still pending and two fell through as both founders found other investors that he preferred. Coincidentally both were gen AI startups. I guess this space still has some easy money from less demanding investors.
For context, we have invested in excess of S$8+M into ASEAN startups and VC funds and have seen a DPI of 0.27. That's very bad for a 9 year period and unfortunately it corroborates with industry study average of VC returns for 2015/16 vintage too. The TVPI of 2.4 and IRR 15-20% is ok esp since I feel this is the bottom already.
Observation 1 - DPI is still very weak for our startup ecosystem. Implication is little new money coming in.
Distributions are weak because there are little trade sales or big up rounds or IPOs. And these activities are very subdued as the valuation rerating caused by high IR has resulted in many startups being very over valued based on last private round. This prevents exits. Moreover these startups are not improving financials sufficiently well to attract big up rounds by new investors.
Eg. Last round worth $100m on 10x revenue. Now norm is 3x revenue, so startup needs to 3.33x revenue with improving cash and profits just to stay at 100m valuation.
This situation is similar in the USA but seems worse for ASEAN, I track cathie woods ARKK etf as a proxy for the growth loss making stories. ARKK fund recovered 22% in 2024 but is still 60-70% below its highs.
My view is until the later stage startups generate liquidity via trade sales or IPOs and/or show vastly improved financials, new money will be very careful entering ASEAN startups.
Observation 2 - Full cycle returns are still good for regional comparables but no longer great against other tech regions. Implication is that buying cheap matters and company selection matters.
Our 48 startup portfolio IRR is now at 20% with a TVPI of 2.45 since 2015.The VC portfolio side is 2.37 TVPI roughly with a slightly worse IRR. Absolute value wise, a small 3-4% annual paper gain for startups/VC blended. Very bad compared to listed markets. Its like property market returns.
The peak in IRR was over 38% back in end 2021. IRR has fallen steadily for 3 years. I would feel 20% IRR for something so illiquid and risky is probably ok if we compare with the STI etf total annualized returns of 6.1% for same period.
But if we compare against India Nifty 50 index returns or China IT index returns or SPY returns, they both return about 9-13% annually. I suspect if we adjust these returns to account for cashflow, the IRR becomes closer to 15% which then to me is better than an illiquid startup portfolio. Needless to say global tech indexes like QQQ did much better.
In a way this makes sense, why should our smaller ASEAN markets naturally produce quality profits and companies that outperform big competitive markets. The implication of this is that as ASEAN angel investors, we must find a margin of safety via lower valuations and also via selecting excellent teams and models that beat the ecosystem index.
Observation 3 - Bottoming out is ongoing, more problems will emerge, no ecosystem catalyst for rebound. Implication is founders must create your own catalyst via solid revenue growth and profits.
Of our 48 startups, 4 managed to have up-rounds as some money started flowing again. Valuations all higher than last round but lower or same valuation multiples. Also these are the earlier stage companies where they are raising $3-5M. For the later stage ones worth >100M, one had a big down round back to previous valuation while the other two didn't raise at all as they have sufficient cash in bank. We also wrote down 50-100% of value for 4 startups. Current count is 48 invested, 3 profitable exit, 17 closed down/bad return, 15 doing well/uprounds, rest too early to say.
I believe there will be more closures and negative disclosures. Most will be due to running of cash. Some will be founder burn out. And some really bad ones will be like efishery types of story.
For us, we don’t mind losing money but we do mind backing undeserving unethical people. When things turn tough, we really can see how founders are wired and their true natures. Wrote on this before.
Anyway, as they say, when the tide runs out, we will know who is swimming naked. And the tide has been out for 3 years already….
From a more macro standpoint, I don't see any big catalyst on the horizon. China is still bottoming out with a loss of faith from their own consumers/businesses + loss of western capital. USA markets are hot and is sucking up a lot of global capital, broader ASEAN economy is doing fine but ASEAN tech ecosystem is grappling with scandals, lack of profits and dearth of good exits. USA IR is expected to cut at most 1% more this year, so capital is still expensive. Its telling that ARKK etf is still 65% below high.
The implication of all the above is that founders should take a leaf from SEA and Grab who are driving growth and cashflow and profits so that they succeed as top dog businesses in spite of the weak ecosystem. Don't rely on ecosystem improving, improve your own business so that you are the exception! It can be done.
Observation 4 : Founders have mostly got the memo on the importance of profit and cashflow
We sounded the alarm back in early 2022 to cut cost and aim for profit. Rely on your customers not your investors. And yet I know for a fact, many mgmt teams waited until end 2022, mid 2023 or even early 2024 to get the memo. The good news is that those who got it early are near breakeven now and have learned quality lessons on what lean looks like. Some of those companies who started late on this journey may not make it. I guess that’s part and parcel of a capitalist system.
Observation 5 : Startup Creation intact. More angels in market.
One silver lining is that AngelCentral saw even more startups this year. 900+ companies registered with us and the quality of the startups are still high. In fact, there is data that shows startups formed during down periods tend to be big winners. Our club also stabilized in terms of funding made by our angels and we ended the year with record number of members. This corroborates with the view that the investing demand slump has bottomed out. Savvy investors are starting to look around for good stories at fair prices. And most important, many new founders are still daring to dream and taking risk to build their companies and make their mark on the world.
Hopefully next year when I review 2025, we will see a pronounced upturn in sentiment and funding numbers and exits. And better still that these are driven by solid startup financials rather than by macro factors alone.
