Listing as a form of Series A or B - Migme

21aug 2016 Edit : Steven reached out and corrected me on some items. Here are amendments. First mgmt owns a fair bit more due to 53m restricted shares and about 20m option pool. About 73m shares in total which majority will be mgmt. so about 25-30% owned by mgmt. Second, migme has announced they will be raising 6.5m to 10m more very soon. At current burn, it will last 6 month to 9 months more. Their game strategy must really take off and reduce cash burn from current 5m per quarter. It looks like a key period coming up for the team!

Migme has resumed trading after a 1+month trading suspension. It is not normal for a listed company to stop trading for long because the basic idea of a listed firm is be liquid and tradable all the time for it's shareholders.  Migme has announced raising $8m more various investors of which Mnc group is one. Mnc is a large conglomerate in indo with a lot of broadcasting interests. A good strategic investor. However market is punishing it today with a 23% drop in stock price to 0.36 below the subscription price of 0.4. What I wrote earlier still stands. The key period is upon migme now. It has to use this 10m over next 9mths to prove it can improve financials and maybe even be cash flow breakeven. To me, this whole suspension episode is a good reason against raising via public markets instead of usual Vc. Mgmt has so much more public stress than needed. Readers can read Steven fb post to feel his pain.

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I am writing this because someone asked me what I thought of migme.

Have commented about this before. Essentially, migme was a 7m series A "ish" round raised via an ipo route. Then over the last 2 years raised another 15m or so ala a series B. So while there is added complexity clearly there is some advantage to be listed. However end of the day cash flow and subsequently profit is king.

So in migme case they are still like most series A and some series B type company, deeply unprofitable and need cashflow aka more funding. One thing good as a listed entity is that has a bit more options to raise via more non vc routes like rights issue, corporate investors etc. they proved this by further raising the 15m.

An interesting downside for listco style raising is that a listed entity structure may deter traditional vc firm from investing. Too many moving parts, less control, public disclosure and also have to spend more to maintain listing status.

So if we treat migme like a usual money losing  series b firm, then there is nothing surprising it needs to keep raising. The only issue is that it has to be all public due to listed status!

The question then turns to whether non vc investors will have the patience to fund migme moving forward. Financials are not pretty. The 22m or so raised all spent. But business still losing 10m per half. In 2015 negative cash flow of -17m!

1H2016 Cash receipts growing only 7% QonQ so not massive growth. The good part is cash receipts was 12m in 2015 and looking like 20-30m this year. But again it is not revenue and we don't know how much is high margin stuff or how much is just low margin ecommerce. How much is recognisable revenue, how much is future revenue. Too many questions.

Final point is that Mgmt has too small (about just 20m shares or < 10% of company) a stake now and it is a concern. Granted the company is extremely generous with options. For the financials of company, CEO was paid 1.35m of which 933k is in options which are in the money still as issued very early so low strike price. In contrast, Patrick grove of iprop paid himself $1 for first few years and had a much more sizable stake.

It will be interesting to see how this story turns out. There is a limit to investor patience and when it is all public, it can all go downhill very fast esp if key business metrics don't perform. Ibuy/ensogo is a good example. From 100+m company to just 20+m market cap, CEO resigned and shares
suspended.

Entrepreneurs - How to Manage That Windfall !

Entrepreneurs who have a liquidity event are often like lottery winners. They are not well equipped to know how to manage the money esp if they are not from a wealthy family and have always lived a more normal/middle class lifestyle. They can end up being too conservative or too risk taking and the worst part is that they may not even be aware of it. Entrepreneurs also have an added problem of usually having a big ego, always optimistic and wanting to make all the decisions ourselves. Good recipe for investment failure.

I am writing this article so share some learning experiences which i had over the years. Both from reading, own experience and from others. Please feel free to comment and add experiences.

1) Don't touch bulk of money for next 6-12 months

Say you suddenly now have X million in the bank after a trade sale. There is a further prospect of another Y million over the next 2-3 years. You feel rich and super liberated. At the same time, everyone seems to expect you to give back and to start showing the moolah.

I would suggest to just do nothing major with the money. Put 90% of it in FD or a few 6 mth super safe bond. Let yourself and your family get used to your new found wealth. By all means, go for nice $$$$ dinner, buy a cartier ring or hermes bag for your loved one. Or take a 5 star vacation with the family for once. But don't spend anything more than 1% max 2% of your new net worth on these extravagant purchases. For Singapore, it means don't go buy a sports car that costs $500K right away unless you have $25M or more.

Note i don't mean that we should not buy the sports car unless we have 25M or more. What i mean is that we should let the money sink in and let our brains adjust first. Then if 1-2 years later, you still think that 500K sports car or 100K luxury watch is worth buying, then go get it!

After 6-12 months is up, if you have been doing your homework below, you will have an idea how to invest or work it. Your sense of value will also have adjusted and you will be less prone to impulse buys or dumb financial decisions.

2) Admit you are not a financial planning expert. 

Entrepreneurs do well because we are experts in our own micro area. Whether it is software, internet, manufacturing, F&B etc. We need to admit we are not experts in the field of financial planning and portfolio management. So get a private banker(s) to help you.

Most private banks will let you open an account with min US$1M USD and especially if you show you have more to come or with other banks. Be discerning, there are private client solutions out there which is a sandwich tier between Priority Banking and Private Banking. Not so good because their fees tend to be higher. Go for the actual private banks and if possible get a referral so you start with a good relationship manager.

Apply your same determination to build your business to understanding the world of personal finance. Be patient and take the time to learn from others. For starters, learn indepth about the following terms :

Fixed income, equities, interest rates, private equity, hedge funds, portfolio allocation, rebalancing, yield, ROI, options, structured notes, dividends, commodities, gold, property, leverage, inflation.

3) Set Goals for the Money

Now that you have a lump sum, you need to decide what goals you have for it. Is it to preserve and grow this capital? Is it to take high  risks with it? This topic is frequently tied up to the actual number you require for financial freedom. For most living standards in SG, it is about S$3-5M range that will allow for retirement in your 40s to 50s. For people who live it up more, even $10M is not enough - skies the limit.

A good advice i got from a tech "qianbei" (older expert) is to build a stable property/bond/equity portfolio that generates cash flow that pays for all annual expenses. So if you spend $360K a year, then at 4% inflation adjusted real returns, this portfolio needs to be about S$9M excluding your residence. The extra money above this 9M can then be used for starting a new business or investing in startups etc.

One word about investing in startups. Be very careful and be prepared to lose all the money. A wise man told me before to spend not more than 10% of your net worth in such investments. Also, for this 10%, spread it out into 50K angel sizes and make sure you can invest in at least 10? Otherwise no diversification. If you can spare less than 500K, i think it makes more sense to be an LP with a venture fund.  I know readers may disagree on this. Feel free to comment and share.

4) Be aware of vastly higher mountains, maintain humility, give generously.

Don't let money change you. We are still the same people. We just have more responsibility since we are lucky enough to have exited our businesses. Continue to be useful to your family and people around, continue to learn and be generous. One method that has worked very well for me is to interact with people who are both a lot more successful and a lot less successful in terms of wealth or career. Listening to the both groups share their experiences and perspective and observing keeps me grounded.

We can't take our money with us. So give generously annually if you can. Many people lose out on the genetic/life lottery which you won. So give back to society and worthy causes in a sustainable way.

5) Spend within your means!

Be careful not to be seduced by the ever upward spiraling lifestyle which one segment of society espouses. If you are below 35 and have self-made millions, there is a tendency to think believe you can duplicate it again and be overconfident in your next venture or investments. There is also a possibility you may upgrade your lifestyle to beyond your income and wealth. Note, i am not advocating to be stingy, upgrade your lifestyle by all means just don't go above it. A good rule of thumb is that you should aim for total spending  <70% of total income per year.

You did not get to exit your business without brains, so apply it to model carefully what you can or cannot afford, use it to plan out your investment plans and act on it.

I hope the above 5 points help fellow fortunate entrepreneurs in terms of starting to think about what to do with  their new found wealth. Feel free to email me or add comments.

Analysis on Zopim acquistion by Zendesk

This deal is a great validation that it is possible to build a globally relevant business out of Singapore. I first encountered Zopim a few years ago and got JobsCentral to use their voice chat SAAS solution. They have a very simple and effective product and sold it on a freemium model which works great. I started hearing more about them and it is wonderful to know that they have negotiated a fair exit for themselves and shareholders. Here are some details and comments. For once, tech blogs have covered them pretty well :

http://www.techinasia.com/singapores-zopim-acquired-zendesk/

1) Revenue based on ACRA ending Mar 2013 is 1.8M in revenue as recognized properly. PBT is 362K. So it is quite safe to assume a continued 100+% growth rate and project revenue ending Mar 2014 is about min 3.5 to 4M with profit of at least 700K to 1M. My guess is closer to 1M since there is great economies of scale for SAAS.

Share table as shared by techinasia is accurate.

2) I particularly like this story because i know SAAS is the current highly valued wave. Zendesk is probably going to IPO at min 10 times sales of 73 or about 700-800M. They may even be able to do 1B IPO. So for players in the SAAS space, this is the best time to raise and to exit partially or fully. Zopim is also great because they are profitable.

3) Some have commented that exiting for 15.9M + 13.9M earnout is a little early since clearly Zopim is growing nicely and is profitable. So founders have time. I somewhat agree but i always feel outsiders do not know all the details and feelings which founders have. And anyway once the deal is done, founders should be happy with their decision. So ignore your detractors Royston and gang and enjoy the new found freedom.

Moveover, looking at the structure of the deal, Zopim is being valued 37M SGD. That is probably 10 times multiple to their revenue. Very fair as that is the IPO valuation likely for Zendesk. Of course, the devil is in the details of earnout.  This one only founders and zendesk will know. My guess is that is a proportionate tied to revenue/EBITDA mix and the 13.9M is the cap performance.

10 times sales is actually a very high valuation which currently only biotech and SAAS tech companies are given. But it is not the record for Singapore. That is held by the hungrygowhere guys who sold for about 12 times sales although a smaller total value.

4) The earnout structure of about 50+% first in cash and stock and later the rest over 2-3 years will allow mgmt team to ride the upside both in their business and also in the overall market valuation of SAAS companies. If the market values Zendesk highly in the next 2-3 years, mgmt may find that their 15-20M in stock could double or triple in value. So from this angle, i think mgmt did not sell early but rather is betting on being part of a bigger entity as a route to get better valuation for Zopim.

All in all a very nice deal. And i think as there are more exits that earn the founders 5,10,15M or more, there is room for an article next on how to handle a entrepreneurship linked windfall. The story and learning just started.... Stay tuned.

Towards Better Tech Reporting Standards?

(Added 11th April : This is an example of much better reporting :
http://techcrunch.com/2014/04/10/zendesk-buys-zopim-will-add-its-live-chat-platform-to-its-cloud-based-helpdesk-solution/

Details given on S1 filing by zendesk to ascertain what was missing in press release. And to techinasia credit, they managed to get hold of share table and P&L for year ending Mar 2013 for zopim to put more flesh into the deal.

http://www.techinasia.com/singapores-zopim-acquired-zendesk/)

My last post on Grabtaxi was triggered because i read a techblog that stated they raised 10M for a Series A round. This number just felt wrong, because by definition Series A does not go to 10M USD. When i did some digging, this number was repeated it seems, simply because another blog said so and there is an e27 and SPH article where the founder was quoted as saying it is "8 digits". Based on acra share allotment report , it is about US$5M and about US$3M in most recent round lodged early march 2014. More importantly and the part where readers can learn from is that the funding was done mainly via family funds which is a great way to do it for 2nd gen. Below are some of the articles by popular tech blogs I refer to:

http://www.techinasia.com/grabtaxi-nets-funding-10-million-transportation-apps-sweep-asia/

(Made reference to this link below from TNW that just blindly said 10M)

http://thenextweb.com/asia/2014/04/08/grabtaxi-is-growing-a-taxi-booking-service-in-southeast-asia-using-a-unique-model/

To be fair to techinasia, they  quoted and attributed to the TNW. And below is an article by e27.
http://e27.co/grabtaxi-announces-8-figure-sum-funding-singapores-vertex-venture-holdings/

Again they repeat the 8 digit funding comment and this time attribute the quote to the founder Anthony. They also claim they are sure they heard it right. Can this be right? Or was he misquoted? There is really no way for us to know. But the ACRA reports on GrabTaxi holdings say the funding is not 10M. Of course it could be in tranches which have yet to be realized or injections into other companies not mentioned.

Even SPH has quoted Anthony saying 8 digit. Maybe he meant in RM.. Either that or future tranches... Anyway the key learning here for us is the use of family funding bargaining power not so much whether 8 digit or not.

One comment for tech writers and journalists, there is a reponsibilty to readers to get our facts right and to try to think deeper into the topic. And if we are speculating, we should say so. And we should always aim to uncover the details and if possible learning. BTW, tech blogs are definitely not the only ones guilty of this. There is still a SPH story about Beeconomics being sold for 24M back in 2009!

http://business.asiaone.com/news/brothers-remain-humble-after-groupon-buys-their-start

A simple ACRA search would have told the journalist that Groupon invested in beeconomic 2.6M if i remember correctly. Then Karl and brother had 2-3 years to really grow the business to desired metric and they got paid nicely each year in the form of an earnout for doing such a great job with Groupon SG. I am sure the Groupsmore people MY had the same deal.

There probably are many more such lapses. For example :

http://e27.sg/2012/06/07/breaking-propertyguru-secures-s60million-strategic-investment-from-immobilienscout24-for-further-regional-expansions

Its not 60M injected into company for sure. If there are tech writers reading this, I hope you will do more indepth forensic work and get hold of their ACRA report for allotment of shares and p&l etc

In summary, our community needs to start getting our numbers right! Not only is there a credibility issue, equally important, we owe it to our fellow entrepreneurs and wider business community to report the right numbers so that proper decisions and expectations can happen.

When to raise outside capital & what kind of dilution is ok.

Have been talking to quite a few entrepreneurs lately and i realize that many have very mixed views (rightly so) about raising capital from (semi)/ professional investors. Some also never seem to have thought about dilution and seem to have an almost ambivalent attitude about ownership.

So i thought i will pen down my thoughts on these issues both as an entrepreneur who tried to raise money before and as an investor in startups. DISCLAIMER : REGIONAL CONTEXT ONLY.

There is actually only 1 good reason why a tech startup raises money.

Company needs the cash to grow in SG or to expand into overseas markets which current organic cash flow projections cannot meet. Growing can be by organic or acquisition route. Usually your 5 or 3 or 2 year P&L projection shows great revenue growth but you need to spend money to get there and you are negative cashflow for a good period. Then you need funding to tide all that negative cashflow and then some. The extra is buffer.

So if you find that you are in the lucky situation where you are already profitable and cashflow positive. And you actually do not have a burning vision that you cannot execute due to lack of money, then perhaps you should not be fund raising. Even though usually, this is when VCs and investors and brokers will bug you the most to raise. They will tell you stuff like money in the bank is king, having a buffer is always good, you never know, how much network and strategic help they can give etc etc.

They are not wrong. But you need to weigh that against the distraction of fund raising, the distraction of dealing with investors, the value of network and also whether you actually need the money. I have known of at least 2 big internet companies who raised 800K and 1+M each and they actually almost did not touch the money at all until exit!

To be fair, I am not including the strategic help which a good investor can offer and that is valuable. This cannot be underestimated and i think if you find an investor who really helps and cares, then the story is different.  For these cases, i have seen people do convertible notes so that valuation is higher later or just raise less money. You still get the help and network but dilute less.

How about dilution? How much is too much or too little for our tech space today?

It really depends on each entrepreneurs goal. But by and large, most entrepreneurs are highly competitive people who benchmark a lot. I think they also want to win and there are many measures of winning. It can be to control the biggest company by revenue or profit or user traffic etc. It can also be a combination of those factors.

1) My first non-contentious observation in SG is that it will be best to bootstrap and skip the angel round. Lets say we have a 2-3 founder team. They run through  100K to build their prototype and a further 50K to market the prototype and raise money. At this stage they still own 100% of the company.

So they raise the Seed round to hire a few pax, market more, build out software more. Lets say they raise 500K at 1.5M premoney. So now, the founders own 75% of the company. With this 500K, they build out SG and after another 1 year want to expand overseas and drive to SG profitability. Now in SG, it is usually a 1.5 to 2.5M raise. So lets say 2M raised at premoney 8M, now founders are down to 60%.

Wait, there is now employee option pool which varies from 5-10% usually paid jointly or out of founder pool. So lets say founders down to 55%.

This is where we depart from USA since our ASEAN market is a lot smaller. With this 2M raised, the tech company needs to grow into exit event.   An exit event can be an IPO or a trade sale. There are some fewer cases of raising Series B to expand even further but most of the SG stories exit already - Hungrygowhere, Tencube, Brandtology, Groupon, Dealguru, sgcarmart, Travelmob, Asian food channel all exited after raising 1-2+M. The only ones i know who raise Series B or equivalent is Propguru and Reebonz. Maybe readers can add.

So back to the optimal stake. At 55% left for founders and average sale value of lets say 20M, that is 11M only for say 3 founders. Or about 3.66M each. Now imagine if this company raised a initial bootstrap round that took out 15%, they are left with 2.7M each for about 6 years work if divided evenly.

2) The 2nd observation i have is a lot more contentious. I have seen many teams where the 2-3 founders share the stake equally. While this feels right at the startup phase, it actually does not make sense. A company will require a CEO and driver. That person performs a role that is more stressful and more impactful than other founder roles. And in startup, pay cannot be used to compensate. So i would argue and indeed prefer configurations where the key leader has a much higher stake and plays a stronger role. So in the case of the 3 founders, maybe 50%, 30%, 20% or even 60/20/20. Of course, the founders should put in capital commensurate to their shareholding and i am all for equal or near equal pay among the 3 to show the solidarity.

On the flip side, i would not advocate any key founder having less than 10% equity from the start. Too little to feel any pain and to be aligned well. And after all the dilution, the person will be left with 5%. Too little for talent for our region. They will end up looking around and asking for near market rate salaries to compensate.

As an investor, one thing good about CEO owning the bulk is that we know even if the shit hits the fan, there is one clear person with the most to lose. And that is good alignment.

Patrick Grove's Empire.

Kudos to Patrick Grove again. He is truly a strong deal maker. For readers who do not know Patrick's background. I will cover the iBuy and Dealguru thoughts in another post. But first...

Patrick was from the first dot com boom and started this general portal called Catcha which was meant to be like Yahoo for SEA. They raised money and were all geared up for IPO. But market crashed in April 2000 and they missed the window. What happened next is quite a tough period as Patrick and partners bought out their investors and pivoted the business into an English magazine publisher based in KL. They grew that until some in 2007 or 2008 when he went back into the dot com area with his purchase of iProperty in malaysia and at the same time pushing the malaysian Catcha Media into becoming a reseller for MSN and other digital media properties.

What happened next is what i admire him for.

He somehow managed to string together a bunch of in principle aquisitions and concurrently IPO on ASX the iproperty group. Between 2008 to 2013, the company used Other Peoples Money from IPO, European investors and rights issues to expand regionally with mixed results. iProperty is super successful in Malaysia but has lost out to Propertyguru in SG. Current market valuation is A$355M or about S$400M. iProperty sales is at A$15M last 12 mths with a loss of 1.5M or so. Mostly winning in MY market.

He is a significant shareholder via Catcha Group which owns about 23% of iProperty. He is majority shareholder of Catcha group. So what he did is to structure the initial deal, build up a team of good executives from REA group (top Australian portal) and then get the business to work in this region. 1.5M loss is not a big deal if iProperty can continue to grow and scale. And their losses are reducing. So to outside investors, he has proven his ability to deliver to shareholders so far.

Also to note, this market valuation i am sure has helped Propertyguru get the price they wanted for their deal.  So it is not always a bad thing that your competitors get good deals!

The next thing he did was to list the malaysia Catcha Media at a RM100M valuation. Much lower valuation since the market is KL and also magazine publishing is less sexy. In testament to his deal power, he has recently merged it with Says.com and has gotten the Says guys to try to grow this business well in MY. But i think the lesson is that KL investors value  dot coms a lot less than in Australia. I believe investors right now are still valuing Catcha Media below IPO price.

The next deal he did was last year when he entered the car market but IPO yet another low revenue and profitless firm on ASX leveraging on his success with iProperty. iCarAsia is currently doing what iproperty did 5-6 years ago and trying to build up car portals in SEA. Market cap of A$71M on barely annualized 1.5M revenue!!!! 

Whether iCarAsia can become another iProperty really depends on execution next few years. Will be interesting to watch.

So what he has effectively done is to seed fund privately and do his series A, B,C via the stock market. The ability to IPO at Series A/B round is where his magic is.

Most recently, he created a new company to enter ecommerce space via acquiring key deal sites in 3 countries. Will talk about iBuy in another post.