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.

=================================================================

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.

Comments on Grabtaxi funding so far

This story caught my attention for a few reasons. First, i have heard much about Uber and how it has taken USA by storm. When i was in USA late last year, read an article about how Uber is able to price discriminate and set prices that reflect real time demand. Economic theory put into action finally!

Second is that i read about Grabtaxi a while back. Founder is the son of Tan Chong Motor family fame.
Anthony Tan, studied in harvard and started app in 2012 in Malaysia with about 500K USD funded entirely by family. Makes a lot of sense as it leverages on both the resources and equally important the network that the family already has in malaysia. Without knowing Anthony personally, i think this is a great model for 2nd generation to follow if they are keen in technology. Leverage on family business knowhow and tech to disrupt a space. Funding is a less an issue and they can do what i advocate which is to fund out angel round themselves.

Now they just raised more money from vertex. Previous round was also funded by vertex. Now some will ask why not just fund it all themselves? I think bringing on board a VC is a smart move. It forces discipline onto the company and founder and will also lend more credibility for subsequent rounds or acquisitions. And in this case, it also helps give them a good valuation benchmark to work on for future deals.

From what i can see, the number raised is not 10M as some tech news blog has mentioned but rather, this round is a further 3M USD raised which is far more consistent to a Series A round. I really wish our reporters can get their facts right before publishing. It distorts the industry unnecessarily and the company and founder usually will not want to or cannot (due to NDA) comment and such matters.To set record straight, it seems that the company Grabtaxi Holdings pl has raised 5.281M USD to date where Anthony and Family have funded the seed round of 518K and a further 4.7M USD from investors which includes themselves. Of this 4.7M, 20% came from vertex. So to date, Vertex has invested about 1M in GrabTaxi. The rest is all family money.

Based on above, it also means GrabTaxi is being valued at US$12-13M (using latest round 15+ per share x 800K+ shares) USD based on this April round. Of course, some may argue since founders self funded 80% of this round, this valuation is not accurate. I dunno, but at least Vertex agreed to it...

My guess is that most likely, family just wants a VC for credibility and discipline and connections but is unwilling to give up too much at this early stage. This is a UHNWI family based in Malaysia so while investing US$4M sounds like a lot, it probably is something they can afford to take risk with and aim for a much later exit.

Of course, i think their revenues are probably neligible at this stage. So looks like the ball is squarely in Anthony;s court now. I am rooting for them so succeed as a local ASEAN company as opposed to Rocket or Uber!

NB: So where did that 10M investment figure come from? That is the topic of my next post. Straits times and e27 quoted Anthony as saying it is 10m. I guess if in RM it is correct. Or maybe there are more tranches coming.

NB : to be rigorous, there is a myteksi sdn bhd which is a malaysian entity which Anthony and family funded 600K RM. Logically, this entity should be owned 100% by the SG holding company which Vertex invested in. However, i am unable to verify this since malaysian ACRA is slower and share updates are shown only 1 full year later.

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.