Startup Portfolio Report for 2020 - Impact of COVID

It has been a good 5 years since we started being a whole lot more active on angel investing. We now have now invested in 35 startups in our angel investing portfolio and 8 VC funds which probably have another 500 startups between them (skewed due to 500 startups large portfolio numbers). 

Our 5 year ago thesis was that we enjoy meeting and helping founders, we have knowledge of the space, we think the startup space will boom in ASEAN and also since we made money as startup founders, lets give back to pay it forward. So we set aside the equivalent of a commercial shophouse to invest. I deliberately use this comparison because it shows very starkly the difference in the amount of activity and value which angel investing creates compared to if we passively invested in real estate. Of course the activity must be worth our risk and show up in the return numbers.

In late Feb to March, COVID was a big shock to startup founders. And because of  GFC experience, many grey hair investors like Sequoia, some local VCs (and yes Ning & I had same experiences too) swung into crisis mode. We quickly advised founders to plan for doomsday type scenarios on the funding front and plan for various levels of revenue decline. The narrative being survival is key. Then watch for what your clients and sales is telling you. If you are not badly affected, then its a chance to grow through the recession and at expense of bigger, expense heavy competitors. Market sensing and willingness to take action is key. What world famous PE fund Silverlake did next is super instructive. They made big bold bets into Airbnb and others right at the peak of COVID confusion and despair. That takes some serious balls and also helped reinforce our decision to continue investing through the crisis. So in 2020, we actually added 6 startups to our portfolio.

Fast forward to end 2020, this ongoing COVID recession has been K shaped indeed. We did an assessment of the 25 older startups we have and here is what we found :

- 3 in bad trouble revenue <50%  with 1 in process of closing down.  

- 5 experienced flat to moderately negative performance 

Above 2 categories obviously are operating in industries directly affected like travel, hospitality, office services, advertising, construction. 

- 17 grew revenue from 2019. Of note, 5 are profitable and 10 net beneficiary of COVID. The categories are edtech, healthcare, digital media, saas and surprisingly recruitment.

On the VC front, it is a similar K shaped picture. They slowed down investing first 1H but resumed deal making in 2H. The data we see from the VCs we invested corroborate what we are seeing in our direct angel portfolio. 

Our own rough performance calculations for those of you curious. Startup returns since 2015 is at 2.6+ TVPI or >40+% IRR. VC returns since 2014 about 1.98 TVPI. No IRR as hard to blend them together but definitely below 40%.

Most gains unrealized of course so while far exceeding a 4-5% unlevered return on shophouse, we are mindful of the volatility and risk. 

Some learnings we have for fellow angels/investors.

- Diversification of portfolio really matters. Imagine if we invested in a pureplay travel VC or if we had heavy travel weightage in overall portfolio.

- We really don't know what will happen. So its best to have same bite sizes per startup. Winners can go to zero in a COVID event.

- A bad recession is a great time to see if you chose right founders. We are are incredibly proud of most of our startup founders. Most of them very quickly saw the first and second order of the crisis on their business and made changes quickly to adjust. Even right now, they are still making the adjustments and trying to capitalize on trends. Unfortunately, we also had 1-2 founders who chose to blame everyone and everything for their own lack of prudence and thoughtfulness. That's why diversification is key - we can't read founder minds.

- Rising tide really lifts all boats. Its key to get the macro thesis right. If we use VCs as a proxy for indexing the startup market, you can build a portfolio of VC funds and track it. Doubling your money in 6 years is not bad and IRR is much higher than 12% since drawdowns last 3 years. And the value is still adding as the J curve accelerates. 

- Growth and Seed stage startups are less affected by recessions. They are already very lean and efficient most of the time. So usually recessions are a great time to retain and hire talent and also take market share from heavier competitors. I think this explains why our recruitment and manpower type startups grew well during COVID even though overall recruitment market clearly slowed down. 

- Angel Investing is not easy and the reward must be more than just the returns.  Looking at our VC and Angel returns, our angel portfolio is better than all of VC we invested in but not by a large magnitude. And if we factor in all the fees, our work and time, its probably easier to just pick a bunch of good VCs (have to be top quartile!) for someone who only wants the returns. I don't advocate just 1 VC fund as then you have managing agent risk in the VC manager itself.

In summary, we are quite happy with how our startup investments have performed during COVID year. It is indeed true that each crisis is different and so our playbook needs to adjust and be flexible always. Yet the basic principles of diversification, bite sizing, continuously investing etc must hold true.

nb : if anyone is keen on how we do angel investing, we are running our first class for the year on 23rd Jan 9am-12noon.

  

 

Investing in ICOs - Accounting Angle

Was chatting with Ning about ICOs and we got stuck at accounting post ico. So did some research and below are some comments and link to good article.

1)  equity type tokens are cleanest but they are regulated by securities laws. So few ico do this. 

Utility tokens are liabilities and from investment standpoint it would appear that if token price plunges, its actually good for equity owners. Whereas if token price goes up a lot, equity holders get wiped out. Of course if we hold mix then we can have some inbetween configuration.

2) the above means it will be a nightmare to value the company in future and that creates big barrier for future round equity investors.

3) audit and ipo becomes very tricky and expensive. I think pre ipo auditors and accountants will need to charge a lot just to figure all this out properly.

4) using utility tokens to pay staff and founders is just the same as paying staff via an asset the company owns. 

Knowing above, I think it is risky and more complex to invest in the equity round of a pre ico startup. Basically need to expect more costs and less access to fiat capital in future rounds. But in exchange a successful ico gives you a lot more cash than a Vc round at similar stage. Of course, the ico still needs to execute well like any startup!

Side note : ico valuations are high because of crypto whales who made 100-1000 times returns via crypto bull. But that’s over for now. Believe it will come down. So I don’t think it’s a smart time to change fiat to crypto now.

https://medium.com/@gregorysimon/the-impending-risks-of-ico-accounting-has-avoiding-treating-initial-coin-offerings-as-equity-b23150f08ae0

All about Angel Investing (Part 1)

This article has 2 parts. Below are general questions many people ask about Angel Investing. The next article will be specific experiences and learning which I absorbed over the past 5 years of actually doing it.

NB: While I have experience mainly in tech startups, I believe the principles mostly apply to non tech angel investments too.

1) What in Angel Investing ? How is this different from other Private Investments?

Angel investing is more specific. It is investing in startups in hope that they succeed and you earn back your money via an exit (trade sale, IPO, sale to next investor).  In non tech world, you can also earn back your money via dividends once the company turns profitable. Private Investing covers angel investing but also include later stage investments into companies that are already larger, profitable etc. Private investing also covers investments into VC or PE funds. Basically investment into any non listed company.

2) Can I afford to be an angel investor? How much to invest?

We invest money that we can afford to lose completely. If you look at most strategic portfolio allocations (this is the various asset classes that experts advice people to allocate their investible money in), most will have an alternative allocation that includes private investments, art, wine, hedge funds and commodities. This percentage varies from 0% to 20%.

So lets say it is 20% of investible assets (excludes own home and current business which you run if applicable). 20% is currently what some banks recommend for alternatives and also what some UHNWI (people with more than 30M USD investible) individuals in the USA are doing.  Of course, not all 20% is for angel investing. Probably 5% of that? The other 15% is for hedge funds, PE funds, later stage VC funds, commodities etc.

Now flipping to the other side, we need to spread our bets since we do not control the companies we invest in. We will make mistakes and invest in bad models or bad people. So lets say at a minimum of 25K per investment and at 10 investments over 5 years, this means 250K is 5% or we need an investible net worth of about 5M min.

3) Is 25K the usual quantum for Angel Investments and what does that buy?

From what I can see, most angels in this region invest anything from 25K to 200K. One mistake I made early on was to invest way above that. Doing so made it hard for us to diversify properly and spread our bets. If your average bite is supposed to be 25K and you are doing 12 companies, then you can allocate 50K for 2-3 exceptional stories that you feel strongly about.

In the current tech space, angel/Seed round valuations range from 1M to 2.5M and amount raised is usually 500K. So 25K buys you anything from 1-2%.

4) What kind of returns can I expect as an Angel investor and in what time frame?

We all read about the lucky guy who invested in the next FB or Google. But lets face it, most Angel Investors in this region will take anything from 2 years to 10 years or more to exit their investments. We have invested in 7 startups in SG and regionally so far. None have exited yet. Luckily none have failed yet too.

So the usual timeframe to expect will be similar to a early stage VC fund. Anything from 3 years to 10 years for exit and blended returns of above 25% annualized would be good.

5) How do I get deals?

This is critical for success. There are a 2 ways that have worked for me.

a) Spread the word that you do coinvesting alongside incubators for SEED and Series A rounds. This way, you follow the lead investor for deals. This method has an advantage in that the lead investor helps settle the terms. It helps if you actually invest in some of these VC/incubators too.

b) Value add when you meet founders. Don't just view founder meetings as potential investments. Rather try to help them with your experience and connect them to relevant people. After a while, people will see you as a good person to talk to regardless of whether you invest.

6) What is my role as an Angel Investor?

With a stake of 1%-2%, you are not expected to play an active role in the business. Experience sharing if you have it and can get along with mgmt would be good periodically. Connecting to relevant people too would be useful if you have such contacts.

Of course, if you invested a lot or very early and own >5%, then it is entirely possible that the management wants you to perform some structured role. All these should be decided before investment.

7) I don't have access to good deals or any good value add, I just want to invest. What else can I do?

Of course, another way is to outright invest directly into early stage/Series A funds. You will be called in LP (limited partner) if you do so. Usual quantum ranges from $100K (for small funds) to $5M for large funds. The expected returns for these funds range from 15-25%. Some names in this area include Jungle Ventures, Golden Gate, Walden, Monkshill, 500Durians/Startups and many more. They are all raising capital now.

You can then treat these investments just like a mutual fund but classify it under alternatives.

In my next article, I will share specific experiences and learnings we have from our own foray into angel investing.

Entrepreneurs beware of DIY Investing!

I have  people who ask me this question. They think that because i started a business, sold it and because i make private investments that there is something special or unique about how i invest my assets. Let me be the first to say that the traits required to be a good investor are very different from those that entrepreneurs have. And i think i am still learning from the market and about myself all the time.

By default, entrepreneurs are high risk takers who control the risk by knowing everything there is to know about their business and industry. We deep dive into every aspect of our work so that we are able to control risk and maximize our returns. Even when our business has grown a lot, we continue to invest more into it and take further risk by going overseas or into adjacent markets. Frequently, the company we own is most of our net worth.

Furthermore, Entrepreneurs are also highly passionate people and you will hear many successful ones who advocate a combination of gut and metrics to make major decisions.

Good investors on the other hand, diversify. They minimize risk by not concentrating in one area and by proper portfolio allocation. And it is also humanly impossible for them to know with any depth any particular industry which they are invested in. They frequently outsource and use professional managers to help manage their money. Decisions are made based on numerical allocations and frequently a fixed methodology for deciding when to buy or sell. Investors who employ their gut tend not to do well. 

My personal experience is that the above descriptions are totally true and one can lose a fair sum of money if one does not understand the very different traits required. I lost close S$100K or 100% of portfolio during the 2000 dot com crash because i had over-concentrated my positions in technology stocks. Then more recently in 2010, i experimented with options without clear knowledge of how volatile they can be and lost another S$100K on these simply because i could not cut my losses and applied the dogged perseverance entrepreneurship trait to options!

From the above lessons, i learned that it is best for me and perhaps for entrepreneurs like me to stick to passive portfolio decisions and outsource the active selection decisions to good fund managers. 

What this means is that we should make the decision on how much to keep in cash, how much to invest in stocks, fixed income and properties. But when it comes to the actual stock or fixed income picks, either buy ETFs which mirror the market or buy a few different mutual funds. Use dollar cost averaging strategies if we get more cash and rebalance the portfolio periodically every 3 to 6 months. 

If the urge to take risk or to make decisions is too strong and if we have an interest in trading, then set aside a small percentage of assets - say 5% to make speculative trades on equities, options or bonds. The above philosophy has worked well for me and i hope it will work readers too.