How Should Angels Think About WeWork?

There has a recent spurt of bad news coming out of startup world this year. Readers will know Ning & I are conservative angel investors - is there such a thing? We take calculated risk in angel and VC investing and worst case, are prepared to write off our money. Of course,  we are obviously doing it because we like the activity and believe we can generate returns worth our time.

Lets do a recap just for this years news alone. Locally we have :

- Honestbee on brink of bankruptcy.
- Carousell taking a less than ideal round with OLX
- Rotimatic losing $1 for every $1 they sell.
- Propertyguru shelving IPO due to poor valuation offered by retail investors

I also buy the ACRA reports of many startups at Series A and B and they are inevitably all loss making. And to make things worse, the losses are not narrowing but sometimes expanding faster than revenue!

On a global basis

- Wework failed IPO and subsequent writedown/bailout by Softbank
- Uber & Lyft poor post IPO performance
- Grubhub stock tanking 40+% in 1 day due to poor earnings guidance

So how do we read all this? Especially as an angel investor? Does this mean we should just stop investing? Wait & See? Every angel needs to make up their own mind. For us, these are some of our thoughts:

First the good, positive stuff.

1) The fact that Carousell & Honestbee can raise so much with such bad revenues and/or unit economics is actually a sign that the ASEAN ecosystem is really strong with liquidity and interest. It is also the reason why SEA has decided to go all in for Shoppee so as to really stake their claim as a major ecommerce player in the region.

So ecosystem is growing and doing well. Liquidity is there as we see more and more VC funds raise and so will deploy capital next 3-5 years. And this is across all stages. At AngelCentral, which is an angel investing club, we have seen amount funded for our pitches grow at least 50% YonY.

2) Market growth is real. ASEAN really is a strong demographic play. GDP growth is strong in Indo, Vietnam, PH etc and this growth will accrue to tech related plays.  Just see how fast revenues have grown in Shoppee or Grab or Gojek.

Now the not so good stuff.

3) However, because of (1), many founders have decided to go for revenue or even just metrics without the cost discipline and patience to grow revenue and cost in tandem. This has led to massively loss making entities who all claim that their ultimate market size will justify the losses. In industry speak, we hear founders talk about their unit economics and the LTV of each customer.  This all makes sense provided capital is sufficiently patient and that the unit economics assumptions are real and market growth assumptions are accurate. Unfortunately, asssumptions are often wrong and unit economics or market size sometimes does not bear out.  When this happens, valuations have to come down dramatically.

Eg. I suspect this will happen for all the coworking spaces. None of them have succeeded beyond being a property play with some ancillary services added on. This makes them a 1-3 times revenue multiple play which is exactly how softbank values wework now. Thats a 50-90% valuation haircut.

Will this play out in more verticals? Unfortunately the answer is yes. With softbank licking its wounds, IPO market rejecting expensive listings, the froth has been blown off somewhat.

4) So there will be more bad exits or failures coming. Where will they come from? My bet will be on those low gross margin or pure traffic plays. B2C and with loads of cost and who have raised loads of VC money. The pressure will be intense to deliver on actual revenues next 1-2 years and profits thereafter. Quite a few names come to mind but i will reserve my judgement and see what happens.

So what should angels do?

Personally, we are sticking to our investing thesis. Remember VC/Angel investing should be just 5-20% of your total portfolio. So you probably made that same 10%-20%  in public equities and bonds last 5 years. So it must be money you can lose. We cannot stress this enough.

Next, we invest base on the founders skills and ambition, business model, product and market sizing. We invest systematically on a portfolio approach with discipline.  We want our companies to become profitable with superior unit economies and branding. Then they have the luxury to decide to trade sale or IPO. We do not want to invest just because an area is hot or if there is a high valuation ascribed to the vertical overseas or if a famous VC is investing. That is called investing blindly and greedily.  You need luck to behave that way and do well.

And if the shit really hits the fan on the ecosystem, i would argue it will be the best time to fund great founders who make it work even without much funding. Talent also becomes easier to find and of course, round  valuations will adjust downwards to compensate for risk and capital scarcity.

What should startups do?

To me, founders should take a long hard look at just what your unit economics are. And have a plan if funding is less or dries up. Because I can tell you having gone through SARS in 2003 and GFC in 2008, operating a startup without any outside money requires a mindset and hunger and obsession that is very absent in many founders mindset today.

Capital efficiency should be your buzzword. So many local Series A//B b2c startups need to spend 5,10,15,20m over 5 years just to make 1-3m of gross profit. In lean times, this is a ridiculous sum and implies a lot of wasted dead ends and maybe just plain waste! It may take a few years longer but I suspect often it is possible to spend much less and achieve same results.

In Summary

We don't think things are so bad right now like back in 2008. In fact it is nowhere near. Our assessment is that the pendulum has merely swung back to more normal state and there is still much interest and liquidity. Of course, if the rest of economy swings into recession and more failures like wework appear, then all bets are off. But we do believe sticking to consistent disciplined investing will work through both good and bad times.

NB : if you are keen to learn and hear our sharing as rather prolific angel investors, come attend our next workshop for Angel Investors.

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.

Online Classifieds Heating up back now. Now all acquired!

Enough said. This is my industry so my comments back in 2007 almost all came through. I just feel short of mentioning that many acquisitions and investments will happen for the winners.

To update :

Real estate - Great guys at Propertyguru are SG #1. in MY it is iprop. Valuations in excess of 100M even though no total exits yet.

Jobs space - Only jobstreet left still independent. JobsCentral and JobsDB all acquired in 2010/2011. Jobs classifieds revenue probably 40-50M this year in SG alone.

Cars - Sgcarmart acquired by SPH in 2013 Buy/Sell - Mocca died due to execution issues, Ebay going strong. New ecommerce wave has commenced!

======================================================================= (Article first posted Aug 2007)

There has been a lot written on new internet businesses based on concepts like social networking, aggregation, mash ups etc. Singapore too has seen its fair share of such businesses but I think I am right to say that they are still very nascent and I do not know of any local ones with meaningful revenues. Except maybe xiaxue which is an excellent spunky site!

However, I do see a large battle coming up in the online classifieds space. See the number of online classifieds mass media ads running – ST701, Mocca, JobsDB, Jobstreet, JobsCentral, Monster etc. I predict much more to come. I have always felt this space warrants attention but so far few players have come in to do it. Online classifieds can be very profitable even in a small city like Singapore. I estimate the whole cars, jobs, real estate, buy/sell market is worth at least S$40M this year in online classifieds alone and it is poised to grow dramatically once someones figures out how to handle more than 1 vertical at a time.

Who are the players?

Real Estate – No clear player yet. So this space is wide open for someone to come in and make good$$. Jobs – 5 main players. Combined at about 15M revenue by my estimate. (monster, jobscentral, jobsdb, jobstreet, 701)

Cars – sgcarmart, onemotoring Buy/sell – Mocca, Yahoo!, EBay Personals – Fridae, Trevvy (all Gay sites though)… where is the local large personals for straight population? I think in the next 3 years, you will see lots more ads, lots more competition and the winner will start to emerge.

Ultimately, I feel newspaper classifieds should shrink as more people see the benefits of online classifieds with its unlimited space, search engines and transactional capability. So to all the readers who are keen on internet businesses, i think online classifieds will grow at about 30% per year min. With margins of 20+%, to me it is a very attractive business.

Unedited Version - First published on Straits Times 1st Jan 2013

Reflections of a Singaporean Dot Com Entrepreneur

Mr Lim Der Shing, 37 is currently the CEO of JobsCentral Group. He co-founded the company in 2000 during the dot com crash and grew it into one of the largest online career media companies in Singapore. JobsCentral was acquired by CareerBuilder in 2011.   He is happily married with three very energetic boys. This article is written in his personal capacity. 

Background

My cofounder & I started work full time on JobsCentral Group during the dot com crash of 2000. It was a tough time as nobody wanted to fund us and so we had to bootstrap our business. I can still recall our first sale which was for $9 and we actually cashed the cheque when we received it.  We paid ourselves a monthly salary of S$500 for the first 9 months. Fortunately for us in 2001, we pivoted our job portal business and found a good niche in campus recruitment. We executed on that plan and managed to bootstrap our business to cross S$1M in sales by 2004.  We also got other co-founders with complementary skill sets to join us in those very early years. 

In 2005, we made a major decision to expand our business back into the job portal business. Leveraging on our 5 years of campus recruitment experience, we expanded quickly and by end 2010, we were one of the largest locally owned dot com with over 1M jobseekers and 10,000 employers using our services. In 2011, we were acquired by the #1 job portal in the USA – CareerBuilder for the price of a small listed company.

Currently, my team and I still run the regional business as professional management. We all give back to the startup community as angel investors and by sharing our experiences as mentors. I have gathered some key learning experiences in my twelve year journey and I would like to share them below.

Attitude & Mindset

I have lost count of how many times I have obsessed over some minor detail throughout the day.  Whether it is a watching out for competitor advertisements, or vexing over a small feature bug or even just checking the site every 30 minutes to ensure applications are working fine. I have found that being obsessive ensures success. I also found that when I am obsessive over my business, the various short and long term problems and issues are percolating in my mind all day long. Then sometimes, as if by magic, a solution or path will present itself that frequently works well for the business. And this usually happens when I am doing something totally unrelated like jogging or even sleeping.

Besides being obsessive, most successful entrepreneurs I know are street smart, curious, very competitive and take failure in their stride. Of course, being well educated helps too. This is especially important when scaling beyond 100 staff as many business school type principles and work process issues start to become increasingly relevant.  

We frequently read about successful entrepreneurs whose core motivation is to solve a problem or scratch an itch. Most I have met are driven to build an empire and many simply like to win. I once had a dinner with a very wealthy entrepreneur and he let slip that there are about fifty families ahead of him in terms of net worth in Singapore. I laughed at that time, but upon reflection, I realized that he is dead serious. Net worth is how many entrepreneurs keep score even if they will not admit it.

Are there many potential entrepreneurs in Singapore with such traits? I believe so. We are a highly competitive, well educated society and are famous for being willing to work hard. We just need more success stories where entrepreneurs of varying educational and economic backgrounds succeed spectacularly. With these role models in place, a safe and well paid job with a MNC will seem less and less attractive.

Team Selection and Management

My team works well together. We have clearly defined roles and the team is willing to report to one person. Each member of the team is better than me in what they do and frequently, all that is needed from me is to get out of the way. What works is to be totally transparent in terms of how each person is paid and also to be transparent when it comes to the accounts of the company. Every year, we collectively review and agree on our own pay and bonuses. Once the trust is built, then we can all focus on improving the business.

I have found that managing a team of talented owner managers requires me to manage my emotions very well. There have been many incidents where I have to swallow my pride or put aside anger or disappointment in order to make sure that the best decision is made for the business. It gets easier with time but it is still very much a challenge. I believe that is why some entrepreneurs chose to do it alone and just pay professionals to do the key functional jobs. You can always remove a professional manager but it is much harder if that person is also a significant shareholder.

Most startups I see today are a team. I think a team makes the most sense still especially if you intend to raise funds. Investors like to know that there is a team that complements each other and that their money is in the hands of not just one person. New startup teams need to have a clear idea of roles. They should decide who is the leader, how will pay be decided and sign a joint legal agreement called a shareholder’s agreement to spell out these details and contingencies.

Fund Raising

Back in 2000, nobody wanted to fund us. We were a bunch of fresh graduates with no money or experience.  As such, we were forced to grow organically with just $100K funding from savings, family and friends.  We built a habit to always be cash flow positive in all we do and to grow at our own pace. We kept focusing on clients and what they needed. Fortunately for us, it worked out well.

The usual silicon valley model is to raise funds via angel investors. Once the product has traction, the company will raise further funds via Venture Capital firms (VCs).  This model works well if the business is very scalable and can grow revenues rapidly. However, after observing and speaking with many local and regional startups, I feel there are not many that can meet the rapid growth and large market criteria for raising VC funds.  Generally speaking, the final exit has to be at least worth S$25M to justify a Series A round at S$5M valuation. The only exception is unless the exit happens in 1-2 years like the Tencube or Hungrygowhere case.

In terms of raising capital up to S$600K, there are many options nowadays thanks to the plethora of co-funding schemes from MDA, SPRING, ACE and NRF. A good skilled team with a viable business model should be able to find funding up to this level. What is missing is the Series A round from S$1M to S$5M.  However, I feel this is a consequence of our market rather than something that the government should step in to help on. Entrepreneurs should use their angel round and grow to justify their next round. Very often, it will mean they have expanded into an overseas market and/or are breakeven or profitable in Singapore already. In both cases, they will need to show a clear path and vision to grow to an eight digit valuation to justify a VC round.  We do not want to waste taxpayers money and end up funding many S$1M to S$5M rounds which cannot scale to the required exit size.

Overseas Expansion

We are a conservative bunch of entrepreneurs. We take only calculated risks.  So we did not expand overseas until 2009 when we were clearly profitable in Singapore with sufficient management resources. We have since expanded into Indonesia this year and will enter more ASEAN markets. Many entrepreneurs expand far more quickly and it depends on many factors like whether they are first movers, expected capital investment, market readiness, management team depth etc.

The current situation is that many startups feel a need to go global from day one. They believe that having a regional story is of utmost importance. To some extent this is true especially if the startup is trying to raise money. However, it would be best to have at least firmed up their home market processes and basic business model first.  This ensures that the business does not end up failing on both home and foreign markets.

Mergers & Acquisitions

We had a grand total of 4 possible buyers during the five year period from 2003 to 2008. What I found out is that the valuations offered by Asian firms are really quite poor compared to western suitors. We were offered valuations that ranged from 5 to 10 times PE even though we were growing at 40% per year. The attitude I found that works best is to not plan for an acquisition. Before we were cold called by our current shareholder, we already decided to just hunker down and build the best possible business. Since we were already profitable, there was little pressure to sell or raise more capital.  This also helped us much when negotiating since we staying happily private was always an option for us.

Today, while there is definitely more activity in terms of M&A in the region, entrepreneurs should always remember to look for clients first before looking for buyers. We need more highly profitable local outfits and/or highly scalable regional/global outfits. Both will then be sought after by different type of global buyers. The exits will be eight, nine or even ten digits. And the founders who exit can then become role models and investors for other startups. 

Contribution to Singapore

I feel strongly that entrepreneurship needs to be nurtured and considered as a career path for all Singaporeans. We want both top students and school dropouts to start up.  By deciding to start a business, my team has generated a hundred new good paying, high productivity jobs for Singapore. We help thousands of employers cut costs by improving their recruitment process and we are now helping spur the digital startup community via our angel investments and mentoring.  Imagine if there are thousands more such stories in all industries doing the same!

The various schemes by ACE, SPRING, MDA and NRF are all on the right track. We need to help locally owned SMEs as much as possible. While most of us may never make the same revenue numbers like an MNC can, some of us will do well and the long term rewards will be substantial. I strongly believe that a Singaporean owned company will stay in Singapore through thick and thin in a way that a MNC will never do. SMEs may expand overseas and sell overseas but the profits will be repatriated and spent via their Singaporean shareholders.  

Mentors & Government Help

I have been fortunate to have met and interacted with many entrepreneurs through the course of the past 12 years. It really is true that not only do we need to meet the right person, ask the right questions but also we must be at the right stage of development and frame of mind to benefit. I have learned the most when speaking to fellow entrepreneurs who run similar sized or larger companies. Talking to professional managers helps when I have a specific functional problem. For instance, during our acquisition process, I consulted accountants and lawyers. They were useful in so far when I was discussing specific points of law or financial terminology. But the best learning points I got were with fellow businessmen who have bought and sold companies and who were able to share from personal experience. 

With respect to the many government grants and funding which are offered to digital startups. I would advice new entrepreneurs to go for them but go with the mindset that even if you fail to obtain a grant, you still have a good plan to succeed. In fact, if we look at recent eight and nine digit exits/investments like PropertyGuru, Reebonz, Beeconomic, JobsCentral, and Hungrygowhere, none of us have taken any form of government funding.  Entrepreneurs should always start with ourselves and blame ourselves if anything goes wrong. I cannot stress this enough. Only when we see ourselves as the root of all our business problems, then can we act to overcome them.