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.

  

 

Purposeful Life - 2020 in Review

This year was a tough year due to many many adjustments for COVID. But in terms of purpose and the philosophical breakthrough i had in 2019,  i think the mantra of being useful, focused, grateful and having fun still works very well. So hopefully after 5 years of retirement, I have hit on a good formula to lead my life.

To recap, below is what i came up with in the period from 2014 (retirement) to 2020.

Purpose 1 - help and be there for family. Extend to friends if i can.

Purpose 2 - be as healthy as I can

Purpose 3 - Be a good custodian of wealth and knowledge. help grow startup ecosystem via angel investing & AngelCentral.  Contribute to broader society as volunteer.

From the above, I generate goals and results as posted before. Below is an update.

Purposes 1 :  Good relations with Family & Friend & contribute to their lives

Goals: High level of family/wife/friend time. Share more learnings with kids.

COVID circuit breaker definitely helped with family bonding time. For 2020, we already planned to stay home a lot more as 3rd son had PSLE and 1st son has A levels. So not traveling our usual 80-90 days in 2020 allowed us to do that. 

We continued our regular dinner discussions with boys on learning topics. As they mature, Ning & I are thinking about how to pass key learnings we have in the area of daily quality living, business  and personal finance. Continued routine with Dad and made good time for dinners with friends. My own feel is that zoom sessions to maintain relationships are better than nothing but very inadequate. 

Purposes 2  : Be Healthy Mind and Body

GOALS: Keep lean, weight below 70kg. Pick up more outdoor sport. Control mood even better through exercise and mindfulness.

Kept with regular exercise routine of 5-6 times a week. Mostly jogging, yoga with some swimming and a bit of tennis lately. Critical to keeping healthy and warding off depression. I did not cope well with circuit breaker initially. Felt cramped and locked up. Ning said i kept going to supermarkets every other day. Took me almost 5-6 months to adjust well. What helped was opening up in July and adjusting my own mindset to find joy in the small things and be grateful for what i have.

Eg. watching sunset daily during circuit breaker. consuming a whole lot more wine, heading out to local beaches to satisfy my inner beach bum, did a 17km walk with old friend etc.

Purpose 3 :Portfolio mgmt & Work role in Society

Goals: min 6% (change to 10%) long term annual growth on investable net worth.  hit 100 startups for angel investment doing well as a portfolio. Quality volunteer in any such work I take up.

Portfolio Work

Big wins this year include SEA (first 10 bagger), Baidu, BABA, Tencent, FB basically tech companies. Biggest mistake is buying into SG stocks too early in Feb. Overall did a decent teens returns which far exceeds our 6% annual target.

After 9+ years of running own funds, I now know myself better and feel more confident in asset allocation, analyzing of companies and markets. Read a great book called Masterclass for Investors by Martin Sosnoff in Dec and it reminded me on the power of compounding.  Learned that in USA,  besides entrepreneurs, the other big group of UHNWI (>50M usd) are wall street asset managers who made a pot of gold in late 30s or 40s and then compounded it at 8-15% for 30-40 years. 

Our original decade goal of growing investable net worth 6% annualized has been revised upwards to 10% as we managed to beat the 6% significantly last 9+ years. 10% is a stretch goal and will require me to treat portfolio like my main work next 10 years. Hope it works out well!

So next few months, will be spending time with Ning re-planning asset allocation and modeling returns and cash flow.  

Startup/AngelCentral Work 

Angel portfolio side now at 35 startups in total. We invested in 6 more startups. 4 without even meeting the founders face to face! Did our first Vietnamese and Thai startups.

Interestingly and to my surprise, this downturn has not been a very big hit on our startup portfolio. The K shaped recovery is very clear. We have 4 startups badly hit (1 has closed down), 10 more hit but the majority all managed to grow in 2020 revenue compared to 2019. Deeper analysis here.

Ning & I are very proud of our startups and the AngelCentral team for navigating well through this downturn. Some founders took a month more back in April to watch first before acting, but most of them took our advice to act fast and make needed cost or product changes. And i think most of them are better off for it. 

As a portfolio, our private equity investments in 40+ startups, VCs and PE funds grew in value by almost 20% year on year thanks to it being very tech heavy. On the downside, one big drag was due to L Capital fund 2 which held lots of retail plays and which in my opinion was badly managed by previous owner.

On AngelCentral side, when COVID hit, Shao Ning reacted quickly and ran experience sharing sessions for AC/own startups. We also offered our experience about downturns with our startups and helped quite a few look over their revised business plans. We also had to switch completely to zoom based pitching and classes. 

While we see some weakening of appetite on angels part, more than half still continued investing like us and we still saw a good $4-5M being funded by AngelCentral angels in 2020. Valuations too are slightly more reasonable now with a good 10-20% drop in seed round valuations. 

Volunteer Work

Still volunteering with ITE, PEP and SWCDC. One project of note I did was to help ITE make use of crowdfunding platform giving.sg during COVID to raise funds to help with the expected increase in social assistance recipients. Ning & I donated 10K and the campaign raised over 200K (with dollar for dollar matching by govt) for this purpose. 

I am beginning to realize that sticking to what one is good at matters a lot. So while $200K may sound a lot, its value is low compared to what we do for the startup ecosystem. So i am mindful that if we want to add good value, it must in the areas where we have an edge, have the brand and the people network. 

 

Hope 2021 is a much better year for everyone and that we can finally put COVID behind us and travel again!

Steps to take now to prepare for the Covid Recession

Its happening as we speak. Last 1-2 months, many startup management teams and boards have been in emergency strategy planning sessions to figure out how best to navigate this deep downturn. And because data is coming in fast and furious in this new connected world, it can sometimes be tempting to wait for more data before doing up a revised plan for this year and next.  Don't be tempted. Do it now!

Ning & I have been on many video calls with our portfolio founders last 3 weeks helping them figure out what is the best path. I want to share our thought process and some steps today to help fellow founders.

Step 1 : Assess your situation.
Use latest sales numbers last few weeks to figure out the level of slowdown you are facing. So far it looks like travel is almost 90-100%, Events / F&B is 40-70%, B2B saas software around 30-50%, media up on traffic but down on spend=net down 10-30% expected and ecommerce/delivery/healthcare/edutech all doing better than expected. The list goes on and it will be interesting to see the follow on demand shock and wealth reduction effects on p2p lending and other fintech businesses.

Get a clear handle of your costs and start to think which can be cut. Get a calculation of the time frame and amount of wage and rent subsidy.

Step 2: Make a reasonable projection on forward revenues and collections for various scenarios.
Assume the recession will result in depressed sales for 6 mths (base case), 9 mths (bad case), 12 mths (very bad case). You should make cashflow projections for all 3 cases. What this means is for eg if 1Q2020 sales was $300K. But its falling off a cliff for March say to just 50k entire March . Then for the 6 mths scenario, extrapolate April-Sep will be just $50K mthly. Then project some growth and recovery from Oct - Mar 2021. Apr 2021 onwards back to $120K a month. Thats for base 6mth case.

Step 3: Project out a 24mth scenario and reduce costs
With 1,2, you can project out 24 months and see how much cash you will spend each month factoring in grants, reduced sales and collections. Next step is to reduce costs until you meet your desired goal. We are asking our startups to execute a plan for 24 month runway now. You figure out your own.

Step 4 : Get credit line. Then SELL AND INNOVATE OUT OF THIS CRISIS
Start applying for credit lines if needed to shore up finances. At same time, see if there are opportunities to grow other types of sales. During the GFC, recruitment advertising plunged. But employer branding budgets were still present in select FMCG, Govt, Tech sectors. So we created brand new packages that gave them branding. Interestingly branding packages were worth a lot more than recruitment ads and they helped us a lot. Go full steam to acquire clients.

Step 5 : Track cash and new metrics in mths ahead and tweak plan as things change.
Self-explanatory.

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Additional Point 1  - Get a handle on collections and clients.
AR is not cash. AR is you behaving like a bank when you are not. You need to do 2 things.

a) Chase down all the old AR and stop selling new contracts to clients who are not paying. This is particularly critical now esp for fellow startups who may not have runway left. But they will continue to consume your services if you let them.

b) Shift sales to sell to clients who can pay upfront or good credit. Divide your clients into 3 segments. First segment is the bluechip profitable MNC and govt clients. You can continue as per normal getting their sales and even extending usual AR timing. Second segment is normal customers who have always paid up on time and who deserve some trust.Third segment is unknown or risky credit clients. For group 2,3, you can still do their business but ask for cash upfront. You can even give a discount for it. It will work out better that way.

Additional Point 2  - Deliver all the bad news transparently  in 1 go and lead by example
It may feel correct to cut down costs and manpower as the revenue falls but that is not good for morale. Do it all in 1 go at the front and make sure management takes the biggest cut. At the same time be very transparent and overcommunicate everything. From the economy, how it is hitting company to your thought processes.

From there on, its off a low base and things hopefully keep improving. If it turns out the 6 mth scenario is wrong and its a 9mth, then do another cut 6 months later. But not small cuts month by month.

Additional Point 3 - If you are removing headcount, make sure it is done legally and humanely. Explain to remaining staff why. And yes, of course take the opportunity to remove poor perfomrers.

Good luck to all fellow founders and see hope to see a wave of cost efficient and super battle hardened startups when we emerge from this downturn!

NB: we also did a survey of our 31 startups to gauge impact on their business and runway. Situation better than we expected thanks to recent fund raising and emphasis on costs.

Third Angel Investing Course on 27th April 2-630pm

Some of you may be aware but i have been conducting Angel Investing Workshops for people who are keen to invest and find out more about this asset class. Reception has been very good and we have trained about 56 people over the last 2 classes held in Dec last year and Jan this year.

This half day course covers comprehensively all the things we need to think about.

* How Angel Investments fit in your overall portfolio
* Ecosystem data
* Positioning as an Angel
* Evaluation of Startups
* Due Dilligence & Legal
* Post Investment Issues

Best of all, i use real data from our own portfolio as examples and to show what is really happening now.

And after the workshop, you will also gain access to pitch sessions of startups which are validated by more experienced investors. So far 2 pitch sessions have been organized.

Find out more at :

http://www.drwealth.com/angelinvesting

ps: DrWealth is the event organizer for the workshops and this is a paid event.

How to think about Revenues and Costs in a startup

Over the years, i have been both running internet business and investing in internet businesses. In both cases, management will always have a profit and loss projection for the year. I have seen enough internet P&Ls and tracked enough such P&Ls that i have come to some conclusions for our region. Here are 2 major  :

1) Revenue projections are almost always optimistic.

I have must seen and helped or tracked more than 100 internet businesses by now based in SG and MY. Of these, only a handful have revenue projections that are largely achieved. And these are usually achieved due to market conditions being extremely favourable. A good example is Groupon SG and MY which rode the adoption of ecommerce in a big way. Or job portals and property portals which rode the economic growth and property market growth. Of course execution matters equally too. Usually companies that achieve their projections are those who executed very well on a day to day sales and operations basis and which are also aided by market trends which added wind to their sails.

What about the rest? Most of the other startups fall short of their projections. A common mistake is to assume a certain conversion rate for platform plays without taking into account that as one scales up, the conversion rates could change for the worse. For sales team plays, a common mistake is to assume scalability of sales staff without taking into account the fact that it takes time to train up a sales staff and that attrition for corporate sales startups is pretty high. Also sales management is not something easy to get right from the start.

Another common mistake is to assume revenue from new markets based on old market assumptions. I have seen many business plans where SG makes X revenue and the assumption is to grow MY and ID at the same pace as SG. This is quite dangerous. Many reasons. One is that core team that made it work is still in SG and not the new country. Another reason is that SG core assumptions are significantly different from new market. Another close parallel of this is assuming in your projection that you can sell a complementary  product as easily as your core. For example, an ecommerce company thinking that it can branch out and sell to the same clients advertising media.

2) Costs are usually at projections or worse above projections.

On the other side of the income statement, most startups manage to spend what they say they will spend. Unfortunately, when coupled with (1), this means many startups fail to hit their EBITDA goals. While not damning if they are growing fast enough, some startups do get caught and run out of cash.

Implications of the above 2 observations.

If the above 2 are usually correct, then it means that startups should always have a ultra conservative plan which requires them to project revenue at the worst case scenario and then spend at the worst case scenario. And be reactive enough so that if revenue comes in as expected, then ramp up the cost to match it. But never let cost ramp up in anticipation of revenue.

Now i know some people will say that is extremely conservative and startups that practise what i just suggested probably cant scale up super fast. Also, some people may also wonder how such a startup will get funded. I have 2 answers for this.

First, use your average to optimistic scenario for fund raising but use your conservative one once you get funding. This will solve your funding valuation issue and investors usually dont mind if the entrepreneur is more careful with their money.

Second, it really depends on market adoption or revenue growth. If market are growing like crazy (read over 100% per year), then yes, by all means ramp up the costs. But if market is still those that require you to educate clients (like job portals during the 2000-2003 days)... then perhaps it makes sense to pace costs to revenues.

Feel free to comment!