Startup Portfolio Review for 2022 - The pain of costly capital

I just reread my 2021 report and unfortunately a lot of the points/predictions we made one year ago came true. The growth stock rerating lasted the entire year with no reprieve in sight as the Fed raised interest rates to 4+% in an effort to combat persistent inflation. SPACs and IPO attempts mostly all failed as the markets refused to tolerate expensive listed company valuations. Carousell, Kredivo, Carsome/Carro all have to say IPO or SPAC deferred for another 1-2 years as investor appetite dried up on loss making companies. And those few ASEAN startups that did manage to exit in 2020/21 like Goto, Grab, Buka, Prenetics, Propguru all crashed anything from 50-80%. Even the largest ASEAN tech company SEA crashed 76% from 220 to 52 per share.

In spite of the tough investing environment, Ning & I stuck to our investing philosophy and continued investing into 4 new startups and did 5 follow on rounds for existing portfolio. Amount invested 20% lower than 2021 which was a record year for us with 9 follow ons.  As shared in 2021, covid and Ukraine war has caused great pain to 3 of our startups and we have chosen to write them down to zero in 2022. On a positive note, 2022 saw a decent exit from our 2012 investment in an animation startup. Also, in spite of the bad market, we had 5 series A up rounds happening for our first Vietnamese and Thai startups and 3 SG startups. So in total,  for the 41 startups we invested since 2015, the IRR is now ~28% (down from 38% last year) with a TVPI of 2.66 (down from 2.98 last year).

On the VC front, our 8 funds are at 2.6 TVPI mirroring our angel side and actually up from 2021 2.47 TVPI. IRR should be low 20%s as they took capital much faster. 

Putting both angel and VC together, we actually still eked out a small gain of 2ish% year on year for 2022. Hard to believe but there is big caveat. See point 5 below.

Some comments and thoughts :

1) The drop in early stage valuations has happened. The valuations for follow on A rounds have been significantly worse than what founders thought. However, it is nowhere near the levels of how the growth stocks have fallen. ARKK fell almost 70% in 2022, it is only logical that series Seed, A, B, C, D, E valuations fall drastically too. Right now, startups are deferring fund raising if they have cash or raising from existing investors whose interest is to maintain last round valuations. Something has to give and i believe if interest rates stay above 4,5% this entire year, we will see some capitulation and failures from later stage startups which will cascade further to the earlier stages.

2) At Seed level, valuations have fallen 20-30% but its still expensive with no revenue startups valuing themselves at 4-6M SGD. If the later stage fallout happens as described in point 1, then maybe we will see valuations for seed back to the old S$2-3M range which would reflect the risk reward for angels and seed investors. 

3) One silver lining is many ASEAN VCs just raised capital for new fund and have cash to deploy. So it is entirely possible that they can maintain their winners valuations and ride out the storm until 2024/25 where they expect inflation rates to moderate back to the 2-3% range and hence interest rates to weaken and valuations to rebound somewhat. For these VCs with cash, they are in a relatively good place to slowly pick and choose  for new stories and only invest in valuations are good. For VCs who want to raise a new fund, i hear 2022 2H was very tough and i believe it will be very hard to close any meaningful sum for a few months more. Global investors need more clarity on inflation and IR and economy before deciding next steps. 

4) VCs (as of 3Q end) are still declaring good numbers. Two ways to see this. First explanation is the nice way.  Winners can still grow and command up-rounds in bad climate. Some of our VC funds invested in Ninjavan, Carsome, Grab, Buka, Kredivo etc. So its possible to swim against the tide for sure.  Second reason is that VCs have leeway in how they determine valuation. Usual rule of thumb is to keep at last round valuation. But they can also chose to up a valuation if company has no new round but business has a grown a lot. Also, they can continue to fund internal rounds at last round or even up from last round. All these moves allow them maintain valuation stickiness. The game is only up if the startup fails to perform, or lists and stock price drops or if climate stays permanently depressed and new round is down. Then write down becomes inevitable. 

While we can understand the logic of VC behavior, it does contrast with later PE funds. We also invest in some later stage PE funds and because they have many listed investments, they have had to write down 20+% mirroring at least a good chunk of tech stocks revaluation. So it’s important to take the VC numbers with a big grain of salt. 

5) On a personal front, while 30% IRR sounds good, it is mostly unrealized gains on unlisted companies.  The weakness in the ASEAN ecosystem is the lack of distributions. In current climate, I would much rather have a TVPI of 2 and 15% IRR but with 1x DPI already. 

6) This combination of high interest rate + high inflation + geopolitical issues = great uncertainty in global and ASEAN/SG economy. And when we add on our personal asset allocation shift into property, we feel a need to recalculate how much more to invest in startups. Bottom line, we want to see cash returns from earlier investments before committing much more capital into the space. So a lot depends on what happens next 2-3 years. Hitting 50 startups will probably happen but hitting 100 will require more exits. 

Bottom line, capital is now costly. Why would an investor take high risk to earn 15% returns if they can get 8% investing in a relatively safer bond portfolio? And why invest in a loss making unlisted startup if they can invest in google or baba at 12-18 PE ratio? Ning & I remember a time when startups were valued at 15 times profit and that was considered good valuation. And if you are not profitable, your business is not worth much until you show you can be soon!

7) We have actively communicated this investing climate change to many of our portfolio companies reminding them that profits matter a lot more now. I do believe many founders understand that turning profitable is the surest way to navigate 2023 successfully. Quite a few of our startups are either profitable in 2022 or have a clear path to become profitable in 2023. Those who can't are cost cutting to at least show narrowing losses and also making sure they line up equity funding to stay alive.  

It’s not a good time to run a startup now. Costs are rising due to inflation esp wages, but funding is hard to get. Debt is expensive and we expect startups that need lots of debt to suffer in the months ahead. See what's happening to Affirm and Klarna and Carvana. What will drag things down further is if USA economy goes into bad recession with its consequent impact on ASEAN. Then customers too will be hard to find as overall demand shrinks. 

8) Timelines to exit are now all extended at least 1-2 years as many startups will just stay alive and tread water in 2022 and 2023. So fellow investors, please do your own modeling and analysis and base it on a 10-15 year horizon for each startup and VC fund you invest in. With 10 years being a good scenario!  

9) One great thing that happened in 2022 is how the AngelCentral community has continued to grow. Our first investments into Vietnam and Thailand paid off well this year with significant uprounds happening as Series A rounds happened with good VCs. We also had earlier syndicated investments raising Series A in 2022 at improved valuations. So if you are keen to join us, do check out our services to help angels.

Moving forward this year, we intend to continue investing but with even more caution and discipline. This climate is not a bad thing as it removes all the crazy excesses of the 0 interest rate environment. It never did make sense that NFTs/alt coins were worth trillons or that startups are worth 10-30 times their sales even with lousy gross profits. Its a much needed reset for asset prices and forces everyone to get back to basics of profits and cash flow management. 

On a founder or investor individual level, we of course hope for the global economy to not tip into bad recession in this adjustment process and that inflation is curbed with minimal collateral pain. However, an old adage comes to mind - we can hope for the best but we should plan for the worst. Sounds like a good philosophy for 2023!

Footnote : This review focuses only on our startup and angel investments mostly in ASEAN space. if you want to know about overall philosophy in life, pls read annual review on life.

Back to the 2000s for startup valuations?

Have been watching and analyzing the public tech markets and broader markets for the year. Like everyone else, I have been taken by surprise by how rapidly valuations for loss making growth companies have fallen. Some examples ranging from those with really bad financials to those with slightly better ones:

1) Carvana has fallen 90+% in value. It’s now trading at just 1.65b usd or about 0.15 times of its revenue. So what does that say about what carsome or carro is worth and the IRR and TVPIs of their VCs?

2) SEA has fallen 88% from peak and is now worth just 20b or barely 1.5 times revenue. And they have a profitable gaming unit some more.

3) Grab, Goto, crowdstrike, twillo, teladoc all crashed 50-90+%. 

4) QQQ which is profitable big tech mainly has fallen 34%. But at least the valuations are supported by profit. That’s an important point- profits and not revenue now support valuations more.

5) And to add to all this pain even China tech and consumer companies- which frequently are profitable too have not been spared. They too are down >>50%. Their issue is a combination of worldwide revaluation + slowing economy + lack of trust in Chinese markets. 

For us in Asia, I am hearing most investors are hit bigger by the China & SE drop than by the DM fall in the form of QQQ or SPY as we started the year feeling that China stocks were cheap.

What does all this have to do with earlier stage startup founders in Asean? I hope I am wrong but current multiples remind me of post 2000s tech crash when it was normal for tech companies to be worth something serious only if profitable or approaching profits. A company with 10m revenue and 3m profit back in 2005/6 was worth more than a 100m revenue company with 10m losses because it is the PE ratio that matters more.

And the PE ratios for fast growing companies were usually ranging from 15 to 40. So the profitable tech company with 3m net profit off high gross margin of 70-80% was still just worth $45m give or take depending on growth rate. But the loss making one is probably worthless to public market investors or just worth its NAV esp if it cannot show path to profits and has widening losses.

So if I am a founder today running a loss making startup, I would plan for a “profit and cashflow hungry” capital market. Revenue growth matters much less than narrowing losses and profits. It’s also far more sustainable.

And if I were a fund, I would aim to make the current portfolio profitable and focus on getting distributions for LPs. Forget about raising a new fund for a while until the dust settles. Any LP will want to see this situation clear up and stabilize first. We also want to see distributions being done before just believing in current fund IRR and TVPI as it includes unrealized gains which have not reflected public market reality. Very soon LPs will see that 6x tvpi and 40% IRR means little if distribution is only 0.1x for a 6-7 year old fund. I would much rather have a 1x distribution and tvpi of 3x.

Unfortunately, there seems to be a state of tension going on between optimism/kicking the can down the road and being honest and realistic. Eg. bridge financing is needed but are still being done on last round valuation even though clearly the listed comparables have crashed to a 1/3. This deliberate mispricing by VC and PE funds is self serving behavior and will result in unhappy LPs if the write down ultimately happens 1-2 years later. 

Let’s see how this plays out. I would not be surprised if this downturn worsens on revenue front as businesses and consumers cut back.  if that happens,  there will be big loss making startup failures or down rounds in 2023 or 2024 as there is no way to justify 10x or more revenues when growth disappears and profit is absent.

As investors, we have been hiding out in profitable companies for listed market (only one nostalgic position in loss making SE) and some quality bonds since start of year. Even so, still down for the year but better than Acwi benchmark. For startups, we intend to continue investing but we will only do so at reasonable market valuations led by new lead investors to the round. No internal round at last round valuation for us if business has not improved dramatically.

As for our existing portfolio companies, we continue to ask them to prioritize ebitda and cashflow over revenue growth. Don’t count on always having investors to fund you and instead get customers to do it. Focus more time/energy on product, on customers and on employees. That always pays off.

Happy to see that many of our founders seem to get this and have moved to lower spend and drive revenue growth.  In the 2000s, it  was normal and desirable to turn a net profit if you have a few million gross profit. It was also normal to grow costs only if revenue grows in tandem or better still grows proportionately more. It’s time to bring that mindset back in vogue and stop being proud of losing money and using investor money to stay afloat! 

Lessons from a $1+M write down of a startup investment

Frequent readers, friends who know us or fellow members of AngelCentral will know that Shao Ning & I are careful risk takers. We are deliberate and  methodical when Angel investing and we also have parameters and systems set up for all our investments so that we achieve the right risk reward for us. 

Recently, we had to write down an angel investment that was on paper a multi-bagger and which was worth >$1M if we sold it.  Please don't ask us which startup as its not professional to reveal. The entire area which this startup operates obviously was badly hit by covid.

Anyway, the point of this post is not to gripe about the painful paper loss, rather it is to share that this setback actually validates what we have been teaching and practicing for angel investing. 

So here is what this experience has validated for us:

1) Bite sizing matters. 

We have a cap of about $200K per startup and have increasingly standardized first and follow on bite sizes. By not being greedy and following round after round on winners, we prevent any overly painful loss when there is a need to write down. Of course the bite must still hurt if lost but it should never kill you. The only time you invest all in for something is when its your startup.

2) Diversification matters. 

We set a goal of 4-6 startups a year with a target of 25 every 5-6 years. Each set of 25 can be viewed like a VC portfolio and we hope for 1-2 big winners that pay for everything and account for the 3X return after 10 years. During the holding period, some will grow and die. But our thesis is to never sell until the founder sells. This last point does merit further debate since technically portfolio returns can be even better if we sold out and realized the 1+M profit. But then what if this is the startup that goes on to grow 5X or 10X from here?

On a broader portfolio level, diversification also means don't overinvest in any one asset class. Startup investing whether as an Angel or via VCs should not exceed 10% of what you have. If you are super on, then not more than 25%. And if you have a lot sitting in startups, please invest in blue chips, property, bonds and other much safer instruments for the rest of your portfolio. 

3) Put it at book value always. 

This is something quite different from others that we practice. So while we have to mark to market so that we can compare with VCs and also use for workshops, we actually always put the value of the startup in our overall portfolio spreadsheets at the value we invested in. We even write down if we know realistically not doing well and may die. We only write up if realized. This practice really showed its value this time as we did not have to really write down our portfolio value by 1+M, rather we just wrote down the value invested which is quite small. So psychology wise, this book value recording for startup investments helps keep us grounded and also ensures our leverage use is always based off conservative asset numbers.

And for completeness sake, we updated our angel portfolio to reflect this writedown and now our IRR since 2015 for the 31 startups we directly invested in is now 35% with a 2.4 TVPI. Still good for us as it matches top quartile VC and within our projected return goals.

Hope this is a useful read for fellow angel investors.

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.

  

 

Thoughts on Paktor fund raising

This one pipped my curiosity as its the 3rd >30M dollar deal for a Sporean company that I am aware of this year alone! Ninja Van, then Caurosell and now Paktor. You can read more about what I think about caurosell here. I never reviewed Paktor space before though I did meet and are friends with Violet & Jamie who run Lunch Actually which is a more traditional offline dating company which now has also ventured into the online space. No vested interest in both parties.


Company story & financing so far
==============================
Paktor is founded by Joseph Phua, Charlene Koh & Ng Jing Shen. They run a combination of various dating apps and offline dating services in 4 countries. They started in 2013 and grew the company via VC money.

Paktor did revenues of 21.5K SGD In 2014 and 1.05M SGD in 2015. This rapid growth is impressive and does perhaps show that there is demand on consumers part to pay for dating and social dating related services. However, this growth came with spending 9.1M SGD in 2015. So I think any reasonable person would say the jury is definitely still out on whether their current business model makes sense. The strength is that they claim to have 22M users. So that is a cheap $0.5 per user acquired if I just use their last 2 years costs. Not bad and if these users are engaged, then that is a reason for optimism.

Joseph further claims in his msg to me to be profitable 3Q16. If he is referring to GAAP accounting profitable as a consolidated entity, I am extremely impressed as it means top line must have grown 10X with costs constant. Perhaps this explains the investment. However, I would wait for ACRA report next year to verify this fact. They had deferred revenue of 261k sgd for 2015, assuming that is 1 month sales, their run rate in Jan 2016 is still just 1/4 of what they need per month.  I have yet to see any ASEAN startup grow revenue so fast AND be profitable. Its usually one or the other. Happy to be wrong though. Actually, if Paktor grows revenue 10 fold for 2016 to 10M SGD without increasing costs, nevermind profit, I think they would have justified the round already simply because the speed of revenue growth is screaming at demand.


Company Founders
===============
Joseph is the main owner with about 31-32% before most recent round. The other 2 founders own  2-3% each. Of course, may be there is private agreement to split more shares. On salary front, they don't overpay themselves and it is a fair sum for the 2 directors of a well funded startup.

I have never met any of them but Joseph immediately contacted me after I posted a comment on FB and I must say I like his style and what he says. Considering he is from a very privileged background, he does genuinely come across deeply engaged with his business and clearly cares. He also talks about profits which resonates very well with me. Of course to have some many VC (esp Vertex who has had some nice wins this year) support them it should be that way. Anyway feedback is also good about how the company culture is run.


Financing Details
=============
Since  2013, Paktor has raised Seed, Series A, B of about 18M USD from Vertex, Majuven, Yahoo Japan etc and now apparently $32.5M USD Series C from MNC group and K2 global vc with follow on from existing investors. I say apparently because the newest round have not been lodged as far as I can see.

The most recent rounds valued Paktor at about 33.6M USD. So this latest run in Nov is really a large and quick round considering they raised and settled last round only in Jul 2016. Valuation (if indeed it is a full cash Series C round) should be anything from 60-100M USD premoney.

This is a pretty large investment for MNC and K2 Global.  The latter is a newish fund that came out last 2 years saying they aim to raise 100M to invest in pan Asian plays. So even if K2 took 10M of the 32M, it is a bold first investment. For MNC group, they are large media player in Indonesia with holding company having a market cap of around 660M USD. However, they have large bond/debt obligations which need to be refinanced which caused their Ottawa USD to be marked down a fair bit. I can't imagine MNC taking all the rest, so their existing investors must have ponied up more money. We will know when the filing is made.


Deal Rational/Market Sizing
======================
In the USA, Match.com group does around 900M USD and has profits in excess of 300+M. So the potential is huge if they are able to make it work the same way  in Asia.  Match was valuing themselves at around 4-6 times revenues. Closer to home, Jiayuan which was china's listed dating online/offline play, was taken private in 2015 at 233M USD market cap which was just 2+ times revenues of 110M USD.

So if we account for per capita differences and of course higher mobile adoption, it looks like there is an opportunity here on paper. However, experience tells me things always take longer. China and USA are ahead of us in this area and I suspect total dating revenues in ASEAN will be lucky to approach 50M USD next 5 years. But of course, readers know I am conservative. The VCs obviously think Paktor will be closer to Match rather than Jiayuan. I don't know why though.

BTW, closer to home Lunch Actually has much larger revenues at least back in 2015 but has taken many years just to get here. This is another reason why I think the market will take time.

How about this whole social entertainment thing? Its rather vague so I am not sure that it means. I guess we will know as they execute. But there is a company called Migme which I analysed before which tries to monetize social networks differently. Still very much a work in progress and is facing a big cash crunch next few months.

In a nutshell, Paktor will need to find some scalable new  product within this dating and social space that is radically different from jiayuan or lunch actually in order to grow well to justify this kind of round and deliver for their investors.

Summary
========
Overll, my assessment is that this round is very much a selling the future type of story similar to Caurosell. It is is a lot of funding  for a proven S$1M revenue. They need not just superb business execution as they expand regionally and improve/create products, they also need market wind behind them for adoption via subscriptions or advertisements to grow fast enough to justify their spend and valuations. It will be interesting to see what happens next. My gut is market wind is not that strong next 5 years but this is a viable good market but it may be a long haul game. Good luck to Joseph and team!

One a final note, if more such deals happen and set the benchmark, we are going to see larger deals with even less fundamentals moving forward! Is this good or bad? Well, I see it as part and parcel of the ecosystem evolution. Some founders/investors who get the timing off will lose big and those who read it right will gain big as the markets run up and down, but so long as usage grows, revenues grow, the overall ecosystem will continue to do well. Just be clear what is niche and what is broad market and make sure you have enough cash in the bank to do the battle!

How do VC actually work in terms of revenues?

UFor a vc, funding a company is just the first step. It is like hiring a potentially great employee or finding a good business partner. All potential no real revenue. Even subsequent rounds raised at higher valuations are just unrealized gains which can evaporate esp at early rounds. Eg. Vc invest in company at 2m post money. Company raises 1 year later at 8m. Vc will change the net asset value of the company on their books by 4x. But later if firm fails and is written off, all the unrealized gain disappears.

So what is real revenue worth celebrating from a VC point of view? Finding more investors or lp. Each 1m in investments is worth 20-30k in annual mgmt fees for 5-7 years. That's real revenue and the hard vc work happens at pre-start of fund. Then vc work even harder, "hire employees" and then after 3rd year onwards of fund life hope to start exiting companies in trade sale or ipo. This is real cause for celebration as it is the carry revenues that count the most to the partner. Roughly for every 1m in excess of lp capital, vc partners in aggregate earn 200000. 

So a 50m fund in ASEAN, say 2 major partners will earn :

1) 1m per year revenue from Mgmt fee for 7 years. Usually not much profit here after all costs like legal, transport, salaries, compliance, marketing etc

2) 12-15% of the 20% carry at end of fund. So if fund in the end exits 150m. The classic 3x, the 20% carry is 20m. Their 15% is worth 15m. So each take home 7.5m before any tax (10% if concession or 17% normal corp) if equal carry.

Reward is sort of like running a startup for 7-10 years and exiting for 20m. But the risk is lower since there are 20 bets made rather than just 1 concentrated bet.

VC friends, pls feel free to chime in!

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.

Execution - Perception gap between investor and founders?

This article is triggered by recent exchanges i had where i realize that there is a gap in perception between founders and the investors who fund them. On one hand, i have the hardworking founder telling me that they dont think they executed badly and in fact executed well given the situation but from my point of view , they did not execute well. So who is right? After some reflection i realize both are right!

Founder point of view :

I have so much shit happening all the time. Traction takes longer to achieve. Staff are hard to hire and quit on me. Sales takes so much longer to happen and when it happens, clients buy less than projected.

And worst of all, market keeps evolving and changing!. So of course i cannot hit my projections. They are just projections. Surely the investors can see i am working crazy hours and obssessing about it all and trying my best!

Investor point of view :

You only execute well if you have achieved the metrics which you pitched and plan annually in terms of revenue, EDITDA, product development plan, marketing plan and HR hire plan. Anything less means execution could have been better.

Sounds harsh? Actually not really. After all the investment as made based on the premise founders will deliver. And don't forget i also need to make sure the investments realize a profit at the end.

Yes, i know startup is difficult. Marketing is hard. Hiring and retaining is hard so is growing revenues. So most investors discount what you pitch somewhat. But it does not mean we agree execution is good when founders fall short.

For me, i will only feel execution has been good if we meet all annual projected metrics and also feel the founder has the right attitude and mindset. Execution is great if we beat of course!

My comment?

Both sides are right. I do both right now and in the past. A little empathy and regular communication will go a long way. So the investor needs to express the worry they have that business not going to deliver on promised returns, founders need to agree they are not executing well and appreciate the other party's stress. And both sides meet. But who should do more in the communication department? I think the founder. Simply because you probably have more to lose and you own more of the company.

No simple solution right?