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! 

Recent angel investment exit during market crash

We recently exited one of our earliest angel investments in an animation company. Return was about 11-12% IRR over a period of 10 years. On a scale of things not a fantastic angel return but we feel its decent considering what we know of the industry now and current funding climate.  

We met the team back in 2012 and were impressed by their experience in animation and also back then, there was a desire to build the animation industry in Singapore. The idea was to use state of the art in house software to improve animation studio productivity while at same time also develop a franchise of quality animation characters. As its one of our earliest investments, we were still quite green and invested a sizable bite (a few times our current first cheque) and also did not care whether the company had a lead external investor or whether shareholding was well aligned.  I also did some initial research and actually could not find any recent listed comparables with the exception of Zinkia which owned Pocoyo. Anyway back in 2012, we just sold JobsCentral and so felt quite cash rich.

The company quickly managed to attract more funding at better valuation. However, as they executed, we quickly realized how hit driven the industry is and also how much cash it needs. And even if one creates a franchise with decent traction & feedback, its still a tough journey to sell to more broadcasters and even tougher to create sizable merchandising revenues. The company had to make ends meet by doing some production studio work for big brands. But just like software integrators, every resource spent on outsource work is a resource missing to build a good internal brand and product. 

What changed things in my opinion is the rise of youtube and other free to stream platforms. By placing content on these platforms worldwide, the company managed to earn decent, high margin revenues from ads and also place their characters in front of millions of kids worldwide. The covid crisis helped further as more kids spent more time in front of screens. All this was not contemplated at all in the original business plan. So kudos to the team for not giving up and always looking for new ways to grow the business. With this new stable and growing revenue stream, the company managed to turn profitable. 

Some takeaways & learnings.

1) Industry matters. Space like movies and animation very hit driven and distribution matters alot. Production talent alone is insufficient. And the fact that i could not find any strong independent studio back in 2012 probably was a big warning. I would not invest in movie or animation production now. Also its very unstable. Zinkia is not doing well at all now. Only franchises owned by giants like Disney or Sanrio have staying power.

2) Company ended up consuming quite a lot of capital. So that diluted returns. So initial valuation and bite size matters a lot. All this is no brainer in hindsight but it does mean having a founder who does not give up and good at financing deals is important.

3) Industry sometimes has huge shifts. In this case it is the free to stream segment. Catching it early to create ones channel and mindshare on youtube and like platforms matter a lot.

4) Profitable, own strong IP and growing is a great combination. Not only have much less funding pressure, such companies will be attractive to buyers in all markets. This deal was concluded in May 2022 at the depths of a 6mth down market on growth stocks. 

5) It really does take 10 years to grow a business. I hear angels who speak of exiting in 5 years and seed VC funds whose fund life is 7 years. I dont think they factor in sufficient time for their portfolio companies and for VCs, that can cause problems for themselves at end of fund life.

6) Paying attention to Secondaries also matter. Company had a shareholder who had to exit for personal reasons. So the price per share was very good and we picked up a little more as part of pro rata and right of first refusal. That extra bit helped juice up returns a fair bit upon exit.

Overall, this sale together with some new up rounds this 1H2022 helped improve our overall angel portfolio since 2012 to 28+% IRR and 2.78 TVPI. And for the more active period from 2015 to 1h2022, it’s 39+% and 3.03 TVPI. 

Hope this sharing is useful for fellow angels. 

NB :Full bite size investment up front worked for us in this case. But i think more of luck and it does not change our current bite strategy.

How will the current stock market rerating affect our startup scene?

A fellow angel asked us the above question. Ning and i discuss this a fair bit as we have both public and startup equity. I actually summarized some initial thoughts back  in Jan article on Sea’s stock crash. Unfortunately the trend has not just continued but has deepened. 

It should be pretty obvious for investors and founders who watch public markets that there has been a rerating of valuations in the tech space. Both stable profitable tech as expressed in QQQ (Nasdaq100) and loss making growth tech as best expressed by ARKK (Ark Innovation) have dropped 21% and 49% ytd respectively.

I think with interest rates scheduled to rise more to control inflation, it does look like this trend is good for a while until inflation shows clear signs of abating. That may take 6mths- 1 year.

So how does this affect our local and regional startups? 

The most obvious hit will be for the late stage ones who are near IPO. SPACs are dead no thanks to dismal stock performance by Grab post SPAC. And don’t get me wrong, for grab mgmt and founders it’s a great timing move to raise the 5-6b at peak of bubble and dilute little. But for all investors who invested above 10b valuation, it’s losses all around. Same thing can be said for Buka and Goto. Interestingly, Goto raised only 1+b as investors can see what’s happening on grab front.

So what the above means is that no more easy Spac near term and IPO will be also be hard to bookbuild.

So if I am a late stage Vc or PE investors, I will be looking at the current public market valuations to value upcoming rounds. Cuz that’s the exit I get at best in near term. So at least 30-50% haircuts all round?

Eg carvana is now trading at 0.8 times revenue. How does that affect carro and carsome valuation who raised at 2-3 times gmv?

Or even profitable tech like tencent, baba, Google and fb are at 10-25 forward profit. So even if our local tech startups turn profitable, are they worth 50-100 times profit if growing at 30% per annum? Probably 30 times is fairer? 

A barometer to watch will be if carousell and carsome can do their IPO or SPAC. If they delay or pull, it means public investors have drawn a conclusive recent lesson from Grab and like.

How about earlier stage startups? Those B round and earlier ones? 

We don’t see any big impact on seed valuations yet. Though logically it should cascade to this area but maybe need to see the prolonged pain another 6 mths first. If I am a seed founder, I will quickly raise if I can and be more flexible on valuations. If i am an investor, I will continue investing this period as it’s good timing for the upcycle in a few years time. Companies formed during recessions and tough times tend to do well when the upswing comes. 

But I will be more discerning and take my time. As a reminder, seed valuations before the rapid rise of last 5 years, used to be 2.5-4m sgd. A rounds used to be 8-12m sgd.

What if I am a startup founder 

Of course fund raising is still a sales game, if as a late stage founders, you can sell a great story and convince investors to still pay more vis a vis public markets, kudos to you.

But if can’t convince, then the solution is to turn profitable or at least narrow losses and work with the cash on hand. And if cash not enough, then a down round dilution may be in the cards. 

There is also another less obvious fallout. And that’s on the value of stock options across loss making tech industry. I am sure sea and grab employees who did not cash out will be feeling the pain of worthless options. So you may find esop less valuable as a retention tool.

Looking at our portfolio startups, many are focusing on profitable growth instead of revenue at all costs fueled by super cheap investor money. I strongly believe those that do it well, will reap great rewards when this cycle turns. 

What does this all mean?

Actually I think this reversion to the mean is normal for markets and good for our ecosystem. It will flush out the excesses of the last few years and expose startups who are swimming naked and have no real sustainable business model. Investors who blindly chase the next hot story will also learn their lesson and be more discerning for the next deal. 

And let’s not draw the wrong conclusions. Crashing valuations and stock prices is a reflection of the risk reward investors want. For profitable companies, valuation matters a lot less except in the area of esop and pressure by shareholders. Truth is, they have time on their side and perhaps opportunity too. 

From what I can see, all the easy money whether in public or private markets has been made last 4-5 years. I won’t bet on a quick recovery any time soon unless inflation magically disappears.

Thoughts about SEA limited (& other plunging listed tech stocks) and implication on tech startups

Was discussing SE today with Shao-Ning Huang. We were lucky to spot it in 2017/8, and bought our usual bite. The position quickly grew to be our top holding by far.  We sold on the way up and closed out position at 344 last year not due to any timing brilliance but because needed the funds.

When we spotted it, SE was trading at $10-20 or just 4-5 times sales, mostly profitable gaming and growing revenue 100+% per annum. we felt was a no brainer to buy! moreover, the gaming and e-commerce space are both huge. Sweetener is lots of Chinese high alumni working in SE.

So what do I think of SE now at 138? At 138, it’s trading at 7-8 times forward sales and the growth is slowing esp at gaming side. Gaming revenue also more fickle and hits can lose favor. Also now composition of revenue is a lot of loss making ecommerce. Add on the rising ir environment which bashes down all growth valuations and the picture is not rosy for stock price.

So we will correspondingly adjust our bite sizing and expectation. Recently sold some puts from 100-145. Aiming to build a normal sized position at anything below $120 blended. Won’t go crazy to buy beyond normal bite unless it plunges irrationally below $80. And If plunge for good reason also won’t add.  

Bottom line: easy money made on SE for foreseeable future. Likewise for many loss making growth stocks. Be very careful everyone.

Side note:  results coming out in Feb will say a lot on direction. Likewise for grab coming results must see before doing any big move on it. Also it’s not all rosy for us in this downdraft too. Caught by surprise by the depth of Chinese tech sell down. Easily lost 0.5m there since Jan 2021 to now. Lucky kept to bite sizing discipline and did not add. Falling knife can keep falling.

HOW ABOUT TECH STARTUPS?

So how about unlisted tech startups valuations. If listed side falls to 5-10 times forward sales, how much you think a much smaller and also loss making startup should be worth? Quite concerned here as we have big positions in tech startup space. Looks like we have to be even more disciplined to make sure don’t overpay for new and follow on funding. 

A sure test ahead will be the various spac attempts and loss making unicorns trying to fund raise and/or create exits. Will they have large down rounds coming up or will they be able to still list or sell out at decent valuations? 

And for founders, better build something profitable which gives you infinite runway or at least make sure you plan for poor funding climate where there may still be VC money or trade sales or IPOs but investors want much lower valuations. 

Startup Portfolio Report for 2021 - Liquidity trumps covid

2021 has turned out to be a banner year in spite of Covid. As I mentioned in my life review of 2021, Covid has resulted in greater inequality and unfairness in the distribution of world resources.  The reason is because govts have to inject lots of money into their economy and keep interest rates low in order to save jobs, certain industries and not cause a downward spiral. And while much of this money helped do just that, a lot of it also flowed to inflate financial assets and that means listed stocks, unlisted stocks and even crypto assets, properties and commodities.

We invested in 6 new startups in 2021 and did follow on rounds with 9 more. This is a new record for us in terms of amount invested.  Add on our Vc investing, we have invested over S$7m into the ASEAN startup space. As of end 2021, 41 startups and 8 VC funds. 

Generally 2021 has been a good year for the startup ecosystem and hence our diversified portfolio. Only the travel and events related startups continue to hurt badly and we do expect to maybe see 1-2 failures this year if they are unable to raise capital. However, almost all the rest grew significantly business wise with healthcare players like Homage and Alodokter growing a lot and raising large rounds at much higher valuations.  We also had Patsnap that became an official unicorn.

We did have a execution specific problem with a centaur startup that resulted in a 1+m write down. It’s clear it’s execution specific because another startup we have from similar space just turned around to good numbers. As a result of this write down, our direct startup investments did not improve on IRR though it’s still a great performance. From 2015 till end 2021, IRR is sitting at 38.83% (drop from 40+% last year) and the portfolio has a 2.98 TVPI. 

VC did very well as they did not suffer from any major winning startup write down. The 8 funds we invested are at 2.47 tvpi (from 1.98 last year) with IRR harder to calculate since all slightly different vintage and drawdowns. But we started investing in 2014-2015, so I would estimate IRR  in mid to high 20s.

Here are some learnings and thoughts we have:

1) Investing in the same sector may not be such a bad idea provided we are clear not to share info across competitors. At least we still get to participate in the sectorial growth and have 2 shots at the goal instead of just one. But it’s important to make sure both founders know and to not reveal any sensitive info.

2) Diversification and bite sizing matters. Having 41 startups allow for portfolio to handle black swans like Covid. Similar bites also allow the winners to do the hard work of lifting up entire portfolio. Last thing we want is to have a 30 bagger on an undersized position. Furthermore by investing in 8 VC funds, we have another 100+ to 200 startups in the region. This adds to diversification and also adds on an indexing effect.

3) VCs are a good asset class if riding the cycle up. We started in 2014 on the thesis rising tech/startup tide will lift all boats. True enough, VC funds rode the upswing. If you study almost any of the Vc funds started back then, they all have 1,2,3 great winner that return so much that it should have returned entire fund. Vertex, Jungle, Monkshill, wavemaker, Goldengate, 500 all have their own unicorns and centaurs. 

But it’s important to note fees really affect things. The current difference between our own startup portfolio and VC is almost entirely the fees and carry.

4) Startups will require a lot of follow on decision making. Our policy is to generally follow all bona fide next rounds up to a limit of about $200k. But we are beginning to wonder if it is worthwhile following less strong bridge rounds. On one hand we want to support founders but so far the data shows many bridges tend not to work out that well.

Looking ahead this year, we expect to continue investing in 5-6 startups and for sure there will be some follow on. The funding climate should continue to be strong as we know VC dry powder is still aplenty. 

One big danger is the current rerating of high growth loss making listed stocks. Grab, Sea, Buka have all crashed anything from 40-50%. Likewise other nasdaq listed counterparts like crwd, OKTA, palantir etc. If this continues or worsens, there will be a rerating at PE level and hence startups will also be affected. An upcoming barometer will be if carousell/traveloka/carro etc SPACs can happen and if they happen, how they trades. Crashing like Grab for a prolonged period will make future SPACs fail. It’s telling why these startups  are not IPOing normally like sea or razer did. I believe it’s because SPAC has biased price discovery and so they get better valuation and less oversight in a bubbly environment. Hope those we are vested in manage to squeeze in their SPAC in time! 

Anyway, rerating of valuations and the subsequent liquidity squeeze need not be a bad thing as it will show who is swimming naked when valuations drop and profit margins come to fore. 

So to fellow investors, do be thankful for your gains and remember to give back to the society that enabled it. For fellow founders, the easy valuations and fund raising could get harder, focus on building both a profitable and scaled up business. That way even if really funding gets tough to obtain, at least you just grow slower by reinvesting profits and not end up with a distressed situation. 

Purposeful Life - 2021 in review

I had hoped that 2021 would be a year where life got back more to normal. But instead it just felt like a re-run of 2020. Quite tough year actually as I felt very stuck. In fact this year made it very clear that doing well at work or portfolio has a weakened  link to happiness for me. The link was super strong when I was in early 30s for sure. 

Being an internal scorecard person who enjoys experiencing old and new things, being restricted in movement, socialization and travel hit hard this year.

Turned 46 this year and when I reread last years review post, glad to know the 3 purposes i wrote down and the values associated did not change. Though I must say purpose 3 doing very well numerically but not resulting in more fulfillment is worth paying attention to.

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.

Quite a lot happened on all 3 fronts.

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

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

Oldest son enlisted in April. 2nd son had A levels, 3rd son entered Sec 1 and 4th son entered P1. All major life events for kids. So this year, wife & I had hands full ensuring all 4 get the right attention and help when they needed it. Its very hard to do it all well. We tried to have family bonding time by singing Karaoke at home, having staycations during March and Dec holidays and family dinners daily where we discuss topics or share our day. But as the kids get older, they become adults and we just have to hope we did enough right for them to be happy, fulfilled and useful people. 

Dad turned 80 in Dec and the great news is that i am now staying with him for a couple of months this year while waiting for new place. Got a new place as we need a larger space for 4 fast growing kids and we ourselves need more space. Definitely consequence of Covid. It has been fun watching Dad go about his daily life these few weeks. A good role model on aging actively. 

As for Ning, we are closer than ever with so much more time to spend together. We celebrated our 20 year anniversary so busy with moving house that all our plans of a photoshoot or travel or even staycation took a back seat. Hopefully can make it up in 2022. I must say finding a life partner that grows alongside you is super critical to happiness and achievement. I am very happy to have found one and I hope she feels the same way about me too.

As for friends, time with them really fell this year with all the restrictions happening. A lot of meetings for forum/peer groups happened on zoom, old school friends met opportunistically whenever we could meet in groups of 5 or 8. Even managed to attend a wedding for a relative. But these in person social events were far and few between. 

So while i can say i managed to continue on family bonding, friendships took a big backseat this year. Hope to remedy that this year with more socializing when allowed.

Purposes 2  : Be Healthy Mind and Body

GOALS: Keep lean, weight below 70kg. Control mood better through exercise and mindfulness.

Managed to keep to a regular exercise routine of 4-5 times a week. Weight hover 68-70kg. Mostly jogging, yoga with more swimming compared to 2020. In fact, i found myself heading out to the beach almost weekly at one stage. And i would spend a good 3-4 hrs there just chilling and swimming. Singapore has one or two nice beaches still with decently clear waters on some days. Interestingly, the beaches are mostly empty though Dempsey is always full during this WFH period. Don’t make sense to me but I am not complaining.

Purpose 3 :Portfolio mgmt & Work role in Society

Goals: min 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

Its very strange that COVID has resulted in one of the best years portfolio wise. Portfolio overall went up by a record high teens return with PE fueling most of the gains followed by the public equity markets. The market is fueled by huge liquidity and low interest rates. I am not sure how long this party can last but my gut says its reaching the end soon. There is already a clear rotation in the public markets where loss making growth is being sold down in favour of financials and value stocks. China tech is our sole detractor this year losing a good chunk due to the crackdown on BABA and like. We are holding but not adding. We are also mindful that PE gains esp startup gains can be ephemeral and may disappear overnight. So we always keep them at book value.

I am still very much focused on compounding over the years at a good rate. One good practice is that Ning & I sit down monthly to discuss portfolio like a business and we make decisions jointly that are split up for execution. This formalization of activity reduces stupid decisions when investing and also fosters accountability. We are also mindful that the more systematic we get, the easier it will be to involve more family members down the road. 

The other confirmation/takeaway i have is that the capitalistic system is really very unfair and it reminds me that those who benefit really must try to do more to be generous and fair minded to everyone. This global pandemic has greatly enriched people who invest in stocks and private equity. Since 2018 to now, an investor in S&P500 would have almost doubled their money! So while some workers have to rely on govt help to tide through the pandemic, many others have made much more money just by owning shares. From this angle, China's push for common prosperity as a resource allocation philosophy is not wrong at all. 

Startup/AngelCentral Work 

Angel portfolio side now at 41 startups in total. We invested in 6 more startups this year and a few of our startups had large uprounds. Likewise, the very tech heavy VC and PE funds we invested in also had large writeups. Combined, our PE side was up 20+% on mark to market basis. The only exception remains the L Capital Fund which has continued to write down. Really the saying that a dog will stay a dog holds true in this case. We also had a startup in the travel space that continues to be badly hit by COVID. See analysis of startup portfolio for 2021.

On AngelCentral side, under Ning leadership, we continued to grow and carried on with our mission of building effective angels in ASEAN. As an angel club, we funded another 5-6M into various startups and successfully helped them form 6 new syndicates. What is heartening is that we also see other syndicates and angel groups being formed. While on one level it is competition, on another level it bodes well for our ecosystem to have more activity and validates that what we do is useful. 

Volunteer Work

Continued volunteering with ITE, PEP and SWCDC. I don't believe in constantly seeking new titles and roles to do. I believe real value get created when one sticks to a commitment and role. Having said that, I may find a new commitment this year to do more for. Also need to catch up on charity giving since we want to give away 2% of profits/income made over time. 

 

In Summary, my goal for 2022 is much more of the good stuff of 2021, but with an added dimension of going back to traveling. Aim is to have a short trip in 1Q. hope it works out! Not promising no thanks to omicron rise…

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.

Temasek under new CEO.

 Temasek is getting a new leader to help grow our SG champions and invest strategically worldwide on the PE side. Let’s hope the new Mgmt shakes things up on the governance focused boards and also replace ceo who fail to deliver much faster and actually deliver on the next gen of SG Champions.

Temasek under mdm had a mixed performance in my opinion. Total shareholder return of 6% last 20 years.      I think this compares badly against top quartile PE Fund blended with S&P or ACWI 60/40.

First half of tenure from 2004 to 2010/11 great performance riding the Sg/asia/oil&gas boom. Credit must be given. But 2nd half from 2012 to now, bad. 

Mainly caused by TLC portfolio not growing well. Just look at Singtel, our TLC industrials, Mediacorp/SPH, SIA etc only capitaland, dbs are fine. As major shareholder, much should have been done to take board and Mgmt to task.

The other major contributor to relatively poor last 9-10 years is missing investing in strategic champions where we invest at PE stage (0.5b-2b) and which realize big gains when listed and they really scale. Obvious example will be SEA and to lesser extent Razer. 

Moving forward I hope to see :

- Boards role include more of add business value

- Mgmt and board that are removed faster if not performing

- benchmarking to top PE funds with talent to run like top PE fund managers for the non TLC side of portfolio. This means picking new winners better and also helping them more. 

-invest bigger chunks and drop the small size cheques. Or set up new entity with talent to do the smallish ones. And then make sure they get the bigger cheques based on the initial stake so that we own 10-30% of these giants ultimately and can really build the next gen of Sg champions with govt/people ownership.

This last point i think miss out right now. There are unicorns being created now with small Temasek indirect stakes via VCs and heliconia.  But we somehow have not been able to follow on the later big rounds. Eg patsnap, ninjavan...

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!