It’s that time of year when tech pundits everywhere emerge with prognoses for the year ahead. I’m jumping on the bandwagon too.
Let's get into the details.
India is currently seeing quite a bit of excitement in the early-stage funding scene. By “early-stage” I mean companies raising (much) less than US$5 million in financing in their last round. There are sound reasons for the excitement — accelerating growth in smartphone usage, positive developments on the government and policy front, increased availability of early-stage capital, and a lot else. Yet at the same time, it is fair to say that valuations may be getting a little ahead of themselves.
I think there is still some room for valuations to build further, driven mostly by capital chasing high-quality entrepreneurs in attractive market segments, a combination that still remains scarce today. That is the bull case.
The bear case is that valuations will over-shoot and the trend will break — and this is what I think will happen. All it will then take is for a couple of leading venture capitalists, who have a lot of available capital in comparison to the size of these small early-stage rounds, to take a breather. I anticipate that this will happen in the second half of the year. These bigger funds will then retreat to their original focus on growth-stage investments and leave the early-stage scene to specialists and smaller funds.
Although Singapore is very small and hasn’t produced big successes on a consistent basis, government support in one form or another — grants, equity funding, smart promotion of Singapore to entrepreneurs and financiers outside Singapore, assisting Singapore-based firms with commercialization and internationalization, educational resources, and more — has resulted in Singapore punching well above its weight in terms of the number of early-stage ventures at the top of the funnel. Even more so than in India, early-stage startups in Singapore have lots of sources of capital to choose from (and not just from the government). This implies that any decent early-stage startup can raise initial rounds of funding on attractive terms.
There’s nothing to prevent more such startups being founded and many more will continue to be. However, it will remain true for the foreseeable future (not just in 2015) that the amount of early-stage capital available will easily dwarf the number of companies that can absorb that capital. This underpins my prediction.
Whether this story will eventually have a happy ending — and who will be its beneficiaries — is something to think about.
Note however that this is only about early-stage startups as I defined earlier. Among startups that are at series B and beyond, attractive companies will continue to raise money at appropriate valuations while others may find themselves plateauing or worse turning into zombies. At that stage, it is difficult to talk about valuations in broad-brush language.
Facebook has made many acquisitions in the US and a few elsewhere. In contrast, their deal activity in Asia has been subdued. In Emerging Asia (loosely defined as India plus Southeast Asia), Facebook has made only two acquisitions – an Indian startup called Little Eye Labs and Malaysian company Octazen.
This will change.
I think Facebook will make its first big acquisition in Emerging Asia in 2015, where I define “big” in this context as anything valued at over US$50 million.
My reasoning is straightforward. The two biggest countries in Emerging Asia are also two of Facebook’s most important markets: India and Indonesia. Facebook’s India userbase is set to surpass its US userbase in the near future. Indonesia is not far behind.
As to what Facebook might buy, I think it’s very unlikely Facebook will purchase a company purely to bulk up its userbase. Facebook’s traction is already so large and has such strong in-built network effects that it doesn’t make sense to do this. They bought Whatsapp not (only) because it had a large userbase — of which a big proportion is in India and Indonesia — but because it brought them exposure to a new, parallel area. The same is true of Instagram, Oculus Rift, Internet.org, Little Eye Labs, and so on.
So what might Facebook buy in Emerging Asia that operates in a parallel domain and warrants a good-sized cheque? Here we move away from prediction and towards speculation, but here are some ideas anyway:
Google is perhaps the most global Silicon Valley company I can think of in terms of its userbase. Yet, most of its commercial focus has continued to remain the US and Europe. With the majority of its revenue still coming from its core search advertising business, Google doesn’t gain much by aggressively pursuing users, new technologies, or even advertisers in Emerging Asia. This isn’t to say that they will not grow their business organically in Emerging Asia; just that M&A dollars are far more easily justified in their home market. I’d love to be proven wrong with this prediction.
Singapore’s two government-backed investment companies GIC and Temasek Holdings have raced ahead of their peers in terms of getting exposure to technology titans in the US, China, India and elsewhere, seemingly as a result of putting a formal programme in place rather than merely making opportunistic investments. Temasek-affiliated firms like Vertex Venture Holdings and Pavilion Capital have given Temasek further exposure to tomorrow’s potential titans. I don’t know of too many other sovereign investment firms that have done the same thing, barring the occasional one-off deal such as the Qatar Investment Authority’s recent investment in Uber. I think this will change this year, as other sovereign investors start to pursue large tech companies who continue to stay private well past the US$1 billion valuation mark.
Many Chinese tech companies are already quickly becoming household names outside China by virtue of organic expansion and some investment activity. We can expect investment and M&A activity by these large technology companies to substantially ramp up in 2015, and specifically in Emerging Asia and the US. The most active players will be ones like Alibaba, Tencent and Baidu, but several other less known players will also appear on the scene.
This is perhaps the one prediction I am least comfortable with. I am aware of Southeast Asian companies that have already reached this valuation level. What I am less sure of is whether they will achieve an exit this year.
Over the past few years, Japanese investors have, for a variety of reasons — fall-out from Fukushima, contracting home market, desire to diversify away from China — looked at Emerging Asia as an attractive investment destination. Japanese firms generally make decisions in a careful and deliberate manner and thereafter tend to “stick with it” unless and until there are strong countervailing reasons to change course. Investments by Japanese firms in Vietnam, Indonesia, India and other countries in Emerging Asia have generally followed this pattern and I anticipate that this will continue in 2015.
The one exception to the steady-as-she-goes approach is SoftBank (of course), which has made big bang investments in Emerging Asia recently and is likely to follow these up with more such deals. A related investor is Visionnaire Ventures, a joint fund by Temasek Holdings and Taizo Son, brother of Softbank’s founder Masayoshi Son.
So there you have it.
I focus in this post mostly on investment activity, not broader predictions about attractive new opportunities for startups and VCs because:
This piece first appeared on Tech in Asia.
This piece first appeared on Ask(Your)VC.
That title isn't clickbait: I'll tell you upfront that I don't believe that there is any such thing as the Next Silicon Valley. Apples to apples comparisons across regions are mostly meaningless. Now that that's out of the way...
I was invited to speak on this topic at dmexco earlier this month, Europe's largest digital media conference and expo, with 30,000 attendees. The discussion was moderated by Terry Kawaja of Luma Partners and my co-panelists were Marvin Liao of 500 Startups and Stefan Gross-Selbeck of BCG Digital Ventures. The conference organisers have produced a slick recording of the session here.
Although I don't believe in notions like the Next Big Thing, I do strongly believe that there is globally unparalleled potential in what I term Emerging Asia.
South and South-East Asian countries are a few years behind Japan, Korea and China, and still have poor broadband coverage on the whole, low digital media spend, low incomes relative to the developed world, etc etc. Yet these same marketes contain in aggregate close to 2 billion of the world's people. Their median age is a mere 26 and the fastest growing demographic is aged 15-24. The top 5% wealthiest people in India have the same aspirations and spending power as the average Western consumer -- while also easily outweighing their Western compatriots in terms of sheer numbers.
People in Indonesia and Philippines are far and ahead the world's leaders in terms of time spent per day looking at screens. Not US users, not Koreans, not even the Japanese come close.
Attitudes to entrepreneurship are changing and no one bats an eyelid at the idea of launching a company in Emerging Asia that targets Western businesses as clients.
The number of VC firms actively seeking to make Series A and B investments in Emerging Asia of between $1 million and $10 million (i.e., well below Silicon Valley norms) is less than 30, possibly less than 20.
Singapore, although small and far wealthier than its neighbours, sits right in the centre of all this activity and is a natural hub for start-ups to set up regional HQs, access financing and, at a later stage, become a venue for exits.
Finally, not all of this is mere potential: over the past 6 or 7 years, we have seen about a dozen technology companies hit the magic billion-dollar valuation mark.
Isn't all this mind-boggling?
It's clear that these markets are massively attractive though not without their risks and obstacles. We discuss some of this in the video.
Lots has been written about WhatsApp’s sale to Facebook back in February this year. Plenty has also been written about how this is perhaps one of the best returning investments ever made by a venture capital investor. After all, WhatsApp’s backers Sequoia Capital are estimated to have received proceeds of about $3.4 billion for an investment of about $60 million.
One point that has been remarked upon in a bit less detail is the fact that Sequoia was thesole VC to invest in WhatsApp. Rob Go of NextView Ventures seems to have been the first to talk about this at any great length. He wrote:
I can almost guarantee that if any other fund was an investor in this company, the cap table would look very different by the time they exited. Well done.
Very true. Well done indeed. (Not that Sequoia is waiting for the rest of the industry to pat them on the back.)
“For This I Took a Bath” by Beau Considine
Rob explains why this sort of situation is very rare. In summary: it takes guts.
It also requires having a lot of dry powder, a VC partner who is willing to stick their head out without social proof, and the ability to convince a genuinely successful entrepreneur that they don’t need a different investor at the table in their next round of financing.
Dan Primack of Fortune asked whether Sequoia’s phenomenal success as the lone WhatsApp investor meant the death of social proof. Dan feels that social proof “deserves to be on the run” but also hints that it is unlikely to go away. Why? Because being the sole investor requires conviction.
CB Insights dug into their database to see how many other large VC-backed tech exits in the US had just one institutional investor and found that just 7 out of the 100 largest exits fell into this category. (I unfortunately don’t know which companies these 7 are.) Their conclusion? Leaning in requires conviction.
Conviction. Guts. Is that the #1 factor?
In the US, yes.
That’s probably because the US financial markets are the deepest and most sophisticated in the world. Not only do start-ups have access to the world’s largest and oldest venture capital industry, they also have access to other forms of financing, such as from wealthy individuals, the government, venture debt providers, banks, hedge funds and several other financial entities. All this makes the market incredibly competitive. A consequence of this is that consistently generating outsized returns is very hard. This implies that if a fund does have access to a high-return investment opportunity and they have strong conviction about it, they quite rationally should take a shot at being the sole investor. If they don’t, someone else in their highly competitive marketplace will happily jump in.
How does this play out in India and South-East Asia? Quite differently.
Over the past few years, there’s been a trend of Indian startups moving to Singapore. To be sure, this is only true of a tiny minority of startups but the trend has become noticeable enough that Quartz felt compelled to write a piece titled How India Can Keep Startups from Moving to Singapore.
Find your own path
Now, there are several flavours of “moving” to Singapore:
As mentioned, the number of Indian startups actually making a move to Singapore remains small. Of this already small number, ones that fall under the 4th category above are an even tinier minority.
Some notable startups, not only from India, who’ve moved to Singapore from elsewhere:
Is all of this a ‘problem’ for India? In aggregate, I think not. In fact, for some startups, maintaining a presence in Singapore may actually be a positive. Here are some benefits that looking outside India can bring Indian startups:
A broader regional perspective
In my several years looking at startup investments not just in India but also across SE Asia, Australia and the US, I’ve noticed that Indian startups sometimes get “sucked in” to solving only problems in their own backyards and don’t realise that other countries outside India may be just as attractive places to operate in.
Ease of achieving exits
We’ve started started to see good-sized exits coming out of India in the past few years. However, for a country of the size of India, the number of exits is still smaller than it should be and the exit valuations achieved could be higher, if not for the fact that the legal and financial environment for IPO and M&A exits in India could be more favourable.
Singapore (and some other places) in contrast is a good place to be based in when a startup has achieved exit velocity. Some startups plan ahead and domicile in Singapore from early in their development. As more and more exits start to happen, a virtuous cycle of innovation and entrepreneurship in India can get going.
Access to a different set of customers
Enterprise-focused startups have often related to me sorrowfully that the typical Indian enterprise doesn’t like buying from startups and even if they do decide to go the startup route, there is a tendency to bargain for extreme discounts and favourable payment terms. For B2C customers, this is less of an issue. However, both B2B and B2C startups can benefit by at least examining the different market dynamics present in other countries, even if they ultimately decide not to expand outside India. Singapore offers one particular benefit in that a lot of major multinational corporations base their Asia headquarters in Singapore.
Abrupt policy changes, corruption scandals, hot-cold investor sentiment and several other factors beyond one’s control result in heartache for entrepreneurs. Being present in more than one country while certainly adding a layer of operational complexity may help reduce one’s overall risk.
Access to complementary talent
Again this is a consequence simply of looking outside one’s own backyard. Someone who would bring a lot of value to your team may not be able to move to Bangalore but might be quite happy to be based in Singapore or another city elsewhere.
Improving operational metrics
As a consequence of some of the above factors, operational metrics like margins, days receivable, pricing structure and so on can change quite dramatically from business-as-usual levels.
Each of the above can have a pretty major impact on a startup’s path of development.
However, simply because the above benefits are available to startups in Singapore doesn’t mean that India doesn’t have complementary benefits of its own. It really isn’t one versus another.
Some other perceived benefits may not actually be true. For instance, Indian entrepreneurs sometimes assume that Singapore’s status as a global financial centre means that it’s easier to raise startup funding in Singapore than in India. Arguably, this isn’t really true. India has a far greater number of active VC firms and other sources of startup capital.
So should India worry when startups migrate to other shores? Mostly, the answer is no. If anything, this is something to be encouraged as Indian startups start to forge regional and then global identities as they grow and mature.
The piece Why India shouldn’t worry about startups leaving for Singapore first appeared on e27.
Photo credit: Jon Rawlinson
We need more soft landings in Singapore, India, and other markets in SE Asia for start-ups that fail to fulfil their initial promise. Why? So that more potential entrepreneurs and start-up employees will actually take the plunge.
I'm a little late to the party but I just realised that Brandscreen, an ad-tech company that went into administration at the end of 2013, was bought by a US ad-tech firm last month. I've been told that Brandscreen went through a raft of problems prior to its entering administration but I also know that they had some great assets in their staff, intellectual property and client roster.
It's a virtual certainty that none of Brandscreen's shareholders made a profit on the sale to Zenovia, but that's not the point. We need more of these fall-back options which will allow start-up founders and employees to dust themselves off and live to fight another day, whether that be at another start-up or at a larger organisation. Over time, prospective white knights will find that there are talented, motivated and cohesive teams, not just individuals, available to them.
Getting this started is the responsibility of everyone here -- senior entrepreneurs, investors, large tech companies, corporate executives, everyone. Ultimately, we will all benefit from increased start-up activity and greater market depth, so it's up to us to make it happen.
Let's do it.
We've all heard about why it's important for entrepreneurs to be passionate about what they're doing. But passionate investors?
Mark Suster explains why entrepreneurs should seek out investors who share their passion. Investors who will go the extra mile and give your company more patient long-term support than would be rationally warranted.
I've written about this myself as part of larger topics here, here, here and here. I have fallen in love, as Mark says, with a few entrepreneurs in my time, and in all those interactions, there was always something special that went beyond just the numbers, and that relationship continues to this day.
At the same time, entrepreneurs in Asia should be wary of placing too much emphasis on this. Not because passion is somehow an unnecessary ingredient in Asia. Quite the contrary. Most Asian countries are difficult markets and you want every bit of support you can get.
The reason for my caution is that the number of VC firms in countries like India, Singapore, Australia, Indonesia and so on is at least one order of magnitude smaller than in the US. This necessarily means fewer potential investors who're going to be truly passionate about you. If your #1 criterion for picking an investor is someone who passionately believes in you and your mission, then I'm afraid you are going to find yourself restricted to a tiny handful of prospective investors, perhaps as few as 1 investor (or even none) depending on where you live. The investor who's passionately interested in, say, tackling market inefficiencies in the media industry (me!) may not be as passionate about the next Flappy Bird app. Some other investor may have exactly the opposite perspective.
A related reason is that many investors here are, as one entrepreneur disparagingly said to me, "Excel VCs". By which he meant, accountants, bankers and spreadsheet mavens. So let's say you've actually hit upon a VC firm that's made a few investments in your sector and seems to understand what makes your company tick. That still doesn't guarantee passion. This can be true across stages and across investor profiles -- it's not only the growth stage guys (Series C and beyond) as you might think. One reputed investor once said something to the effect, "Why should a successful entrepreneur with an exit to his name become an angel investor? Far easier and less risky to just invest in real estate."
Finally, VCs in this region are faced with a huge surfeit of investment opportunities in sectors as diverse as logistics, manufacturing, hospitality, healthcare, non-banking finance and so on, apart from tech. This means that they probably haven't decided what it is they are truly passionate about... mostly because they don't need to.
All of which means that when you do come across your dream match, grab the opportunity with both hands. Don't be shy.
I write this because I know how difficult it can be to find a potential investor and to decide with whom you’d like to try to work. You may not have a choice – many don’t. But if you do – or if you’re simply deciding which VCs to put in super-human effort to targeting as potential investors, I would encourage you to think about their core beliefs and interests.
First-time entrepreneurs who're out to raise their first or even subsequent rounds of funding don't always realise that they can (and should) do DD on their prospective investors, not just the other way around. Why don't they realise this?
The most obvious reason is the skewed balance of power. The entrepreneur wants money and the investor holds the purse strings. But is this really a skewed balance of power? It really depends on who the specific parties are. A strong entrepreneur who has a good investment opportunity to offer and several interested investors can certainly shift the balance back in his favour. (This has been most obvious in Silicon Valley in the recent past, where super-star entrepreneurs raise money at valuations unheard of in Asia.)
Another somewhat related reason for entrepreneurs' diffidence is the unwritten but widespread belief that investors are omniscient super-beings who are above question. That's one big reason why MBA grads, senior guys in operating roles, and even investment bankers clamour to move to investing roles. Nonsense. Just as there are good and crappy entrepreneurs, engineers, journalists and marketing professionals, there are good and crappy investors too.
Ok, so you're convinced. You know the value of doing your homework on your investors. What questions should you be thinking about?
The one question you don't see above is whether this investor has experience making investments in your specific sector. This is partly because, at least in the tech world, industry cycles move very quickly, and a five-year old investment may have little relevance to you today. More important, what matters more from your perspective is whether the investor has done her homework on your industry, has overseen investments in at least a few start-ups before yours and has evaluated at least several hundred firms in total. You're the expert in your industry sector, not your investor. The investor only (only!) needs to be good at helping you with the overall company-building process and everything that entails.
"Could Australia’s tech stock frenzy ignite the next Silicon Valley?" asks this piece in the AFR.
Australian start-ups face both considerable obstacles and opportunities. Consider this quote:
“I have seen businesses that give up equity and head over too early to the US, but then had difficulty managing their growth,” said Ms LoRusso. “There is a skills shortage and funding shortage holding back tech entrepreneurs in Australia, which forces them to accept the money more easily available in the US. You can have a great idea but the ability to nurture that through its growth stage is very limited, largely because of that funding gap of $1 million to $10 million and a skills shortage. So picking the time to expand is critical.”
For some growing start-ups, certain Asian countries might actually offer better scope for expansion than the US. My experience has been that many Australian entrepreneurs either don't realise this or don't know how to tackle the opportunity, because few role models are available to them and because Asia doesn't have as much mind share in Australia as one might expect.
An entrepreneur asks this question, which not so long ago would have been quite an absurd thing to contemplate:
Why do we see more product companies than services companies? When investing, do VCs also tend to have a bias?
Actually, if you ask any tech-focused investor in India, they will lament that there aren’t enough product companies in India. Even some of the companies that claim to be product companies actually have a strong services orientation.
In contrast, VC-funded startups in Silicon Valley are predominantly product or market-place startups, and rarely services companies.
The reason for favoring product companies is because they have high gross margins and high operating leverage. Generally speaking, services companies have low fixed costs and high variable costs, which means that the cost of servicing customers (usually manpower) moves in tandem with revenue growth, necessitating constant investment back in the business. In contrast, product companies don’t have particularly high growth in variable costs as sales grow.
Note that this doesn’t mean that product companies are ‘better’ than services companies. For example, a services company may be able to more quickly respond to changes in customer needs, whereas a product company may need to go back to the drawing board. The first big development of the Indian IT industry in the 90s was clearly based on a services model and several entrepreneurs and their employees and investors made a lot of money.
Note also that the distinction between a product and a services company isn’t always cut and dried.
From my latest column at Yourstory.