Greek Complexity

Singapore vs Hong Kong as a business jurisdiction

Link of the day: Singapore as a Holding Domicile for Your China Operations

This piece contrasts the use of Singapore as a location to set up holding companies for Asian operations versus using Hong Kong instead. Mostly about tax but also other matters. Not as boring as it sounds. The article doesn't mention it explicitly but Singapore also has bilateral trade and tax arrangements with India, separate from the India-ASEAN tax treaty. China and HK don't.

Entrepeneurs: please ignore these tips

Luke Johnson writes a piece in the FT piece titled "Ten pieces of advice that should be ignored". Every entrepreneur and, arguably, everyone else associated with a young business should read this list. Says Johnson, don't listen when someone tells you:

• "Never borrow money." What? Why wouldn't an entrepreneur want to borrow money? Equity is much more expensive than debt. Sometimes, much, much more expensive. (As you can see, I use very specific technical terminology like "much, much more"!) Given that I am in the business of providing equity capital, you might think I am making things hard for myself but I stand by this. Of course, best of all is funding yourself via internal accruals, but that doesn't sound very start-up-ish.
• "Profit is all that matters." As Johnson says, different situations call for different metrics of success. Accounting profits aren't the only thing to strive for. For example, one of my portfolio company CEOs has this slogan in his email signature: "Revenue is Vanity, Profits is Sanity but only Cash is reality".
• "Don’t worry about your competitors." The lay reader might wonder why an entrepreneur might even fall into this trap. Surely every business has rivals, you'd think, (and if it truly doesn't, consider the possibility that it isn't a very attractive business to be in), but you'd be surprised how often some entrepreneurs fall into the trap of complacency and ignoring their competitors. I'm not saying that entrepreneurs should be paralysed by the presence of rivals -- sometimes competition can even be a good thing, for instance if it helps educate prospective customers -- but razor sharp focus on who else is in the market is very important.
• "Don’t work with partners." Johnson doesn't say much about this but I cannot stress this enough. In contrast to the first point, where I talk about how some entrepreneurs unnecessarily dilute their shareholding, the same entrepreneurs sometimes don't like working with partners because it feels like they're "sharing" an opportunity with someone else or giving away control. This kind of thinking is a bit upside-down. 1 + 1 really can be more than 2 sometimes... subject to picking the right partner and forging the right partnership arrangement. I use the term "partners" broadly, whether these are formal business partnerships with another company or getting seasoned execs to join your team.

These are the four out of Johnson's ten tips that I have personal experience with and can assure current and aspiring entrepreneurs that they really can have a big impact on the success or failure of a business.

When NOT to go with a (big-name) VC

Old post by Chris Dixon but, heck, I just saw it. If it's new to me, it's bound to be new to someone else. Quote:

Suppose there is a pre-profitable company that is raising venture financing. Simple, classical economic models would predict that although there might be multiple VCs interested in investing, at the end of the financing process the valuation will rise to the clearing price where the demand for the company’s stock equals the supply (amount being issued).

In practice, the equilibrium states for venture financings are: 1) significantly oversubscribed at too low a valuation, or 2) significantly undersubscribed at too high a valuation. ...

When you invest in early-stage companies you are forced to rely on very little information. Maybe you’ve used the product and spent a dozen hours with management, but that’s often about it. The signals from other investors who have access to information you don’t is an extremely valuable input.

So what should the smart entrepreneur do? They should read The Importance of Investor Signaling in Venture Pricing including the comments that follow the post, separate the wheat from the chaff, and then turn theory into practice.

I am not an investment banker

When I tell people what I do for a living, I sometimes get asked (mostly by people who've heard the term but have only a vague idea what it means) whether I am an investment banker. I generally respond jokingly with something like, "How dare you use cuss words with me!" The joke is often lost on the audience but, for sake of clarity, here is why I'm not an investment banker:

It is curious to reflect that in the London market of 25 years ago, last week’s decision by UBS to maintain investment banking bonuses in the face of a thumping loss would have been literally incomprehensible. Back then, bonuses were paid out of profits. So without profits, where might the money come from? [...] I have written on this hallucinatory procedure before. Suffice it to say that whereas any corporation could in theory adopt it, only the banks have had the brass neck to do so. Then again, only the banks paid bonuses based on imaginary profits of various kinds throughout the bubble years.

from FT: Good old days when bonuses were paid from profits

This is also why I can't imagine myself ever investing in shares of investment banks. I really don't know how to analyse or value companies where profits, cash flows and spending decisions aren't necessarily related, and where the principal-agent problem is so pronounced.

VC/PE in India vs SE Asia

Interesting piece at VCCircle here. I thought the comparison below of PE in Indonesia to India a few years ago was apt. The writer's estimate of the number of Indian PE funds in the market today is quite extraordinary too.

Another VC investor mentioned in a discussion yesterday -- and I know that he had the same views three years ago -- that although Vietnam presents great opportunities for the canny investor, entrepreneurs there don't yet have familiarity with terminology and structures that VCs are used to in other markets. For instance, in the Vietnamese legal system, loans and equity are understood, but the concept of preferred shares trips them up.

First big acquisition in Indian gaming evaluated

Disney India, which already owned more than half of Indiagames, announced plans recently to acquire a further 30% in the company. So how does this measure up?

VCCircle has done an analysis of the likely valuation and returns to shareholders. It certainly bodes well for the Indian entrepreneurship and early-stage investment ecosystem that a long-standing player has gone through an M&A process successfully, achieving a good-sized valuation with a global player as the buyer. Terrific.

However.

Cisco and Adobe, two of the company's investors, doubling their money in over six years? And unrealised at that. That's really not much of a return. It also isn't something for the management team to be particularly proud of. The investment hasn't gone to zero for sure, but it ain't no hit either and shouldn't be pitched as one.

Two caveats. One: I am taking VCCircle's numbers at face value here. Who knows, the investors might get a sweetener or two to up their returns. Even so, I don't expect this can help too much. And two: if we separate the investment returns from the company's own needs, I think this transaction makes eminent sense for the company. No arguments there.

Note that I don't foresee my firm investing in the gaming or content business because we (meaning, I) don't think we have any particular expertise at picking games or other content that will prove to be winners. I'm making a generic observation here about return requirements in the VC business.

Also, VC is certainly a "hit business" as Luke Johnson says, meaning "disproportionate rewards accrue to the most successful participants, while a substantial majority earn peanuts". The ratio of successes to so-so investments and failures is generally highly skewed. One way to mitigate the risk of investing in, er, non-hits is to focus on stuff you know. I certainly am more comfortable assessing technology businesses than I am predicting the tastes of the average gamer.

Bringing banking to the masses via technology and telecoms

Here's a massive opportunity for technology companies serving the financial services sector: roving bank tellers serve rural India. Has the potential to be a great "Bottom of the Pyramid" success story. Opportunity across several areas including banking software, analytics, security, mobile payments, CRM and so on. I imagine a similar opportunity exists in nearly every emerging market, not just India.

Frothy valuations: Telling it like it is

Mahesh Murthy is on fire!

This was too good to just stick on my radar feed.

For non-slang Hindi speakers, "topi" literally means "cap" but in this context refers specifically to the dunce-cap. By "topi" investors, Mahesh means investors who've had the dunce-cap placed on their heads but hope to pass it on to an even bigger dunce in future.

Apple: I was wrong

...on current evidence. Six months ago, I called a top on Apple. Since then, the stock price has continue to rise, briefly making it the world's largest publicly listed company by market capitalisation last week. Cue many excited articles. I can't be bothered to link any more. There were also more sensible articles from Paid Content (which contains the hilarious quote: "Microsoft is finally taking mobile seriously but its legal department has had more success than its product development people") and the WSJ among others telling us why such comparisons are, apart from their entertainment value, pointless and stupid.

More important than the symbolism of becoming the world's most valuable company -- note that they were helped by a 14% fall in Exxon Mobil's share price -- is the fact that Apple's stock price rose 4% over the same period, going bang against my prediction.

However, what does all of this mean for the future? Will Apple continue to generate outstanding returns for its shareholders? I remain cynical, but maybe that's just bias. There is the problem of being so big: how do you grow even bigger at the same pace as historically? Lex is doubtful, but perhaps not as much as me. Aswath Damodaran was optimistic as of January. Time will tell. Let's check back in six more months.

---

The idea of checking back in six months reminds me of this funny Ellen Degeneres quote I once came across, which you are welcome to use to make fun of me:

The good psychic would pick up the phone before it rang. Of course it is possible there was no one on the other line. Once she said "God Bless you." I said, "I didn't sneeze." She looked deep into my eyes and said, "You will, eventually." And damn it if she wasn't right. Two days later I sneezed.

The VC hears the entrepreneur's lament

...and responds: Mukund Mohan does a nice follow-up to his article the other day here. I covered a few of his points in my own post.