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.
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.
Snip: "Funds launched by the likes of Alibaba have been lambasted as parasites that are endangering China’s economic health by a prominent commentator, the latest salvo in a battle that pits new online funds against the traditional banking system they are shaking up. The war of words over the weekend is a sign of the growing controversy over the online investment funds, which were launched less than a year ago but have already upended traditional business models in China’s banking system."
This is an auto-generated post from my reading list.
Snip: "In 1930, John Maynard Keynes predicted that, by century's end, technology would have advanced sufficiently that countries like Britain or the United States would have achieved a 15-hour working week. There's every reason to believe he was right. In technological terms, we are quite capable of this."
This is an auto-generated post from my reading list.
Fascinating and so obvious when summarised thus:
If there is a park or some kind of store within a half mile of their home, school-age youth are more than twice as likely to walk. If destinations are farther, they wait for a parental chauffeur. Think of the implications: a community with one central mega-sports complex with several baseball diamonds and soccer fields can actually be bad for children’s health if it replaces small parks scattered every few blocks.
Combine this with the tendency for lifelong exercise and eating habits to be influenced in childhood, and it's clear what the implications are.
Worth reading the whole piece: "Why Cul-de-Sacs Are Bad for Your Health"
Snip: "In the past months, there have been several troubling research reports, from different parts of the world, exploring aspects of the same problem: Multi-drug resistant bacteria are present in chicken, apparently because of the use of antibiotics in poultry production, and are passing to people who work with, prepare or eat chicken, at some risk to their health."
This is an auto-generated post from my reading list.
From the Economist:
Motorists in America generally receive no punishment whatsoever for crashing into or killing cyclists, even when the accident is transparently their fault. This insane lacuna in the justice system reflects extreme systemic prejudice by drivers against cyclists, and would be easy enough to fix. All that America would have to do would be to adopt traffic regulations like the ones in place in the Netherlands, where the number of cyclists is vastly higher than in America while the rate of fatalities per kilometre ridden is far lower.
And does the Dutch system result in gross injustice or even a major inconvenience to drivers?
The Dutch regulatory regime places an extra burden on drivers. That burden can be summed up as follows: before you turn, you have to check carefully in the mirror to see whether there's a cyclist there. That's it. When you are driving in the Netherlands, you have to be more careful than you would when driving in America.
This is what is known as a no-brainer.
Clay Shirky on an important lesson from the poor implementation of Healthcare.gov:
In well run organizations, information runs from the top down and from the bottom up.
As Clay points out in his piece, well run organisations gain the benefits of efficiency and effectiveness by taking this approach.
Just as important, this approach also gives line employees a stake in outcomes and implicitly creates a sense of motivation and purpose. Without two-way information flow and some degree of devolution of control to those actually doing the work, your organisation is almost guaranteed to see talent walk out the door. Beyond a point, no monetary incentive can compensate for the frustration that talented employees feel from the lack of genuine control over one's work.
Which is what I mean by the very tongue-in-cheek title of this post: the more you frustrate your own employees, the more likely they are to leave and start something of their own.
See Clay's piece for background: Healthcare.gov and the Gulf Between Planning and Reality
Snip: "Is India even a country? It’s not an outlandish question. 'India is merely a geographical expression,' Winston Churchill said in exasperation. 'It is no more a single country than the Equator.'"
This is an auto-generated post from my reading list.