Greek Complexity

Whither 2016? Prognostications on IoT, the venture capital model in Asia and more

Last January, I jumped on the Here Are My Predictions For The Year bandwagon and came up with this set of 8 predictions. Although I was not rigorous enough to attach probabilities to my predictions, you can see that some of my predictions were deliberately bold: in the start-up world, the mantra is, “Go big or go home." You can judge for yourself how well I did.

 

This year, I suddenly find myself in March not yet having put out a similar list for 2016 even though I’d consistently Evernoted down some thoughts all through 2015. (An anti-prediction: “Evernoted” will never become a colloquialism!) No matter — here we go now. This year’s list is somewhat eclectic and doesn’t focus just on start-ups and venture capital.

 

As usual, you’ll find a TL;DR version at the bottom.

 

1. “IoT" is dead, long live IoT.

Just like “on-demand” last year, “big data” a couple of years ago and “daily deals” before that, I think this is the year the term “IoT” will become so widely used as to become meaningless, banal, even uncool. This doesn’t mean that the move towards an Internet of Things will no longer be a truly powerful trend. The trend will, in fact, accelerate. But when anything with a chip in it can be said to belong to the Internet of Things, which could encompass everything from wearables to logistics tracking technologies, home appliances, entertainment gadgets, cars and more, then I argue that the term not only loses its meaning but actually inhibits clarity of thought on how to tackle a given opportunity. (In the same manner, I've heard people declare with a straight face that their little Excel spreadsheet with a few thousand rows of data constitutes Big Data — urgh.)

 

As “IoT” itself becomes meaningless, what I expect to see is more specific terms within the broader IoT universe gaining currency, reflecting specialisation and maturation of yesterday’s sub-niches.

 

2. Fintech touching consumers more directly and in more ways

Today, most ordinary consumers don’t know what “fintech” means. In Asia, most don’t even experience fintech directly except occasionally in the area of payments. This will change. Fintech underpins pretty much every aspect of banks’ internal operations as well as many of the ways institutional/corporate clients interact with banks. This year I expect to see the beginnings of fintech directly touching consumers. Untapped opportunities exist in personal financial planning, term insurance, investment execution, credit, security as well as in payments itself. Each of these is a vast area.

 

3. Rationalisation and specialisation of VC firms in Asia

Even with recent market turmoil, there is plenty of growth capital available to start-ups in Asia from non-VCs. These include wealthy individuals and families, corporations, government agencies, crowd-funding platforms and more. Most of these actors don’t invest for a living and therefore may have lower return thresholds and/or different measures of success from traditional VC firms. This means that VCs who fail to recognise this new reality (where they are not the sole source of capital) will get blown away in negotiations and fail to win deals. Over time, these are the VCs who will end up as has-beens. Other, smarter VCs will focus on building their strengths in specific industry sectors, stages of development or other areas of specialisation, which will help them make a compelling and differentiated case for winning the right to invest in companies.

 

Note that phrase: "the right to invest". This has not historically been the way capitalists in Asia have thought.

 

To be clear, I expect this to be a multi-year trend, not just in 2016: the venture capital business has very long lead times and poorer performing firms don't die overnight, instead fading away over several years.

 

4. Privacy and personal control renaissance

The proliferation of smartphones and Facebook’s continued insinuation of itself into every aspects of many people’s private lives will, I hope, finally have the effect of provoking a substantial backlash and precipitating a move towards greater personal control for users over their data, phone features, notifications, etc. (I call out Facebook because they are the biggest culprit but they are by no means the sole culprit in this regard; LinkedIn may be worse and several others deserve blame too.)

 

I think there will continue to be a number of people for whom privacy does not matter, but I think others will demand and gravitate towards services that respect users’ desire for full control over their own information and devices. How could this come about? At multiple levels of abstraction, ranging from changes to mobile operating systems — I hope my next phone will allow me to set app permissions at a much more granular level instead of presenting me with a take-it-leave-it "choice" when I install a new app — through to businesses built around VRM-like principles, and government regulation and standards-body frameworks concerning what’s permissible.

 

5. Push back against always-on towards rediscovering mindfulness and focus

This is a strange suggestion for me to be making given that I’m writing primarily about tech. I think this is the year that many of the earliest adopters of tech will say, “Enough.” I see this in my own habits — and I've been online since the early 90s — but this isn’t (purely) a self-reflective prediction. It also comes from my observation of the behaviour and expressed desires of hipsters (I know, I know…), very busy and tech-savvy people, and other early adopters of new trends.

 

Ok, so that may strike you as anecdotal — but take a look at how often people have searched for the term "mindfulness" on Google. As a comparison, you can add other terms like “stress” or “meditation” that you might reasonably expect to be correlated with mindfulness. The growth in searches for "mindfulness" has been much greater (off a smaller base) than these other terms.

 

The implication? Perhaps users choosing not to use apps that incorporate infinite scroll and create a state of permanent distraction. Or more single-button apps, i.e., press a button, get what you want, move on. More prominence given to Do-Not-Disturb modes. More services, apps and OS features that actually help with focus and productivity rather than always-on and interruptions.

 

All of these will change the way we work, play, learn and live.

 

TL;DR

1. “IoT" is dead, long live IoT.

2. Fintech touching consumers more directly and in more ways

3. Rationalisation and specialisation of VC firms in Asia

4. Privacy and personal control renaissance

5. Push back against always-on towards rediscovering mindfulness and focus

6. “Evernoted” will never become a colloquialism ;-)

 

8 predictions for Asia’s startup scene in 2015

It’s that time of year when tech pundits everywhere emerge with prognoses for the year ahead. I’m jumping on the bandwagon too.

TL;DR

1. Early-stage valuations in India will continue to build towards a breaking point
2. Startup valuations in Singapore will continue rising unabated
3. Facebook will make its first big Asian acquisition
4. Google will continue to NOT make acquisitions in Asia
5. Sovereign investors will follow GIC’s and Temasek’s lead into funding late-stage tech firms
6. Large Chinese tech firms will invest outside their home market
7. Southeast Asia will see its first US$500 million tech startup exit
8. Japanese firms’ investment activity in Emerging Asia will remain steady

Let's get into the details.

1. Early-stage startup valuations in India will continue to build towards a breaking point.

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.

2. Startup valuations in Singapore will continue rising unabated.

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.

3. Facebook will make its first big Asian acquisition.

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:

• Technologies that enable Facebook to acquire, service, and retain new kinds of users – the types who don’t fit the profile of the typical Facebook user today. This is a stated mid and long-term ambition for Mark Zuckerberg (Internet.org being one manifestation of this goal) and Emerging Asia would be the ideal place to run a large-scale experiment that could be rolled out to the rest of the world if it succeeds.
• Companies that offer (access to) new kinds of content that Facebook doesn’t have familiarity with today. As an analogy: the biggest app stores in China aren’t Apple’s and Google’s official stores; they’re actually third-party marketplaces. People are trying the same thing in Indonesia and there’s no reason why the trend should stop with Indonesia. Facebook is already a platform in more ways than one and this could be a way for them to become an even more comprehensive cross-OS platform. It would have the added benefit of helping with user retention as they traded up from feature phones to smartphones or from low-end smartphones to higher-end devices.
• Infrastructure. As early as mid-2012, Facebook was far-sighted enough to invest in a submarine network cable in order to secure guaranteed capacity and the ability to better serve users in Emerging Asia. If I were them, I would look closely at doubling down on other similar bets.
• On the customer (B2B) side, smaller companies that have the distribution capability to sign up advertisers or tools to help those advertisers achieve their goals more easily.

4. Google will continue to not make acquisitions in Asia.

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.

5. Sovereign investors will follow GIC’s and Temasek’s lead into funding late-stage tech firms.

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.

6. Large Chinese tech firms will invest outside their home market.

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.

7. Southeast Asia will see its first US$500 million tech startup exit.

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.

8. Japanese firms’ investment activity in Emerging Asia will remain steady.

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.

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I focus in this post mostly on investment activity, not broader predictions about attractive new opportunities for startups and VCs because:

• such predictions are easier to evaluate within a defined period, and
• other trend predictions will either take longer than a year to play out or likely occur within a year but be so banal as to be meaningless.

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This piece first appeared on Tech in Asia. 

 

Why do VCs hunt in packs?

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.

China’s online funds come under fresh fire

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."



More: http://ift.tt/1pgEAew

This is an auto-generated post from my reading list.

Andreessen on start-ups without business models (prepping for a future career in politics)

From a longer interview:

WSJ: How do you get behind startups with no business model? With Pinterest, how do you get from zero revenue to a $3.8 billion valuation?

Mr. Andreessen: There are two categories of companies like this. You can guess which one I think Pinterest is in.

There are the ones where everybody thinks they don't know how they're going to make money but they actually know.

There's this kind of Kabuki dance that sometimes these companies put on where we're just a bunch of kids and we're just farting around and I don't know how we're going to make money. It's an act. Facebook always knew, LinkedIn always knew, and Twitter always knew.

Now, there are other companies that honestly have no idea. Like, they really honestly have no idea. You need to be very cautious on these things because one of the companies that had no idea how it was going to make money when it first started was Google.

That's an insightful take on the question.

Though notice how he manages to argue two opposing viewpoints and get away with not answering the interviewer's question about valuation! That was almost politician-like and very amusing.

Are these companies likely to have strong business models in future? Quite possibly. Are they therefore worth tens of millions, hundreds of millions or billions today? No one knows.

More here "Andreessen: Bubble Believers 'Don't Know What They're Talking About'"

Eye-watering returns from public Chinese tech companies

What. The.

Look: http://pandodaily.com/2013/10/07/the-staggering-recovery-of-chinas-public-tech-companies-in-charts/

Disclosure: my firm was an early investor in Tudou, one of the companies named in this piece.

Thorny Side Effects in Silicon Valley Tactic to Keep Control

Excerpt: "The gods of Silicon Valley have repeatedly sought to take the companies they founded public while retaining control as if they were still private. Recent events at Google and other technology companies show that perhaps this control may be bad not only for the companies but also for the founders, who are increasingly living in a world bereft of checks and balances."

More here: http://dealbook.nytimes.com/2013/09/03/thorny-side-effects-in-silicon-valley-tactic-to-keep-control/?src=dlbksb

This is an auto-generated post from my reading list courtesy IFTTT. See http://ifttt.com

The "new" HP

Printers? Dying.

Services? Lots of pain.

PCs? Let's not even talk about it.

But, says Meg Whitman, "Cloud is a funny word, because when you say it, people think it’s all like Amazon’s cloud. But [HP's] private cloud business is much, much bigger than Amazon’s public cloud."

More from Whitman: http://allthingsd.com/20130612/more-questions-about-hps-business-for-ceo-meg-whitman/

The company's shares are up more than 80% this year, up about 11% over 12 months, down 48% over 5 years and up 13% over 10 years. Is that a confusing picture? I only mention it in passing. Look ahead, not back.

More Exits For Asian E-commerce Firms, But Valuations Still Small

Excerpt: "There has been a growing rate of exits happening for Asian e-commerce companies, but valuations remain small on average. Most are under the $50 million mark, according to CB Insights’ latest report."

More here: http://techcrunch.com/2013/06/11/more-exits-for-asian-e-commerce-firms-but-valuations-still-small/

This is an auto-generated post from my reading list courtesy IFTTT. See http://ifttt.com

Why are terms of investments or acquisitions often not disclosed?

Here are some reasons why: http://www.linkedin.com/e/-86igng-hh88okw6-47/nua/s1445610994/http%3A%2F%2Fgoo%2Egl%2FN7U7i/XCnT/5744416305931382784/EML_nus_share-F1-2/?hs=false&tok=18PjV4Wwjgl5M1&trackinfo=updateId%2C5744416305931382784

In our part of the world, a few more reasons for not disclosing the terms of a sale include:

1. Cultural preference for keeping one's cards close to one's chest, not just in business but in life in general. The nail that sticks out, etc
2. A tendency for many entrepreneurs to see selling out as, well, selling out
3. Not wanting the neighbours, not to mention the taxman, to be aware of the details

Data really is scarce on the ground in Asia, much more so than in the US. The consequence of this, of course, is that people not in the know end up making poor estimates and assumptions, some downright stupid. When those assumptions start to spread in the market, it gets very hard for the original parties to correct the now prevalent misapprehensions.