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