Greek Complexity

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.

---

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.

---

This piece first appeared on Tech in Asia. 

 

New Money Ventures to Silicon Valley

Excerpt: "When SurveyMonkey LLC Chief Executive Dave Goldberg wanted to raise money for his Palo Alto, Calif., company, he didn't lean on the venture capitalists that scour Silicon Valley looking for the next Google Inc. or Facebook Inc. Instead, Mr."

More here: http://online.wsj.com/article/SB10001424127887324034804578346500201330208.html

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

Money in movies

Here's an amusing and sardonic take on the film industry and financial investors investing in films: Vegetable Capital Ripens. Draws some unsuspected parallels to the private equity industry. Another piece on the same blog here.

So, short of making or distributing movies oneself, how does one make money investing in movies? I suppose you don't.

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.

Apropos successful exits

An interesting coincidence. I ranted yesterday about Dave McClure's conclusions about

• the future success potential of large VCs and
• what constitutes a good exit for entrepreneurs in Asia

I had a tiny voice telling me I'd end up with egg on my face for stating my opinions so vociferously. But look what happened almost immediately.

Today someone pointed me to a report by VCCircle about a planned IPO by Just Dial, an Indian directory service.

VCCircle speculates that Just Dial could be looking to IPO at a valuation of over Rs. 2000 crore (20 billion rupees or about $430 million).

Is this a successful exit? Most definitely. The article says that Just Dial had revenues of Rs 134 crore in the year ending March 2010. That means a trailing P/S ratio of 15x when they list. That's not chump change!

Has a large blue-chip Silicon Valley VC made money in this deal? Sure. Sequoia will make a 5x return in two years or less. What has worked in Silicon Valley in the past for the big-boy VCs may not work there in future, but don't count 'em out elsewhere.

Getting your start-up through tough times

Mohanjit Jolly of DFJ India writes another insightful article. To quote just one hard-hitting statement out of many:

Don’t think that the investors can’t afford to shut the company down, or can’t afford not to fund the company. Usually, the entrepreneur loses that game. Instead, it’s best to tackle the tough situations through collaboration, to anticipate the tough times ahead and have a plan to get through it.

How true.

Private equity: "India zooms past China"?

Chest-thumping, statistic-twisting propaganda from India's Financial Express, purports to show that India is Asia's most favoured market for private equity. In January (whether 2006 or 2007 is unspecified), according to the article,

India has emerged as the most favoured private equity destination attracting $1,239.22 million worth investments in January, surpassing Asian giants like China and Japan, a study says. India ranks top in terms of PE investments in January-February and has left behind Asian giants like China with $ 609 million and Japan with USD 980 million, according to a report by Asian Venture Capital Journal (AVCJ).

Link: India zooms past China

How useful such a statistic is supposed to be beyond... no, wait. I can't think of a single situation where such a statistic could be useful. Anyone with the slightest interest in private equity should know that this is an asset class where:

• Investors can be counted in dozens and scores as compared to the millions who participate in the public markets
• Investments are similarly few in number (both because of long due diligence processes and an absolute small number of deals in consideration at any given point)

To then state that one country is the favoured destination for private equity based simply on data for one month smacks of ignorance, incompetence and propaganda. Even if the headline conclusion is attributable to the AVCJ (I suspect not) and not to the FE directly, it is a journalist's job to raise questions, not blindly repeat other people's nonsense.

The same article then goes on to provide the following broader statistics:

Asian PE investments in 2006:

• Australia: $24.9B
• Japan: $10.4B
• China: $7.7B
• India: $7.0B

2006 growth in funds raised:

• Australia: 88.9%
• China: 72.1%
• India: 37.6%

This is why I think most journalists are idiots mindless stenographers who haven't the faintest what they're writing about.

Disclaimer: I have not read the original AVCJ report upon which the article is based. Kind souls who would like to enlighten me further may please email me at blogfeedback [at] murli [dot] net or leave a comment here.

Technorati Tags: private equity, asia, india

Minnows begin to hunt whales

It was only a matter of time and the planets aligning in the correct configuration.

Credit markets are buoyant, private equity's techniques look increasingly attractive to and imitable by corporations, structured finance is scaling new heights of innovation each day, and aspiring giants want to make their presence felt outside their traditional markets. What more could one expect but this? Onward ho, I say.

Link: FT.com / In depth - Small fry stir corporate waters (subscription may be required)

Chief executives are increasingly inclined to plot bids for companies that are far bigger than their own, thanks to the availability of cheap debt and creative structures devised by investment banks.

In recent weeks smaller companies in several sectors, surprising many investors with their audacity, have made bids for larger rivals that they could not have pursued in earlier times.

The moves, mainly made in the US, highlight how the world of debt-fuelled deal-making has expanded from its traditional practitioners in the private equity industry.

Now it also includes publicly traded companies with aggressive mergers and acquisitions strategies.

Technorati Tags: banking, structured finance, private equity, finance, M&A

Private equity = conglomerates?

The Economist has an interesting article pointing out that calling today's biggest private equity firms conglomerates isn't too far a stretch, notwithstanding firms' aversion to the appellation. The distaste comes from the conglomerate structure not being in fashion for the past 25 years (in the US, not Asia; large Asian companies are often byzantine setups) but looking at the question purely from a linguistic point of view, it would seem that private equity firms are conglomerates. There really isn't too much more to say on the topic but it's an interesting read with some notable titbits, so go take a look.

---

An aside: I usually put links like this on my radar, and my radar gets spliced into my main RSS feed. So I'm in the funny position of having a richer RSS feed than a website. The bottom line is that you should probably use my RSS feed or my email newsletter to get updates :)

How to sell businesses

An insightful article on AltAssets on how to sell businesses, even lemons. Summary (but do read the complete article):

Tell a coherent, credible story that seamlessly takes the business from the past into the future. Pitch the business appropriately for the intended purchasers. Beware the disingenuous over-bidder; they are often the worst of all time wasters. Agree a process to allow the purchaser to get comfortable with the risks of the business. Look well ahead as well as at the road in front of you and know when it's best to do nothing. And, remember Akerlof's Nobel Prize and "The Market for Lemons": Where information is asymmetric, if you don't know what you are doing, there is a very real risk that an asset won't sell, whatever the price.

Link: How to Manage a Private Equity Sale Process: "The Market for Lemons"