Investors live and breathe term sheets and waterfall tables, and so things that might be simple for them to understand can be downright byzantine for most others, including entrepreneurs.
So if there’s one topic I get asked more questions about than any other, it’s liquidation preferences, or as investors might call them, their get-out-of-jail-free card.
In simple terms, a liquidation preference entitles investors to an amount equal to or, in some instances, greater than what they put in. Note that I say only with preferred stock. Investors with preferred stock cannot benefit from liquidation preferences and still receive a financial windfall greater than what they’re guaranteed by said preference; it’s one or the other.
Genuinely don’t understand why people are confused — even upset — by Google’s restructuring.
Look at this Org Chart. Look at all the crazy shit Google was doing. At the end of the day, Google is a search company. By spinning out, Sergey and Larry can devote themselves to the moonshot projects that have, rightly or wrongly, defined the company. Google no longer has to devote valuable time, resources and money to projects that distract it from its core business, and S&L don’t need to answer to shareholders anymore.
Google can now lean the fuck up while still (hopefully) maintaining the work culture and incentives that keep it competitive (debatable).
On a positive note, if anyone is holding Google stock, that shit is going to *pop*.
Been a lot of local bank activity in the early-stage financing space, primarily through venture debt, but this
is an awesome idea by Silicon Valley Bank: warrants in exchange for low interest rates.
The venture capital industry has past its inflection point in Southeast Asia. If historical trends are any guide, the region will continue to grow in terms of new funds, assets under management, and investment across industries.
Of course, the term venture capital implies a single, homogenous industry when in reality this is furthest from the truth. Venture capital runs the full spectrum: from massive, billion dollar funds to small angel investors writing ten to fifteen thousand dollar cheques.
Angels are often more sophisticated investors than friends, family, and the unfortunately-but-aptly named fools; possess a pool of liquid capital, and often have skills and experience that can be highly relevant to the startup. Indeed that’s often why they invest in a startup in the first place.
If they’re genuinely active, angels can often make the difference between successfully helping a startup reach their next milestone, and going disastrously belly-up, especially when startups are in desperate need of new funds.
This is partly why I often say the first check is the most important.
But note that I said ‘partly’.
Apple is the richest company in the world, considered the most valuable brand in tech, and for its ubiquitous iPhone, specifically the flagship iPhone 6, the top-of-the-line models retails close to US$1000.
A comparable Xiaomi Redmi? US$150 dollars.
GoPro’s high-definition camcorders transformed it into one of the fastest growing media companies in the world, created an entirely new industry of video photography, and its most advanced Hero4 action camcorder retails for US$400.
A comparable Xiaomi Yi Action Camera? US$70 dollars.
Fitbit successfully rode the Internet-of-Things wave that catapulted its fitness trackers to become some of the world’s most popular wearable tech, solidified its place at the centre of health-centric big data and analytics, and its high-end consumer model Fitbit Charge retails for US$120.
A comparable Xiaomi Mi Band? US$13 dollars.
Working in venture capital in Southeast Asia, I’m blessed with the opportunity to help entrepreneurs, colleagues, and all sorts of people create value, help others, and hopefully make them a nice financial return. It’s tiresome work sometimes, the hours are tricky, and it can be incredibly stressful, but I know I’m lucky to be in this industry. That’s honestly what got me into this in the first place: the opportunity to meet folks much, much smarter than myself.
And so I’m often pinged with various requests from folks, especially those working overseas, looking to enter the venture capital industry here in Southeast Asia. Naturally, I would say to myself. There’s a ton of opportunity here. And the food is amazing.
But then the caveats: Before I move I need at least this much money. Or, I want a clear path to another industry or geography after putting in my time. Or, my personal favourite, I’m working in Silicon Valley. Doesn’t that command a premium on my knowledge?
To those people, a polite word of advice: Southeast Asia isn’t ready for you yet.
Copying — or as practitioners might call it, ‘flattering emulation’ — gets a bad rap. In many instances, that disapproval is glaringly deserved; I’ve come across more than a handful of companies that went well beyond casual adoption of best practices to outright mimicry, down to the copy and colour scheme, but those are stories best left over a couple of beers and not a respectable publication like Digital News Asia.
But in other instances, say, copying validated business models in other markets and importing them into Southeast Asia? To those entrepreneurs looking to copy Urban Compass, FreshDirect, and Amazon, I can only say: shamelessly, unapologeticlally, audaciously copy, but do it right.
Note the emphasis on ‘right.’ Copy, but do it right. By that, I don’t mean simply avoiding the kind of egregious aping that brings all sorts of embarrassing claims to light (really now, there are literally millions of different color schemes to choose from; don’t be lazy). By copying, I mean: make sure you understand what you’re copying, and more importantly, whether it will work here.
Because chances are it won’t.
There’s a lot of money pouring into the ecosystem. I think I’ve made that abundantly clear by my previous columns, but to emphasise: at least two billion dollars is coming into Southeast Asia, and it’s going directly into technology companies across the region. We’re going to see larger fundraising rounds, higher valuations and — wait for it — great, unimaginably, ha-ha-you’re-joking-right?-sized exits. Viki’s $200M acquisition by Rakuten, JobStreet’s purchase for $530M, Zendesk’s transaction for Zopim at $30M, all tremendously successful, but only a precursor of what’s to come. There’s simply too much money, from too many sources all competing with one another, for too few regional deals.
Not only will there be a rise in the quantity and size of institutional funds, merger and acquisition activities will be lead by Japanese and Singaporean money. And once China steps into the game, thanks in large part to Alibaba’s massive wallet, M&A activity will skyrocket. More successful exits will manifest itself into more and more money flooding into the ecosystem, even larger exits, and even greater numbers of unhappy, visionary employees flipping their bosses off before creating their own startup.
What’s this all mean?
With the increasing frequency and size of exits, it’s a great time to be an entrepreneur or investor in Southeast Asia.
…But even the most successful entrepreneurs or investors may not see them.
When categorised according to target markets, there are three types of startups (notwithstanding hybrids):
1) Startups that are global from the outset: these companies can provide their products and services to customers regardless of where they are located. The caveat here is that these kinds of companies must provide a consistently high quality of service for all customers regardless of location; finding customers in different countries and time zones, especially first adopters that initially require a high touch, is also tremendously difficult.
2) Startups that are local from the outset: these provincial companies are concerned only with their immediate customers, and either do not have the ability or need to expand into new markets. Note that local doesn’t necessarily mean ‘small.’ Sometimes, startups are blessed with a substantial local market; for those that are not, they must simply make due if they do not intend to expand. Depending on the size of their selected market, these startups can either flourish, or expire.
3) Startups that are regional from the outset: these are the Goldilocks of Southeast Asia. Their markets are not too big, nor too small; they are companies that have the potential to scale across multiple markets in the region. They are geographically close to their initial customers but nevertheless provide a service or solve a problem that is immediately recognisable to consumers across Southeast Asia. They do not share the same burdens of quality of global startups, nor the market constraints of local ones. Given such potential, Goldilocks attract a tremendous amount of venture financing, especially once they start scaling into new markets. And, perhaps most importantly, successful regional companies are prime acquisition targets for overseas companies looking to enter the region.
It’s to the companies in the third bucket that I offer these words of advice: consolidate or die.
Every other week there is a new funding round, and every other week valuations are breaking records. Readers can take their pick: Uber and Airbnb are both rumoured to be raising new rounds of funding valuing them at $50 billion and $24 billion US dollars, respectively; Xiaomi is conservatively valued by private investors at $45 billion; and Snapchat still turns heads with its almost $20 billion dollar price. These are only a handful of the most expensive private tech companies; at last count, there were some 100-odd startups valued at least $1 billion dollars.