We recently exited one of our earliest angel investments in an animation company. Return was about 11-12% IRR over a period of 10 years. On a scale of things, not a fantastic angel return but we feel it’s a good job considering what we know of the industry now and current funding climate.
We met the team back in 2012 and were impressed by their experience in animation and also back then, there was a desire to build the animation industry in Singapore. The idea was to use state-of-the-art in-house software to improve animation studio productivity while at the same time also develop a franchise of quality animation characters. As it’s one of our earliest investments, we were still quite green and invested a sizable bite (a few times our current first cheque) and also did not care whether the company had a lead external investor or whether shareholding was well aligned. I also did some initial research and actually could not find any recent listed comparables with the exception of Zinkia which owned Pocoyo. Anyway back in 2012, we just sold JobsCentral and so felt quite cash rich.
The company quickly managed to attract more funding at better valuation. However, as they executed, we quickly realized how hit driven the industry is and also how much cash it needs. And even if one creates a franchise with decent traction & feedback, it’s still a tough journey to sell to more broadcasters and even tougher to create sizable merchandising revenues. The company had to make ends meet by doing some production studio work for big brands. But just like software integrators, every resource spent on outsource work is a resource missing to build a good internal brand and product.
What changed things in my opinion is the rise of youtube and other free to stream platforms. By placing content on these platforms worldwide, the company managed to earn decent, high margin revenues from ads and also place their characters in front of millions of kids worldwide. The covid crisis helped further as more kids spent more time in front of screens. All this was not contemplated at all in the original business plan. So kudos to the team for not giving up and always looking for new ways to grow the business. With this new stable and growing revenue stream, the company managed to turn profitable.
Some takeaways & learnings:
1) Industry matters. Space like movies and animation are very hit driven and distribution matters a lot. Production talent alone is insufficient. And the fact that I could not find any strong independent studio back in 2012 probably was a big warning. I would not invest in movie or animation production now. Also it’s very unstable. Zinkia is not doing well at all now. Only franchises owned by giants like Disney or Sanrio have staying power.
2) Company ended up consuming quite a lot of capital. So that diluted returns. So initial valuation and bite size matters a lot. All this is no brainer in hindsight but it does mean having a founder who does not give up and good at financing deals is important.
3) Industry sometimes has huge shifts. In this case, it is the free to stream segment. Catching it early to create ones channel and mindshare on Youtube and like platforms matter a lot.
4) Profitable, own strong IP and growing is a great combination. Not only have much less funding pressure, such companies will be attractive to buyers in all markets. This deal was concluded in May 2022 at the depths of a 6mth down market on growth stocks.
5) It really does take 10 years to grow a business. I hear angels who speak of exiting in 5 years and seed VC funds whose fund life is 7 years. I don’t think they factor in sufficient time for their portfolio companies and for VCs, that can cause problems for themselves at end of fund life.
6) Paying attention to Secondaries also matter. Company had a shareholder who had to exit for personal reasons. So the price per share was very good and we picked up a little more as part of pro rata and right of first refusal. That extra bit helped juice up returns a fair bit upon exit.
Overall, this sale together with some new up rounds this 1H2022 helped improve our overall angel portfolio since 2012 to 29.3% IRR and 2.91 TVPI. Quite similar to our VC portfolio as at end March 2022.
Hope this sharing is useful for fellow angels.
NB: Full bite size investment up front worked for us in this case. But i think more of luck and it does not change our current bite strategy.
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