The good news: Global startup investments totaled ~$300 billion up 4% from the previous year, despite the COVID-19 pandemic. The interesting bit: the deal volume was 3% lower in 2020 with most of the capital invested concentrated in the later stage technology startups. The not-so-great bit: total funding for early-stage startups decreased 11% in 2020 vs. 2019.
We have observed a similar trend in our AngelCentral members in 2020. In the past 15 months, we have become more “demanding” in selecting startups and required more traction and market validation before cutting cheques. In some cases, while the investment frequency has not dropped, the bite-size has come down 20-30%.
But what’s encouraging to observe too, is that our 2021 pitch day attendances have gone back to 2019 level, and our members are noticeably more “active” and engaging more with the founders. In the first 4 months this year, we have successfully completed three syndications too.
Is this observation in early-stage investment too optimistic or do investors now really prefer later-stage opportunities? We reach out to other seasoned investors to hear their views and to learn their insights. Check out the session in the video!
Transcript of Webinar
Der Shing: Welcome everyone, my name is Der Shing and I am one of the partners at AngelCentral. With me today we have our panelists, Michael, Chirayu, Qing Ru, and Mohan. I will get them to introduce themselves shortly.
Additionally, with me today are also my partners and colleagues at AngelCentral. We have Shao-Ning, Teck Moh, Serena, Shirley, and Yujie. Today’s topic is going to be about angel investing post-COVID but actually, we are not done with COVID. So, we were a bit too optimistic when planning the title and the marketing materials a few months back. Without further ado, I’ll just quickly introduce what AngelCentral is, for the benefit of those who are not our members and also for some of the panelists that we are meeting for the first time, and then after I’ll pass it over to the panelists to introduce themselves.
AngelCentral is actually a 2.5 to 3-year-old Angel club. We are around 140 members strong, a good mix of C-suite corporate level investors who want to find out more about startup space and have spare cash to invest. We are also made up of quite a lot of exited entrepreneurs like Shao-Ning, myself, and Qing Ru. We also have people like Steve, Jani -the PropertyGuru guys-, some of the Zendesk guys, and also quite a few different founders, and of course, the last group is family offices. We are a club with around 140 members and we see around 700 deals a year. Shao-Ning, Teck Moh, and I will vet the deals for you and we display them on our platform, we probably display over 100 of them on our platform and every month we will showcase 4 on our pitch day.
To cut the long story short, in the last two and a half years, we have funded more than $20 million into different startups and our services to startups are mostly free. The only time we charge startups is when we do syndication. We also pioneered syndication like Angel List style in Singapore and we have run more than 20 successful syndicates. To be clear, the syndicates are the ones that engage AngelCentral to do the syndication work and administrative service. In a nutshell, this is what AngelCentral does and if you are keen to find out more, our website is www.angelcentral.co. If you are a founder, you can register with us to raise money. If you are an Angel, we have got tons of content, we provide Angels not only with deal flows and syndication services, we also help a lot with training. We teach many Masterclasses and nowadays, thanks to Serena and Shao-Ning’s effort, they are mostly in video format, so you can watch them. Alright, so that’s about it for AngelCentral.
Today, we are very privileged to have four very good angels. Like Teck Moh was saying, we see some of them on the cap table many times, but we may not have met in person. So, they are each very different, with very different backgrounds and we’re going to get each of them to share a bit more about how they’ve been angel investing, and also very importantly whether COVID has had any impact on their investments.
Additionally, what do they see moving forward, especially if there are any major trends that observed have changed due to COVID, which has informed their investment decisions and the way they go about investing. Without further ado, I’ll get each of our panelists to introduce themselves, Mohan, please.
Mohan: Hi everyone, thanks Dershing and the rest of the AngelCentral team for inviting me. My name is Mohan, I run the tech ecosystem platform called e27. We work with startups, corporates, and investors to do business matching activities, media, and pre-COVID we used to do a lot of events but now everything is online. My angel investment experience started way back in 2013 as an LP in an early-stage fund, Golden Gate Ventures Fund One, rather than investing directly into startups. That was my initial pathway to investing in companies. Now, I’ve done about 20 deals since then and not just in Southeast Asia, but also in the US, New Zealand as well as in India. Great to be here!
Der Shing:Thank you, Mohan, and then Chirayu.
Chirayu: Thanks, Dershing. My day job is at Google Cloud and I help them evangelize new products. My association with Dershing has been through SeedPlus where he was an advisor to us and I spent some time in venture investing in APAC. More recently I have been involved in angel investing where I have done about six deals in the last one and a half years. My angel investing experience is more recent, but I had the inside view of how Singapore and the broader ASEAN ecosystem have evolved in the last four years. I look forward to speaking to all the participants and answer any questions that the audience might have.
Der Shing: Thank you, Chirayu. Chirayu is actually a member of XA Network, which is another angel group. At AngelCentral, we are not very possessive about things like that. So long as you are a good Angel Club and we think that you can add value to the ecosystem then it is great. The next speaker we have is Michael.
Michael: Thank you for inviting me to this panel. I do not often talk about my angel experience, but you guys are persistent to get me on this stage. Professionally my career has been in tech, I have been with McKinsey and Company for 20 years, where, in my last role I was leading the digital practice for Southeast Asia. My professional passion has been to work with mostly large companies to understand how they can make use of technology to innovate and disrupt. In the last three years, I’ve done that in a different context. I’ve joined a big conglomerate called the CP group in Thailand, where I am the Chief Digital Officer, and I’m also the Executive Vice Chairman responsible for their portfolio. I’ve been doing angel investing for more than 10 years and I think I’ve invested in more than 50 companies, and I’ve lost count. I have invested globally, and I have a global deal flow. I have done probably half of my investments outside of Asia, in particular, in North America and Europe. My focus has been in B2B and Deep-Tech, where I just have a passion and the patience for the long gestation period that it takes.
Der Shing: Thank you, Michael. And last but not least Qing Ru.
Qing Ru: Hi, thanks for inviting me. I am super excited to be here with the rest of the distinguished panel. Just a brief background, I co-founded a chat software company back then in 08′ with a couple of friends called Zopim, and we sold the company in 2014 to Zendesk ($ZEN) and subsequently, we listed on the New York Stock Exchange in two months time. I was with the company for a while before I kind of decided to start a blockchain company in Israel. However, that dream busted when I realized that I had to do some family planning. Very shortly after, I continue to invest in the blockchain space by joining True Global Ventures as a partner, so we are into our fourth fund and we are targeting a $100 million AUM fund, and right now we’re on the last leg of our fundraising cycle. We generally do Series B onwards investment in blockchain companies and we usually don’t lead those deals, but we do it with partners that we trust.
Der Shing: Thank you Qing Ru. All right. So this is really a free for all session. I will just start with one of the preset ones, just to get some context going for all of us. One of the key questions a lot of people have been wondering is, what has COVID done to your investing thesis? Has it made you invested more or invested less? Has it changed your evaluation criteria? The lack of face-to-face interaction, is it impacting you in any way? You don’t have to answer all of them, because each of them can have a pretty complex, detailed answer. But you know, which is the one that jumps out to you? Maybe we can go around in reverse order this time, and then by then, we should have accumulated quite a few Q&A that we can work on.
Qing Ru: I was tracking the investments that I made in the last six months and I did 4 angel investments. So I invested in Day One, which is a software as a service for restaurants. Mindfi, which is a mental wellness company doing B2C corporate wellness. GoTrippin, which was founded by one of my ex co-founders at Zopim, Royston and it’s a travel startup. Lilu is a syndicate from she1K, which is a breast pump company. Besides these 4, I also did 5 late-stage investments in all unicorns or near unicorn startups. I did a follow-up with ShopBack, I think everyone knows what ShopBack is. Rari, which is an NFT trading platform for football players and they are a unicorn company. NerdWallet, which is going IPO later this year, The Pill Club, right now they do birth contraception for women in the USA and I also had a chance to invest in SpaceX. So kind of this is more or less what I’ve done post-COVID.
Der Shing: Cool. So very varied. Maybe we focus more on the angel side. So is it safe to say that COVID-19 actually did not affect your investing pace at all?
Qing Ru: Not really. We see a lot of really good deals coming in, within my fund. I think valuation was a bit suppressed for startups in certain sectors that are not favored during this period. But, we also see opportunities coming up in “wind” categories. So, there are a lot of deals going on.
Der Shing: Okay, yeah. Maybe Michael, do you have any insights in the last year?
Michael: I think I have invested probably somewhat less than other years, I am more focused on helping my existing portfolio. Several of my portfolio companies postponed larger equity rounds and did bridge rounds. I think I’ve used my firepower to help them go through that.
Frankly, I can now say that this year, several of them have gone on to raise a substantial Series A round and I’m glad to see the development of that. As I have been investing for quite a while now, I have more and more companies that are in Series, A, B, and C stages. This provided more opportunities for me to invest in later-stage deals. Particularly for the ones that are not well, I always think is a good thing to help them.
Der Shing: So does COVID have any impact? I mean, you mentioned one whereby they had to push out their funding, which I observed also, and that’s why they do a bridge from existing investors. But from a new investment point of view, do you see yourself more cautious because you can’t meet the founders, or it’s not a big thing.
Michael: I’ve invested globally in the last 10 years. So, to me, COVID didn’t change anything. I’ve invested in companies in the US and Canada, and in many parts of Europe, where, actually, I have so far not met the founders. To me, it’s about building a longitudinal view, by interacting with them over a longer period of time, whether that’s face to face or in person, you can always develop an opinion.
Der Shing: That’s good. Yeah. How about you, Chirayu?
Chirayu: I think COVID provided an interesting opportunity for investing in startups. To Michael’s point, a lot of the VCs actually took the stance of doubling down on a lot of their portfolio companies and putting dry powder aside, not knowing how long this (COVID) would last. I think in hindsight, that was pretty wise. However, I think how that affected some of the companies is they had done Seed or Pre-Seed rounds, and they were back in the market for additional funding. A lot of them then were supposed to raise from VCs, when VCs were not making as many bets.
Therefore, we had an opportunity to invest in some of those companies, and I personally had an opportunity to invest in a couple of them. We saw that situation, and the founder said, “Hey, I’ve got all these interesting VCs from my seed stage. But, I really need a runway for the next 18 months, and I’m putting together a Pre-Series A round.” So there were a lot of these Pre-A rounds happening, but not all of them were bridge rounds. Honestly, as an angel that gave me an opportunity to invest in something that’s a little more formed and at a valuation I wouldn’t get it otherwise. Therefore, I think, the last few months have been pretty interesting.
Der Shing: Okay, Chirayu, since you’re talking about valuation, in general, would you say that there are any differences in valuations pre-2020 versus now, for the Seed and Pre-A rounds?
Chirayu: I think it did soften up for a bit, then once the Fed addressed the dangers, I think we were back in and we’re playing the same old game. I think it’s all downstream capital based on what happens upstream. So, public markets first, and now I think private markets are seeing it through SPACs. Then now I think we are even seeing VC funds, and a lot of unicorns being announced globally. I think it’s percolating down and sure enough, it will hit the valuation at Angel level very soon, if not already.
Der Shing: Yeah. Okay. I have to admit, so I was expecting the seed round valuations to at least dip somewhat. But there was hardly any dip, there was just more of a freeze for a while and everyone took longer than they needed. Then suddenly, when the stock market rebounded in a big way last year from the fourth quarter onwards, I can see the valuations are almost back to normal already. Of course, there can be discounts in certain sectors, and specific stories warrant a premium or discount accordingly. Then, Mohan, you want to share a bit about how has COVID affected if any, the way you invest?
Mohan: Yeah, so the other panelists have expressed quite a few interesting views. Interestingly, because of the nature of COVID, where we were not able to meet the founders, last year, was when I did my first ever angel deal purely off a cold LinkedIn message. The founder reached out via LinkedIn and he was really smart. He reached out in a very specific way, like just three, four lines, talking about credentials, extraction numbers, and comparison to the competitors, and that was like the intro so to speak. Then, he followed up with a much longer message with a lot more detail, and then there was a call. I noticed that the deals were moving a lot faster.
That was also one of the fastest deals I have done like within two weeks it was completed. I did have the ability to check with some of the other angels that I knew that were in (the deal) just to do a bit more background and sanity check. But I thought that was the one big defining difference with respect to all my other angel deals, where I could physically meet founders, spend more time with them and the process was a lot longer. This one was kind of two weeks, and done deal, so really really fast and that’s something I’ve noticed that has really changed in the COVID era.
Der Shing: Okay, so you find yourself more comfortable just invest without a meeting, because we did quite a few deals last year also, and all of them were without meeting the founders in person, though we meet on Zoom. So I guess nowadays, psychologically, I’m treating meeting in Zoom like I’m really meeting you. I think some angels might disagree because we have some members who told us not to call them until we are back to physical pitch.
Okay, I can see we have some questions now on what do angels look for in a hardware startup, because the development time is longer, the amount of seed and subsequent capital is usually a bit larger. So any of us have invested in a hardware startup, or a technology startup that requires a longer cash runway? How do you think about this vis-a-vis the more platform software-type investments? Anyone?
Michael: I can speak, I’ve done several of those. I think I would say, they are generally harder to pull off. Firstly, hardware development still has a longer development cycle, and you don’t do hardware development in weekly sprints. So it typically takes longer, and it typically takes a bit more capital. I think my first advice is to make sure you’re ready for venture funding, I see many hardware companies going too early to market and there is no one going to invest there. I mean, if you know, the TRL framework, don’t come out for venture funding until you’re TRL, seven or eight.
Secondly, make sure that you have a fit with local markets. Typically as a hardware company, it’s more difficult to sell overseas immediately, you’ll need to physically show your product, especially if your product is huge. I’ve invested in companies that have batteries the size of a container, or water treatment systems that are huge. If you don’t have a market for that in Singapore, it’s going to be tough. So I would say it is possible for a hardware company to be successful and raise venture funding, but you need to do it at the right stage and you need to be clear on the market and make sure that that market is in proximity.
Der Shing: Thank you, Michael. Does anybody want to add to what Michael has shared?
Chirayu: I’ll just add because I think I spend a lot of time investing in hardware, and I have spent time in one of my companies that shipped hardware out of a combination of both Singapore and Shenzhen. So I have shipped hardware myself and I’ve worked in hardware. I think, fundamentally, there are a couple of areas that I feel differentiate, software versus hardware companies.
I think one of the biggest differences I saw is the choices around where the hardware will be developed. It is a mistake a lot of companies make upfront. They tried to create the hardware in ecosystems that may not have the necessary wherewithal to produce them at scale. I mean, I went to a point where if I received an answer other than Shenzhen, in terms of where you’re going to develop the hardware, the answer was no, I won’t invest. Simply because the ecosystem there is about 20-25 years ahead of every other ecosystem that produces hardware. You can sort of speak of consumer enterprise hardware, and you’ll find a solid ecosystem there. So for me, that was one clear point of differentiation for any hardware company.
The other one was, how does a hardware company really go-to-market. I think when you start thinking of go-to-market, they could create their own e-commerce store or there’s a route to market in terms of retail versus telco. 10 years hardware professionals would know that you can’t change that overnight, it takes time. Therefore, the way you kind of evaluate, the selling, and the making are both very different from a conventional software company. I think, yes, it takes more capital but, if you’ve backed someone who knows how to ship hardware, you’ll realize there’s a certain way of thinking that I think is very unique. If you find that entrepreneur, you should reinvest in that entrepreneur over and over again because they really know what they’re doing. So, that’s how I’ve looked at it from my lens on hardware companies.
Der Shing: Alright. Qing Ru, Mohan, do you have anything to add to that?
Mohan: I mean, I very indirectly invested in a hardware company called Stretch Censors based in New Zealand. I think they struggle in the early days with fundraising and all that because of what Chirayu mentioned, and unclear go-to-market. But, something that they did really well is that they found a strong niche in the large triple-A gaming company, where, you know, budgets are in the millions and timelines are in years, not even months. What they were able to do with their technology, was to make such a significant cost reduction, that it became quite a no-brainer for companies to purchase a large number of their product quite upfront. I think the go-to-market part was quite critical in that sense. Once they had that first enroll in the sector, everything else opened up quite easily. They ended up closing a Series B funding last year.
Qing Ru: My first investment ever was in a hardware company called, TinyMos. So back then, they were doing a Kickstarter to build the world’s smallest astronomy camera, which they successfully did. Through that cycle, I saw so many challenges that they had to go through, to Chirayu’s point, where are your factories going to be located? Where are you prototyping? How’s the team gonna interface with the hardware team? There are so many moving parts. For someone who has not gone through the rigor of a hardware accelerator where literally they present to you the entire process from start to the end, how it is going to be like, they give you contacts for manufacturing. That means you’re almost going to have to learn along the way and the cost of learning is extremely high.
For TinyMos, kudos to them, they actually developed the camera in the end and they fulfilled the Kickstarter orders, which were great. But then, after that, one of the components that they had was going to end of life, so they couldn’t get components for that and they had to support with something else and that means that the entire camera had to change because the form factor was different. So it really is so difficult.
One of the investments I have made in the last six months is Lilu, which is a breast pump company. I think now if I’m going to do a hardware investment, I’ll make sure that it is at least a ready product and there is already some user feedback. Then the next thing you need to do is get to scale, I feel like this kind of investment would be a lot more tolerable for angels like myself, because I’m not an expert in that space. It’s a lot easier to understand business demand and invest accordingly, based on that.
Der Shing: Totally agree. Actually, all the speakers come from different experience sets. Personally and also through AngelCentral, we actually have quite a few hardware deals that we’ve invested. One of them has already failed. It was a digital bartender. But we have quite a few that are like digital IoT that’s doing pretty well, we have one in the e-motobike space in Indonesia. So it really boils down to the composition of the team like Chirayu mentioned. They must have that ability to really build something and scale the manufacturing at scale. They must have the right skill sets to either manufacture it themselves or outsource correctly to the right factories. Then after that, there’s still a distribution challenge. I noticed most angels seem to like it when there is also a software component to the hardware that they are building or assembling so that there’s a certain stickiness or a certain barrier to entry that they create with the software that they are offering.
I think we have one very good question. I’m sure all of you investing in so many companies, you will track your TVPI, IRR, at least on a rough basis. How are the growth projections of your portfolio companies as well as you know, on your own portfolio (growth)? So if you’re willing to share, how has it been, now that it’s been almost one year and three months already, since COVID first hit. This is free for all, whoever’s ready, feel free to speak up.
Michael: I can start. Luckily, no company in my portfolio failed last year. Those that had planned to raise at the beginning of last year, were challenged. I think last year, the valuations were generally quite modest. I’ve seen several of the same companies raise a new price equity round this year at double or triple, in extreme cases, even much higher valuation. So I think, last year for many it was essentially survival of the fittest and those that were able to be really resilient that were willing to cut costs and take the tough measures, sometimes, it requires salary cuts, and even to reduce headcount to slow down, given every business, in general, was affected. The ones that survived, I think came out stronger. And I think we’re seeing that in the valuations this year.
Der Shing: Yep. Totally agree. Anyone else wants to just share a little bit? What happened to your portfolio? In terms of numbers, yeah.
Mohan: There weren’t any adverse issues. So thankfully, no companies closed down. I think the interesting thing is that I definitely had a couple of portfolio companies that had to change their entire customer base or their service. In that process, there were a few months of scary cash issues, but they were able to do it quick enough and come out stronger that led to a much larger Series A like what Michael mentioned in 2021. So there were two of them that went through that process. There were a couple that actually was in M&A talks. One is in a very late position to do that. Then the rest of them were quite early so there were all raising money mostly last year or had just raised not too long ago, so they didn’t have any significant growth. So overall, I would not say it was a bad period for a lot of them.
Der Shing: Okay, Chirayu, Qing Ru, anything to add?
Qing Ru：Maybe I can go. I did Zopim, during the recession in 07’/08′ and that was the big financial crisis. So for the investments that were made last year, I think, if the companies managed to fundraise during COVID year, you will have at least one or one year plus of runway to hunker down and do product development. Which, thankfully is still quite isolated from the effects of COVID. However, I think it really encourages a very prudent financial mindset. So you don’t go after the expensive growth vanity matrix that we always chase in the software space. But it is kind of like for every dollar that you have, you are realistic about what you want to do with it, and profitability is always something that’s on your mind. I think that is actually a very healthy mindset for COVID-born founders.
However, there are casualties that I had, as a result of COVID from my previous years of investment, Mobikon, which is a restaurant management company based in India. So they tried to do a pivot, but then they ran out of cash. There was another offline retail monitoring company that was based in Indonesia that also died. I mean, there’s a couple of them and I think, as Angels we have to be realistic, this is what happens when you have the greatest epidemic in 100 years. People suddenly become conservative, your customers disappear depending on which industry you’re in, they might even ask for a discount and that’s the reality.
Der Shing: Yeah, very candid answer. Thank you.
Shao-Ning: Can I just chime in a little bit? We have a question on Facebook live, that I thought I would just bring it up. One of our viewers on Facebook is asking what do angels view about fundraising done during this period of time and the fund usage is to support working capital needs rather than for scaling. I think it’s actually very similar to what Qing Ru was saying. During this period of time, some of the businesses really just need extra cash. So what’s your view on that? As an angel or as an early-stage investor, would you support that?
Der Shing: Yeah. Maybe let the panelists think on the answer on that, just to also give a bit of data to their fellow angels who are asking. So Shao-Ning and I, have around 37 startups. So during COVID, quite a few did fail. I think one in retail space, we have one that’s in travel that’s struggling, it’s really very hard because it’s travel and they couldn’t pivot because they have regulatory commitments to pay for. But we also had huge winners. So we had some healthcare startups that basically doubled or tripled their valuation because their revenues just shot through the roof. We also have a co-working/co-living space that crashed and burn and still burning, not done yet, I’m sure you all know which story that is. But overall, actually, I think on a TVPI basis it is hardly changed, maybe up a little bit, if I count the latest rounds this year that I have not done yet and on the IRR basis is still hovering 35 to 40% range. So it kind of offset itself. That’s why it’s important we build a portfolio, so you have a mix of different types of startups and not all from the same category. Imagine if I just went on a travel and retail slant five years ago, not that I would, but you know, I’m screwed, man. I can’t imagine how that kind of portfolio will look right now.
Okay, so yes, back to the question, and it’s linked right, so when the startup needs more funding, how do you decide whether as an angel to put more money down? Even if your strategy is to always follow, it could be to always follow Series A right and not to follow a bridge because a bridge can be for many reasons. So which are the reasons that make you willing to open your wallet again to follow?
Mohan: We did have one company that raised a bridge round. This was in anticipation of a larger round that was slightly delayed, and there are a few factors that I will look at. Firstly, what is the founder really doing in the first place? Assuming there was really no bridge, what will be the founder’s game plan. Whether it is cost-cutting measures, or saving some money through cutting off essentials or whatever. Does the founder have a plan? Or is he just taking it for granted that it’s only about the fundraise?
Secondly, it is also some deeper level thought or discussion on what is the founder doing differently with the current situation? Is the founder just waiting for the situation to pass or is he taking a long-term view and really changing the plan? Is there any real pivot on the business model, or the customers, or how they are serving their user-base?
Finally, I would really also look at how is the founder treating the investors in the process? Is the founder taking the first cut from a salary standpoint? Is the founder really working together with investors to make sure that he’s getting the support or is he just merely asking for the money? I think this is quite relationship-centric, and also how the founder manages the entire thing. So these are like on a high level a few things I would look at.
Michael: I think I’ll build on what Mohan said. Firstly, I also agree that there needs to be a plan. The question is, what was the plan prior to this? There needs to be a plan that tries to give at least 12 months of runway and it can’t just come from bridge financing. There need to be other sources of cash creation, including cost reduction, including the founder taking a salary cut. If founders are not willing to put skin in the game, it’s over as far as I’m concerned.
Secondly, I’ve had several companies go through bridge rounds and some managed to get a bridge round, some didn’t. I think you quickly figure out where it’s going to land. In some cases, there are just a few investors willing to top up and you get a bunch of other investors free-riding on them. Versus in other cases, we had a case where they essentially had a term sheet in February, and it was pulled away in front of their eyes at the beginning of March last year. However, they were able to round up all of their existing investors, everyone put in, and essentially covered the term sheet as a sign of belief.
In summary, do the founders have a plan, or is it just a bridge to come to a plan? Are the founders putting skin in the game? Can they mobilizing all of the investors, if the founders can mobilize all the investors, that typically means there is something if they can only mobilize one or two? That is typically a possible concern?
Der Shing:Do we have any other add ons? Qing Ru?
Qing Ru: Well, I think the other speakers have made very valid points. I also see the same thing, it is extremely difficult to do bridge rounds with angels because we need to know that there is at least a lead investor who’s going to commit in the next round. If the lead investors are not coming in, then this bridge round is not gonna work. There won’t be enough resources for the startup to hit the next milestones and we know what is going to happen.
I think I appreciate a lot of honesty and genuine feedback, they (founders) may be in a worse position because of COVID but, if they’re willing to be very upfront about the challenges and they’re genuinely very authentic, very transparent with how bad the numbers are, but they actually have a plan to go about problem-solving around that, and there is potential for something to be put together that is sustainable that could last through this period. Then, I think there is a good chance that angels might come in if the valuations compensate for that.
It’s always the risk-reward ratio. If you say that you are willing to take a cut on valuations because there’s a perceived risk for the angel I think that will be really encouraging. Also, I think the founder needs to have skin in the game, it can be in the form of a personal guarantee, if I know that this guy is willing to take a loan, with a personal guarantee, it says a lot. If I believe in the founders and they are going to tide through, then I think that is still a round that is possible to be done.
Der Shing: That’s a good point. So a founder having skin in the game definitely does help. Last year, we had one of our co-living startups that actually had to raise a bit more money through debt. Then a bunch of us, angels just loaned 50, 100k each and it was a lot because firstly, he got a debt-style fund willing to lead that debt round, and then the rest of us filled it up. Also secondly, there was a PG associated with it. So that makes a big difference because he is signaling intent.
There are some questions from startup founders here. And they’re asking about, whether VCs and angels are still investing. I think, maybe very quickly, just, yes or no, because for my side, and in fact, on AngelCentral, we are probably investing more than ever already and it actually started since the second half of last year. There was only a slowdown for one quarter at best, once the stock market boomed and that’s a layman way of saying there’s great liquidity in the market. I see everyone still investing I don’t see any slowdown. How about you guys?
Mohan: Yeah, the short answer is there is no slowdown, angels and VCs are still investing. You go to TIA, DealStreetAsia, you still see a lot of funding announcements going on. I am personally vetting two deals now, so the market is still very hot.
Chirayu: I agree, 100% that everyone’s investing, and whether it’s VCs, angels, or later stage, I don’t think the pace has dropped at all.
Michael: I mean, there’s a lot of capital in the market. So I think funding is not an issue. I personally have been a lot pickier because the abundance of capital has attracted entrepreneurs that should not be entrepreneurs. Compared to when I started investing in Singapore, 7-8 years ago, you only had the diehard entrepreneurs building businesses. Now, every kid thinks that they can be an entrepreneur. Unfortunately, that’s not always what they’re meant to do.
Der Shing: Yeah, but I’m gonna ask you on that, Michael, we are picky on quality and model traction but we’re not that picky on valuation right?
Michael: I am picky on valuation.
Der Shing: Because that’s what one of the angels asked also. So you have a fixed number for a seed round whereby you will not exceed or is it based on what’s the expected outcome and you work backward? You want a 30x?
Michael: Yeah, I mean, there’s a number of rules. But yeah, not at any valuation.
Qing Ru: I think definitely I’m still doing my angel investments, I’m still doing investments in late-stage companies. Just to give an example, my VC fund, we do blockchain investment and last year, we raised about $20+ Million and this year we raised another $50+ Million, so right now it’s tracking on $70 million and because of the boom in the crypto market, there is so much liquidity out there. We invested in a company that does the secondary market, Forge, they are like EquityZen. So they had a big raise and a big valuation jump in the last year, because of the amount of interest that they’re getting. There really isn’t a slowdown, depending on the space that you’re in, as far as I know, in crypto and blockchain it is not slowing.
Der Shing: Yeah, let’s dig into that because there’s also another angel, who asked about are we seeing an increase in the number of cryptocurrency or blockchain startups right now. I have to admit, this is where I’m a dinosaur. I just started learning about DEFI and, how those startups are working there, and the kind of returns they’ve been generating. So, obviously, we’d like to hear from Qing Ru and also the rest of the panel, are you guys investing in crypto or blockchain-type startups and where do you see going?
Michael: I have invested in blockchain companies, but rather companies that leverage blockchain technology in B2B use cases, I have not done any crypto direct investments.
Chirayu: Yeah, I have done crypto investments, but no investments in blockchain companies or even crypto companies. I think, for me, what I have noticed is that the valuations of the cryptocurrencies are affecting the quality of the entrepreneurs that are flowing in. Therefore, the signal to noise is not within my abilities to figure out who’s good and who’s not. As much as I’ve read, probably coded a little bit of stuff on crypto, I have no knowledge or ability to figure out if someone’s good or bad, and therefore, for me, I have stayed away. I just bet my own money on cryptocurrencies.
Der Shing: Yeah, very similar for me, and maybe Qing Ru can be the one to lead us to the promised land on this topic. So, because I’m not seeing many cryptos or DEFI-type app companies coming to me, I suspect they are raising from the crypto community themselves, they don’t need us. So I’m just wondering how do you all get yourself into space and participate?
Qing Ru: We don’t invest in crypto. We only invest in blockchain companies. I must say that I’ve been an entrepreneur since ’07. I’ve been in this space for a while and I think an indicator in the growth in a certain segment is always represented by the number of talents that you see, there are a lot of smart people in the in blockchain space. Undeniably. Even though we would like to think that we were smart when we made the bets, and it paid off really well for us, but the fact is there was also a rockstar team behind each of those investments that we made. The talent is incredible, there’s so much learning, there are so many advancements in the field. I mean, some of the things that they are doing could be really not something that we see could be applicable right now but people are hacking at it.
That said, from a retail investment because we deal with LPs, the carnage of the ICOs of 2017 is still very vivid in a lot of people’s minds. Back then, retail investors were doing a lot of ICO investments, and most of them went down the valley of death. So people are generally very cautious. Crypto investments in the retail space are generally still choppy but there is a lot of crypto money, there are lots of crypto billionaires, millionaires being minted, and they don’t mind taking a small cut of that profit to fund more crypto blockchain startups. So it is a trend that we see.
Der Shing: We still have quite a lot of questions. So there’s one asking that as angel investors we see very early startups and it can’t be everyone is a copycat startup. So how do we think about the total addressable market? The ultimate obtainable market and things like that, if it is a new space. If it is a relatively blue ocean, how do we do the math? How do we go about thinking?
Michael: I think, first of all, I would say if founders themselves haven’t done the math already, and aren’t providing you that in their data room, then they have not done their homework. So turn down. I am typically biased by what I learned at McKinsey, I would apply the rule of three. I will try to break down the market back into how many units do I need to believe that it will be sold? At what selling price to meet the market expectations? And then typically, you kind of see that the assumptions are ridiculous. You know, you see too many decks with $50 Billion addressable markets. So, it is actually often a question (market size) that I asked because I find many ideas that sometimes just won’t scale. I think it’s something that as an industry, you definitely need to double-check.
Chirayu: My starting point is usually the size of the GDP of the immediate market they are going after, then the GDP per capita. I use these two as a rule of thumb as to how much can you really do in this market? I think often, you see people coming up with concepts that might work in more developed markets, but in emerging markets, the economics just does not make sense. There are many ideas that fall into that and therefore, the question then becomes, how do you test the founder quality for them to redefine what that total addressable market could look like? So if you start with product A, which addresses a smaller market, are they in a position to go from that product A and expand to product B, which will extend to a broader market?
The way I kind of ask that question is if you’re given $150 million today, what could you do with it? Usually, that gives you a good sense of how they’re thinking about the long-term vision and whether they are kind of narrowly defining the market, and are they willing to imagine things beyond what they’re doing today? I found it a good way to figure out whether they will be able to get to a larger market size. So, that’s how I evaluate the market size. When you create new concepts, there is no market size, but at the end of the day someone’s paying for and it comes from someone’s wallet, and these are the theoretical limitations, which is the economy.
Der Shing: Yeah, I totally agree. Actually, I can illustrate this because this morning Shao-Ning and I just had a meeting with an audio super app company that is based out of Vietnam, where we just invested. So we invested pre-seed and we led the syndicate for the seed round, and a lot of VCs actually balked at it because they were very concerned, firstly, it is audio for Vietnam only, so Vietnamese is only in Vietnam plus the diaspora. So that’s worrying. Of course, Vietnam is quite large, but the GDP per capita is not high. So it became very risky. That’s when I think sometimes as Angels, we just take a risk and we go in, and the one that swung it for me is really the founder. It’s the founder that is very thoughtful, very detailed, has a big vision at the same time and he gives very thoughtful replies to all the questions that we have, and he paints an accurate picture.
From there, what we are betting is really that you will win the audio ebook market, then can you be the meditation app? Can you really be an audio super app for Vietnamese first? Then, we know that if you are not just an ebook player, you’re not just an audiobook. If you become the Headspace for Vietnam, you become the Ximalaya for Vietnam, then that actually is quite a big story already. That’s what we are working on with him now. A lot of times it’s like that, especially when we enter in seed/pre-seed, a lot is still up in the air. Of course, if the addressable market is way too small, it is ridiculously small then obviously, it’s not a VC style or Angel style investment. But a lot of times it’s at that gray line, and it can go either way. We have seen so many stories, some die, some actually make it very big and they expand into complementary adjacent spaces. Any other thoughts from the panel?
Qing Ru: I think we see that a lot in crypto blockchain where everything they do is new and revolutionary. So the way to go about sizing these companies is the problem that they’re trying to address. Back then when the Bitcoin paper came out from Satoshi, there were trying to create new digital money for peer-to-peer lending. So the growth of that company is very important, like how many developers are willing to work on it? How many commits do they have every week from these people who are willing to spend their time on the project? What’s the growth like? I think growth is more representative than actual market size, in that case, it is very difficult to put a number on it. However, that does not mean that there isn’t an opportunity. I think the assumption that if there isn’t a market for it right now, there isn’t a need, is not true. It is possible for the company to succeed if they’re doing things in a revolutionary approach.
Der Shing: We have one question on are we seeing more crypto millionaires? Definitely. Okay, that was a no-brainer, and are they investing in startups in the Angel space. So that’s more like for AngelCentral as a club, and maybe Chirayu can share, and of course, other angels feel free to chime in. For us, we are seeing actually quite a few angels that joined us lately curious about this asset class. It’s because the source of funds is from cryptocurrency trading or investing, they invest in some of the DEFI startups in the crypto space, and actually, if you look at the returns, you know, how fantastic it is in the last one to two years. So they are looking, and I think it’s more portfolio diversification, they are holding on (Crypto) for dear life for sure. But they are also taking some money off the table and then wondering what to do with it. So, they are putting into traditional stocks, property and of course, angel investing is one possible asset class. Yeah, maybe panelists you want to add whether you’re seeing such crypto guys around investing?
Chirayu: I haven’t seen any. At least I haven’t. Maybe they are investing with us on cap tables, but I’ve not encountered them just yet. But I think I will in the near future looking how many of them have made money and I’m pretty sure they’ll start to come in and start investing and perhaps you know, inflate the valuations even more.
Der Shing: We are seeing some, how about Michael or Mohan?
Mohan: There is one I am in touch with on a regular basis and I think it’s not a matter of if but more like a when. It seems that the folks that are making money, especially from this person, where I learned that there is just so much opportunity in the crypto space. It’s one thing to trade tokens, but it’s a whole different thing to be the first few people that get access to a new project that is run by maybe a very high-quality team. I think these people are going downstream in that sense where they’ve started to realize that their open tokens can now be diversified and shifted into more private projects where they can add more people to crafting the blockchain and crypto future.
I think that’s really what’s driving a lot of these crypto enthusiasts, it’s not just about the money now, it’s really about the community that they belong to and making an effect to really change the landscape completely. I think in that sense, angel investment is not something that they’re looking at the moment, in fact, this particular guy doesn’t even have any public stocks. So I do not think this is going to happen that soon, maybe when the crypto bubble starts to die down a bit, or in the next six months when they are not that many new interesting projects happening, but not now.
Michael: I have not seen any and I’m personally not surprised because I think it’s a very different game. I mean, angel investing is a long-term game with a longer gestation period. You’re stucked, versus trading. I think except if they can do projects where either their expertise or their tokens can be directly leveraged as a way of diversification. I’d be surprised that we see many of them shifting to the kind of angel investing that I think we’ve been discussing.
Der Shing: Yeah, that’s true. I mean, to give context to our 140 members, we have only two or three have declared that it’s mostly through crypto and you can see that it’s very experimental for them. It’s probably just some small part of the portfolio. They’re just trying to learn may be other ways of evaluating and maybe apply to the crypto startups that they are investing in.
So, to be mindful of the time. I’d like to thank all our panelists for attending the session today, Qing Ru, Michael, Mohan, and Chirayu, thank you so much for sharing what you have been seeing in the last one year plus, and what you see in your portfolio. I hope it’s been an interesting session and it’s good to see that everyone is still investing. I just saw very good news today, today we only have four cases. So it looks like those of us who are in Singapore. I know Michael, you’re in Thailand, but those of us in Singapore look like we can go out and eat soon. I hope so. So thank you everyone for coming. And I hope you guys have a great day and month ahead. Alright, and thanks to all the participants for attending. Take care. Thank you.