This article was first published on Der Shing’s Blog.
It has been a good 5 years since we started being a whole lot more active on angel investing. We now have now invested in 35 startups in our angel investing portfolio and 8 VC funds which probably have another 500 startups between them (skewed due to 500 Startups large portfolio numbers).
Our 5 year ago thesis was that we enjoy meeting and helping founders, we have knowledge of the space, we think the startup space will boom in ASEAN, and also since we made money as startup founders, lets give back to pay it forward. So we set aside the equivalent of a commercial shophouse to invest. I deliberately use this comparison because it shows very starkly the difference in the amount of activity and value that angel investing creates compared to if we passively invested in real estate. Of course, the activity must be worth our risk and show up in the return numbers.
From late Feb to March, COVID was a big shock to startup founders. And because of GFC experience, many grey hair investors like Sequoia, some local VCs (and yes Ning & I had the same experiences too) swung into crisis mode. We quickly advised founders to plan for doomsday type scenarios on the funding front and plan for various levels of revenue decline. The narrative being survival is key. Then watch for what your clients and sales are telling you. If you are not badly affected, then it’s a chance to grow through the recession and at expense of bigger, expense-heavy competitors. Market sensing and willingness to take action is key. What world-famous PE fund Silverlake did next is super instructive. They made big bold bets into Airbnb and others right at the peak of COVID confusion and despair. That takes some serious balls and also helped reinforce our decision to continue investing through the crisis. So in 2020, we actually added 6 startups to our portfolio.
Fast forward to the end of 2020, this ongoing COVID recession has been K-shaped indeed. We did an assessment of the 25 older startups we have and here is what we found :
- 3 in bad trouble revenue <50% with 1 in process of closing down.
- 5 experienced flat to moderately negative performance
The above 2 categories obviously are operating in industries directly affected like travel, hospitality, office services, advertising, construction.
- 17 grew revenue from 2019. Of note, 5 are profitable and 10 net beneficiaries of COVID. The categories are edtech, healthcare, digital media, saas, and surprisingly recruitment.
On the VC front, it is a similar K shaped picture. They slowed down investing the first 1H but resumed deal-making in 2H. The data we see from the VCs we invested in corroborate what we are seeing in our direct angel portfolio.
Our own rough performance calculations for those of you curious. Startup returns since 2015 are at 2.6+ TVPI or >40+% IRR. VC returns since 2014 about 1.98 TVPI. No IRR as hard to blend them together but definitely below 40%.
Most gains unrealized of course so while far exceeding a 4-5% unlevered return on shophouse, we are mindful of the volatility and risk.
Some learnings we have for fellow angels/investors.
- Diversification of portfolio really matters. Imagine if we invested in a pureplay travel VC or if we had heavy travel weightage in the overall portfolio.
- We really don’t know what will happen. So it’s best to have the same bite sizes per startup. Winners can go to zero in a COVID event.
- A bad recession is a great time to see if you chose the right founders. We are incredibly proud of most of our startup founders. Most of them very quickly saw the first and second-order of the crisis on their business and made changes quickly to adjust. Even right now, they are still making the adjustments and trying to capitalize on trends. Unfortunately, we also had 1-2 founders who chose to blame everyone and everything for their own lack of prudence and thoughtfulness. That’s why diversification is key – we can’t read founder minds.
- A rising tide really lifts all boats. It’s key to get the macro thesis right. If we use VCs as a proxy for indexing the startup market, you can build a portfolio of VC funds and track it. Doubling your money in 6 years is not bad and IRR is much higher than 12% since drawdowns last 3 years. And the value is still adding as the J curve accelerates.
- Growth and Seed stage startups are less affected by recessions. They are already very lean and efficient most of the time. So usually recessions are a great time to retain and hire talent and also take market share from heavier competitors. I think this explains why our recruitment and manpower type startups grew well during COVID even though the overall recruitment market clearly slowed down.
- Angel Investing is not easy and the reward must be more than just the returns. Looking at our VC and Angel returns, our angel portfolio is better than all of the VC we invested in but not by a large magnitude. And if we factor in all the fees, our work, and time, it’s probably easier to just pick a bunch of good VCs (have to be top quartile!) for someone who only wants the returns. I don’t advocate just 1 VC fund as then you have managing agent risk in the VC manager itself.
In summary, we are quite happy with how our startup investments have performed during the COVID year. It is indeed true that each crisis is different and so our playbook needs to adjust and be flexible always. Yet the basic principles of diversification, bite sizing, continuously investing, etc must hold true.
nb: if anyone is keen on how we do angel investing, we are running our first class for the year on 23rd Jan 9 am-12noon.