Are Early Stage ASEAN VCs Valuing Start-Ups Wrongly?
From my experience talking to VCs over the past 10 years, many of which are great people, great friends and mentors whom I was able to have honest conversations with, I realised that there might be something ASEAN VCs are doing wrongly that’s preventing truly innovative global start-ups like Google or Facebook from ever getting started here.
The Purpose Of Venture Capital
Venture capital as an asset class was created to take advantage of the tremendous rewards in store for funding an innovative and disruptive start-up that could change the world and dominate or even create entire new industries for years to come.
From J.P Morgan investing in Thomas Edison’s electric company more than 100 years ago that eventually resulted in General Electric and every household being powered by electricity to Peter Thiel investing in Facebook to connect everyone in the world through an online social network that everyone is using to keep in touch with friends and get news today — in the process helping create an entire industry of digital marketing and content marketing, venture capital has been able to capture tremendous rewards and return on investment by investing in risky ideas aiming to solve big global problems.
Super High Risk — Super High Return
To capture the tremendous value and financial windfall that a truly innovative start-up like Google or Facebook can generate, VCs need to be bold enough to invest in risky and ambitious ideas aiming to solve big global problems before anyone is ready or have even heard of the technology — like lightbulbs when everyone was using candles.
Through vision, intuition and good judgment, VCs need to believe before they see. Believe me, Wowwwz will become the last and best dating app in the world that solves dating thoroughly and everyone uses everyday to meet all their relationship needs.
It is a game of super high risks, but also super high and super sweet returns.
Most Startups Will Fail
VCs also need to understand the hard fact that most start-ups of this nature will fail, we are talking about more than 90%. VCs need to start to be comfortable with that fact.
You’re Betting That One Will Become The Next Facebook/Google
That’s okay, because you only need 1 out of all your portfolio start-ups to become the next Facebook or Google, or at least the next Airbnb or Dropbox to make 1000x returns or more on your entire portfolio.
All your other start-ups can crash and burn and lose all your money, that’s perfectly okay!
Go Big Or Go Home — Pointless To Invest Otherwise
It is a high stakes game, you will have to go big or go home.
You need to have the balls and confidence to bet BIG, bet on VERY AMBITIOUS start-ups with an ACTIONABLE PLAN to execute on that are trying to solve HUGE GLOBAL PROBLEMS everyone in the world faces.
If you’ve ever played poker, you’ll know that you will only keep losing money if you are afraid to bet big at the right time, multiple small wins won’t win you the game. You need to be even more aggressive if your fund size is small, like most VC funds in ASEAN.
Stuck In Dividend Paying Start-Ups You Can’t Exit From
Having a small 10–30% stake in small to medium sized profitable start-ups that can’t exit but are paying you a small dividend like what I suspect a lot of ASEAN VCs are facing now is NOT A WIN.
Mismatch In Mindset
I’ve realised from having honest conversations with many friends, founders, and mentors that there is a mismatch in the mindset of most ASEAN VCs and the mindset that great VCs should have.
Investing Like Bankers
A lot of VCs in this region are investing more like bankers than a VC.
That’s probably due to how wrongly some VC funds here are structured and the previous experience of VCs here as bankers. Banking experience is useful when it comes to structuring a company, knowing what it takes to prepare a company for IPO and using various financial instruments, but you shouldn’t value an early stage start-up the way you value a late stage conventional business that’s preparing to IPO.
Those are 2 totally different things that require totally different mindsets!
A caterpillar looks nothing like a butterfly, if you don’t know that butterflies used to be ugly caterpillars with no wings, you will never find a butterfly when they are still young.
Venture Capital Here Is More Like Private Equity
Private equity firms usually invest in late stage stable companies that are almost ready to go for an IPO. All they need is that one last boost of capital to expand to a new market or streamline their operations before they prepare themselves for an exit via an IPO.
These late stage companies usually have strong financials and can pay back the money taken from a private equity firm with interest over time if things don’t go so well or if they eventually decide not to go for an IPO. That’s the kind of thing a firm like Goldman Sachs or Blackstone would do 1–2 years before a company like Facebook plans to go for an IPO. They are already huge global companies with strong financials who have already conquered the world by the time private equity firms invest in them.
Unfortunately, since most VCs in this region have either have a background in private equity or banking, VCs here also invest like private equity firms, which is crazy.
That’s still okay for late stage VCs, but that shouldn’t be the case at all for early stage start-ups. You can’t judge an early stage start-up the way you would judge a late stage company that’s ready to go for an IPO.
Lack Of Founder VCs
The best VCs are usually those who were start-up founders themselves, people who were once hustlers who started just with an idea to change the world and grew their start-up all the way to a successful IPO. Acquisitions are fine too but that’s not the entire journey, especially if the acquisition occurred early, acquihires are usually not really acquisitions — they are just a more glorious way to close down so you can say you exited.
Either way, founder VCs are able to better identify quality start-ups that could change the world or become the start-up they once started and exited during the early stages of a start-up before the start-up’s product fully takes shape.
They would also know what terms are fair, what terms are fatal and how to guide a start-up all the way form inception to IPO.
There is a severe lack of such ex-founder VCs in ASEAN.
Only Understanding Copycats
The few good ex-founder VCs we have in this region mostly founded regional copycats, which is great, there is nothing wrong with that, it’s just that they might only understand how to spot and guide other regional copycats and not truly innovative start-ups that could change the world.
It requires a totally different mindset and set of skills to do that.
Limitations Of A Regional Copycat
Although copycats are still hard to build, and you still have to innovate and iterate fast to hyper-localise, the journey of building a regional copycat is still drastically different from a start-up trying to solve a global problem and being involved in an innovation war to solve a problem thoroughly, expand globally and become the last and best in their class like the journey Facebook or Google went through.
Unfortunately, no one from ASEAN has done that yet.
So, if there is ever to be a start-up the scale of Facebook or Google from ASEAN, the founder would have to be a visionary, a pioneer and someone who can start a paradigm shift in thinking in the ASEAN start-up ecosystem.
I don’t know if I can become that person, but as you can see, I am trying everything I can.
Making Revenue A Mandatory Criteria
One of the biggest mistakes I think ASEAN VCs are making is making revenue or GMV or gross merchandise value a mandatory criteria before investment. That’s okay for e-commerce or marketplace start-ups, but not for all types of start-ups.
With that requirement, it means that no ASEAN VC would have ever invested in Google, Facebook (Facebook had some revenue, but insignificant and is due to the experimental ad budget present with big tech companies like Microsoft that does not exist here), Instagram or Whatsapp when they first started.
By that logic, ASEAN VCs would be missing out on some of the most valuable start-ups of all time! That would also mean that if Google or Facebook were started in Malaysia or ASEAN, they would have never been funded and would have died.
The Flaw In Valuing Early Stage Startups Using Revenue Multiples
It is okay to value a start-up using revenue multiples during the growth stage of a start-up, during Series B or C onwards, but never during the early stages. A start-up needs enough capital just to get started properly with today’s demanding consumer market and high costs of assembling a decent team to build and iterate on a quality product.
Furthermore, an early stage start-up that hasn’t yet found product market fit is constantly evolving and iterating, and should be focusing on building a product that solves the problem thoroughly before even focusing on revenue.
It is unfair and highly flawed to value an early stage start-up using revenue multiples.
Ask The Right Questions — Will The Startup Solve A Global Problem If They Succeed
Instead, ASEAN VCs need to start asking the right questions, whether a start-up would have solved a big enough global problem if they succeed.
They should focus more on the what if they succeed, rather than all the reasons they could fail.
Would they be building a product that everyone in the world would be using. If the answer is yes, and the team has an actionable plan to get it started, you should give them a chance.
How Much Do They Need To Properly Get Started — To Get To The Next Stage
The next question ASEAN VCs should ask is how much does such a start-up need to properly get started. That depends on the complexity of the problem they are solving and the quality of the team that they would need to build to get them there.
Start Taking More Risks — Start Asking The Right Questions
It is my sincere hope that ASEAN VCs would finally start to take more risks and invest like a VC should. Leave the mindset of a banker and private equity investor behind and start asking the right questions and investing the right way.
Let’s Build The First 100 Billion USD Start-Up From ASEAN Together!
ASEAN is ready for the first 100 Billion USD global champion to join the ranks of Facebook and Google, all that is needed is a slight shift in investor mindset.
Let’s create history together, shall we?
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