My friend, Rama Mamuaya (aka @rampok) from DailySocial.net (the top tech & social media blog in Indonesia) wrote a tweet this morning, “How exactly does one measure a startup’s success? Exits?” I want to emphasize why exits are very important as a whole for the technology scene in Southeast Asia. It is one of the major reasons why top tier venture capital firms from US like Sequoia and Benchmark Capital and super angel investors from Silicon Valley only pump their money to China and India instead to an emerging market like Indonesia and its surroundings. I will explain why exits are important (as a metric) for the success of a start-up and how it impacts the venture financing in the entire region of Southeast Asia.
To start off with, there are very few companies in Southeast Asia which are true venture capital firms and they seldom take chances with up and coming start-ups. The reason is simple because most of the people who run these companies are former financiers (people who are investment bankers or works in the private equity firms), and to be even more blunt, none of them are former entrepreneurs, which means that they have no access to talent who you can rely on to scale up the business development, sales, marketing and operations in the future. The reason why venture capital works in the US and China is based on three essential components: (a) market size and revenue (b) talent and (c) number of exits which either goes towards a public offering or an acquisition.
Oftentimes, when I have drinks with my friends who do investments beyond S$4M and above, I will hear the following comment from them, “You know why we are not interested to invest in early stage start-ups, there is no exit that are worth more than US$30M (=S$36M) across the whole Southeast Asia.” I did a check on that claim and even Friendster who was bought by MOL (rumoured to be about US$27M from various sources) and Transfer.To which was acquired by Ingenico last year (S$35M). That claim turns out to be true. That’s nothing wrong with what these investors are saying. The central doctrine for them, is that out of 10 investments, 9 will fail and 1 will succeed. If I have a 100M fund (and break it on an average of US$1M per company), I have to invest on 100 companies. It means to get back the return for my stakeholders, I need 5 companies to hit US$100M valuation per company. That’s simplistic but you can understand why investors from Silicon Valley have no interest in Southeast Asia as a whole.
If you look at the start-ups in China, all of them are moving towards either IPO or acquisitions and most of them are hitting above US$50M if they manage to scale in the country. Once investors see more exits above a certain price, their appetite for creating an investment company in the region becomes higher. Although the whole Southeast Asia is currently growing with new venture firms like Neoteny Labs, SingTel Innov8 and East Ventures, the money for early stage start-ups are still few and far between. Unless the Indonesia market booms like how the start-ups in China are, it is very unlikely to see a Sequoia SEA or Benchmark in this region.
So what should you do as an entrepreneur? There are two schools of thinking about this. One school is focus on creating a company with vision and reach there without being sure what the exit looks like. This is what they teach you in entrepreneurship courses for the local schools. Even though I teach a course on that in NTU, as a practitioner, I also teach the other school of thought. The other approach which I am advocating is to start from the exit and work backwards in time to see what kind of company you should build with a set of realistic timelines and milestones (plus a Plan B should everything go south). Unfortunately, to do this, you have to be very experienced and have a good network in the industry to spot what is going to be happen in 3 years time. However, that being said, nobody including myself, can be right about which school of thought is better.
I have an interesting discussion with Professor Turner from INSEAD Business School sometime back, where I advocate that we should teach students in Asia who attend classes on entrepreneurship & private equity to think about exits instead of wasting time on thinking about grandeur visions. Yes, young entrepreneurs can have grandeur vision and goals but if they want to do a Facebook, Twitter and Google, they should pack up their bags and head to Silicon Valley in California or Zhong Guan Cun in Beijing. The reason is simple, the risk appetite is larger and there are people within that ecosystem who can help them to scale. Otherwise, their best case scenario is what happened to TenCube who gets acquired by McAfee (and Darius Cheung is now an investor to Neoteny Labs which is a very good sign of people gaining success and contributing back to the community). What we need is not one Darius, but at least 100 of them (exiting with acquisitions above US$15-US$20M and it means 900 failures) around Southeast Asia to attract investors to come for the early stage companies, and not just Singapore but the region as a whole. Once that happens, we can have entrepreneurs with grandeur vision.
1. My colleague, Daniel Cerventus, wrote a piece Why Startups should not focus on Exits to illustrate the possibility of abuses in thinking that way.
Author’s Note: Photo Credit: Mark Hillary under Creative Commons