Why Exits are Important (as a metric for Start-ups)

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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.

Update:
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

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Bernard Leong

A Pragmatic Idealist

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8 thoughts on “Why Exits are Important (as a metric for Start-ups)”

  1. Well written article, I like the fact that you put things in perspective. It makes sense why VCs are few and far between here. Had tea with an established Singaporean Technopreneur recently and he advised me to do the same thing. If you wanna build a global biz, pack ur bags go to a larger, more representative market. 

  2. actually not correct to say no exits in south east asia above 30m esp if we consider ipo as an exit. Iproperty market cap is 150+m aud on asx. Asiatravel.com listed on Sgx market cap is about 90m. jobs central sold to CareerBuilder, jobsdb sold to seek 430+m Sgd early this year. Most recent , catcha media ipo at 100m myr and job street current market cap is 700m myr.

    Issue is that local media and govt do not cover these companies. Why? I do not know.

    1. Presumably you are talking about portals in the web 1.0 era. You can only IPO if your revenues are above 100M. So, the companies are running with that revenues. Exits are different, is how much the company is valued when they are either sold or go public. Try looking in the past 10 years. The companies you mentioned are all dinosaurs now. Let’s look at the present scene and see what’s happening in the current space.

      1. IPO is a form of exit for shareholders and you can IPO so long as you have a good growth story and can sell it to bankers.  Catcha just listed with revenue of about $20+M, iprop did it without much revenue on asx. So it is totally not true you need 100M. Just check the catalist market. You need a good experienced team , a good growth story and perhaps some revenue and profit to the tune of at least 2M profit which all the firms above have except perhaps iProp as it is still in growth phase.

        These companies did most of their growing in the last 10 years and for many of them, grew in the last 5 years same as all the firms which MDA supports and which i suppose u consider web 2.0.  Frankly, I do not quite understand why they are dinosaurs. In fact, I would argue the dinosaurs should be the success stories we talk about rather than all the small players MDA is supporting. Garena revenue in Fy10 is 3+M with losses of 2M, Brandtology 1.4M revenue, loss of 900K.  Tencube same same and all have much smaller exits/investments.

        My point is there are success stories with decent size large exits but they are not known and covered. The deals are recent… JobsDB/central acquired only this year. iProp just achieved investment from french portal at 100M valuation.  Missed out sgcarmart, propguru and I think reebonz which will also have good sized exits in coming years.

        We should not care whether web 1.0 or 2.0 as it is a meaningless categorization. These businesses all embrace mobile, have social elements and integrate marketing and system with facebook and some have location features. Most important they are viable, profitable and scalable businesses.

        I do agree that the above list of 10 odd successes is not enough as it is accumulated over 10 years… we should be having such 10 stories each year!

        1. Think you need to define where you are listing. Specifically, one of the companies u mentioned listed in another stock exchange. I am referring to the ones which are in SGX, and SGX has rules for IPO.

          The amount for Jobs Central acquisition is not known and my guess is that it’s below the 30M mark because they only operate in Singapore. Jobs DB might be different but they are not from Singapore to start off with. I hope that SGCarmart and PropGuru will get good exits.

          I am not even bothered with the categorization. If you think that these companies should be focused, send them these data and get them to talk about it.

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