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Technology Business Valuations – A Hurdle to VC Deals in Developing Markets of Asia

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Ask prospective investors in Pakistan or Bangladesh for a $200K investment at $800K pre-money valuation and see the jaws drop. Most investors will question whether you and ‘that thing’ on your laptop is worth that much money. That’s a legitimate objection by anyone not used to valuing tech ventures, especially seed stage ventures that are still pre-revenue or project insane numbers based on some ‘creative’ sources of revenue in the future.

Part of this is usually inexperience of the founders pitching to the investors who are just not able to sell the value proposition of the company effectively. There is usually too much focus on costs and very little on the value being provided. Thankfully, the pitching skills of founders are getting a good polish in several pitch competitions, launch pads, incubators like The Foundation at LUMS Center for Entrepreneurship, and entrepreneurship courses at local universities across the region.

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But an equal, if not bigger, part of the issue is the lack of expertise and adequate data to value technology ventures. The usual approaches using discounted cashflows or asset based valuations don’t provide much confidence to investors because:

  • The cashflow projections of a currently pre-revenue company requires a big leap of faith on part of the investors in the absence of comparable success stories and trusted tech-savvy advisers who understand the business model;
  • Bulk of the asset based valuation of a tech start-up would be based on the goodwill of the founders and the intellectual property of the company which again requires seasoned technology advisers to evaluate and price and not the accountants who usually aid the investors;
  • Some of the revenue models proposed by start-ups are not yet fully proven in mature markets, let alone in the developing region;
  • Intellectual property (IP) is perceived to be less protected by law and hence of lower value by investors in developing markets.

Another method of valuing tech companies is based on comparable deal value which is also hard to locate in these markets.

A fourth model is based on strategic value of an acquisition post merger which is solely buyer driven and can sometimes result in insane pricing like that of Instagram, but which may be justified in the eyes of the sole acquirer, Facebook, in that case.

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In mature VC markets, the law of supply and demand sometimes takes over deal pricing where the price of a deal might go up beyond a reasonable value solely driven by the demand for that deal and totally devoid of any fundamentals. The developing world is still working on kicking off a VC ecosystem, and hence not supported by this model either.

In the absence of these valuation methods, the only choice typically left for valuating tech ventures is a ‘cost to build’ model where an investor might conduct due diligence to figure out what it will take to build the same product or service from scratch. That certainly doesn’t work for the founders and seals any prospects of raising venture capital for them unless the company is centered around a key piece of IP that took years of R&D to develop, something that might evolve out of a start-up bootstrapped in a university.

So how do we avoid these stalemate like scenarios and invigorate the start-up ecosystem with some capital injection? The following, in my opinion, can help the investors get closer to the deal table:

  • Successful exits in the local or comparable markets in the region;
  • Proven revenue models that work in the constraints of the local environment and play to the strengths of the local and regional markets;
  • Supplementing the accountants who advise them for the deals with experienced tech savvy advisers;
  • Test the waters with more mature, growth stage ventures where the risk is slightly lower at the expense of a more expensive deal;
  • Collaborate with other local investors to pool in money and form a diversified, broader focus fund that makes seed stage, early stage and growth stage investments;
  • Collaboration with international VC funds or angel investors to provide their investments international exposure which a local founder might be hard pressed to achieve by him or herself.

The founders on the other hand:

  • Need to refine their pitching skills so that they can solidly pitch the startups’ value proposition, not just to its investors but its customers and partners as well;
  • Rely on proven and classic business models like charging for a product or service instead of experimenting with newer revenue models still being proven in more mature markets;
  • Sign up experienced advisers to help with strategic direction of the company;
  • Shoot for a broader market focus that spans at least the region and not just the country;
  • Approach investors after proving product-market fit and adequate revenue/eyeballs traction;
  • Try to collaborate with international companies and investors;

This also means that local entrepreneurs will need to bootstrap their start-ups for longer periods and iterate over their business models quickly enough so that product-market fit is established sooner. The Lean Startup model should therefore be preferred by the start-ups in the region.

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The governments need to play their part as well. The VC industries in two of the most thriving entrepreneurial ecosystems in the world, United States and Israel, owe their success to government interventions. In the case of United States, the government backed Small Business Investment Company (SBIC) program provided a downside protection to the investors. In the case of Israel, the Yozma fund provided upside advantage to foreign funds to invest in local companies. The results have been compelling!

When everything is said and done though, the investors also need to realize that early stage investment deals in the developing region are extremely cheap compared to similar ventures in more mature markets. If they can find a great team with a great idea and proven product-market fit, the upside can be huge, especially if they can help connect the start-up with broader markets and follow-on investors at the right time.

Callum Connects

Agnes Yee, Legal & Compliance Recruiter of Space Executive

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Agnes Yee started Space Executive in Singapore, which is a hub for businesses in some of the world’s fastest growing economies.

What’s your story?
After graduation, I joined a design media company as a Business Development Executive, during the era when ‘reading a magazine online’ was unheard of. I believe that laid the foundation for being unfazed by rejections.

I fell into recruitment pre-GFC and rode the highs and lows in the early years. A decade later, I decided to set up my own recruitment company, partly because I could. I’m acutely aware of the face that being an Asian female in Singapore is sometimes a privilege, and that many women in the world are living a very different existence.
Thereafter, we joined Space Executive as part of a merger. I am currently the Partner of Space Executive, a recruitment company focused specialist disciplines, including Legal, Finance, Digital, Sales and Marketing and Change. We also run Space Ventures, a venture capital business, which invests in seed and pre-series A businesses.

What excites you most about your industry?
On a daily basis, we’re influencing how one spends a third of their day. It is interesting how the Internet has transformed the industry, and I’m excited to see how we can harness technology to bring us to the next phase of this business.

The VC is an extension of applying our skills and experience in reading people. We very much invest in the people as much as the idea. Being a native Singaporean, it’s been exhilarating watching Southeast Asia becoming a hotbed of ideas; and young entrepreneurs simply daring to dream.

What’s your connection to Asia?
I’m a born and bred Singaporean. I love that I speak both English and Mandarin, grew up playing with Indian friends and eating Malay food.

Favourite city in Asia for business and why?
Singapore for the low barriers of entry to set up a business, but has to be China (and Hong Kong) for their hunger and constant innovation.

What’s the best piece of advice you ever received?
青春不要留白 which translates to ‘Don’t waste your youth.’

Who inspires you?
Anyone who has gone against the grain.

What have you just learnt recently that blew you away?
It wasn’t recent but reading the article on https://waitbutwhy.com/2015/12/the-tail-end.html never fails to blow my mind how little time we have left. Charting our lives in weeks, and realising I only have enough time left to enjoy 60 Christmas turkeys, read 300 books (all if I’m lucky); and mostly, I’m left with the last 5% of the time that I spend in-person with my parents.

If you had your time again, what would you do differently?
I’m cognisant that every decision I made in life has brought me to where I am today, and I wouldn’t change one thing. But I’d really like to have had more time to travel.

How do you unwind?
Exercise and wine.

Favourite Asian destination for relaxation? Why?
Trekking any mountain in Asia. It brings us back to the most basic. To overcome elements of nature and our own mind.

Everyone in business should read this book:
Start with Why, Simon Sinek

Shameless plug for your business:
Space Executive started in Singapore, a hub for businesses in some of the world’s fastest growing economies. We assist organisations in accessing a targeted and specialised, and often times transient talent pool.

Out of Singapore, we have recruited across 14 countries; and have embarked on our global expansion plans with offices in Hong Kong and London this year, and US, Japan and Europe in the following years.

Space Ventures provides funding, management and financial guidance to young businesses with original ideas. We have invested in peer to peer lending platforms, credit scoring, social media education, and other start-ups spanning diverse industries. We are always interested in hearing more about new ideas.

How can people connect with you?
https://www.linkedin.com/in/agnesyee/

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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Callum Connects

Chrystie Dao-Szabo, Founder of iPayMy

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Chrystie Dao-Szabo founded iPaymy for Business – a secure and easy to use
platform enabling SMEs to pay rent, salaries, invoices, and even corporate tax using the credit cards they already have in their wallet today.

What’s your story?
I’m Chrystie Dao-Szabo, and I’ve worked as an international banker for over 22 years. During that time, I travelled through Asia, Australia and Europe, and everywhere I saw how my clients struggled with managing their finances and keeping cash around.

I wanted to use my experience to help them, but I also knew the solution they needed didn’t exist yet. This pushed me to give up on my secure career, and instead look into the innovative world of FinTech for an answer.

This is how I founded iPaymy – at its launch, a platform to help consumers pay their monthly expenses using their credit cards. We’ve grown a lot since, and today, iPaymy for Business is a platform that allows business owners to use their credit cards to pay for rent, salaries, invoices and taxes, freeing up their cash for business-critical operations.

What excites you most about your industry?
What excites me most about FinTech is it’s culture of constant disruption, thanks to cool and innovative products and services coming out every day.

What’s your connection to Asia?
I was born in Vietnam, grew up in Australia and worked in Asia, Europe and Australia. Being raised by traditional Vietnamese parents meant that deep down I was still an Asian at heart, so I have a strong connection with the region.

Favourite city in Asia for business and why?
Singapore of course. It’s easy to do business, English is the main language, and the infrastructures like public transportation are great. Also, the government supports local innovation in multiple ways, like giving grants for SMEs and FinTechs.

What’s the best piece of advice you ever received?
Keep giving, and one day you will receive.

Who inspires you?
My parents. My father had a successful business in Vietnam just before the fall of Saigon in 1975. After the war, my father was sent to a re-education camp for three years, which meant my mum had to bring up two young kids – a 3-year-old, me and my 4-year old brother on her own.

In 1980, we all fled Vietnam on a boat and arrived in Sydney, Australia via refugee camps in Indonesia and Singapore. There, my parents had to start over with nothing to their names and only AUD 50 given to them by the Australian government.
They went on to build several businesses in Australia!

What have you just learnt recently that blew you away?
The number of young and smart people who have carved out successful careers by founding their own startups (or joining really cool ones). When I was starting out my career, doing any of these was not a viable option; it was either working for an accounting firm, an insurance company or a bank.

If you had your time again, what would you do differently?
If I were starting out my career now, I would choose the path of joining a startup as you get to learn so much about running a business and how to assemble a winning team.

How do you unwind?
I like travelling to a beach or a resort destination and just relaxing by the pool or beach. I also like to unwind after work with a glass of champagne or wine, and a bowl of truffle fries.

Favourite Asian destination for relaxation? Why?
Thailand. I love the people and the spicy Thai food.

Everyone in business should read this book:
The E-Myth. It’s a book series that dismantles common myths about entrepreneurship in different industries.

Shameless plug for your business:
With iPaymy for Business, SMEs can pay rent, salaries, invoices, and even corporate tax using the credit cards they already have in their wallet today. SMEs love iPaymy because it works like a credit card, but pays like cash.

iPaymy’s secure and easy to use platform reliably delivers payments to vendors while freeing up cash and providing access to interest free credit. Forget the delays and aggravations that come with traditional SME financing options. Schedule recurring payments, manage invoices, set payment reminders, and monitor payment status all from one dashboard.

It’s never been easier for SMEs to meet monthly payment obligations while keeping cash available to fuel growth, bridge receivable gaps, and make immediate investment in the supplies, services, and expertise needed to drive a growing business forward.

How can people connect with you?
You can find me on LinkedIn or contact me by email.
My LinkedIn: https://www.linkedin.com/in/chrystiedaoszabo/
My email: [email protected]

Twitter handle?
https://twitter.com/ceedeees

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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