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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

Benjamin Kwan, Co-Founder of TravelClef

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Making music to create a life for his family, Benjamin Kwan, started an online tuition portal and his music business grew from there.

What’s your story?
I am Benjamin and I’m the Co-Founder of TravelClef Group Pte Ltd, a travelling music school that conducts music classes in companies as well as team building with music programmes. We also run an online educational platform which matches private students to freelance music teachers. We also manufacture our own instruments. I started this company in 2011 when I was still a freshman at NUS, majoring in Mechanical Engineering.

I was born to a lower income family, my father drove a taxi and was the sole breadwinner to a family of 7. I have always dreamed of becoming rich so that I could lessen the burden placed on my father and give my family a good life.

After working really hard in my first semester at NUS, my results didn’t reflect the hard work and effort I put in. At the same time, I was left with just $42 in my bank account and it suddenly dawned on me that if I were to graduate with mediocre results, I would probably end up with a mediocre salary as well. I knew I had to do something to gain control of my future.

During that summer break, I read a book “Internet Riches” by Scott Fox and I knew that the only way I could ever start my own business with my last $42 would be to start an online business. That was how our online tuition portal started and after taking 4 days to learn Photoshop and website building on my own, I started the business.

What excites you most about your industry?
Music itself is a constant form of excitement to me as I have always been an avid lover of music. As one of the world’s first travelling music schools, we are always very eager and excited to find innovative ways to a very traditional business model of a music teaching.

What’s your connection to Asia?
I was born and raised in Singapore and I love the fact that despite our diversity in culture, there’s always a common language that we share, music.

Favourite city in Asia for business and why?
Hands down, SINGAPORE! Although we are currently in talks to expand to other regions within Asia, Singapore is the best place for business. I have had friends asking me if they should consider venturing into entrepreneurship in Singapore, my answer is always a big fat YES! There’s a low barrier of entry, and most importantly, the government is very supportive of entrepreneurship.

What’s the best piece of advice you ever received?
I have been blessed by many people and mentors who constantly give me great advice but right now, I would say the best piece of advice that I received would be from Dr Patrick Liew who said, “Work on the business, not in it.” This advice is constantly ringing in my head as I work towards scaling the business.

Who inspires you?
My dad. My dad has always been my inspiration in life, for the amount of sacrifices that he has made for the family and the love he has for us. He was the umbrella for all the storms that my family faced and we were always safe in his shelter. Although my dad passed away after a brief fight with colorectal cancer, the lessons that he imparted to me were very valuable as I build my own family and business.

What have you just learnt recently that blew you away?
You can not buy time, but you can spend money to save time! With this realisation, I was willing to allow myself to spend some money, in order to save more time. Like taking Grab/Uber to shuttle around instead of spending time travelling on public transport. While I spend more money on travelling, I save a lot more time! This doesn’t mean that I spend lavishly and extravagantly, I am still generally prudent with my money.

If you had your time again, what would you do differently?
I would have taken more time to spend with my family and especially my father. While it is important to focus our time to build our businesses, we should always try our best to allocate family time. Because as an entrepreneur, there is no such thing as “after I finish my work,” because our work is never finished. If our work finishes, the business is also finished. But our time with our family is always limited and no matter how much money and how many successes we achieve, we can never use it to trade back the time we have with our family.

How do you unwind?
I am a very simple man. I enjoy TV time with my wife and a simple dinner with my family and friends.

Favourite Asian destination for relaxation? Why?
Batam, it’s close to Singapore and there’s really nothing much to do except for massages and a relaxing resort life. If I travel to other countries for shopping or sightseeing, I am constantly thinking of business and how I can possibly expand to the country I am visiting. But while relaxing at the beach or at a massage, I tend to allow myself to drift into emptiness and just clear my mind of any thoughts.

Everyone in business should read this book:
Work The System, by Sam Carpenter. This book teaches entrepreneurs the importance of creating systems and how to leverage on systems to improve productivity and create more time.

Shameless plug for your business:
If you are looking for a team building programme that your colleagues will enjoy and your bosses will be happy with, you have to consider our programmes at TravelClef! While our programmes are guaranteed fun and engaging, it is also equipped with many team building deliverables and organizational skills.

How can people connect with you?
My email is [email protected] and I am very active on Facebook as well!
https://www.facebook.com/benjamin.christian.kwan

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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Entrepreneurship

Before you enter a Startup or before you choose your founding team or new hires read, “Entering Startupland” by Jeff Bussgang

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Before you enter a Startup or before you choose your founding team or new hires read “Entering Startupland” by Jeff Bussgang.

Jeff knows how to spot and groom good culture, as the book session was held in Zestfinance a company he invested in and now, “The Best Workplaces for Women” and for “The Best Workplaces for Tech”, by Fortune.

These are the questions during the Book Launch.

How to know if a hire including the founder is Startup material?
Jeff says to watch for these qualities.

First, do the hires think like an owner?
Second, do the hires test the limits, to see how things can it be done better?
Are they problem solvers and are biased toward action?
Do they like managing uncertainty and being comfortable with uncertainty? And comfortable with rapid decision-making?
Are they comfortable with flexible enough to take in a series of undefined roles and task?

How do we know if we are simply too corporate to be startup?

Corporate mindsets more interested in going deep into a particular functional area? These corporate beings are more comfortable with clear and distinct lines of responsibility, control, and communication? They are more hesitant or unable to put in the extra effort because “it’s not my job”.

If you do still want to enter a startup despite the very small gains at the onset, Jeff offers a few key considerations on how to pick a right one.

He suggests you pick a city as each city has a different ecosystems stakeholders and funding sources and market strengths. You have to invest in the ecosystem and this is your due diligence. Understand it so you can find the best match when it arises.
Next, to pick a domain, research and solidify your understanding with every informational interview and discussion you begin. Then, pick a stage you are willing to enter at. They are usually 1)in the Jungle, 2) the Dirt Road or 3) the Highway. The Jungle has 1-50 staff and no clear path with distractions everywhere and very tough conditions. The Dirt Road gets clearer but is definitely bumpy and windy. Well the Highway speaks for itself, doesn’t it?

Finally Please – Pick a winner!

Ask people on the inside – the Venture Capitalists, the lawyers, the recruiters and evaluate the team quality like any venture capitalists would. Would you want to work for the team again and again? And is the startup working in a massive market? Is there a clear recurring business model?

After you have picked a winning team and product, how would you get in through the door?

You need to know that warm introductions have to be done. That’s the way to get their attention. Startups value relationships and people as they need social capital to grow. If you have little experience or seemingly irrelevant experience, go bearing a gift. Jeff shared a story of a young ambitious and bright candidate with no tech experience who went and did a thorough customer survey of the users of the startup she intended to work with. She came with point-of-view and presented her findings, and they found in her, what they needed at that stage. She became their Director of Growth. Go in with the philosophy of adding value-add you can get any job you want.

And as any true advisor would do, Jeff did not mince his words, when he reminded the audience that, “If you can’t get introduced you may not be resourceful enough to be in startup.”

Startupland is not a Traditional Career or Learning Cycles

Remember to see your career stage as a runs of 5 years, 8 or 10 – it is not a life long career. In Startup land consider each startup as a single career for you.

Douglas Merrill, founder of Zestfinance added from his hard-earned experience that retention is a challenge. Startup Leaders to keep your people, do help them with the quick learning cycles. Essentially from Jungle to Dirt road, the transition can be rapid and so each communication model that starts and exists, gets changed quickly. Every twelve months, the communication model will have no choice but to break down and you have to reinvent the communication model. Be ready as a founder and be ready as a member of the startup.

Another suggestion was to have no titles for first two years. So that everyone was hands-on and also able to move as one entity.

Effective Startupland Leaders paint a Vision of the Future yet unseen.

What I really enjoyed and resonated with as a coach and psychologist was how Douglas at the 10th hire thought very carefully what he was promising each of his new team member. He was reminded that startups die at their 10th and their 100th hires. He took some mindful down time and reflected. He then wrote a story for each person in his own team and literally wrote out what the company would look like and their individual part in it. In He writing each of the team members’ stories into his vision and giving each person this story, it was a powerful communication piece. He definitely increased the touch points and communication here is the effective startup’s leverage.

Douglas and Jeff both suggested transparency from the onset.

If you think like an owner and if you think of your founding team as problem solvers. Then getting transparent about financials with your team is probably a good idea. As a member of a startup, you should insist on knowing these things
Such skills and domain knowledge will be valuable. There is now historical evidence of people leaving startups and being a successful founder themselves because they were in the financial trenches in their initial startup. Think Paypal and Facebook Mafia.

What drives people to enter a startup?

The whole nature of work is changing. Many are ready to pay to learn. Daniel Pink’s book Drive showed how people are motivated by certain qualities like Mastery, Autonomy and Where your work fits into big picture. Startups do that naturally. There is a huge amount of passion and the quality of team today and as it grows then the quality of company changes.

The Progress principle is in place, why people love their startup jobs is not money rather are my contributions being valued? Do I see a path of progress and do I have autonomy over work and am I treated well?

Find out more about StartupLand on Amazon

And learn from Zestfinance

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