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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.

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Benedict Heng, Founder of Mr. Farmer

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Benedict Heng is bringing back the ‘kampong’ days of having the Ho Liao (good ingredients) for Ho Jiak (good tasting) food.

What’s your story?
I’m Ben from Mr. Farmer. Mr. Farmer is an online grocer dedicated to supplying the freshest produce to our customers. We believe in sustainable and ethical farming. Since a young age, I have always been an avid food lover (especially meats), developing a strong interest in all things delicious. That is why I ventured into the F&B industry, working as a junior cook for 3 years.

Midway through my career, I made a move to the finance industry to pursue monetary rewards. I dove into high-risk investments and I made lots of money from these investments. However, the good fortune did not last long and all these came crashing down when I suffered a tremendous loss. This coincided with the time that I had just started my own family and it was a huge blow to me both materially and mentally. It was this crash that made me realize that this life wasn’t for me. I went on a hiatus and eventually, it was only through the strong support from my family that I managed to tide over this tough episode.

I went back to help the family business and this was how Mr Farmer came about. My family has been in the food industry for many decades and one thing they noticed from years of experience is that sustainable farming practices are not as developed as in Europe. This is why through Mr Farmer, we hope that we can provide the best quality products to families out there who want the best ingredients for their loved ones.

What excites you most about your industry?
Delicious and wholesome food excites me. I believe food is a critical component of life and it brings people together. The opportunity to serve the community with fresh produce for a healthy life, that brings me joy.

I feel that there is still so much more we can do to improve the quality of food and bring it to the masses. One of the key components of ensuring greater quality of food is to support ethical and sustainable farming. Due to commercialization and urbanization, most farming practices these days are no longer the way they were in the old “kampong” times. Shortcuts are taken, standards are compromised, all in the name of profit. At Mr. Farmer, profit is important too but we want to focus on the concept of One Welfare – sustainable farming directly impacts our health. Our vision is to bring back the ‘kampong’ days of having the Ho Liao (good ingredients) for Ho Jiak (good tasting) food.

What’s your connection to Asia?
I was born and raised in Singapore. I call Singapore my home as it’s where my family and close friends are. I also travel frequently to Malaysia and APAC for work.

Favourite city in Asia for business and why?
It’s definitely Singapore. There is just so much this tiny city can offer! Singapore has been globally recognized for its top-notch business environment providing its residents with developed infrastructure, political stability and excellent connectivity. These factors have given us an outstanding support system for businesses to strive.

What’s the best piece of advice you ever received?
Surround yourself with people that inspire you, challenge you to rise higher, make you better and, keep them in your life.

Who inspires you?
I draw inspiration from my uncle, who is the head of both the family and business. He takes care of our family matters at home and manages hundreds of employees at work. Handling both the family and business side of things can be tricky, but he has shown me that success can be sustainable and done with a conscience. His guiding philosophy of handling business and family is simply, to have a big heart.

What have you just learnt recently that blew you away?
Even just one day of separation from the day the meat is slaughtered, makes a world of difference to its flavour.

If you had your time again, what would you do differently?
I have come to learn that awareness is the beginning of everything. If I had my time again, I would have probably spent more time figuring out who I truly am and with that self-awareness, begun to lead my life with more purpose and meaning.

How do you unwind?
I like to spend my free time sipping white coffee at my favourite coffee place. I enjoy taking in the surrounding sights and letting my mind wander freely. It allows me to unwind and gain clarity at the same time. It also helps me organize my thoughts to prepare for the week ahead.

Favourite Asian destination for relaxation? Why?
It would be Bangkok as the people there are genuinely friendly and hospitable. They say people are what defines the city and I couldn’t agree more with this. I also enjoy the ‘laid back’ vibe of Bangkok. Not to mention Bangkok has all the good food and awesome shopping choices too!

Everyone in business should read this book:
“Spin selling” by Neil Reckham. It’s an amazing book that teaches you a process designed to help you successfully sell your products and services to business buyers.

Shameless plug for your business:
We at Mr. Farmer have the best tasting meats in Singapore, do a blind test and you will know why it’s Michelin chefs’ preferred choice. Not only are we very confident about the taste, we are also proud to say that all our products are chemical, hormone and antibiotic free. We also focus a lot on supporting ethical and sustainable farming practices believing in the ‘One Welfare’ concept. Do check us out if you enjoy good quality food like us!

How can people connect with you?
[email protected]

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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Zac Chua, Founder & CEO of The Kettle Gourmet

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Zac Chua’s popcorn business validated itself straight away and fast tracked him to the startup world. Zac now employs 11 people and shifts 500 bags of popcorn daily.

What’s your story?
It’s a crazy one. It was an accidental startup. If you think about it, no university graduate would ever dream of becoming a popcorn seller. We crashed our first tech event to validate our idea and it took off from there. I bought a logo for $7 from a designers marketplace, printed some cheap name cards, and built a 1 page landing page. Sales started pouring in and eventually, we were serving B2B clients (corporate pantries) and we have never looked back. Today we move about 500 bags daily, we have 11 employees and we are growing. Talk about a validation that worked in our favour.

What excites you most about your industry?
It’s food! Everybody loves food! In Singapore the F&B scene is brutally competitive and it spurs me on to fight and compete for market share and to prove to myself that I can do it. It keeps me going and I won’t stop until we become the market leader.

What’s your connection to Asia?
I was born in Singapore, and have traveled to most of Southeast Asia.

Favourite city in Asia for business and why?
Singapore! Even though Singapore has a high cost of living, the Government is actually very supportive of startups. They provide grants for us to tap into, and the technological infrastructure makes it possible for us to compete on a global scale. I believe if you can succeed in your business in Singapore, you can succeed in most of Southeast Asia.

What’s the best piece of advice you ever received?
You only need to be right once, and the rest is history.

Who inspires you?
My father, who was a VC. In fact he was the one who gave me the best piece of advice which I shared above. Having one successful exit, he showed me that it’s okay to fail a million times – all it takes is just one time for you to win in business and in life.

What have you just learnt recently that blew you away?
The power of compounding.

  • Mary and John are the same age.
  • Mary saves $2k annually from the age of 19-25 – so she puts $14k into her portfolio
  • John saves $2k annually from the age of 26-65 – so he puts $80k into his portfolio, but 7 years after Mary.
  • If both are able to generate 10% per annum, who would have more at age 65?
  • John of course! But how much more?
  • Mary will have $944,641 whilst John will have $973,704
  • Think about it! Mary puts in only $14k but John delays for 7 years and puts in $80k.

CRAZY RIGHT!?!?

If you had your time again, what would you do differently?
Nothing, my mistakes taught me how to become a better me. But if I really must choose, I’d say take more time to find the right business partner.

How do you unwind?
Poker, Mahjong and Dota 2.

Favourite Asian destination for relaxation? Why?
Vietnam! Things are cheap, people are warm and friendly, and their coffee fills up my life. I would love to retire there if possible.

Everyone in business should read this book:
The richest man in Babylon

Shameless plug for your business:
We don’t need a plug. Just try our competitors and you’ll understand why!

How can people connect with you?
Facebook: https://www.facebook.com/chuazongyou
LinkedIn: https://www.linkedin.com/in/zacchua

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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