I give a lot of talks at colleges and universities these days and every so often I have students coming up to me telling me how they want to start a business. When I ask them what they have in mind and it’s often tech related. It’s not difficult to see why. I mean just this week we had news about WhatsApp being bought out for $16 billion, before that Snapchat was offered $3 billion and who could forget Tumblr for $1.1 billion.
My current thoughts are that we’re yet to see many real Malaysian or Singaporean companies that came out of our local ecosystem that has had a huge exit (exit means you IPO or you sell the company so you can cash out though in this article I refer more to acquisitions). Yes there’s Jobstreet, but Jobstreet is a 16 year old company and is as much a brick and mortar job-matching business as it is a tech business. It also happens to do RM50 or RM60 million in annual net profit. It’s a big company.
So based on the 7 years I’ve been in the tech industry in SouthEast Asia, I’ve learned some things and I thought I share my thoughts. Now note that these are my thoughts… every internet entrepreneur you meet probably has a different point of view or different thoughts too. Anyway here goes:
1) There is a lot of seed funding in Malaysia and Singapore. But beyond that your funding options are limited.
Take a good look at the venture capitalists we have in Malaysia and Singapore. With the NRF, Singapore has quite a few more but they’re all largely seed funds. When I say seed I mean $5 million or $10 million funds. So a $10 million fund can probably make 20 $500,000 investments into 20 different startups. They can’t or won’t… make an investment of $5 million into your own startup even if they really love your startup. Because they’ll be putting all their eggs in one basket.
So if you’re a startup that is hoping to raise $500,000 to gain some traction then you’ll have plenty of options. But once your company passes the seed stage and hits the growth stage, you will probably need more money. That’s when you’ll find it more difficult to raise more money from Malaysia or Singapore. You need to start looking abroad. Whether in VCs abroad or IPOs abroad. Some entrepreneurs here have done super well with this… like Patrick Grove.
Why though? Why are VC funds in Malaysia and Singapore so small? A part of this is because of my next point.
2) Tech Startup Exits In Malaysia and Singapore are Small.
We haven’t had a really big exit. Sure there was Viki but as much as it was branded a Singaporean based company, it wasn’t a company that was bred out of the Singaporean ecosystem. Most their backers are Silicon Valley based VCs (who have the ability to put in tens of millions) and none of them (to my knowledge) are actually Malaysian or Singaporean VCs. It’s all part of the ecosystem right. If one VC had a big exit that would mean they had more money to reinvest into other startups.
So what exits do we have left?
We have the group buying sites that the foreign players like Groupon, Living Social and all came to buy everyone out. The group buying site in Singapore was bought out for a fairly decent amount. In Malaysia I hear the deal sizes weren’t particularly big at RM1.5 million or so plus an earn-out.
We have sites like Hungrygowhere in Singapore that were bought out for S$12 million and iBilik for RM15 million. Decent amounts but it’s not enough to arm the VCs with loads of money for their future investments. It’s also not enough to make the entrepreneurs behind these startups super rich so they can start angel investing heavily.
Think about it, say I have a company and I sell it for RM15 million. I don’t get all that RM15 million because most of the time I have partners and other investors. So maybe I end up getting RM6 million of that. It’s $2 million, decent amount of money but not super rich. On top of that what happens is you’re bonded to work with the company that acquires you for the next number of years.
We build good startups, but they don’t get acquired for a lot and we don’t end up owning a lot of them by the time they exit. But why don’t we? This brings me to my next point.
3) VCs in Malaysia and Singapore are less generous with valuations
I spent some time in Silicon Valley two years ago. We were pursuing a pet project called Imotiv. It was a mobile app which started a few months ago, with 50,000 users and no revenue and no plans to have any revenue. After talking to some VCs in Silicon Valley we ended up with a term sheet on our table valuing Imotiv at $4 million. We didn’t do the deal in the end and Imotiv was put in a back-burner because we had another project that was gaining much better traction. Still…. a few month old mobile app with a small team and no revenue had a valuation of $4 million.
That unfortunately is rarely the case in Malaysia and Singapore.
Malaysian and Singaporean VCs tend to look at tech companies in the old school way. They look at profit and revenue mulitples. And when they look at profit multiples they don’t look at 20 times earnings (even if tech companies listed on the Malaysian stock exchange are trading above that). Even if you’re at a pre-IPO level, they look at trying to buy into your company at 10 times earnings in the hope that they can flip it or so at 20 times earnings. It’s business, they want to make money… but if you’re not desperate for money, why would you do a deal like that?
It’s almost as if VCs here don’t invest in you purely because they believe in you or your startup or what your startup will be worth in future. They try to invest in you at a discount of what you are worth. Though the good news is that not ALL VCs in Malaysia and Singapore are like that. I’ve met good ones that are willing to invest in the entrepreneur and the future value of the company. Not the current.
Another point to note also though is that at the seed funding stage though when profit and revenues aren’t significant yet though… you might be able to get away with being valued on revenues or profit multiples.
4) Exits often come with strings attached.
Some time back it was in the news that SPH had acquired SGCarMart for $48 million. I was like WOW… finally… a big exit from a startup bred out of our local ecosystem. Then I happened to be in Singapore one weekend talking to some VCs and industry insiders. I was talking about how I’m really impressed at the deal. The insiders said “Nah… it’s not $48 million. It’s UP TO $48 million… but in order to get that they have to achieve certain miletones… like profit guarantees or revenue guarantees. The deal size is much smaller. I was disappointed… but hey even if the base price is half (and that I would consider extreme)… it’s still a lot of money and a really good exit.
5) Internet companies in Malaysia and Singapore don’t really make a lot of money.
There are some that do make good money like MOL, Jobstreet, MyEG (if you’d count that) and a few more. The rest of the tech startups here even the well funded ones in the ecommerce space don’t make a lot of money (yet at least). On the flip side I have friends like Bryan Loo who came out and started a purely brick and mortar business Chatime in Malaysia and he makes tons of money.
I guess my point of this article is to share my thoughts. I haven’t taken the effort to link sources for numbers quoted here because well I don’t intend for this to be a news article. It’s just my thoughts on my personal blog. You can however Google and do a fact check and if you find something that I got wrong then correct me. Some of the other stuff I’ve shared are from what industry insiders have shared but take it with a pinch of salt too.
My partings thoughts is that the startup scene in Malaysia and Singapore is a place where a generation of young people have made their initial wealth. It has certainly been an industry where I have personally made everything I have today. So I’m not saying that it’s something you should avoid like a plague and go work in a bank instead. I’m just trying to say that in my experience, this is what it’s really like right now but I’m hoping that things will change. That our exits will get larger and our ecosystem be able to support great new tech startups out of Malaysia and Singapore.
Timothy Tiah – Co-Founder of Colony, Kuala Lumpur Co-Working Space