Southeast Asia has never been a more exciting place to do a tech startup. Years ago many tech entrepreneurs fretted about the lack of funding, low valuations and lack of VCs.

Today we have more VCs than ever before, more money being raised and bigger valuations than we’ve ever seen in this region. We hear about investment bankers, lawyers or consultants leaving their jobs in Singapore and joining startups in hope that they’ll become millionaires from the stock options. I’m happy that tech is getting the recognition it very much deserves and how we’re beginning to feel like we’re in a mini Silicon Valley but it’s worrying when you realize what’s missing:

1) The number of exits

In order for a sustainable tech ecosystem, our VCs need to make money for their investors. And the only way they can do that is if they have exits. Not just small exits too. It’s not good enough if a VC exits at 2X their investment when the quantum is small because that probably won’t be enough to make up for the other 8 or 9 failed investments. They need BIG exits (and companies like Viki don’t count because they’re not companies that were born out of the ecosystem here. Their investors are mostly from the US. Has anyone heard of Reid Hoffman investing in any other Singapore startups after Viki)?

Tech In Asia compiled a good list of exits SEA has had since 2008. You can count the number of sizeable exits there. We don’t have many and when you take into account the meaningful exits that’s even less. Which brings me to my next point. What is a meaningful exit?

2) VCs need REAL exits. Not paper exits.

A real exit is when an acquirer buys and pays the price in CASH or Listed company stock. The kind of exits we often get are like this:

You sell your company for a small amount of cash and the rest paid in stock from the acquirer’s private company.

We see this all the time. They normally look good in the news too. You see headlines like “Startup A gets acquired by Startup B for $20 million in cash and stock”. The local tech community celebrates that we have yet another successful company out of the ecosystem and we have new tech millionaires but the insiders know better.

The insiders know that $2 million was paid in cash. The rest of it was paid in stock in the acquirer’s private company. The stock in the acquirer’s private company is useless to a VC until they can EXIT in the form of an IPO or a trade sale. It is illiquid. None of that $18 million can be cashed out and put into another promising startup in the ecosystem.

What makes matters worse is that share swaps like that tend to happen on a very inflated valuation because it’s just an agreement between two parties on what both their companies are worth collectively. So now the other players in the industry are going to their VCs and saying “Hey… this competitor of ours got acquired at this valuation that would make it 10X revenue. So that’s my valuation now.”

3) The rise of zombie companies.

I first heard about the term “zombie companies” from this Techcrunch article. It’s a very interesting read.

What the article basically says is (and I quote)

VCs typically raise new funds every 2-4 years. However, it historically takes 5-12 years to exit (liquidate) an investment. To communicate the success of the fund to potential investors when raising money, VCs show that their portfolio companies’ valuations have continued to rise, which is great — if the numbers aren’t artificially inflated.

If a business is doing poorly, the logical move is to stop throwing money at it and shut it down. If a VC firm does this, it’s legally obligated to report it as a loss to limited partners when raising the next round of funds.

But if the VC chooses to keep the company going, the zombie rises.

By keeping the company artificially alive, the VC can tell limited partners that the valuation of the business has stayed constant or is even going up. It certainly doesn’t want to show that the company is doing worse than when the investment was made. Therefore, VCs sometimes go to great lengths to keep valuations artificially high.

This results in zombie companies on VC life support. The company receives injection after injection of capital, even though it’s not hitting its numbers, all because the VC is unwilling to write off the investment.

I’ve seen this happen a lot even in SEA. I know of a startup that raised a round at say a $5 mil valuation. One year later the startup fell apart. Some of its initial founders had given up and left, the startup had cashflow issues and their revenues had dropped from the year before.

One thing they did have though was an acquisition offer. The acquirer wanted to buy them but after their own due diligence was only willing to pay $3 million. Makes sense because the company now was worth less than a year before. It had less money, less revenue and burning even more money.

The VC who invested in them though didn’t want to take the deal because then they would have to report a loss in their portfolio. So what did the VC do? They ploughed in more money into the company at an even higher valuation.

They used good money to chase bad money. It’s a company that should be shut down but VCs incentive schemes like in the Techcrunch article was to keep the startup alive because as long as it was alive, it would still hold that paper value on its portfolio. At the very minimum it would retain its value instead of showing a negative value. In fact in this case because they put in more money at a higher valuation their portfolio value went up. One day I’m sure they’ll report to their investors that their investments have been very successful and their portfolio value is now 6-8 times their initial capital. They feel good and the investors feel good.

When does the party stop?

Eventually VCs will have the close their funds. Whether it’s 5 years, 8 years or more it comes a time when they have to liquidate their investments and return cash to their investors. When that happens they’re going to realize that a number of their portfolio companies can’t be sold at the price they valued it at. Worse… they can’t be sold at all.

When that happens at the end of the fund we’ll see huge write-offs. Investors get burnt and not only is there no profits to put back into other promising startups in the ecosystem but investors just walk away from tech entirely.

So we’re in a bubble? When is it going to burst?

Yes I think we are in a bubble but when it’ll burst is a question I can’t answer. In Silicon Valley, billionaires like Mark Cuban and Chris Sacca have been predicting a tech bubble crash since the beginning of this year.

I think the exact timing is really hard to predict because there are too many variables in place. It depends on when a significant number of VCs have to close their funds (which I understand is still quite a way to go). Many things could happen in between that would prolong the bubble though. The Singapore government could put in more money to fund startups. There could be more investors from overseas chasing the SEA dream putting more money in.

Or who knows… with some luck.. maybe we’ll start seeing some huge exits and some VCs in SEA making BIG money and putting it back into the ecosystem.

Our ecosystem’s cycle for now is not complete. Who knows what the future has in store for us?

In the past few years, we’re seeing a huge boom in fund-raising for startups in South-East Asia. Startups are raising money at valuations higher than ever before having people wonder if we’re in a bubble.

Personally I’ve never raised money for Netccentric or Nuffnang before our IPO this year. Fund-raising can be a distraction to the main business because it takes a lot of effort and we never really had the fate or the luck to meet the investors that we think would work well with us. So the Netccentric you see today before IPO was the result of our SGD65,800 startup capital that we had from the beginning. As such our DNA was to make sure our business units were all profitable and able to contribute to a stream of profits that we could use to reinvest.

That’s a good and a bad thing. The good thing is that post IPO, Ming and I still own a substantial stake in the listed entity. We own approximately 36% each of Netccentric Limited.

The bad thing is perhaps if we had raised money earlier we could have scaled quicker.

In any case this year we went for an IPO and it was the first time we properly went into fund-raising. I came out of this experience with a lot of insights about the process and learning from the mistakes that I had been making in the past. Some really newbie ones.

Here are the most important things I’ve learned.

1) Don’t over-introduce your company in the introduction of your presentation.

This is a mistake I’ve seen a lot of startups make and is a mistake I used to make myself. You only get one chance to make a good first impression. Make a bad one and the investor is tuned out for the rest of the presentation.

I’ve seen presentations that start with what the company does and then on to the capital structure, the founders, the team, the use of proceeds and then the financials.

Why is that wrong? Because investors don’t really care about your company beyond a simple answer to “What does it do?”.

What do investors care about? If you answered “Considering they are taking the time to listen to my pitch I’m assuming, my company?”.Well then you’re wrong.

Investors don’t care about your company unless you’re an AirBnB or a Snapchat. They care about HOW YOU ARE GOING TO MAKE THEM MONEY. Focus as much of your presentations as possible to how much money you’re going to make them.

So the way I would start a presentation now is first with a VERY brief introduction. Then jump into how you’re going to make them money. Your traction, your growth plans, how much money you will make when you’re there, what your comparable are and how much you can be acquired for or IPO for.

After you’ve told them how you’re going to make them money, THEN you can go into the details of your company. The capital structure, the team etc etc.

2) Use comparables to value your company

In this potentially bubbly market, investors are getting more and more cautious when it comes to valuations. Comparables are your friends. You need to find what your peers in your industry are trading at.

I imagine Patrick Grove of Catcha does a really good job at this. He started a car classifieds website for SouthEast Asia. Then he goes to Australian investors and say

“You know Carsales.com.au? The billion dollar company? Well we’re like Carsales but for SouthEast Asia and SouthEast Asia collectively is a market with a much bigger population. So this is what we think we’re going to be worth and this is why we think we’re worth this now.”.

Pick a good startup idea where investors are pouring money into and you’ll be able to command higher valuations. All the taxi app companies in the world for (whether in SEA, China or India) trade as such high valuations because their comparable is Uber.

So they go to investors and say “We are Uber but for China” or “We are Uber but for India” and when investors compare your startup to Uber which is trading at a really high valuation they’re less likely to be sticky on your valuations.

3)) Line up your cornerstone investors as early as you can (Part 1): Start with the low hanging fruit

Imagine you’re an investor. Two similar companies come to you to pitch.

The first company tells you they’re raising $10 million but they’re still pitching and they haven’t confirmed their investors yet.

The second company tells you that they’re raising $10 million and about 80% of the allocation has been taken up by a number of existing cornerstone investors. There’s only $2 million left and it’s first come first serve.

Which company would you pounce on first? The second right? It’s mob mentality. Everyone wants to go for the thing everybody else wants. So the sooner you can lock down your cornerstone investors the easier it is to lock down the rest of your raise.

Don’t be shy to ask friends, family or anyone who knows you and is more likely to trust you and invest in your startup.

My uncle is a fairly prominent businessman in Malaysia. For the past 7 years of running Netccentric I never asked him for any favors and never wanted to. One day over lunch he asked me what I needed to grow my company. I answered money and he then asked why I have never asked him to invest in my company.

My answer was that I didn’t like to ask family or friends for favors and his reply was “In business you have no time and place for pride. If you need something to scale you have to explore every single option.”

So for Netccentric’s IPO he became one of our cornerstone investors.

4) Line up as many cornerstone investors as you can (Part 2): Now to the smart money.

Once you line up the investors that you know personally and will trust you, your deal automatically becomes more attractive. The next step then is to line up the smart money. Other influential people or funds.

In our case we managed to get Kevin Tsai who is the President of Want Want Media Group and comes from one of the richest families in Taiwan, Tan Sri Pang Tee Chew of Mamee Double-Decker and KSK (The group that was behind Kurnia Insurance).

People like to follow the smart money and when you have these investors on board it’s less likely that people are going to have confidence issues with you.

5) Times of exponential growth is the time to raise money, not sit still.

Most startups don’t have exponential growth forever. Sometimes you get exponential growth and then you plateau for a bit, consolidate your position then grow again.

The other mistake we often make is that when things are going really well you think “I don’t want to raise money now. I’m growing so well”.

But when your growth takes a temporarily breather you realize you need more money to supercharge that growth again and by then it’s too late. Investors want to invest in growth and not when you’re plateauing and they don’t necessarily want to wait another year for you to get your ducks in a row and hit hyper growth again.

These are the 5 lessons I’ve learned in the past 12 months. Fundraising can be a time consuming process that distracts you from your business. So if you can, get it done as soon as you can with as little mistakes as possible. Once you raise money the pressure is on to deliver which is what I’m really focused on now. To deliver long term shareholder value to our investors.

These are just my few cents. Hope you guys find it helpful.