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.
Stay updated on the go with our mobile app.
Get latest insights with smoother, more personalized experience through TIA mobile app.
