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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on April 13, 2020 - April 19, 2020

The harsh economic conditions brought about by the Covid-19 pandemic could drive down the valuations of start-ups in the foreseeable future. In this environment, angel investors are expected to be more selective when looking at start-ups to invest in, observes Huang Shao-Ning, co-founder of AngelCentral, a Singapore-based investment community for angel investors in Southeast Asia. 

In these challenging times, only quality start-ups will survive and valuations may return to more reasonable levels, she says. “The fact that the market did not accept WeWork’s initial public offering was a good wake-up call to start-ups [in terms of their valuations]. Now with the Covid-19 outbreak, I am already seeing signs that investors are being far more careful when valuing start-ups. 

“The reversion to basics [focusing on profitability] is a good thing for our ecosystem as it will breed a new generation of more sustainable tech businesses when they rise from the ashes of an [economic] recession caused by Covid-19,” says Huang, who co-founded JobsCentral, one of the biggest Singapore-based online job portals, in 2000. It was sold to US-based job portal CareerBuilder in 2012.

According to an analyst’s note published by data provider PitchBook in April, venture capital valuations (venture capital funds invested in start-ups) plateaued and dipped in late 2019. This trend is likely to continue in the current environment.

Huang observes that valuations have been trending upwards in recent years to expensive and unrealistic levels, making it expensive for angel investors. But even if the potentially lower valuations are good news for investors, they will be cautious as the outlook remains unclear.

Some investors, like Huang, are now focusing on helping their portfolio companies to get through these tough times while those who are looking to invest will seek out businesses with strong foundations and more realistic valuations. “Experienced angel investors will take this time to really look at how founders [manage their businesses] during this period. If the start-up does not have a strong foundation, then it is definitely not safe to invest in,” she says.

Huang and her husband have a portfolio of 28 companies in which they have invested as angels. Since the outbreak of Covid-19, she has been monitoring the companies and offering advice.

“If our portfolio companies require a bridging loan, and they have shown good traction since our investment, we will support them. As for new investments, we are still planning to invest in three or four more start-ups this year. But we are in no hurry and we want to pick the best in terms of talent, risk and reward,” says Huang.

US-based venture capital firm Sequoia Capital recently published a letter to the founders of start-ups on its blog, suggesting that they re-examine their cash runway to ensure that they have enough to withstand poor earnings for a few quarters and prepare for a softer private financing landscape over the next two years, among others.

Similarly, Huang advises angel investors to help their portfolio companies solve any potential cash flow issues. “Is there a problem because of overspending? Are the start-up founders being practical about solutions to go through this period of time? For example, some of my portfolio company founders cut their own salaries but felt bad about cutting the salaries of their employees. But what if the company gets into trouble [and has to lay off people]? Sometimes, it takes these kinds of conversations to help founders make practical decisions,” she says.

“Typically, angels are older, so they can provide that maturity and perspective to help the founders go through this time. But if the company is already foundationally weak, do not be too soft-hearted and put good money in it.”

Angel investors can remind their portfolio companies to look at their finances and be realistic about their spending and earnings projections. “What can they prioritise or remove to extend their runways? Are there any non-performing members who are dragging things down?” says Huang.

Before they make new deals or commitments, they should also examine their portfolio strategy to make sure they have enough cash flow as angel investments, being an illiquid asset class, generally have to be held for five to seven years. 

For instance, Huang has 30% of her portfolio allocated to bonds and another 30% to equities as well as other assets that can generate returns. The angel investing portfolio should be just as diverse, she points out.

“Using our portfolio companies as an example, while there are a few who really have to start implementing extreme austerity plans, there are quite a few in the education technology, facilities management and medical media space [like health super apps] that are doing really well despite the outbreak of Covid-19,” says Huang.

Are there some industries that she thinks will do well in this environment? She says this can be difficult to predict.

“It really depends on whether the founder is resilient enough to find opportunities. That is not something we can foretell. One of our portfolio companies is a logistics player that does last-mile delivery for e-commerce businesses in Indonesia. The team was very worried because things were a mess in Jakarta [as non-essential services were not allowed to operate during a lockdown]. But the founder quickly grabbed the opportunity to deliver groceries,” says Huang.

A natural transition to angel investing

Huang is no stranger to running a business or raising funds during a crisis. She and her husband started JobsCentral during the dotcom bust in 2000. They were fresh graduates who had the idea of moving classified ads for jobs online. But they struggled to find investors and had to build the company with no external funding.

They hustled their way through and succeeded in turning JobsCentral into one of Singapore’s largest job portals. It was eventually acquired in 2012.

After leaving JobsCentral in 2014, Huang and her husband started mentoring start-ups by sharing their experience as founders. They also shared their angel investing experience with friends after they started investing in start-ups. Over the years, more and more start-ups and angel investors have approached them for advice.

Eventually, they decided to formalise their efforts by starting AngelCentral in 2018 after observing a demand for such a platform. Angel investors in the region can become members by paying a fee. This gives them access to angel education workshops, syndicated investing deals and curated pitching sessions.

Huang and her husband came up with two key solutions to meet the needs of the members. One was to lower the minimum investment for angel investors who wanted to join the fundraising rounds.

Founders typically prefer to raise bigger amounts from smaller pools of investors as it minimises administrative work. However, few angel investors are comfortable writing cheques for S$50,000 to S$100,000, says Huang.

AngelCentral addressed this issue by supporting syndication rounds that offered “bite-sized” investment opportunities to angels. If a start-up was looking to raise S$300,000 to S$400,000, an angel investor could become the syndicate lead and AngelCentral would provide syndication support services by setting up the investment vehicle, conducting due diligence and handling the back-end administrative work. The lead investor would represent the others in interacting with the start-up.

The minimum size of a syndicated deal is S$14,000 to S$20,000. This is lower than investing directly in a start-up, which could require a minimum investment of S$50,000 to S$100,000, according to AngelCentral’s website. Huang recently completed a syndicate round with WORQ, a co-working space in Malaysia. 

AngelCentral charges a service fee for syndication deals. It has completed 12 syndication rounds since 2018, with almost S$7.5 million invested, according to Huang. 

One of the benefits of participating in a syndicated deal is the standardised terms for investors, who do not have to spend time structuring the deal. The lead investor also ensures that investors’ rights are protected and that it is possible for the investors to sell their shares to others in the syndicate.

The other solution that Huang and her husband came up with was addressing the need for an intermediary between angel investors and start-up founders. As some investors — who had more traditional business backgrounds — usually found start-up valuations unrealistic, the duo took it upon themselves to explain things.

“The angels would find a new start-up’s asking valuation of S$4 million ridiculous because of the difference in mindset and timing. It was a huge mismatch in terms of expectations, so we had to translate that to both sides,” she says.

That is why AngelCentral runs workshops for investors, to provide them with information on key trends and recommended practices in angel investing and how to work with start-up founders. “We do deep dive sessions as well. The angels have expertise in different areas. For instance, I am comfortable with human resources, software as a service, e-commerce and classifieds,” says Huang. 

“But if you ask me about financial technology (fintech) and hardware, I am less familiar with these. I have to diversify my portfolio. I can learn about these things in the deep dive sessions, where we get start-up founders who have been in the space for a few years or venture capitalists (VCs) in that particular space to come and share their experience.”

According to her, AngelCentral received 700 applications from start-ups last year and shortlisted 110. Some of these presented their business ideas to its members at the monthly pitching sessions while others were listed on its website.

“We have about 140 members. About 65 to 70 of them actually cut cheques to invest last year. That is a high activity ratio compared with most angel clubs,” says Huang. 

The majority of the members are Singapore residents, although some are from Malaysia and other countries. For instance, 500 Startups managing partner Khailee Ng and Endeavour Ventures managing partner Sam Gibb are listed as members on AngelCentral’s website.

“I once joked that we had an ‘angel kampung’. Most of our angels are in their mid-forties and early sixties. When they hear interesting pitches, you can see the excitement in their eyes. They will tell me that a particular start-up is very interesting and that they would like to help by investing in it or introducing it to others,” says Huang. 

“This led me to do a panel discussion last year on ‘Angel investing as a second career’. Many of us are past our half time, so it is very important for us to be able to contribute. I think they see the ability to do that via helping young start-ups.”

Her advice to new angel investors is to only make their first investment after seeing 10 to 15 companies and having face-to-face sessions with the founders. “One veteran VC told me he had seen a lot of angels ‘retire’ due to ‘indigestion’ [due to investment losses]. It goes back to a lack of methodology and structure to support investments in this space,” says Huang. 

“In the excitement, the angels forgot that these are highly illiquid investments and [the start-ups are in] the extremely early stages. So, we recommend that our members make bite-sized investments, take a portfolio approach, diversify into different verticals and invest over a period of five to seven years.”

Going by a checklist

Huang and her husband do not invest based on verticals. Instead, they use a checklist of criteria when evaluating companies.

For one, they do not invest in start-ups that are involved in gambling, soft porn or other sin industries. They like committed, hardworking and coachable founders with the right value system. This is difficult to assess, so they usually meet the founders multiple times, says Huang. 

The founding team should have complementary skill sets and good chemistry. “When I am talking to founders, the first thing I look at is whether they [have the ability to sell their products and services effectively]. If they cannot even sell to customers, then they cannot talk to investors or sell their vision and long-term goals to employees. That is problematic,” she says.

The start-ups need to be in a vertical with scalable growth opportunities and have a reasonable market size, says Huang. “This means they are usually in the technology space. The first geographical location [the start-ups] operate in must have a market size of at least S$30 million to S$40 million. Our logic is that if they could hit just 5% to 10% market share, they would have a market value of S$1 million to S$2 million. If they succeed in doing this, then it is easier for them to get enough funding to expand to the next market.”

She also likes start-ups that have a positive impact on society. “It is not exactly an impact-driven investment, but I would like to see the companies do something good for society,” she says. 

For example, Huang has invested in Homage, an online platform that provides on-demand professional caregiving solutions to the elderly. “They are able to support people through the insurance scheme. So, it is not just for rich people,” she says.

She has also invested in Singapore-based Nimbus, a technology platform that provides on-demand cleaning services. “The founder is an Oxford University graduate. I am sure he could have found a lot of better jobs, but he really wanted to improve the lives of cleaners through technology,” she says. 

Huang likes the founder as well. Once, when she was meeting him for coffee, he emerged all sweaty from his high-end car. “He said he had to go and wash his customer’s toilet because his cleaner could not make it at the last minute,” she recalls.

In January, Huang added medical device start-up KroniKare to her portfolio. It had invented an artificial intelligence-driven solution for chronic wound detection, using sensors attached to the back of a smartphone. Usually, nurses check for wound healing the manual way, such as poking a needle through the skin to examine if the wound has healed beneath the skin’s outer layer, Huang explains.

“The founder explained to me how painful this process could be. I had not realised that this procedure was so manual,” she says. 

Yet wound detection and care is essential for diabetics and ageing patients, whose wounds do not heal quickly.

“I met the founders in 2016. Last November, their prototype was released and they managed to get it certified by the Health Sciences Authority of Singapore. After they received the certification, investing in them was an easy decision. The valuation was high, but they are doing a good job. They have been very capital efficient in the past three years to get to where they are,” says Huang.

So far, she and her husband have seen only two exits from their portfolio while two of the companies they invested in have failed. According to Huang, their internal rate of return on paper is 58% since they became full-time angel investors in 2015.

The couple have a philosophy of not exiting an investment unless the founder wants to exit as well. “This goes back to our goal of investing to support founders. This is also [driven by their personal experience] because when we were founders, no investor believed in us. So, we want to help start-up founders,” says Huang.

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