‘Exit’ is an event when you turn your investment into cash, or sometimes a mixture of cash and stocks in another company. For entrepreneurs and investors, exit happens through merger & acquisition (M&A), initial public offering (IPO) or liquidation (‘closing shop’, negative exit, when you take back less than what you put in).
In the past 3 weeks, we have seen 2 exits in our Malaysian startup ecosystem.
1. SAYS, a startup founded by Khailee and Joel Neoh exited through a merger with one of Catcha Media Bhd’s subsidiary. The is valued at RM60 million, valuing SAYS at RM18 million or RM24 million, depending on how you want to calculate.
2. Yesterday itself, The Star announced that they acquired 90% of Ocision Sdn Bhd, founded byNg Say Joe, that owns iBilik.com, Propwall.com and Carsifu.com for RM13.5 million, valuing Ocision at RM15 million.
Around late 2011, Carlist.my, founded by Yew Jin and Michael Leow exited to Catcha Media Bhd, with Catcha acquiring 50% of Carlist for RM5 million, valuing them at RM 10 million. 3 exits in the past 2 years plus is not a lot but at least we are seeing some M&A activities and hopefully it picks up even more. Maybe I have left out some, do let me know in the comments if I did.
When a positive exit occurs, the immediate thing that comes to mind is that the entrepreneur and her investors made it rich. Looking at the bigger picture, their exits and the exit activities itself could potentially have a greater positive impact on the startup ecosystem and the economy, beyond just the entrepreneurs and investors adding dollars to their bank accounts.
1. The entrepreneurs and employees that exited, now become investors
Exits will add wealth to these entrepreneurs. They will have more financial capacity to take on risk and bet their money on new startups creating more funding opportunities in the ecosystem. More importantly, besides being an investor, these entrepreneurs will bring along their experience and knowledge in operating and scaling their businesses. Unlike bankers, corporate and finance people that pays too much attention to the numbers and financial projections, these entrepreneurs understand that the nature of startups is unpredictable and hence do not overemphasise on their financial projections, instead looking at the potential of the product in the longer term.
As for employees of the startups, they might get stock options in exchange for taking a pay cut and joining the startup during its early days, owning a small piece of the company. An exit will add wealth to them as well, and should the exit be of a significant amount, their small stake in the company could translate to something more substantial. Like the entrepreneur, they will have the financial capacity to recycle their new wealth through investing in other startups.
2. Increase in supply of expertise
Post-exit, employees will either stay in the acquirer’s or move on to another company or even starting out on their own. Should they leave, this will make available to the market more technical expertise. Their insights and experience from their previous startups can help other entities to grow. In addition, they could also function as mentors to aspiring entrepreneurs.
3. Increase in financial capital funding with more investors participating in the ecosystem
Investors invest when they know they can get their investment back plus profit in cash. This means if there are exit opportunities, investors will take the risk to invest and hoping their investments turn out to be the next SAYS. Otherwise, their investment is stuck and not able to convert to cash. Previously, exit opportunities are rare in the tech ecosystem in our region resulting in very low investor participation. With more success stories, more private capital will be available for startups to seek funding. Not only do these investors bring money to the table, they also bring along their expertise and extensive network for the startups to tap into. But of course, not all startups will turn out a success.
4. A source of inspiration for aspiring entrepreneurs
Successful exits are good stories to inspire people. It will inspire more and more people to explore entrepreneurship instead of the traditional and conservative path of employment. But one has to be aware that for every success, there are hundreds or even thousands of failures that are not reported.
5. Increase in M&A activities
Should Catcha Media and The Star capitalise on their acquisitions and creating substantial value post-acquisition, this will demonstrate to the market, especially towards other corporates that M&A activities of web and mobile startups is a strategic move that could add to their competitive advantage and ultimately contributing to their financials.
6. Accelerating innovation
Having more entrepreneurs creating new products, with more investors funding them, with more experienced mentors to guide them, innovation in the market will gradually increase, contributing to increasing wealth, employment and efficiency in the economy.
It’s hard to say whether is exits the one that will kick start the ecosystem and creating the virtuous cycle we can observe in Silicon Valley ecosystem. If there are no entrepreneurs, we wouldn’t have startups to be acquired. If there aren’t acquirers, there wouldn’t be any M&A activities. What is more important is that entrepreneurs shouldn’t be too obsessed with selling their companies. You are in it for building things, changing the world, and not just purely for the money. Just focus on building great products, awesome startup culture and a sustainable business model. Startups that have value and strategic advantage will eventually have acquirers knocking on their doors. As the saying goes- startups are bought, not sold.
Now go build your product and change the world.
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