9 Reasons to be Super-Bullish on Fastly

Fastly helps internet-enabled enterprise to deliver faster, more powerful sites and applications on secure, programmable edge cloud platform.

Fastly Investment Research Summary

  • Dozen of Mega-trends are enabling next generation of internet usage behaviour and have more than enough Edge Compute+CDN’s Total Addressable Market (TAM) of approximately $72 billion on the back of approximately $4 billion of revenue collectively captured by 3 CDN leaders – Akamai, Cloudflare & Fastly.
  • Make no mistake, both CDN and edge computing is a commodity business. Let’s repeat, CDN and edge computing is a commodity and will still be a commodity down the road while all CDN provider’s USP will be diminished in the long run. This indicates that no one clear player in the market will have a sustainable moat. Fastly’s only economic moat is about building up switching costs for the clients. Fastly’s customer acquisition strategy is more sustainable due to the nature of high switching cost.
  • Edge Computing is the tech buzzword now like how “Cloud Computing” is a buzzword in 2010. Edge Computing is definitely not a new technology but it’s buzzing due to driven demand of such need. It is also being buzzed due to the rise of IoT and 5G. CDN providers and public cloud vendors are also buzzing it now to capture the enterprise customers’ attention.
  • 7 other risks to be priced-in which might derail the investment thesis while complementing 2 wild cards or opportunities.
  • Valuation is suggesting a 64% upside over the next 24-month period.

Weak USP <=> Commodity offering

Both edge computing and CDN offerings are currently offered by Amazon’s Lambda@Edge, Cloudflare’s Workers, Akamai’s EdgeWorkers, Microsoft’s Azure Edge Zones, IBM’s IBM Edge Application Manager, Limelight’s Edge Compute……. (and the list goes on…). Just to summarize, ALL public cloud providers and ALL CDN providers had already provided or soon to provide edge computing services.

Compute@Edge is not unique to Fastly and any unique features in Compute@Edge would definitely not be unique for long until competitors catch up.

Fastly’s ONLY Moat: Dive-in with in-depth switching cost within the industry vertical

This chart was extracted from Cloudflare’s Investor Day presentation  on 12 Feb 2021.

This chart was extracted from https://w3techs.com/technologies/details/cn-fastly on 25 February 2021.

Combining both charts, Fastly’s share of the Internet is more than Akamai and almost the same as Amazon CloudFront but nowhere near to Cloudflare. If you compare the revenue per share of the Internet, Cloudflare obviously has huge upsides to charge more to capitalize further. Akamai’s revenue is approximately 10 times more than Fastly but approximately 50% lesser in share of the internet which either Akamai charging 20 times more than it should or Fastly is underpricing which boths scenarios also indicate huge upsides for Fastly to get more revenue from re-pricing or more enterprise customers migrate away for cost-saving. W3tech is showing a very promising territory that Cloudflare is getting into which is mass-market approach and rising in rank in terms of number of high-traffic sites.

I hope this analogy would make sense to you: Would you like to land 5 big clients within the same vertical which own 100 subsidiaries each or land 10000 small clients across 50 different verticals with only 1-2 subsidiaries each? That’s how I look at Fastly versus the rest of the CDN providers or Edge Cloud providers. Go Niche. Go Deeply Integrated. Go Specific. Then cross verticals.

Across many Fastly’s content and earning calls, Fastly has always been saying “Built by developers, to empower developers”, “Giving back the control to the hands of developers”, “We support our customer’s needs and customer’s needs is our core priority”. Fastly’s customers also repeatedly champion for Fastly and love Fastly’s solution a lot. Some of Fastly’s customers also say “Fastly’s support team is great and they are a fun team to hang long to grow together”. This is no coincidence. It’s all about building switching costs as an economic moat that the customers won’t leave and it attracts more new customers to join.  

Fastly’ CEO says: “We believe that we are unique in delivering the specific set of interconnected tools that our customers have shown us are the exact right combination required to build the future of the internet. “. It’s essentially saying Fastly’s tool is specifically designed for the industry vertical (think digital publishing and e-commerce).

Every industry vertical has different use cases and you just can’t use one generalized / commoditized feature to land every enterprise customer in different industry verticals. To land big clients, you would need to ensure you have the agility to customize features that no other CDN providers are willing to deploy development resources. Other CDN providers or edge computing providers  are using a one-size-fits-all approach compared to Fastly’s agile approach which is willing to dedicate development resources to customize solutions on catering for big clients’ needs. In some way, Fastly is acting like a software house which builds customized solutions via API to one client. But let’s not forget that the client’s use case is not unique. 

For example, news publishers like The New York Times made a feature request for some new use cases, Fastly developed it for The New York Times to beta test and public launch then rolled out to the rest of Fastly’s news publisher. This gives a strong feedback loop and pulls in the rest of the news publishers who are not on Fastly yet and making the migration way from public cloud vendors to Fastly. 

News publishing industry is competitive in nature and the “fear of missing out – FOMO” is helping Fastly to land more enterprise clients organically within the same verticals. When a CTO in a news publisher who uses Akamai or Cloudflare or Amazon, he/she starts to notice every other news publisher is on Fastly with features that their current cloud poriver don’t have, the CTO will first make a feature request to the current cloud providers. However, if such a feature request is so niche in the use case that only the news publishing industry will need it, good luck having that the current cloud providers will prioritize the feature request in the development pipeline. It’s just in a matter of time that the CTO will be inpatient and migrate to Fastly.

Fastly already conquered the news publishing’s cdn and edge computing market share. And they did the same with other verticals such as e-commerce – Shopify, Target, Etsy just to name a few. Their next move is on Video, Audio, SaaS, Travel Marketplaces and Fintech. My next guess is they are also trying to make their way into the game industry which they are late in the game as of now.

Page Load Time Matters and it Drives Demand for Edge Computing

Back in 1999, internet users were willing to wait up to 8 seconds for page load on desktop. You have to remember back then, the internet use case was just dominated with Internet 1.0 websites which without much web complexity. You were just plainly downloading the content from the websites and minimal uploading from your end to the websites.

Today, the web application is getting very complex to the point that the speed load is slower year over year (on mobile). This is due to the fact that you are simultaneously downloading a lot of contents from the web page and also uploading a lot more data back to the web page’s server. There are countless web cookies, trackers, interactive plugins, targeted ads, dynamic contents and live contents within the same page session or mobile app which adds up the application complexity while internet users are browsing it on mobile devices. 

Why would enterprise customers want to add so many elements within the same page and what are you uploading to their server? Enterprises want it to be smarter with more data analysis which then resulted for better targeting with high relevance. Furthermore, the enterprise also wishes to achieve all of these heavy processing and return immediate responses within milliseconds while wanting dozens of the plugins to be able to feedback to compute and deliver results within the same milliseconds timeframe. As you type in the search bar for character by character, the algotherim is computing and predicting what you want and deciding what’s the best strategy to rank the result for you all within milliseconds. If e-commerce buyers can’t get what they want within the first result page, they will not click into the second result page. E-commerce operators would want to change the product results instantly and live within the first page itself when you land on the first page of the result page. How do they plan to do that? When you land on the result page, the enterprise would want to analyze how long you spend on reading/watching/scrolling/interacting the first 2-3 products while gauging what you are really looking for and quickly swap out/in the next 7 products without the consumer even realizing. You should watch The Social Dilemma on Netflix then you know what I am talking about. This is entirely based on the live interaction that you have provided and the compute engine processes it immediately and responds back to you immediately. Personalization element is also pushing the boundaries of what results should be given based on how you are interacting with the application. When you ask Apple’s Siri or Google Assistant or similar AI assistant a question with more than 30 words, it’s not likely to provide an accurate response at the moment. Even if the tech giants cracked the complex question with the most accurate answer, it’s not likely to deliver it back to you without buffering as all of the heavy computing is done at a central location instead of distributed.

Let’s take a look at amazon.com’s PageSpeed Insight at https://developers.google.com/speed/pagespeed/insights/?url=amazon.com

This PageSpeed snapshot was take around 23 February 2021 

Looking at the PageSpeed snapshot shared above, you would notice that the Speed Index is 8.9 s while Time to Interactive is 12.6 s. Every web application would very much want every single element to be all loaded within 30ms while adding even more complex stuff along the way. This is where Edge Computing plays a role too. As more websites or mobile apps set a higher page load benchmark without compromising the data analytics capabilities, the demand for edge computing will explode.

In conclusion, the future of internet usage is about relevancy, data analytics, personalisation, real-time, zero buffering, high complexity and big computing done at the closest server located in the same town that you are using the devices. This change of behaviour drives the demand of edge computing.

Edge Computing

Edge computing changes the way developers build applications. To simplify it, Amazon’s Edge Computing explained it 8 words: “Bringing data processing and analysis closer to end-points”. Instead of relying on one single core compute engine in a single centralized massively-scaled cloud server campus in San Francisco to run the logic processing for global users located all over the world of 195 countries, the developer will distribute more processing to be done on thousands of small-scaled distributed server campus which are located within 1000km (or nearer) of the user. Instead of relying on one master database in San Francisco to authenticate user access, developers can now distribute the authentication process by replicating the database to the distributed server which is nearer to the users. For telemetry use cases, instead of sending 10GB worth of imagery data all the way from Sydney to San Francisco for central processing, the developer would utilise distributed computing to process such data within Sydney’s distributed server which reduces the latency tremendously. However, there’s tremendous tailwinds on edge computing as it requires developers to change the existing compute, authentication, database storage and cache architecture. It involves huge effort to overhalve the legacy applications to the distributed architectures. CTOs are still busy adapting to big data, cybersecurity, machine learning and artificial intelligence.

Looking at Google Trends to compare the search interest of “cloud computing”, “big data”, “edge computing”, “cloud gaming” and “machine learning”, you would notice the interest for edge computing is way lower than the rest as we are still in very early phase of developing the infrastructure of edge computing. The infrastructure is referring to both hardware and software which there’s a lack of mainstream open-source contribution to an open-source edge computing software stake. To escalate it, Fastly is championing WebAssembly as the standard to help developers overcome the problems.

9 Reasons to be Super-Bullish on Fastly

There are 9 growth factors which would sustain Fastly’s growth rate or even super-charge Fastly’s growth rate moving forward. This investment idea is suitable for value investors who already understand what is a Content Delivery Network (CDN) and what’s the USP of Fastly. If you do not know what Fastly does, you make check out other explanations first then come back to visit this write up. Edge computing is known to be the number one reason that all other investors are betting on Fastly or Cloudflare. Akamai was founded in 1998 and was and still the preferred choice of CDN provider for the majority of the CTO while it was deemed as a legacy CDN.

Cloudflare and Fastly are competing at different segments of the CDN market

The next-generation CDN providers like Cloudflare focus on small business or startup while Fastly goes niche to focus on large customers with millions of visits or web requests. 

Fastly’s revenue is heavily concentrated with 89% from 324 enterprise customers who collectively contributed close to $74 million. Fastly’s average enterprise customer spending is approximately $782,000 on a trailing twelve-months basis. 

Cloudflare’s full year 2020 revenue is at $431 million which is almost 50% more than Fastly’s full year 2020 revenue of $291 million. Cloudflare’s have 828 enterprise customers contributing 46% of FY2020 revenue or approximately $198 million which simple calculation indicates an average enterprise customer spend of $240,000 on a trailing twelve-months basis. Cloudflare’s Non-GAAP gross margin is much higher at 78% compared to Fastly’s 60.9%.

The bottom line here is if Fastly’s customer made the migration decision from Akamai to Fastly and spent way more than Cloudflare’s average enterprise customer spending, the decision-maker would make a considerable comparison that Fastly’s tech is the best match the needs compared to Cloudflare’s mass-market approach.

Take a look at the top 100 most visited websites in the United States of those using hosted on Fastly’s CDN. At least 30 of the most visited 100 websites are suspected to be using Fastly which migrated from legacy CDN. 

I would like to provide more fundamental reasons to support more than just Edge computing as the core / fundamental investment thesis. Akamai’s team had shared that edge computing had been around for a long time. In fact, Akamai’s edge computing innovations represent approximately 20% of Akamai’s more than 400 technology patents, and edge computing solutions generated well over $2 billion in revenue over the twelve months ended June 30, 2020. Although many investors are bullish on Fastly’s deep tech but bear in mind that Akamai has a huge arsenal of engineers than Fastly which indicates Akamai can at any one point of time out-compete Fastly. Hence, it’s best to ride on mega-trends that drive tremendous demand for next-generation CDN that can benefit more than 1 player. So, let’s dive into the 9 other reasons outside of edge computing on why value investors should be bullish on Fastly.

Reason 1: 5G Adoption will accelerate CDN & Edge Computing demand

The recent filing revealed that Warren Buffett’s Berkshire Hathaway is betting on 5G mass adoption with an $8 billion investment in Verizon while Verizon’s 4Q2020 earning presentation shared that 5G target sites are expected to grow to at least 30,000 sites during FY2021.

Traditional CDN infrastructure is not capable of delivering content for 5G speed and capacity and Fastly’s is one of the few that has reached over 100 terabits per second (Tbps) of connected edge capacity. But do note that Akamai once reached 181 Tbps as disclosed in an earnings call dated Feb 10, 2021. Akamai CEO also shared, “Nobody in the marketplace comes anywhere close to our capacity to serve customers at the edge on a global scale.” which is a warning sign to monitor moving forward for Fastly if Fastly were able to scale the infrastructure and surpass a new milestone. 

5G will and has unlocked many new business use-cases that were never made available prior. Imagine a massive multiplayer game that streams within a mobile browser powered by 5G and edge computing. Check out Intel’s case study on “How to leverage 5G with Cloud Gaming” at https://www.intel.com/content/dam/www/public/us/en/documents/case-studies/playgiga-cloud-gaming.pdf

To monitor the strength of this investment thesis, one should measure the 5G infrastructure deployment status (supply) and also the 5G adoption rate (demand).

Reason 2: Live streaming event’s demand will accelerate demand for low latency network via CDN

Marketer had been making use of Zoom to conduct various live streaming sessions to reach out to prospects as studies find that live video has a higher engagement and conversion rate. One of Fastly’s customers – Twitch, had cultivated rising game streaming demand globally. During the year 2020, the majority of the world population had been used to enjoying the comfort of work-from-home to watch various business or leisure events via live streaming. In fact, 2020 is the year forcing many inaugural events to be hosted virtually and live for the very first time and it will not stop there. In a post-COVID-19 world, more physical events will be held and event organizers would recognize the demands of online viewers to sell live viewing access which pushes demand for the live streaming event further. The boom of short-video streamings and OTT streamings are another enabler at play currently. Approximate 40% of Fastly’s revenue comes from the video streaming industry at one point in time. Fastly’s enterprise customer – Vimeo’s recently filed S-4 spin-off exercises from IAC, it shared that “While the COVID-19 pandemic has accelerated the demand for video from businesses, we believe this shift is secular and will endure given the fundamental need for businesses to communicate online. For example, we believe that the businesses streaming their town halls, classes and events today will continue to value the global reach of live streaming along with their physical events in the future. We see countless examples of the power of this reach in our user base today”. Another of Fastly’s customers – Clubhouse also accelerating the demand for live events. TED Conferences would be another great example that Fastly powered the live stream. To monitor the strength of this investment thesis, one should measure the continuous trending momentum of the live streaming events.

Reason 3: eSports will accelerate demand for low latency network via CDN

Fastly’s 4Q 2020 letter shared that “Our efforts in this rapidly-growing vertical saw significant expansion with a large gaming company, who is leveraging our platform to deliver new titles and support the launch of the next-generation consoles. We also added a leading interactive gaming company to our customer base, supporting their storefront for games available via the web.”. In the same letter, it also shared an internal prototype use case, “edge-native, multiplayer version of the popular video game Doom”. This means that the computation of the entire game’s interaction was done in the distributed point instead of at the central point which could unlock more possibilities of gaming experience to game developers.

Fastly’s Q2 2020 letter also shared “As online gaming becomes a popular choice for entertainment at home, a developer of massively multiplayer online (MMO) games chose Fastly to optimize and accelerate in-game assets and interactivity to over 75 million of their browser and mobile casual games customers.”

Online games have risen in both desktop and mobile while the rise of the live massive multiplayer mobile game is on the rise too. Do note that the keyword here is “live”, “massive”, “multiplayer” and “mobile” which makes a big difference. A non-live mobile game like Candy Crush doesn’t require low latency. A non-massive live mobile game like a turn-based game such as Crash Royale or chess is a 1-on-1 play that usually has plenty of waiting time for the player to act before the times up. A massively multiplayer game is coined as Battle Royale which has 50-100 players within the game sessions like PUBG, Mobile Legends, Marvel Super War and Free Fire. The recent rise of battle royale was made possible thanks to Unreal Engine and Unity, while more game developers are tapping into the engine to develop a more competitive gaming experience. Lastly, desktop gaming on battle royale games was the mainstream compared to the mobile version of battle royale games due to the mobile device capabilities issue. My next reason will change the landscape and further boost the rise of mobile battle royale gaming.

Reason 4: Cloud gaming will accelerate demand for low latency network via CDN

Cloud gaming will enable device-agnostic gaming which allows gamers to have a level playing field. The current gamers are forced to purchase expensive smartphones or better desktop gaming gears to compete with other gamers. Cloud gaming built on the promise of zero install, zero download, zero update and low latency at any devices to play all games, To gauge the momentum of cloud gaming, one should monitor the number of games on these platforms: Nvidia’s Geforce Now, Google’s Stadia, Microsoft’s Xbox Project xCloud, Sony’s PlayStation Now, Amazon’s Luna.

Reason 5: Demand for reducing reliance on Amazon or Marketplace will accelerate demand for e-Commerce traffic outside of Marketplace

We are not talking about a boring topic of brick and mortar going to e-Commerce but we are talking about merchants having increasing concerns about fully relying on Amazon for their e-Commerce contribution. Shopify is enabling e-Commerce sellers to reduce their reliance on Amazon and level up the playing field. The growth of Shopify will accelerate growth for Fastly as Shopify is using Fastly. Approximately 60% of Fastly’s revenue comes from the e-Commerce industry at one point in time. And why e-Commerce will give rise to Fastly CDN adoption? Refer to Reason 8 for cybersecurity concerns. As e-Commerce merchants can’t afford to suffer downtime during the shopping period and it’s a wise investment decision to turn on Fastly to be ready for DDoS attacks.

Reason 6: Better channel partners with top 3 public cloud vendors such as Azure, AWS and Google Cloud will accelerate the migration from legacy CDN to next-generation CDN

The general-purpose CDN providers like Amazon Cloudfront / Google Cloud CDN / Microsoft Azure CDN / Cloudflare CDN are a one-size-fits-all approach that doesn’t meet the needs of enterprise customers who demand low-latency. However, it’s very hard for Fastly to win over enterprise clients who were using legacy CDN. The decision-maker for such an important migration to next-generation CDN like Fastly is made by the coders/back-end engineers / CTO who know the technicality. The typical procurement process in big companies is troublesome for tech guys as they need to jump through the many hoops for rallying support on such a decision or red tape if it’s a new vendor and if there’s a contract to commit for the long term. The reason being is big companies will negotiate a bulk-purchase rate with Fastly given that the company who wants to migrate can commit a full migration or a large bandwidth commit, which then involves a 12-months or 24-months lock-down contract. If the company that wants to migrate is already using Azure or AWS or Google Cloud, they just need to activate Fastly selection as an “add-on” without going through the lengthy procurement process as it’s all billed under the single billing account arrangement within the cloud vendor. Hence the recent partnership with the cloud vendors is expecting an acceleration of more enterprise companies to migrate away from legacy CDN. Google Cloud’s partnership with Fastly was announced in September 2020, while the partnership with Microsoft Azure was announced in January 2019. However, I had yet to verify whether the single billing account arrangement was in Azure or AWS. The bottom line is that the great relationship with the cloud vendor indeed accelerates the transition.

Reason 7: Hyper-growth in real-time data analytics to make a real-time decision at the edge will accelerate demand for low-latency CDN

Again, we are not talking about Big Data but real-time data analytics. The increasing inter-connected data points across multiple IoT devices in various locations of the world give rise to the needs for edge computing to enable enterprise customers to make faster decisions. This real-time data analytics trend was enabled by Snowflake, Palantir, MongoDB, Cloudera, Teradata and all major cloud providers. The real-time logging powered by Fastly and the massive millions of event logs delivery per second are the key considerations for delivering real-time data analytic solutions. This is a game-changer as the nature of a content delivery network is meant to be distributed across multiple places and it will take hours or days to fully receive all the delivery logs across all of the distributed networks.

Reason 8: Spike in cyber-attackers’ capacity and capabilities in DDoS Attack will demand a CDN with stronger cybersecurity

As shared by Cloudflare’s blog post dated 18 Nov 2020, the attack size, frequency and sophistication of DDoS attacks are concerning the enterprise customers which then accelerate the migration to next-generation CDN which can provide massive logs in real-time to the cybersecurity monitoring tools.

Reason 9: Internet penetration and hyper-growth of OTT activities in emerging markets accelerate the acquisition of new enterprise customers

CDN provider selection for enterprise customers is not an all-in decision as there’s a multi-CDN approach via a smart selection or dynamic selection. Hence, don’t be surprised on why some big enterprise customers were using Akamai or Limelight and also concurrently using Fastly which was due to Fastly’s capacity availability in the markets which the enterprise customers wish to tap into that the legacy CDN does not have sufficient capacity. Another reason for the multi-CDN approach is also to prevent “single point of failure” and hence introduce redundancy to the architecture as in black swan events that one CDN provider does fail, the enterprise company can switch to another CDN provider dynamically. As of 4Q 2020 disclosure, Fastly is already in 56 markets and 26 countries while 30% of the revenue contributes outside of the United States. Riding on Fastly’s existing customer’s needs, Fastly is expanding to more new markets for capturing more revenue streams. For example, Fastly’s customer – Taboola is serving ads on Singapore Press Holdings (SPH)’s digital media assets and hence having PoP in Singapore. As per Taboola demanding for more presence within South Asia, Fastly could leverage on the demand and build more new markets.

Here are a couple of potential risks that might derail the investment thesis:

Risk 1: Patent infringement

Google Patent Search tool is showing that Akamai has 575 results (https://patents.google.com/?assignee=Akamai&num=100&oq=assignee:(Akamai)&sort=new) while Fastly have only 56 results (https://patents.google.com/?assignee=fastly&num=100&oq=assignee:(fastly)&sort=new). As of December 31, 2019, Fastly had 40 issued patents, 47 patent applications pending for examination, as well as 10 pending provisional applications. In the same period, Cloudflare had over 110 issued patents and over 70 pending patent applications. However, this doesn’t mean that there’s potential infringement but such high-value tech would face it soon or later. Hence, this is one risk that investors should price-in too.

Risk 2: Key-man risk on innovation

As the Google Patent Search tool indicates that the founder Artur Bergman represents as the major patent inventor for 46.4% of the Fastly patent search results, the next-generation product vision and innovation is heavily concentrated on one single person which is the current Chief Architect and Founder, Artur Bergman. As of December 31, 2019, Fastly had 191 employees in Fastly’s research and development group which the research and development expenses were $46.5 million in the year ended December 31, 2019. The key-man risk should be reduced gradually as the R&D department increases as domain knowledge is being compounded and transferred across. Akamai’s payroll and related costs in research and development expenses for the years ended December 31, 2019, were $382 million which is 8 times more than Fastly. Furthermore, Akamai’s net cash provided by operating activities for the year ended December 31, 2020, were $1.2 billion with a significant war chest to accelerate innovation ahead of Fastly. This risk was arised due to Artur Bergman selling close to $200 million worth of Class A common stock after he exercised employee stock options between Nov 2019 till Feb 2021. I would hope I’m right that he’s using his personal money to fund a stealth team outside of Fastly for accelerating innovation. Or else, this is not a good sign.

Risk 3: Increasing OPEX or burn-rate and doesn’t meet the rule of 40

As a final risk, Fastly’s incoming earnings quarters might be recording increasing CAPEX (expect to spend 11%-13% of revenue on CAPEX) or increasing researching and development expenditure or possible many acqui-hire related activities which might cause many sell-side analysts giving bearish call due to declining free cash flows. Due to aggressive bandwidth purchase which indicates the risk of increasing unutilized bandwidth over the quarter, the gross margin might be volatile as it doesn’t achieve the economics of scales during growth in capacity expansion. Fastly is an emerging investment idea that gearing up for the long-term instead of the near-term. Hence, if you are not ready for short term losses (<24 months), you should not hold this stock and should move to other investment ideas. This investment idea is not matured yet and bets on multi enablers to accelerate the revenue growth.

Risk 4: Market correction on Price-to-sales ratio

Fastly is currently trading at 30-35 times price-to-sales ratio and revenue grow at merely 30%-40% compounded annual growth rate (CAGR) which there’s no one SaaS company in history with such growth rate to trade at such a high price-to-sales ratio (Please correct me if I’m wrong but I guess it would only be a handful that ever trades at such high ratio for a long period of time). It’s understandable that such 30-35 times of price-to-sales is justifiable if the company is growing at 80%-160% or more but Fastly isn’t. Currently, Investors are too bullish to price-in Dollar-Based Net Expansion Rate (DBNER) which is indeed growing at a range of 136%-147% for sustaining the 3X price-to-sales ratio.

Risk 5: A sudden and major security breach to Fastly’s CDN

As Fastly championed for security capabilities, it would be a fool to not price-in a possibility of corporate espionage that attempted to score a successful breach in Fastly’s CDN. This risk was highlighted due to this disclosure: “On July 29th at 00:00 UTC, Fastly was notified by a customer (customer X) that a single log line intended for a different customer (customer Y) was received by customer X’s log system.” https://www.fastly.com/security-advisories/incorrect-delivery-of-partial-log

Risk 6: A predatory acquisition at play by the public cloud vendors

This might be too much of a conspiracy theory but it makes sense for either Microsoft, Google, Amazon or IBM to acquire Fastly as analysts are continuously bearish on Fastly to a point that the stock is trading at 20 times the price-to-sales ratio and the cloud major would able to justify the valuation to make an acquisition offer and the trade position would be unable to realise its maximum return. Amazon’s Twitch, Amazon.com and IMDB are using Fastly. Fastly is currently traded at around $9 billion market capitalization. The risk of such acquisition is high if the market capitalization goes below $5 billion at any one point in time. This risk was surfaced due to rumour that Cisco is planning to acquire Fastly (Source: https://www.msn.com/en-us/money/topstocks/heres-why-fastly-stock-is-soaring-today/ar-BB1bDFqz)

Risk 7: weaker growth in DBNER and enterprise customer acquisition

Sales & Marketing Expenses ‘000CloudflareFastly
2017-2020533,466263,230
FY2020217,875101,181
FY2019159,29871,097
FY201894,39450,134
Cloudflare’s S&M Expenses is more than double of Fastly’s.

Historically, Fastly is not a sales-driven SaaS company with a mega team of sales personnel or sales engineers as they are busy catering to inbound / organic requests. Since IPO, Fastly has gear up the sales and marketing expenses from $50 million a year to $100 million a year. However, the conversion to number of new enterprise customers added is low compared to Cloudflare’s size of enterprise sales team and the number of new large customers added. This risk would be mitigated by the new Chief Revenue Officer – Brett Shirk, who has almost 25 years of experience in SaaS enterprise sales to transform Fastly into both an innovation-driven and sales-driven organization.

Opportunity 1: Revenue Expansion from existing enterprise customers

Sell-side analysts and the investment community who are bearish due to too much focus on a single blue-chip customer – Tiktok while should also be reminded that Fastly had even more blue-chip customers which is way bigger than Tiktok. At the moment, Fastly already has 324 enterprise customers. Some of Fastly’s enterprise customers are mega in nature which have many new business units opening at nearly every quarter while also acquiring rivals or new verticals every year. Take a look at Gannett who currently owns 383 websites which collectively attracted 160 million unique visitors a month. Another of Fastly’s enterprise customers – Reddit had raised $367 million and aiming to raise up to $500 million for expanding the ever-growing community size and expecting reddits time-spent to grow to new high. Last example – Shopify is growing at 94% year-on-year in the top line as well which Shopify’s merchants are indirectly fueling the usage of Fastly’s edge computing solution. These are the key under-currents that are fueling the future growth of Fastly’s revenue.

There are some public sources indicating who are the customers but I had gauged the customers by using danetsoft website to identify the origin server was hosted with which CDN provider. However, there’s no real evidence that danetsoft might be accurate in knowing the company’s architecture is using Fastly or not while it might not be a mutually-exclusive customer due to the fact the top websites tend to deploy multi-CDN selection. Here’s the link:  http://data.danetsoft.com/

Suspected list of Fastly’s current enterprise customers:

Video Content: TikTok, Twitch, Vimeo, fuboTV, Super Bowl, Atresmedia, MediaPro, Fox TV & Sports, Viacom CBS & CBS Sports, A&E

Sound Content: Spotify, Clubhouse, Shazam, 7digital

E-commerce and related SaaS: Amazon.com, eBay, Target, Etsy, Shopify, 1800flowers.com, Ticketmaster, Wayfair, Grubhub, Deliveroo, KAYAK, Alaska Airlines, Airbnb, HomeAway, Hotel Tonight, JetBlue, Tripadvisor, Eurostar, Holidayextras, Aer Lingus, Love Holidays, Dollar Shave Club, Big Cartel, Dunelm, Yottaa, Adobe Magento, CommentSold, Wanelo, Kickstarter, La Redoute, Daniel Wellington, Boots UK, Catch Digital, 1stdibs, Adorama, Casper, Overstock, Rakuten

Software / SaaS: Slack, Firebase, Taboola, Wix, New Relic, Pantheon, Jimdo, LaunchDarkly, imgur, Sonatype, Opera, Drupal Association, HashiCorp, Speedtest, Hoodoo, Cloudera, Chartboost, Firebase

Publisher: Fandom, CNN, CNET, Gamepedia, IGN, Buzzfeed, BBC, Fast Company, Forbes, The New York Times, Financial Times, Guardian, Gannett (USA Today), Nikkei, Vox Media, WIRED, Business Insider, Condé Nast, Hearst, PRISA, RCS MediaGroup, ZEIT ONLINE, Lonely Planet, Dictionary.com, Urban Dictionary, Wikia, Wenner Media

Investment Content: The Motley Fool, Seeking Alpha, Investopedia, Bloomberg

Financial / FinTech: PayPal, Stripe, Affirm, Wealthfront, Chartbeat, Virgin Money, RVU, Simple, Marqwta, wepay, Bankrate, GoFundMe, ConsenSys

Social Network / Community: Twitter, Reddit, Quora, GitHub, Stack Overflow, Stack Exchange, Pinterest, Foursquare, Yelp, Meetup, Disqus

Education: Blackboard, UC Davis, MIT, Khan Academy, TED, Skillsoft, AAMC, Education.com, Kahoot, Inspired eLearning, Coolmath.com, Nearpod
Game: Paradox Interactive

Opportunity 2: WebAssembly or WASM

Fastly built Compute@Edge based on WebAssembly. Fastly (along with Google, Microsoft, Amazon, Cloudflare engineers) been a supporter and contributor to the emerging open-source software development framework – WebAssembly or known as WASM. WASM is built on the promise that allows any internet user to run the web app at near-native speed. Layman explains it allows apps to run faster due to it being compiled in lightweight to run on your device / browser instead of the server’s end as it skipped the latency issue. However, WASM is still in its infancy stage while tackling many problems on it’s way. Taking a look at the number of questions tagged to WASM on stackoverflow, it’s not bad at all with 1,520+ questions but the developers crowd is still relatively smaller than other emerging technology. (https://stackoverflow.com/questions/tagged/webassembly

This opportunity has arised due to Fastly sponsor-hiring the Mozilla’s Wasmtime and WASI team to work on outside-the-browser projects. Ex-Mozilla & now-Fastly’s Aaron Turon also tweeted that they are expanding the team around Aug 2020 which is just 2 months before the hiring announcement of the Mozilla team. The WebAssembly Fastly’s customer – Shopify leverages WASM to enable third-party apps to be run with WASM on Shopify merchant’s site.

Valuation

Here are the price target given by these analysts with average price target from $49 to $110 with average price target at $84:

  • $110 by Timothy Haron @ Oppenheimer
  • $105 by Rishi Jaluria by DA Davidson
  • $95 by Robert Majek @ Raymond James Financial, Inc.
  • $90 by Brad Zelnick @ Credit Suisse
  • $90 by William Power @ Robert W. Baird
  • $85 by Jeff Van Rhee @ Craig-Hallum
  • $77 by Brad Reback @ Stifel
  • $75 by Tal Liani @ Bank of America
  • $65 by James Fish @ Piper Sandler
  • $49 by Walter Pritchard @ Citi

Fastly’s weighted average basic shares outstanding is expected to be 118.4 million for the full year 2021. Fastly’s last traded share price was $75.76 on 25 February 2021 with a price-to-sales ratio of 31 times. At the high-range of FY2021 revenue guidance at $385 million, it implies YoY revenue growth rate of approximately 30%. FY21 forward revenue per share is approximately $3.25 per share, implying a reasonable price-to-sales ratio at 23 times.

Cloudflare’s latest weighted-average shares outstanding is at 303.8913 million. Cloudflare’s last trade share price was $76.43 on 25 February 2021 with a price-to-sales ratio of 54 times. At the high-range of FY2021 revenue guidance at $593 million, it implies YoY revenue growth rate of approximately 38%. FY21 forward revenue per share averaged is approximately $1.95 per share, implying a high price-to-sales ratio at 39 times on the back of a mere 38% growth rate. This is the main reason why even Cloudflare is an amazing company but it’s still too expensive for investors to even consider at the moment.

I would value Fastly with a 2-years Revenue CAGR of 30% and 30 times price-to-sales ratio, which then derive a target price of $125 which represents approximately 64% upside over the course of 2-years.

Bonus: Warning signals to be monitored over the earning release:

  1. Declining annual revenue retention rate (Now at 99%)
  2. Declining Dollar-Based Net Expansion Rate (DBNER) (Now at 133%)
  3. Stagnant count of enterprise customers (Now at 324)
  4. Revenue YoY growth rate declined consecutively (Now at 40%)
  5. Compute@Edge is yet to surface as a major revenue contributor or the count of customers using Compute@Edge is low (Unknown or Nil at the moment, to be verified). However, there are 60 customers participating in the beta program of Compute@Edge.

Websites and insights that helped to support the above investment thesis and huge credits to the content owner:

One last thing, a bonus reason to consider is Cathie Wood’s ARK ETF also bullish on Fastly https://cathiesark.com/ark-combined-holdings-of-fsly, but do your own due diligence and don’t be a herd.

Happy to be corrected or debated! Please leave your comments below.

AirAsia Investment Note – The Market

Market Positioning

  • Competition Market: Short-haul Low-cost Carrier within 4 hours flight radius from the hub
  • Market: Malaysia, Thailand, Indonesia, Philippines, India, Japan, China
  • LCC Market leader in the Globe: Southwest (US), RyanAir (Europe) & EasyJet (Europe)
  • LCC Market leader in Asia: IndiGo (India), Cebu Pacific (Philippines), VietJet (Vietnam), SpiceJet (India) and privately-held Lion Air Group (Indonesia)

 

Performance Benchmark (Global)

Southwest RyanAir EasyJet Average (Top 3) AirAsia
Passenger Carried (Million) 152 120 73 N/A 57
Aircraft Fleet 723 341 257 N/A 217
Staff Size 53,536 13,026 10,000 N/A 16,067
Founded 1967 1984 1995 N/A 2002
ASK (Million) 239,022 157,569 87,724 N/A 80,200
Load Factor 84% 94% 93% 90% 85%
Average Revenue Per Passenger $135 $59 $85 $93 $51
RASK USc 8.55 4.98 7.08 6.87 3.43
CASK USc 6.97 3.83 6.32 5.71 2.68
Cask Ex-fuel 5.45 2.4 4.63 4.16 1.73
Operating Profit Margin 18% 23% 11% 17% 17%
Core OPEX over Sales 69% 77% 83% 76% 77%

Excluding the Full-Service Carrier (FSC), there’s around 30 LCC in the world carried more than 1 million passengers on an annual basis. Southwest is the largest LCC in the world by carried 152 million passengers while AirAsia ranked 4th largest LCC in the world by carried 57 million passengers.

While AirAsia can maintain a profitable operating profit margin at 17% which is the average industry operating margin, AirAsia remains the cost leader in keeping the operating expenses low to offer low-cost fares to passengers and achieving the industry load factor benchmark of 85%.

Performance Benchmark (Asia)

AirAsia IndiGo JetStar Cebu VietJet SpiceJet Nok
Passenger Carried (Million) 57 44 24 19 14 12 9
Aircraft Fleet 217 131 95 57 41 42 32
Staff Size 16,067 14,604 Unknown 4,123 2,435 5,360 1,400
Founded 2002 2006 2004 1996 2011 1983 2004
ASK (Million) 80,200 54,583 48,703 25,989 16,498 12,916 6,264
Load Factor 85% 85% 83% 82% 88% 91% 85%
Average Revenue Per Passenger $51 $67 $117 $65 $86 $66 $59
RASK USc 3.43 5.16 5.77 4.76 4.35 6.06 6.06
CASK USc 2.68 4.56 5.10 3.82 3.89 4.30 7.53
Cask Ex-fuel 1.73 2.82 Unknown 2.60 2.43 2.68 6.21
Operating Profit Margin 17% 11% 12% 20% 12% 29% -19%
Core OPEX over Sales 77% 80% Unknown 75% Unknown 83% 105%

In Asia, AirAsia is the largest LCC by passenger carried. The main contenders in Southeast Asia are the Indonesia-based privately-held Lion Air Group which have 272 aircrafts by the end of 2016. AirAsia achieved the best unit cost (CASK) compared to Asia rivals and gave them the advantage of offering lower fares on expanding more routes and destinations.

 

Target Market

Country AirAsia Market Share

(Passengers carried)

Air Passengers Market Size 2016

(million)

Population

2016

(million)

Population

2035

(million)

LCC Competitors
Malaysia 49% 68 31 38 Lion Air Group
Thailand 22% 122 69 67 Nok
Indonesia 8% 90 261 305 Lion Air Group
Philippines 11% 46 103 131 Cebu Pacific
India 4% 131 1324 1585 IndiGo, SpiceJet
Japan Nil 141 127 117 Vanilla Air, JetStar, Spring, Peach
Vietnam Nil 52 93 108 VietJet
China Nil 490 1379 1408 Spring

 

Malaysia – A Small Cash Cow

Malaysia is a cash cow market (dominating at 49% market share) for AirAsia, but it has the smallest population among the target market and Malaysia also experiencing slightly slower growth regarding passengers carried 3-years-CAGR of 7%. The future of AirAsia is out of Malaysia, namely Thailand, Indonesia, Philippines, India, Japan, Vietnam and China.

 

Thailand – Nice-to-have Market

Zooming into AirAsia’s second largest market by profit – Thailand. Although Thai AirAsia achieving passengers carried 5-years-CAGR of 20%, the population is not increasing (is shrinking by 2035) and not big enough like other major Asian countries. Two of it’s LCC rival in Thailand – Thai Lion and Nok are facing operational difficulties. Thai Lion has low utilisation of current fleet and excessive order of aircraft. Nok is suffering a 19% operating loss margin and carried 9 million passengers in 2016 (Thai AirAsia carried 17 million passengers in 2016).

 

Indonesia – Tough Market

Indonesia is AirAsia’s third largest market yet facing intense competition from Lion Air Group. Indonesia AirAsia achieves a slow growth: passengers carried 5-years-CAGR of 5%. In the back of Lion Air Group aggressive fleet expansion plan, this will be a tough market for AirAsia on commanding a bigger market size. In 2012, Indonesia AirAsia deployed a total of 22 aircraft fleets and since then increase and reduce throughout the years. In 2016, Indonesia AirAsia still maintaining the fleet size at 22 aircraft fleets. Regarding market size, AirAsia achieved peak at 11% in 2014, reduced to 9% in 2015 and further reduced to 8% in 2016. In FY2016, the operating profit is only 3%, but the 1Q17 and 2Q17 did showing positive results that Indonesia operation had the turnaround. Despite the pullback from the Indonesia operation, this market will require some time for its competitors to be rational on the aggressive expansion. At the meantime, AirAsia strategy will be focusing on profitable international route from Thailand and opening of unique routes to stay away from Lion Air Group in the meantime.

 

Philippines – Too Early To Say, Keep In View

Philippines AirAsia commenced first flight in 2012 and later acquired Philippines’ Zest Airways. In 2016, they achieved an 11% growth in passengers volume while Cebu Pacific grew only 4.1%. This market is yet to see fruition as it still at early stage of growth.

 

India – Big Market For Many Players

India AirAsia is the star market for AirAsia in the next decades with a whopping 1.324 billion population, almost double the size of Southeast Asian populations. The competition is intense too with 2 LCC, IndiGo carried 44 million passengers, and SpiceJet carried 12 million passengers. India AirAsia only managed to carry 2.45 million passengers in 2016 on the back of result that they first commence flight in 2014. Investors should take a close eye on how IndiGo and SpiceJet are performing to decide whether AirAsia can rely on this market as the catalyst market. SpiceJet is a smaller LCC rival and currently achieving only a 2% passenger carried 5-years-CAGR. IndiGo is the India’s largest LCC which achieving 28% passengers carried 5-years-CAGR. As of 2016, IndiGo has 131 aircraft fleet, and India AirAsia has 8 aircraft fleet. However, IndiGo has a much higher CASK and lower operating profit margin at 11%-13% which gives AirAsia an advantage to leverage on the strength of low CASK on offering lower fare as compared to IndiGo.

 

Japan – Unknown Market With Intense Competition Among LCC

Same like Thailand, the Japan population is shrinking from 127 million (2016) to 117 million (2035). At the same time, this market has more prominent LCC such as Vanilla Air, JetStar, Spring and Peach. Japan AirAsia had yet to commence the flight but expecting to commence within 2017.

 

China – Soon-to-be Largest LCC Market In The World

China is having a large population of more than 1.379 billion people but still having a low LCC adoption rate of 10.4% in 2016. This indicates there’s huge room for LLC to grab the market share. As of 2016, 488 million passengers travelled through airlines in China while the 7 only public-listed China airlines (excluding Cathay Pacific) command about 83% of the passengers volume at 407 million passengers. At the meantime, Vietnam, Indonesia, Malaysia and Thailand are having at least 50% LCC adoption rate. The competitors are entering into this lucrative market as well. Spring Airlines is the largest LCC in China with 74 fleets to date and carried 14 million passengers in 2016 which is still in the early growth stage. Investors should keep all eyes on the execution of the joint venture progress between AirAsia with state-backed financial firm Everbright Group and Henan State Government. However, AirAsia is expecting a long 5 to 10 years to produce significant results from this market.

Growth Rate, Thrive! or Dive?

Before you read this, first check what your historical compounded monthly revenue growth rate is.

Got your growth rate figure ready? Let’s continue.

To evaluate an investment opportunity, investors will be looking at all areas of your startup such as business model, addressable market size, team profile, traction, etc. The growth rate, which is under the “Traction” section of your pitch deck, plays a big part in how an investor will evaluate your valuation.

So, the question is how much does growth rate affect your valuation?

Here’s an example:

Assume there are two competing B2B SaaS startups (A and B) with the same monthly revenue of US$10,000 a month but with different historical growth rates. Startup A was able to achieve a 10 percent revenue MoM growth while Startup B achieved 20 percent.

  • 10 percent revenue MoM growth for the next 12 months = US$31,000 per month or an annualized revenue of US$400,000 (rounded up for simplicity)
  • 20 percent revenue MoM growth for the next 12 months = US$89,000 per month or an annualized revenue of US$1 million (rounded down for simplicity)

Generally, SaaS startup valuations tend to apply a revenue multiple on top of the annualized recurring revenue (ARR). The range of revenue multiples is between two and 10 times and is determined by four core elements:

  • Growth rate
  • Market size
  • Revenue size
  • Churn rate

The average revenue multiple is four times, in general.

Let’s get back to the above scenario.

  • Startup A, with 10 percent MoM growth and US$400,000 in annual revenue, will multiply with a revenue multiple of four times and have a valuation of US$1.6 million.
  • Startup B, with 20 percent MoM growth and US$1 million in annual revenue, will multiply with a revenue multiple of six times and have a valuation of US$6 million.

When both startups raised series A at the same time with 20 percent dilution, Startup A got only US$320,000. Startup B, on the other hand, was able to raise US$1.2 million, which they can spend on scaling up customer acquisition, executing faster technology enhancement, and onboarding more expensive talent.

Eventually, Startup A will be losing clients to Startup B due to the latter’s better product features. This will lead to Startup A managing to break through at only 15 percent MoM while Startup B is aggressively growing at a higher rate of 30 percent.

By the end of another 12 months with those growth rates, Startup A will have monthly revenue of US$166,000 or an annualized revenue of US$2 million. Startup B will have monthly revenue of US$2 million or an annualized revenue of US$24 million. That’s a revenue gap of 12 times!

Guess what their valuations are by then? For simplicity, just apply the revenue multiple of four times to both startups. Startup A will have a valuation of US$8 million while Startup B will have a valuation of US$96 million. Startup B could literally make an acquisition offer to Startup A with 9 to 10 percent equity or an all-cash deal.

Of course, the investor who invested in Startup A’s A round would still be happy, as they invested at a valuation of US$1.6 million and the valuation grew to US$8 million. But what if there was no acquisition offer or investors willing to fund their next round and the startup was forced to pivot? That would be a nightmare.

Dear startup founders, growth is what all investors care about in the end. Not your fancy achievements, key recruits, growing but not paying user base, beautifully designed app or pitch deck, and groundbreaking features. Revenue is the king to stay ahead of the curve.

If growth strategy is not working, fine-tune and change! If you are growing, don’t just be comfortable; escalate the growth to the next level! If you’re not careful, you’ll end up like Startup A.

In the case where there’s no competitor in the country or region, having a first-mover advantage does give you a fantastic head start. But a late-comer startup with a better growth rate will still overtake you in a matter of time.

Malaysia Startup Valuation – The Angel Investor’s Perspective

When an early stage startup approaches angel investors for fundraising, the founder should know how angel investors compute the valuation in their mind.

First, lay down the funding stage definition first.
“Angel” or “Pre-Seed” stage defined as the startup have no up and running business or the business is in Alpha or Beta stage, the valuation is around RM2.2 million (or US$500k).

“Seed” stage startup defined as generating minimal revenue or none, the valuation is around RM4.4 million (or US$1 million).

“Pre-Series A” stage startup are not ready to go into full-scale commercialization or yet proven a consistent growing revenue and thus need to raise fund on completing the R&D, the valuation is RM11 million (or US$2.5 million).

“Series A” stage startup is emerged into a full-scale commercialization path and generating consistent (+growing) revenue monthly, the valuation is RM17.6 million (or US$4 million).

What about Series B? Series B is which the startup had figured out a winning formula to scale up the revenue rapidly and plan to expand the market. The size of funding required is so huge that it need a sizable number of angel investors to participate with large ticket size. Hence, startup often approaches VCs for post-Series A funding stage instead of angel investors. In this discussion, we will ignore Series B and above scenario.

The earlier the startup stage, the higher the risk that angel investors would expect the investment get wiped off. Early stage startup investment is a very high-risk asset class which often have a higher risk than private equity investment and hedge fund. The liquidity level in this risky asset class is extremely low and the time it takes to exit is long as well. The angel investors would always expect one or a few of their early stage startup investment wiped off. Given its risky nature, angel investors would only invest if they expect a minimum IRR of 18%-25% depends on the vertical. An IRR of 25% is indicating a startup is doubling it’s valuation within 3 years or tripled its valuation within 5 years.

Series A stage startup carries less risk than Angel stage startup and hence angel investor expects a lower IRR. Angel stage IRR should be around 25%, Seed’s IRR 22%, Pre-Series A’s IRR 20% and Series A’s IRR 18%.

Angel investors know that not every startup can achieve an exit as an Unicorn ($1 billion valuation), nor Centaur ($100 million valuation) or even reaching Pony ($10 million valuation). However, reaching Pony stage is reasonable to expect. Hence, the angel investor is often expecting a RM44 million (or $10 million) valuation when the startup exit via IPO or trade sale. Trade sale opportunity is too uncertain to be treated as exit strategy as compared to IPO.

Screen Shot 2017-04-26 at 6.51.37 PM

In Malaysia, the lowest barrier to execute an IPO is ACE Market. ACE Market currently has 114 listed companies and more than half of them are having a market cap of below RM100 million mark. 67 companies (60% of ACE) having a market cap of below RM100 million, 34 companies (30% of ACE) having a market cap of between RM100 million to RM250 million, 10 companies (9% of ACE) having a market cap of above RM250 million.

For the 67 companies which market cap is below RM100 million, the average valuation is RM55.6 million, median valuation is RM49.6 million, average turnover is RM62.54 million, average revenue multiple is 4.4 times, and average PE ratio is 31.6 times.

In the previous paragraph mentioned that investors are expecting a RM44 million (or $10 million) exit valuation, this is further echoed by the fact that majority of the ACE companies valuation is around RM50 million.

So, we are now clear that what’s the valuation range should a startup falls into. If a startup wants to raise at a higher valuation despite it’s asking at a stage which it doesn’t belong to, Angel investor might think one question repeatedly: “Can this startup gonna beat ACE-listed companies?”. Let’s look at the examples below.

Example A
“Startup A” approach angel investor with a valuation of RM30 million and turnover of RM3 million, consider it a “Series A” funding stage. Just to be clear, the RM30 million valuation is almost half of the exit valuation of RM50 million.

Angel investor who wishes to achieve at least 18% IRR from this Series A investment would expect this startup can achieve an IPO on ACE market at RM50 million as an exit strategy within 3 years timeline. It sounds too aggressive when investor look at its current revenue of RM3 million. If the startup wants to garner RM50 million valuation during IPO with revenue multiple of 4.4 times, the revenue at IPO year gonna be hitting RM11.36 million.

From revenue of RM3 million scale up to RM11.36 million within 3 years, the revenue CAGR is 55.87%. How realistic is 55.87%? One of the Malaysia most successful tech company MYEG is achieving a 5 year revenue CAGR of 36.8% and MYEG is constantly recognised by Forbes as one of Asia’s “Best Under A Billion” companies. Angel investor gotta be thinking if this startup asking at RM30 million valuation, the startup gotta shows that they can perform better than MYEG (RM7.8 billion or US$1.8 billion market cap company).

In this example A, clearly a number of angel investors would walk away from this deal due to its current revenue is too low and asking at a high valuation.

Example B
Using the same startup A as the reference, the changes now is the valuation lower to RM22 million instead of RM30 million. The startup is targeting a 5 years timeline to achieve revenue of RM11.3 million and list on ACE market at RM50 million valuation. This derives from the same revenue multiple of 4.4 times, gives an IRR of 18% with revenue CAGR of 30.51% (revenue RM3 million increase to RM11.36 million within 5 years).

In example B, the angel investors are now seeing a reasonable valuation with realistic CAGR and finally a good balance of risk and reward at IRR of 18% with 5 years timeline.

Have a word to say? You are welcomed to join the discussion below.

Disclaimer: Although I’m from Crowdo Malaysia (Malaysia’s licensed Equity Crowdfunding platform), the point of view above doesn’t represent the platform’s view. It’s solely my personal view and a collection of views by my personal interaction with angel investors.

Peer-to-business Lending

 

a

According to World Bank, 200 million businesses globally are unable to get the credit they need, both for working capital and for investments. The estimated global credit gap exceeds $2 trillion. Entrepreneurs are always eager to seek capital to grow their business, but banks can’t meet their needs. Small business loans also are not as profitable for banks, because they cost the same amount to originate as larger loans. For this reason, banks tend to put less emphasis on lending in the sub-$500,000 range. This creates a large funding gap for small businesses, which tend to seek out significantly smaller loans.

 

Peer-to-peer (P2P) lending platforms have evolved to solve the funding gap issue for small businesses. P2P platform is an online platform to allow small businesses to borrow a loan from a pool of investors who are seeking an interest repayment with an interest rate between 9-14%.

 

In 2015, an estimated amount of $23 billion was lent to borrowers globally via P2P platform whereby China accounted for 85% of the loans borrowed and the UK accounted for $4.4 billion of lending. Morgan Stanley predicts the P2P loans will exceed $150 billion to $490 billion globally by 2020. Given the huge opportunity, there are 60-80 countries that now have at least one P2P platform operating or lined up to launch in 2015/16. Governments around the globe are aware of the phenomenon and have assigned their relevant agencies to regulate the alternative finance activities.

 

Alternative finance activities such as equity crowdfunding and peer-to-peer lending are now regulated by the Financial Conduct Authority in the United Kingdom and have been from 1 April 2014. Two years later on 13 April 2016, Securities Commission Malaysia (SC) announced the introduction of a regulatory framework to facilitate peer-to-peer financing and allow P2P platforms to be operational in early 2017. In this particular announcement, Malaysia will only plan to launch the peer-to-peer financing option to business loans instead of personal loans. To put it into perspective, a Federal Reserve (US) report states that debt consolidation loans account for more than half of all peer-to-peer loans, followed by credit card payoffs (17%) and home improvement (8%), while small business loans account for an estimated 3.5% of all funded loans.

 

The big players in the P2P lending industry are Funding Circle, Lending Club, Prosper and Zopa. Interestingly, the big 3 US players even formed their own alliances: Marketplace Lending Association which sounds similar to UK’s Peer-to-Peer Finance Association. Here’s a snapshot of the big 4 players:

 

  Funding Circle Lending Club Prosper Zopa
Founded 2010 @ UK

2013 @ US

2007 @ US 2005 @ US 2004 @ UK
Loan Funded since operational £1.3 billion $18.7 billion $6 billion £1.5 billion
Side Notes Funding Circle is a pure peer-to-business lending platform and not accepting individual as borrower. UK Government putting £20m in Funding Circle to fund small businesses along with investors Largest player with most available loans for investors at all time and rate usually better than Prosper Prosper only allow individual as borrower and the loan limit is $35,000. In 2013, Zopa changed its model to let consumer feels more like putting money in a fixed-saving account. Lender don’t get to choose who to lend to. More details can refer to http://www.zopa.com/lending

 

Most of the P2P portals are focusing on personal loans instead of business loans. My writeup focus will be geared towards peer-to-business (P2B) portals.

 

Here’s the 5 key elements which businesses should know about P2B lending:

  1. Speed & Simplicity

On Funding Circle, the online application for loan eligibility can be completed in 10 minutes without visiting any physical office. Within two hours, the business owner should hear from a loan specialist, who will ask them to submit documents for the application verification. If approved for a loan, the business should be funded within 10 to 14 days. It shows how businesses can now bypass a much complicated bank lending process.

 

  1. Access to funding

Based on a Nesta survey, 33% of SME borrowers from P2P platforms were convinced that they would have been unlikely to get funds elsewhere. In the UK, close to 50% of the SME loan applications were rejected. P2B portals quickly become the go-to place for these SMEs.

 

According to Bank Negara Malaysia (BNM) statistics, non-household loans approved in 2014 and 2015 were RM 160 billion and RM 180 billion respectively, while loans outstanding in 2014 and 2015 were RM 578 billion and RM 624 billion. The BNM statistics included listed companies, large private companies and SMEs. SME Bank had provided a brief statistic for SME lending: it states that SME loans outstanding in 2013 and 2014 were RM 199.6 billion and RM 225.9 billion of which borrowed to a total of 693,115 SMEs. RM67.3 billion worth of loans were approved in 2014 to 140,815 SMEs.

 

Referring to 2 tables below, it could clearly show the funding gap in Malaysia. Although the loan amount is not equivalent to the number of SMEs loans rejected, it does show how many business expansion opportunities were rejected due to loan rejection.

 

Year 2012 2013 2014 2015
Loan Applied RM mil 372,118.7 358,947.3 386,192.9 396,783.3
Loan Approved RM mil 186,326.9 154,814.2 160,017.1 179,865.5
Loan approval rate based on loan amount 50.07% 43.13% 41.43% 45.33%

Source: Bank Negara Malaysia. Non-household loan, including listed companies, large private companies and SMEs

Period 2012 Jan-Aug 2013 Jan-Jul 2014 Jan-Aug 2015 Jan-Aug
SME Loan Applied RM billion 123.8 111.1 119.9 126.6
SME Loan Approved RM billion 54.8 42.4 42.5 43.6
Loan approval rate based on loan amount 44.26% 38.16% 35.45% 34.44%

Source: Ministry Of Finance. SME only

 

The SME Bank report also stated the key reasons for SME loan rejection in Malaysia were insufficient sales, income or cash flow (55.2%), too high leverage or outstanding loans (31.7%) and failure in providing sufficient documentation (31.7%)

 

  1. Eligibility

Peer-to-business lending is suitable for established businesses which have been trading for at least a couple of years and profit generating while the business could offer a favourable interest rate to investors.

  • P2B portals aren’t for large companies. Funding circle allow businesses borrow between $25,000 to $500,000 while Lending Club is between $5,000 to $300,000
  • Isn’t for startup either. Lending club requires the business to be in business for more than 24 months and to have made at least $75000 in annual sales. Funding Circle requires the business to have made at least $150,000 in annual sales.

 

  1. Interest Rate

Interest rate on P2B portals are not necessary cheaper than banks.  Annual Percentage Rate (APR) represents the true annual cost of borrowing, including interest and fees. The advertised APR for Lending Club business loans ranges from 8% to 32% while Funding Circle’s APR is between 8% and 33%. According to analysts, the typical APR ranges from 14% to 19% among 2 portals. Commercial bank’s SME loans are significantly cheaper with APR ranging between 6% to 8%.

 

Goldman Sachs reports that the average APR on loans charged by OnDeck was 51.2% in the fourth quarter of 2014. Granted, banks take a lot longer to issue loans than P2B portals, but if businesses can wait and can qualify for an SME loan, that will be the less expensive option. However, as bank credit is not available for SMEs in many cases, P2B appears to be the only option.

 

Term Interest Rates
12 months 5.49% – 23.29%
24 months 7.99% – 25.79%
36 months 8.99% – 26.79%
48 months 9.79% – 27.79%
60 months 10.49% – 21.29%

Source: Funding Circle

 

  1. Fees

 

Generally, the fees on P2B platforms can be classified into the following 4 types of fee:

  1. Origination Fee: Applied when the P2B loan is approved, businesses do not need to pay it if loan is disapproved and the fee is deducted from the total loan proceeds. Lending Club charge between 1% to 7% of the loan proceeds, Funding Circle is between 1% to 6%. On Lending Club, 80% of the borrowers pay 5% while 20% of the good borrowers pay only 1%.
  2. Late Payment Fee: Funding Circle charge 10% of missed payments.
  3. Non-sufficient Funds Fee: Funding Circle charge $35 when businesses don’t have sufficient funds in their account to make monthly repayment.
  4. Early Settlement Fee: some platforms do charge, but Funding Circle and Lending Club don’t have this fee.

 

 

P2B Lending For Investors

For the first time in history, the ordinary investor is now able to invest in the business credit market just like big banks. In 2015 alone, $23 billion was lent by thousands of investors via P2P platforms.  Why were investors attracted to this new asset class? How much return and risk does this asset class consist of?

 

Before going into details, let’s take a look at the UK’s top 4 P2B players who had collectively lent about £1.7b since operational and it’s dominating around 80% of the entire UK P2B lending market share (excluding property financing)

  Funding Circle ThinCats Assetz Capital Folk2Folk
Founded 2010 2011 2012 2013
Numbers Lent £1.3 billion to 15000 businesses from 50000 lenders Lent £175 million to 644 businesses from 5000 lenders Lent £116 million to 200 businesses from 12500 lenders Lent £104 million
Loan offering Secured Loan between £100,000 to £5 million; Unsecured loans up to £250k Secured Loan between £5,000 to £1 million Secured Loan between £50,000 to £2 million Secured Loan between £25,000 to £5 million

 

Here are the 6 reasons why P2B Loan is an attractive asset class for investors:

  1. 7% Net Return + Cash Monthly Repayment

Funding Circle had disclosed investor’s average return after fees is 7.1% which 50% of the investors are earning 6.4% and above. ThinCats’ weighted average return after fees and before losses and tax is 11.24%. Assetz Capital’s earning gross rates of return between 3.75% – 18% per annum with an average gross interest rate of 10.6% (before fee). Folk2Folk didn’t disclose their average rate but their advertised rate of return is 6.5%. Hence, it’s safe to say that the net return is 7% and above. Investors are able to receive cash repayment on monthly basis. It empowers the investor to reinvest the cash repayment into new loans and compound it on monthly basis.

 

  1. Simple Fee: 1%

Same as mutual funds and stocks, there are fees involved when investing in P2B loans. Unlike the stock exchange, there’s no transaction fee for every purchase of a loan. P2B platforms practice a relatively simple fee structure: 1% annual servicing fee. On Funding Circle, the 1% is charged based on the amount outstanding on any loan, payable on the capital only, not interest. It is included in the interest rate payable by the business and taken directly from loan repayments. Yes, that’s only one fee: the 1% annual servicing fee, nothing more.

 

  1. Liquidity

The P2B platforms provide the liquidity option to investors too. On the platform itself, there’s a secondary market for investors to trade loans. 0.25% sales fee is applied on Funding Circle when a loan is sold to another investor; the fee is based on the outstanding loan amount. Interestingly, investors can also add a premium or a discount to the loan which they are selling, just like a bond.

 

  1. Secured

The majority of the UK P2B loans which investors lent to are secured against something solid, tangible and recoverable in the form of property, equipment, inventory, account receivables or other equivalent worth considerably more than the loan. The Big 4 UK P2B platforms practice a maximum loan to value (LTV) ratio of 60%-65%. For example, when the business borrow a £600,000 loan, the business must provide the platform a charge over asset which worth at least £1,000,000. When the loan is declared as bad debt, the P2B platforms will recover the debt by selling the assets and return the principal plus interest to investors. In some cases, the platform might not fully recover the principal due to the liquidity of the asset, the investor losses could be up to 5%. You might wonder how much is the default rate in reality.

 

  1. Low Default

Funding Circle’s current bad debt is 1.6% and expected annualised bad debt is 1.8%, ThinCats’ current bad debt is 5.02%, Assetz Capital’s current bad debt is 1.41%, Folk2Folk is still achieving a record of zero default as to-date. Let’s zoom into Funding Circle’s statistics. Since operational, there are 259 bad debts worth £21 million against a total of 19,479 loans worth £1.3 billion. In terms of percentage, 1.33% of the loans are bad debts and the monetary amount is 1.63% of all loans. To put it into local perspective, major commercial banks in Malaysia are getting a non-performing loans (NPL) rate between 0.95% and 3.15% while SME Bank once stood high at 12.3%.

 

  1. Simple Diversification Strategy

How do P2B loan investors achieve high returns while safeguarding against default? Diversification! Diversification simply means spreading the lending across hundreds of different businesses, which means investors have a small amount lent to each one (instead of a large amount to just a few). For example, investor can lend as little as £20 per business, so by lending £2,000 in total, an investor can lend to 100 businesses and be diversified. While doing that, an investor should retain a maximum of 1% of their total amount lent to any one business. This becomes important when a business is not able to fully repay its loan as the impact on overall return will be less. On Funding Circle, diversification can be done by filtering risk grade (interest rate), location, industry sector, the business’s financials, loan purposes. Here’s an example of the interface:

Screenshot 2016-06-14 00.25.59

 

Different P2B lending model between the West and Singapore

The majority of the UK’s P2B platforms and the US’s largest P2P platform Lending Club operate on the auction model and the majority of the loans are secured. Every business loan will be funded through a live auction. Investors participate by placing a ‘bid’. The bid is the amount of money that the investor wants to offer the business and the interest rate he/she set for them to pay back. Just as with any auction, the bid is final and can’t be withdrawn – but other investors offering lower rates can knock it out. If this happens, the investor can bid again at a lower rate. Only lowest rates offered in the auction are accepted into the loan. If the business chooses a fixed interest rate auction, there’s no bidding needed and thus the loan is filled on a first-come-first-served basis. All platforms have the auto-bid feature hence it’s not that complicated for new investor.

 

You might wonder how investors are going to know how much interest rate should they bid for. It’s based on risk grade. Funding Circle’s credit assessment model consists of 2,000 variables including company performance, credit history and existing loans and debts. Every business that passes their credit assessment process is given a grade from 6 risk levels (A+ to E). Here’s the weighted average interest rate offered by investors to each risk band: A+ is 8.3%, A is 9.4%, B is 10.4%, C is 11:8%, D is 14%, E is 18%. Lending Club even provide 25 risk grade with a specific interest rate ranging between 5.32% to 30.99%.

 

While the majority of P2B loans are secured in the UK and US, Singapore’s P2B platforms are offering P2B lending on a no-collateral-required basis. However, the platforms do require the business’s director to be personal guarantee on the loan. The only 3 peer-to-business platforms (MoolahSense, Capital Match and Funding Societies) in Singapore have collectively raised more than S$10 million for SMEs in 2015 and a collective total of S$24 million was lent to businesses since operational. To know more about the P2B space in SG, you may read more about The Straits Times’s reporting here. It mentioned that an investor managed to earn an average return of 17%. Among the 3 platforms, MoolahSense is the leading P2B platform with S$11.42 million lent to 65 loans while Capital Match is catching up with S$9.53 million lent to businesses.

 

If you wish to know about a more detailed real world example of how much can you earn from a P2P portal, you can read this blog: http://www.lendacademy.com/quarterly-p2p-lending-results-q1-2016/. He shared his investment return on a quarterly basis starting from Q1 2011 until Q1 2016 for 18 quarters. His latest annual return is 9.28%.

 

Personal Reference

The Parenthood (Fundraising on Crowdo)

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The Parenthood

The Parenthood is Malaysia’s first one-stop parenting concept based on a London Street-themed indoor family park that offers a comprehensive range of products and services catering to both the needs of parents and children alike. Visit their official website at http://theparenthood.com.my/ and their Facebook Page at https://www.facebook.com/The-Parenthood-983915141672761/
Funding Update: According to Leroy’s Facebook post, The Parenthood had raised RM2.5 million from a group of investors and transferring to Crowdo. Adding the RM0.21 million which recorded on Crowdo campaign page, The Parenthood had raised a total of RM2.71 million as at 22nd March 2016, which still require RM0.29 million to reach RM3 million target.

 

Pitch: The Parenthood Equity Crowdfunding Campaign Video

 

The beauty of the business idea

 

#1

According to government statistics, there were 511,865 live births in 2014 alone. Let’s multiply it by 5 years, that gives us 2 million babies and children who need to be fed, educated and to play. Every day, there’s an average of 1,400 babies born. That’s an evergreen business which The Parenthood is tapping into.

 

#2

Parents want their kids to be happy, want to have fun with them, socialize with them. Hence, a children’s playground is a no-brainer idea to attract parents to getting into The Parenthood outlets.

 

#3

The parents will be there as long as the kids want to stay there. The longer they stay, the more money they will spend, more time to do shopping. That’s great, more revenue for The Parenthood!

 

#4

The Parenthood will always acquire a megastore retail space and subpartition it to 20-50 mini stores within the mega stores. The Parenthood welcomes the merchants’ consignment of their product in there, just like the way Parkson and Aeon are doing it. Some merchants would rent the space to promote their newly-launched products as well.

 

#5

There’s one more great reason why parents should bring their kids to The Parenthood. Education! Parents want their kids to have talents that they can show others, want their kids to know better stuff. The Parenthood would organize weekly weekend classes like drawing, DIY, creation, language classes, cooking, role playing, and science etc. The usual talent classes outside require at least 4-8 weeks fees commitment, while The Parenthood could do the walk-in style where parents choose to go when they are free over the weekend. The more activities happening at the outlet, the more money will be spent there. So, more classes, more visits, more chances to get parents to buy kids’ products! It’s like gym classes—the instructor arranges many types of classes and any patron can choose which to join. Aha! The Parenthood could charge a membership fee on the classes and I would call it “Genius Pass”: pay a whole year’s membership fee of RM299 to join unlimited classes in The Parenthood. The walk-in price would be RM19. The idea is to encourage parents to bring their kids to the outlet at least twelve times a year, educating their kids while shopping at the same time. In future direction, The Parenthood would have 10% of the group revenue contribution from the school sector.

 

About Leroy

Ever wonder whether an identity as parents makes a good entrepreneur and CEO of The Parenthood? You would need more than that! The experience of ventures is what is required to make a good CEO of The Parenthood. Prior to The Parenthood venture, Leroy had been running baby-product-related businesses such as baby product sales fairs and baby product retail shops. 2009 was the first attempt; Leroy and Lilian set up a baby product retail shop in Jaya One and relocated to Kuchai Entrepreneur Park in 2010 while setting up their online shop – happybaby.com.my which also focuses on baby products. They once set up a booth at the infamous Parenthood Expo 2009 & 2010 in Mid Valley. I assume this was the first Ah-Ha! moment for Leroy to get into baby product sales fairs. Back then, happybaby.com.my had organised a couple of workshops and classes for parents on several parenthood-related topics. In 2011, the shop was relocated to a 4,000 sqft retail space at Pearl Point Shopping Mall. You can see their venture is getting larger and larger every year! In 2013, Leroy’s second attempt was the Malaysian International Parenthood Fair, the sales fair which aggregates multiple brands in one place for a week and moves from mall to mall. In 2014, Leroy’s third attempt was upgrading their retail shop size to a 15,000 sqft megastore – Malaysian International Parenthood Superstore at The School, Jaya One. The one-stop shop was just like The Parenthood now, but back then it was just pure retail. In 2015, the Parenthood Superstore was expanded to The Shore Mall, Melaka and Klang Parade which gives them three outlets running at the same time! In 2014, Leroy even considered expanding the idea into Malaysian International Parenthood Education (MIPE). All of us shall see The Parenthood idea didn’t happen overnight. Leroy had taken a long journey to accumulate his experiences.

 

Concerns

 

#1: Online purchase trends

There’s 2.5 million monthly Google searches made about baby products by Malaysia internet users. It gives a strong indication that parents are purchasing baby products online. No doubt more and more parents are making purchases online nowadays given its convenience of staying in the comfort of their own home while comparing product prices between sites. In the industry, there are a lot of mini-baby-product shops and also top e-malls like Lazada, 11street, Mudah, Lelong, Tesco online, Aeon’s Shoppu, Anakku’s online shop who also owns retails shops, and Chinese-language media group’s Logon.my who have a great exposure to their massive readership. According to research by eCommerceMILO, the average monthly web visits of the top 10 kids and baby stores in Malaysia is only 10,800. This is a small amount, but the report didn’t manage to include the statistics from the e-malls like Lazada, Tesco Online and 11street.

The Parenthood not only need to secure great merchants but also great discounts to drive in-store sales in the long marathon run against online shops.

 

#2: Price War

Just like Tesco, Aeon and Giant, The Parenthood would need to engage in a similar discount war to encourage parents to visit the stores to shop. The key to price war is to scale up tremendously with multiple outlets throughout the cities. It gives them the purchasing power on lower cost of purchase. If you could visit The Parenthood outlet now, most of the products can be bought at other places at a significantly cheaper price.

 

#3: Too many ideas at once

To give parents a reason to visit the The Parenthood, education could be one, leisure could be one, and play could be another one too. The Parenthood is focusing on too many sectors to begin with: Education, Play, Shopping, Relaxation, Leisure, Dining and probably more. There is too much hiring involved and too many resources needed to do one thing well at a time. You could imagine the initial setup capital is incredibly huge on making the one roof concept.

The core idea is to buy baby and kids’ goods at the store. The question is whether The Parenthood is able to give a compelling reason for parents to visit the outlet and spend money in the store. Clearly, the one hub idea is to generate a reason to visit. Another explanation to why The Parenthood focuses on many sectors at once is – Activities! Activities will drive foot traffic to the outlets.

 

#4: Outlet location

Prime location is an important factor for a huge amount of visitors and drives in-store revenue. The outlet also  needs to have huge store space, which means high overhead costs including staff salaries, utilities and shop rental.

But this is not a bad concern given that Leroy had managed a couple of megastores prior to The Parenthood.

 

There’s some strategy that has yet to be implemented:

A membership card to collect email and mailing address for maintaining customer relationships, sending a newsletter to invite the customer back into the store. This is an extremely important part of the team effort on maintaining every single customer relationship. Yes, they do have the newsletter form on the website. But did they offer the membership signup over the counter when the customer made their purchases?

 

Assumptions for successful business model

  • Prime location with huge floor space, location with high velocity of visitorship
  • High inventory turnover to maintain healthy promotion activity
  • A proven management team to manage multiple outlets

 

Financials

  • The initial capital investment of RM3 million was invested by Leroy, not taking any debts and other shareholders yet prior to this equity crowdfunding campaign on Crowdo.
  • Since the outlet launched in December, The Parenthood has a RM100k turnover each month which is impressive!
  • Retail is not their major revenue contributor in the future. The parenthood will have five evenly distributed revenue contributors: 35% from Playzone, 31% from Retail, 13% from Dining, 11% from Service and 10% from School.

 

Conclusion

Given Leroy’s journey since 2008 in turning a small retail shop lot into 4,000 sqft, 15,000 sqft and three mega outlets, and right now a 16,000 sqft megastore which houses 33 retail merchants, I would bet that Leroy is one of the few who could make The Parenthood a success story in the retail industry. When investing in the company, the founder is the key to everything and in this case Leroy has it. Regarding execution, The Parenthood is doing RM100k turnover a month as a start and in the middle of launching second outlet. On a higher level, baby business is an evergreen business and would survive an economic downturn too. Let’s invest in The Parenthood!

 

References:

List of grow hacking reading materials

Blogs

Books

Slides

Articles

The 6 Idea Generation Approach (Part 1)

If you are seeking a startup idea, here are my first six favourite approaches for you to generate that next billion-dollar idea.

 

Idea Approach 1: Dis-intermediation

– What is intermediation? It is the middleman, agent, or third party between a transaction. They charge a fee and jack up the price to make a profit. This idea is to eliminate the need for a third party between a transaction.

– If Xiaomi were to rely on a reseller but not via online sales, the price wouldn’t be that cheap either.

– Organisations used to pay headhunters a high fee to find relevant talent with required skill sets. Now LinkedIn has significantly reduced the business size of headhunting firms.

– Before Uber, taxi drivers were unable to drive their own car and were required to pay a fee to a licensed taxi operator to get their certified car. Uber has dis-intermediated the need for taxi drivers to pay that fee, and now they can become an UberX driver with their own car.

– In Malaysia: iMoney.my and RinggitPlus.com will soon eliminate the need for local banks to hire more credit card salespeople. (Idea giveaway: There are so many unit trust agents and insurance agents out there. What if you could build a compelling platform that convinces the consumer to buy directly with the insurance company without paying commission to an agent?)

 

Idea giveaway: The speedy transfer and low or close to zero transaction rate of Bitcoin allows user to do cross border transfers faster and cheaper. It will soon make a big impact on Western Union and MoneyGram, who both charge a fee. If you could make the user experience good, people would start adopting your system to transfer money via Bitcoin back to their home city. That’s your opportunity to dis-intermediate both Western Union and MoneyGram.

 

Idea Approach 2: Curing Pain

Refer to http://www.forbes.com/sites/georgedeeb/2014/07/24/is-your-startup-building-a-vitamin-or-a-painkiller/.

– If you could choose to pursue something, choose an idea that is a painkiller instead of a vitamin. It has to cure the pain and not just be a “nice to have” value to the consumer.

– The common questions to help cure the pain are the followings: Is it better, is it significantly cheaper, is it faster, is it easier?

– What is better? Storing and transferring files over a USB thumb drive is a pain and the worst is it often goes missing. Dropbox cured the pain for this.

– What is significantly cheaper? Business owners used to pay a huge fee to freelancers or programmers to develop an E-commerce storefront. Shopify allows businesses to pay about 100x less to achieve the same purpose.

– What is faster? Instead of hiring five staff to do a repeated job that is slow, CloudFactory and Mechanical Turk distribute the repeated tasks to more than 10 people and very often, this works five times faster. skyscanner.com was my favourite; if it didn’t exist, I would open multiple tabs to check a flight price. It indeed has saved a lot of my time.

– What is easier? Evernote built a lot of awesome features to make you store all your notes in one place. Ticketing sales were hard to keep track of in messy excel or other forms, so Eventbrite saved the day, allowing event organisers to make it easier.

 

Idea Approach 3: Commission-based Model

– If you could build a platform that could increase the sales for others, they would be willing to pay you a fixed fee or commission. Companies that are spending marketing dollars to acquire a customer can spend some time to get the deal. There’s cost involved for every transaction. If your idea could bring them sales and eliminate the need for spending huge marketing dollars, they would pay for it.

– Marketplace: Marketplaces spend a huge amount of marketing dollars to acquire users who will stay with the Marketplace. Marketplaces generally have a high volume of visitors and hence, it make senses for companies to give out commission to the Marketplace in return for lower marketing dollars spent.

– zaarly.com collects a 10% commission fee by getting jobs for local service providers.

 

Idea giveaway: What if, in the future, companies no longer need to hire so many permanent sale forces and even ordinary people can be their sales people? I came across this startup that is yet to launch: https://www.commissioncrowd.com/.

 

Idea Approach 4: Under-utilised Inventory

– Inventory in this context means the things which have the potential to generate income. It could include services like taxis. The idea is to find out what are the inventory items in this world that are under-utilised and aggregate them into one platform.

– Have an extra seat in your car? Why not share it? See: Lyft

– Have extra space in your office? Why not share it? See: sharedesk

– Have extra room in your house? Why not share it? See: AirBnb

– Have extra money that you’re able to lend out? Why not lend to people in need? See: LendingClub

– Have free time after 9-5pm? Why not do some work for others? See: CrowdFlower, Mechanical Tucks

– Want to share your moment or photos? Why not post in a place where people are? See: Facebook, Youtube, Instagram, Pinterest

 

So, now you should look around and identify what are the inventory items that are under-utilised. Although there can only be so many Airbnb’s or Uber’s for anything, keep looking for the ones that have great demand and supply.

 

Idea Approach 5: Targeting Millennials

– Most of the startup ideas are targeting Generation XYZ, so it’s a crowded and competitive market. Why not set your target on solving a different set of problems — creating solutions specifically for the Millennial generation?

– The Millennial’s lifestyle is easily shaped by technology. Hence, let’s think out loud — what do you think their future lifestyle will be?

– What are the differences in the Millennial lifestyle compared to our generation? Think deeply about their life stage cycles, daily activities, spending preferences, and job preferences.

– I would guess they have high spending power, and they always want everything while also wanting to save big bucks.

– Yet, Millennials are also very competitive among their generation in every aspect. It could be in terms of jobs and home purchases.

 

Idea Approach 6: Connecting the people with the platform

Let’s identify what platforms are lacking globally and build them.

– Connecting friends to keep in touch with each other: Facebook

– Connecting professionals to extend business relationships: Linkedin

– Connecting shoppers to buy things from businesses: Ebay, Rakuten, Alibaba

– Connecting private drivers with consumers: Uber

– Connecting service providers with customers: Zaarly

– Connecting teachers/trainers with learners: Udemy, Lynda

– Connecting wedding related services to couples: theknot

– Connecting home renovation related services to homeowners: houzz

– Connecting content writers with readers: Medium, Tumblr

 

What is lacking in the market? Identify it and launch it!

 

Idea giveaway: Connecting financial planners, unit trust consultants, insurance agents, and investment product consultants with people.

 

I will stop here with these six approaches first and do stay tuned for my upcoming post for the rest of the approaches.

 

Disclaimer: I’m a business developer at speedrent.com. I haven’t launched a successful business yet but am just a humble guy who always loves to pitch random ideas in pitching competitions (and win some). I love to help people bounce ideas off and generate awesome business models for their ideas. Email me at me@steason.com if you need my help on your pitch, getting your idea more solid, and generating a business model for it.

Manifesto – Startup Journey

What I believe in the future:

  • The world need more Problem Solvers: Engineers, Scientist and Entrepreneurs
  • Salesforce-less, lesser repeated task base job
  • Happiness / achievement is defined by how much innovation can a person bring to the world

There are 7 billion populations in the world and problems are everywhere. It causes sadness moment for everybody. We should be act on it to solve the problems.

Business model generation, technology breakthrough and innovation are needed to solve the problems.

To the millionaires or billionaires who are spending unnecessary dollars on luxury stuff, they should invest in startups instead. People should be proud of funding a startup instead of owning a Lamborghini.

My future journey would begin with an exit of $150k in cash and form a tech lab which constantly builds tech products and grow the snowball way up to Unicorn level. The tech lab is a mixture of software outsourcing company and accelerator. It will constantly fund early stage idea to help it launch in market to gain traction to growth for million dollar valuation. The next step will be exit it with a huge pill of cash and the money will be further invest in multiple early stage ideas again. And there goes the snowball. I will call the tech lab as FREAK LAB in future. Because what it does is turn idea into reality rapidly and crazy enough to shock the world.

I’m a strong believer of sharing economy and I believe that talent could also be a commodity in a sharing economy. In Freak Lab, there will be several consulting team consist of 2-3 people each which startup teams. These consulting teams would be top-tier in their expertise area. In my mind, there would be 3 consulting teams: Growth, Engineering, Business Development. Growth consulting team would be consists of growth hacker, marketer and market expansion experts. Engineering consulting team would be consists of computer scientist, researchers, programming experts and data scientist. Business development team would be consist of business analyst, business researcher, lean startup practitioner and entrepreneur.

When a 2-person team come to Freak Lab work on an early-stage idea, the consulting teams will assist them along. Yes, you see it right! That’s how a startup should be. The startup don’t have enough expertise or capital to get a proper team with fully complimentary skill sets. Each startup spends lesser overhead, get the best help they ever had, the consulting team can keep improving internally as they have the chance to work on various ideas with same skill sets.