Deal street asia - 29th May 2017

SGX is for companies with strong fundamentals, not risk: Dinesh Bhatia, SportsHero

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Dinesh Bhatia, CEO-Founder of SportHero. Credit: DEALSTREETASIA


Shiwen Yap
May 29, 2017:
Dinesh Bhatia, CEO and founder of tech company SportsHero, believes that while Singapore lags in key elements of its venture ecosystem, this state of flux will see the ecosystem develop and mature in the coming years as investor awareness of the potential of technology firms grows.
After listing on the Australian Securities Exchange (ASX) via a reverse takeover (RTO) of a cash shell, SportsHero today has a market capitalisation of A$4.5 million ($3.35 million).
According to Bhatia, SportsHero emerged out of his management team and him taking an existing asset in a previous company MyHero and spinning it out as SportsHero.
“SportsHero and TradeHero were not getting the proper attention they deserved individually. Investors saw them in different buckets — one in sports and another in finance. We had to split it in order for them to receive proper attention,” Bhatia said.
“Sports is more emotive and sees global sentiment, so with SportsHero, a better adjudicator of its value was the public market. People don’t realise that as long as you fulfil public market criteria, they’re a good way to raise capital. Most startups look to VCs to raise funding, as most startups will never pass the qualifications of a stock exchange. Because we were a carveout from MyHero, we had revenue, time and other valuation figures to show. The difference with going public is the need to perform at the stock price and people are looking more at the short-term gain – every 3 months – and if you look at it, some companies need to build up to the next wave. I’m a believer in that it doesn’t necessarily need to go anywhere in the short-term but has to go somewhere in the long-term. For me, that’s a horizon of 6-9 months, of up to 1 year,” he added.
Edited excerpts:
There’s concern among founders and investors that going public exposes the company to retail investors who may lack understanding of a company’s technology and business operations. As someone who’s shifted from being a private company to a publicly listed firm, how do you respond to these concerns?
I agree, but therein lies the issue that you need to communicate what you are about to those investors. I have always tried to simplify and gamify what SportsHero and TradeHero are. It should appeal to everybody and be something that everyone can use. I feel we are not there yet and are always improving on that front.
If its an app or a B2C company, then you need to look at your message, simplify it and try to make it work. If you’re a B2B play, then maybe retail investors will be looking at revenue and clients and not really what you do as such.
What’s the growth strategy for the next 2-3 years?
SportsHero is going to expand in three dimensions — product, sports and geography. For the next two years, we’re very focused on the Asia and ASEAN region. In terms of how we plan to do this, one element is product-wise and be a replacement fantasy league that has a tipping and prediction platform for those predicting game outcomes.
And in terms of tipping, those that are most popular can be followed online and offline for the purpose of fans bettering their own prediction purposes. In July and August, we are going to engage in a new product enhancement to overhaul this element.
The other aspect is in terms of sports. We started with soccer and just got into cricket. We have moved on into basketball and that will cover Asia for us. Thirdly, we plan to do marketing specifically in regards to SportsHero in India, focusing on our cricket offering (the firm recently recruited former cricketer Ian Chappell to provide exclusive content such as video and editorial for its cricket offering).
Are M&A strategies a part of your growth process?
Certainly. There are one or two deals that we’re looking at to accelerate that expansion process of product, geography and sports. Sports is virally and emotively epidemic. There could and does exist many fan groups and sports brands that aren’t able to monetize their fan base and we enable that with our platform.
With that, there are many opportunities for M&A and we are just starting to explore them. As a startup, you’re being pushed and pulled in so many directions that you have to prioritise, and M&A is a very valid way to go forward
Looking at transport, you’ve seen Grab and Go-Jek invest in digital payments infrastructure to control the customer lifecycle. Will SportsHero be looking at this in the future to control its own customer lifecycle?
We are too small and it makes much more sense to outsource elements of the customer lifecycle such as this. There are fantastic customer aggregation platforms that manage this and PayPal is one of them. Their analytics platform is great for managing platform and user engagement.
When you’re very small you want to move very quickly. When you get to the scale of Grab and Go-Jek, you can start to disintermediate some of these platforms and build your own because then it becomes much more important due to economies of scale, particularly with regard to the cost of transactions.
If we can get such scale, then we’d naturally look at such a move.
There’s substantial concern about the Southeast Asian exit architecture. As a Singapore-based tech company listed on ASX, what’s your take on the state of it in the region?
When you look at exit architecture, you need to look at what companies want to do. It could be as simple as being bought out by a larger company to form a new division for them. It could mean being bought out because your IP serves to fill a missing gap for a corporate. M&A exit architecture could be a reverse takeover (RTO) or an IPO.
Stakeholders in the startup ecosystem need to identify in what context and how do they want to structure their exits. A group of incredible salespeople in an incredible tech firm? It’s much better to be bought out by a corporate with a strong sales focus. If you’re a group of bright technologists but lack in sales, it might be better to be bought out by a research institute.
If you’re a B2C company and what you are doing is going to affect the masses, then go the IPO route. If you’re B2B and doing something that is about increasing engagement or some utility in some product or demand lifecycle, then an amalgamation into a larger company might be a better approach.
You as an entrepreneur need to see what you want to do. Look to position yourself in the industry based on the trends you’re seeing. The founder or management team or board needs to devise an architecture that is a good fit to the context of the company.
In a previous interaction, you weighed in on the SGX versus the likes of the ASX and noted that certain classes of assets performed very well on the Singapore bourse. Recently, the SGX has been working to attract tech startups as part of building up its IPO pipeline. What’s your take?
I commend the SGX on its efforts in re-engineering itself but it’s more about changing the mindset of retail investors dealing with the products on offer on the bourse, which is extremely challenging. If you’re used to Hyundai being a second or third tier car, even if Hyundai launches something comparable to a BMW sedan, you’ll still go to the BMW.
I think SGX needs to adopt a different strategy. They need to adopt rules and regulations for a new breed of companies. But they also need to realise that those companies will leave as the investor mentality has not changed. There needs to be a massive investor education programme.
The effort has to start outside of Singapore, maybe in China and Hong Kong or by reaching out to ASEAN, by making it easy for them to invest in Singapore stocks and growing the investor base from there. The Singapore mentality is to provide investment products that are safe and the SGX does a fantastic job of committing itself to that ethos.
We cannot and will never allow any risky venture to come to our shores! Singapore is a safe haven in case people haven’t realised, as Singapore investors are about dividend plays. Singapore is very much about having companies that have strong fundamentals, not about risk. In many other countries, you need risk and failure for disruptive success. This is not the case in Singapore. It requires some sort of disruptive change in the mindset of investors.
The SGX will never come up with something disruptive because it’s not something in the regulator’s mindset. If you look at Australia, from a very early period they were a resource-rich country with many buccaneers and entrepreneurs wanting to go and raise money because they went about prospecting and looking at soil mineral levels and thought they’d possibly found gold or silver or uranium or some other mineral.
Now, the banks wouldn’t underwrite their risk or meddle in such a risky proposition, so they’d list their exploratory venture to raise $2-4 million and come up with this marketing material that could appeal to retail investors. Maybe 1/20 of these succeeded. But retail investors in Australia are very used to putting in $2000 to $3000 in 10 to 15 companies. They were VCs in their own sense. And the ones that succeeded converted their $200 to $200,000. Those that failed closed down and the vehicle we took over was an example of that.
There are stable companies delisting on the SGX because they cannot get their required P/E ratio. When a company is very established and their equity is not being recognised or leveraged property, they can’t do M&A deals because they can’t use their equity as capital, which is very important. A lot of deals are done with equity as capital.
In the US, you have massive P/E ratios and they can give away their equity in M&A deals that far outweigh Singapore transactions. Nasdaq is known for tech and high risk. ASX is in its early days was a tech board but the mentality of the retail investors in Australia is one that is used to taking risks. What has once been a high-risk exercise taking stakes in mining companies is now about mining for digital gold in Asia.
In Singapore, we need to change the mentality and it might require a phase one and phase two. Do we create another board that has small startups allowed to fail or do we create a board that is a crowdfunding platform? I think it’s great to have a listing for startups where investors are permitted to invest only up to a certain amount and completely crowd funded with no institutional investors allowed. But they then have this three-month reporting scenario and have to be transparent in their dealings.
We need to have failures; we need to have 10 failures for 2 to survive. We need 100 failures for 20 to survive. But there is going to be greatness in those 20. We need to change our mindset and allow failures. We cannot have companies that all succeed and end up with two or three that are going to be great. .
You cannot always tread the careful route. or you’ll never be a massive success. You’re dealing with high betas, with $1 going to $1 million, or $1 million to $1 billion.
Look at Malaysia! Its’s cowboy territory in terms of businessmen and ruthlessness. And that’s why Grab started in Malaysia. We haven’t seen greatness in Singapore in a long time because the investor/entrepreneur mentality is very risk limiting.
You have places like the SIX Swiss Exchange and the HKSE which are located in jurisdictions with small population bases (i.e. 7 to 10 million) relative to the liquidity and size of their stock markets, which have market capitalizations in excess of $1 trillion. What can be done to boost liquidity of the securities market? One of the proposals is injecting CPF monies into the securities market or establishing a separate sovereign venture fund as a vehicle to drive liquidity in the SGX. What’s your take?
Liquidity is driven by transactions and is grounded in the investors’ mindset and them tracking market movements. Those people investing in the SGX are looking for a dividend play, so you’re not going to get that liquidity. In other countries, people are looking to ride the wave with six different stocks. People are listening to the news and transactions and interest in the companies is being generated.
I think one of the problems is that we’ve been hit by this down cycle in the shipping and oil & gas sectors, and our industry and a large part of our stock exchange is representative of that. This shows that we need to be more shock-proof. And this goes back to the fact that we need to allow more industries and more risk to come onto our board. But the investor mentality doesn’t understand nor appreciate risk in Singapore.
Singapore needs a two–pronged approach. We need to invite people with a high-risk mentality. Secondly, we need to educate existing users that rather than getting a dividend play look at having a portfolio spread where 20-30% of their funds can be placed in the stock market.
In the US, VCs were so successful because they did their capital markets outlay and disrupted it for institutional investors. They took their $100 million and put it into 20 companies each, rather than investing it all into one company. Their risk is much more spread out with them.
Retail investors need to change their mindset and maybe put $3000 in a couple of companies. An investor may be flat on 30-40% and totally fail on 60-70% fail while still making substantial returns on two to three big bets. But he has to keep monitoring the market and reading the news, and that market interest will drive more transactions and create a more balanced stock profile.
It’s about reeducating the retail investment mindset. The SGX also has to open up the markets and change the rules, which can drive further trading. If you’re lagging in any of those efforts, then it is not going to work. You need to treat the stock exchange as both a product and market and both have to be carefully handled.
You’ve had exposure to the startup/VC ecosystems in Los Angeles and Singapore. What’s your take on the key differences and what can be learnt from the business culture there?
I’m limiting my comments to the tech sphere. Now, San Francisco was known as the tech hub from 2004-2010, while LA was the content hub. Yahoo built their content hub in LA because they wanted to be close to the movie studios and everyone always talked about tech and content.
If you have a great product but no content, you’re in trouble. If it’s only tech and no content, then it’s easily replicable and you are nobody. User-generated content is crucial and Yahoo had already differentiated itself. If you were in LA, you were a content company. And in San Francisco, you were a tech-centred firm.
Again, the concept of VC was founded in the US. The traditional VCs are headquartered in San Francisco but they have offices and outfits everywhere now. It was like a single place with VCs flying into LA to look at companies. The risk mentality of the US is higher and bankruptcy is not seen as a failure. If a company s bankrupt, it can be repositioned and rehabilitated. If a person is bankrupt but a genius, there’s no stigma attached to it.
In Singapore, people are afraid to go bankrupt. There are so many restrictions and you cannot sit on a board for 5-6 years. So what can you do? You are just marginalised genius, which doesn’t happen in the US.
The VC mindset here and in the US is different They know how to immediately excite the entrepreneur and offer the right equity stake at the right valuation, which is a very delicate balance in order to motivate the entrepreneur to work and make it a success.
In Singapore, they try to squeeze you and make a safe play. They don’t understand that at some point if the entrepreneur is paid too low, lacks control or sufficient equity, then nothing’s going to work. He might say okay because he needs the funds to move forward, but too many VCs in Singapore look only at the numbers and lack people skills.
VCs in Singapore are not “people persons.” They need to speak to the founder’s team and look at what they have done in the past, what they can do in the future and their potential for success.Is he driven to make something work? What can be mobilised to motivate him?
Every entrepreneur is flawed or eccentric in some way and you need to use them for their skill sets because it’s often crazy to do what they’re doing. You need to look at it from a balanced perspective, which is better in the US. In Singapore, they’re more prone to assigning fault and take much more equity, which creates a more unfriendly environment.
Things are changing because of the younger breed of people who are now joining VCs have studied in the US and are a product of that system. And that has loosened up the ecosystem a little more but in Singapore, the entrepreneur mindset is not there. That is symbolic of Singapore, but that also leads to people using Singapore as a base and looking at ASEAN at investments in Thailand, Indonesia and Malaysia.
There’s incredible investment there because these people have an entrepreneurial drive and spirit. In Singapore, its muted compared to these destinations but there are outliers. However, people do it for the wrong reasons here.
I think the whole thing about startups is to expand markets and make a global play, and you don’t find that here. When foreign VCs come to Singapore, they are often disappointed, but I think it’s changing now for the better.
But some of the VCs may be grumbling that they cannot find good deals or startups. They’ve been exposed to the US system where they see entrepreneurs with unbridled energy with no impediment and striving for growth but here we are all impeded by factors like political systems or the Asian mentality, which has always been more conservative than a North American (i.e. Silicon Valley).
But who’s to say that Asian won’t be doing more of the research & engineering work of startups in the future? Right now in Singapore, things are in a state of flux. And that’s good because flux generates potential disruption and may create something that works. Another thing that may help is boosting the IP infrastructure.
In the US they have a great respect for patents but this is lacking in Singapore. We published the patent for SportsHero and it was shocking that in writing the patent we had to revert to India to seek an IP specialist. There are law firms here that claim to be IP specialists and represent your IP but there is no infrastructure for proper engineering talent who are legally trained to write patents and dive into the technical details of it. Singapore needs an infrastructure to support such expensive and skilled specialist work.
Singapore needs to specialise in certain niches. If we’re not good at being a place for marketing and growing a company, then we can definitely be good at patents and the current IP initiative is good. And this comes at a time when educations systems are all changing but Singapore is not there yet.
Also Read: ASX is like the Nasdaq of Asia: Dinesh Bhatia, SportsHero