By Francis Kan
You can’t outrun a bad diet – or a bad investment choice. Luke Tan, 38, tells about how a decision to invest in Singapore start-up GuavaPass left him S$20,000 short.
A couple of years ago, a friend introduced me to a Singapore startup called GuavaPass, which would provide users access to wellness classes and health clubs through an online platform. My friend was trying to raise capital for them.
I had worked in finance marketing, and on paper, the company looked like it had a lot of potential. Revenues were growing by 25 per cent each quarter, and they were expanding quickly across Asia. Since they were in a growth stage, they were burning cash fast as they expanded, and needed to raise more funds.
Getting in early, while risky, could pay off in a big way. In 2017, I put $20,000 of my own money into the company. Other seasoned investors I knew had done the same, so I felt a little more assured. But you cannot analyse a private company the same way you can analyse a listed stock. You have to like the business model and go with your gut. That’s what I did.
By the third quarter of last year, the company was in the process of raising Series B funding. This would have put it on surer footing and things seemed to be going well.
However, at about the same time, a much larger competitor from the U.S. called ClassPass announced its plans to enter the Asian market. The U.S. company had a war chest to compete aggressively in the region. Potential investors were spooked and GuavaPass’ Series B funding round fell apart.
I didn’t panic. As an early-stage investor, you always think about exit strategies, and one that I had envisioned was an acquisition by ClassPass, so when I got an email at the end of last year from GuavaPass saying they were going to be bought over by ClassPass, I was initially overjoyed. But that soon turned to dread as I kept reading. GuavaPass had far more debt than its investors could have imagined. By the time the creditors were paid, there would be nothing left for shareholders like us.
In fact, funds from the acquisition wouldn’t even cover its debt, forcing a cheap sale to ClassPass. By the end of January this year, GuavaPass stopped operating in markets where ClassPass was present, and I had lost my entire investment.
Looking back, I knew it was a gamble. Maybe I could have done more research but, at the time, though, it was impossible to anticipate what would happen. What if ClassPass hadn’t come in? Or as a growing Singapore brand, GuavaPass had drawn a large investor?
But that is the risk you take, and you should only use money that you are prepared to lose. For me, such private equity investments form 10 per cent of my total portfolio, and I tend to make safer bets on Singapore REITs because I am quite risk-averse.
That said, I haven’t given up entirely on private equity. I’ve invested $50,000 in a pharmaceutical start-up developing a drug to treat Alzheimer’s disease, and is waiting for FDA approval. Depending on whether they can commercialise it, they could become huge or got to nothing. If they are able to offer shares to the public via an IPO, I could see a massive return.
But again, this is money I can afford to lose. With so much at risk, it would be foolish to bet the farm on something like this. So for now, it’s fingers crossed and we’ll see what happens.