California technology companies continue to soar in valuation as the rat race to the magical billion dollar market cap becomes more achievable. As more and more apps hit the market, more and more angel investors and VCs are placing huge bets on extremely early stage companies in order to cash out on a 5 year exit plan. With the rising popularity of convertible notes and other means of discounted options to buy, investors are finding it easier and easier to step up to the startup roulette table.

Serving as the benchmark for startups around the world, California tech companies need to start acting more responsibly in their activities as to not provoke a world-wide tech bubble collapse.

Although not illegal, realtors have been using the tactic of straw-buying for years. Simply, it involves using another’s credit and standing to take out a mortgage for a completely separate buyer. Where it starts to get tricky is when property-flippers (those seeking short-term profit) promise high returns while backend transactions and approvals happen without proper due-diligence.

 

History Repeating Itself

The same thing is happening in the startup world. With the ever increasing pool of newly minted millionaires, startups are heavily attracting heavy-hitting advisory boards with little other intention of leveraging their name and reputation to get investment in the company. Doesn’t that sound familiar?

In 1997 there was a huge Asian Financial Crisis. Gripping much of East Asia, the Asian Financial Crisis left the world at the edge of their seats hoping that it would not cause a catastrophic meltdown of the world economy. As rapidly emerging markets appear all over Asia, and boasting a majority of the world’s manufacturing and working population, Asia simply cannot afford to have any of its industries burst. The world relies on Asia for nearly everything.

From a recent CNBC article, Is Asia start-ups’ new-found funding popularity a bubble? reporter Michelle Loh  writes:

“The flood of liquidity puts the region on pace for 45 percent year-on-year growth, according to a report by KPMG and global venture capital (VC) tracker CB Insights. While the region still lags behind the United States’ $19 billion worth of funding, Asia now attracts slightly over a third of the venture funding available globally, the report said.”

You read that correctly, the Asian region attracts nearly a third of venture funding available globally! The fitness startup KFit recently raised $3.25 million USD in order to tackle the problem of finding the right gym to go to in the Asia Pacific. According to a recent article on Techcrunch about the Asia startup:

“KFit is currently operational in six cities across Asia Pacific: Kuala Lumpur, Singapore, Taiwan, Hong Kong, Melbourne and Sydney. The company is aggressive with its growth plans and is aiming to be in 20 to 30 cities within the next 18 months.” The main KFIT development team is in Kuala Lumpur, Malaysia. The recent round funded by California based Sequoia capital, famous for it’s early investment in the Facebook social networking platform.

 

Western Economics May Not Apply to Asia

What’s really happening in the Asia startup market is that the problems being solved are solved in ways that only make sense in Asia. US companies simply cannot address the concerns of the consumers in the Asian markets.

All said and done, who will really be at fault if the Asian tech bubble fizzles out and valuations are forced to go lower and lower with companies inevitably taking “down rounds” (funding rounds that cut valuation instead of assume more).

From the CNBC article, cited above:

“Edith Yeung, a Partner at 500 Mobile Collective, a $10 million spin-off from McClure’s 500 Start-ups that focuses on early stage mobile investments, is keen to sound a note of caution.

Yeung says that while tech start-ups might be the “hip thing” at the moment, investors in Asia need to be schooled in the art of patient capital. While “there’s definitely tonnes of talent” in Asia, most start-ups will fail, so investors should not put their money down unless they’re prepared to wait it out, she said.

“It’s highly risky,” she said. “If you want to get to a point where there’s a good exit, take an IPO, or there’s some sort of acquisition, it takes at least 5-10 years.”

About Lee Decker

Lee Decker is a serial entrepreneur who is close to the Silicon Valley start-up scene and is the founder of several successful companies. He lives in California and is InvestAsian's CTO and Start-Up Analyst.

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