Serial entrepreneur John Fearon, a partner at Singapore-based venture builder Sugar Ventures, looks for deals beyond traditional technology plays and prefers the higher yields of private equity-like deals.
Venture-builders, also called startup studios, source potential business concepts from within their own network of resources and subsequently develop them with internal teams of engineers, advisors, business developers, sales managers, etc. They develop multiple projects in parallel — parallel entrepreneurship — with operational resources and capital assigned to portfolio firms, functionally acting as a holding company with equity in various corporate entities.
With a background in digital marketing, Fearon enjoys sourcing digital arbitrages in the venture landscape. According to him, much of the capital invested into portfolio firms originates from the personal wealth of its partners, who have invested “more than S$4 or S$5 million to date”.
Fearon sums up the investment philosophy of Sugar Ventures being to “make money and to deliver returns ultimately”, with the venture builder lacking any particular investment thesis. He opines: “I think that not having an investment thesis is what makes us special. Unlike VCs, we don’t have a thesis that we have to live and die by. If we see opportunities, we will do it. That’s why we have been able to move beyond the traditional VC tech stuff.”
Does Sugar Ventures have any specific venture fund?
I can’t give exact numbers and honestly, you can fake IRR quite easily. So what I think really matters is what the actual returns look like in probably another 3-5 years for Sugar Ventures’ first investment vehicle.
We’re going to raise a fund, as right now we have a holding company structure. I am personally quite positive on what that will look like. I think the fund will be self-sustaining as the companies are all profitable. That’s very different from a venture fund.
It is not an open-ended fund as it is going to be 10 companies that our investors bought into. The companies themselves are effectively making this sustainable for the partners to continue to do this because they are profitable.
In terms of structure, how will you say you are different organizationally or in terms of corporate governance to a VC firm?
VC firms are very hands off. They give you the money and then you do the reporting. Theoretically, some VCs try to support with services but they are ad-hoc services, rather than actually managing the businesses.
We’re more like a private equity firm. We actually get involved in the strategy and some day-to-day management. We’re involved in strategic discussions and decisions on a day-to-day basis. We are like operating partners; we are not just giving you money and staying away. We’re funding on a continuous basis and are actively involved in management a lot of times.
Sugar Ventures is an established venture builder. Are there any plans for the future to form a venture fund or going to continue along the current line?
We can do both. I think we can be sustainable for the next 5 to 10 years, based on our first fund and the companies that we have. Throwing off evidence of profits, there is a potential to raise a larger fund and take some of the lessons we learned from our first fund. It will probably be more like a hybrid of a private equity with an incubator.
The type of business PE goes for are the kind of businesses that require more capital than tech guys will be able to put up. A lot of times when I speak to VCs, they are not interested in the sort of deals or ventures we’re working on.
PE deals have traditionally yielded better returns than VC. When you meet a private banker, they are going to tell you what their customers would like to put into PE. We will take the lessons from PE, factor the risk into it and then launch our fund.
You’ve been in the VC space for a number of years. How do you see the 2017 to 2020 period?
Honestly, I have become less engaged in venture stuff and startup stuff and more focused on the day-to-day stuff, helping our companies secure their rounds and supporting their growth.
I think that is quite trying in our model because we don’t fit into a lot of VC kind of mandates. We are not just focusing on growth; we are starting to become more interested in profits. We are becoming more interested in the cockroach startups. I don’t go to tech or startup events. I have friends in that world but I’m not involved there.
What would you say are the inefficiencies in the local venture ecosystem?
I think the biggest mistake people are making is that they are sticking to too much traditional tech stuff. I think there are bigger opportunities.
Take Grain – I’m not an investor – but they are actually making the food and putting tech on top of it. That for me is a good example of a company that is getting its hands dirty and playing with tech. They are not just pure tech. Traditionally you see VCs just want to be pure tech. They don’t want to deal with making the food.
With Grain, someone makes the food, they’re going get their hands dirty and trying to incorporate the tech into the actual manufacturing process.
Recently the Singapore government consolidated various startup funding schemes. What’s your take on that?
In terms of my journey, I came to Singapore seven years ago and I started with coming in and out of Singapore for six to eight months on visitors passes before I got my entry pass, employment pass and now I’ve got a permanent residence. In two or three years’ time I’m aiming to get a Singapore passport. So I have seen all the stages that most people theoretically go through.
I think that opening up and getting more entrepreneurs in the system is a good idea. I think the government is trying to do things. People will always say it could be done better but at least they are looking at it and trying, and that is already very positive. I’m sure that it will improve over time.
Much has been made of ongoing efforts by the SGX to reform and build itself as a viable exit platform for technology enterprises. But critics point to its lack of liquidity and low-risk appetite of local investors. What will it take to make the SGX more competitive and more attractive to local technology firms seeking a listing?
I just have a theory and my theory is based on what I see in the Australian stock market, where a lot of the companies from Singapore are trying to get IPOs, while in Singapore it isn’t happening.
If you take the lessons of the ASX – which is not the biggest stock exchange in the world but still very sizeable – there is liquidity for startups. The lesson that I see there is the superannuation funds model, which allows for local companies in Australia to access liquidity in the securities market there. I think that is probably missing in Singapore.
My suggestion to Singapore government is for the SGX to hopefully benefit from these lessons and take some of the monies that are put into the CPF fund to be diverted and given to funds managed by accredited local fund managers, and then to allow the public to divert some money – based on their risk profiles – to those funds which match their risk appetite.
That will help in a couple of ways. The funds and SGX need to take more risks, and investors need to take a greater risk on small-cap stocks in the local bourse which isn’t happening with either GIC or Temasek. They are not investing in those small-cap stocks and giving those guys a chance.
That will then help those fund managers in Singapore to take a punt and potentially grow the fund management side of the business. This will lead to more local and regional companies wanting to list on the Singapore stock market, which will effectively give liquidity and higher yields that these companies are looking for.
In 2016, the Singapore Business Federation suggested a third market board on SGX that could cater to “middle class” firms in the gap between the Catalist and Mainboard like tech companies. What’s your position on that?
Personally, I don’t think that matters. You have to find capital that is prepared to take the risk. Unfortunately, most of the capital in Singapore is not prepared to take that risk. So, how do you force that position? I think the only way that works is for the public money to get into that risk. It is the type of capital that needs to be exposed, be pulled through into the system.
There’s a lot of interest in corporate venturing now as the corporates want to get into the startup space. What’s your take on this? Will Sugar Ventures be exploring partnerships with local enterprises?
Probably not. Not that we don’t want the capital but we don’t want the narrow remit that these guys are looking at. For us, we find more interesting plays that everyone’s not looking.
So we start with a private school, a vending machine business, and we have a soup business. But one thing that is happening is that software is eating the world. So that basically is an interesting take — if you do a traditional business and then add technology what can happen there.
Just having a partnership with a single corporate will narrow the focus of the fund. It doesn’t give you a diverse portfolio. From a portfolio management position, that doesn’t make a lot of sense. However, if there are funds or pools of people who are looking to get exposure to PE type of plays with more yield on top of that, then we would start looking as that’s interesting.