Want to create a billion-dollar company? Just S$16 will do

OVER the past four years, The Business Times’ Garage team has written about startups raising insane amounts of money to hit billion-dollar “unicorn” valuations. In a playful nod to this, my colleague Claudia Chong and I started our own faux fundraising drive for Garage.

We set up a DIY-ed donation box in between our desks, diligently collecting spare change from colleagues. To date, we’ve raised over S$10, mostly in 20-cent coins.

Can that measly amount grant us a startup-like valuation? Technically yes, with some aggressive financial engineering. If we gave our investors a 0.0001 per cent stake in our hypothetical company, we could declare ourselves worth S$10 million.

This may sound like a pointless exercise, but a group of South-east Asian tech founders and executives applied this concept to illustrate just how fuzzy the whole idea of tech valuations can get. With S$16 and some nifty math, they turned a shell company into a unicorn.

Here’s how they did it: The group first set up a Singapore-registered company, called MetaBDE Partners Pte Ltd, with just S$4 in paid-up capital and 250 million shares outstanding. This translates to a price per share of S$0.000000016.

They then got some friends to invest S$4 for one share each, raising S$12. Multiply 250 million shares by S$4, and you get a company worth S$1 billion on your hands. Voila! A unicorn – on paper, at least – is born.

ESOP fables

Unlike the Garage donation box, the S$16 unicorn experiment actually had a purpose: to educate tech workers on how an Employee Stock Option Plan (ESOP) works.

The initiative, dubbed dothemath.tech, was founded in January last year at the height of the tech boom. With venture capitalists (VCs) pumping funds into startups, there was a problem of “inflated valuations that seemed disconnected from reality”, said Vardhan Kapoor, one of the executives behind the initiative.

“We believed that this was a major concern, as only a small number of people in the tech industry, such as VCs and founders, have the resources and expertise to navigate the consequences of falling valuations,” explained Kapoor, who is the Asia-Pacific regional head of US fintech Remitly.

Tech workers, on the other hand, can be left in a vulnerable position if the startup they work for takes a valuation cut, he said. This is because the value of ESOP, which many startups offer as part of a salary package, is tied to the company’s valuation.

If the startup makes a big splash going public, tech workers could make a windfall. But the opposite is also true: if the valuation plunges, so does the worth of the ESOP the employee holds. And there are a tonne of other factors that could eat into returns too, from tax implications to dilution.

All of this is explained at the group’s website, dothemath.tech, which Kapoor says has been used by thousands of individuals, including job seekers and recruiters.

Such education is especially important now, as the “funding winter” has forced tech valuations downwards. Grab, which went public at a US$40 billion valuation, is now worth under US$14 billion as of Jan 25. GoTo Group, which debuted at US$28 billion, is valued at just US$9.3 billion.

Back to reality

The days of unicorns running rampant may well be over. Entering 2023, the tech bubble has deflated. Kapoor believes that there are lessons for all players in the ecosystem. The hype was an anomaly, and founders should not expect their startups to be valued as richly moving forward.

“I believe that economic historians will view the period from 2020 to 2022 as a prime example of irrational economic optimism. The driving forces behind this trend, such as greed and misaligned incentives, are similar to those seen in other historical economic bubbles,” said Kapoor.

Perhaps it is time to go back to the original meaning of a “unicorn”. These creatures, as beautiful as they may be, are after all mythical. When dozens of them are minted in the span of a year, we know the market has lost its grip on rational behaviour.

But if you’re not too keen on returning to reality – the Garage donation box welcomes your generous contributions.

The S$16 unicorn experiment is just one of many weird and wonderful phenomena out there that can teach us plenty about the world we live in. Every month, this column will go off tangent from the news and look into more curiosities in various fields, from finance and economics to science and psychology, or even beyond.