Warning! Heavy reading ahead!
Last Thursday night, “The Startup Lifecycle: From Seed to Exit” event saw a stunning turnout of 120, up from the original headcount 50. To coin a term, the tickets sold like hotcakes, and unsurprisingly too. If you didn’t manage to attend, here it is.
Joining in the festivities were 4 founders at different stages of startup funding.
From left to right, there was Jonathan Eng, founder of Partipost, Ernest Sim, CTO of Grain, Bjorn Lee, founder of MindFi as well as Joel Lou, ex-founder of JustCommodity.
Background here is that Jonathan was an ex-investor turned founder who wanted to know more about the startups he invested in, “so that when I gave advice, I knew what I was talking about.”
As for Joel, he has already exited the startup scene after JustCommodity was sold for $21 mil. He has now joined the ranks of VC.
1. The first fundraising has a lot of bruised egos.
Bjorn starts by sharing that his first round of S$50k from NUS’ iGEM was pleasant, but it was followed “years of pain” as back then, the government “wasn’t great”.
“If I can have anything else to share, avoid taking government money,” he laughs.
Joel, whose last funding round was from the government – Series A of $56 million – chips in.
“They helped me opened up doors, but it is important to know how to use your shareholders wisely. Don’t look at finance, but strategic as well.”
On his first fundraising, Joel remarks that there was “a lot of trial and error, bruised egos. But you have to keep on going to find the right partnership, the right chemistry.”
2. You need to start fundraising before the actual fundraising.
On when to start fundraising and valuation of startup, Joel continues that the valuation depends on what today’s norm.
“At pre-seed, the business plan should be about $1 million, raising a quarter to half a million. For Seed, it would be about $1-2 mil of fundraising, with a $3-5 mil valuation. Series A would be about $10 mil, raising maybe $3-5 mil, and B and C would be $20-30 mil.”
“Through the fundraising evolution, the avenues are also important,” he emphasises.
“VCs might not be willing to support you at the beginning, so most likely it’ll be friends and family, some angels. But for $3-5 mil, you’d want to go to institutions, maybe a syndicate or consortium. Super-angels, if you will.”
Bjorn jumps in here, and discusses the importance of traction.
“At the very early stages, traction could be multiple forms – a long waiting list of consumers, prominent companies willing to trial the product and with letters of intent.
Depending on your experience, it could be fast or slow. But typically people want to to see traction.
“Setting valuation is a game. You can have it in your head, but that’s all it is.” Bjorn states.
“Fundraising starts before you actually start fundraising. Talk to people early. That’s the best time to fundraise, when you’re not desperate. Find out their interests, their portfolio, their deal size ASAP. You can shave weeks to months off the actual fundraising.”
“People look at fundraising as a [success], but if you get a wrong investor, that’s years of pain. You may not see the exit […] and the terms can look toxic to other potential investors.”
Socialise with investors and find the right people. They will give you a fair valuation.
“Startups with fixed assets, they will not get high valuations at a low round as it is hard to prove scale. Brick-and-mortar startups trying to disrupt will also take a hit on multipliers. You’ll be squeezed at your balls to prove yourself.”
“Mobile app, deep-tech, fintech will have better valuations,” shared Ernest.
3. Talking to investors is like learning a new language.
“I had an unfair advantage because I already had a network.” shared Jonathan. “But when I’m looking for an investor, the most important is thing is trust.”
“You need a solid plan,” adds Ernest. “During Grain’s Series A, we had an Excel sheet of all the investors we could think of, and ranked them on relevancy. We planned who we were going to meet, and put more than 1 each day, so you don’t go home feeling sad from a rejection.”
It’s like a Playbook. The first few investors might not work, but it’ll get you warmed up and ready for the investors that do matter.
For Bjorn, his previous fundraising was in Silicon Valley’ AngelPad.
“I managed to sneak in 2 weeks early because I knew a founder through a friend. Introductions are very important.”
Also, talking to investors is also like learning new languages. During the incubator, they prepped us on elevator pitches, how to cut from 20 min to a 3 min presentation. But VCs expect you to talk for an hour, it’s completely different. I was lucky to pitch to [TechCrunch] VCs but I quickly found myself out of my depth.”
You meet investors of all stripes, you cannot have one vanilla deck.
“Some investors care about the team, some are bottom-line number focused, some want to know your alma maters. Do your research, talk to them, learn about them way before you’re ready. When you walk into their office, you don’t have time to learn about them. Is this a VC focused on the bottom-line, or the team?
Different VCs have different languages, like slang. Segmentise your deck, and have multiple versions. And for VCs with whom you don’t have much chance, treat them as a training wheel for your pitch deck.”
“But try your friends first. Don’t make yourself a fool in front of the world’s best VC,” he laughs.
4. Be ready to walk away from any term sheet.
“If you don’t, it means you’re very desperate, and it puts you on the defence,” Joel notes. “People walk away because it’s a one-sided agreement, and you might even end up losing control.”
“A founder’s life is lonely and difficult, with more downs than ups,” Bjorn adds, “get to know founders around your stage in the same or related industry.”
Socialise your thinking. You cannot be trusted to make difficult decisions all the time.
“These founders are your sounding boards. When you get a term sheet, ask them, what do you think? Or, I don’t know how to ask this VC about these terms, how do you do that? Don’t try to solve everything yourself, it’ll drive you crazy.”
5. Fundraising is a marriage.
“Once you take people’s money, there are many considerations. If you need money, raise it. But if you don’t, please don’t raise it,” warns Ernest.
“For Grain, after our Series A, there were the pains of scale, how do we use the money? Really read a lot, sync in with the mistakes of others, absorb them.”
Don’t be jaded by the valuation, you have to be really comfortable with it.
Joel refers to fundraising as a marriage, as “you don’t go to bed with the first bride.”
“The chemistry [with stakeholders] is very important – how can they plug you into the ecosystem? How can you leverage on their expertise? The synergies with their other companies also matter.”
6. Investors look at the management, the alignment.
“I only invest in late-stage companies so I want to make sure they have scaled, they have the right revenue model,” Joel shares.
“I look at the management, they need to be aligned with the investors. I want to know what my exit horizon is, how many multiples am I going to be making? I don’t want a company where I have to reset the exit horizon. There are so many expectations, it’s more of a social science, part of the ball game.”
“And yes, every startup needs an exit strategy” he states.
7. How do startups price a round?
“It’s easiest way to price on straight equity, but for investors looking at later-stage,” Joel continues.
“In a liquidation situation, it’s a last money-in, first money-out concept. Late-stage investors will expect multiple liquidation preferences, they will be build in returns from the get-go.”
“The second part is on accrued dividends, e.g. a 10% year-on-year, so the longer you hold my money, the more you’re going to pay me.”
“The third component is participating preferred. I want my money first, then we start sharing pari passu. If I’m putting $5 mil, I’m converting them in certain equity, say 20% of the company. I take my $5 mil first when we sell, and then I take my equity alongside you.”
“Be careful with the terms, the valuation might be good but not the terms,” he warns again.
8. It’s all about the returns for investors.
“I need a home run,” Joel states plainly. “If the startup cannot show disruption, a 10, 20, 30x return, people are automatically priced out.
“A startup I invest in – Delegate – they come with a lot of domain knowledge, they understand the space. They are able to Uberise it, to take old a [bread-and-butter business, create innovation and increase utilisation]. That kind of disruption is scalable beyond Singapore.”
“Many founders focus on Singapore, but the market is too small. If from the start, you have an idea that can go global, you have a chance of raising a much larger round.”
“Knowledge helps you understand and scale in the market,” Joel adds, “but being able to sell is too. Founders get burned when they assume [their idea] a natural sell. I will never go into a saturated market. Virality and innovation are important.”
Joel shares that as an trader, he believes the Fintech revolution is strong here.
“Singapore is a Fintech hub, with regulators like MAS creating a test bed for everyone to plug in. Regulators are usually the ones creating barriers of entry, so it is an opportune time for you to go out there and mine the access that you have.”
9. The management is the next biggest relationship after the investor.
“You learn as you go,” Ernest shares. “You fire, you hire, and after a while, you may not know what you want, but you know what you don’t want.”
A lot of it boils down to culture, the heart behind the people, the alignment of vision.
“If you’re a founder with no experience, leave it to the head-hunters. If you try to shoulder this, and you don’t do it right, it’s going to be very, very painful.”
10. Ask if VCs are D-bags, ask how nice they are, how smart they are.
“You might not know just by talking to them. Backchanneling is super important. I trust it way more than just talking,” Bjorn says. “A bad investor inserts terms unfriendly to future investors, and these could make future rounds toxic.”
“Entrepreneurs benefit from interacting with VCs, but VCs will do their due diligence and backchannel you before they invest in you. Do the same to them.”
“Learn how to stalk them on LinkedIn, Facebook, figure out your mutuals and talk to them. Consult someone in private equity, or maybe another VC not investing in you. Ask them, would you mind taking a look? Or is there anything that jumps up at you right away, something that’s super toxic?”
Ernest add that what resonates well with him is if the investor has been an entrepreneur before.
“They can empathise, and they’re not incentivised to squeeze money out of you. And they can also give you good advice. They understand the stages that you are going through. Also, the VCs’ analysts are interesting because they can give you good insights and advice on VCs.”
As for Bjorn, he shares that VC updates are important.
“There’s a pre-investment assessment of the investor. Interview them, what strategic value can they bring? If their answer is unsatisfactory, pick up a portfolio, ask them what they have done for that company. And for existing investors, send updates, weekly or monthly. Not everyone reads the updates, be succinct.”
Figure out what is the best information to send, and the benefits that you’ll get from it.
Some investors might even help on hiring, he adds.
“Ask them what kind of criteria they would be looking for in an VP etc. Or if you’re planning to expand globally, they could introduce you to someone. Some investors like how startups stay connected, the communication is good for relationships. Otherwise they look at you only as numbers and exits.”
“Like Joel said, it’s a marriage. You have to think about the relationship, the bond. Where do you see the VC helping you in 9 months? 1 year? 1 year is typically when you start raising a new round, and if you only go to your investor once a year, I think the answer will be a flat no, right?”
“The investor will ask, I only see you when you need money, where were you when you doing really great?”
But don’t expect them to do too much as well, you the balance.
Jonathan that family and friend investors might also be “unwilling to part with their losses. In the end, you might lose your money and your home as well,” he jokes. “I know parents who try to steer the company. You end up losing your freedom.”
“Somebody I was interviewing as an investor, he was super interested in startup investing. He liked my previous company of kids games but only because he had read that it was ‘trendy’ and ‘hot’.” Bjorn says.
That is a warning sign. You don’t want people who jumps on a bandwagon. Once you’re no longer on that bandwagon, they will ditch you like a hot rock.
“Interview them, how much do they know about your space? You want someone with expertise, or someone with a personal interest, so at least they feel vested.”
11. The VC qualities doesn’t lack, and there is plenty of money here.
“From a personal standpoint, a way to measure maturity of the ecosystem is by quantity and quality of exits. That determines VC profiles,” Bjorn shares.
“In Silicon Valley (SV), there are so many operator VCs. They are typically better because they have walked the talk. Read ‘The Hard Things About Hard Things’ by Ben Horowitz, that’s like a gospel for entrepreneurs.”
And that is something only operator VCs can do. They can empathise, and will try to be on your side.
“In Singapore, we don’t have many big exits yet, and we have few unicorns, so that means that the VC quality is not as great as SV. Everyone tries to compete with SV, but it’s impossible.”
“If you’re targeting the S.E.A market, there might not be successful VCs in this area, so find the people working in the area instead. Say you’re in e-commerce, find a VC firm that has worked with Lazada, Zalora etc. Not Carousell, they are not there yet.”
Ernest follows by sharing that “VC quality doesn’t lack, but Singapore has a finite market, and ideas will not be so easily received. VCs are particular on scaling, so it’s more about our unique ecosystem. But in general, the quality is not too bad. It’s a different ecosystem anyway.”
And if you still feel money is restrictive, try going to SV and raising fund as a YC startup.
12. Chinese investors consider S.E.A an untapped market.
On startup flavours VCs like, Jonathan notes, fintech, big data, A.I,. just as Grain’s Ernest pipes in with “definitely not foodtech.”
Consumer-based startups like Facebook and SnapChat are unlikely to be the flavour. For these, you should venture to places with VCs who know how scale a consumer-based app / product. Investors like bottom-line startups with strong financial fundamentals.”
“S.E.A has a good fire, it’ll be great if you have a unique take on this market.” Jonathan elaborates. “Many Chinese investors consider us an untapped market. They will come and eat our lunches cause we are not hungry enough. Over there, it is cut-throat.”
“A billionaire shared with me they would very much like to see an Uberisation kind a model. Like Grab and Carousell. If you have a Southeast Asian regional focus, that’ll be very attractive.”
13. Use crowdfunding strategically to raise money.
“Startups like TinyMOS use Indiegogo and Kickstarter to raise equity-less funding,” Bjorn shares.
“This strategic use of crowdfunding generates a customer list and builds the startup’s media profile in front of investors. A low-risk, high-payoff solution.
“Some startups crowdfund for equity financing from credited investors instead of going to a VC or angel. Personally I find it tricky. How do you know these investors care about your product?
I would use AngelList led by a syndicate with a grand name investor leading it. You want someone to lead the round and corral the other investors. Say your syndicate leader is top SV investor Jason Calacanis, he has his own way of determining who joins his syndicate. He sets the right terms, he prevents people from inserting potentially damaging terms. I would look for [that] credible lead.”
“Prominent companies have successfully raised good early stage financing through the syndicate model. I personally benefitted, and I got very good investors such as 500 Startups. Other investors came to know about me through the round.”
Featured Image Credit: Samantha Tay / Vulcan Post.