- Welcome to Dear VC, a new segment on Vulcan Post where seasoned venture capitalists to answer questions that relate to startups, funding, and venture capitalism posed by our readers. If you have a question you’d like to ask, please fill out our questionnaire here.
- To kick things off, we get Ben Lim of NEXEA to answer two very relevant questions: are VCs always more attracted to fresh ideas, and how can a business get invested in without a monetisation plan?
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Dear VC,
During a seed funding round, do VCs typically have a preference towards funding a new idea, or do they prefer an enhancement of an existing product? Aside from actual money-making, are there other things that VCs look for when funding an idea?
– Joe
Hi Joe,
Normally, VCs do not fund ideas; they fund traction!
However, there are always the “Family, Friends, & Fools”, Idea Stage Accelerators, and Angel Investors to fund your idea.
VCs typically look for innovation but also fund “copycats” that localise and improve products. For us at NEXEA, we fund companies that can provide a solution that has the potential to be ten times better (figuratively) and cheaper than the current solution. This is to ensure that there will be customers switching over to your solution, or what we call market disruption.
When we evaluate idea-stage companies, we cannot be looking for revenues or the number of users you have accumulated. So, we will be funding you based on your team—mainly your experience, industry background, and why you are starting a company. We will also look at the market opportunity, the pain points of the problem, if the business model can work, and also if your proposed solution is strong enough. We call these the ‘business fundamentals’.
Be careful not to test your ideas only with friends and family. I have never heard them give bad feedback! Their “love capital” is also something to avoid if you can as it can affect relationships if things do go south. If you have to take it, then make sure you get half from them, and another half from an Angel Investor or Accelerator (for critical support) to be fair to your family, friends, and yourself.
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We launched a debt management app named Buku 555 about two months ago, and hit 50,000 downloads this month. We have a complete plan on how to reach one million users before end of this year, but we have one problem: Our team consists of 7 people, and to fund our project and monthly operational expenditure, we need to do side projects like building custom websites and app for other businesses to pay our expenses.
We’re looking for external investment so all of us can focus on Buku555 and bring this app further. How do we convince investors that we will have few millions of users soon even if we don’t have plans for monetisation?
– Buku 555
Hi Buku 555 Team,
Congratulations on your 50,000 downloads!
That is always a tricky question to answer. Basically, you’re asking how you can convince investors to fund your team of 7 to a million users without a monetisation plan.
I am not going to lie: the truth is that you probably need a monetisation plan to get investments. Startups need to understand that for investors to make money, they must make a huge exit. To make that exit, they must sell their stake via acquisitions or IPOs, both of which usually require profit (monetisation).
There are always ways to monetise. Do look at B2B instead of just B2C. It could be that loan sharks need to upgrade their Buku 555 (this is a joke, by the way).
But back to the point—many SaaS (software as a service) companies have started with B2B to sustain their operational expenditure before they pursued B2C, which can be harder to monetise.
One might argue that WhatsApp did not need to monetise, that they were able to convince Sequoia to fund them and the rest was history. That is far from reality. The fact is, that WhatsApp was growing at a crazy rate without any marketing, and it was growing like crazy in many countries. No other startup had this kind of traction. This signals to investors that the product solves a really huge problem, and Sequoia was willing to pay a premium (US$100m valuation) at the time. As to why they did not need to monetise, they actually did try and had plans to do so. Also, WhatsApp is literally one in a billion.
So, if I were you, I would look at it two ways. First, bootstrap to gain crazy traction. Do you have what it takes? If not, second, try to find a way to monetise and fundraise like how most startups did.
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Ben Lim is a co-founder and venture partner at NEXEA VC & Accelerator, a venture capital and angel investor network covering Malaysia and Southeast Asia that supports and invests into local startups across a broad range of industries. He and his team strongly believe that every company will eventually become a tech company, and that getting the fundamentals right always leads to a profitable outcome.
