Raising Capital – Partnering The Right Investors

In our previous post, we assessed how founders should gear up for their startup journey by understanding the real purpose of their offering, as well as build their team with the right people. In this second instalment of our Technopreneur series, we will explore how founders can prepare themselves when pitching to investors, and how to identify the right ones to partner.

Knowing the lay of the land

Founders should first familiarise themselves with the investment landscape before engaging investors - by understanding the typical startup funding cycle and identifying investors most active at their fundraising round.

For example, individuals and angel investors tend to invest during the pre-seed or seed stage when startups are developing their proof of concept. On the other hand, VCs tend to be involved from Series A onwards once product-market fit is achieved. James Lee, Managing Director of Vertex Growth notes that startups seeking investors should understand how VCs look at target returns and risk.

“In a typical VC fund, there’d be an 80-20 split; 80 percent is the amount to be invested and the remaining 20 percent is the fund cost,” he says. He elaborated that, within that 80 percent, a third would be allocated to portfolios that VCs expect to fail, another third to those where returns are equal to the amounts invested and the last third, to portfolios where returns exceed the invested amounts.

Clarity and commitment

To get the right partner who can back the business in the long term, founders must make it as easy as possible for investors to form their investment thesis. To do this, investors must be convinced of the potential of the product or solution, which founders can do by clearly articulating these five key elements: [1] Vision, [2] Market Opportunity, [3] Product, [4] Team and [5] Traction (which we covered in the previous article).

However, founders need to be mindful and avoid “creating a solution that’s looking for a problem”. “Many founders can get carried away with explaining their solution without actually addressing the market problem. Founders must clearly explain both in detail they cannot oversimplify the problem statement, as investors may consider this as an attempt to pull wool over their eyes.” he explains.

His sentiments are echoed by Cindy Kua, co-founder and CEO of Sunday, a full-stack InsurTech platform that completed its pre-Series B round in Q3 2020 to fuel its Southeast Asian expansion, which includes a foray into Indonesia. According to Cindy, founders must be detailed, but also be careful to not be overly technical.

“Founders must understand who the audience is and focus on articulating their ideas in terms of vision and product or solution commercialization,” she notes. “Good and experienced investors do not expect everything to be perfect, but they want to see the startup’s ability to bounce back.”

Hedging bets and establishing priorities

After knowing how to engage with investors, the next step is to find the most strategic way to meet them for pitches. The advice James has for founders is to meet investors in parallel rather than sequentially. He explains that this not only shortens the time of the overall fundraising process, but also helps tilt the information advantage back in favour of the founder by fostering a competitive dynamic between investors.

“Apart from the benefit of compressing the fundraising timeline, having a parallel strategy helps to mitigate the risk of one investor spoiling opportunities with others – especially since the investment community grapevine is strong,” he states.

What is equally important is to target the right investors that founders can approach for each specific round of fundraising. This is to help founders identify the type of investor that can truly add value to the startup, in addition to availing financial support. Ideally, a founder should target investors who can take a more active role in guiding the startup, providing both financial and operational support.

Beyond that, a personality fit between founders and investors is crucial, according to Nikhilesh Goel, co-founder and CEO of Validus. The company is an enterprise financing platform that went through its Series B+ round last year and has since tied up ecosystem partnerships and continuing its regional expansion.

“Founders should not go for investors that do not believe in the way that the startup wants to grow; they must also be invested for the long run,” he says. Nikhilesh also stressed that founders cannot have fair-weather investors as, startups rely on the experience, knowledge and tenacity of the investors to, “be the guiding light when times are tough, and the chips are down.”

Investor diligence

Despite 2020’s challenges, Asia’s startup ecosystems, especially in Southeast Asia continues to thrive. This has led to a surge in the number of investors looking for the region’s next great opportunity. To distinguish themselves and increase their ‘pull’ factor, many investors (especially VCs) are presenting themselves as having ‘smart money’ – alluding to the capital invested by experienced and well-informed investors, often at scale and with a track record of portfolio value creation. In the “Omakase and the Art of Venture Capital”, Vertex Holdings CEO Chua Kee Lock aptly draws a parallel between value creation beyond capital and the artful Taisho tailoring the menu for each customer.

For James, these claims are becoming more prevalent. In his view, the onus is on founders to conduct their due diligence rigorously, if they seek to onboard the right investors.

Sharing the same view, Cindy says that founders must study an investor’s credentials in detail- reviewing the performance of portfolio companies, successful exits and those still being supported. She adds that, “startups should look at how many economic cycles the investors have gone through. It is also beneficial for their founders to speak to others in the startup community about their experiences.”

Additionally, Nikhilesh says that when pitching, founders must not only be prepared to answer questions posed by investors, but also evaluate the sort of questions being asked. “Do the questions reflect a good understanding of the business model presented? Are they just asking the same generic ones? The good investors should ask more specific questions, even if they are tough for the startup to answer.”

James states that founders should evaluate how supportive investors are. “The right investors must also be equally determined and have the right attitude, gumption and capabilities to ride the growth journey with the startup.”

Do not pursue growth at all costs

As the startup ecosystem in Asia continues to grow despite the pandemic, fundraising will be more crucial than ever given this highly uncertain environment.

What startups need are investors who are not just there to provide the capital for growth, but also serve as close partners and a sounding board that can help guide founders going forward. The objective should not be to seek funding at all costs, but instead to partner backers who are invested in the founder’s vision.

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“Raising Capital – Partnering The Right Investors” is part of our Technopreneur webinar series. Be sure to check out our other sessions below:

Raising Capital – Partnering The Right Investors

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