The IVF Drip - Realities about Raising Capital for Tech Companies in Singapore

Last Saturday, I facilitated a breakout session in the Unconference 2008 Singapore, organized by the E27 group. I have been working with them for almost three years in counting. The topic of my discussion is entitled, "What’s so difficult about valuing and investing in Internet Companies?", and the primary synopsis is to discuss valuation, business strategies and how VCs view investments in internet companies and also how to establish relationships with big companies for acquisitions. Unknown to all, this is my preparation for a panel discussion that I will be doing in upcoming trip to Barcamp Malaysia. The title of this post will be the same title that I have given to them. I called it the "Invest, Value & Fund" drip, where I am trying to alert the entrepreneurs in the tech industry some current problems about fundraising and also offering what the venture capitalists in Singapore are looking into even if their start-ups fulfill some of the textbook criteria. So, I summarize some of the issues which I have covered in the breakout session on all three areas.

• The textbook answers that all venture capitalists or business angels claim a tech start-up qualifies for their money: Here is a common situation which I have often heard from entrepreneurs lately. The usual scenario is that the technology entrepreneur has an interesting product and a business proposition that has investment potential. According to the venture capitalists and business angels, the correct textbook answer is that if your business is scalable and sustainable, you are likely to be funded. So, the optimistic technology entrepreneur in Singapore will try his luck with the venture capitalist, and then get a rejection. Then it follows that he see a less technological start-up which he considers inferior,  obtains funding. So, the normal human reaction, "My start-up fulfills these critieria, why not me?" So, I offer two perspectives to the floor for discussion. The first is that the textbook criteria is just the first pre-requisite for funding. Seriously, the real pinching point is that whether the start-up can amass a strong P&L statement at a short time. If your start-up is really lucrative and move from red (losses) to black (high profit margins - think 5-10 times more) in a short time, you won't find the need to patronize the venture capitalists. It is very likely that they will come to you. The second perspective is that they have no understanding of the businesses. To be truthful, I have seen venture capitalists who have zero idea what the start-up is about, and will prefer to talk in dollars and cents. If I have to advise now, I will suggest the customer for tech start-ups, particular the Internet ones to demonstrate some offline monetary conversion. The important lesson to learn for the entrepreneur is Plan B. I like to ask the entrepreneurs who I mentor, "If you don't get the funding from this investor A and B, what are you going to do?" They will be speechless, and my answer, "Be creative to ensure your survival to profitability."
• You ask too much funding from Business Angels and Government funding, but too little from Venture Capitalists and Private Equity Investors: Here is a common situation I have encountered in Singapore. A lot of entrepreneurs have an amount to ask for to fund their technology companies. The problem is that they ask too much from the people in the lower funding range, but too little when they hit the investors from the other side. In Singapore, unlike Silicon Valley (with their ecosystem in place), there is no smart money. The smart money is usually in the range of 250K to 1MS$. Now, an entrepreneur trying to be conservative goes for 300K, but no angel nor early stage business incubators can fund that range. Then they got the product, they ask the venture capitalist for S$1M, but it's too little for those guys wanting to invest more in the range of S$2-5M. So, it's a catch 22. The entrepreneur can do the following: ask for more money and create a merger and acquisition situation for related tech companies. I used the Taiwan businesses model. For example, a Taiwanese entrepreneur will go into a big deal by bringing in related companies such that they have a joint revenue sharing model. In Singapore, entrepreneurs don't make this type of strategic alliances to covet a big deal. If you want an example, try the online advertising market for social media and see how fragmented it is.
• Young Singapore Entrepreneurs don't care about Execution Risk: I offered a personal anecdote to the people in the breakout session. The story is that I was at a panel invited by the Singapore Venture Capital Association, where I made a comment about young entrepreneurs, "Sometimes, I encounter some young entrepreneurs who think that they know everything after a one year stint in Silicon Valley or some courses here in Singapore. They waste their time on negotiating for the terms and conditions in the contract for S$55K, whereas seasoned and successful Singaporean entrepreneurs and foreigners don't waste my time. So, in the end, I walked out of the deal." I won the agreement of many venture capitalists. The reason why I made this comment is not to whine but I think that young entrepreneurs waste their time to negotiate where their main job is to execute their idea and bring it to success. Yes, the young entrepreneur is entitled to fair valuation but if he waste time on such things and don't work on his or her product, then I am definitely sure that some guy from China, Israel, US or India will finish the product and beat this kid to the game. Execution risk is something very real and some entrepreneurs here take their time and not realize that speed is important for a start-up.

I suppose that it is enough for many to digest and I will write a follow up post on the valuation of Internet start-ups soon.

Related Links

[1] Chin Yong aka Thinking Nectar, Of Valuing and Investing in Internet Companies

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Comments

[Gibson Tang]

The problem I am finding with developers, designers and even entrepreneurs is that they have this belief that once you get the money, the rest will come.

That is something I concur with as I too have noticed this behavior with the developers, entrepreneurs that I socialize with. I prefer to take the contradictory view that once you have taken the money, then the real work begins. As the mandarin saying goes 拿人钱财，替人消灾.

[Bernard Leong]

The funding from MDA microfinancing is easy to get if the prototype/idea is innovative. For example, a Facebook/YouTube/Flickr/Deli.cio.us clones are all out. It will be good if the idea is a possible solution for a business problem out there. Okie, the textbook answers aside - you must be able to execute and deliver it within 3-6 months. It must be something attainable.

The best scenario for an entrepreneur is to use his own funding and bootstrap the prototype with his resources. If he can make the prototype with his own funding, he concedes less to an investor if he pitches his idea to an investor. Here is the reality: there is no such thing as a free lunch. If you want to take money from an investor with just an idea, be prepared to concede more equity because the investor has risks. If you want to leverage against an early stage investor, you must have a working prototype. I have seen people without prototypes asking for less equity and I just tell them politely that I am not interested. Unless you have done 1-2 companies with high success, there is no way an investor will concede low equity from you.

50K can reduce execution risk and also risk to fundraising. Here is what a lot of people don't realize. If an entrepreneur wants to be stingy and give 5% and the investor don't really find the incentive to work with you, the company is worth a 1 million. Then it is not a worthwhile investment. If you give 10% to the investor and the investor helps you to turn it to 10M, then it is a win-win for everyone. I am simplifying things here but the essence is there.

Honestly, it is easy and cheap to start an internet company.

[weekee]

hey thanks for the comment. Hope you can clarify some of the points. Is funding from MDA micro financing relative easy to get? From the developer perspective, does it make more sense to just spend time and execute the idea to get a prototype to the second round instead of focusing on spending time trying to get the first round funding?

Pardon if the questions sound stupid but for most web stuff, is it that costly to get it started using own money? Does the 50k helps to address the execution risk that you mention or does it only serve to reduce the risk so as to attract people to start up?

[Bernard Leong]

@Daniel Thanks for the suggestion. Something of that nature is in the works, but on a slightly related topic.

@UZyn: Thanks for the headups.

[Daniel]

You should write a book on startup funding with a more local or Asian perspective!

Most if not all resources are Western or US-centric, it's no wonder some local entrepreneurs live with illusions of grandeur.

[uzyn]

Interesting article. I missed your session at Barcamp due to having to man the booth. I guess this article makes up for it.

[Bernard Leong]

Hi Weekee,

The aim of the early stage fund by the MDA micro-financing scheme is to let the founder or entrepreneur to implement the idea into a prototype such that it becomes an invest-ready target. The role of the incubators is to help the entrepreneurs to get to the 2nd round. The risk of the investor at the early stage is far higher than in the later stage. So, investors at that stage will tend to ask for more equity to leverage against the risk.

The problem I am finding with developers, designers and even entrepreneurs is that they have this belief that once you get the money, the rest will come. The reality is that they are actually inheriting a lot of execution risk if they do not make sure that their idea has proper market traction, i.e. customers using their services.

Will follow up on the valuation issue later. :)

[weekee]

Hi Bernard,

One question i have is that it seem relatively low cost to start a tech company (specifically web based start up). Would it simply be easier to use your own fund and execute then worry about the raising more funds later?

I am looking forward to your next entry on valuation. In my prev module on technopreneurship (you were one of our judges), valuation is always the difficult part in the project. Esp when we are not even working on our idea. In the end, we smoke and did the best we can to meet the "criteria". Will be great if you can share your thoughts if VC really trust those valuation and till date how many investment actually realized those valuation stated in their business plan.