Finding diamonds in the rough: what are investors looking for in a startup?
Yong Soo Ping and Kris Leong are Vice-Presidents at Walden International. They take us behind the scenes to tell us what it means to work as a venture capitalist.
WHAT DOES A VENTURE CAPITALIST DO?
Kris: I would say one of the roles of a venture capitalist is the ability to source new deals. We are constantly meeting new companies and people. We decide as quickly as we can: are they addressing a big market? How is the team? Do we have the background to help the company so that it makes sense for everyone?
FINDING DIAMONDS IN THE ROUGH
Kris: The two most important criteria are market size and the team. We like big markets. It helps if the company has an advantage by being number one in the space, such as Tech in Asia, HungryGoWhere or even BankBazaaar, at the time of our investment. We like companies that are capital efficient: they have to figure out how to scale organically. Finally, we also like companies that have unique technology as it gives them a proprietary advantage.
Kris: We spend significant time with the companies that we invest in. Besides the financial reports, we also work with the team to define what we call the key performance indicators (KPIs): we do this for every company. They track the progress of a company and help us detect early warning signs. The team would know whether the business is going as planned — and if it is not, the team needs to take action fast.
PRE-INVESTMENT AND POST-INVESTMENT
Soo Ping: I would divide our work into pre-investment and post-investment. Kris mentioned the sourcing process: the due diligence before making an investment is usually a very intense period. In the post-investment phase, we focus our time on a few things.
Firstly, senior executive hires. If the team is not complete, we identify gaps and participate in the interview process. Secondly, international expansion. For example, if the company wants to expand to another country like Malaysia or India, it needs local country managers. Sometimes, we can draw on the Walden network if we already have colleagues on the ground who can help with recruitment and expansion.
Third, we spend time planning the future financing of the company. Most of the time, we invest in the Series A round, but Series A is not the last round. The valuation of the company is not a straight line going upwards. It’s more like a step, a staircase: you need to achieve certain milestones before the valuation goes up. So, as a value-added investor, we want to plan the milestones that a company needs to achieve so that they can go out and raise money for Series B.
Besides the financing, we plan the timeframe. What will you achieve within this time or money that you have? Finally, when the company goes out to fund raise, we facilitate introductions to appropriate investors.
Soo Ping: Kris and I are usually the first to shortlist and decide on promising deals. We bring this to the committee for a discussion, and the other members give us different perspectives on what to look at. The composition of our committee is such that the decision-making process is quite straight forward.
Kris: There are teams that work really hard, but the startup does not pan out. Sometimes, they are still at it after 10 years. It could be due to market conditions, or perhaps their technology was ahead of the market — but they tried. We can only hope that they draw on these experiences when they launch another startup or work for another company. These are nuggets of wisdom that you will bring along with you. No one can take those learnings away. These are hard and valuable lessons about what to do and what not to do.
PLANNING AHEAD (CONTINGENCY PLANNING)
Soo Ping: Startups do not always plan enough. Many years ago, we introduced an experienced executive to JobStreet as an independent director and mentor, and I learned from him the importance of contingency planning.
Many of the startups have a plan, and it goes like this: this is what we are going to do next year, this is my budget, and this is Plan A — and it stops there.
It will be better for startups to think a little bit ahead. You need to insert check points into your plan that says: if by the end of first quarter my revenue is down by 10%, these are the list of actions I need to do to recover from it. And what if my revenue is down by 25% — what are the actions that I need to do? If you come up with Plan B before the start of the year, it will be much more helpful than when your revenues are already down by 25% in Q1, and then you start thinking about alternative plans.
So, I have found this process of planning ahead early can make a difference to the success of a company.
Soo Ping: Sometimes founders disagree on the direction of the company and it creates a fracture. Perhaps they only got together because they were building similar products, they thought it would make a stronger case for fund raising, or they thought they have complementary skillsets. However, after a while they stop listening to each other and cannot move the company forward.
Running a startup is an incredibly high-tension, high-pressure environment. I personally value a team of founders who have known each other for very long. You need to have a close relationship in the past, or have done things together, to understand each other well to get along in a startup. Stability in a founding team is very important, and we look into this when we decide on an investment.
WORKING AT BLK71
Kris: We are on the 5th level and right outside our windows, there are trees. We see greenery through the windows and hear the singing of the birds, so it’s really nice! We also avoid the downtown city traffic which is where the venture capitalists tend to work.
On the social side, the eco-system has evolved into a convenient place for investors and startups. You will easily meet people working on interesting projects, and it’s a likeminded community.
Thank you, Soo Ping and Kris, for this magnificent interview and sharing such useful insights on venture capitalism! http://www.waldenintl.com/