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.
* 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.
