Pick Your Bat­tles and Fight Them Wisely

How pro­fes­sion­als are pro­tect­ing the in­ter­est of in­vestors


In­vestors treat the uni­corn – a startup that is val­ued at over $1 bil­lion – much like many peo­ple did the Poké­mon sev­eral years ago. Ev­ery­one is look­ing for one, and wants one early enough for a big bite of the rain­bow that fol­lows it. Un­for­tu­nately, this ob­ses­sion for uni­corns has blinded some in­vestors, caus­ing them to ig­nore po­ten­tial is­sues, and thus putting them­selves and their fi­nances in a bad place. A re­cent ex­am­ple is the un­rav­el­ing of Ther­a­nos, a health tech­nol­ogy com­pany founded in 2003, which even­tu­ally raised more than US$700 mil­lion from ven­ture cap­i­tal­ists and pri­vate in­vestors, many of whom were so­phis­ti­cated vet­er­ans. Ther­a­nos, which was val­ued at US$10 bil­lion dur­ing its peak, was even­tu­ally found out to have made mis­lead­ing and down­right false claims about its blood test­ing tech­nol­ogy. On top of that, in­ves­ti­ga­tions re­vealed that the tech­nol­ogy never re­ally ex­isted from the begin­ning, lead­ing to le­gal and com­mer­cial chal­lenges from med­i­cal au­thor­i­ties, in­vestors, and part­ners. By 2018, the com­pany was close to bank­rupt. Ther­a­nos founders are cur­rently em­broiled in sev­eral US fed­eral law­suits; its in­vestors left with over US$750 mil­lion sunk into what is ef­fec­tively a dead com­pany with a non-ex­is­tent prod­uct. Although a fi­asco in the scale of Ther­a­nos is un­com­mon, the re­al­ity of its re­cur­rence looms, beg­ging the ques­tion of in­vestors’ com­mit­ment to pro­tect­ing peo­ple’s money.

An Eye on the Lead­ers

“We’ve seen many com­pa­nies with a lead­er­ship team boast­ing stel­lar re­sumes and ex­pe­ri­ence back­grounds, but their ex­per­tise and ex­pe­ri­ence don’t fit the prod­uct and com­pany they’re try­ing to build,” ex­plains Mr. Kelvin Lee ( be­low), co-founder and CEO of Fund­nel. “If a com­pany does not have the rel­e­vant ex­per­tise and ex­pe­ri­ence, we are much more hes­i­tant to ap­prove them re­gard­less of how much ex­pe­ri­ence they’ve clocked else­where.” Pri­vate in­vest­ment plat­form Fund­nel has achieved a to­tal deal orig­i­na­tion value of US$100 mil­lion with 25 trans­ac­tions com­pleted to date. While it does not di­rectly in­vest in the com­pa­nies on their plat­form, it has an­a­lyzed more than 2,300 com­pa­nies and fa­cil­i­tated deals rang­ing from brick-and-mor­tar busi­nesses to tech com­pa­nies and, even ven­ture cap­i­tal­ist funds. When eval­u­at­ing po­ten­tial op­por­tu­ni­ties, Fund­nel takes over 130 pos­si­ble data points into ac­count to de­ter­mine fund­ing vi­a­bil­ity. This covers a mas­sive amount of top­ics, but while fi­nan­cial data such as rev­enue, EBITDA and net profit give clear signs on whether a com­pany can sup­port its cur­rent burn-rate and po­ten­tial fi­nan­cial well­be­ing, the im­por­tance of the found­ing team can­not be over­stated.

This train of thought is echoed by

Mr. Tiang Lim Foo ( left), part­ner at SeedPlus, an early stage Ven­ture Cap­i­tal­ist based in Sin­ga­pore and fo­cused on fin­tech, in­suretech, mar­ket­places and au­to­ma­tion. Op­er­at­ing since early 2016, SeedPlus has around 14 port­fo­lio com­pa­nies around South­east Asia at the mo­ment. When eval­u­at­ing a po­ten­tial in­vest­ment, Mr. Tiang finds him­self ask­ing three Whys: ‘Why this mar­ket?’, ‘Why now?’, and ‘Why you?’. The first two are fairly straight­for­ward to an­swer with mar­ket and tim­ing anal­y­sis; how­ever, the in­tan­gi­bles of the hu­man di­men­sion are dif­fi­cult to grasp and to quan­tify. Mr. Tiang says: “What makes you and your team spe­cial? This is the most dif­fi­cult to as­sess, as it’s in­cred­i­bly dif­fi­cult to truly get to know a per­son within a few meet­ings.” He picks up sig­nals such as how open the in­di­vid­ual is to feed­back, how they han­dle stress­ful sit­u­a­tions, and if they are in­tel­lec­tu­ally hon­est, among other fac­tors. To Mr. Alex Cromp­ton ( right), man­ag­ing di­rec­tor of En­tre­pre­neur First (EF) Sin­ga­pore, the founders too are im­por­tant suc­cess fac­tors in an early stage in­vest­ment. Hav­ing helped over 500 in­di­vid­u­als build over 120 com­pa­nies with a to­tal val­u­a­tion of over US$1 bil­lion, EF fo­cuses on the size of the am­bi­tion and the de­sire to build a glob­ally im­por­tant com­pany.

Mr. Cromp­ton’s ap­proach is a lit­tle more in­volved on an in­di­vid­ual level. “Ev­ery in­vestor has their own due dili­gence re­spon­si­bil­i­ties and com­pli­ance pro­cesses. At the ear­lier stages, we spend lots of time with the founders to as­sess their char­ac­ter – al­most al­ways we in­vest be­fore there is a prod­uct or even a cus­tomer. At the later stages, met­rics ex­ist and there­fore be­come more im­por­tant to ver­ify.” Founders are very im­por­tant that EF’s exit strat­egy is tied to them, as Mr. Cromp­ton ex­plains. “We usu­ally only exit when the founders exit. Aligned in­cen­tives are the only way to at­tract great founders in the long run, and that’s why we want to back them all the way.”

Eval­u­ate Hu­man Fac­tors

Mr. Tiang adds that, “No mat­ter how wealthy, smart or so­phis­ti­cated an in­vestor is, we have to ac­knowl­edge that we are hu­man and are still mo­ti­vated by emo­tional bi­ases. Greed and fear are very pow­er­ful mo­ti­va­tors and if not rec­og­nized could lead to very bad de­ci­sion mak­ing. The best form of se­cu­rity, there­fore, is to try our best to make the best judg­ment pos­si­ble, with­out be­ing driven by FOMO (Fear Of Miss­ing Out.)” Sim­i­larly, Mr. Lee tells us that all ap­pli­cants must pass strin­gent eval­u­a­tion checks and screen­ing to en­sure only the best com­pa­nies are made avail­able as in­vest­ment op­por­tu­ni­ties to their in­vestor net­work – with ap­prox­i­mately only 8 per cent of these ap­pli­ca­tions even­tu­ally be­ing se­lected for a fundrais­ing op­por­tu­nity. First recorded in 1978, the fa­mous words of Kenny Rogers still ring true to­day, “You’ve got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” Though one might add, that pick­ing which ta­ble to sit at, is equally im­por­tant.

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