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.