2020 has been a tough year for startups, Venture Capital (VC) and Corporate Venture Capital (CVC) firms. Though some larger startups in China were able to raise over $1 billion in their latest rounds, many investors around the world have refocused on smaller, more local deals within their community.
This shift in behaviour has resulted in more competition among startups, many of whom are vying to become a part of some lucky firm’s portfolio. To stand out from competitors and gain the funding they need, founders need to be smarter about how they approach potential investors.
To help founders understand what institutional VCs and CVCs are looking for, SGInnovate hosted the Investing With VCs and CVCs in Southeast Asia webinar. The insights from this webinar can help potential founders and business leaders recognise differences between VCs and CVCs, identify investor priorities and prove their startups’ worth.
The difference between CVCs and VCs
“Functionally, CVCs can be quite similar to a VC, but funds may be structured separately, as different entities,” said Shannon Lee Chaluangco, Director, MDI Singapore.
VCs and CVCs vary in their primary motivation for investing. CVCs will invest in startups that can help drive innovation in their main corporation. For example: a large telecommunications provider could invest in startups that are developing edge infrastructure for data centres.
VCs, on the other hand, might simply wish to grow their local ecosystem. Partners in a VC firm often have decades of experience in a specific region — and they will become involved with a startup to earn a return on their investment.
Founders gain different benefits depending on which investors they work with. As industry leaders, CVCs offer access to data and leverage in specific markets. VCs, on the other hand, have experience in running and building a business from the ground up, and they will serve as crucial consultants.
What makes a founder interesting to investors?
There is a common misconception that founders can build their personal brand to the point where VC firms will compete to fund their early-stage round. This is unrealistic. It will take more than a sleek LinkedIn profile and CV to convince investors to take a chance.
Serious institutional founders will look at several main factors aside from the founder leading the startup: the team, the idea’s market potential and their own long-term projections.
Wei Sheng Neo, Investor, Qualgro, shared in the panel that he prioritises several factors. These include experience, execution, ethics and transparency, openness for input, perseverance, management skills and creativity — in the entire team.
He stated, “Investors will often ask: ‘What is their motivation? Do they have a story that drives them?’. Teams who are cohesive and passionate about their cause are more likely to rise to the challenge than those who have simply spotted a good opportunity.”
Neo also shared another question that many of his peers ask before making a decision: “Is this a team we can work with for years to come?”
VCs and CVCs are tasked with nurturing an idea and bringing it to market. They want to hear about specific use cases and end goals. Founders should show investors potential paths to profitability and help them recognise the business opportunity the technology offers.
Many VCs and CVCs in Southeast Asia are especially interested in Deep Tech opportunities that can have a positive impact on entire regions and populations. They are digging deeper into complex technology and asking: “What new opportunities will be unlocked that are not immediately present, but will be in the future?”
Investment terms and exit potential
Investors and founders are not destined to stay together forever. Ultimately, the engagement will end. This could happen through a merger, acquisition, IPO or even the closure of a startup.
In some cases, an investor might be excited about an idea but feel that its future lies in a market they have little experience in. In such a case, they may not be willing to take that long-term risk.
Or, they may feel that it is not the right time to invest: most investors specialise in specific startup stages, so they might ask founders to contact them again once the company has grown.
Image shared by Wei Sheng Neo during the webinar.
Tips to follow when seeking out investments
A founder must know their needs
The business ecosystem is a rich one, with many players and an array of potential “supporters” — founders should consider what they truly need, where they want to go in the next five to 10 years, and how much cash they need to sustain until that point. Neo stated that many startups tend to overestimate their runway, causing them to seek additional funding too late.
There are many ways to prove a startup’s potential
Most VCs will not reject an early-stage startup simply based on traction on metrics alone, so there is no need to over-inflate numbers or focus too heavily on that aspect.
Founders should instead consider which metrics are relevant to their business. For example, Neo mentioned, although non-performing loan (NPL) ratios have become a standard measure of success in the Financial Technology industry, there might be better ways to showcase a startup’s potential.
Prepare key documents beforehand
Aside from the standard company information on a startup’s team, history and business model, it is important to prepare a “Data Room”: a folder with important numbers such as traction, cap table, segmented revenue, financial projections and other details such as hiring plans, tech architecture and financial projections.
Opportunities are there for founders with a clear vision
Investors from VCs and CVCs are savvy, and they know that sometimes, success or potential cannot always be measured in traditional manners. Founders should not worry if they do not have prior business experience. They can earn trust by showing their creative mindset, ability to rise to the challenge and willingness to take criticism.
Follow the SGInnovate Blog to learn more about growing a startup and gain insights from top VCs and leaders in Deep Tech. Or, attend one of our upcoming SGInnovate webinars to listen to key leaders in relevant Deep Tech industries.