Many digital companies that I meet and work with in the private markets in South East Asia are relaying their experiences of the covid crisis along a similar storyline – it goes something along the lines of:
“….operationally we are fine, or even growing faster, thanks to the acceleration in digitalization triggered by covid. That being said, fund raising-wise we are shocked in terms of how quickly interested investor capital dried up, and still is far from back to normal.”
Shortly after the initial waves of covid ramped up across the region and the follow-on social distancing measures were implemented in South East Asia, early stage venture capital investors, by and large, switched from ‘risk on’-mode to a conservative ‘wait and see’-mentality. This reaction was to be expected as implications of the pandemic were, at that time, still highly uncertain and it was becoming increasingly hard for regional investors to travel to meet new potential investment targets while the vast majority of their current portfolio companies were all screaming for ’emergency investment rounds’.
At a second stage, as most investors had dialed down on their risk appetite, the large group of early stage companies that were still making operational losses and consequently were more or less forced to raise next financing round, started to desperately drop their valuations in order to secure survival. This in turn triggered somewhat of a ‘deflationary spiral’ (i.e. valuations continue to go down since everyone is expecting them to go down) in early stage valuations in the region, in turn reinforcing the rationale for investors to stay in ‘wait & see’-mode even longer. This general reluctance among early stage investors in South East Asia to get back to previous levels of capital deploys have in turn resulted in a significantly (and possibly permanently) changed funding environment in the region. The changes have not only affected valuation levels and total capital invested, but also the types of companies that are generally preferred by investors – for one, the focus on growth & profitability (instead of the previously somewhat one-sided focus on growth) has increased dramatically over the past six months.
With this backdrop, there are many South East Asian company builders out there that are currently sleepless either because they don’t know how to secure the capital for their next payroll and/or significantly deterred by the daunting challenge of raising first/additional funding for their early stage businesses. In this article, I wanted to try to share some perspectives, along with real life experiences and tips on how to approach the challenge of fund raising in this current desert-like climate:
- It takes six months to raise – plan for it. Including outreaches, pitches, follow-on meetings, document negotiations and capital calls it, more often than not, takes six months to complete a fundraising process successfully start-to-end. Make sure that you a) plan for your company to have staying power for that long (maybe you need to make proactive and painful cost cutting to survive long enough to see it through?) and b) don’t get frustrated and give up just because you receive 50 ‘no:s’ and things drag out – they always always do.
- Make sure you have a long, I mean really long, list of potential investors to approach. In my experience, a long list of 100-300 investor names were enough to close a round pre-covid. I would plan for a 200-300 names list post-covid. Of course, the names need to be of good quality and the list should be put together in a thoughtful manner in terms of what investor can fit for your particular needs (Do they invest in your country? Do they invest in the stage of development of your company? Are they too big? Too small? Do they only invest in software and you do hardware? Only Fintech and you do Pet-tech?). Why is it important to have a long list – why not focus on quality instead of quantity? The simple answer is – it has to be both quantity and quality. The more nuanced answer is – we actually don’t know what we don’t know – we can not know perfectly who, out of all investors in the vast universe of potential sources of capital, might or might not be willing to invest (especially not in these times) in our companies. When I look back at the 30-40 fundraising rounds that I’ve been part of, more often than not I’ve been surprised of the actual investor names that in the end completed the round. The key learning here is that we should not over-rationalize who should or should not be on that initial list. All we know is that will be needing backups, and boat loads of them in the post-covid world. If we don’t start our approach broad enough, we might invest 2-3 critical calendar months only approaching ten investors – what if they all say no? There is high risk its too late to start to approach another batch of investors from scratch (remember the 6 months rule of thumb).
- Relationships are more key than ever. The art of raising funds from investors is very closely related to the classic art of closing a larger B2B deal. The steps of the process are very similar: a) gather leads (your investor list above), b) put together marketing material (your pitch deck), c) do outreaches (many of them cold or semi-cold), d) follow-up and remind, e) meet and discuss the deal, f) convince the counterparty to part with her/his hard-earned money and d) wrap it all up and get it signed. That all being said, I think there are a handful of elements of fundraising that make it slightly harder than B2B sales. Foremost, in relative terms, its a bigger and more sensitive/intimate transaction than most B2B sales in a company of comparable size. Its intimate since its about asking the investor to part with a significant part of her/his money and its intimate since the company builder is not just giving away a product in return, she/he is giving away ‘her/his life’s work’. This is also why relationships and the physical meetings traditionally have been so pivotal in fundraising processes. Tough luck – post-covid, physical meetings are now a lot more restricted and many people are reluctant to meet and/or travel. Hence, in our post-covid world we need to spend much more of our efforts on thinking about a) who within my country is still investing and could be a relevant investor for my company and b) who that I know can introduce me to these investors that I actually can still meet in person? That being said, we also can’t be overly selective as we still need to keep our list long initially – left with no other option, it is still possible to close a funding round over a video call (I’ve experienced this first hand in multiple companies).
- Probe for commitment / indications up front. Its important to remember that the incentives are such that its usually in an investor’s interest to learn more about a rapidly growing industry and key startups in it (regardless if she/he is genuinely interested to invest or not) – this can be either because the investor is interested to invest in your particular company OR because the investor is interested in investing in your competitors and want to use the meeting with you as competitive benchmarking. I’m not saying this as something that is terribly wrong, its just the nature of the VC industry and how it gathers information. That being said, its important for someone who is in the process of investing their time into raising funds to be aware of this dynamic – primarily in order to be better at avoiding wasting time with investors that are just gathering competitive intelligence. To do this, its important to probe and ask questions early on in the dialogue with a new investor. How much capital do they have left to deploy in the fund? Have they looked at other players in your industry? What do they think about your competitors? Do they invest in companies of your size/industry at all to begin with? What does the process, step-by-step, look like for them to make a decision on an investment? Etc. The investors’ answers to these and similar questions will start to give you a more transparent picture around the investor’s actual willingness and ability to invest in your particular company.
- Leave time for document negotiations – if not you’ll get squeezed. At the end of the very long and demanding fundraising tunnel, there is typically light, but be mindful to not cheer too early. After you have managed to secure enough investor interest, signed your preferred term sheet (if you are fortunate enough to have a choice) and survived the due diligence, there is a somewhat unexpected step at the end of this protracted process – documentation drafting and negotiations, which painfully enough has to be endured before your company can reignite with fresh funding in your accounts. The stack of documents needed will vary depending on the complexity level of the funding transaction structure as well as the number of investors involved. Usually the key documents are a subscription agreement and/or investment agreement along with a shareholders agreement. Unfortunately these documents are usually quite lengthy and many times both you and the investors will need to engage separate legal advisors to complete the negotiations. As you’ve already guessed, this all boils down to extra calendar time needed – typically I would say that it is wise to leave room for at least four weeks of document drafting and negotiations (earlier and simpler rounds can be quicker and vice versa). As with all other steps in the fund raising process – the less time you have left before your money runs out, the more likely it is that you will get squeezed by the investors you are negotiating with – i.e. they will start to ask for better terms as soon as you are showing signs that you need their money faster.
- Try other forms of capitals than just VCs. I find it to be a common mistake among early stage companies to focus their fund raising efforts too much on traditional VC funds. Yes, they are easy to find via Google, but the flipside is that you might focus your efforts on a group of investors that might not be ideal fit for your company long term. Majority of VCs are operating along a very specific set of preferences and ways of working (e.g. historically many of them have been overly focused on growth, at the expense of pushing companies to over-burn cash on near term operational expenses, in turn increasing the founders’ operational risks significantly), plus the VC community as a group can many times chase narrow trends in investing and thereby also show a higher degree of “heard mentality”. This can also be seen in the midst of covid, when many VCs at the same time switched over to “wait & see”. However, needless to say, as with everything else in life, of course there are exceptions and many VCs can indeed be great long term partners in your business. In times like these, it can be helpful to also put a fair amount of focus on alternative capital sources, e.g. investment arms of larger corporations (typically with better long term focus and staying-power than traditional VCs) or maybe even consider a small public listing for your company on a smaller stock exchange such as AIM in London, Catalist in Singapore, or even Nasdaq First North in Stockholm, if your company has reached that stage of maturity. It can be helpful to leverage the fact that currently stock markets around the world are still rallying upwards, while private capital markets are in general more conservative at this point.
Best of luck in all fund raising efforts out there across the region in this long desert walk!
Written by Christopher Brinkeborn Beselin, Founder and Partner at Endurance Capital Group. This story was first posted on his LinkedIn