Building a business is hard. But asking money from people so that you can grow your business further is equally tough, if not more.
Hence, it’s not uncommon that founders may feel that they are at the mercy of investors because they’re the ones that need the money. But it doesn’t have to be that way.
While capital is key to further the growth of your company, choosing the right investor to work with is just as important. A good investor will not only provide you the capital that’s required but they will also help you to be a better founder.
We spoke to two regional investors—Nikhil Kapur, managing partner at STRIVE and Brian Ma, managing partner at Iterative, to learn more about the things that startups should look out for when fundraising.
Before becoming fund managers, both Nikhil and Brian were founders. In 2012, Nikhil co-founded India’s first SaaS-enabled artist management platform TommyJams. Previously, he was a software development engineer at Microsoft. Brian, on the other hand, was the co-founder and CEO of $2-billion Divvy Homes. He also founded Weave in 2014 and Decide.com in 2009 (exited to eBay in 2013).
Let’s dive in.
‘Stress Test’ Potential Investors
Filter out the not-so-helpful investors by asking them the right questions. Yes, investors are usually the ones asking founders questions but founders too, are entitled to learn more about their potential investors that are about to pick a stake in the company that they have worked so hard to build.
We’re not talking about questions like follow-on commitments and fund size. These are important, but doesn't give you enough context. Instead, founders need to dive deeper to gauge how can an investor be helpful during tough times.
Some examples given by Nikhil:
- “It’s year three since you’ve invested, the market has gone to shit and my company isn’t doing well. Would you lead a bridge round and what’s your criteria for that? What’s your priority—growth or profitability?”
- “If an investor loses conviction in the founder’s ability to helm and manage the company, what will they do?
- “Will you fire and replace the founder or write the investment off and move on to the next company?”
In other words, lay all your cards and hypothetical worst-case scenarios on the table with your potential investors. “It’s a 10-year bond that you’re going into, and you’d want to go into it with your eyes completely open,” says Nikhil.
“It’s important to get these nuances upfront…I think there’s still a lack of depth [among founders] in questioning [the investors].” — Nikhil
Know Your Investors’ Value-add
Just five months into 2022, the region’s has chalked up $455 million worth of deals, according to Preqin. For the whole of 2021, the figure was $20 billion.
Clearly, there’s no shortage of capital across Southeast Asia. To stand out, investors are always shouting about how they can add value to founders.
But how does value-add look like?
Understanding your investors’ strengths is important, says Brian. That way, you have a clear idea on how they can be helpful/add value to you and your company.
Drawing examples from Divvy Homes, Brian shared that a16z provided a lot of guidance on early-stage challenges such as product-market-fit and company focus. “Series B was from GIC and they have a massive real estate portfolio. So anytime when we’re freaking out on real estate debts, we know we can reach out to them.”
“Know what your investors are good at and when you can tap on them for help. As a founder, [you need to know] how you can be proactive and get the most out of your investor. No investors want to be annoying, they just want to help you at the right time.” — Brian
Nikhil agrees, saying that it is an investor’s job to predict problems that would be faced by startups. This is because fund managers are the ones that have a bird’s eye view on any shifting trends across the region, through research and exposure to their peers and other founders.
It’s then down to these investors on how can they use these resources to help their startups to avoid falling into pit holes. “And if they did fall into that pit hole, how can we help them climb out of it?”
“Mental health is an underrated value-add that’s being discussed. But if more VCs can hold space for their founders, allowing them to be more candid, I think the world will be a better place and we will see less drama from companies. But it’s not an easy thing to do because there’s so much ego flying around and even more money at stake.” — Nikhil
Value-add can come in the form of customer introduction or talent-sourcing. It could also be giving mental health support to the founder.
“We try to be as there for our founders as much as we can during tough times and have a no judgement policy. Allowing founders to be transparent and candid with you is a big thing. The journey of being a company founder is a very lonely one.
Never Spray and Pray
Speak to many investors, but not just any investors. The key here is to be tactical.
Brian’s suggestion: Make a list of 50 top investors. Research and sort them based on their value add potential.
“Form a founders’ network, especially with founders who have recently fundraised. This is so that you can learn more about the investors you plan to pitch to and exchange notes on all-things-fundraising/startup.” — Brian
On the other hand, Nikhil observed that most founders are choosing their investors based on branding - it's probably not the right way to go about it. “You should speak to other founders who have fundraised from this particular investor—without the VC firm knowing.”
This is because different partners from the same VC firm have different perspectives. So it’s best to do a cross-reference check with other founders who have worked directly with said partner that is looking to invest in your company. It not only helps you understand what the experience was like for the founders, but also helps to gauge if the investor is as helpful as they claim to be.
And of course, you can also check with your existing investors to see if you are prioritising the right group of investors for your fundraising journey. This could potentially shorten your fundraising period significantly.
“Sometimes, some investors say they’re deploying but they’re actually not. Speak to your investors to find out more and the sweet spots (eg. check sizes, sectors) of these potential investors because they’re the ones that’s connected to these people,” says Nikhil.
Last but Not Least
An ideal investor should be able to provide support that is above and beyond the capital that’s being invested into your company.
If you’re an early stage company, you’d want an active investor because you’d need all the help you can get. As you scale the company, you may prefer your investor to be slightly more passive so you can focus on running your business. At the same time, however, never forget that it’s equally important to have a strong board of directors to keep the your company’s health and governance in check.
A good investor is the one that could be a founder’s first call for just about anything.
Remember, not all capital is equal.