I was invited by NUS Enterprise recently to share some of my insights from the perspective of a founder turned investor. It was a sweet homecoming sorts, as this is also the same place where my start-up was being incubated 2 years ago!

Sharing to an inquisitive audience that my time as a VC investor is typically split between three distinct responsibilities – sourcing new deals, keeping up with market trends, and portfolio management, I then dived into the three key topics for the day:

When is the Right Time to Raise VC Money?

An age-old problem plaguing entrepreneurs is this – when does one seek their first injection of institutional funding from VCs? To gauge whether your start-up is ready for VC funding, meeting the following criteria is crucial:

• Assembling a strong founding team: This is especially relevant for companies seeking seed funding, as investors at these very early stages typically give greater weightage to the assessment of the founding team over the company business model. Getting domain experts of ex-founders to join your team will help boost the founding team’s credibility significantly, so will hiring early employees with strong industry relevant experiences.
• Finding product market fit: Investors look out for strong and sticky demand for the product your company is placing on the market. These are often indicated by the consumers’ willingness to pay, high retention rate of users, and strong organic growth over time. A simple litmus test is this – will users be disappointed if the product went away?
• Understanding your unit economics: Knowing the revenue and costs of an individual unit of product like the back of your hand is critical. Taking the SaaS industry as an example, monitoring your customer lifetime value (CLV) to customer acquisition cost (CAC) ratio is paramount to achieving long term profitability (having a CLV/CAC between 3 to 5 is healthy). Having a growth at all costs strategy is simply not sustainable, as profitability cannot be attained with a marketing and sales budget that exceeds revenue generated per user.
• Ambition for exponential growth: “Taking on Venture Capital is like rocket fuel; you must ensure your start-up is fundamentally ready to take on that accelerated growth.”

Once you are sure that VC funding is the next step for your start-up, how do you go about finding the right VC for your company? This brings me to my next point…..

How to Identify the Right VC for You?

Embarking on a journey with a VC investor is a long-term game and finding the right investor can be a very challenging process. Especially for first time founders, asking them to source for the right VCs without any prior knowledge or connections to the VC industry is akin to planting them in the middle of a maze.

To simplify this daunting process, founders can first approach other entrepreneurs within their own networks and seek a professional introduction. Obtaining a referral from a trusted source within a VC’s network will greatly increase the odds of engagement from the VC in question. Additionally, investor directories such as OpenVC, Startup SG and E27 Pro are also great starting points for start-ups to get attuned to the profiles of VC investors operating in their geography. Understanding the profiles of different VCs is fundamental to not only the odds of initial engagement, but also the prospects of securing funding later. Only through knowing what specific VCs are looking for (eg. specialised sectors, regions, funding stages, ticket size) will you be able to better discern whether your company aligns with their investment mandate.

Beyond the tangibles, founder-investor fit is probably the most important aspect to identifying the right VC. This boils down to whether a VC value adds in other ways beyond capital. Ask yourself the following questions when evaluating a VCs fit:

• Will they open doors to potential customers and partners?
• Are they able to introduce new investors for your next round?
• Will they help attract C-suite and tech talent?
• Can you relate well with the investor?

A good VC is one that walks with their founders through the highs and lows and can always be relied upon as an advisor and a sounding board for the management team to refine their strategy and ideas.

What Does a VC Look Out For?

In sum, a VC investor looks out for the following when evaluating a prospective start-up:

• Clear problem statement and product market fit (mentioned above)
• Good team with sound execution (mentioned above)
• Good founder and investor dynamics (mentioned above)

• Sizeable market opportunity: The start-up demonstrates an attractive serviceable obtainable market for their product supported by projections obtained via a bottom-up approach

  

• High growth potential: The start-up has proven traction and high growth potential, evidenced through the use of industry relevant metrics and comparison with industry benchmarks

  

• MOAT (Unique Advantage): What differentiates the start-up from its competitors? These can be in the form of network effects, cost moat (eg. high switching costs, cost advantage from economies of scale), intangible assets (eg. Proprietary technology, patents, trademarks) and even branding

Concluding Remarks

Given the broader market climate filled with both recessionary and inflationary fears today, funding in the private markets has also slowed down as a result. As such, it is an apt time to part with some brief comments on valuation and runway.

Raising at the highest possible valuation may be particularly enticing for most if not all companies, but this could have potential drawbacks in the long run, particularly in today’s market. The prospects of a successful fundraise at the next round may be dampened, as evident from start-ups who raised money at inflated valuations over the past 2 years but are struggling to raise today. Thus, those who raised at fairer valuations would stand to gain from a bear market where investors are particularly cautious in deploying capital.

A good rule of thumb when it comes to raising funds might be to raise enough to provide you with an 18 to 24 month runway. Raising too little would compromise your company’s ability to reach its next milestone, while raising too much leads to over-dilution.

Lastly, obtaining VC funding is not the be all and end all for a start-up, neither is it the best measure of the merits of its business. At VVSEAI, only 0.25% of the companies we have talked to eventually get funded. Looking at the most recognisable names out there today, Github and Gopro amongst others, were bootstrapped till they were eventually sold or went public.

It is wise for founders to always keep this in mind: “Raising VC funding should not be your end goal; it is merely a means to reach your ultimate goal”.

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