Tech startups want 'right fit' with investors

Climate favorable for tech startups, but entrepreneurs looking to raise funds need to focus on investor fit, rather than dollars, say businessmen and venture capitalists.

The current economic and technological environment has made it both appealing and easier for more aspiring businessmen to start their own companies, but when it comes to securing funds to do so, entrepreneurs say it is more than getting "the right price" from investors. Rather, there needs to be a "right fit", as well as clear consensus and open communication between both parties.

Danny Tan, founder and CEO of Foound, told ZDNet Asia that when there is a choice of investors available, tech startups have "every right to pick the best offer on the table" because most of the time, "it's not just a matter of price, but the right investor profile".

"The right fit is definitely more important than price," he said in an e-mail. "The best investments are always done when both entrepreneur and investor have a meeting of minds regarding their financial and non-financial goals."

"As an entrepreneur, you never want to have an investor who is driven purely by financial rewards," he added. Foound, which was launched in 2009 and develops geo-social apps, secured US$500,000 seed funding from Neoteny Labs in 2010.

Tan observed that "sophisticated investors" today are more "entrepreneur-friendly" as they realize the value of supporting the management team rather than the product, and also fund startups because they are "solving a problem which is dear to the heart of the investor".

Proper planning and candidness
Tan also emphasized that potential entrepreneurs need to bear in mind that "soliciting investments is merely a means to an end, and not an end in itself".

Over at the other spectrum, startups ought to know why and what they are raising funds for, and what investors can get in return, he said. Therefore, any entrepreneur needs to "be as honest as possible to their potential investors when fund-raising".

Fernando Martin, CTO of ShowNearby, advised startups to "make sure that you actually have a plan to use the money wisely". Set up in March 2008, ShowNearby, which develops location-based services and apps, received S$3.5 million (US$2.7 million) investment from Global Yellow Pages in July 2010.

Martin noted in an e-mail that meeting different investors and the ability to attract investors via incremental financing rounds will help to prove a startup's ideas and business model. "Once proven, you can be sure that the idea can be replicated and you'll be ready for a home run," he said.

Work closely with investors
Venture capitalists similarly highlighted the need for open communication and consensus between investors and startups.

Michel Birnbaum, general partner from venture capital (VC) firm iGlobe Partners, noted that entrepreneurs can be "difficult at times", hence it is important for investors to assess if they are able to "communicate with the entrepreneur" and if the latter also "understands what it means to take VC money".

Entrepreneurs must understand the focus and mandate of the venture capitalist and there has to be an "understanding of governance and fiduciary duty" between the two, said Birnbaum in an e-mail interview.

A successful relationship, according to him, requires the venture capitalist to work closely with the startup's management team to develop a strategy and guide the execution of the business. Investors adopt a more hands-off approach only when a startup "has everything in place" and only requires cash injection, he added. If the startup is only looking for money and unwilling to let investors play a greater role, "don't come looking for investors and instead just bootstrap your company", he pointed out.

Dennis Phua, executive director at Azione Capital, another VC firm, pointed out that a startup needs the "necessary connections and expertise" to execute their business. Hence, venture capitalists will frequently offer their own input, so the startup must be able to accept changes and work beyond their original business plan", he explained in his e-mail.

Venture capitalists, said Phua, also note the capital efficiency of a startup because they prefer "lean and focused teams".

Birnbaum added: "It's a question of 'Does it take a lot of money to build and scale the business and eventually get it to exit?' The more capital-efficient a business, the more chances it has to get funded."

Favorable time for startups
According to ShowNearby's Martin, "not all tech startups require external funding".

The barrier to entry for setting up a tech business is "very low", particularly for firms which do not require strong R&D (research and development) or manufacturing, and there are also "plenty of government grants to kickstart your idea", he explained.

Furthermore, today's cloud computing infrastructure, open source technologies, skilled workforce and the possibility to reach a worldwide, Internet-savvy market "more keen than ever to purchase any kind of online service or product, means "now is the best time to create a new startup", Martin added.

Foound's Tan concurred, saying that today is "probably a golden era for tech startups, particularly in the Web 2.0 and mobile space". Similarly, he attributed this to the amount of infrastructure built by other tech companies, which have made it easier for a startup's product or service to reach more people.

For instance, the Apple App Store enables a company to potentially reach millions of users for just a few hundred dollars worth of licensing fees, he said.

iGlobe's Birnbaum acknowledged that some companies in sectors such as Internet, social media and mobile can afford to grow unaided until they are in a better position to get funding.

"Entrepreneurs are savvier and want to have investors who can bring something to the funding round besides money," he added. "The onus is on the investors to demonstrate that they can add value."


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