Insights on Venture Capital

May 16, 2020 5 min read

By Chia Chu You

The Discovery+ Series is a series of events, delivered through online digital solutions, which give students the chance to speak directly with working professionals, and learn about careers they aspire to enter. Given the developments in the COVID-19 situation, Advisory is keen to provide support to the many students who are experiencing woes in this time of disruptions, by digitalising professional mentorship.

On 21 April 2020, Advisory organised its second Discovery+ online panel: Discovery+: Venture Capital. On our panel, we are privileged to have

Lim Ee Ling (moderator), Country Head, Innovation & Partnerships Team, 500 Startups,
Rina Neoh, Co-founder of Ficus Venture Capital,
Christian Cadeo, Managing Partner (Asia) from Big Idea Ventures and Ian Sikora, Director of Openspace Ventures.

Our registered participants comprised students from various education levels and institutions with a common curiosity in the prospects of the Venture Capital space, and what they can do to better position themselves to enter.

How should start-up founders get angel investors to invest before they have a viable product?

Angel investors are people who invest in companies when they only have a pitch deck (PowerPoint slide deck). There are 2 main things that would persuade an investor to write a cheque for you. The first factor is if your company fits the investment mandate or theme that the investor is looking for. If the investor is looking for a food-tech firm but your company is an ed-tech firm, the chances of securing a cheque is drastically lowered. Secondly, it is crucial to build a strong relationship of trust between you and the investor.

In that case, even if the investor may not be personally able to write a cheque for you, they might pass your company on as a recommendation to other potential investors. If that happens, it would make it substantially easier to secure a meeting and potentially score a cheque.

What are some of the reasons to join a Venture Capital (VC) firm? How does one end up in Venture Capital?

There are a variety of reasons to choose to join a VC. Most of the time, people might be interested in working on start-ups but prefer to be working on the buy-side (people who write checks). Being in a VC also provides the opportunity to be exposed to a variety of companies and different business models that are being deployed to solve problems. The VC space in Singapore offers many opportunities for learning.

There are 2 main tracks in venture capital. The first track is the finance track. These are the people who analyse the business models, come up with valuations and analyse the addressable market size and project potential future cash flows. The second type is the start-up track. Typically, these consist of former founders or entrepreneurs that have either exited a start-up or have failed in a previous start-up. These people join with operational experience and are involved due to their hands-on experience in running a start-up.

Another potential but less explored track is to develop niche expertise in a field. For instance, food-tech VCs like Big Idea Ventures would be willing to hire food scientists with a PhD in the relevant field of technology they are looking for.

How can we apply for entry-level VC positions?

Typically, entry level roles are hired based on pedigree and networking. Alternatively, one could try to secure an internship and go through the required interview processes where the interns could learn how to analyse a sector or particular companies. It is possible to get in without technical skills, as a large portion of the skills required to do the job is learnt while on the job. A proper attitude towards learning will go a long way in helping a junior get hired for entry-level VC positions.

As the VC space in Singapore is rather small, it is important to network and make friends as a junior after qualifying in order to ascend the career ladder.

What is the culture and working hours for a typical VC firm?

The culture and the working hours required for a VC firm is dependent on the type of funding round that the firm focuses on. For early stage firms that cut smaller checks, there is usually a smaller team than a comparatively later stage VC firm. In these smaller firms, there are longer working hours and each person is required to take on multiple roles in order to complete their due diligence. Furthermore, there is a strong emphasis on finding and meeting more start-up founders, since they tend to cut a large number of cheques to more firms.

On the other hand, for late stage focused VC firms, they are usually bigger and more structured in the process of conducting due diligence or meeting institutional investors when trying to negotiate an exit. The bigger teams would consist of more people doing detailed analysis and projections on the company that they are investing in as well.

However, regardless of the type of the firm and the stage that they are focused on, VC firms definitely work more than the typical 9-5 employees. It is definitely not the glamourous culture it has been made out to be, so applicants should be fully prepared to embrace the grind. However, working arrangements are usually very flexible and even large VC firms tend to have more of a start-up culture than typical established firms.

How has COVID-19 affected careers and investment in VC firms?

COVID-19 has not really impacted careers in VC firms. VC firms are still open for business, even in the economic downturn due to COVID-19. However, it has had an adverse impact on the end of business cycles. As start-ups tend to be tight on cash flow, some of the companies have to lay off close to 20% of their employees.

Furthermore, in a cash-strapped market, valuations are becoming smaller due to the investment risk appetite shrinking. This results in lower valuations, meaning that successful VC exits will be harder to reach as expected valuations are hard to hit. Unsuccessful exits for a venture capital firm means that it will be more difficult to raise money for successive funds. All of these factors will combine to hurt the liquidity of investments made by VC firms.

How do you determine a business pre-revenue?

The Discounted Cash Flow method is the best way to determine a company’s worth. The final valuation depends on the stage that the company is at and the sector that they are placed in. It also depends on the roadmap. If they are able to gain market power or dominance due to their position in the value chain, or are well-positioned to obtain that position, then their valuation would increase.

In SE Asia and Greater SE Asia (Including Australia and Bangladesh), the development cycle also tends to be behind that of the US and China. Hence, valuations could also be constructed through comparing these companies with other more developed ones.

Start-ups also try to come to investors with their own valuation. Most start with the highest month of Gross Merchandise Value (GMV) that they were able to achieve in the past few months, multiply it by 12 to obtain the targeted yearly revenue and then ask for a 10x multiplier on that. However, the final price will be dictated by market demand, which sometimes can vary from the estimated valuation.

What are some of the biggest lessons learnt from deals from past years?

There are 2 main lessons learnt. Firstly, do not allow portfolio companies to become overzealous and push for expansion before gaining market validation, especially in a foreign country.

Secondly, it might not be advisable to not invest in companies with founders that have close personal ties. A company, with only two co-founders who are married to each other, would be one example of this. It may become emotionally difficult to dissociate one’s personal life from one’s professional life.