Week in Review: Investors ask the wrong question

By Karamjit Singh March 21, 2014

Angel, seed stage investors need to stress less on monetisation
Distracts from building a great product, undermines their investment

Week in Review: Investors ask the wrong question IT is the curse of being a startup in Asia that a monetisation strategy has to be a top priority for founders, along with building a great product and finding the best team possible, with little to offer top talent beyond the dream.

That’s driven by investors who almost always ask, “How are you going to make money?”

But this just feels like the wrong question to ask in the early stage, let’s say the first 18 months, of a startup. It should be more about getting the product right and getting users. The path to monetisation can only start when you have users … a critical mass of users, at that.

What that magic number is, I don’t know, but if you are targeting consumers, that means the world is your market and it has to be in the low millions, at the least.

And your investors need to know that they are just the early players in, with their stake likely to get diluted as you grow larger and attract larger investors in. But that is a good thing for them and the value of their investment.

In the early stages, those investors are going to be from the ‘FAMA’ and professional seed level. FAMA of course stands for Father/Mother/in-laws/extended family, while a Malaysian example of this professional seed will be the Cradle Seed Venture Fund and some of the new funds that Malaysian Venture Capital Management Bhd (Mavcap) is spawning through its Third Outsourced Partners Programme (OSP3), where some of the money will go into seed investments.

I am particularly looking forward to the OSP3 fund that Catcha Group will set up with Mavcap, specifically because the former’s CEO Patrick Grove said he wants to be the investor that he wished he had when he was out there looking/ begging for funds in his early years. Grove said this at a DNA-TeAM Disrupt panel discussion last November.

But this early chase for a monetisation strategy can be distracting and I witnessed this when talking to some student entrepreneurs who are building a productivity app. Funded by FAMA at the angel level – actually, it was just at the idea level – and I saved my “how you going to monetise this” for last.

They invariably went the advertising route with ‘merchants’ ‘targeted’ ‘bidding’ ‘social’ thrown in for good measure.

Their conviction was not there and the pitch sucked. I am sure they are not alone. So why can’t they and others like them just focus on the problem statement they want to solve? They have a much higher chance of getting that right, driven by their passion that makes them put in insane work hours into building the product.

It is because they have been told, and they have probably read it on Digital News Asia (DNA) too, that investors want to see their exit path or at least a monetisation strategy up front.

But this should not apply in the beginning stages and to expect that and then base their investment on the dreamy numbers they get sucked into is just plain wrong, and tells me this part of the funding ecosystem is based on the wrong principle.

I mean revenue projections are even wrong for mature companies that venture capitalists (VCs) invest in. One of the top VCs in town told me last year that the revenue projections of the companies they invest in are wrong 90% of the time.

And he invests millions per company and these are companies that have finance-trained people working the numbers!

At the startup level, especially in the first two years, the main formula is based on the “I am confident” or “The market is there for our taking” equation which is divided by billions and multiplied by “We just want to take 2% of the market.”

The only way to fix this farce is to educate investors and through the painful experience investors have to go through themselves.

The education part we can influence. How? Get everyone you know who is keen to explore investing in tech entrepreneurs to join the Malaysian Business Angels Network (MBAN), which is now led by the private sector after being nursed by Cradle Fund Sdn Bhd.

MBAN will be running a series of education sessions that will be invaluable to understanding the nuts and bolts, and nuances, of what it means to be an investor. At least for us in Malaysia, the steps to help educate early stage investors have begun, and for that I am thankful.

Hopefully the student entrepreneurs I talk to in 2015 to 2016 will answer my monetisation question with, “We will work on that when we have market traction. Right now, our investors are betting we will build a great product that the market will use.” Home run!

Meanwhile, this week’s most read story is, MDeC shifts its focus to games and digital comics sector.

Editor’s Picks:

Disrupt #16: Meet the buyers

Malaysia’s mobile space: No 1 position up for grabs

China sourcing hub a key move for iBuy

MDeC shifts its focus to games and digital comics sector

Would you like some insurance with that phone?

Creative multimedia: Private sector urged to step up

Malaysian VCs invested US$80mil in 2013

Previous Instalments:

Week in Review: Tootpay scores one for the ‘old-school’ boys

Week in Review: Tech tales from two cities