Disrupt: ‘Even bad businesses will get money’

By Goh Thean Eu November 20, 2014

Lots of funds will come into ecosystem, even ‘bad companies’ will get money
Focus on building relationship with investors, it’s a ‘courtship’

Disrupt: ‘Even bad businesses will get money’

ENTREPRENEURS finding their journey filled with obstacles may feel more relief next year, as key industry players are confident that 2015 will be a “great year for entrepreneurs.”

“I think there is going to be a lot of money coming into the ecosystem,” Proficeo chief evangelist Dr V. Sivapalan said at the DNA-TeAM Disrupt panel discussion on Nov 19, at the Telekom Malaysia Convention Centre in Kuala Lumpur.

Entrepreneurs will have more funding options. Besides venture capitalists (VCs) and angel investors, they are also expected to have access to new funds set up by various organisations.

Recently, regional telecommunications giant Axiata Group Bhd announced that it was setting up the US$30-million Axiata Digital Innovation Fund with Malaysia Venture Capital Management Bhd (Mavcap).

Catcha Group’s recently-launched Catcha Ventures announced that it will invest between US$50 million and US$100 million in selected digital companies over the next three to five years.

Also, successful entrepreneur and JobStreet.com founder Mark Chang has voiced an interest in becoming an angel investor, and will be focusing on entrepreneurs from disadvantaged backgrounds.

Then there are the existing VCs and angel investors, both local and regional. With Malaysia’s intentions to launch equity crowdfunding added to the picture, entrepreneurs will have many more funding avenues available to them, the Disrupt panellists noted.

Disrupt: ‘Even bad businesses will get money’ The DNA-TeAM Disrupt session is a monthly event organised by Digital News Asia (DNA) and the Technopreneurs Association of Malaysia (TeAM). The theme at the most recent one was ‘Are Investors Asking All the Wrong Questions?’

However, as more funds come into an ecosystem, investors tend to loosen their purse-strings, Sivapalan (pic) noted. Not wanting to lose out on possible deals, they may rush into bad investments.

“2015 will be a great year for entrepreneurs and good startups, but a lot of bad businesses will also get money,” said the TeAM cofounder.

“Not wanting to lose out, investors will start making silly deals as well. This is a common trend; it has happened before and will happen again,” he added.

Courtship and marriage

Disrupt: ‘Even bad businesses will get money’ According to his fellow panellist Amin Shafie (pic), cofounder of Malaysia- and Hong Kong-based venture capital firm Questmark Group, entrepreneurs need to build long-term relationships with VCs. It’s not just about taking money.

Referring to his own experience with entrepreneurs, he said, “In most cases, there was no mention of fund-raising or investments in the first eight months of conversations. They would talk to us about what they were doing, and ask us our opinions on certain strategies.

“They would just want to bounce ideas off us. VCs in general are optimists, but they can’t help being cynical. At the end of the day, it is something like a courtship,” he added.

Sivapalan concurred, and encouraged entrepreneurs to meet investors regularly to pitch to, and bounce ideas off, them.

“Don't always hound them for money. At the end of the day, it is about building relationships. Entrepreneurs have to be realistic. You can’t think that VCs are just waiting there with their chequebooks,” he said.

The third panellist was Lee Ching Wei, founder of iMoney Group, who said that it was important to have constant communications with the investor community.

“After the first round that we raised, we kept investors in the loop of what was going on, so that when the need for fund raising arose, we had a ready pool of up-to-date investors,” he said, noting that in the course of building iMoney, he had met with 30 VCs.

This has been a good year for iMoney, with Australian Securities Exchange-listed iSelect Ltd recently acquiring a 20.1% stake for US$4 million.

Cold-calls vs referrals
Disrupt: ‘Even bad businesses will get money’
The panellists also noted that VCs prefer to deal with “familiar faces,” or having personal referrals from people they already know.

“When we first set out to raise funds, we sent cold-call emails to investors, but it was never as effective as personal referrals,” said Lee (pic). “From our second round onwards, it was all based on personal referrals.”

Amin agreed, saying that most VCs in the country and even in the region do deals when referred to by people they already know.

“VCs like these types of referrals. The cold calls that come to us, we will take them, but with some doubt,” he said.

As for the main topic of the conversation, the three panellists had their share of titbits in terms of the questions VCs ask.

“For example, they will ask if the entrepreneur is an industry expert or whether if they have domain expertise [in the industry they’re going into],” said Sivapalan.

“Does the entrepreneur actually need domain expertise to run the business? [Catcha founder] Patrick Grove is not a real estate agent, and yet he turned iProperty into a success. [MOLGlobal founder] Ganesh Kumar Bangah was never a banker, but he is building a successful payments business,” he said.

“Sometimes, it’s the person from the outside who can truly disrupt an industry,” he added.

Another frequent ‘wrong’ question that investors ask is what the barriers to entry were in the business the entrepreneur was going into. According to Sivapalan, there have been investors who balked when they found out there weren’t really any barriers.

He argued that unless the startup was developing unique technology and owned the intellectual property, in today’s technology-enabled world, there were few barriers to entry.

Some investors only want to invest in ‘teams,’ looking to see if the startup already had the right team to grow the business to the next level. If the entrepreneur does not have the right team, the funds will not flow in.

“They should instead ask: “How can we come in and make it successful? Who do you want in your team, and how much will it cost to make that happen?” Sivapalan said, as his fellow panellist also lamented the fact that many VCs ask what they described as ‘template questions.’

“Sometimes, it feels as if they only want to invest in a goose that lays the golden eggs, one that meets all the criteria,” Sivapalan said.