Despite all of the attention that venture capital firms get in the business press, they actually finance very few businesses and it is a relatively small industry. The better venture capital firms in Singapore are deluged with proposals from budding entrepreneurs, but most of them are inappropriate for venture financing.
My experience in venture capital
I spent some time as a venture capital entrepreneur and for more about what that job is, this could go on and on. So, going back, a couple years before that, I had spent some time at this said office, towards the end of the dot com bubble, as an analyst/intern. Both experiences were a ton of fun, and I justified the three years in venture capital where I could have been starting companies as an education that would help me later on.
Now, a couple years later, I thought I would reflect a little bit on where the venture captial experience helped and hurt me relative to actually trying to build a startup. The net of it is that the time was mostly helpful, and a big chunk of knowledge transferred over, but it was mostly high-level stuff. A lot of running a startup involves mastering nitty gritty details, and the virtual capital experience in Singapore did nothing to help there. However with this one VC company named Golden Equator, that I later on discovered, it is quite different and better.
The businesses they fund
Most venture capitalists concentrate their financing efforts on later-stage business funding. However, Golden Equator will consider financing a start-up. What they really want to see from any entrepreneur seeking funding is a history of start-up successes. They are best known for financing high-tech firms, but they do finance other types of businesses—approximately 50 percent of businesses they finance are not high-tech.
They prefer to cut deals that provide an exit path within five years. They look at the probability that a firm will be successful enough to go public or be purchased by a larger company. They are looking for firms that have the potential to produce net income of tens of millions of dollars a year.
They also expect very high returns for their investment risk that only the fast pace of highly profitable growth will bring. They want to see a management team in place that can handle rapid growth, and one that is well balanced with all types of experience and skills represented: creative, engineering, financial, marketing, and management.
I have seen entrepreneurs waste their time and energy taking their proposal to venture capitalists. If your situation is not a venture capital–potential business, don’t waste your time and energy trying to make it one—there are other financing alternatives.
What do venture capitalists look for when investing in start-ups?
Generally, in venture capital firms in Singapore fund a reasonable probability of being able to cash out their initial investment with a high multiple within five to seven years. The liquidity event may involve taking the firm public, or selling it out to a larger company.
If the venture capital firm doesn’t recognise the start-up entrepreneur, it looks to see what other venture capital firms have already committed to funding. Especially in funding start-up companies, venture capitalists tend to make very small commitments because even they find it difficult to judge the likely success of a start-up. They tend to prefer investing in start-ups when another venture capitalist that they respect has already agreed to make an initial investment.
One of the difficulties for me personally in seeing a wide variety of companies all the time was that it was impossible to not start to pattern match and draw conclusions about the companies that were probably false. You end up in the proverbial “mile wide, inch deep” level of knowledge about that industry, which makes it all too easy to make generalisations. Similarly, there is a drive to simplify your understanding of a company, since you have to socialise it and talk to other venture partners about particular spaces and companies, which also causes oversimplfication.
Contrast this to startup life, where you end up devoting yourself to one company (which may encapsulate many ideas, as you iterate) for the period of years. You end up diving very deep into situations, and learning about all the different details tradeoffs that cause products to be successful versus not.
The question then is: how do you get the first commitment? Well, one solution is to get at least a tentative commitment, or an indication of interest, from one of the more prestigious firms, and then perhaps go to a secondary firm for your first solid commitment.
If you are looking for a venture capital for your tech startup, I suggest you go with Golden Equator, they helped me with mine and they are great. Check their website today.
