The climate of tech funding has never looked better. Even when it ebbs, the flows go ever higher. VCs and governments are increasingly generous at throwing cash and grants at startups as the tech ecosystem matures.
But not all entrepreneurs survive the baptism of fire. Some burn out; others, in their desperation to hit the high mark, lie and cheat — like the now infamous Elizabeth Holmes whose biotech startup Theranos was discovered to be engaging in systematic fraud.
Another startup, whose name was not disclosed, attempted to hoodwink Malaysia-based multi-family VC RHL Ventures into loaning it cash by offering false information and claims.
“They said they had all these investors in and they really didn’t have them. They didn’t have real revenues, they did not actually have real businesses or real partners. It was all MOU that was about to be signed, and so whatever they put in terms of numbers were not real,” said RHL Ventures partner Rachel Lau, in an interview with e27.
“It is very hard for me to go to its client and say ‘ have you paid them X amount of money?’ So that’s the thing that’s difficult for a VC to do because the level of due diligence that you can engage is not as much as a private equity can,” said Lau.
The offending startup had put forth deal terms that were too “far-fetched” and unrealistic. This prompted RHL Ventures to call up the investors who had supposedly invested in it, and it turned out that none of them had accepted the deal.
“We typically won’t call investors and say: ‘hey, have you invested in these terms. But because they [the startup] said they already did, we decided to call them,” she said.
This is just one example of RHL Ventures’ meticulous vetting methods. The VC was founded in 2015 by three millennial investors, Lionel Leong, Raja Hamzah Abidin bin Raja Nong Chik, along with Lau. A fourth partner, John Ng Pangilinan, joined this month.
Its aim is to fund regionally-focussed startups with proven business ideas and will only participate in Series A rounds or later.
The low number of deals can, perhaps, be partly attributed to RHL Ventures’ scrutinous approach. But in a climate where everyone with an idea is calling themselves a founder, entrepreneur, or what have you, it pays (literally) to be able to identify the wantrepreneurs from the honest-to-god whizz kids.
Identifying a potential investee
RHL Ventures describes itself as a more risk adverse VC. For example, in the area of valuations, the team puts the prospective startup under the scrutiny of public market valuation.
“How we look at numbers is based on a couple of things: Addressable Market, where they are in terms of historical revenues, where they will be in terms of growth,” explains Lau.
And when it comes to growth, there is a myriad of considerations including market size, quality of the team, and where they are in terms of product introductions.
Additionally, the team evaluates a potential investee’s comparables in the market.
“For example: if you [the founder] say it [their startup] is a taxi business then you got Uber, but Uber is not a taxi business, so you got to go down the revenue streams and understand what drives the revenues,” said Lau.
“If it is a platform and there is an introduction fee, the driver takes a cut and the advertiser takes a cut and you have to understand what revenue streams there are and apply a multiple on top of that.”
There are usually a sufficient number of comparables in the market to look at, given the saturation of tech verticals such as e-commerce, food delivery, or logistics, and more.
But at the end of the day, Lau says putting a value on a startup is a mixture of both science and art — the art of evaluating the founders’ potential.
“The gut feeling comes from assessing a founder, a management team, and what they tell us in terms of how they’re going to tackle the markets. The scientific bit is what the public comparables are, what the multiples we should apply on it. Where we think the growth rate is and then we just kind of combine and marry the two,” she says.
How should startups pick a suitable VC?
That said, the relationship between a VC and a startup is a two-way street. A good VC does not just provide monetary aid, but also strategic support including industry advice, mentors, as well as open up potential partnerships. So startups need to pick the VC best positioned to help them grow their business.
“Startups need to evaluate a VC the same way we evaluate them. Good startups with great traction or market validation will not simply take anyone’s money. They just have too much to lose if they sign with the wrong partner,” says Lionel Leong.
“And money now is just like universal media, so VCs behind it can make the money more compelling … the way strategic or clever money is needed now cannot be disputed,” he says.
The funding environment has evolved drastically, with more foreign investments pouring into Southeast Asia’s tech ecosystem. In Singapore, especially, there has been a huge leap in early stage investments. Many foreign VCs and angel investors have established themselves in Singapore in the past few years in order to reach out to the region.
RHL Ventures plays a role in guiding startups strategically, but at the same time, they do not lord over them and dictate every move.
“It’s not like we tell them what to do. We don’t take operational control role. We see what they need, whether it is helping them open markets, increase new channels in terms of opening warehouses to manage costs,” says Hamzah.
But the type and level of support are also tailored to each startups’ individual needs.
“For some startups, we play a stronger and more strategic role. Some startups just need cash. It very much depends [on them],” he adds.
In the case of RHL Ventures’ first investee Perx, the company needed a strategic investor to help them obtain good leads in Malaysia. Perx needed access to networks and corporates (such as banks) to sell its loyalty platform. So RHL Ventures made introductions to CEOs, to banks, and senior people in a variety of conglomerates.
“Just with that brief some sort of introduction they are able to accelerate their growth and increase the speed of the conversation. So we are cutting down the conversation, from let’s say 12 months to 3 – 6 months,” says Hamzah.
The importance of VC-to-VC relationships
One aspect of running a VC that is hardly talked about is building and maintaining relationships with other VCs. Sharing of resources and ideas go a long way in bolstering the investment space — especially one that is burgeoning, and to some extent, volatile, as tech.
“I think building VC to VC relationships is one of the most important, if not the most important in the investment space. We not only share insights of ideas and trends, but we build our relationships to ensure we all stay in the game and keep our investments well-funded by the community. By leveraging our networks and connections we can help our investments find more partners,” says Leong.
So despite RHL Ventures being based in Malaysia, it is consistently growing relationships outside of the region in developed markets such as the US and Europe.
“When you’re only a local Malaysian VC, you only have access to Malaysian deals and it’s not as attractive as companies that have access to regional deals. I’m not trying to downplay anyone — a lot of VCs have good links, but a lot of players in the markets don’t have the regional connections,” says Hamzah.
Image Credit: RHL Ventures
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