A look at the role of the funding ecosystem
Should start-ups value their worth over survival?
LET’S close this loop. No, not A Asohan’s “reinforcement via internal loop” mentioned last week.
I find myself thinking about Vinnie Lauria’s defence of angel investors and venture capitalists (VCs). Lauria is a founding partner of Golden Gate Ventures, a Silicon Valley-based VC firm focused on South-East Asia.
His article was in turn triggered by my co-founder Asohan’s views of how the funding scene in KL looked for start-ups. And, bear with me here -- Asohan’s article was ignited by a comment posted by Dr Gabriel Walter, founder of Quantum Electro Opto Systems, to an article I wrote two weeks ago on Nizran Noordin, of TaxiMonger.
The original article sparked off a discussion about the value of one’s equity in a company and with Asohan challenging the accepted notion that start-ups need go to angels or VCs for their funding needs. Lost in the subsequent discussions was his advice of looking at small business loans or even going to the banks!
But that’s not sexy, so who wants to explore that.
The discussions really boil down to the role of the funding ecosystem, including the value of a new type of investor in the scene, the accelerators. And on the value our start-ups slap on themselves.
Many a time that value is not based on anything concrete. Even the most solid of projections are inevitably off base, says the CEO of a leading venture capital company in the region. “In every company I have invested in, the real financial situation has never worked out anywhere close to the projections that were used to get my investment,” he notes wryly.
Not to say that there was any hanky-panky going on, but valuations are ALWAYS sunny side up. In fact, even I have been advised to post my most positive projections for Digital News Asia (DNA) if we look to raise some funding.
Apparently, it is the job of the interested investor to knock you down and come to an acceptable compromise for both parties.
But here’s the rub, if your venture needs other people’s money to get started, you have no negotiation power other than your own credibility. And frankly, if it means giving up more than you initially wished, so be it.
In fact, that will give you an even greater incentive to grow your company so that the valuation is more attractive in the next round.
DNA would not have started if not for the boost from our angel. You think we founders care that we may or may not have given up more equity than we should have? That is just a totally irrelevant conversation to us. The angel investment allowed us to get in the game and we are having a blast!
TaxiMonger’s Nizran clearly felt he needed a boost of a different kind. Having already pumped in RM800,000 (my original article had it at RM400,000) of his and his partner’s money, he opted to give up 10% equity to an accelerator in Dubai called SeedStartup that mentors selected start-ups from all over the world, and is affiliated with TechStars from Silicon Valley.
As he mentions in the comments section of the article, he took a bet and clearly feels it has been worth it.
Walter however, who is building an exciting company around a technology differentiator, clearly makes it known he felt it was too cheap to give away.
But if your back is to the wall, do you walk away because you cannot agree on valuation and risk not even starting? Or in Nizran’s case, where you feel you need to bring in a different type of investor to give yourself a chance to turn the corner, do you worry too much about how much you are giving away?
There’s just so much to think about in this start-up space and it’s always exciting. No wonder Lauria says he has never seen as many start-ups launch as in 2012. We are sure 2013 is just going to be as exciting. Hold on to your hats!
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