Disrupt: More success stories needed to plug funding gap: Page 2 of 2

‘You have no business’
 
Contrary to the other panellist, Dr Gabriel Walter (pic), cofounder of high speed LED startup Quantum Electro Opto Systems (QEOS), has an entirely different experience.
 
“I come from a totally different angle here. In my opinion, it’s very easy to raise money in Malaysia. You have a government that is very active in looking for success stories, and it has changed policies over and over again, just to enable that.
 
“You also have a tremendous number of grants – I mean where else can you get RM500,000 just to try out your Internet business?” he said.
 
QEOS itself has raised over RM37.6 million over the past five and a half years in Malaysia. “Almost half of it came from grants. We recently got RM400,000 for our R&D (research and development) work, and we didn’t even ask for it,” he added.
 
And QEOS did not have to give up much – only about 30% of its equity, with the original founders still holding on to 70%.
 
Indeed, Walter said that reading media reports of some Internet companies getting funding only surprises him.
 
“They’re just offering services. What happens if another guy comes in with more money? If your advantage is how much money you’ve raised, then the next guy who comes in with more money, he’s going to win,” he said.
 
He said too many of today’s Internet companies put ‘first-mover’ advantage as the be-all and end-all of their business plan. VCs would want to know how their investments are going to be protected when the next challenger comes in.
 
“Somebody is always going to come in and take away your cake. Your investor is going to ask you the question, how are you going to protect your business? If you don’t have an answer, then don’t do the business.
 
“If you can’t answer the question, then why should anybody investor invest in you? I wouldn’t,” he said. “In my opinion, if you cannot raise money from professional investors, then don’t start a company. It means there’s something wrong with your business model.”
 
“VCs all think alike. They’re Excel spreadsheet guys. If they cannot project your returns, then they’re not going to invest,” he added.
 
QEOS is not your usual technology startup, having been formed to market Walter’s PhD research work in optical electronics. It is an unusual company because it develops actual technology, instead of being a startup that uses technology.
 
“A lot of technology companies aren’t technology companies at all, but merely companies that use technology for their business. There’s no barrier to entry,” he said.
 
“Google versus Yahoo was technical competition – Google’s search was faster, there were complex mathematics and a complex technology infrastructure behind it.
 
“You need some form of technology basis for an investor to see value; your advantage can’t just be that you’re going to market it harder – anybody can do that,” he added.
 
Disconnect, not a gap
 
Indeed, Walter also argued there wasn’t so much a funding gap as much as a disconnect between how the entrepreneur expected to make money and the investor’s understanding of how this could be achieved, if at all.
 
“It’s not the VC’s job to understand you; it’s your job to convince them that there’s money to be made here. Every time you fail to raise money, don’t blame them – look back at your plan and try and figure out why you couldn’t convince them this would make money,” he said. “Go back to your business plan and presentation, and refine, refine, refine.”
 
It is a point that DTA Ventures’ Sardar (pic) could relate to, saying that sometimes entrepreneurs were just too infatuated with their business plans and didn’t have the self-honesty to pivot and change them.
 
When told by a member of the audience that this was described as the ‘ugly baby syndrome’ – only a parent could love such a child, and think it the most beautiful business plan in the world – he said, “As hard as it is for me to say it, in the business world, if you have an ugly baby, then you just have to abandon it.”
 
“[When it comes to] the successful companies we’ve harvested as a VC, the actual business that was sold was a completely different business from what was told to us on the first day.
 
“The big difference is that they were honest enough to say, ‘This is not going to work, let’s rethink our plan.’ Things change, and the ability of the entrepreneurs to change is paramount.
 
“A lot of companies that close down do so because there was a lot of finger-pointing and not enough honesty to recognise the need to change,” he added.
 
As for the tough funding environment in the region, Sardar said that VCs anywhere in the world have certain standard practices and requirements.
 
“We don’t want to appear hard to please, but when we look at 100 business plans – and this is true anywhere in the world, not just in Asia – we may shortlist 10. Out of the 10, we may end up investing in two or three at the most.
 
“The [funding] success rate is very low. Most companies, even in the United States, do not get funded. This is not just me, this is the VC industry. It’s not like the banking industry, where as long as you have the collateral, you’re going to get the loan. In the VC business, even if you have the idea and you’re smart, you still may not get funded,” he added.
 
Sardar also admitted that he has sometimes chosen not to invest in a company despite it having a good idea.
 
“Entrepreneurs sometimes have this tendency to chase for valuations. Taking the money to build your business is far more important than getting a valuation.
 
“We sometimes prefer deferring a valuation based on multiples of future earnings, so please don’t chase us for a valuation – take the money to build your business,” he said.
 
What he looks at in a business is the character of the entrepreneur. “It’s not how cutting-edge your technology is or how great your business model is, it’s about people, people, people,” he said, adding that he has even invested on a company because of the tenacity of its founders.
 
Related Stories:
 
Disrupt #12: Addressing the Asean funding gap
 
Weak VC leadership letting Asean region down: Catcha chief
 
Market size crunch for Malaysian startups?
 
Startups and VCs: A two-way street
 
 
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