In the dynamic and ever-evolving world of startup financing, founders face crucial decisions that can significantly impact their ownership stakes and the control they have over their ventures. One of these critical choices is the selection of pre-money or post-money Simple Agreement for Future Equity (SAFE) instruments.

In this article, we’ll explore the nuances of these SAFEs and make a compelling case for why choosing pre-money valuation caps is a more founder-friendly financing strategy.

The key distinction

Pre-money and post-money SAFEs may sound deceptively similar, but they have distinct implications for ownership dynamics. Let’s dive into the key difference between the two:

Pre-Money SAFEs: When opting for a pre-money SAFE, the valuation cap is applied before the investment, determining the investor’s stake based on the company’s valuation before their investment.

Post-Money SAFEs: In contrast, post-money SAFEs apply the valuation cap after the investment has been made. This seemingly subtle difference can lead to significant discrepancies in ownership percentages, directly affecting founders.

A tale of two investors

To illustrate the profound impact of these SAFEs, let’s consider a scenario involving two investors:

Investor 1: Injects US$1 million into your startup through a post-money SAFE with a valuation cap of US$10 million, resulting in a 10 per cent ownership stake.

Investor 2: Contributes US$3 million with a higher post-money valuation cap of US$15 million, resulting in a 20 per cent ownership stake.

The crucial point here is that when these SAFEs convert to shares during a priced round, your ownership as a founder gets diluted by a staggering 30 per cent (10 per cent from Investor 1 + 20 per cent from Investor 2).

Understanding the dilution

With post-money SAFEs, the risk of diluted ownership in future funding rounds is significantly higher. It’s essential to grasp this key concept: each investor gets a fixed ownership percentage, and when SAFEs transition to shares during the priced round, the dilution from other SAFE investors primarily impacts only the founder’s remaining portion.

Also Read: Startup investments in SEA in Oct see 205% jump over previous month: Tracxn

Choosing a pre-money SAFE

Now, let’s revisit the same scenario with pre-money valuation caps of US$9 million for Investor 1 and US$12 million for Investor 2. The dilution for founders drops from 30 per cent to 28 per cent, resulting in the following ownership distribution:

• Founder: 72.0 per cent
• Investor 1: 8.0 per cent
• Investor 2: 20.0 per cent

Each SAFE note mathematically interacts with others, mitigating the impact on founders’ equity. The result is a more favourable ownership structure for the founders.

The recommendation

Given these considerations, the recommendation for founders is clear: opt for a pre-money valuation cap over a post-money one. By doing so, you’re not only preserving your ownership stake but also ensuring a more equitable distribution of equity in your startup.

The nuances of pre-money SAFEs

Now that we’ve established the importance of pre-money valuation caps, let’s delve deeper into the nuances of using pre-money SAFEs for your startup financing.

Valuation cap calculation

In a pre-money SAFE, the valuation cap is determined before the investor’s contribution. This approach anchors the investor’s ownership stake to the valuation of the company at the time of their investment. As a founder, this can work in your favour, as you are less susceptible to dilution caused by subsequent investments at higher valuations.

Mitigating dilution

Pre-money SAFEs naturally provide more protection against dilution. Since the valuation cap is established beforehand, founders can maintain a more significant portion of their ownership when subsequent rounds of funding occur. This means that you retain more control over your startup and can preserve your vision for the company.

Investor attraction

Interestingly, pre-money SAFEs may also attract investors who prefer a more founder-friendly structure. Investors may appreciate the fairness of pre-money valuation caps and the reduced risk of future dilution. This alignment of interests can lead to more fruitful partnerships and a more stable foundation for your startup’s growth.

Fundraising flexibility

Pre-money SAFEs offer founders greater flexibility when it comes to raising capital. By setting a pre-money valuation cap, you can establish clear terms for investment rounds, making negotiations with potential investors more straightforward. This transparency can streamline the fundraising process and help you secure the right partnerships for your startup’s success.

Enhanced control

Opting for pre-money SAFEs not only protects your ownership but also safeguards your control over the company. As a founder, maintaining control of your startup’s direction and decision-making processes is essential. Pre-money SAFEs support this by minimising the dilution of your equity and allowing you to steer your company with a firmer grip on the wheel.

Also Read: 5 fundraising tips for first-time founders

The pitfalls of post-money SAFEs

To fully appreciate the advantages of pre-money SAFEs, it’s essential to understand the pitfalls of post-money SAFEs and why they may not be the best choice for founders.

High dilution risk

Post-money SAFEs expose founders to higher dilution risks, as demonstrated in the earlier scenario. With fixed ownership percentages for investors, any subsequent investments at higher valuations will primarily dilute the founder’s stake. This can erode your control and influence over your own company.

Founder’s vision at risk

A significant consequence of high dilution is that it puts your vision for the company at risk. As your ownership decreases, you may find it increasingly challenging to make strategic decisions and execute your plans as intended. Protecting your ownership stake with pre-money SAFEs can help you maintain your vision and drive your startup’s success.

Investor preferences

Investors choosing post-money SAFEs may have different motivations and interests that may not align with those of the founders. Their primary concern may be maximising their return on investment, potentially leading to conflicts in decision-making and overall company direction.

Funding negotiations complexity

The complexity of post-money SAFEs can sometimes lead to protracted and challenging negotiations during fundraising rounds. The uncertainty regarding ownership percentages in subsequent funding rounds can complicate discussions and potentially discourage investors.

Conclusion

In the world of startup financing, the choice between pre-money and post-money SAFEs is a crucial decision that founders must make.

While both options have their merits, pre-money valuation caps stand out as the more founder-friendly choice. They offer protection against dilution, attract like-minded investors, provide flexibility in fundraising, and safeguard founder control and vision.

Founders who prioritise maintaining ownership and control over their ventures should consider the benefits of pre-money SAFEs. By choosing this financing strategy, you can not only protect your interests but also build a more equitable and secure foundation for your startup’s journey to success.

In a landscape where informed decisions make all the difference, pre-money SAFEs empower founders to chart a course for their startups that aligns with their vision and aspirations.

—

Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic

Join our e27 Telegram group, FB community, or like the e27 Facebook page

Image credit: Canva

The post Decoding startup financing: Why pre-money SAFEs are founders’ best bet appeared first on e27.

This article was first published on September 2, 2022. There are several updates from these second-generation unicorns regarding their international expansion plan. For example, Kopi Kenangan has prepared to expand further to Singapore in 2023, as reported by various media.

When it comes to producing unicorn startups, Indonesia has done a phenomenal job. The market was first predicted to have three unicorns by 2020, but even in 2019, it was able to shock the world by having five unicorn companies –Gojek, Tokopedia, Traveloka, Bukalapak, and OVO. Fast forward to 2022, the country now has around 14 unicorns operating in the market, and it is expected to grow to 25 companies by 2025.

Even more astonishing is that nine of these companies secure their unicorn status at the height of the COVID-19 pandemic.

On the second day of NXC International Summit, held in Bali, Indonesia, on September 1, we got to see a panel discussion featuring five of these unicorns: Edward Tirtanata (Kopi Kenangan), Tessa Wijaya (Xendit), Kusumo Martanto (Blibli), George Hendrata (Tiket), and Robin Lo (J&T Express). Dubbed as the second-generation unicorns, in a session moderated by former Minister of Communications and Informatics Rudiantara, these companies explain their approach to success, in addition to the latest updates from their business.

There were some distinctive features that I noticed from these second-generation unicorns that set them apart from their predecessors. First, there seemed to be a wider variety of verticals they are operating in. If the first generation was dominated by e-commerce and fintech services, we could even see an F&B company among the second-generation unicorns.

But apart from that, there is something more outstanding about this new wave of unicorn companies: They seem to have a more robust international focus than their predecessors.

Also Read: Why HR tech will make Asia’s next unicorns

Beyond Indonesia

If we look at the list of first-generation unicorns, only two out of the five companies –Gojek and Traveloka– had an international presence by the time this article was written. It took Gojek years to finally expanded their business to neighbouring Southeast Asian countries when Traveloka’s international presence was a given, considering the travel and tourism industries that they are operating in.

From the F&B sector, Kopi Kenangan is currently planning its expansion to Malaysia in the final quarter of 2022 while Xendit has already entered the Philippines earlier this year. The company is also looking forward to entering new Southeast Asian markets soon. For Xendit, its international expansion was part of its effort to fulfil the demands of their customers

“The zero marketing concept that we implemented earlier in our operations can no longer work when we are expanding to a new market,” explains Tirtanata at the sidelines of NXC International Summit. “Having an established presence in Indonesia and having raised investments from the likes of Jay-Z and Serena Williams helped us to build rapport in the new market.”

As a logistics company, J&T Express has the strongest international presence, expanding even as far as China. “We were told that entering the Chinese market was an impossible feat,” said Lo.

Within the second-generation unicorns, Blibli is the only one that aims to remain laser-focused on the local market. Martanto told the press that the company intends to remain laser-focused on building and expanding its omnichannel platforms.

It had recently secured partnerships with leading supermarket chains and launched an integrated service that allows its customers to use its services through a single entry.

Also Read: Synergizing a corporate, a tech unicorn and startups with a corporate-backed accelerator programme

Behind the phenomenon

One might wonder what is behind this attitude shift among Indonesian unicorns, especially because these second-generation unicorns secure their status only about three to five years apart from their predecessors. One might say something must have happened within the span of three to five years to enable this change to happen.

It all comes down to a single factor: Indonesia securing its reputation as a promising and established market for tech companies.

Back in 2016, in an interview with e27, Tokopedia CEO William Tanuwijaya expressed the company’s plan to remain focused on tier-two and -three cities in Indonesia. This came out as no surprise, considering the infrastructure gap between provinces in Indonesia and the challenges it may provide to e-commerce companies that want to win the market on a national scale. There were also other factors, such as the high level of distrust against fintech services amongst customers.

But today, in 2020, especially after the pandemic, Indonesian customers are just as savvy as the other markets. The rise of GoPay’s popularity has made it possible for other fintech services to enter and win the market;

As tech companies become a more integral part of the lives of Indonesians, more and more investors are coming into the market. These investors also began to invest in various verticals, opening up even more opportunities for Indonesian startups in the global market.

For companies who are looking to expand internationally, Indonesia’s reputation as an established tech hub –with notable companies operating in the market– certainly helped with securing potential partners, investors, and customers.

In the end, it is all about timing. What the first-generation unicorns chose to do was undoubtedly the best for them. But today, the Indonesian market has evolved in such a way that it would be in vain for the unicorns not to give the international expansion a try.

—

Fundraising or preparing your startup for fundraising? Build your investor network, search from 400+ SEA investors on e27, and get connected or get insights regarding fundraising. Try e27 Pro for free today.

The article was first published on August 10, 2022.

The post For Indonesia’s 2nd generation unicorns, international expansion is the name of the game appeared first on e27.

Private funding in Southeast Asia (SEA) has declined to its lowest level in six years, with the deceleration in late-stage deal activity being the most pronounced. A substantial 87 per cent of investors reported encountering increased hurdles in fundraising, while 88 per cent expressed that they are dealing with a more complex landscape when it comes to exiting investments.

Despite the slowdown in venture activity, SEA continues to be a promising region as the digital economy remains a major growth driver. The region recently achieved a significant milestone, crossing the US$100 billion mark in revenue from all digital economy sectors this year – marking an eightfold growth over the past eight years.

Singapore remains the bright spot for the region’s venture activity. In the first quarter of this year, technology startups in Singapore managed to secure the most funding in SEA, totalling US$516 million, despite the region witnessing its lowest quarterly deal value over the past year.

To help Singaporean startups tap into this promising landscape, TiE Global is hosting the TiE Global Summit (TGS) 2023 in Singapore.

As a vibrant ecosystem of global investors, entrepreneurs and enterprise innovators, TiE has enabled over 25,000 startups via mentoring, networking, education, incubation and funding. Furthermore, the organisation has created US$1 trillion in wealth and generated employment for 2.5 million people directly.

As the world’s largest entrepreneur forum, TGS will bring together visionaries, industry leaders, investors, and entrepreneurs from around the world to connect with Singaporean startups and put a spotlight on groundbreaking areas of innovation.

TGS 2023 will be held in Singapore in conjunction with the Singapore Fintech Festival for the first time ever. It will feature topics such as AI, Web3, and the digital economy and will provide opportunities for startups to network, gain valuable insights, access funding, and foster collaborations, as well as facilitate the exchange of ideas between the world’s largest entrepreneurship event and the world’s most impactful fintech festival.

Also Read: The future of startup fundraising in Singapore

TGS 2023’s theme, #GoodForTheWorld, represents the spirit of entrepreneurship, which, at its core, underscores the pivotal role of entrepreneurship in driving innovative solutions in a world facing unprecedented challenges. Entrepreneurship generates economic growth, creates jobs, and drives technological advancements that serve as a catalyst for social and economic development, ultimately fostering progress for communities and nations alike.

Besides networking opportunities and thought leadership sessions from industry titans, other key programmes at the event include:

• TiE Women Global Pitch Competition: Finals of TiE’s largest-running global investment support program for women-led ventures from 62 countries will culminate at TGS 2023. This year, more than 1,600 applications were received for the TiE Women Global Pitch Competition. To date, 13 women-led startups have received equity-free grants worth more than US$350,000. The programme has also accelerated over 350 women-led startups and provided over 600 women entrepreneurs with chapter-level monitoring.
• TiE-KPMG SEA Entrepreneur of the Year Awards: The Awards are a recognition of entrepreneurs by entrepreneurs who are the top business leaders in SEA and will be presented at the prestigious Gala Dinner of TGS. The awards finalists and winners will have a unique opportunity to network with and be recognised in front of leading entrepreneurs, business leaders and government officials from across the world.

Why Singapore

• Global and regional innovation hub: Singapore is known as the ‘Silicon Valley of Asia’ and a global leader in digital and AI readiness. The country is currently home to approximately 4,800 tech startups and 252 incubators, 529 investors, and 700 family offices and has consistently ranked among the top 10 countries in the Global Innovation Index.
• Opportunities in the deep tech enterprise space: Tech startups in Singapore remain the most promising in the region. Technology continues to be one of the key drivers of innovation in the country, with tech spending in Singapore likely to jump 4.6 per cent in 2023 to SG$22.17 (16.29) billion.
• Strong government support for sustainable development: The country has been working towards green outcomes amidst its digitalisation efforts. The Singapore Green Plan 2030, or the Green Plan, is a whole-of-nation movement to advance Singapore’s national agenda on sustainable development. One key initiative spearheaded by Govtech involves the integration of independent data centres and the transition of government systems to cloud-based platforms. By 2023, approximately 70 per cent of the government’s eligible workload will be shifted to the cloud, resulting in substantial reductions in the digital carbon footprint of the Singapore government.

How to join

TGS 2023 will be held from 15 to 17 November. Register here.

—

Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic

Join our e27 Telegram group, FB community, or like the e27 Facebook page

Image credit: Canva

The post TiE Global Summit 2023: Connecting Singaporean startups to the world appeared first on e27.

Five startups are a step closer to receiving a EUR 100,000 ($145,451) investment from the EQT Foundation, along with 300 consultancy hours from Ernst & Young to improve their strategy and business development.

Chosen from a shortlist of 10 startups, the finalists of the EQT Impact Challenge’s Southeast Asia 2023 edition attended a closed-door Pitch Day on Nov 14, where they were coached on crafting compelling pitches.

“We’re using a lot of metaphors around how Hollywood does it, how you create compelling stories,” says Ted Persson, partner at EQT’s venture capital fund EQT Ventures, who led the training programme. “I think it’s all about empathising with the audience that you’re presenting to.”

The biggest mistake startup founders make is not connecting with the audience in their pitches, he adds. “They spend too much time rehearsing, thinking through everything, that they forget about the audience… They go into the pitch forgetting [the people] they’re presenting to.”

Founders with deep technical knowledge of their startups often lose their audience when going into specifics. They make the pitch too technical or try to cram in too much information, says Persson, “instead of thinking about what they want to achieve during the time they have to present”.

Instead, he adds that founders should employ “basic” techniques like establishing some type of rapport or talking about “trivial things” before moving on to the pitch. “The story being presented should be pretty simple; remove all the unnecessary, technical details and [have] an overarching storyline that [the audience] can relate to and buy into.”

Based in Stockholm, Persson joined EQT in 2014 and was part of the team that set up EQT Ventures. “When I joined, there were maybe 150 people, and now we’re 2,000 strong. So, I would say it’s a different firm now than it was back then. We gathered a couple of ex-founders and ex-entrepreneurs to create the VC investor we would have wanted when we were entrepreneurs ourselves.”

Persson observes that a lot has changed in the entrepreneurship space over the past decade. “The biggest shift — now it is proven that you can create tech startups outside of Silicon Valley; [it] doesn’t matter where you are in the world.”

He points to a “climate shift” some three years ago. “Up until then, everyone followed the formula around two guys in a garage starting a software company. Now it’s very different; it’s way more diverse and I would say that we’re tackling bigger problems — and in many cases, problems that the people solving them have experienced themselves.”

When creating pitches, founders should bear in mind that the average audience member tunes out after 30 or 40 seconds, says fellow trainer Tyler Crowley, who is credited with elevating Stockholm’s startup scene. “Honestly, you really only need about — I know this sounds crazy — three and a half minutes. That’s hard and it takes practice.”

The pitch is akin to a 30-second movie trailer, says Crowley, who was the brainchild behind Sthlm Tech Fest, Scandinavia’s largest annual startup event. “You’re not making a movie… The whole point is to get everyone in the room excited to come meet you as you go offstage. Your goal is not for them to understand everything, make a big calculation and do the due diligence about everything. No, your goal is [making your audience think]: ‘I want to go talk to that person and have a meeting with them.’”

The post Five startups closer to bagging EUR100,000 in EQT Impact Challenge appeared first on e27.

With World Mental Health Day over just a few weeks ago, depression is not something to make light of and it is not the intention of the article even as I say it was the best thing to happen to me.

It is a terrible terrible illness that involves the body, mood, and thoughts as well as affects the way you eat and sleep, which impacts your ability to do your job and lead a social life.

If your brain is a computer chip and how you think is the operating system, depression can be a virus that can affect not just you, but also friends and family around you. Depression can happen to anyone and it is not about how strong or weak you are. 

Founders are 6-11 times more likely to suffer from mental conditions and substance abuse with some studies showing that they are 50 per cent more likely to end in divorce than the general population.

Then why would I say it was the best thing to happen to me as a founder?

Better understanding of how the mind works

Whether it’s the fear of spiders, heights or failures. Every one of us has that one fear we wish we could get rid of. During my period of depression, I began reading apart from many philosophy books but so some psychology books and learned that, for example in interviews with serial killers– most of them do not consider what they did wrong. 

If you consider something is wrong would you still want to do it? But what if we cannot trust our minds to tell us what is right or wrong, good or bad, what is illogical or not, how can we be confident of the many decisions we as founders have to make each day? 

Take, for example, Survivorship bias: An error that comes from: focusing only on surviving examples, causing us to misjudge a situation. Where Business Insider quoted an instance, where we might think that being an entrepreneur is easy because we haven’t heard of all those who failed. 

[also_read]

By having a better understanding of how the mind works, I found myself being able to make better decisions less guided by bias and emotions. Having just 1 out of the 20 biases they mentioned, you could already already be making a lot of mistakes.

Take, for example, we certainly underestimated how difficult it can be, to acquire some anchor partners because most lenders are always on the lookout for partners that can drive business to them. 

Most lenders we managed to speak to found our technology to be helpful to them. But the number of people we had to talk to before we could reach the decision-maker, was something that caught us by surprise.

One company after talking to the head of sales, decided to let his CEO make the decisions who then decided best to let London make the decision.

Another had seven RMs, and five team leaders who reached out but only one dared to connect us to his team head for us to present our capabilities, for the 13th time!

Being a better leader

By having a better understanding of how the mind works, I found myself more sensitive to my people’s needs as well as how they think. As a leader, you cannot know everything underneath the sun and would require capable people to assist and even advise you.

[also_read]

By understanding how they think, you can better understand when they prefer to do things a certain way, or recommend to do certain stuff, where they are coming from and if it is a suitable move for your company.

Finding the right friends

From an evolutionary perspective, humans are social animals. Our ancestors found safety, protection, and access to resources by forming groups and communities and the need to form social bonds is hardwired into our biology. 

While probably better than a decade ago, there is still a lot of ignorance and ill-informed understanding of mental conditions. Sometimes people can be difficult when they are depressed and they do or say things that push people away. 

Author of The 7 Habits of Highly Effective People Stephen R. Covey said we are the average of the seven people closest to us. My depression allowed me to differentiate between, close, good and supportive friends.

[also_read]

While I miss some memories I had with some friends, I also realised that quality rather than quantity matters and my depression allowed me to find out those who will not judge you, are willing to overlook minor transgressions and who I can count on in life.

Outlook in life

I had always been a workaholic and I think I still am even to this day. Previously I had no idea why I was working so hard. I never considered myself as someone who hankers after material stuff or wealth. 

However, my depression changed my outlook on life. It forced me to question my thoughts and what am I truly thinking and why. Now at least when I am working hard I know why

– and that it is equally important to, from time to time, stop and smell the roses with your loved ones.

Having depression or any form of mental condition can be a horrible horrible thing. If you suspect yourself or someone around you to be suffering from one, please consider getting yourself or them, help.

–

Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic

Join our e27 Telegram group, FB community, or like the e27 Facebook page

Image credit: Lacie Slezak on Unsplash

The post Depression was the best thing that happened to me as a founder. Here’s why appeared first on e27.