Minh Vu Hong, investment manager at Qualgro
With the world yet to get out of the grip of COVID-19 and with travel restrictions yet to be eased, fundraising continues to be a challenge for startups. This is because VCs are unable to perform physical due diligence, an important part of the whole investment process. This is why many VCs have taken the ‘virtual route‘ to perform due diligence.
But is it easy to raise funding in the new normal? What you need to take into account while fundraising digitally?
In an attempt to get down to the nitty gritty of ‘digital fundraising’ in the new normal, e27 recently launched a new webinar series, titled ‘Fundraising Fundamentals (FF)’.
The first episode of the FF series featured Minh Vu Hong, an investment manager at Qualgro Ventures. Based in Singapore, Qualgro invests mainly in B2B companies in Big Data, SaaS and Artificial Intelligence to support talented entrepreneurs with regional or global growth ambitions.
In this article, Minh discusses the five most important questions founders should ask themselves before raising money in the new normal:
Why do I need external funding?
Before even starting, you should ask yourself: ‘why does your business need external fundraising? What are the key milestones that you are trying to achieve with extra capital, particularly with the VC support’.
Asking yourself these questions will allow you to take a step back and not necessarily rush into fundraising.
Also Read: Qualgro Partners: Southeast Asia is home to the next big B2B tech companies
First of all, ask yourself ‘do I want to accelerate on the existing business’, ‘do I want to expand to a new country’, or ‘do I just need capital in the beginning because I need to hire people to build my team’?
All these are good reasons to raise external money. But having them clear in your mind is the best way to set you on fire for fundraising.
When to start fundraising?
The timing is actually important for fundraising. People will tell you ‘you should not raise too late or not too early’. But usually a rule of thumb is that if you have capital left to run the business only for six months, you have to start the fundraising process now, before you run out of cash, because the process takes time.
It takes time to network to get to know investors to pitch your ideas. Investors take time to understand your business and analyse the financials.
So, six months is a good timeframe to start fundraising.
Of course, you will always hear stories of companies who have raised funding, say, in two weeks. They pitch their company today and get term-sheet in 48 hours, and then two weeks later, they get the money. This happens, it’s true. On the other side of the spectrum, sometimes it takes six months, if not more.
If you’re lucky, you’ll be in the first category. However, the vast majority of investments take at least two three months. So, giving yourself enough buffer to not run into a cash crunch is something quite important to keep in mind.
How much money do I want to raise?
Interestingly, a question which is not always well-addressed by founders is: ‘how much money do you want to raise and how much should I give away’
Of course, the valuation of the company is important. I have seen many companies reaching out to us for fundraising, who will have a range of US$1-2 million in mind.
It is okay to have a range. But it cannot be too wide. The reason is for investors, it gives a signal of how much you know about your business and how much you know about your requirement, because raising money is about fuelling your business for success.
So if you tell me ‘I need to raise, maybe, between US$3 million and US$6 million’, it basically implies that you have only a rough idea of how much you need.
In my opinion, if you know your business well, giving a ballpark range to test the market is not a good signal.
Then, the second sub-question is ‘how much you’re ready to give away’. Let’s say, if it’s a US$1 million round and you give me 10 per cent equity, this means that your company is worth US$10 million.
So the shareholding that you give away to the investors — VCs, family offices, or even friends and families — is important to know because that is going to drive directly the valuation of your business.
Investors, of course, have other ways to evaluate your business and how much shareholding you’re ready to give away.
When you go into a pitch with a VC, you’re ready to negotiate but you should have a clear idea of how much holding you’re ready to give away against a certain amount of money.
And prepare yourself because as investors we usually do the math quite quickly and we know how much we want and you should be quite clear on the target that you’re trying to achieve.
Who to raise funding from?
There are two different types of ‘who’s in this case? One is, ‘what type of investor you want to raise money from?’ ‘Do you need VC money or angel money’, or ‘do you need debt from banks or venture capital?’
All of these types of fundings are going to bring money to your business and all of these factors are going to help you scale your company.
However, not every dollar is the same. Raising venture debt, for instance, is very different from raising VC money because in VC investment, investors take equity/shareholding of your company.
If you raise venture debt, you don’t give away the shareholding of your company. But you’re under the obligation of paying back your lender.
So it’s two different mindsets in the relationship that you’re going to have with whoever’s giving you money. Also different obligations that are going to follow up.
So you need to think what type of capital you want to raise. It will allow you to identify and narrow down the type of funding that you’re looking for.
As for the second type of ‘who’: let’s say you want to raise money from a VC fund. Not every VC is the same. Every VC fund has its own investment thesis. At Qualgro, for instance, we specialise in B2B software, AI and data. Then, there are VCs who are focusing on the B2C industry, consumer goods, or purely healthcare companies, so on and so forth.
And there are some who invest only in pre-Series A to Series B stages, while there are some who only invest at seed stage. There are also late-stage investors.
So all of these type of segmentation of funds you should be aware of because, depending on what stage you are in and what vertical and what type of business you are building, you can choose the investor you want to take money from.
Since fundraising is a very tiring process for founders, you need to focus on identifying the right funds that are going to understand your business faster. You should know who can support you to bring your business with more relevancy because they know the industry, have the right geographical coverage. All these things will save you a lot of time.
How do I approach investors?
This needs some planning. Having a clear plan on how you want to reach out to is crucial. Is it through a warm intro, or do you know some founders while reading their portfolio? Have you attended one of their sessions and then reached out to them as a follow-up?
Also Read: Get to know these 10 verified investors who are ready to connect today
The tactics of reaching out to investors is something that needs to be clearly planned, so that you don’t waste your time and energy sending cold e-mails. And even though we try to answer every single cold email, as you can imagine, we receive hundreds, if not thousands, on a yearly basis.
So having a clear plan to approach this is something that you want to take some time to think about.
Regarding the second type of ‘how’. Let’s assume you secured a meeting with an investor. Now, how will you drive the meetings? What type of information you want to share in the first meeting, second meeting and the third one? What do you want to show during the meeting?
There is little room for improvisation because usually VCs know quite clearly what they are looking for in the first meeting, then in the second one, and then in the third one.
Preparing yourself for each meeting by getting feedback from other founders who have pitched to the same firm or who have been through the fundraising process is going to help you a lot to prepare yourself for the meetings and to prepare the material and then to handle the whole process in relationship with the different visits. And, again, every visit is different.
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Image Credit: Qualgro Ventures
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