Finding a promising startup and investing in it is no mean task. It takes weeks and sometimes months to find a good fit that aligns with an investor’s goals.
VCs consider many criteria before zeroing in a startup for a financial deal, including the team, product, target market, and many other things. Even if everything falls in line, the investment can still go wrong, and the VC may lose its investment.
Different VCs adopt different approaches and have different ways of finding out a potential investee.
In this article, co-founder and managing partner Kuo-Yi Lim shares how Monk’s Hill Ventures picks a startup for investment, its due diligence process, and investment thesis.
Edited excerpts:
What are the different methods/channels through which MHV sources the deals? Do you have any formal partnerships with accelerators and incubators?
Kuo-Yi Lim: We work closely with a wide variety of co-investors and partners. These include angel investors, incubators and accelerators, venture capital firms investing across different stages, corporates/corporate VCs, and government-related investors in the ecosystem. Our co-investors and deal flow partners include Y Combinator, 500 Startups, and SGInnovate.
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We have also recently launched our MHV Venture Scouts programme, comprising over 20 venture scouts who will invest further in high-growth pre-seed and seed startups across Singapore, Indonesia, Vietnam, Thailand, the Philippines, and Malaysia.
How many funds have you launched so far/currently running? What is the corpus of the ongoing fund? Any new funds in the pipeline?
Kuo-Yi Lim: We have deployed and invested from two funds — Fund I (US$80 million) and Fund II (US$100 million). Fund I is fully deployed. We also manage an Opportunities Fund that focuses exclusively on later-stage investments of our portfolio companies.
We are actively deploying from Fund II in startups we’re very excited about, including Jenfi, CoderSchool, and Dagangan.
Can you explain your investment thesis? What is the average cheque size? How many deals do you do a year? How many firms have you invested in so far?
Kuo-Yi Lim: Monk’s Hill Ventures invests in early-stage tech companies, primarily Series A, in Southeast Asia. Our vision is to build a venture platform that allows founders and operators like ourselves to fund and support founders in Southeast Asia.
We take a first-principles approach in making investment decisions. We break down ideas and business models to understand the fundamentals. We then spend time understanding the team’s values, motivations, purpose, and ambition.
We get into conversations with founders with humility and a fundamental curiosity about why they are motivated to devote their lives and energy to the venture. By building conviction around these elements, we then seek the opportunity to partner with the founders. We are prepared to underwrite and support founders over a long period.
We usually do about five to six deals a year, and we have invested in over 30 startups so far. Our cheque size ranges between US$2 million and US$8 million, and we are focused on companies at the pre-Series A or Series A stages.
Do you actively reach out to companies for investment? Do you also receive inbound interests? Is your approach the same for startups in both these categories?
Kuo-Yi Lim: Both. Our investment team across Southeast Asia will regularly speak to and meet with founders. Additionally, the best way for founders to get in touch with us is through a warm referral in our network. Monk’s Hill Ventures typically likes to get to know our founders early (even before they are Series A) and build that relationship over time.
What are the essential criteria that you look for in a potential candidate? What is more critical — team, product, market, or something else?
Kuo-Yi Lim: All the factors are relevant, although we tend to index more towards founders. We look for teams that show maturity and level-headedness in their approach to addressing issues and challenges. The teams should also be highly motivated, ambitious, and purposeful. Alignment between the founders and us on building a sustainable business with a laser focus on fundamental metrics is essential.
We look for companies that are addressing potentially large markets with robust underlying growth dynamics. We also look for companies that have demonstrated some level of product-market fit, including early customers for enterprise-focused products or user adoption for consumer products and services.
What is the duration of your due diligence (DD) process? Can you also talk about the process? How do you do DD during the ongoing crisis?
Kuo-Yi Lim: Since the founding of Monk’s Hill Ventures, we have systematically and purposefully built out a team of investment professionals located across the region, with a presence in Singapore, Jakarta, Ho Chi Minh City, and Bangkok. Our team members are typically familiar with the ground and the communities. This approach has been constructive during the pandemic.
Given our long-standing relationships with many founders and ecosystem players in various countries, we continue to engage companies and actively invest. Due Diligence is still done very much on a local basis. In-person contact between our team members and the companies is still typical for us.
How do you determine the amount to be invested in a company? What are the different factors you take into account?
Kuo-Yi Lim: At the early stage, valuing startups can be more art than science.
However, we do take into account various factors. These factors may include taking a deep dive into the business model and the industry to understand better the amount a startup needs to scale at this stage to hit its milestones.
We will draw references from comparable transactions both regionally and globally within a similar space. We also assess the quality of the team and the startup’s overall growth potential.
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The most crucial consideration is arriving at a valuation that will set the company up for success. This often means managing dilution on the founders’ ownership while ensuring that the valuation is supported by fundamentals that the company can meet.
Do you make follow-on investments in your portfolio companies? What are the criteria/factors that you consider here?
Kuo-Yi Lim: Yes, we typically would make follow-on investments into our portfolio companies. We don’t lead in the subsequent rounds and will follow the terms of the new investors.
Can you also talk about the mentorship process at MHV, especially the venture scouts program?
Kuo-Yi Lim: When we invest in a new portfolio company, it has a core Monk’s Hill Ventures team that will support the startup throughout their startup journey from financial, legal to operations support.
In addition, we have our head of communications to support our startups on anything marketing, PR, and branding-related. We also have the head of talent to help them with anything HR and people-related and a legal counsel to support our startups on any legal matters.
For the Scouts programme, our scouts directly nurture the seed startups while the MHV team is accessible to the founders as well. We have also built a community for our Venture Scouts to support each other and for us to provide any expertise or advice needed as they nurture these startups.
Do you want to share details about your exit strategies?
We believe in taking a sustainable and more patient approach towards exits. Even in the earliest days of investment, we encourage founders to think about unit economics and profitability even as they focus on growth.
Ultimately, we want to see that our portfolio companies build sustainable businesses of scale that generate intrinsic value and can stand up to the competition. We are prepared to support the founders on this journey over a long period – sometimes ten years or more.
Monk’s Hill Ventures believe that exit opportunities will present themselves naturally to such companies. Our primary focus is to help the founders to build great companies, and exits will take care of themselves.
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Image Credit: Monk’s Hill Ventures
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