Written by Ngee Hua, 25th Sep 2019
This fundraising sharing session by the five (5) panel speaker is a start of a series of seminars, events, networking sessions on Capital by the Singapore Fintech Association.
Topics covered under ‘Overcoming Obstacles in Fundraising including Valuation’ are:
This workshop session is to help fintech companies navigate in their fundraising efforts by avoiding the common pitfalls. Workshop is structured based on 1st contact the fintech company would meet, from Start-up Generator Antler to the lawyer Eversheds Harry Elias before meeting the venture capitalist (VC) from the early-stage VC Pandan Ventures and late-stage VC Eight Road Ventures and finally being the fintech company Validus that receives funding. The allocated 15 mins Q& A sessions is extended to 20mins to address questions from the interested audience. A copy of the presentation is attached here.
Pitching to Investors – Common Blind Spots
Antler, founded in Singapore in 2017 by Magnus Grimeland who previously co-founded fashion e-commerce company Zalora, is a start-up generator which help founders find compatible co-founders and accelerates their progress with inhouse coaches and pre-seed funding.
Lara stressed the importance of finding the right VCs whose investment scope matches with the market and type of company, rather than hoping the VC will ‘come through’ and get interested with your product/business. Lara also stressed importance clear economics and story and realistic numbers. Fintech companies also need to differentiate between ‘smart money’ usually arising from strategic investors compared to ‘dumb money’ from investors who do not value-add but end up taking a lot of stake in the company. This should be done with cap table staying simple for future rounds of fundraising. In terms of managing limited time resources, one founder/person should be dedicated to fund raising but not the whole time.
Negotiating Term sheet & Purchase Agreements
Law firm Eversheds Harry Elias is part of Eversheds Sutherland international network with 68 offices across 34 countries.
Claudia advised to examine closely on timeline to sign clause, the usual binding ones like non-solicitation and exclusivity clauses, and the break-cost for term sheet, with considerations that there are multiple rounds of fundraising ahead. For subsequent agreements (i.e. share purchase agreement/subscription agreement), it is importance to watch out on other terms like protective mechanism, disclosure letter and limitation of liability schedule, representations or warranties for title and capacity with longer time duration and high cap on limitation of liability respectively, operational and regulatory aspects as well as walk-away rights through condition precedents and material adverse changes, moratorium for founder’s transfer of shares and anti-dilution mechanism. The founders should also examine employment agreements for provisions on dismissal, removal and termination as well as non-compete provisions.
Early Stage fundraising
Pandan Ventures is an early-stage investor which invests along with Draper Associates in Funderbeam which is a fintech company with platform that enables investors to find investments and liquidity growth investments.
Christopher narrated various ways to value early-stage fundraising based on estimation through stage/milestone and future value and in conjunction with the financial needs of the start-up. The latter is in line with Lara view to raise only the amount really needed. However, it would raise alarm to a VC to pitch that the fund raised is to be deployed fully (depleted) in specified limited timeframe. Christopher opined that valuation is no more important with identifying ‘value’ in the fintech company, citing Wework which is in essence, a tech-enabled retail property company but positioned as a tech company. As each VC needs time to know what and who they would be investing and the negotiation needed, Christopher recommend reaching out to as many VCs as possible and to all types with this industry comprising ‘largely friendly folks. This approach is a departure to Lara’s view to selectively pitch. He suggested set aside roughly 25% stake limit for angel investors via non-interest-bearing safe notes.
Late Stage fundraising
Eight Roads Ventures is the proprietary investment arm of Fidelity International Limited and has invested in companies such as Alibaba, Asia Info, iSoftstone and StashAway.
Prakhar opined that early stage valuation is more art than science, primarily driven by demand and supply; a highly sought after founder can raise up to $30mil in seed money; however the most important aspect is the ability to estimate the amount needed to raise in order to attract next set of investors. As the company grows for late stage fundraising, valuation techniques such as comparables, DCF, etc. start coming into play. Often in cases where there is a valuation mismatch, people raise a structured round: e.g. SAFEs, ratchet to the next round; it is important to be clear about the implications of each of these structures; a high valuation means there is a higher onus on the company/founder to deliver on the promised business plan. However, valuation remains the last consideration factor. Depending on the stage of the company, varying weightage is allocated to market opportunity and founder quality. Another point to consider is a founder need to be focused on the long-term – it is more important to reach the finish line i.e. exit/build a sustainable business than anything else; a right investor is aligned with vision and can add value to build the business
Fundraising Lessons Learned by fintech company Validus
Validus whose investor includes Vertex Ventures, is a lending platform in Singapore that connects SME companies that need short-term financing to accredited high-net-worth investors and institutional investors.
Nik recommended defining your VC fundraising strategy by working backwards by looking at the perspective of VCs to understand their size of their deal and required rate of returns and their restrictions amongst others and look inwards to see if there is a fit. Working with Angel investors, classic VCs and Corporate VCs are different. Often it is not just about the money but the strategic input and value your startup could benefit from the background of the different types of VC like alignment of growth plans, scaling outside Singapore with the VCs using their network and local knowledge.
You can refer to the deck of slides provided by Validus here.
The conclusion are: be diligent in reviewing the contractual clauses highlighted, look for strategic investors that can scale the business further through their networks and is aligned on goals and be simple with your Cap table and raise only what you need for the current fundraising round and only at later stage investment would valuation techniques come into play whereas early stage is valued based on milestones. Work numbers backwards to see if your business model fits the VC investment appetite. Fintech company has to decide whether to be focused on the type of VC based on industry and investment stage especially given limited time and resources or to reach out to all investors as they might ‘come round’ one day in later fundraising series as fundraising is a process that takes time.
About the writer
Ngee Hua LIM is Secretary and Executive Committee Member of Singapore Fintech Association and lead/co-lead four (4) subcommittees/focus areas, namely Capital, Partnerships, Co-working fintech space and Woman in Fintech. She can be contacted at [email protected] to discuss on fundraising support and partnerships.