With 21 years of investment experience, Michael Blakey is a well-known name in the Singapore early-stage investment scene.
With his depth of experience, Michael enlightened us on some of the most important yet elusive aspects of early-stage start-up investments – what early-stage investors should expect, start-up financing, pitching, and lastly talent acquisition.
Keeping an open mind and open interaction
When asked about industries that excite or interest him, Michael tells us that he prefers not to limit himself to any as that may cause him to miss out on opportunities in other industries. Instead, he exposes himself to entrepreneurs regardless of industries and this has allowed him to build a diverse portfolio that ranges from logistics to cosmetics.
Start-up financing requires understanding of what comes with the money
There is no debate on the importance of start-up financing so let’s jump right into the dilemmas and challenges that founders face.
Bootstrapping and angel investments
Common options of start-up financing include bootstrapping, angel investments and venture capital investments. The first option is only suitable for start-ups in a low-growth sector. If you are in a high-growth sector, you need the resources and capital to grow quickly or you will certainly be out-paced by competitors.
Angel investments may be less stringent in their selection, but they need to be carefully evaluated as the investor background and involvement, and investment terms may cause more detriment than benefit. Depending on their background, angel investors may not understand your business and industry enough to provide tangible support. First-time investors may not understand the implications of the investment terms they request for and make future fundraising impossible.
The minute founders take VC money, the clock is ticking towards an exit.
Regardless of where the funds are coming from, it is important to know what comes with the money. A VC may only take 5-10% of the shares but minority protection can greatly limit founders' control over the company. Understand that while all investors look for an exit, VCs have particularly fixed timelines depending on their fund age and commitment to their investors.
Start-up financing is a marathon, not a sprint
Rather than simply looking at how to derive a suitable valuation, Michael shares some simple yet crucial tips about how much of the company to give away when fundraising. For a fundraise for an 18-month runway, founders can expect to give away 20-30% of the company. Giving away more than 30% can render the company un-investible in future rounds. Conversely, giving away less than 10% of the company may mean being overvalued and that will make the next fundraise incredibly difficult unless the company really hits it out of the park or goes for a down-round, which also turns away many investors. As compared to the valuation start-ups may receive in Silicon Valley or China, valuations over here are a lot more modest. Founders should not try to achieve that level of valuation here because that is the nature of their market, and high valuation here simply turns away investors.
Three most important things in a pitch - problem, market opportunity and people
Focus on the problem, not the solution
Very often, founders make the mistake of focusing on their solution when pitching. However, the focus should be on the problem because the solution may change, but the problem will not.
Take a bottom-up approach when showcasing the market opportunity
When presenting the market opportunity, everyone thinks they have a billion-dollar market. That does nothing to attract investors. Instead, founders should take a bottom-up approach of identifying their sector characteristics such as revenue, the estimated number of users, market pricing, and building their assumptions from there. That displays a comprehensive understanding of their end-user and market.
Early-stage investments are often investments in the people
When looking at a deal, Michael actually looks at the people and the team - whether he believes that they can deliver. Founders should start forming relationships with potential investors before the company needs to fundraise because, in early-stage investments, it is as Michael emphasises repeatedly, very much an investment in the founders. Forming a relationship in advance allows investors to get to know the founders and understand their vision and ability. During the pitch, do not leave the “Team” slide to the last and definitely do not skip over it. We asked Michael about his opinion on outsource certain technology development or build an offshore technology team such arrangements and he acknowledged that the best-case scenario is to build the technology in-house. However, he knows that in reality, funds are never enough and start-ups have to make do with what they can afford. An offshore technology team is viable provided the CTO is in-house and willing to travel back and forth Singapore and the offshore team office frequently to ensure control.
Cocoon is a Singapore-based venture capital fund focusing on early-stage deep technology and business-to-business companies in Southeast Asia.
Cocoon recently raised US$22 million for their second fund
The fund will invest up to S$1 million in each deal, looking to fund the investee for the next 12-18 months. As an active investor taking a hands-on approach in helping their investees with business-building and growth, Cocoon has found having 20-25% ownership to be the sweet spot for their investments. Consistent with their active management style, Cocoon will be making up to 6 deals a year.
You may find out more about Cocoon here https://cocooncap.com/.
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