Why I didn’t invest in them

My investment evaluation ratio is 40/15/15/30, founder/ problem & solution/market/ deal terms respectively. Currently in my family angel portfolio, we have done about 20 deals (since 2009 or so) There have been 2 exits (smallish), and 1 write-off. I just signed off on one deal last week and currently waiting to finish up paperwork to invest in the 21st deal.

The first big 40% covers everything “people” – team composition, skill set, coach-ability, likability, industry exposure, past work experiences, personality  X-factor, ability to execute, and so on. From these, I try to figure out if this is someone / the team with the right aptitude with grit and resilience to ride the roller coaster journey, and emerge champion.

The next 15+15% is on evaluating the business and its market- what’s the problem it is solving, how big is the problem and what’s the market opportunity for this solution proposed and the financial projection viability. Also here I would add in if it’s a problem that I can understand. If FaceBook or Instagram had come to me for investment during their early days, I know I would not invest, cos I would not get the value then. However, I would totally bet on Google or WhatsApp as I appreciate what they are trying to achieve immediately.

The last 30% is on the deal on the table-  what’s the valuation the team is seeking, what’s the current traction, what’s the intended use of the raised funds, is the target realistic for the timeframe sought, etc. Important too I have come to realise the composition of the existing capital table – esp when it’s a pivot model.

Notice I do not have a % for ideas, but maybe 3-5% of my first 15% segment. Without execution, ideas are just air. So while it’s part of the solution, the ability to design the solution and actually carry it out is key. On a similar point, don’t be a solution looking for problem..

Last month I had passed on two deals that I quite like the founding teams, and also the space they are in, but eventually figured that they were too expensive mathematically. Based on their sales logged to-date, the valuation sought was about 30 PS ratio, while our usual investments are typically <10. (For comparison sake, listed companies such as FaceBook has PS ratio ranging from 14-20 in the past three years, and Google 6-8.) These two deals took me a while to decide, but I think I am happy with my decision.

There were deals that I immediately rule out within first hour of meeting. To cite an example, we met a pair recently asking for 12M valuation, on the back of 40K topline, but only ~7% gross margin. Reason for raise was to go into 2nd and 3rd markets. I commented 40K MRR is good for a 15mth old company, but it’s a sharing gig with high COSS, and 7% gross is too low for sustainability, and what are they doing to build that up – what’s the demography of their primary users and etc. They then explained that they were not looking to build up the local market as the space they are in is very crowded, and they don’t really want to optimise this. I was like !!??!!??!! Then we asked about the choice of the 2nd market – oh, one of the co-founders worked there for 2-3 years and has good guan-xi (network) there… Giving them the benefit of the doubt, I asked what have they done to prepare their entry into the new market? oh, the co-founder with the guan-xi will relocate there with his wife and will hire a local GM to work with him… I gave hubby a look and outright told the pair they should work on home ground first to hone their market understanding. If they can’t fight on home ground, they have no chance to win any other market. I should also mention the co-founder with guanxi did not have eye contacts much during the meeting, and just did not come across as trust worthy and committed.

Lesson for myself from this meeting – we need to screen even when deals are referred by trusted sources.

Earlier in the year, I went through a proposal with huge market potential, but in the end, I voted NO too, due to the founder. He was a serial start up person, and this was his 3rd start up. Typically I like founders who failed and willing to try again. For his case, I went from 30/12/9/28 to 15/12/7/20 eventually. What happened was very interesting – hence I remembered this case. I liked everything that was shared and even more so after I researched on the space he wanted to enter. But I found his headcount projections extremely unrealistic and aggressive. His rationale – previous start up experience where he tried to save cost and used an offshore team, the development was slow and problematic and hence the decision this time round to have local team. But he wanted the best possible so he pursued ex-founders of failed start ups and promised high salaries with some vesting interests. High salaries were needed as he needed to bring them to SG. So on the spreadsheet he had 1CEO himself, 4CxOs(ex-founders) I understand where he comes from but I could not accept the HR plan; he agreed and toned down by the next day. Then we discussed further into his commercial plans and he accepted our suggestions almost wholesale. By the 4th meeting I noticed a pattern. He would accept everything we suggested cos we said we were going to invest. His previous experience taught him to not to fight with investors (??!!) Well, we gave feedback and said let’s keep in touch and we can speak again in 6 months to see how he has progressed. I don’t invest in puppets or yes-men. I invest in individuals who can process, filter information and debate their views so that the best outcome for the business can be achieved.

Lesson here: some people could over-learn and come to the wrong conclusions (from my POV of course) In this case, he came across lacking in conviction. End of day, founders please remember, investors are not the one executing the business. We share views from what we went through, but you are the one who have to execute. You should not bend backwards to comply just to get the valuation or the money. There was this other guy who told us that he would take whatever model we suggested – as long as it could give him investment and good valuation…

One aspect of angel investing has me pretty uncomfortable – is that typically we need to decide very fast – after just 1-2 meetings. Last year I met this really brilliant ex-CEO who has turned a super mentor. He told me that he invests only after he has mentored the start up after at least 6 months. And my work with EF now also got me rethinking if we really should rush into investment decisions. After all, my first expensive investment mistake was because I decided too quickly after only one meeting (and also because I believed in keeping my words…) So now I need to re-caliberate on how fast I should decide. After all, I had insisted on additional 3rd and even 4th round interviews when I was hiring key positions. There are bound to be new discoveries.  Another aspect I need to review my thoughts are on IP licensing. I used to view it as no-no, as I do not like businesses built on something that can be taken away and you have no control over long term. But with the development of AI and Machine Learning, at times licensing saves you time and speed up market entry. I have not drawn my conclusion on this yet.

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