TSB 2020 Fireside Chat: Common Startup Fundraising Pitfalls in Hong Kong
Speaker Backgrounds
Alvin Lam — An entrepreneur for over 17 years, built a digital agency in Hong Kong and grew it from two people to 300, acquired by Accenture. In 2016, started a private equity (PE) fund — T12M Ventures that focuses on venture capital (VC) and angel investments. So far, invested in 20 projects.
Tenny Lam — Co-founded Grand Rise Technology in 2019, which received funding from Hong Kong Polytechnic University (PolyU) Launchpad. The startup commercializes a green antimicrobial nano-coating technology and is believed to be more cost-effective, safe and also more environmentally friendly. Prior to founding the company, Tenny took on a number of key roles in corporations such as Pearson English, SAP Greater China, and China Resources.
Anthony Huen — Founder and CEO of ASA Innovation & Technology Limited with 14+ years of experiences in design, development, optimization, and product development. Upon graduation from a university in Canada, moved back to Hong Kong to work as an engineer. Prior to ASA he founded a technology company which provided one-stop IT solutions to corporates. Later founded ASA Innovation, which focuses on air purifying technology. Since its incorporation in 2016, ASA has already secured over HK $6.1million.
Paul Wang — Paul leads the entrepreneurship development team within Institute for entrepreneurship (IFE), the commercialization arm of PolyU, overseeing an array of funding schemes which amount to HK$12 million annually. Supported 270 startups with his team in the past 7 years.
Leo Chiu — Chief Technology Partner from Click Venture. Previously worked for Morgan Stanley and was the Venture Partner of Spike Ventures (a venture fund for Stanford University alumni). Conducted M&A on multiple startup companies in the Silicon Valley.
Paul: In this session, we will try to give you some taste of the investment atmosphere and how the ecosystem is like in Hong Kong. We invited both investors and investees as speakers to this panel — two from each side. Let’s try to picture the investment ecosystem for early stage startups.
What are some common startup fundraising pitfalls you have experienced or observed in the Hong Kong ecosystem?
Leo: As an investor, I would say that startups should know their target audience and customers well, and should have certain kinds of traction before actually going out to Investors. In the last few years, specifically for Hong Kong, I’ve seen quite a lot of entrepreneurs — they have passionate ideas, and they spend a lot of time coming up with their business plans. They talk to their friends and family and go like “I have the best thing since sliced bread” then they go out and knock on hard doors. They go to startup competitions and win prizes. And then they meet with VCs and professional investors. But from the investor standpoint, particularly nowadays when we have cloud computing, social networks, and facilitating platforms like Kickstarter, we look for more than just your presentation. You might have won a few prizes, but what we really go after is some kind of initial attraction. May not be the ultimate product market fit, but we do want to see something — some magic clicks you know out there, ideally some kind of numbers to back up your product or your market.
A lot of the so-called pitfalls that entrepreneurs run into is what we used to call “drinking your own kool-aid”, or buying too much into your own ideas thinking investors should just give you money. A lot of times you really need to step back, push your product or prototype to the market and see what you get. Another point is that you should run fundraising as a campaign. You cannot just say “I have an idea and I’ve already won prizes, so I’ll just go out and meet with a few VCs and see what happens”, and then you wait for a week or two without following-up, and then three or four weeks later, you go out to meet with another group of VCs. This is not a good way to run your fundraising campaign. You should treat the process as more like an election, or a well-organized week after week after week which you plan ahead of time. For example week 1 would be how much traction you’d like to generate from the VC community, and week 2 week 3 how you’re going to pace it out, all the way up to a 2–3 months campaign. You set the timeline to when you want to close the deal, such as in 4 months or 6 months.
Under COVID-19, it’s getting tougher and tougher to raise money, so my recommendation is to spare at least 6–9 months before you actually fundraise. The key is to make sure that you monitor your fundraising campaign as a full-time job. When you do decide to go out and raise money, you either fully dedicate to it or you have one of the helpers or co-founders help you out so that you can focus on building the product and land more customers. The better proposition is to make sure that you deliver a good value to your customers.
Alvin: I agree with Leo’s ideas and would like to add a few things. Startups like to tell investors that they’ve already prepared for the fundraising project and its advertising when they actually know nothing about marketing. They know nothing about digital marketing and they just get investors’ money to try. That is not persuasive because for every business, we are loading for the growth potential, and the growth potential is not just for a trial. When startups say “our market size is US $20 billion”, I usually ask “what is the number of market shares you can get in the short time”. I usually ask questions like “what are your growth hacking strategies? Are they related to digital marketing?” Startups themselves often don’t know of the clear definition of growth hacking, which directs at the way you can grow your business that other people can’t. We look for people that can tap into solid growth hacking strategy, not only by digital marketing. In the past few years, we saw so many startups who are asking money for marketing, but not many of them can give good results from that. That’s the first point I want to make.
The second point I want to make is on high valuations. At the moment, the fundraising market is very tough. As Leo said, before a fundraising process usually takes 3–4 months, now it takes at least half a year. Because we cannot meet with investors face-to-face now, it is very difficult for investors to feel your passion over the video. The whole world is in lockdown now. Not only has the local economy been affected, the whole global economy is affected, so the market growth is expected to slow down. There’s not much one can do staying at home aside from online shopping. So unless you’re making health-related products or tools such as online video conferencing that helps with digital transformation, it’s unrealistic to propose a high valuation.
Paul: Both investors touched on the number one issue when facing investors: you should be able to convince investors that you can do it. Show them some sort of traction or a good growth/acquisition strategy.
Are there any things you regret or observed from your previous fundraising efforts that you can share?
Anthony: I agree with Alvin, I think valuation is the distance between startup and investor. Investors are trying to buy things with the lowest cost. From startups’ perspectives, all our ideas are one of a kind and are the best in the world. They should be worth more than what the investors suggest. I think one of the major problems I often observe is that startups and investors spend too much time discussing how much the shares are actually worth. The next thing you know, the process stretches for so long that it ends up with no results.
I suggest people look beyond the return on investment (ROI) of the project and try to see the social impact in the bigger picture, or what vision the company actually has. Using myself as an example, we are doing air purification development. If we’re just trying to create a purifier, there’s no point spending a lot of money on R&D. We can just go to Alibaba, buy some air purifiers, and start selling them right? But the thing is, if you try to create a technology that will improve the world from an environmental perspective, or the social impact perspective, there might be a point where investors and startups can get closer together with that idea in mind, and may be able to come to another agreement. I think we should look beyond the money side.
Tenny: I would suggest that startups shouldn’t fundraise just for the sake of fundraising. As startups, we need to know what we want. Are we looking for funds or support? Also, we must identify and find the right angel investors or venture capitals. Different investors may have different purposes and interests, so we should find the right investors that can add value to us when we do marketing at the later stage. Another point that we’ve learned is time management and expectation setting with potential investors. Usually startup companies have multiple co-founders. A good strategy is to assign only one co-founder to negotiate or discuss with investors. Otherwise, the investors may sometimes get confused talking with multiple co-founders at once.
How many times did you have to try before getting your first investment?
Anthony: I think we’ll need many hands to count the number of presentations we had to do before getting our first investment. We at least pitched for over a hundred times, especially at the early stage when we had no tractions yet. You actually learn from each pitching session what the investors are looking for. Like I said we all think our ideas are the best, so you need to communicate the idea with investors and the general public to see what is missing from the original idea and over the process you evolve. You become better and better and eventually the idea is good enough for investment to come in. It’s not until 2 years after I started fundraising that I got invested. But looking back at the journey, I would say if I was an investor, I wouldn’t invest in myself during the first 6 months — the idea wasn’t even complete! However, I think it’s always good to start early.
Tenny: We went for a different path. We’re quite lucky that we can co-work with the PolyU Launchpad Funding Program supported by Paul. We spent two months finalizing the term sheet with our angel investors. The key differentiation is that because we worked closely with the incubation program so we went through quite a systematic approach. We also received coaching and training before we really pitch to potential investors..
From the investors’ perspectives, usually how many cases will you see per year? And how many cases will you invest in?
Alvin: We usually invest in five projects a year. We don’t need to see so many proposals a year. Each month we look at around 20 projects, so 200 projects a year.
Leo: I review about 5 business plans per day. Each year we invest in about 10 to 15 companies. But really we’re investing into the team — the people behind. Because business ideas come and go, just look at COVID-19 — it killed a lot of business models. Speaking of valuation, I was just talking to this company the other day. They used to be making a few million USD per year. But because of COVID-19, their revenue literally dropped to zero. They had to revisit the whole valuation again because they cannot justify last round’s valuation anymore. That’s why we invest into the teams instead. If people are good enough they can pivot to a profitable business model.
Paul: To the audiences not from Hong Kong, to give you some brief idea about the investment ecosystem we observe from the investor perspective: Hong Kong is a place full of rich people, but they are not professional investors, so they probably have a different approach than what you have learned. Hong Kong is also the financial hub of Asia — a lot of VCs, private equity (PE) funds, but these shares are usually for early stage angel investment. There are plenty of angel investors, but not so many growth and later stage investors. Usually at pre-IPO there are plenty of funds and the VCs can help you out in Hong Kong. But if you are in the middle stage, then you probably will face difficulties finding series A/B rounds of investment.
Any last words of advice you can give?
Alvin: I think growth hacking is the way to get your business flying and attract investors’ attention. Always keep in mind that growth hacking is not just digital marketing. You should think when and how you can get your first batch of plans, like the first hundred plans. This will help with your business development and your fundraising process.
Leo: Like Alvin just said, once you build your fundamental core competence, you need to think big. In Hong Kong we have a lot of mega rich families, but they are very conservative, also very geared toward real estate. When we approach them, we need to pitch to them a big dream, a business model that is scalable enough — a dream that can go beyond Hong Kong to Southeast Asia, to the Greater Bay area of China, and all the way to Europe and the US.
Tenny: My advice will be to do your homework. We were quite fast to get our investment, but we spent 6 months preparing our homework. We knew exactly why we need funding and what kind of product we’re going to make and why. More preparation will attract ideal investors.
Anthony: There are different types of investors no matter how small the investment is. A good investor will bring an extra value to your company. For example — connect you to the right people, connect you to the right customer sector. Bad investors talk a lot and sometimes distract you, bringing you to where you didn’t intend to go, slowing down your overall business development. Instead of just looking for money, you should look for the right investors for your company.
Conclusion:
One of startups’ common pitfalls, especially those that sprouted from startup competitions, is misplacing their focus on creating perfect pitch decks, or good presentations. Instead of placing all your energy on perfecting your presentation decks, startups should go directly to the market to see for a product’s market fit — VCs want to see whether or not the market is accepting of your products, not if you employed the newest or more innovative business models.
Another common pitfall is that when explaining the use of funds, startups only touch on the general direction, for example: “for marketing purposes — to attract more users through advertising and offline events”. A more detailed plan should be provided, such as “to achieve X through growth hacking” — specify the percentage of current users gained from online exposure. If you want to increase your online marketing budget, how much budget? And how many users will you gain in return? What is your expected market share? Provide investors with detailed data to illustrate the expected effectiveness of your marketing campaign-to-come to justify the use of funds, drawout a prolonged timeline, and be fully dedicated. The more the details, the easier it is for investors to invest with confidence.
