“Is there a secret sauce to fund raising?” While working for Vickers as a VC in China, this is a question that I get very often. The answer?
Most VCs look at 4 points in a deal – Space, Competitive Edge, Team and Price. Articulate this properly and you are well on your way to receiving a cheque to grow your business.
VCs are concerned about the type of space a company is in. There is less risk in investing in developing a product with a ready market than to invest in a product that is ahead of its time. Hence VCs are always concerned about the current size of the market and its growth rates to date as well the potential moving forward.
In particular to China, entrepreneurs always begin their pitch by saying, “I am the XXX equivalent in China.” In my 4 years in Vickers, I have sat through countless such presentations which includes the equivalents of Facebook, Twitter, Youtube, Groupon, LinkedIn, Zynga, Square, Gilt Group, Airbnb, Dropbox, Spotify and most recently, Pinterest and Path. And the list goes on and on.
Is this a bad thing to a VC in China? Not necessary so. Investing in a copycat does take a lot product risk out of the equation. Just look at how Baidu, Youku, Renren, Weibo, Jiayuan, Vipshopand Qunar have done. Each one of these companies have followed the concept of a similar company in the US, localise it fit the needs of the Chinese Internet users and have grown to be market leaders in their own fields. Granted, not all of them are profit making at the moment, and some are even being criticised for going public as a means to an end to cover up for their losses, but credit has to be amply given to them to be able grow to this size and stand out in a country where the competition is extremely strong and new copycats are appearing every single day.
Unfortunately, simply being a copycat is insufficient. VCs are looking out for the Numero Uno of copycats and work has to be put in to convince them that you are the one.
In a market with too much money going around and the cost of labour being a fraction of the US, every dollar raised can be stretched a longer mile. This phenomenon has resulted in the breeding of competition and the main reason why various companies have tried to venture into businesses out of their traditional job scope. The most recent Group Buying craze in which almost every single company in the Chinese Internet space wanted a slice of the pie is an example of that.
Hence especially so in China, the competitive edge that sets one company apart from another is absolutely crucial to its survival and eventual success. And this edge could come in different forms. For example – having cutting edge technology in an IT company, having a superior supply chain for an e-commerce company or having a cheap way to acquire new users for an Internet games company. Superior search technology has resulted in Baidu emerging as the top Chinese Internet company and superior customer acquisition has resulted in Tencent being the top Chinese games company. Lastly, while first move advantage is good, it is hardly considered a sustainable competitive advantage in China.
Likewise, in a recent investment that Vickers led (together with some notable US VCs) in 2121.com, similar to Club Penguin and Taomee, what stood out in competitive edge to us was that 2121.com had signed the rights of the top animations in China to put their characters in its virtual world. Instead of having to spend valuable marketing dollars in developing their own characters, they now have access to characters that is instantly recognised by their target market.
Any VC worth his grain of salt will tell you that the team is the most important part of the entire equation. As no product is 100% transferable from one market to another, and no competitive edge of a company is everlasting. The onus falls solely on the team to read the market, be quick to react to the latest changes, constantly innovate and emerge as the eventual winner.
Which begs the question, what do VCs look out for in a team? Is there a preference for returnees with Ivy League educations? Or engineers with previous work experience in Google, Microsoft, Baidu and Tencent?
Statistics have shown that teams with the above have found it easier to raise VC funding but let me be the first to assure you that this is not the most crucial checklist item for most VCs. While IQ is no doubt important, what we look out for in an entrepreneur is a deep and intricate understanding of the addressable market and the problem the company is solved as well as the drive and determination of the team to make the company an absolute success.
In addition, while having work experience is good, age is not often a determining factor in making the eventual decision whether to fund or not. For example, when the founder of iPart.cn (Vickers is the largest investor behind it, a social network for couples to meet) came to us, he was a fresh graduate. The company is now one of the top social networks in China and Taiwan and is in process of filing for listing in Taiwan. In one of our more recent investments, where we backed a 28 year old founder of MIT and Harvard pedigree, what impressed us most was not his smarts, but his drive and tenacity to drive the company through peaks and troughs and coming through each time.
Even if all the stars are aligned, there is a right price that a VC is willing to pay for every investment.
While getting a fair price and reducing dilution on the team is important, I would recommend that founders do not make a decision on choice of VCs simply because of price, or to turn down a VC just because the offer is too low. In the grand scheme of things, while building a USD 1 Billion company, a post-money of USD 6M or USD 8M is simply inconsequential.
At an early stage of the company, it is important to get a VC who would be able to value-add the most in the growth of your company be it in terms of strategic input or getting the chance to tap on their wide network of contacts. The right advise which results in a winning formula is worth so much more than the USD 1-2M that you are giving up.
Lastly, be prepared for a marriage and not a one night stand when you get into bed with a VC. Hence chemistry is extremely important in making your choice as well, seeing that they will be sitting on your board and has a say in every important decision that you make.
The piece was written by Ian Ho, an Associate in Vickers Venture Partners , specializing in investments in the TMT space in Asia-Pacific. Deals that he has been involved in includes, 2121.com, 24Quan, California Intercontinental University, Spicy Horse Games, Matchmove Games and Lotaris. You can follow him on Weibo.