20 October 2016
Startups should guard against angel investors who attach unreasonable conditions in financing deals. Photo: Internet
Startups should guard against angel investors who attach unreasonable conditions in financing deals. Photo: Internet

How do startups find their right angels?

Funding support is crucial for a startup to grow a fledging business. In this, the most important aspect is finding the right kind of financier. Almost like the relationship between husband and wife, separation could be painful if things don’t work out between a startup and its investor.

In selecting partners, startups must have a good idea of the investors’ backgrounds and should also pay close attention to the contract terms.

Greg Sung, founder of online translation platform OneSky, shares some of his insights on this matter.

First of all, Sung urges startup entrepreneurs to do their homework and find out more about the investors.

“If people around you have not heard about the investor before, ask the company what projects it has invested in the past. If the investor is not willing to disclose, this is probably not the investor you want,” Sung says.

A proper investor should have nothing to hide. It should be happy to provide information on startups in its portfolio and let prospective investees engage with them to get to know each other better.

As for the contract, the norm in Silicon Valley would be a useful reference.

Sung have heard of some harsh financing terms. Some investors would promise to provide a certain amount of capital, but the money will be available only if the startups reach certain milestones.

“They may divide up the sum into a number of portions. Say, if the first quarter revenue hit certain number, then Phase One capital would be dispensed,” Sung notes.

“But If I am already doing so well right from the start, why do I need that money? I am seeking capital because there is an investment period with little return. Asking immediate investment reward from startups is unreasonable.”

Some investors would ask for a 50 percent stake in a startups in return for providing the seed money. Such moves mean that after a few more rounds of funding exercises, the founder’s share could be diluted to a very low level, killing his or her incentive.

“If the founder quickly loses the drive, what good does it make for the investor?” Sung asks.

“In Silicon Valley, investors usually ask for 10-20 percent of the company in the seed funding round. Not because they are not greedy, but they know asking for more will just backfire.”

In seeking funds, timing is vital. The macro environment matters, and the startups’ own financial status also needs to be taken into account.

Talking about his own venture, Sung says the company is now able to sustain itself with present income. Before looking for outside capital, he prefers to wait for the business to grow some more, so that he will have stronger bargaining power.

Between 2007 and 2012, only 3 percent of the venture capital supplied to local startups came from Hong Kong companies and organizations, according to an April report published by the Center for Entrepreneurship of The Chinese University of Hong Kong and Google.

The figure is far less than the corresponding ratio of 16 percent in the US.

The number of local investors is indeed quite limited, Sung said.

Usually, angel investors would have made their fortune from their own tech companies. In order to help young wannabes, they became investors themselves. Therefore, the more successful startups we have, the more local investors there will be, he says.

To assist startups in finding the right investor, Hong Kong Cyberport Management Company provides a three-month course under its incubation program to help entrepreneurs get in touch and make pitches to investors.

True angels only ask for a small equity stake and they will share with their investee their contacts and experience, says Dr. David Chung, Chief Technology Officer of Cyberport.

Finding the right angel is a long process. One may have to sift through a hundred entities to find “the one”. Startups need to be well-prepared, otherwise they might get cheated or fail to get good proposals, Chung added.

Some investors deliberately ask startups to try applying for Cyberport’s subsidy scheme as a stress test before deciding whether or not to commit.

Let’s also hear from the investors now. What are they looking for in a startup and what can they bring to the table?

43Ventures was set up three months ago. The company, which has four partners, focuses on early stage financing for startups.

Ada Yip, one of the partners, had earlier worked for SOW Asia’s accelerator program.

Unlike the traditional venture capitalist who typically meets the investees once or twice a month, 43Ventures prefers to roll up the sleeves and work together with investees, including making joint calls on potential clients, Yip says.

It’s not about trying to manage investees, but rather giving them “an extra pair of hands”, she says.

43Ventures wants to invest in projects that will benefit the society while generating a reasonable return over the long run.

“We won’t be interested in gaming projects like AngryBird. But if a game can for example, help kids with learning difficulties, we might,” said Yip.

Yip advises startups to be “polite, humble and honest”, saying that such approach will give a solid foundation to forge a good and long-term relationship with investors.

Leroy Yau, another partner, said the majority of investors want to see how devoted the startup founders are, and whether they are able to communicate clearly their business plans and goals.

Most of the better known investors in Hong Kong’s startup universe are foreigners, but there are also a group of local investors who often tend to keep a very low profile.

Yip hopes that there will be more sharing and interaction among investors as that will help enhance the overall investment climate in Hong Kong.

The Chinese version of this article first appeared in StartupBeat. [Chinese version 中文版]

Translation by Raymond Tsoi

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