Jurassic World: Predatory investing behaviours we’d rather not see in today’s startup ecosystem
We hold an investor’s perspective. Our objective is to drive a return on our investment: not just the cash we provide, but the connections/market access we enable and the time and energy we invest in each deal. Our financial focus and the capital and relationship/reputation risk that we take aligns us closely with the founders’ own objectives:
- Because we are not a charity, our key metric is neither funds deployed nor grants given. Our performance metric is not about Inputs: it is about Outcomes and Results. Which is what the founders most benefit from, ultimately.
- Because we are not a PR machinery: our key metric is not the media mileage we as investors get. We value PR for the benefits it brings to a business and to our deal flow, and to evangelising to corporates and consumers. But our focus is investing; and we prefer to shine the spotlight on startups and founders.
- Because we are not a development organisation, our capability-building initiatives focus on driving successful outcomes – liquidity events, in this industry. Massive development, advocacy are side benefits we seek, but these are not the focus of our investments.
All the above have consequences.
- Our objective is to have some spectacular winners, the significant funding rounds and landmark exits that place our market on the global investment map. We double down on a few high-performers. But we do not have the bandwidth to invest in everyone who pitches to us. And while we do follow-on investments, we do not guarantee follow-on for every single startup in our portfolio.
- Our strategy is a combination of straight-up venture investing, authentic community engagement and intensive portfolio development. We do not invest in advertising for the Kickstart brand. We don’t have sponsorship budgets. We don’t have an ad agency; we don’t even have a full-time marketing person. I moonlight as copywriter-slash-creative director (those Kickstart geek shirts? Yup, that would be my copy. Saved by Hannah’s great design capabilities!). Hackathons and business plan competitions are not our main source of deal flow. These have a purpose, but their purpose doesn’t perfectly align with our investing objectives; and other groups are better are staging these.
- Our ethos is to aim for homeruns and moonshots. We like ambition, coupled with methodical execution. We’re not impressed by the wild uncontrolled swings, or avowals of passion as the sole driving force. We believe in planning, preparation, measuring and iterating. We practice rigour in our investing.
So having framed our position, here are a few investing practices we wish we hadn’t seen (but we have).
- Taking too much and giving too little
- Taking too much equity for too little cash. Our starting position for Philippine seed stage investments is a minimum $200K post-money valuation because we know that seed-stage startups need a longer runway, hard cash to hire talent, and multiple future rounds of investments. Taking 20% equity at this stage, for less than $40K in cash, is not a good thing for founders: it ruins their prospects for future funding because smart investors will see that the founders are close to losing control of their own startup. What investors value in founders is skin in the game: “owner behaviour,” not “employee behaviour.”
- Taking significant equity (>3%) for advice, introductions, and anything that is not full-time, has no concrete commercial outcomes (and no consequences for non-delivery), or is on a “best effort basis.”
- Confusing investing with commercial practices
- Mixing commercial and equity agreements – these are separate transactions, and should be dealt with in separate documents. This delineates which transaction is which, and allows founders to negotiate commercial deals in a fair environment.
- Taking collateral for investment. Yup, we’ve seen this kind of a term sheet.
- Any sort of revenue share deal for investors. We’ve seen this, too — in the Philippines, and overseas.
- Hidden conditions in investment documents or commercial agreements. Three words for founders to Google: “Entire Agreement Clause.”
- Using time, deliberately or not, as a means of control.
- Taking too long to decide. Or, having made the decision to invest, delaying funding for reasons outside of the agreed list of Closing Conditions (this is why founders need to pay attention to this part of the term sheet).
- Deciding quickly, then piling on the conditions after. We’ve seen startups suffer from vague term sheets and long-delayed Share Purchase Agreements. Even the ostensibly generous offer to “fund now, and sign SPA’s later” can be dangerous: by the time definitive deal documents are swapped, and founders are wanting to negotiate newly-introduced deal conditions, they may have already spent the cash. They are now not in a position to return the cash and walk away from what has become an onerous deal.
- Overly asymmetrical conditions
- Too stringent reserve matters. A burdensome approval process for standard operating decisions; or for too low a cost hurdle.
- Investor self-promotion at the expense of startups.
As startup ecosystems evolve, and more traditional investors and corporates come into the marketplace, they (we!) carry with us the DNA of our genesis. Some investors evolve and adapt more quickly to the startup ethos of generosity, collaboration and fairness. Others are slow to shed their more aggressive, predatory investing practices: after all, in the corporate world, we are trained to squeeze all value from a deal, to never miss a trick, and to leave no money on the table.
Investor self-promotion is also a potentially damaging practice for the ecosystem, especially for very young ecosystems such as the Philippines. The politics of corporate hierarchies and investment banking mean that some investors want to be the rockstars of whatever passes for the ecosystem’s version of Wall Street or Sand Hill Road (come to think of it, even Wall Street and Sand Hill Road are not immune to this). What people need to realise, though, is that what makes a startup ecosystem valuable is having (and hearing about) amazing startup founders, and high-performing startups and startup teams. Everyone else — investors, advisors, policy makers, event managers — we’re supporting cast. We don’t make the show better, or the ecosystem more valuable, by calling attention to ourselves.
Thankfully, we’ve also seen investors — traditional and otherwise — who genuinely strive to understand the ecosystem, who listen and learn, who don’t hard-code overly aggressive practices into startup investing. These are the early days; and many of us are learning, too. With any luck, most of us will evolve quickly enough to help the ecosystem grow healthy and robust. And maybe Darwin’s theory applies to startup investing, too.
Image credits: www.jurassicpark.wikia.com