Introducing the Panel Session - ESG & Startups

On the 07^th December 2023, Ng Kin Foong, our Chief Executive Officer for Red Sycamore, will chair a panel discussion for the Institute of Electrical & Electronic Engineers GreenTech, Sustainability, & Net Zero Policies & Practices Symposium.  This is a programme in alignment with the United Nations Climate Change 28^th Conference of Partners (COP28), in the Green Zone, at Expo City, Dubai, United Arab Emirates.  The title of the session is “ESG & Startups.” 

The panellists for the session are as follows:

David Chen C. Y.; Chief Executive Officer; AgriG8

De’Angello Harris; Partner; Think & Gro

Dr. Victor Tay; Group Chief Executive Officer; RHT Consulting Asia 

The climate crisis is real, and several government and large multinational corporations worldwide have declared that they will be unable to meet their pledges.  Given that the top-down approach to solving climate crisis is not working as intended, we need to democratize the process by encouraging and enabling more people to be active stakeholders in solving the climate crisis, and explore this blue ocean of opportunity.  Many great ideas and solutions die undiscovered for several reasons.  These reasons include lack of funding, the lack of public acceptance because it runs contrary to common convention, or simply being too far ahead or behind the curve due to the rapid rate of technological advancement.  We need new perspectives from all stakeholders, not just those with access to resources. 

Yet, in the push towards renewables and saving the environment, we often fall short on the social aspect. Lithium batteries are championed for their role in EVs, but the outcomes on the people impacted by lithium mining have been discounted. If such climate initiatives negatively impact peoples’ livelihoods and health, we will lose support from people in the conversation to avert the climate crisis, especially from people on the ground. 

Our goal for this session to for us to have a discussion to arrive at more perspectives for all stakeholders to address problems of climate crisis by democratising the process of looking for solutions.  People need to be sufficiently excited by the opportunity to change the world for the better.  What we should address includes the uncertain international regulatory environment, political interference, and siloed economic agendas hampering funding efforts, as well as the social aspect of environmental initiatives.

Quora Answer: How Much of a Startup Should be Given Up to Investors?

The following is my answer to a Quora question: “How much of a startup should be given up to angel investors for collateral?”

Before you come to that decision, both founders and the first mover investors need to agree on the valuation of the company.  This would be an extent discussion.  Once that is agreed upon, then you can come to a decision on how much equity to give up for investment.  Because they are first movers, they take the most risk, and may request some discount on that collateral. 

The first consideration here is to ensure that you give up just enough equity to receive funding, but not so much that you lose majority control.  You also need to reserve space for further rounds of funding.  1^st mover investors normally have provisions against splitting their shares, so you need to carefully manage the capitalisation table across three or more rounds of funding.

Quora Answer: Is a Loan or Equity Funding Better for Startups?

The following is my answer to a Quora question: “Between a loan and equity funding, which is better for startups?” 

That depends on the requirements of the founders, and the underlying financials of the company.  There are actually three options here: loan, equity, and loan to equity.  They have different implications. 

A loan means the balance sheet is loaded with debt.  This may have an effect on the company’s credit, and will be a consideration in future rounds of funding, since there is a stress on the cashflow.  Revenue is projected but the repayment is definite.  A loan does have the advantage in that no equity is given out, and the capitalisation table is preserved.  There are less complications in managing the capitalisation table across future rounds of funding. 

An equity stake means that the funder is now a shareholder of the business,  While there is no guaranteed cost in the form of loan repayment, the equity given out diminishes the authority of the founders.  A major shareholder can also demand a seat on the board, and interfere in the running of the business.  If too much equity is given out, founders may lose control of the company, and be unseated from the board.  Any equity given out cannot simply be taken back.  It also complicates the capitalisation table in future rounds of funding. 

A loan to equity is when a loan is given to the business, with the understanding that it can be converted into an equity stake in the future, dependent on conditions specified in the contract.  This is when the funder is hedging his bets.  Such options normally disadvantage the founders. 

Generally, for startups, it is best to give our some equity early.  The valuation of that stake given out should take into consideration future rounds of funding.  Any stake given out for this first round should never be more than the stake the founders control.  A loan is something that can be taken on after the first round of funding, to address immediate cashflow needs, while preserving equity in preparation for the next round of funding.  A loan to equity is only considered under special circumstances.  It is seldom palatable.

Quora Answer: Does Venture Capital Choose Companies with No Competition or are Disruptive?

The following is my answer to a Quora question: “Do venture capitalists choose companies that have no competition or ones that are trying to disrupt a competitive market?”

Venture capitalists choose companies that are likely to make them money.  That does not necessarily mean they invest in companies with no competition or are disruptive.  Sometimes there is no competition for an idea because it is not feasible.  Sometimes, the market is not ready for it.  Sometimes, it is simply because consumer behaviour does not support it.  There is no competition if you sell a candlestick knuckleduster, but I doubt you would find investors lining up to put money into it.  Not everything disruptive is necessarily good either.  WeWork was supposed to disrupt how we viewed flexible shared workspaces.  The underlying financial basis was not profitable. 

What this means is that there has to be a niche for the product or service offered, and it can be scalable.  The money is either found in seizing market share, in which venture capital can cash cow, or there is hype in it, in which case venture capital will exit to another group of investors.  An example of the former is Amazon, which seized market share in an underserved segment and invented online retail as an industry.  An example of the latter would be Grab or Uber, who have never made a profit, but continue to grow revenue.

Quora Answer: How Do Venture Capitalists Make Investment Decisions?

The following is my answer to a Quora question: “How do venture capitalists make decisions, and for what reasons?” 

Are you asking about the philosophy of the choices, or the decision making process itself?  Venture capital is a high-risk business.  The vast majority of startups fail, for a variety of reasons.  For a venture capitalist, they need to consider, should the startup fail, is there anything to salvage, or is there a possibility of mitigating tax exposure elsewhere using this loss?  Among a hundred startups invested in, how many do they need to succeed, and to what level of success, within what specific period of time?  These are the considerations they need to consider before committing to the next investment. 

The process, however, is relatively straightforward.  Someone from the investment committee and his team, meet a founder.  The founder and his team give a proposal or presentation.  This may be one meeting, or if there is interest, a follow-up meeting after some due diligence is conducted.  Further queries are put forward about the company, the technology, and the team.  Once the investment team is satisfied, they make a proposal to invest in the startup.  They negotiated the equity stake, the exit, their interests in further rounds of funding.  Once that is agreed, the proposal is taken to the full investment committee to vet and approve, or disapprove.  In most venture capital firms, this final process is largely a formality since they would have been appraised of the negotiation process, and were heavily involved in the due diligence and analysis process.

Quora Answer: Can Venture Capital Funds Invest in a Non-Innovative Idea?

The following is my answer to a Quora question: “Can venture capital funding be used to invest in a non-innovative idea?” 

Venture capital funds companies and entrepreneurs at various stages of their product or service development, specific to their mandate.  Most venture capital funds claim they fund innovation.  That is the marketing spiel.  What they are looking for is high-growth opportunities, in something that is replicable and scalable.  It does not need to be innovative.  Everything they invest in, they will claim it is innovative regardless. 

To mitigate their risk exposure, most venture capital funds hunt in packs and tend to invest in the same companies within the same industries, looking to the next unicorn.  They are just as likely as many others to be caught out and fooled sometimes.  As such, most of them succeed as a pack, or fail as one.  As long as you can demonstrate that your idea is replicable and scalable, with a viable potential exit, they will pile on you and offer you money.  You do not need to be innovative.  You just need to be the most likely to succeed.

Incubator Workshop: What is a Pitch?

The following is my background material for Basics of the Pitch, held on the 17^th December 2021.  The programme is a workshop on pitching for Korean startups.  The main coordinator on the Korean side is a Korean a management consultant company, Y&Archer Inc.  Y&Archer Inc. is a specialised accelerator company designated by Korea ministry of SMEs and Startups.  Their headquarter is in Korea, but they also have global offices in Guangzhou, China and Luzern, Switzerland. 

In business, a pitch is how you present your ideas, in a manner that gains interest.  The intent is to create a favourable impression of your idea, and most importantly, for yourself.  That support is often in the form of financial investment.  Perhaps, it is about putting forward a case why it is worth investing in your idea, whether in terms of time, association, or opportunities. 

The basics of the pitch is not about what you say, but what they hear. Putting together a pitch is an art in itself, and you need to consider what you want out of that meeting.  The average venture capitalist, or angel investor meets two or more prospects a days.  At a minimum of 250 working days, that is over 500 people.  If you cannot stand out, you are not getting that call back. 

A pitch is not a business presentation, in the sense of a slide show, and videos.  How many of you have ever seen Steven Paul Jobs in action?  How many of us remember how he unveiled the new iPhone then?  That is Toastmasters training at work, and he hired the best to coach him.  You would note that the entire presentation was carefully choreographed.  The way he spoke, the way he paced himself, even where he walked and looked at the audience.  Your slides, your videos, your data; must never be the centrepiece of your presentation.  Investors are investing in you, not a slide deck. 

In a good pitch, timing is everything.  Depending on the format of the meeting, sometimes, you have 3 minutes, sometimes you have 30 minutes.  The average attention span is around 5 to 7 minutes.  That means, in that time, if you cannot put forward a convincing argument for your idea, if you cannot get your story across, you have lost them. 

Every moment of airtime counts.  Perhaps you met them in the lift lobby, waiting for the elevator.  Maybe you bumped into one of the venture partners parking your car.  Sometimes you even move around in the same circles.  What am I trying to say here?  I am telling you that your pitch starts long before that formal meeting.  Impressions matter.  First impressions matter most.  These moments of airtime, these opportunities of impromptu speaking, they are invaluable.  That means you must have an elevator pitch.  You should be able to, in less that 3 minutes, lay out the gist of your idea.  It should be enough to get their attention, to elicit interest, to leave them wanting more.  This is your teaser trailer. 

Whether it is the elevator pitch, or the formal pitch, whatever the case, if you cannot seize their attention in the first 30 seconds, you face an uphill battle winning that audience over.  How do you do that?  Think about it: you have a startup because you have an idea.  Your idea is meant to answer a question, to fulfill a need, to address somebody’s burning desire for the revolutionary, the convenient, the innovative.  You begin by asking a question. 

One of the maxims of asking questions, even rhetorical questions, in a pitch, is never, ever, and I must emphasise it again – never, ever, ask a question you do not know the answer to.  Anticipate what they will say, so you are not caught off guard.  You do not want to lose control of the narrative.  Once that happens, your credibility is shot.  You may still get the deal done, but you are disadvantaged when it comes to negotiating the outcome. 

If you are confident, and accomplished, consider asking a controversial question.  Controversy and drama wake people up.  People love gossip.  They may pretend, but everyone has that bit of schadenfreude; they enjoy the failures of their enemies.  What you want is to ask a question that is seemingly controversial, and then walk it back.  You need to be able to create a fire within the audience, and then control the flames.  That is the 30 seconds of flame. 

The intent of the pitch is to get a buy in, and start further conversations.  You can get a yes, but the negotiation starts from here.  How do you build that argument?  To build from the opening statement, your 30 seconds of flame, you need a narrative.  Everybody loves a good story.  This story should be about you.  Telling somebody else’s story diminishes your credibility.  It must be your story.  Investors are investing in you, not the company. 

A good pitch never lays out more than three points.  Anything more, and you lose the audience.  You can have ten points why your technology is the quantum leap.  Pick three.  If the investor wants to know more for further due diligence, they will request for that information.  If they are not interested, you are wasting air time.  Those three points are the most fundamental to the business.  The address a need that may or may not be apparent. 

When you speak, there is that speaker persona.  There is a distance between the audience and you.  Your job is to remove the barriers, and by the end of your pitch, the audience feels that they are on your side, that they walk in your shoes, that they share your vision.  You want your investors to believe in your vision.  You want to instill within them, this desire that they are going to be part of history when they invest in you.  This requires a pitch that expands and expounds on a larger vision.  You are not selling merely an idea, you are not just pitching a business, you are not only offering a product or service; you are offering a lifestyle choice.  That requires creating interest. 

How do you create interest?  Remember: any pitch is not about what you say.  It is what they hear.  To create interest, you need to appeal to the audience.  What is it you are appealing to?  It depends on who you are pitching to.  This requires due diligence on your part.  Everyone has an agenda.  People with lots of money also have an elevated view of themselves, and their role in the world.  The potential investor needs to see his place in the Sun, not just the money.  Everyone thinks they are the hero of the story, adherent to a specific agenda.  Your pitch should be shaped in that direction. 

This is important because you are not the first person pitching to those investors.  You may not even be the first with that idea.  You may not be the first of that day either.  Other people are pitching financial projections, exit strategies, potential markets.  You need to give more than that.  There is no gain in being the same as everyone else.  You need to be memorable.  When those investors decide to consider you, and go back to make their deliberations, you want them to remember you positively.  They are looking for the next unicorn, and unicorns need visionaries to drive them. 

From a practical perspective, every pitch must address two things: replicability and scalability.  If it cannot be replicated, then it cannot be mass produced easily.  If it cannot be scaled, production cannot be increased to meet demand.  Without these, there is no viable exit and profit.  Once you can establish that, then you need to advance the perennial question: what is in it for them?  To answer this, you need to know who you are pitching to, and address their needs.  The basest is profits.  Investors want to make money.  Beyond that, people want to be part of winning change.  If you can sell them that, you can sell them anything.

Issues with the Wealth Management Industry

Wealth management, as an industry, needs to be more than just about wealth, which sounds paradoxical.  The term “wealth management” is itself a misnomer.  We are not managing wealth.  We are managing people.  Wealth is a consequence of managing them.  Because of this inherent disconnect, we have this situation where the interests of clients is not always aligned with the interests of wealth managers because of the way the system is set up, and this requires a bit of a paradigm shift to address.  This is especially important in an era where people are becoming more discerning, and yet, miseducated.  There is a lot of information to be found, not a lot of truth. 

The system at banks and financial institutions incentivises scale versus personal service.  This is wealth management on an industrial scale.  The least amount of service is done per client to avoid complications.  That means as long as the client does not ask, they will not tell anything beyond the absolute minimum or reporting requirements.  This makes most financial consultants in these institutions reactive, not proactive.  This can be seen in financial consultants who claim to have hundreds or thousands of clients.  This is obviously unsustainable if they are actually servicing them. 

There are 365 days in a year.  There are about 260 weekdays.  Take away holidays, sick days, off days, vacation days, and we are left with 220 days.  Assuming it takes at least one entire day in a year, to service the average client, if we compile the hours, that would mean the average financial advisor can only fully service 200 or so clients, because some of them will have complicated portfolios and require special services.  In insurance, that would include claims.  Handling more than that would mean the financial consultant is being reactive to client needs, rather than proactive.  There is little scope for personalised service and customised portfolios despite what may be claimed.  Good financial consultants work at getting 200 quality clients, unless they have an entire team to service a larger number.  Regardless, face time with the senior consultant is a rare thing. 

Another issue with the industry that needs addressing, is that too much time is spent on marketing and business development as opposed to the actual consultancy.  Starting it, it makes sense that people need to build that network and market themselves.  But perhaps, we should relook this system, especially for tied agencies.  Wealth managers, financial consultants and such, should be experts in their field.  This includes the product, the market, and the client.  The problem with the current system is that it promotes the best salesmen, and not necessarily the best consultants.  Sales and consultancy are actually two distinct skills. 

The market is evolving, and the system in agencies, financial advisories, banks and fund houses should evolve as well.  This is especially so for the insurance industry.  There should be investment in a distinct salesforce, and a distinct agency force for serving clients and advising on wealth management, risk management and fund management.  Otherwise, we end up recruiting and developing the wrong talent, which is detrimental to long-term market positioning. 

In many financial institutions, when we consider it, consultants are incentivised to offer new or niche products, which may not be in the client interest.  This is especially so for banks and fund houses, where the compensation structure sometimes prioritises products that make them money, as opposed to making the client money.  Clients, no matter how wealthy, do not need everything.  They need a portfolio that fulfills their specific needs, such as making more than inflation over an extended investment horizon, or mitigate risk, or reduce tax liability.  A lot of products on the market do not actually do that, especially those that are derivatives-based.  This represents needless risk exposure.  Another issue, is that because financial consultants and wealth managers are often incentivised by overall asset under management, they are more likely to recommend a loan to meet expenses rather than a partial withdrawal of some assets to meet those expenses.  This represents a long-term cost on the client which should be avoided. 

One of the consequences of the above is that too many portfolios are overdiversified, making them needlessly complex.  When I talk diversification here, I am not referring to monies in a portfolio diversified across different funds.  I am referring to a portfolio diversified over five, six or even more classes of investments, from municipal bonds, index funds, high yield bonds, distressed assets, international funds, hedge funds, real estate, venture capital, and whatever is the flavour of the season.  When a portfolio is over-diversified, it becomes complicated to manage, requiring a large staff of analysts specialised in the different asset classes.  The cost of the analysts alone would be substantial.  Those analysts require compliance and management oversight, risk analysis, and an entire supporting structure.  How many family offices, trusts, ordinary portfolios actually need all that? 

This leads to the next reason why these portfolios are over-diversified.  Complicated portfolios have complicated fees structures, and they are never, ever transparent.  While there are the stated management fees, there are also fees for underlying assets under management, and other forms of underlying charges.  Most financial consultants themselves have no idea what they amount to, and it takes work to actually tabulate them.  There are fees for fund switching, custodial and trading, portfolio balancing, investment advisory fees, investment management fees, and a thousand other things hidden in those charges.  Simplifying portfolios make it easier to track those hidden costs. 

The final major cost of an overdiversified portfolio is actually taxes, what we call the tax drag.  Places such as Singapore do not have capital gains and estate taxes, and low corporate taxes.  But while the holding entity is here, and has minimal tax exposure, much of that portfolio is diversified all over the world, and there is a tax liability there.  This is often ignored.  There is taxes on property in a real estate portfolio, there may be exit taxes for specific classes of investments, there will be income and other types of taxes that may not be apparent.  There is also the hidden tax of inflation for specific classes of investments.  Much of that cost is hidden by the turnover of the portfolio, but unless someone actually takes a closes look, clients have no idea how much tax exposure they have, despite claims of tax mitigation. 

As can be seen, the industry is incentivised in the wrong direction, and that leads to a consequential overdiversification of portfolios.  These bloated are a major cost, and serves only to justify the large support teams and significant management costs.  Financial consultants are pushed to continuously find new clients, which feeds a cycle of acquiring asset under management to justify the entire system.

Quora Answer: Why Do Startup Founders Often Decline Venture Capital Funding?

The following is my answer to a Quora question: “Why do startup founders often decline venture capital funding?” 

Startup founders have declined venture capital funding, but it does not happen as often as venture capital rejecting startups.  There are many reasons I can think of, but the most common reason is that the terms of funding are unacceptable to the board.  Money comes with strings attached.  If those conditions are not in the interest of the board, they will reject it.  Sometimes, it is because of the unrealistic expectations of the board.  They want money, but they do not want the accountability.  They do not want to lose control.  They quibble over loss of equity. 

Another reason why founders decline funding is because they have other funders, or do not need those funds.  Just as funders meet dozens of startups a session, startups present to many different funding groups.  They will take the first one that comes along, or the one with the best deal.  Taking one funder precludes taking another at the same stage of funding if the capitalisation table cannot accommodate them. 

Another point of contention is conflict of interest.  From a funder perspective, they are hedging their bets by investing in several startups in the same space.  From a founder perspective, there is confidentiality concerns if the same funders are investing in your competitors, and the mentor is a party to a competitor.  No discerning funder would take that sort of risk. 

Finally, perhaps one of the more common reasons why startups decline to take funding is simply because it fell apart, and founders cannot get along.  This is actually quite common.  Different working styles, different expectations, different visions doom startups.  Money changes people, and when funding is on the table is often the point of the first fight.

Quora Answer: What Happens When a Startup Takes Venture Capital Funding?

The following is my answer to a Quora question: “What happens when a startup takes venture capital funding?” 

Once you have received venture capital funding, it is an endorsement of your startup.  It makes you more attractive when it comes to further rounds of funding.  But that money comes with strings attached.  Those strings can become iron chains that strangle you.  That is why it is important to look through the term sheet and contract carefully, and plan for the fund deployment before you even take it. 

Large funds sitting in the bank account is an opportunity cost, and not savings,  Funds must circulate for there to be benefit.  You need to plan that fund deployment, and this caters to two areas.  The first is the further development of the product or service to that you are closer to a return on investment.  The second is to plan for further rounds of funding to reach the next developmental milestone, as well as to cater to exits for initial investors to newer investors. 

Depending on the nature of the team, taking in venture capital funding may also come with a seat on the board, or the appointment of a business advisor or mentor.  This is the funder minimising their risk exposure due to board inexperience.  This adds the complication of managing expectations with a party who does not represent the interests of the board, but the investor.  This means managing compliance and legal obligations.  Corporate governance, at this stage, is formalised. 

Once you take in any form of funding, the stakes are raised, and pressure increases.  Investors expect a return on investment, and you are now in a marathon towards some form of exit with a lot of passengers on your back.