David Gardner (Cofounders Capital): We have a joke that if we don’t understand something in the first 2 minutes, we won’t invest.
30 Jul, 2021
Hsien-Hui Tong is Executive Director at SGInnovate. He brings his in-depth knowledge and experience in the Business Development and Venture Capital spaces across Australia, Europe, Singapore and the US. Prior to joining SGInnovate, he was the Managing Partner, Asia Pacific for Wassax Ventures. He has also served as the CEO of the National University of Singapore Society (NUSS) and Vice President at Staples. In the early 2000s, he co-founded a data mining company, which was sold to a global bank two years later.
I started from the entrepreneurial side of the table. About 15 years ago I was the founder of a data-mining company. It was a huge opportunity at that time when we came to the market. We sold that company, and for a number of years, I worked for multinational companies. When I came back to Singapore, I became the CEO of the National University of Singapore Society. Later I joined Infocomm Investments, the predecessor of SGInnovate because I felt that it may be time for me to give back to the country, to see what I can contribute to the emerging startups and aspiring entrepreneurs. So, my way to VC business was from an entrepreneurial direction rather than from financial background.
I think that the most unusual startup I supported is one in quantum space. Quantum is a pretty new technology, it is not well understood. We don’t usually invest in such early companies, that hadn’t developed their products yet and just starting out. In this instance, a company called Horizon Quantum Computing. Its founder, Dr. Joe Fitzsimons, came to us not even with a company – with an idea of the company that will help quantum computing developers to create their products. Our journey with him gave us many insights on how this man is committed to the idea and how he is willing to help others. We helped him to raise the first round, despite the company hasn’t been even formed at that stage, we brought our partners from Japan and the United States because Singapore wasn’t ready for such companies. Later Horizon Quantum showed pretty good traction and was able to achieve all milestones. This company was unusual both in terms of stage and technology.
We are quite an unusual fund because we do only early-stage DeepTech. Most VCs prefer to invest in DeepTech later when a company has shown some traction. And we have a lot of inbound flow from all over the world – from MIT, Stanford, Oxford. And we see 1500 to 2000 deals a year based on our criteria. I think, from 1500 we bring it down to 700, this is the first cut, mostly on market size reasons, when the technologies are interesting, but markets aren’t, or there are just too many competitors, or if the stage is too early for us. From those 700 we may choose about 20 companies we will look seriously and make due diligence. We invest in about 8 to 10 companies a year.
We do a little bit of both. With those 1500 incoming deals, it’s really difficult to manage this process, so we have the system to sort the projects quickly. At the same time, we do scout for certain companies in the areas we are most interested in. We know that the best companies don’t really need to look for investors, so we rely on our network of co-investors who need partners for companies in their portfolios. At an early stage most investors want to spread the risks along with the ecosystem, to share them with others rather than take their own.
The first thing we look at is not even technology – it’s the market opportunity. At the end of the day, we are a fund, and a company should realize its financial potential during the lifetime of the fund. If a company is going to be incredibly successful in 20 years, but your fund’s lifetime is only 10, it is not a very good deal for you. You have to be pragmatic. So the market opportunity has to be clear enough for decision-makers and potential customers. We do B2B, and it is easy for us to go to tech companies and ask them, if this problem is painful enough and if this solution is good enough for them to put money into it. When the market opportunities are established, we can look at the technology and other structural aspects, like what are the barriers to entry for a company, do they have some registered intellectual property, is this an approach the industry believes in, what are the partners they need to bring on board. Finally, we look at people, and not only at team composition and dynamics but also at customers who will use this technology and what other challenges they face. So, we are pretty systematic when we evaluate each company.
DeepTech is a very broad definition. Currently, we are focused on Medtech – on devices, diagnostics, and therapeutics. We look at Autonomous Vehicles and everything within the cluster of Electric Cars – batteries, electric vehicles, etc. We look at Smart Manufacturing – IOT, AI, decision-making systems, robotics. And we look at High-Performing Computing as well, at things like Quantum computing, Craft-based AI chips, Neuromatic chip – we are interested in those things, too.
We have a global mandate for a fund, but when we invest in Singapore companies, we can enter as early as the seed stage, because we have a solid team here to provide a lot of help to Singapore startups. When we invest overseas, we try to de-risk it a little bit and enter at Series A, sometimes even at Series B, to be sure that the technology is established, the market is clear, the business model is appropriate.
We invest all over the world. We have portfolio companies in the US, India, Europe, and Japan.
Our due diligence is a function of a few factors: it depends on how much we’re planning to invest, whether or not we’re going to lead the round, and what is the sector we’re investing in. If the sector is familiar, where we have both good knowledge and a good range of experts, the due diligence is faster. If we are leading the round, we spend a little bit more time on due diligence, to make sure that all angles are covered and we are providing responsible leadership to other investors. Usually, the process takes us 1 to 2 months; if we’re leading the round, it is closer to 3 months. The check size is also important: if it is SG$3M-4M, obviously, it takes a little bit more time to get the deal. During the evaluation stage, we try to establish the reasons why we want to invest, and the due diligence process makes us evaluate these key points. A lot of it is focusing on the market opportunities, talking with the potential customers and other experts. Concerning technology: usually, our founders are very smart people with solid tech background. Sometimes they have to do is to get a coherent IP strategy, sometimes their IP rights are mixed with universities’ IP rights, so we need to know who owns IP rights on products because these things are the reasons why tech startups may fail. It is also important to know the country’s legislation concerning the product and the possibility for a company to operate. For example, we like some companies in the Blockchain space, but if the laws of the country are not likely to be changed in the nearest future to allow a company to operate there, we won’t invest. Those are some of the factors that come into play during the due diligence.
We do anything from about SG$0,5 to SG$3, but this is the first check. Then we do follow-ups, and our investments into a company rise to about SG$5M in total.
We have very conservative estimates on returns. This is the DeepTech. We start with 4x estimation, but, of course, sometimes we look at a deal and see the double digits returns as well.
We don’t want to take the big portion during the first round. When you do early-stage investments, you don’t want to participate in a round where incoming shareholders take much more than 20% of the company. So, we will have some concerns about everything beyond 30%. If you do the early stage and the founders have already diluted most of the company, that’s a big worry to us.
Teams are a very important factor that we’re considering. The problem with DeepTech teams is that founders may be very strong on the technical side, but not very strong on the business type of things. It is useful to have a founder strong on the business side, who has some technical knowledge. We like to see or find a balance within teams. We also like to see the completeness of a team depending on the stage of the company. If it is Series A or later stage, you need to have people with expertise in various areas, like finance or marketing, not just technical people making products. Another important issue with DeepTech teams is that there are, sometimes, a lot of PhDs doing research and not building a product to be sold. The dynamics of the team is always important. Founders don’t need to be best friends, rather people who respect one another and the level of competence within their team and try not to interfere with the bounders. But things are never this way, so one of the things we train our founders is how to work together and give way to each other.
We do both. An individual entrepreneur has both strengths and weaknesses. One strength is obvious – it is solo decision making. If a person has a strong enough belief in what he or she has and how he or she wants to achieve the goals but is still ready to take advice, it is a very powerful set of skills. At the same time, we know that the skills need to be complementary, so we also invested in teams. Actually, we’re invested in more companies that teams than in individual entrepreneurs.
A choice between a visionary and a technical guy? Today I’d rather chose Steve Jobs. Steve Wozniak is a great technical talent. But people like Jobs are rarer, and it is much harder to find someone with visionary leadership skills, able to galvanize interest in the market, to sell those products, to really understand a mind of a consumer to get a product to the market. That’s why I choose him.
A lot of times companies fail because they stopped to talk with the potential customers, or realized that the problem is not big enough, it is not something the people want to pay money for. These are things that stop us from investing straight away. Sometimes the problem they solve is local, rather than global, and the perspective market, like Singapore or the UK, is not big enough. If it is the Chinese or US market, maybe, that’s a different situation. IP rights are very important. Sometimes we reject a company because its IP has originated from the university and too many people have a share of it. And, of course, sometimes we see founders who, though not intentionally, mislead us or misrepresent some of the financial figures during the initial pitch. The truth is these are things too easily to find out during the due diligence, so my recommendation to the founders to be as transparent as possible. These are just some of the red flags.
I’ve done that all the time. If I had a dollar for every startup that I’ve rejected and then subsequently regretted it… You know, when I was working in Boston, we came across a company called Facebook. We were completely new to the industry, very big, but still new. And we didn’t understand what they did, so we decided not to invest in that company. But know what? After that, I would never regret rejecting any other company, and life is much easier for me now. Yes, we reject companies and feel regret, but we also reject and then are glad, because a company failed. It’s always a balance.
I wouldn’t say “never,” but right now we are not investing in real estate, and I think this sector needs major disruption. Right now it is just too early for us: it needs to go through digitalization, through implementing new business models. Right now this is an industry I love, but don’t touch. Another industry that we like, but don’t invest in because the horizon is too long and levels of returns are more at equity investments sides rather than VC, is Food, things like hydroponics, aquaponics. These are really valuable technologies from a national standpoint, very important, but if you’re a venture capitalist, you know that growing cabbage is not going to get you much in return. Another area is Consulting: it is very lucrative, but doesn’t scale well and not really there for VC. There are many areas I’m not really suitable for as a VC, but they are very interesting spaces.
Not really, because nothing has affected our focusing on DeepTech. We’d found that our portfolio companies have been extremely resilient. Companies from MedTech space were able to grow their businesses more quickly and had obtained the regulator’s approval faster than a normal scenario. While some companies had more difficulties with raising funds, there is some growing interest to others and they are growing faster. It is challenging to do due diligence remotely on DeepTech companies, and it slows down some of our investments into overseas companies. But generally, it doesn’t change much.
I think that’s VCs are rational people, they are aware of the problem and are looking for a solution. Some of them understand that it is a huge opportunity and try to use it, try to optimize their returns by leveraging the systems and scenarios. COVID has pushed the adoption of digitalization. We have invested in a company named Starship Technologies and expected 5 to 10 year run before they can get traction and really get to the market. But their autonomous delivery robots are developing very-very quickly and in high demand, so their revenue had actually hit the 5-year mark already. Don’t get me wrong: COVID-19 is a humanitarian disaster. Still, it is a great opportunity for companies in DeepTech space.
In my opinion, the first breakthrough was Hewlett-Packard. It is a huge company, one of the first that grew out of the original ecosystem of Silicon Valley and is still around. So it represents all those companies, that made the Valley the place it is now. Obviously, another one will be Google that showed us how important data is. They are purveyors of data to the global level. And they showed that data can influence how people think, how they work, what direction companies take. This is a huge amount of power in one company’s hands, but they are established market leaders. The third one that has made a really big difference is Apple. It has reinvented itself so many times. It started as a personal computer company and stuck with this idea of a personalized experience and grew up into a huge consumer electronics company.
They have to be dispassionate, they have to be able to take emotion out of evaluation. There is a lot of times when I meet a founder face to face and really like the founder. Sometimes I become apologetic to him, helping him to raise money, for example. But the only thing I need to do is to tell myself that the whole thing won’t, probably, work. You need to be dispassionate. Also, you have to have standards for accessing teams, look at deals in terms of evaluating, being able to write a check, and make a commitment with a company. This is the most important thing: being able to make a commitment to a company that you don’t know will it work out or not.
I think, if you invest in early-stage companies, you are, probably, in a card game. You have to get to market quickly, you have to make sure that you’re holding a had. Sometimes it’s a bluff, you know? For VCs, the valuation is almost a game of chance. The founder needs to be sure when he or she has a strong hand and when a VC holds a stronger hand. When a company progressed, it starts to move to things like checkers, when you try to jump ahead of other people, overcome your early-stage competitors, win a place for your product. When you’ve built a bigger company, things become more like chess: there is a lot of strategies, new moves need more consideration. So, at different stages, a company matches different games.
I never say “Never,” but what I’m doing now is very interesting. We focus on DeepTech, and life is never boring. DeepTech is always moving, I’m always learning, always try to establish new investment pathways, look for new technologies, build new ecosystems and connections – these all keep my job interesting. It may be stressful, but it keeps me open to new things and new information.
I think the first one is: Always make sure that your products solve a big problem, and a big problem is that people are willing to pay a significant amount of money for. It is really the bottom line: if your product doesn’t do that, you’d better forget about starting a company. The second is: Try to keep your costs at manageable levels. You need to have a profit at some stage. You will hear that you need to grow as fast as you can and burn as much cash as you can, but the industry shifted back to understanding that companies need to be profitable. I came from the entrepreneurial side, I remember that your revenue must be more than your costs. My third advice for the founders is: Always believe in yourselves. Now and then we meet overconfident founders that cannot actually perform as well as those who cannot make decisions without consultation, who rely on others so much they aren’t able to move forward. Somewhere in between where they need to know when they need to put their foot down and say, “This is what I want to do, and only then I will seek advice on how to do it.” Find this strength within you.