What does it take to attract investors? Be it young founders or seasoned warriors, funding matters and to many founders, this is often the question that pops up. We speak to Johan Rozali-Wathooth, Founder, Chief Executive Officer & Executive Director of Bintang Capital on what founders can do to attract investors into their startup, different types of funding available, values he looks for in startups as an investor and more.
Attracting Investors
Based on 4 pillars, Johan says investors are attracted to businesses that exhibit strong growth, have a clear vision, build a strong team and have realistic valuation expectations. All investors, he says, are attracted to businesses that exhibit strong growth, are highly profitable or at least have the potential to be highly profitable, are potentially able to generate strong cash flows and can clearly demonstrate their competitive edge.
Founders should also have a clearly articulated and ideally differentiated vision for their business. A clear vision should also be shared by members of key management who also have a clear strategy for executing that vision.
Johan also shares that investors generally like to see a strong lineup in addition to the founders that have worked together for an extended period of time and have a strong track record of execution.
It is also important to note that inventors are constantly evaluating investment opportunities and will prioritise investment opportunities and will prioritise investments where valuations are more attractive. Unrealistic valuation expectations, however, can lead to longer negotiations and possibly the loss of the interest of the investor.
Available Funding Formats
For new founders to the scene, it is important to note the different types of startups fundings that are available.
| Funds | Note |
| Angel Investments/ Venture Capital | Capital available for early-stage businesses who have yet to achieve profitability |
| Equity Crowdfunding/ Peer-to-Peer (P2P) | Raising capital via online platforms or angel / venture investor networks |
| Corporate Venture Capital | Funding from corporations’ balance sheets which can be for a range of motives including risk diversification and other motivations as mandated by their shareholders or board. |
| Grant Funding | Non-recourse funding available to startups from government agencies, government funds, non-profit organisations or corporates |
| Bank Loans | Funding of this nature would be relevant to startups where part of the initial investment may be utilised for capital expenditures which are collateralisable in nature. |
| Venture Debt | Loans provided by specialist lenders which are typically repaid from the proceeds of the next funding round and/or convertible into equity at an agreed discount relative to the valuation of the next funding round. |
| Private Equity | Funding typically provided for more mature businesses with established track records of profitability and cash flows; funding can come in the form of growth capital or buyout capital. |
Preparations Key To Success
Before any founder could start his fundraising journey, preparations as it is for many things is important in setting the path ahead. Johan shares factors he often looks for in a startup.
“Business traction. It is important that the founder and company can demonstrate clear past traction in terms of their product or service which translates into a strong financial performance for their business,” he shares.
Additionally, factors such as growth strategy best reflects how well the founder and their company can clearly articulate their growth plans, often by being able to back their strategy up with strong supporting evidence that includes market studies and customer order pipelines.
Companies that have strong financial reporting and a robust budgeting discipline are always helpful for prospective investors. Johan points out that founders who understand their business well and are able to link business factors into their financial projects assumptions around the drivers of their business also provide prospective investors with a lot of added confidence,
Another factor that influences his decision-making is also the founder and management team’s track record. “We value long-term partnerships with our investee companies. Having an experienced and cohesive leadership team that gives additional comfort over execution of the company’s vision as a team in the long run. We would also look at historical staff turnover rates as a gauge of the company’s culture prior to our investment,” Johan says.
Investors also tend to be drawn to businesses which are well-run and have strong internal governance. Johan further shares that he and his team tend to ask these questions around:
- Is there a well-constituted board? Does the board meet regularly? Does the board function well?
- Are there strong internal financial controls in place?
- Is the company in compliance with the relevant regulatory requirements?
- Is the company audited by a reputable/credible auditor? Are the audit reports clean?
On an extra note, Johan also says a special consideration for prospective Bintang investees centers around their impact proposition and aspiration. Impact angles could include having a diversified and inclusive workforce, having a responsible sourcing or supply chain policy, and deliberately managing or reducing its carbon footprint and intensity.
Being Familiar With Different Funding Options
He also urges founders to be familiar with specific preparations required for the respective funding stages. “Depending on what the goal of the funding is, different instruments and structures fulfill different goals,” Johan says.
Not being familiar with different options may result in suboptimal outcomes for founders, for instance, higher than necessary finance costs, equity dilution or loss of control over the business, and in extreme cases may even result in the business itself failing due to a mismatch of funding structure versus funding needs.
“It is also important for the founder to know what they are signing up for to prevent any mismatch between founder and investor expectation. For example, if you are pursuing a growth strategy that requires capex where you are purchasing plant or machinery, bank loans secured against the underlying asset may both be cheaper and avoid equity ownership dilution, as compared to equity,” he adds.
For founders preparing for seed stage rounds, there should be a clear business plan with detailed financial projections and market analysis. A core team with the relevant skills and track record should already be in place to executive the business plan.
As for Series A, the company must be able to demonstrate a scalable business model and a clear growth strategy with a clear pathway towards profitability. The company should also showcase strong user metrics, customer acquisition costs and other key performance indicators.
At this stage, investors would be expected to conduct due diligence on the company and thus, the founders should prepare a data room with the relevant company’s information such as financial statements, contracts, and company secretarial documents among others.
Founders who are preparing for Series B and beyond can foresee investors expecting a proven market fit of the business offering with strong revenue growth and is already positive cash flow generating.
“There should be clear plans for market expansion and operational scaling. Founders must also be able to demonstrate the operational efficiency of the business with effective cost management and highlight the strength of the management team. The founders should also share the exit strategy and options for the investors,” he says.
Looking at more impact-driven startups
According to Johan, Bintang Capital invests in relatively well-established companies that have passed the startup or venture phase and have crossed into the growth territory. Essentially, these are companies which have established a clear track record of revenues and profitability.
“Our collective belief is that funding for impact-focused or impact-aspiring companies is important because founders who have a strong desire towards impact want to be backed by medium term investors who believe in the same ideals and values.
“Many founders we encounter today with highly investable businesses have a strong desire for impact, but struggle to find investors to match up with their belief in Purpose, People and Planet,” Johan shares.
He further shares that for companies looking at IPO as the next stage of growth, having a head start by building internal ESG or an impact reporting capability is important to most stock exchanges today including Bursa Malaysia as they require listed entities to report their ESG practices on an annual basis and the disclosure standards will continue to rise.
Furthermore, larger investors such as sovereign wealth funds and national pension funds are also expanding their portfolio of impact investees driven by national agenda and to meet accelerated regulatory changes.
This article first appeared on MYStartup