What does it take for an investor to say YES?
by Shainan Hora
From 2015-2020, a total of 70 deals were made locally in the Singapore biotech and healthcare sector. Out of the companies founded in the last five years, US$93M was raised by AI-based medical diagnostics and digital health start-ups, and US$105M by start-ups working on immunotherapy and drug-based therapeutics (based on disclosed funding information only).
So, what constitutes a good investment? What aspects are looked at before investing? BCS spoke to Dr. Jessie Tong, Senior Manager at SGInnovate Venture Investing team[i] and Dr. Koh Fong Ming, Senior Associate at Heritas Capital Management, to get their insights on the investment landscape in Singapore.
A good founder
There isn’t a simple checklist for this one as the requirements vary based on the specific industry sub-sector and the growth and developmental stage of the company. However, there are a few things that investors are drawn to:
- Who you are: It goes without saying that entrepreneurs must be mentally strong, optimistic and ready to face rejections (especially new founders). It takes tenacity to weather through the peaks and troughs of leading a company. Investors don’t just bet on the product but on the person.
- How you come across: Investors also look out for good communication skills (read salesman!), presentation skills and team dynamics. According to Jessie, the team members must be compatible and should complement each other – “It’s like a marriage, you have to fit the puzzles together to brave through the storm and then forge your own path”.
- How well you know your stuff: Experience, technological know-how and knowledge about market-size and analysis are some of the other prerequisites. It is also crucial to ask the right questions, such as – How big is the problem? Are people willing to pay for it? Will the project achieve a fine balance of being socially impactful whilst being financially profitable?
“Is the problem worth solving? Is the solution ground-breaking? The ability to convey those answers succinctly and getting people excited about them is the key to a successful pitch”, says Fong Ming.
A strong strategy
“The biggest job of a CEO is to raise funds. Doing good science is critical but it alone may not be enough to guarantee success for the start-up”, says Fong Ming. Fundraising is an important yet challenging task, hence it is crucial to have a clarity of thought and a clear strategy in place. Before approaching the investors, start-ups should make sure that their business model is well thought through and optimized for best growth. This includes operational and commercialization strategy, product’s value proposition, desired investment and exit strategy, among others. Their business plan should also be backed by proof-of-concept (POC) such as performing ground research, making a working prototype and proof-of-value (POV) such as talking to potential customers and understanding how the technology can be monetized. It is also important to research about investors beforehand, engage in dialogues at an early stage and convince them of the company’s growth potential. Getting introduced through a mutual connection always helps.
The right fit
Investors have their own proprietary channels when trying to find start-ups. These can be from fellow VCs (venture capitalists), brokers, networking events, or from founders who reach out directly. Investors can co-invest with other VCs and it is not a stand-alone process. Investors also keep a lookout for ground-breaking research backed by highly cited publications. “There is definitely a filtration process to find the right combination between an investor and a start-up. It is important to align the interests, find the correct domain expertise and speak the same language” highlights Jessie. If the ‘chemistry’ works out between the start-up and the investor(s), it is a win-win situation.
“There is definitely a filtration process to find the right combination between an investor and a start-up. It is important to align the interests, find the correct domain expertise and speak the same language” highlights Jessie.
Start-ups should also evaluate investors based on their capability to help them (besides providing funding, of course). Investors have a network of partners and connections that provide additional benefits, opening a slew of non-financial resources. This can range from providing advice for strategy to opening new markets; helping the start-ups to build their brand; introducing distribution partners to bring the technology to scale and reaching out to various stakeholders to give the company the growth boost it needs.
The investment process
Every investor looks at a potential investment through different sets of lenses. They take interest in a company’s business plan which includes the fundraising amount, intended use of proceeds and growth projections (as foreseen by the company). Investors then apply their own judgements and take an informed decision – a fine balance between asset valuation and investment potential. For example, the potential financial returns of a therapeutics company can be significantly higher compared to a digital health company, but so is the risk profile.
For Heritas Capital, in addition to evaluating potential financial returns, all investments are viewed through the ESG lenses – environmental, social and governance, to determine the long-term impact of the investment beyond financial returns. Their investments range from early-stage seed to pre-A start-ups to growth-stage companies. As for SGInnovate, early stage digital health and medical device start-ups that focus on Deep Tech solutions take precedence. Around 60 investments were made by them in the last three years, out of which 15 were in healthcare sector.
Investment strategy amidst COVID-19
For some start-ups this crisis might be exactly what is needed to propel themselves forward by leveraging key resources and advancing their technology to new areas. For some, this might be a trying time, forcing them to change their strategies. For VCs, it therefore becomes even more crucial to support their existing portfolio companies while scouting for other good opportunities. “The immediate focus now should be on assessing how has COVID-19 changed the long-term value proposition of any company. Capital will continue to flow towards those companies where the value proposition has remained the same or grown stronger. On the other hand, companies negatively impacted by COVID-19, should strongly consider if they need to pivot to stay relevant”, says Fong Ming.
Although COVID-19 has made everyone embrace remote working and digitalization is the new normal, Jessie still prefers meeting founders in-person, as it helps her to better assess their personality and understand the work culture. COVID-19 might have certainly hindered this approach and impacted the investment climate, but start-ups today are at better adept at adjusting and responding to any hour of need. Healthcare industry has certainly stood tall during this pandemic and much more of it remains to be seen in the future.
To conclude, fundraising is an essential part of the entrepreneurial journey to take your start-ups to the next level and there are no shortcuts to succeeding at it. However, if you keep looking for the right connections and believing in what you are doing, you will soon discover your “YES”.
We thank Jessie Tong Wen Hao from SGInnovate and Fong Ming Koh from Heritas Capital Management for their insightful comments. We also thank Jeremy Ang from Sistema Asia Capital for the insights when researching for this article.
[i] Jessie recently transitioned to Regional Venture Capital role at Santen Pharmaceutical.