Shownotes
Hosts Paul Chapman and Jason Ball, are joined by Nalin Advani and Ilya Kulyatin to discuss how startups can go about evaluating potential investors when fundraising in Japan!
💌 Contact hosts Jason and Paul on the Business In Japan group on LinkedIn
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Transcripts
Welcome to Founded In Japan, where we share uncommon knowledge about starting up.
Shiba Inu:Hosts Paul Chapman and Jason Ball, are joined by Nalin Advani and Ilya Kulyatin to discuss how startups can go about evaluating potential investors when fundraising in Japan.
Shiba Inu:Founded In Japan is recorded live on Clubhouse, and thanks to the magic of technology, it sounds like a regular podcast for the most part.
Shiba Inu:Audio for some speakers may be degraded at times.
Shiba Inu:Nonetheless, we hope you find the content to be valuable throughout.
Shiba Inu:Feel free to reach out to us on the Business In Japan LinkedIn group.
Shiba Inu:Thanks for joining us, and here we go...
Jason:Tonight we are talking about how do you evaluate an investor.
Jason:I think the networker in me has been listening and going back to that word evaluation and whether you meet them, whether you consider them.
Jason:Why would you do that?
Jason:At the very least, you're building a network.
Jason:You don't want to assume they're not right for me, or they don't tick that box, because it's still a movement forward.
Paul:There are a lot of places where you can find hints about how to raise money.
Paul:Less so specific to founders in Japan, and even less so specific to foreign founders in Japan.
Paul:As a starting point, I think the first qualification for any investor is, do they have money?
Paul:Surprisingly, you'll find some investors are more than willing to talk to you, but they may not satisfy that all important criteria.
Paul:In the early days of your startup, it may not even be bad to invest some time in speaking to an investor who doesn't have money for you now, but they have information.
Paul:As my dear old mother says, you have to kiss many frogs to find Prince Charming.
Paul:Now I know a little bit about how my parents met.
Paul:Before we get started, Ilya, did you have a specific goal in mind when you proposed the topic?
Ilya:I was discussing with Darrell and Sushant, and right now they're going for a fundraising round.
Ilya:One of the questions they had was, how do we understand if a certain investor is right for us, or should we actually waste our time, or is it wasted if we are trying to talk to lots of them?
Ilya:Because it usually takes an hour to talk to an investor, and then an hour again and again.
Ilya:Usually when you are an early stage founder, you do need the time to actually build the product, on the business and the technical side, so you can't just waste time.
Ilya:From my personal experience, I also remember when I was fundraising for my previous startup, there were moments where mainly with angel investors, where we were discussing for a week plus, and then it just turns out that they have, what, $10,000~ $15,000, which is money , but why do we need to talk for so long to get such a small check?
Ilya:Is it worth it?
Ilya:Will this mean that later in the game, they'll also require the same amount of attention?
Ilya:Is it worth it?
Paul:Casting my mind back to the early days of Moneytree, I was promiscuous, I would take almost any investor meeting, because 'you have to kiss many frogs to find Prince Charming', and you really don't where the money's gonna lie, unless you have a deep network of investors, and you've done this before.
Paul:However, in those early stages, you're right, there are people there who only have a relatively small amount of money to invest.
Paul:For them it's important, it's a lot of money, it's their money.
Paul:If they're not sophisticated investors, they may not have the self-awareness to realize they're perhaps wasting your time, because they were looking for something very small.
Paul:Qualifying, not just do they have money, realistically are they sophisticated enough for what you are offering?
Paul:They may be sophisticated, but they also might just be stringing you along for a long time.
Paul:They may not realize it themselves.
Paul:They may be thinking, 'oh, I'm providing good and useful feedback'.
Paul:From your perspective, you're just thinking 'we just want some money'.
Paul:Closing a round quickly does let you get back to running your business.
Paul:You want to spend your time building.
Paul:When you are fundraising, whoever the founder is that's fundraising, really doesn't have any time to do anything else.
Paul:That's somewhat diabolical if you are a founder who loves product, close to customers, and you're spending this time fundraising.
Paul:You want to get it done as quickly as possible, but at the same time you want to make sure you get the right kind of investor on board for you.
Paul:Dating the right investor is very much in the eye of the beholder.
Paul:So just generally speaking about fundraising, getting it done quickly is good, raising more money means you fundraise less often.
Paul:I think a lot of successful founders will probably say that they tend to be fundraising all the time.
Paul:Now, in the later stages, this becomes perhaps less true.
Paul:But as you get to your series C or D onwards and you're thinking about a potential listing on a stock exchange, what ends up happening is you meet with investors with no expectation you're gonna get money from them in the next two years, but one day they might invest in your IPO, and you'll do a lot of conferences.
Paul:I've probably done about two and a half years of conferences.
Paul:Some in other countries, Singapore, Hong Kong, none in Australia.
Paul:Mores the pity.
Paul:It'd be nice to visit Sydney for that purpose.
Paul:I have met investors from Sydney, mostly on Zoom these days.
Paul:So you will spend a lot of time canvassing and there are, there's a lot of different views out there.
Paul:I was listening to Henry Ward earlier, the founder of Carta talking about fundraising.
Paul:They're well known for cap table management in the US.
Paul:He said he doesn't even want to talk to investors when he is not actively fundraising.
Paul:Whereas on the other hand, these are still people and it's good to make some connections.
Paul:Out of interest, the reason why he said he wouldn't talk to them is because he does want them to push him into a round when he hasn't got other people putting in competitive offers.
Paul:You also have to think about how congested the market is, how much money there is looking for an investment.
Paul:There never seems to be as much as you want, so keep that in mind as a golden rule.
Paul:So let's start putting some structure to this.
Paul:What should we optimize for?
Paul:Speed, size, terms, other benefits?
Paul:Remember, choosing the right investor can be a force multiplier for your growth, whereas difficult investors, may materially harm your company, not to mention the mental wellbeing of the founders.
Paul:Once you hit the public markets, anyone can be your investor and some of them may have a timeframe of investment of 10 years, and some 10 minutes.
Paul:So you have differing stakeholders to manage.
Paul:How do you get them in the door to begin with?
Paul:Alright, so let's look at the fundamentals.
Paul:The number one fundamental, as I said, is 'do they have money and can they invest it?'
Paul:The next one is genuine interest in your business.
Paul:Nalin, how would you rate this in terms of importance?
Paul:Is it important that an investor has a genuine interest in your business, or is it enough that they want to make money, and they think they can make money with you?
Nalin:Thank you Paul.
Nalin:As an angel myself, I do not write million dollar checks.
Nalin:My check sizes are anywhere from $10K to, I think I've done about $150K.
Nalin:By the way, my $150K was in an industry that I do not add too much value, so I think having money is an important criteria.
Nalin:But with an early stage investor, usually the greater value you can extract from them is not their money, as much as who they can connect you to, how they can help you with product market fit, how they can help you with what forms a good MVP, a minimal viable product or a term that I've shared here with you all several times in the past, which is a minimal fundable product.
Nalin:I think an early stage investor, more than the money he brings you, if he has genuine interest in supporting you, will bring you these things.
Nalin:That's personally the role I like to play and I am very upfront.
Nalin:I tell my candidate investee companies, look, if I have no passion or no understanding for what you're doing, I'm very sorry, we'll be wasting each other's time for me to go in.
Nalin:You don't need my money, you need, you might need something I have.
Nalin:If I don't even have that and no genuine passion or value to bring you, then I will help you connect to other people, but maybe I'm not the right person for you.
Paul:I would expect having spoken with you for some time now, that you have a worldview, you are informed and in a good way, opinionated.
Paul:On the other hand, some investors, they may not.
Paul:An early stage angel or family member; there's the FFF round, the friends, family, and more friends round; also known as the friends, family and fools round.
Paul:Many of those people just want to invest in you because they know you and they think, if Ilya's doing this great thing, then I want to support that.
Paul:I've got some angel investors in a syndicate that I put together that thought that.
Paul:I think their investment's gone up quite a bit, which I'm pleased to say.
Paul:Hopefully we can get them all the way to IPO, and then I'm done.
Paul:Phew!!
Paul:My uncle is listening, I'm working on it.
Paul:I'm working on it.
Paul:It's only been nine years.
Paul:Come on!
Paul:Genuine interest in the business can just mean genuine interest in you as well.
Paul:The next is someone who genuinely might invest in your business meaning that not just do they have a worldview of they like you or you're the thing they invest in, are they ready to do it?
Paul:Do they know enough about what you're doing?
Paul:Can they put in enough time?
Paul:One thing about angels I've found is that they can commit very quickly.
Paul:They don't have an investment committee.
Paul:They don't have a process as much.
Paul:Angel syndicates can vary of course.
Paul:There are some who can put together quite a bit of money, a couple hundred thousand dollars from 10, 20 or 30 angels.
Paul:It's nothing to sniff at, but the more organized, the more process you would expect to have there.
Paul:From experience, it takes about as much time to raise a hundred thousand dollars as it does to raise 1 to 5 million dollars.
Paul:The difference is what stage you're at.
Paul:A small check or a large check, it takes about the same amount of time.
Paul:That's something to be aware of.
Paul:If you're chasing lots of small checks, if that's all you can get, then as Chamath would say, 'take the fucking money'.
Paul:You take what you can get, right?
Paul:If the alternative to a bad investor is no investor, maybe you'll take the bad investor, and perhaps you can hedge your risk to some extent.
Paul:Versus no investor, things don't move forward.
Paul:There are probably cases where no investor is better than a really terrible investor who you might be stuck with for years.
Paul:I've heard all sorts of horror stories.
Paul:We've been lucky in that we've also been good at, I think filtering on the way in, and at the same time, we've had luck too.
Paul:The next thing I have in the list here is, do they behave like a professional?
Paul:Now, the word professional often gets thrown around by early stage founders when shouting at each other.
Paul:I know this from early in my career when I wasn't very professional.
Paul:So let's start with my definition of what a professional is.
Paul:A professional is someone who does their job well, even when they're not having their best day, even when they'd rather be doing something else.
Paul:To demonstrate, if your surgeon is having a bad day, you're going to want to hope she's a true professional.
Paul:The same goes with your investors.
Paul:You should ask, are they professionals?
Paul:The question about whether or not someone's professional probably gets thrown at founders more than investors, but I think it, it goes in both directions.
Paul:From both sides of the table, how have you seen that applied to investors?
Paul:What do you think?
Jason:Being less experienced than the lot of you, what defines that?
Jason:How do you look at a potential investor and be able to judge?
Jason:If they are extremely professional, you're going to pick that up, but somewhere closer to the early stage investors you're probably going to meet, or in general, if they're not giving off that professional vibe, how do you judge what is professional in a potential investor?
Nalin:I look at professional as a noun and professional as an adjective.
Nalin:If I look at it as a noun, I'd be very literal and say, hey, it's somebody who does this for a living.
Nalin:In other words, that's how they pay their rent, that's how they pay their gas bill, and their kids' schools.
Nalin:That's a professional investor.
Nalin:I think what Paul's getting at more is somebody who's not so much a noun professional, but an adjective, behaves professionally.
Nalin:Assuming we're talking about the adjective that somebody who behaves professionally, then I think the two greatest things they can bring is some objectivity and structure to the investing process.
Paul:Perhaps I can pick up from there.
Paul:Some of the signals you can look for something as simple as do they keep their promises?
Paul:And small promises count.
Paul:Do they get back to you in a certain amount of time?
Paul:Are they on time to the meeting?
Paul:Do they reschedule last minute?
Paul:Do they show you a degree of respect that they would show to someone who's investing in their fund?
Paul:VCs typically have investors too!
Paul:These are called LPs or limited partners.
Paul:The LPs, they just front up the money.
Paul:Actually, VCs have to maintain good relations.
Paul:Often the money they've raised doesn't sit in a bank account.
Paul:They have to do a funding call when they want to invest.
Paul:If they want to put 2, 3, 4, 5 million dollars into something, they call up all of their LPs and say, hey, it's time to send me some of that money that you promised!
Paul:They're gonna treat them as the people with the money, meaning that they'll treat them well.
Paul:Because you tend to treat the people with money well, because you want their money!
Paul:On the other hand, how you really treat people as a professional comes through when you don't have to treat them well.
Paul:I think that can happen with investors, despite the fact that there's so much competition to invest in good companies now, I'm still hearing stories of, at least especially in the early stages, I'm still hearing stories mostly from the US, not so much from Japan.
Paul:I've only really had mostly professional experiences, but stories of being made to wait two or three hours for your meeting with the VC or just being late, taking other calls, cutting the meeting short, just lack of general decorum.
Paul:I think that's a starting point.
Paul:Whether you're in the US or Japan, unless you're desperate of course, and you just need the money, I don't think you have to compromise.
Paul:In the US, there are badly behaved investors from what I hear, but there's a lot of them.
Paul:Perhaps you've gotta dig deeper.
Paul:In Japan, not as many investors, but I think there are a fewer badly behaved ones too.
Paul:I've only had a few experiences where I would say, for example, what I call the long maybe.
Paul:When someone gives you a quick no, you should be thankful for that.
Paul:I always remind myself when someone says, 'look Paul, this is really great, but it's just not what we're looking for'.
Paul:It can hurt.
Paul:It can sting.
Paul:At the same time, I remind myself to say 'thank you' and to be thankful because they're not wasting my time anymore.
Paul:And then To ask them for references to other investors who might be interested in what we have.
Paul:When you're raising money, remember you're a salesperson, and your product is you and your company.
Paul:Co-founders may not appreciate this, they may not like this; but, whoever is the most formidable founder in the eyes of investors, you are the face of the company.
Paul:You're the product.
Paul:You're the contact with the customers, the 'investor customers'.
Nalin:Another thing that you brought up, you brought up funds, right?
Nalin:I'm not sure about other investors, but certainly this is the case for me.
Nalin:While I do direct investments as an angel, I'm also an LP in two funds, and the beauty of being an angel is that I have an opinion and I have a control on what my money does and where it goes.
Nalin:Whereas as an LP in a fund, you have zero control because it's the fund managers who, you know, who make those decisions.
Nalin:So as being an LP in funds, it's boring, simply put, because you have no role to play other than writing the check.
Nalin:That's another reason, as an investor I enjoy being an angel because I can support and have an impact directly on the founders and what they're trying to do.
Jason:Makes sense.
Jason:So thanks guys.
Jason:So that's DWYSYWD, which is 'do what you said you would do'.
Jason:Is that what the investors are doing?
Jason:And maybe take them to dinner or let them take you to dinner and watch how they treat people.
Jason:That's imbalance between the noun investor and the adjective.
Jason:Do they behave professionally?
Jason:Thanks for that.
Paul:Alright, so rolling on.
Paul:You need to ask if they're active money or passive money, meaning that, are they actively involved or passively involved?
Paul:I think Nalin touched on that.
Paul:Smart money or uninformed money, we don't wanna say dumb money.
Paul:If they're uninformed money and they're passive, you're just getting money.
Paul:There's only one thing I ask of investors who are passive, and that's respond quickly when I need your signature.
Paul:That's it.
Paul:And this is the one thing, I'm guessing, that most founders forget.
Paul:Even at the latest stages, you tend to forget because you have someone else chasing all of your investors.
Paul:But of course, if you are the person who brought them on board and your CFO is like, hey, why isn't such and such responding?
Paul:You're like, okay, leave it to me.
Paul:I will get the response.
Paul:I can't wait till software like Carta comes to Japan assuming that they have all sorts of shareholder approval and voting mechanisms built in.
Paul:Because DocuSign, although it's pretty good it's not really built for that purpose.
Paul:There's a lot of manual work to get all those signatures.
Paul:And of course, TIJ, 'This Is Japan'.
Paul:There are some investors, institutional, who will only put a wet stamp on a piece of paper.
Paul:In place of, signing something.
Paul:If they're passive, you really want 'em to be quick at responding via email.
Paul:I've got one investor and they are pretty slow.
Paul:They're informed, but they're very passive.
Paul:But you know what?
Paul:Their husband is not, so whenever I don't get a response from that person, I call their husband.
Paul:Another one, the signer is the father, but the investor is the son.
Paul:And yeah, they seem to be pretty good, I think they got better over the years, but that's about it.
Paul:I think one thing you need to remind investors before they sign if they're gonna be passive is just that, look, you're now a member of our crew, you're on our journey.
Paul:And what we'll need from you from time to time is a signature.
Paul:There are a surprising number of things under Japanese corporate law that requires the signature of every shareholder.
Paul:Oh my God, whoever thought that we needed everyone, and I don't mean a super majority, everyone has to agree to so many things.
Paul:I don't know how things get done, but maybe that's just, we've been unlucky.
Ilya:When you put them in a syndicate, how does that work?
Ilya:If you have a bunch of angels, you wanna group lots of them?
Paul:I have a lot of angels who aren't in the syndicate.
Paul:You can't put all your angels in there because one of the downsides of a syndicate is you don't have a voice.
Paul:You may have lesser information rights, and you may care about that if you if you make a lot of investments.
Paul:On the other hand, if you're putting a bet on a once in a 10 year winner, then you may not care what happens, as long as when it wins, someone calls you and tells you, hey, this is how you turn your stock in the syndicate into real money!
Paul:A syndicate is just one way it gets done, and this is the way we did it.
Paul:We had a minimum $50,000 check size for seed round.
Paul:The syndicate, which was an FFF friends, family, and more friends syndicate.
Paul:Many years later, it still exists, it's a unit trust overseas.
Paul:It holds a small amount of stock and put in a couple hundred thousand dollars all up from about 10 different people.
Paul:Average of about $30,000 per person.
Paul:That made it just easier.
Paul:I think we also put a few people in there who just didn't have the sophistication to sign when we needed them to.
Paul:They were okay with that, so we put them in the syndicate out of convenience.
Paul:I think they'll be happy when we get to IPO.
Paul:Just to help everybody with their uh, trivia, seed round isn't called a series round because you're selling common stock.
Paul:That's the stock that, that everyone gets to begin with.
Paul:If you're selling common stock, it's not a series round.
Paul:A series round is when you create a new series of stock because it has different rights over the common shareholders.
Paul:That's why you can get, shall we say higher evaluations earlier on, because you're giving more downside protection, and you're giving a more upside on the exit to those investors.
Paul:Sometimes when you see a series A company raise $50 million, they're either a huge winner and everyone wants in, or they've given some pretty amazing benefits to the Series A investors and the common shareholders may be quite disadvantaged, even in an upside scenario.
Paul:Next on the list, strategic synergies or possible strategic threats.
Paul:So we're looking at the fundamentals of how do you choose investors.
Paul:Now angels are probably not gonna be a strategic threat, but you do have to consider that some of your investors may also be co-petitors.
Paul:They may compete with you with the information they get.
Paul:Now, you might think that could never happen.
Paul:But big companies like to invest in small companies for optionality.
Paul:Once upon a time, Eric Schmidt, the CEO of Google in the earlier days was also on the board of Apple.
Paul:Now, at some point, he had to step down from the board of Apple because they'd become competitors.
Paul:They were no longer joining forces to kill Microsoft, they were now separating forces to kill each other...
Paul:sorry, 'compete'.
Paul:Strategic synergies, that means can these investors help you find deals?
Paul:Can they help you find customers?
Paul:Will they help you find more investors?
Paul:So you gotta think about that.
Paul:One more consideration in the fundamentals column is do they lead or do they follow.
Paul:Ilya?
Paul:Are you across the lead versus follow conundrum?
Ilya:Can you repeat that?
Ilya:What do you mean with the lead versus follow?
Paul:I call it a conundrum, which is a $2 word for problem or riddle.
Paul:So to raise around you need a leader, right?
Paul:But a lot of the time there's no leader.
Paul:In fact, oftentimes the leader who, the person who puts in the biggest check is the last money in.
Paul:But you need to have enough momentum so that everyone wants to commit.
Paul:With angel investors, yeah, you get a $50,000 check, great, but if you're raising half a million dollars, you're only one 10th of the way there.
Paul:So finding an investor who's willing to lead, and I've had two lead investors who were not actually lead investors, they were followers, but they put in the biggest check, and so they got leader status.
Paul:They also they consummated the round because it made sure that the round closed.
Paul:So in a sense, leading from behind and we're very grateful nonetheless.
Ilya:I see what you mean.
Ilya:You usually why VCs don't want to lead is to avoid due diligence, right?
Ilya:Or are there other reasons?
Paul:That's interesting, right?
Paul:So investors tend to lean on the leader for due diligence, meaning someone else has gone through the data room and looked at everything with a fine tooth comb.
Paul:Actually, every institutional has to look at the data room.
Paul:So everyone's doing due diligence.
Paul:The difference is how detailed do they go?
Paul:Are they doing more than just documentation, due diligence?
Paul:There's a whole lot of scope for bad things to happen.
Paul:In fact, this is an area Moneytree can help with because of course we do bank APIs, so you know, the documentation in the data room is only as reliable as the people who made it.
Paul:Reliable doesn't describe every person on the planet or every founder.
Paul:Are they telling the truth, for example, do they tell the truth about their revenue?
Paul:Have they reported revenue that has been received but not earned, so unrecognizable revenue?
Paul:All sorts of things can happen because people don't understand the difference between accounting rules and just, getting cash in the door.
Paul:Or because they've actually got some kind of mal intent.
Paul:So the leader or the follower, all the institutionals will do due diligence to an extent, . And to be honest, the angel investors at that stage, there's not much to do due diligence on.
Paul:You'll probably give them a pitch deck.
Paul:You might give them some internal information like financial reports, if you have any.
Paul:Nalin, is that typically what you get as an angel investor?
Nalin:I think that's a really good way to encapsulate it.
Nalin:There's how much money can you give us?
Nalin:Initial conversation, but then it's more like, how much value do you bring us?
Nalin:And then the last piece, which is, hey, can you help us raise more money?
Nalin:I think that's a really important one, you alluded to it as well, right?
Nalin:Where as an angel, the fact that you're there as an angel and or an advisor and mentee actually gives credibility to the next round.
Nalin:So whether it's the next person who's gonna lead or follow the fact that, as an angel or an early investor, you can help facilitate that, makes the company raising the money find greater value in you as an investor.
Nalin:That's true even at beyond the Angel stage.
Nalin:Even, in an A round who you have in your A round very much can shape who you get in your B round.
Nalin:And so I see some, smart founders are looking that far ahead.
Nalin:They're actually planning their next round, even before they've closed the current one.
Nalin:Paul, did I answer your question?
Paul:You did actually.
Paul:I have another follow up question, have most of the rounds that you've participated in or been invited to participate in, have they been a buyer's or seller's market?
Paul:Meaning that, has there been a lot of competition for investors to get in or have these more been situations where the company needs whatever money they can get, and so they're chasing the investors?
Nalin:Really it depends on the stage.
Nalin:Usually for the very early stage ones, sometimes they're even pretty clueless, right?
Nalin:We don't know how much we need to raise.
Nalin:We don't know who we're gonna raise it from.
Nalin:We have a business plan, but we don't even know how good it is.
Nalin:When it's somebody like that, really they're not gonna get institutional or even too many seasoned investors backing them up.
Nalin:That's where I have to be very careful too because, you know, you come across so many passionate founders, but sometimes you just, they need to think this through a lot more carefully before they should be raising money.
Nalin:I'm sorry I'm giving you a long answer to the question, but I think it's useful for everybody to hear.
Nalin:I find myself very often in situations where I tell the founder, it's just too early.
Nalin:You've gotta go ideate this more with your co-founders or look for a few people to test this idea with before you go raise money.
Nalin:And that's also where I came up with this concept of a minimal fundable product.
Nalin:Sometimes that's gonna be software, sometimes it's gonna be something even more sketchy, you know, and directly To.
Nalin:Answer your question, do I find more buyers or sellers?
Nalin:I'd say I find generally I find more sellers than buyers.
Paul:Got it.
Paul:I guess that's probably par for the course outside of the United States.
Paul:I get the impression, for interesting companies, there are always more buyers than sellers because that's a very subjective statement.
Paul:What's an interesting company?
Paul:Our goal is to be considered an interesting company.
Paul:You can't rest on your laurels because you may go from interesting to not interesting very quickly.
Paul:Just ask every Hollywood actress who turned 40, it's a scathing and unfair system there, and startups can be no less scathing and unkind.
Paul:I think one of the things that has been changing in the startup world I've seen over the last 10 years is, the wide-eyed dreamers who never worked in a really huge company for very long, like myself...
Paul:I wouldn't say we're getting replaced...
Paul:there are far higher numbers of ex-Google, ex-Amazon, ex-Big Company, good pedigree, good schools who are also joining us.
Paul:It's not such a bad thing, it's a pretty good thing.
Paul:Meaning that to some extent there's a professionalization of the startup founder, in that once upon a time it was okay to be a college dropout, and in fact, there are many VCs in the US who encourage that.
Paul:But you better have dropped out of a really good school, be an American Ivy League dropout, no less!
Paul:So we've gone through all the fundamentals.
Paul:I'll just read them out so everyone's got a bit of an overview.
Paul:So do they have money?
Paul:Do they have genuine interest in your business?
Paul:Genuinely, might they invest in your business?
Paul:Do they behave like a professional?
Paul:They don't have to be a professional investor as Nalin was talking about, but they need to behave like one.
Paul:Are they respectful of the founders, supportive of founders, active or passive, smart or uninformed, strategic synergy or strategic threat, a leader or follower?
Jason:How do you balance, evaluate, between the value and the money?
Jason:And if they don't provide value, should you take the option of the money or if they if they're providing the value how much does that add to the money?
Ilya:If you need the money and you have employees, and you have the clients then you have a responsibility towards those.
Ilya:Take the money.
Ilya:But if you can afford to wait if you can afford to be picky, to look for that strategic investor, then by any means choose a strategic investor, right?
Jason:Those two, two things are a scale, right?
Jason:How much value can they add and how much money can they add?
Jason:And how do you balance it when it's not just binary, they have the money and they have the value?
Ilya:If you have enough experience to get that value yourself, then it's money you need, and then you hire with that money, and then you build the product with that money.
Jason:Fair enough.
Ilya:It's great to have a strategic investor that can add value, as long as they don't detract value.
Ilya:But even that case, you don't have to fall for the tricks.
Ilya:You don't necessarily need to continue and give too much attention to that particular investor.
Ilya:Obviously it's their money.
Ilya:So you have a responsibility to work to answering, but you also have the responsibility toward other investors, and again, towards your employees and partners.
Jason:Makes sense.
Jason:Nalin thoughts on balancing value and money?
Nalin:Yeah.
Nalin:Thank you.
Nalin:I do tend to agree with Ilya a lot here.
Nalin:We may not always have times like where money seems to be relatively speaking, easy to get.
Nalin:Like Paul said, even more so in the US.
Nalin:So I do tend to say when you bring somebody in as an investor, especially early stage, you need to look at him or her as not so much money, but how they can help you.
Nalin:Whether it's on the ideation, or even possibly, and I mentioned this earlier, how do they help you land larger checks further down the road?
Nalin:I think this is a very big piece of the value of early stage investors.
Nalin:What credibility do they bring, or how could they help you land a larger check?
Nalin:The other thing I think we're overlooking, so I'm gonna throw it out here, is, we're talking about what the investor can do for us, but what are we doing for the investor?
Nalin:What does he or she want from us?
Nalin:Is it just a return on their investment?
Nalin:If we talk about the friends, family and the fools, I don't think that's what they're looking for.
Nalin:They're looking, they genuinely wanna see Paul succeed.
Nalin:They genuinely wanna see Paul's 9 years of hard effort result in something that is not just financially rewarding, but something that is emotionally satisfying.
Nalin:It depends on who you're looking, at what stage and who you're looking at.
Nalin:But I think we shouldn't forget that the investor is looking for something very often beyond just the return for their money.
Nalin:I think this conversation becomes that much more valuable and meaningful when we take that into consideration as well.
Paul:Thanks Nalin, and thanks Ilya.
Paul:Let's think about this in terms of angels and then institutionals.
Paul:For institutionals, you've got return on investment investors.
Paul:So their profit is the core motive.
Paul:Then you've got the strategic corporate venture capital funds whose motive is to benefit the company they're a part of.
Paul:You know at Moneytree, we have quite a few CVCs corporate venture capital funds on our cap table.
Paul:For each one there's a different, there's a different backstory.
Paul:Some of them are similar, but no two are exactly alike.
Paul:They're like snowflakes.
Paul:I really mean that, because each organization is very different despite the fact, for example, we have three mega banks as investors and each one is quite different.
Paul:You might not think that except for the logos, but once you get to know the way that the different organizations manifest themselves as a force in the world, you can see that they have very different characters, and very different ideas in mind.
Paul:But they do tend to run in parallel to each other.
Paul:Am I correct in saying you want to know if you give some of the stock over because someone has skills and contacts and can add value, versus how much you should require be paid by cash?
Paul:Is that the nature of the question?
Jason:Yes, correct.
Paul:I think you've gotta really know what you're not good at as a founder.
Paul:If you can tell what's missing, and what's insufficient.
Paul:So let's say in the early stages, then you know what you'll value out of other people who might be able to help you.
Paul:So if you don't know any VCs, if you don't know how to raise money, then an advisor who can help you with that is extremely valuable.
Paul:If you're, like, we were at Moneytree trying to break into finance.
Paul:But didn't know anyone in finance, and someone who is from the finance world is extremely valuable.
Paul:And it really depends also, like Nalin said, on what their motivation is.
Paul:So we have some advisory board members from the early days who never got any stock from us except the stock that they bought.
Paul:They didn't really need to make money, but they liked helping because they wanted to see us make a change in the market.
Paul:They'd worked in the Japanese financial sector for a long time.
Paul:They wanted to make changes for the better, for the benefit of.
Paul:It's a customer.
Paul:And they said to us, this person said to us, I tried to do this over decades and I didn't make as much progress as I would've liked.
Paul:I hope that you could make more.
Paul:That was the nature of their desire to help us.
Paul:Figure out their motivations.
Paul:Figure out what you need and value the things that you haven't got.
Paul:The things you've got, you don't need more of it.
Paul:On the other hand, if you are getting high on your own supply, and you believe all your own marketing, and you can't see where you're falling short, you're not gonna be very successful either.
Paul:You might be if you're very lucky, but you're probably less likely to be successful if you're not good at looking at yourself and your company in the mirror and knowing what's missing.
Paul:So figure out what you haven't got.
Jason:Figure out what you haven't got.
Jason:Brilliant!
Paul:Looks like Luke's come up onto the stage.
Luke:Yeah, really great topic.
Luke:When doing the due diligence on on the investor, whether that be the um, VC or CVC, um, or even in the earlier stages with an angel investor, how important do you think it is that they have a portfolio, or they've invested in other successful companies.
Luke:There's winning records, or they're surrounded by other sort of successful leaders?
Paul:Ah, That's a good question, my 2 cents on this, my 2 yen, is in the early stages it's important.
Paul:In the early stage, if you've got an investor of note coming in, say at Seed Round or Series A, and it used to be unheard of for VCs to invest in seed in Japan.
Paul:We had a Digital Garage invest in our seed.
Paul:So at the time people were like, ' what are you guys doing?
Paul:My God!' We're like, oh, we have no idea what we're doing, actually.
Paul:We're just making a great product!
Paul:That's all we, that's all we knew how to do at the time.
Paul:But that, that signals.
Paul:Social signaling is really important and it signals to everyone this is an interesting, maybe.
Paul:In the later stages, we were lucky enough to have some really great investors all along the way.
nd the way I describe this is:you know, our third choice said no, our second choice said no, not to mention the sixth, fifth, and fourth choices all said no.
nd the way I describe this is:But our first choices kept saying yes!
nd the way I describe this is:You know, Imagine striking out with the second, third, fourth, fifth person, of whatever gender you prefer.
nd the way I describe this is:But the one that you find most attractive actually likes you back.
nd the way I describe this is:That's the bizarre but lucky situation we've found ourselves in at Moneytree, and I'm truly grateful for that.
nd the way I describe this is:Those great investors signal that we're an interesting company, and of course, we had to earn that to some extent.
nd the way I describe this is:Skill and luck is, is involved in all great accomplishments.
nd the way I describe this is:Having good investors, ones that are recognizable to foreign institutional investors is really big for IPO in Japan.
nd the way I describe this is:The majority of public market investors in Japan are foreign institutional investors.
nd the way I describe this is:That's right, the majority of shares traded on the Tokyo Stock Exchange are being traded by foreign companies investing in Japan.
nd the way I describe this is:Japan is seen as a foreign direct investment destination.
nd the way I describe this is:Of course that money can leave very quickly because these are public markets, it could be gone overnight, if there's a buyer.
nd the way I describe this is:Having those important social signals is really valuable.
nd the way I describe this is:So if first money into the round is my mum, no one's gonna care.
nd the way I describe this is:Thanks mum!
nd the way I describe this is:But if first money into the round is Fidelity, everyone else is gonna go, 'what did I miss?' Does that answer the question?
Luke:It does, it, it really, it does.
Luke:I've been in the situation where just at the seed stage, you've got some interest from some investors.
Luke:You're concerned about their values and trying to find these things out doing my own due diligence process and sometimes to try and find out where they've invested can be a little bit tricky.
Luke:I like your take.
Luke:on what you've said there and, thank you.
Jason:Hosein, good to see you again, my friend.
Jason:Please share your comments or if you have any questions.
Hosein:Thank you very much.
Hosein:Thanks for bringing me up on stage, uh, I really, really appreciate all the effort here.
Hosein:Do you recommend any kind of like checklist before approaching an investor?
Hosein:Like, I got my team uh, in order, I got the pitch, I have a demo POC, my marketing and financials are like this or that.
Hosein:What else do you recommend to make sure before approaching an investor uh, here in Japan?
Paul:You wanted a checklist, is that right?
Hosein:What to make sure before approaching an investor.
Paul:If all goes well five years from now, you will have done this so often, you won't need the checklist anymore.
Paul:Let me give you uh, the minimum list of the things you need.
Paul:So you've got your pitch deck.
Paul:Hopefully you've got a 3 year forecast at least.
Paul:Some investors, even at the earliest stages, this was so ridiculous, but, they wanted a 5 year forecast.
Paul:Now I can understand a five year forecast.
Paul:It's still a bit ridiculous, but not too ridiculous.
Paul:But, they might want a multiple year forecast.
Paul:So that's an Excel spreadsheet.
Paul:You don't take that into the first pitch, but have it ready because your pitch should also tell them something about how much money you're gonna make.
Paul:It's a business, right?
Paul:And please don't do what we did in the early days, which is just making something really cool, with the hope someone will find it interesting enough to give us a lot of money, and then we'll figure out the rest.
Paul:I really don't recommend that it's the source of a lot of pain.
Paul:You got your pitch deck, you've got the model, and then you've got some things.
Paul:You don't have to include the model, right?
Paul:But you want to have some information about it in the pitch deck enough for that first meeting.
Paul:And there's this concept of progressive disclosure or gradual disclosure, where you know it's like a strip tease.
Paul:I'm sorry, I've never done a strip tease, but you, if you take it all off at once, it's not that.
Paul:In some cases, if you take it all off off at all, it's not that exciting.
Paul:But the idea is that you gradually reveal the next interesting thing and ooh, this is fantastic.
Paul:And you build up their excitement over time.
Paul:If you get them too excited all at once, that's not gonna end well.
Paul:So you want to build up their buying temperature gradually.
Paul:so You want to be able to, I think, not just think of one meeting, but think of what would the first meeting look like?
Paul:What could you fit into 30 minutes of presenting and 30 minutes of discussion.
Paul:That's the ideal.
Paul:I fail at that so frequently.
Paul:It's so embarrassing.
Paul:But it took a long time for me to compress my equity story, my startup story and vision into 30 minutes because it was complicated.
Paul:So there's also that, there's a lot of exceptions to the rules, but try and have 30 minutes of presentation, 30 minutes of discussion, and then think about what you'd like to do next with that investor.
Paul:Would they like to meet some of your co-founders?
Paul:Would they like to have a deeper dive on the technology?
Paul:Would they like to just go away and think of some questions and then come back and you can talk again and just go deeper, in an informal way.
Paul:So think about that, what that second meeting might look like.
Paul:Then if you have a third meeting, now you're probably going through a model and really going to the brass tacks of it.
Paul:By that stage, you'll want to have qualified them as well.
Paul:Because remember this is about how we choose them.
Ilya:Before passing to the next question, I just wanted a short remark about the five year financials forecasting.
Ilya:I once added to a pitch deck a picture with a bunch of hockey sticks, and the investor didn't like that!
Ilya:For for me it was just to show, you, you expect some magic story that I can put in a spreadsheet, but maybe it's better if I have some sense of humor, but that investor didn't like it, so we removed that from the pitch deck.
Paul:So there you go Hosein.
Paul:No pictures of hockey sticks.
Paul:You've gotta read the room!
Jason:Speaking of that, let's move on.
Jason:Hosein thank you.
Jason:Darrell, welcome.
Darrell:Good evening.
Darrell:Thanks.
Darrell:Yeah, looking forward to lunch tomorrow.
Darrell:First, I guess I have to say sorry to Paul because I'm breaking Paul's first rule of the room, I don't have my profile completed!
Darrell:Sorry about that Paul.
Paul:We're about to kick you out of the room.
Paul:We found you on LinkedIn.
Paul:It's okay.
Darrell:I guess I'd have to say that maybe that profile tells it all because that's about my experience in this startup community.
Darrell:Actually quite an imposter in here.
Darrell:I'm not a founder.
Darrell:I haven't founded a startup.
Darrell:I haven't actually worked with a startup, really.
Darrell:I've just been a wannabe.
Darrell:My career has been in enterprise business for 25 years.
Darrell:And I have just recently left and been doing something different now.
Darrell:I've started working with Sushant who was just in the room.
Darrell:He's starting up an IoT related startup, and I'm helping him out.
Darrell:One specific question to ask is one, if, you know you've got you've got a few options of investors that look like they're interested in investing, you're going to put together the total round with two or more in investors.
Darrell:It's looking very likely or obvious to me that you need to consider how the investors you choose or choose to go with, what's the chemistry of them working together.
Darrell:How, how do they fit together and how do you consider, and how do you evaluate that or try to see that upfront?
Jason:Before you jump on that, let me summarize.
Jason:The first one was, when you have more than one investor, should you be thinking about how they will work together?
Jason:I, I guess they're gonna both be proactive investors that add more than just money.
Jason:And the second is some good or bad examples and lessons learned from those.
Ilya:Maybe I'll take one, one part of the first one, and I just added as a question to Nalin and Paul.
Ilya:So I have experience, for instance, with a couple investors that don't really like working with each other, but both are required to to, fill the round.
Ilya:How do you go about that?
Ilya:How do you make sure that those two have a good relationship or do you care about that?
Ilya:Or do you actually ignore or turn down one?
Paul:I've got some experience there.
Paul:I've had team members not get along with investors or investors maybe have some differences with the management team.
Paul:Mostly in the early days when we were still getting our shit together, as they say.
Paul:What was important was having different people on the team who could communicate with that person or those people so that we were able to find some common ground.
Paul:Unless you're a solo founder, or there's only one person in your company or in your management team, there should be another investor, maybe an angel or a chairman, maybe one of your co-founders, who might just be on the same wavelength more than you are, or if it's your CFO, or someone else who doesn't get along with that person, hopefully you've got someone that can carry the relationship on behalf of the company with the investor.
Paul:If you haven't got that, that's challenging.
Paul:Darrell, to go back to your question, it occurred to me that you've got 30 years of experience, so you know how to assess people.
Paul:When it comes to investors, it's not that different, right?
Paul:What might be different is, do you put up with an asshole who potentially gives you more money, or someone that you really don't think you can get along with, but they're gonna give you a lot of cash.
Paul:That really comes down to a, the trade off analysis.
Paul:If someone's gonna give you a few million dollars, but they're, a royal pain in the ass, are you willing to manage that relationship potentially for 5 to 10 years?
Paul:Now the good news is people change jobs, the bad news is in Japan, when it comes to changing jobs, some VCs stay in the role for a very long time.
Paul:If you don't get along with that person, it could be challenging, but hopefully you all grow as the company does better, and if the company's doing well, that investor may become a lot easier to handle as well.
Paul:And also they might get busy with other companies they've invested in that need that person's time and therefore they don't focus on you quite as much, and, you get off scott free!
Jason:I reckon we come back to Darrell's second point, some examples of choices made of investors that are good examples of a good evaluation and choice, and good examples of bad choices, and the lessons learned from both.
Jason:Let's go to Sam and then come back to that as the final question.
Sam:Cheers, Jason.
Sam:Thanks for pulling me up here.
Sam:Great room.
Sam:Fascinating as always.
Sam:I'm just gonna drop a quick question.
Sam:I think that there's there's a lot of evaluation criteria that are obviously situational and you just have to decide based on what your strategic priorities are and, do your own kind of analysis.
Sam:I was just wondering if you could share any like definite red flags or like things that are like a hard pass for you or like reasons that you have passed on funding previously things that sort of non-negotiable factors that you should be evaluating against.
Paul:That's an interesting one.
Nalin:Yeah, I've got one too, Paul, but you go first.
Paul:Mine's less funding more M&A, which is going way, way back in time for me.
Paul:Why don't you go ahead.
Nalin:Yeah.
Nalin:Mine is board seats because, around your a round the guy who leads is gonna come in and say, Hey, I want a board seat, and you've gotta think really carefully, whether you know which at what stage you want to give that away, and what value you want from a board member, and what is that worth in terms of the investment value.
Nalin:I think that's one that, you really, you have to think carefully.
Paul:That's a good point.
Paul:Definitely board seats is one.
Paul:You want to give board appointment rights cautiously.
Paul:Although it's interesting, in Japan not everyone who has a board appointment wants to take it up.
Paul:It's more of a more of a safety mechanism, if you start effing up, they're gonna take it up so they can, not make your life hell, but get you under control.
Paul:I've got two examples.
Paul:So one, one was just was bird in the hand thinking.
Paul:When we were selling our first company, my first company, CV Mail I think it was a newspaper group.
Paul:I probably still can't talk, say who they are.
Paul:I don't remember what the NDA was.
Paul:It's probably lapsed by now.
Paul:In the end we sold to Thompson, but one price was much higher, but one price was actually just a number, and the other one was based on a multiple of the next year's revenue or the next two year's revenue.
Paul:So my co-founders who are actually running the business at that stage, we all talked about it and we took the bird in the hand.
Paul:So that was a little bit different.
Paul:In terms of, I guess a hard pass, we were talking about a particular investor who had shown some interest over the years, but we were always too early.
Paul:It seemed like finally this investor might think we're not too early.
Paul:Another investor, an existing one, introduced me to one of this other investor 's investees.
Paul:Does that make sense?
Paul:Another company that the prospective investor had invested, in where the investor had tried to kick out the CEO...
Paul:so that was a hard pass after I spoke to that gentleman and heard the story.
Paul:Some, some of these kind of board shenanigans or gangster moves happen in Japan as well, and not always because, the founder is a miscreant or is deserving of it.
Paul:Sometimes you can have a badly behaved or overly aggressive investor throwing their weight around.
Paul:And look as a CEO, you'd like to think that, you're gonna, you'd replace yourself in a heartbeat if there was a better person to do the job.
Paul:But it's a very narrow job description to be the visionary CEO of the company that you thought of.
Paul:Unless you're messing up hard, then you're probably still the best person to get you through it.
Paul:You'd like to think that the other investors would think the same way until, I guess the writing is on the wall.
Jason:Taking Darrell's second question, could you provide me with an example of a successful decision, evaluation, and then that company or individual invested, or some bad examples?
Paul:A good example of taking investment is where you didn't have to shut down the company.
Paul:That was a good example.
Paul:I've done that at least once, where we got investment just in the nick of time.
Paul:I've never been in the position, Darrell, where, I've had so many offers for investment I had to beat them off with a stick.
Paul:Not at all like my dating life.
Paul:Just kidding.
Paul:My dating life was similar!
Paul:My first choice said 'yes'.
Paul:I've never really had a choice, I've always, as I said, gone after the best we could get, and it turned out that in most, almost every case, we got the one we wanted to get.
Paul:Almost none of the others said yes, except ones who made it into the round.
Paul:I've never been in a position where I've said, ' no', to fund A for 10 million dollars, and 'yes' to fund B.
Paul:It's been, 'thank God we got the money', from this company, and then a few other people joined in, and then we're done!
Paul:That's how, it's always closed for me.
Ilya:I did make a mistake um, around this question in the past.
Ilya:There was an investor that wanted to put in around 800K.
Ilya:That was most of the debt capital round we were looking at.
Ilya:And that capital at this pre-seed level, that was pretty big for that round.
Ilya:Stupidly I, I, I was thinking adding more investors with strategic value and um, I parked the guy for a week and then he decided he wasn't interested any more.
Ilya:Maybe for the best, such a volatile decision.
Ilya:But yeah, so if you get the offer take the money.
Ilya:Right now I'm may be making a similar kind of mistake, but so I'm in a situation where we don't need exactly the money right now because we first need to build the MVP and have a better valuation.
Ilya:So we parked around a million from investors.
Ilya:They just wanted to come in, so towards April I'll update you on this if this is a stupid decision.
Ilya:But it's again, due mainly to the current liquidity situation in the VC and a specific sector where I'm building.
Nalin:Just hearing Ilya talk, I was like, so why don't you turn this into a convertible note.
Ilya:That's uh, that's what we are thinking to do, to make a convertible out of it.
Ilya:But still with convertible you need a cap.
Ilya:And the problem here given that we're here, the problem that I'm seeing at this stage, a cap can be probably maximum 10 million, but with the team that we have and the potential product, the valuation can be much higher at the seed stage.
Ilya:We think so, but maybe we are just delusional.
Ilya:So there is this problem even with a convertible note.
Nalin:Being delusional is part of the game Ilya.
Paul:It's a fine line between being a visionary genius and a visionary idiot.
Paul:Sorry!
Paul:If you have enough luck, then you end up being the genius, and if you don't have quite enough luck, you get called an idiot.
Paul:You can be called both at the same time, but hopefully it coalesces around one or the other.
Jason:Okay.
Jason:We're bit over, but who wants to summarize?
Nalin:I think Ilya and Paul said it very well, the only thing I wanna remind everybody is, to keep in mind what we might do for the investor or what they want from us above and beyond a return on their money.
Nalin:Because that often will help us guide our thought process on whether they're a good investor for us.
Shiba Inu:That's it for today.
Shiba Inu:Thanks for listening to Founded In Japan.
Shiba Inu:This episode was recorded live on Clubhouse on November 15, 2021.
Shiba Inu:Founded In Japan is part of the Business In Japan Clubhouse and Linked In group.
Shiba Inu:Follow us on Clubhouse or Linked In to join our live audio events, or subscribe to us on Apple Podcasts or Spotify.
