5 Qualities SEA VCs look for in a start-up

published 15 September 2016

Start-up and venture capitalist, asking for money and dispensing it, Nikhil Kapur has worked on both sides of the street. In his younger days in India, he established a start-up that served as a marketplace for musicians and those who needed their services. Then he moved to Singapore to get his MBA and became a VC.
An investment manager for Gree Ventures, a VC firm that has invested roughly $120 million in 22 businesses in Japan, two in the Philippines, three in Singapore and five in India, Kapur knows the drill well. Very well.
Over the last six months, Kapur has looked at 1,080 start-ups. At a recent lunch in Manila, he talked to Inc. Southeast Asia about the factors his team considers when deciding on an investment:

1. A potentially big, but realistic, market

Kapur says that a start-up has to have a potentially huge market that it can realistically capture. The business must know: What problem is it solving and how much does that solution cost? Are people taking notice of its product? Are they reading its blog?
“What percentage of this market can you corner?” is a primary question. Then again, Kapur is also wary of answers that are too good to be true like “the global marketplace.” Aim high, but do not misrepresent yourself.

2. A winning team

“It’s really a qualitative thing. There has to be some chemistry between us and the team,” says Kapur. “We gauge it on the first meeting.”
Without the right people to set the plan in motion, the great market potential and the best business models will all go to waste. Entrepreneurs have to make sure that the people in their team is the best possible group they can have.
Kapur says they tend to invest in the businesses of acquaintances whose competence and work ethic they are familiar with. As for friends, Kapur says, “We generally stay away from them, even though we help them find the right people.”

3. A clearly defined business model

At the heart of the start-up is the plan on how to generate revenue. “Do the entrepreneurs have a clear idea of how they are going to make money?” he asks.
According to Kapur, they go by “unit-economics” -- how much money a start-up has to spend in order to acquire customers. After all, this is the ultimate goal of any business: Attract customers first and then figure out how to make money.

4. A workable equity structure

Venture capitalists earn a seat on the board of the start-ups they invest in. As such, they have a direct say in how the business is run. Investors have to look into whether they are the only ones with a stake in the company, or if there are many others with similar exposure.

5. Potential for a good exit

“There are only two ways for VCs to exit: through mergers and acquisitions (M&A) or an initial public offering (IPO),” according to Kapur. In all other cases, the start-up just fails.
As an investment manager, Kapur says he adopts a hands-on approach with their investments. After funding them to a certain stage, they also provide consulting services on how the business is run and then put the company in touch with potential investors at a latter stage as well as those who are looking for companies to acquire.
Kapur’s advice to entrepreneurs, like the younger version of himself: Don’t seek out investors too early in the game. “Ask yourself this question: Do I really need external funds at this point?” Doing so prematurely will only dilute your business. “Just take whatever you actually need for the next 12-18 months, nothing more.”