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VENTURE capitalists (VC) play an important role in the funding ecosystem for startups but they are often viewed with trepidation as their investments are usually made in exchange for a sizeable share of the company.
But seasoned entrepreneurs say startups shouldn’t be afraid to give up a stake in their companies if the VCs are able to add value to the business.
“Whether it’s 30% or 40% is irrelevant. What’s important is that it helps you build your business.
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“And you must make sure the VCs get a return on their investment. An investment is an investment. It’s not a donation. An investor has to make his money back,” says Ganesh Kumar Bangah, executive chairman of venture builder Commerce DotAsia Venture Sdn Bhd.
Ganesh is the co-founder of online payment company MOL Group Inc, which was previously a listed entity on the Nasdaq. He was also responsible for the acquisition of US-based social networking platform Friendster by MOL in 2009.
Trade off: It is alright to give up a stake if it helps you build your business, says Ganesh.
He was speaking in a panel session titled “Startup war stories” at the recently concluded WIEF Idealab 2017. The panel also included CXS chief executive officer Jan Lambrechts.
Ganesh notes that he had given up 60% stake in his first venture for RM2mil in funding from Berjaya Group’s Tan Sri Vincent Tan.
Lambrechts agrees. “You shouldn’t be scared to give away any part of it.”
However, Lambrechts points out that it also depends on the timing of the funding.
“We (CXS) have been able to say no to VC funding so far because we have quite a good team.
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“But for my first venture, I gave away 40%. Why did I do that? Because that VC was the founder of the very first Internet service provider in Europe. We call him the Bill Gates of Belgium. So I saw the value for them to take control, to guide me and to go the long distance. If it’s just about the money, it’s not going to work.
“So you need to ask yourself, what’s your position on this project, do you need a lot of capital, can you wait first and make a better case for investors later, or do you already have your first customer. It really depends on where you are,” he says.
Ganesh explains that it is important to have an investor with a vested interest who will be able to guide the entrepreneurs to grow the business. Ideally, the VCs should be led by experienced entrepreneurs.
“A VC is somebody who takes other people’s money and invests into other people. So they are VCs that are essentially fund managers but there are exceptions, like Khailee Ng, who is active in this region. And that’s what they do well. They are good at managing risks, they are good at investing and to a certain extent, they are also good at identifying good companies.
“But they can’t really help that much operationally. They can’t tell you how to grow your business. They can tell you what you are doing wrong but they can’t tell you what you are doing right. An entrepreneur-investor can tell you what to do right because they have done it before,” says Ganesh.
However, Ganesh also points out that entrepreneurs do have their own weaknesses.
“Entrepreneurs always think everything is going to be great. There is no entrepreneur who will say, you need to manage that risk. So I think in malaysia, we need to slowly match the entrepreneur-investors with VCs so that the entrepreneurs can tell other entrepreneurs what to do well and the VCs can say you got to take care of that risk,” he adds.
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