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How does KK Fund evaluate an early stage startup to invest in?

Bookyung Kim, Investment Director at KK Fund

It’s a fairly well known fact that the management team is the most important factor for any startup. If team members are good and cooperative, they can take their business to the next level. If the group is bad and its members don’t trust each other, it’s a perfect recipe for the failure of such an organization.

This is why every VC focuses on the management team.

The Singapore-based KK Foundation is no different. But this VC, which invests in mobile and internet startups at seed stage across Southeast Asia, Hong Kong and Taiwan, also looks at several other factors before pouring money into a business. .

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In a webinar, titled Fundraising fundamentals‘, organized by e27Bookyung Kim, Chief Investment Officer at KK Fund, explains VC firm’s evaluation criteria.

Here are the edited excerpts from the webinar:

When is the right time to raise money from investors?

Founders should raise money when they find market opportunities, understand customers, when they have products that are delivered to the right opportunity and the product is being used at a rapid rate.

You need money when you have something that attracts an investor / investor interest and you can convince the investor that the investor can get attractive returns.

How much should I increase?

Try to dilute only 10-20% maximum per set. That means if you give up too much equity in the first place, you end up getting too little equity on hand.

When you raise money from VC, think first and next. Think forward at least a year and a half for the runway. Because, it takes time to raise funds. It’s better to think ahead so you don’t have to face financial problems in a very short time.

What is my company valuation?

The general approach is the comparison method. So you look at other similar companies that secured funding before you did it and then you compare them. You try to find companies with similar characteristics to your capabilities, and then you can take that as an example.

But that’s not all, always keep in mind that you should find a valuation that will allow you to increase the required amount with an acceptable dilution. That means if you give up too much equity to attract venture capitalists at the moment, it will be a big problem in the future. So always think about how much equity you can and can give to investors.

Now you are ready to raise funds. The next step is to meet a VC in line with the goals of the business. Of course, before you ask the VC for money, you need to understand what they are looking for.

I want to point out here that different VCs follow different approaches and perspectives when evaluating a startup. There is no single answer to how VCs value a startup for investment.

From KK Fund’s perspective, we look for many of the key things while evaluating a startup at an early stage – team, market size, business model, traction, and competitive landscape.

Here, I will explain the most important factors.

1) Groups

The management team is the most important factor. This is because we cannot change the management team once we invest in the business.

It is possible to change leadership in the private equity sector, but not in the early stages of startup. The management team is the team that really lives in our vision. If they don’t do well, what we can do is get on with them. Of course, we’ll try to help them as much as possible, but I’m just talking about the worst case scenario.

The second reason is that for an early stage startup, the management team is really all the company has. They don’t have too much to think about; they don’t have a solid product or service. They don’t have a sales track record or meaningful data so we can forecast the future.

Therefore, the team is the most important asset and determinant of a company’s future.

2) Target market

The target market is also very important. It’s more important than a company’s business model because if the business model doesn’t work, we can research it together and change it. However, changing the target market is very difficult.

Let’s say I have set up a company in Korea but it doesn’t work out. Then I think I can work to launch it in Thailand. However, I don’t know anyone there, so it won’t work.

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Equally important is the size of the market. If the target market size is too small, there is nothing you can do.

3) Chance to exit

Another important factor is exit good time. This is important because you do not know what will happen in the future. But from an investor perspective, they need to make a decision.

For example, you come to me and then you explain your idea to me. And then I have to hand it over to my boss / investment committee.

To convince them, I need to show them that these are possible exit opportunities and that we can make a lot of return on this investment. So it’s always good to have some degree of exit chance, some plan or forecast.

4) Business model

Terms business modelIf the management team and the VC are good, then it’s not that big of a problem and it can be fixed.

5) Traction

The last thing is traction. I don’t really care about traction. Of course, if it was a Series A deal, I’d probably be looking for more of the traction record. However, we still focus on the growth trend rather than their current revenue.

So normally, we don’t really care how much they’re making at the moment. We don’t ask questions like ‘why is your ARR / MRR lower than US $ 200,000’. Of course, a high MRR is a good thing to have but we don’t expect early stage startups to have a certain revenue figure.

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Rather, what we focus more on is the company’s growth potential and trends. If the sales are low but if they can show me it’s growing like 4x, 5x or 10x, then I would say, ‘oh, this company has potential and maybe I can join them’ .

Again, in terms of sales, we are also not interested in the performance forecast. How can someone predict the future performance of a young startup? In particular, how can you, as a VC, trust the numbers prepared by a startup just to make some money from them. Even corporations can’t predict their future performance, so it doesn’t really matter.

According to my mentor, who has more than 10 years of experience in the business, he has never seen a start-up reach their appeal. So you don’t have to dedicate an entire slide / two to show all these little numbers and make a three-year or five-year prediction. It doesn’t work much when I rate a startup.

But if you still want to include the forecast performance, I think one year is enough. So in terms of revenue recognition, if you do well in the future and get the highest sales, great. But how can you be so confident that you can achieve these numbers?

The most important thing is cost prediction, because unlike revenue, you can always control costs. When I look at a startup, I look at the cost plan in detail to understand the rationality and skills of the management team / founders.

For example, when you look at cost forecasting, I might ask “why the cost of hiring is so high”, “how many people are you hiring”, “what salary are you thinking of” and “What is everyone’s level”. you are recruiting ‘etc

Through these, we can feel the skills of the management team and founders. So I suggest that you focus on areas in which you have control and show your managerial abilities.

Again, this shows that the management team is very important. When you look at the reasons why startups fail, you can see it’s the management team. If your team is bad, it will most likely endanger your company and business.

So my suggestion is, try to form a great management team. When you meet an investor, try to convince him that you have a great teamwork.

Photo credit: KK Fund

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