How does KK Fund evaluate an early-stage startup for investment?

Bookyung Kim, Investment Associate at KK Fund

It is quite a well-known fact that the management team is the most important factor for any startup. If the team members are good and gel with one another, then they can take their business to great heights. If the team is bad and members don’t trust each other, that is a perfect recipe for the failure of such an organisation.

This is why every VC puts strong emphasis on the management team.

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

Also Read: Genesis Alternative Ventures makes final close of US$80M venture debt fund

In a webinar, titled Fundraising Fundamentals‘, hosted by e27, Bookyung Kim, Investment Associate at KK Fund, spells out the VC firm’s evaluation criteria.

Below are edited excerpts from the webinar:

When is the right time to raise money from investors?

Founders should raise money when they have figured out the market opportunity, understand the customer, when they have the delivered product that matched the opportunity and the product is being adopted at a rapid rates.

You need money when you have something that can attract investors/investor interest and you can convince that the investors can make attractive return.

How much should I raise?

Try to dilute only 10-20 per cent maximum for each round. It means if you give up so much equity from the very beginning, you will end up with too little amount of equity in your hands in the end.

When you raise VC money, think ahead of time. Think about at least one/one-year-and-a-half ahead for the runway. Because, it takes time to raise fund. It is always better to think ahead so you don’t face the financial problem in a very short time.

What is the valuation of my company?

The general approach is the comparable method. So you look at other similar companies that have secured funding before you did and then you compare them. You try to find companies that have a similar traits with your competence, and then you can use it as an example.

But that’s not all, always keep in mind that you should find a valuation that allows you to raise the amount needed with acceptable dilution. What it means is that if you give up too much amounts of equity in order to attract VCs at the moment, it’s gonna be a big problem in the future. So always think about how much equity you can, can give away to investors.

You are now all set to raise fund. The next step is to meet the VC that aligns with the goals of its business. Before asking a VC for the money, of course, you need to understand what they are are looking for.

I would like to point out here that different VCs follow different approach and perspectives when evaluating a startup. There is no a single answer to how VCs evaluate a startup for investment.

From KK Fund’s point of view, we look for many important things while evaluating an early-stage startup — the team, market size, business model, traction, and competitive landscape.

Here, I will explain the most important factors.

1) The team

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 the leadership team in the private equity sector but it is not in an early-stage startup. The management team is the one that actually lives our vision. If they don’t do well, what we can do is to go down with them. Of course, we will try to help them as much as we can, but I’m just talking about the worst case.

The second reason is that for an early-stage startup, the management team is literally all what the company has. They don’t have too much things to ponder over; they don’t have a solid product or service. They don’t have revenue track record or meaningful data so that we can forecast the future.

So team is the most important asset and is the one that decides the future of a company.

2) Target market

Target market is also important. It is more important than the business model of a company because if the business model doesn’t work, we can work on it together and change it. However, changing the target market is hard.

Let’s assume I started a company in Korea but it failed. Then, I think I can work on launching it in Thailand. However, I don’t know anyone there, so it won’t work.

Also Read: Future Flow’s cap table helps founders easily monitor the evolution of their stake, equity dilution

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

3) Exit opportunity

Another important factor is exit opportunity. This is somewhat important because you don’t know what’s going to happen in the future. But from an investor point of view, 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 deliver it to my boss/the investment committee.

To convince them, I need to show them that these are the possible exit opportunities and we can make this much return on this investment. So it it’s always good to have some level of exit opportunity, some plan or forecasting.

4) Business model

In terms of the business model, if the management team and VC are good, then it shouldn’t be a big problem and it can be fixed.

5) Traction

The last thing is traction. I don’t really care about traction. Of course, if it’s a Series A deal, I’ll probably look more for traction record. But still, we are more focused on the growth trend rather than their current revenue.

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

Also Read: Ex-VinaCapital Ventures exec’s US$50M fund Touchstone Partners hits first close

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

Again, speaking of the revenue, we don’t care about the performance forecasting either. How can someone forecast the future performance of a young startup? Especially, how can you, as a VC, trust the numbers prepare by a startup just to get some money out of them. Even conglomerates cannot predict their future performance, so it doesn’t really matter.

According to my mentor who has over 10 years’ experience in this business, he has never seen a startup that got their traction right. So, you don’t have to spend one whole slide/two slides to show all these small numbers and come up with three years or five years of prediction. It doesn’t have much effect when I evaluate a startup.

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

What matters most is the cost prediction, because unlike the revenues, you can always control costs. When I look at a startup, I look at the details of the cost plan to understand how sensible and how skilled the management team/founders are.

For example, when you look at the forecasting cost, I might ask ‘why hiring cost is so high’, ‘how many people are you hiring’, ‘what was the salary range you were thinking about’ and ‘what level of people are you hiring’ etc.

Through these kinds of things, we can sense the skills of the management team and founders. So I suggest you focus on the side that you can control and show your management capabilities.

Again, this shows much important the management team is. When you look at the reasons why startups fail, you may find it is the management team. If your team is bad, it is highly likely to jeopardise the company and your business.

So my suggestion is, try to form a great management team. When you’re meeting an investor, try to appeal him that you have a great team work.

Image Credit: KK Fund

The post How does KK Fund evaluate an early-stage startup for investment? appeared first on e27.

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Bookyung Kim, Investment Associate at KK Fund

It is quite a well-known fact that the management team is the most important factor for any startup. If the team members are good and gel with one another, then they can take their business to great heights. If the team is bad and members don’t trust each other, that is a perfect recipe for the failure of such an organisation.

This is why every VC puts strong emphasis on the management team.

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

Also Read: Genesis Alternative Ventures makes final close of US$80M venture debt fund

In a webinar, titled Fundraising Fundamentals‘, hosted by e27, Bookyung Kim, Investment Associate at KK Fund, spells out the VC firm’s evaluation criteria.

Below are edited excerpts from the webinar:

When is the right time to raise money from investors?

Founders should raise money when they have figured out the market opportunity, understand the customer, when they have the delivered product that matched the opportunity and the product is being adopted at a rapid rates.

You need money when you have something that can attract investors/investor interest and you can convince that the investors can make attractive return.

How much should I raise?

Try to dilute only 10-20 per cent maximum for each round. It means if you give up so much equity from the very beginning, you will end up with too little amount of equity in your hands in the end.

When you raise VC money, think ahead of time. Think about at least one/one-year-and-a-half ahead for the runway. Because, it takes time to raise fund. It is always better to think ahead so you don’t face the financial problem in a very short time.

What is the valuation of my company?

The general approach is the comparable method. So you look at other similar companies that have secured funding before you did and then you compare them. You try to find companies that have a similar traits with your competence, and then you can use it as an example.

But that’s not all, always keep in mind that you should find a valuation that allows you to raise the amount needed with acceptable dilution. What it means is that if you give up too much amounts of equity in order to attract VCs at the moment, it’s gonna be a big problem in the future. So always think about how much equity you can, can give away to investors.

You are now all set to raise fund. The next step is to meet the VC that aligns with the goals of its business. Before asking a VC for the money, of course, you need to understand what they are are looking for.

I would like to point out here that different VCs follow different approach and perspectives when evaluating a startup. There is no a single answer to how VCs evaluate a startup for investment.

From KK Fund’s point of view, we look for many important things while evaluating an early-stage startup — the team, market size, business model, traction, and competitive landscape.

Here, I will explain the most important factors.

1) The team

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 the leadership team in the private equity sector but it is not in an early-stage startup. The management team is the one that actually lives our vision. If they don’t do well, what we can do is to go down with them. Of course, we will try to help them as much as we can, but I’m just talking about the worst case.

The second reason is that for an early-stage startup, the management team is literally all what the company has. They don’t have too much things to ponder over; they don’t have a solid product or service. They don’t have revenue track record or meaningful data so that we can forecast the future.

So team is the most important asset and is the one that decides the future of a company.

2) Target market

Target market is also important. It is more important than the business model of a company because if the business model doesn’t work, we can work on it together and change it. However, changing the target market is hard.

Let’s assume I started a company in Korea but it failed. Then, I think I can work on launching it in Thailand. However, I don’t know anyone there, so it won’t work.

Also Read: Future Flow’s cap table helps founders easily monitor the evolution of their stake, equity dilution

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

3) Exit opportunity

Another important factor is exit opportunity. This is somewhat important because you don’t know what’s going to happen in the future. But from an investor point of view, 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 deliver it to my boss/the investment committee.

To convince them, I need to show them that these are the possible exit opportunities and we can make this much return on this investment. So it it’s always good to have some level of exit opportunity, some plan or forecasting.

4) Business model

In terms of the business model, if the management team and VC are good, then it shouldn’t be a big problem and it can be fixed.

5) Traction

The last thing is traction. I don’t really care about traction. Of course, if it’s a Series A deal, I’ll probably look more for traction record. But still, we are more focused on the growth trend rather than their current revenue.

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

Also Read: Ex-VinaCapital Ventures exec’s US$50M fund Touchstone Partners hits first close

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

Again, speaking of the revenue, we don’t care about the performance forecasting either. How can someone forecast the future performance of a young startup? Especially, how can you, as a VC, trust the numbers prepare by a startup just to get some money out of them. Even conglomerates cannot predict their future performance, so it doesn’t really matter.

According to my mentor who has over 10 years’ experience in this business, he has never seen a startup that got their traction right. So, you don’t have to spend one whole slide/two slides to show all these small numbers and come up with three years or five years of prediction. It doesn’t have much effect when I evaluate a startup.

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

What matters most is the cost prediction, because unlike the revenues, you can always control costs. When I look at a startup, I look at the details of the cost plan to understand how sensible and how skilled the management team/founders are.

For example, when you look at the forecasting cost, I might ask ‘why hiring cost is so high’, ‘how many people are you hiring’, ‘what was the salary range you were thinking about’ and ‘what level of people are you hiring’ etc.

Through these kinds of things, we can sense the skills of the management team and founders. So I suggest you focus on the side that you can control and show your management capabilities.

Again, this shows much important the management team is. When you look at the reasons why startups fail, you may find it is the management team. If your team is bad, it is highly likely to jeopardise the company and your business.

So my suggestion is, try to form a great management team. When you’re meeting an investor, try to appeal him that you have a great team work.

Image Credit: KK Fund

The post How does KK Fund evaluate an early-stage startup for investment? appeared first on e27.

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