Shanghaivest in the news > “Startups need cash, then value. No Cash, They Die”
Published on The Venture Hype, 25 September 2009 http://venturehype.com
Whether you visit news sites or flip open the newspaper, you’ll see that Chinese entrepreneurs and the state of economy in China are garnering some serious ink. To learn more about China’s angel investing scene and general investing practices, Venture Hype got in touch with Shanghai-based investor Bruno Bensaid.
Bensaid is the founder of MobileMonday Shanghai, a mobile industry-related community; managing director of Shanghaivest, a boutique financial advisory firm; and accredited investor with AAMA Angels Shanghai group, an institutionalized angel group in China. Prior to Shanghaivest, Bensaid served as vice president of business development at Ventech China, a French venture capital firm with operations in China.
VH: What’s the angel investing scene like in Shanghai?
BB: Angel scene in Shanghai and China is still in its infancy. Very unstructured in general, with a lot of talking but very few actions and investments. The real action usually comes through wealthy angels, typically those who’ve exited a company and who are pulling in a few other rich angels, usually of similar profile.
Since AAMA Angel was created in 2007, we’ve seen the establishment of a few other angel groups. As of today, none of them has established a track record or put in place a proper investment process, e.g. selection, presentations, due diligence, investment, post-investment follow-up, and divestment. I think AAMA is the first non-profit organization that has proper investment process in place. This is a reassuring factor for entrepreneurs who come to us expecting to be treated properly and fairly throughout the process.
VH: In regards to your current investments, what made you decide to choose these from among the myriad of potential investments you hear about?
BB: All of my investments are made in the internet and telecom space. What caught my attention is always the team, then the project itself. If I believe the team can pull it through, I begin to study the fundamentals of the business. I do a lot of research on the market before I decide on any investments. Also, I immediately rule out companies that
1. haven’t done proper research on their own market
2. underestimate the quality of the competition due to lack of research
3. are completely delusional on their sales forecast
We all know that forecasting is rarely accurate, but when you see numbers that are 10 to 100x off common estimates, it’s a deal breaker for me.
VH: What are the qualities you look for in a startup founder? How do you nurture these qualities and bring out the best in them?
BB: Complete dedication to the project is most important. I usually don’t like founders who run several companies at the same time or dilute their efforts on too many business models and hope one will stick.
I much prefer entrepreneurs who slightly hedge their risk but focus on their core business and don’t stop until they understand the model perfectly and have made necessary improvements.
My role is to tell the exec team what I believe they should do to make the company more cash efficient and more attractive to other investors. I don’t want to be the only investor in the company!
VH: How do you value a startup?
BB: Look at valuation 101 from b-school books and you’ll see that there are many ways. But beyond technicality, we look at the team, the market potential, the stage of the company, and what they’ll achieve in the coming 3, 6, 12, or 24 months. These are what matter most. After that, I also benchmark with other recent fundraisings and try to establish some similarities.
VH: What terms do you insist on in the term sheet? Why?
BB: To dilute the risk, I often look at investment based on milestones. It’s a commitment from both sides to achieve success. Some entrepreneurs may see this as unfair, but when you start investing more than US$50,000 then you want to see some serious results before you continue. Otherwise, anti-dilution terms are also quite useful but it’s usually harder to obtain when you only put a small ticket.
VH: When you think of your investments that weren’t successful, what would you do differently if you had the chance to redo them?
BB: The most common mistake is to become too “close and personal” with a startup. That happens a lot when you’ve befriended the startup founders. I’d strongly advise to treat them with equal, but not more, respect as other startups. That would avoid any conflict of interest or being too soft on due diligence.
VH: What advice would you give to new angels?
BB: Choose your industry focus and make sure it’s consistent and relevant to what you’re already doing. I see a lot of angels coming from traditional backgrounds looking at deals in the tech side, internet or mobile. Nothing wrong with that, but unfortunately they don’t bring much value to the table other than money. Entrepreneurs need cash as well as someone to tell them when they’re wrong or help them stay ahead of the competition.
On the flip side, I also see a lot of would-be angels who can’t disburse any money in the end but want to receive shares in exchange for their knowledge and network. However valuable that is, this is usually not acceptable for a young venture. Startups need cash, then value. No cash, they die.