Aug 22, 2016

The Kejora Series: Introduction to Venture Capitals

There's no doubt that there has been an increase in the trend of adopting the startup culture here in Indonesia. Nowadays, everyone seems to be making their own startup or at least talking about it. Knowledge about creating a startup are exchange daily between individuals. However, there seems to be a knowledge deficit being passed around about venture capitals in Indonesia. Information about who they are, benefits in approaching them and guidelines in how to approach them. If you are one of these people wanting to learn more about how venture capitals run in Indonesia, consider yourself lucky as the Kejora Team has decided to help sharing these knowledge through writing our Kejora series to help new founders learn more about the world of investing.

In this series you will find out about how venture capital run, how to attract the right venture capital and other tools that may help you in your funding journey. You will learn about the dos and don't when approaching a potential investor and warning signs to notice when a toxic potential investor approaches your startup. Stay updated with us as we will share some free-to-use tools and templates that you can use for your startup.

What is a Venture Capital?

So what is a Venture Capital? Just like animals need oxygen to breathe, most startups would agree that they need venture capital funding to survive. Venture Capital is a type of equity financing entity that addresses the funding needs of entrepreneurial companies that for reasons of: size, assets, and stage of development, cannot seek capital from more traditional sources, such as public markets and banks.

The Different Types of Venture Capital

Did you know that there are many different types of Venture Capitals in the industry, but to make it simple we will break it down to four different types of venture capitals. So what are these different types of venture capitals and when should you know to approach them?

Seed Ventures

You usually approach a seed venture when you are at the process of developing your product. Due to the early stage of your startup, you are looking at funding range of approximately below IDR 5,000,000,000. In this stage of your startup, you are usually analyzed based on your team, business plan and potential market opportunity of your startup. Our Ideabox program an example of an institution that provides startups in Indonesia with seed funding together with guidance to build your product. Our Mountain Kejora Ventures are also available for the higher-range seed funding. Learn more about Ideabox or Mountain Kejora Ventures if you are interested in approaching for seed-stage funding.

Early Stage / Series A Ventures

When going to Series A ventures, you should already have a ready product and is looking at growing your traction and user-base. At this stage, you are looking at receiving funding of the range of IDR 15,000,000,000 to IDR 20,000,000,000. If you were to go for Series A funding, you are usually analyzed through your current traction, the quality of your product and other partnerships that you have made.

Growth Stage / Series B Ventures

When you approach Series B ventures, you should already have an adequate user-base. You would go to venture capitals in order to increase your growth through revenue. You are looking at the funding range of IDR 50,000,000,000 - IDR 75,000,000,000. If you guessed that you are going to be analyze through your traction, quality of product and company valuation. Then your answer is correct! Because Indonesia is still new with the technology startup industry, there's not many of Series B venture capitals in Indonesia yet.

Later Stage / Series C Ventures and above

Lastly, in Series C Ventures and above, you are looking at expanding to other countries or increasing your profit from your company. At this round, you will be looking at fundraising more than IDR 150,000,000,000. In this stage, you will be evaluated through your company valuation, potential for growth and your company forecast for the next few terms. If you're at this stage of your startup, unfortunately you would have to look outside Indonesia for venture capitals funding of this funding size.

When do you know you're ready to approach a venture capital?

Before you look to approach a venture capital, you have to meet all the basic criteria below.

1. Do you have a validated solution for the problem existing in your startup industry. Is people willing to buy and use your product? Have you tested it with your potential customers? Will you be able to make revenue from your business model? Is your solution clear and scalable enough to a bigger market?

1. Is your prototype ready to be shown to your investors? Keep in mind that when you're talking about prototype this should be fully functioning. Many people tend to confuse prototype with wire frame of their product. How do you know that you have a prototype? Does your prototype have all the features of your future product? Does your prototype reflect the final presentation of your product?

Do you need help in building your startup? Although it is true that angel investors and venture capitals will help startups build their business. However the misconception is that they will help you build your company from scratch. When going to an investor you should be able to be independent in terms of running the daily operations of your startup. Your investors will only help you grow your company through connecting you with the right networks for your business and giving you information about the industry that would help you grow your business or be wary of the current situation of the economy of your industry. Investors are not your guardian angels, ready to hand-feed you with instructions in how to run your company, they are there to make sure their investment is worth it.

1. Do you have the relevant experience in building a business in the industry? Have you done the research about the trends and behaviour of the consumers in the industry you want to start your startup in? Despite your unique proposal to investors, without some type of credentials within your founders team it can be difficult to convince investors to fund you and your startup.

Can you accept rejection? There's no doubt that before finding the right venture capital(s) to fund you, there will be many rejections initially. From this you must understand why you got rejected and fix it. Find out whether it was because your business was not ready to look for funding, was it because your traction was not presentable enough to get funding. If these are the reasons that you receive from the venture capital you approached, then you simply have to grow your traction further before returning to get the funding that you need. Whilst if the reason was because they are not looking to invest in your startup due to the industry or your business plan then it was simply not meant to be.

What to look for when approaching a Venture Capital?

1. Funding Size

How much on average does the VCs in question usually fund for the companies in their profile. Every VC usually have a certain budget on the amount of funding they would be willing to put in entrepreneur startups. Therefore when approaching VCs, you would have to match the VC funding behaviour with the amount of funding your startup needs.

2. Value-Added given from joining the Venture Capital

Some venture capitals usually provide their portfolio companies additional value-added services. It may be from free consulting services, free accommodations or even common sources for information or tools that would help you in running your startup or company. When looking at VCs you should try to get to know the directors or partners of the VC in question. You have to know whether they have had experience in the industry your startup is in. Whether or not their team would be able to advise you in order to grow your business.

3. Networks and Partnership the Venture Capital has with the Industry of your Startup or company.

One of the most important fact about running a business in Indonesia is that network matters a lot in whether or not your startup or company will grow and survive in the long run. Therefore when looking at VC, you should see whether their networks or partnerships would help increase your network or company's growth in your respected industry.

4. Synergy with existing portfolio

When looking to approach a VC, you must first see the different companies the VC had invested in their portfolio. You have to see whether your startup will help out the other startups in the VC's portfolio or not. You also have to see whether your startup is a competitor to one of the company in their portfolio or not. Looking at a VC's existing portfolio would also help you determine whether there are any patterns in the type of startups the VC like to invest in and whether they would be interested in funding your company.

5. Looking into their Track Record

When approaching a venture capital, be sure to know their previous track record. Look at the type of companies that they have invested in the past. See whether they have performed positively or negatively in the past few years. This is an indicator of their funding ability. If you are approaching a venture capital that has a low-performing reputation, chances are that they would be a more risky partner to have for entrepreneurs. Not only will your startup will be deemed as a risky investment, it would be very difficult for your startup to raise funding for the next rounds.

How to know which Venture Capitals you should approach for your startup or company?

1.Research

Know what stage the Venture Capital is looking to invest and find out the portfolio of startups or companies that the Venture Capital has already invested in. Find out about the partners of the Venture Capitals and whether they can help your business grow faster.

Just as we emphasized above, you should always do your research before approaching a VC. Without doing the first step of researching, you will be wasting the time of all parties involved. Researching about the venture capital would also help you find out more about the venture capital earlier on before getting involved with them. If you believe that the venture capital in question will be a great match to your startup or company, do your research about the venture capital and their partners as it will help you gain their favor.

2. Going to Events and Network

Going to Events such as Startup Lokal, Startup Weekend, and many more will help you gain more networks and know more about the different venture capitals in your surrounding. These events can help you get more information about which venture capitals would suit your startup as well as tips you can do in order to get the funding that your startup needs.

3. Get Referrals

Sometime the best way to find out about things is through word-of-mouth. By talking to your community or your startup friends, you might be able to get good referrals about the different venture capitals you can approach to get the funding of your need.

4. Cold Email the different VCs around you

Lastly, you can always use the traditional way in approaching investors. Simply Google search the different venture capitals around you and send them a cold email about your startup and wait to see whether they are interested in funding you. (Remember, there's no guarantee that they will reply!!) But keep in mind that if you choose to cold email your potential investors make sure that you have a positive online presence because they will do their research to find more information about your startup outside your pitch presentation that you've sent to them. And remember as we mentioned previously, don't be afraid of rejection because it would just mean that you have more potential to grow or that it was just not meant to be.

TBT: the chance of meeting the VC is highest through referrals :-) it who you know (and who knows you) who knows someone else.

Alternatives to Venture Capital

Other than approaching venture capitals, you should be aware that there are different ways to raise funding outside of approaching venture capitals. You can keep bootstrapping your business yourselves, or do the tradition method of going to the bank to get a loan for your business. You can try to find angel investors through your family members, friends and other people that share the same beliefs and vision for your startup. You can always go to the public and try to crowd-fund your business. Now with startups like Kickstarter and many more, it is much easier for startups to raise money for their startup as long as your startup brings value to the public and capture the interest of many individuals. You can also save money through minimizing your costs through having partnerships with other startups in your community. As you can see, there are so many other alternatives that you can do if venture capital is not for you. All you have to do is to do your research and learn more about the investing world through our Kejora Series.

Steps to take in order to approach a VC

So now that we've told you about the basic information about venture capitals and other methods of investment, go ahead and do your research about the venture capitals in your community. In the mean time, check out the other articles in our site for more information about the happenings in Kejora HQ as well as updates on the different startups in our portfolio. Keep watch for our next article on the Kejora Series, where we will be guiding you with the steps to take in order to approach a venture capital.