ILead batch 4 finally had our first VC company visit – Vickers Venture. This company visit was going to be different from the previous companies that batch 4 had visited. The past visits presented views from the eyes of the entrepreneur. This time, it would be from the eyes of an investor. We were all looking forward to this visit, as it would give us a different perspective on entrepreneurship. Dr. Jeffery Chi, Vice Chairman of Vickers Venture Shanghai, shared some background information on Venture Capital and Vickers Venture in China, as well as his views on entrepreneurship:

Investment Strategy. Vickers Venture primarily invests in early stage startups but also in some late seed stage companies. Typically, they make investment deals of $500,000 to $3,000,000. To commensurate the high risk involved in start-ups, Vickers looks for deals with expected returns of at least 10x. Despite receiving over 2,000 deal proposals per year, Vickers is highly selective and conducts due diligence on approximately 3% of the business plans. Of this 3%, only 4-5 deals are made per year.

While some startups may have the potential to generate returns, Vickers may not invest in them as Vickers compare investments by looking at the ones that will bring in the most return. Market size is an important factor for investment. Dr Jeffery shared examples of a Singapore centric startup with 200,000 registered and a China startup with the ability to gain 800,00 new users per month. He mentioned that even if the Singapore company is profitable, the amount of revenue it can generate is limited due to the small domestic market. The China startup would look so much more attractive just because of the huge market potential of China. Vickers tends to avoid country specific deals but would rather invest in ones that can serve regional markets.

Most VCs, including Vickers, do not make investments in future funding rounds of company despite having already made investments in the early stages of that same company. Even if Vickers values the company at $25M and the entrepreneurs are valuing the company at $20M, it is unlikely that the VC would re-invest in the same company. Dr. Jeffery mentioned that this practice is mainly because VCs are managing someone else’s funds and justification would have to be given for re-investing. In the event that the start-up fails after subsequent funding by the same VC, accusations of the VC putting in more money to save the company and salvaging a situation of bad investment decision may arise.

Due Diligence: The due diligence process involves an assessment of the management team and business plan, an evaluation of the target market and market size, examination of the business model and competitor analysis and the evaluation of the investment risks and rewards. While due diligence is carried out on these areas, the main focus would ultimately be on the management team. Qualities that Vickers looks for in entrepreneurs include high level of dedication and passion, drive, integrity and key skill sets relevant to the business. These qualities cannot be seen in the curriculum vitae of the entrepreneurs but can only be ‘felt’. Hence, Vickers spends significant time with the entrepreneur during the due diligence process. Time taken for due diligence varies for different companies and industries but typically take from 3 to 6 months.

When valuing companies, Vickers does not focus much on discounted cash flows since the start-up is likely to either have no traction or some revenue flow that is highly unpredictable. Normal distribution does not apply in the early years of the start-up. Vickers analyses the market potential and will assign a value to the company, based on comparable multiples and what they think the company will most likely be worth in 5 years.

Deal Structuring. VCs usually sit down with the entrepreneur and discuss several milestones to be met/accomplished over the course of the funding term. Money is usually disbursed in tranches upon completion of the agreed upon milestones. Dr. Jeffery mentioned that there will never be a final draft to the business plan and changes will have to be made along the way. Vickers Venture will usually arrange for half annual meetings with the entrepreneurs to deliberate on the budget and milestones. While some VCs may not set salary caps for the entrepreneurs, Vickers does set salary caps as they believe that the entrepreneurs should not get rich from the salaries but rather from the building of the business. However, the salary cap would be one that is neither too low nor too high to ensure that the entrepreneurs can live comfortably and channel their focus on the building the business and not to make ends meet.

Tags: Fund Raising, Shanghai, VC, Venture Capital

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