Advice to Investees on Surviving the Investor Mob
featured blog
Advice to Investees on Surviving the Investor Mob
—
By Naam Chakravorty, Gulf Region Analyst, Botho Emerging Markets Group
September 7, 2020
Investor: “The impact is strong, procuring from 4000+ farmers, out of which 50% are women reads well.”
Investee: “Thank you. We also train our farmer-partners in climate-smart agricultural practices.”
Investor: “But the tech angle is weak. The company's value proposition doesn’t lie in its tech design, and that is where we are focussed. While this is not for us, let’s stay in touch.”
Investee (thinking this is the 6th call with a similar ask): “Before you sign off...why is the focus on tech-driven entities? Wouldn’t that be disruptive to the existing tech platforms in the market, one of which my company uses? Developing tech within my business model will set me back in terms of time and cost in R & D.”
Investor: “Umm....(a vague explanation follows)”
If you are an entrepreneur or aspiring to be one, the above conversation likely resonates. How many of you have received countless suggestions on how your company can be made more suitable to an investor or a strategic partner?
These conversations and the criteria sought are eerily similar and are driven by short-term monetary gain rather than long-term vision aligned with the interests of entrepreneurs. Many start-ups are wary of this cycle—tired of positioning and repositioning themselves to fit the additional technical or impact-related metrics that investors have added to the laundry list of “must-haves” to fit their theses. Entrepreneurs put in time and resources to secure the right names on their term sheet. But beyond the money, how are investors aligned with your vision and core product? Let's understand why emerging market investors exhibit mob behavior in their investment criteria and chant “tech-driven” as a key focus area and how, as an investee, you can remain comfortable in your own skin.
Recognize the Pitfalls of Defaulting to Tech-Driven Over Tech-Enabled Start-Ups
Investors have long-had a laser focus on tech startups as they hunt for the next Silicon Valley in emerging markets, such as Singapore and Bangalore in Asia and Lagos in Africa. The influx of cash to companies angling to disrupt through the next big app or API is due to the high-risk, high-reward approach that underpins the venture capital industry. To date, these investors have primarily focused on tech-driven over tech-enabled ventures in pursuit of intellectual property that they can own and scale quickly.
Like Monopoly, tech-driven companies can break other players' deals without any protection for their kingdom. These upstarts primarily focus on building web or mobile-based platforms to disrupt other existing business models. The downside lies in a time-intensive roll-out, the higher capital, experimentative building of a tech algorithm. In balancing the need to scale and building these components, many companies fail miserably. The most successful ventures that pursue this route are those that base their approach on rigorous user research and overcome deficiencies of the existing market to achieve a dominant position. For example, consider India’s intranet facility Foodiebay’s journey to becoming the internationally-renowned Zomato. The company built an entire business model central to a user's consumption habits, creating a platform to diversify its revenue model, from delivery to advertisement, event organization, premium subscription, and consultancy. But the Zomatos of the world are few and far between.
In comparison, a tech-enabled start up’s primary risk lies in the implementation of an existing platform. One such example: Lyft, which uses existing technology such as GPS and mobile communication to offer a disruptive transportation service to customers. Investors lean towards tech-driven business models due to their ability to use their IP to develop additional products or services and scale faster. Instead of burdening your company with a software development team without a clear vision, ask the question, “How will technology support or enhance my product offering?” This approach may help investees evaluate whether there is existing technology in the market that they can leverage as part of their strategy, rather than jumping straight to building a tech platform from scratch.
Make Sure the Investor Has Some “Skin in the Game”
Every investor wants a finger on the pulse of the next big unicorn, but they don't necessarily know where that will come from. That’s why many of them have developed a severe case of FOMO, with some speaking to over 300 founders per year. Too often, these investors dangle the prospect of a “big check” to mine data from potential investees to ensure they do not miss out on the deal of the decade. In some troubling circumstances, this approach is driven by a desire to investigate potential competitors of their existing portfolio. In such a case, the power dynamics tilt towards the investor over the investee.
In this scenario, how can entrepreneurs protect themselves? The investee needs to keep investors at an arm's length. Gauge investor interest without fully disclosing your business model in the first meeting, and focus on highlighting the what over the how in initial conversations. Rather than sharing your intellectual property, talk about what differentiates your company from competitors, your revenue, impact, and reach. Above all, ensure that you have legal protections such as non-disclosure agreements and disclosure requirements around conflict of interest instances before revealing your company’s how. And if you are still meeting investors, who you speak with but disappear after receiving your company’s fully loaded pitch deck, call out their data-collecting shenanigans.
The above approach is not a cure-all, however. In the future, we need a more transformative solution. One such approach could be a market-wide regulatory public platform for investors using blockchain technology, where a transaction can be broken into digital pieces of information, stored in blocks, accessible, timestamped, and impossible to manipulate. Tracking an investor’s transactions would be similar to checking a person's order history on Amazon. Today, websites like Pitchbook showcase investors' historical transactions, but the key difference in a blockchain-based platform would be verifying the due diligence process for every milestone using smart contracts. Although a possible game-changer and admittedly a threat to traditional investment advisory firms, such a platform would showcase the investors’ transactional patterns without censorship. Nevertheless, this approach is merely a pipe dream at present. We need the entire emerging market investor ecosystem to come together to participate for it to be operational.
Promote “Kindness” in Investor-Investee Discussions
The investor-investee relationship is under strain today as we find ourselves in the middle of a global pandemic. Given that emerging markets have not yet recovered from the economic shock, most investors are now treading carefully and sitting on dry powder as they evaluate deals with heightened scrutiny.
Today, investor relations look different as many funds are seeking to create a deal pipeline that includes ventures with a social impact. Accompanying that shift in focus is an evolving business etiquette. It’s no longer a dog-eat-dog world. Instead, companies are starting underpin their operations with empathy, irrespective of whether they are facing an existential threat. Apart from the business owner’s shift to digital transactions, virtual operations, and enhancing supply chain efficiencies, which have had to shift during the pandemic, businesses must now also account for ‘kindness’ in their models. But why stop there? As we re-orient businesses to take community relations into account, we should also demand that investors do the same.
While the investee lists how their company has navigated the market disruptions, assessed related risks, shown resilience, and supported their community in these trying times, investors should undergo a similar level of due diligence. Investors hold the power to decide how they allocate capital, but an investee can collectively organize to decode the terms of this allocation. Investees can do their part by requesting transparency on prospective investors, conducting due diligence for a potential investment, and associated timelines. A feedback-oriented investment evaluation with clearly defined milestones has a faster turnaround as it eliminates the fear of getting “ghosted” by the investor. Since the beginning of the year, only ten percent of the investors that Botho has spoken with practice this ‘kindness’ model, which indicates that the prevailing approach needs to change.
The message here? Even though investors today prefer companies that are from politically stable markets, tech-driven, and with initial market validation, any ask to the investee should be strategically analyzed to make sure it improves the core product offering. In the midst of uncertainty, it's easy for investees to dive into survival-mode and agree to deals that undervalue their companies. Still, there is value in playing the long-term game, pushing the envelope in investor discussions, and holding out for a better deal.
References
Hamburger, Jacob. “Activism in the Age of Financialization.” Books & Ideas, 2019, booksandideas.net/Activism-in-the-Age-of-Financialization.html.
Jones, Paul A. “High-Risk/Reward Startup Investing: Tech-Driven vs. Tech-Enabled Startups.” Lexology, 23 Apr. 2019, www.lexology.com/library/detail.aspx?g=507cd3e9-5b44-49b8-a930-71af0f7416a2.
Vanja, Sameer, and Niraj Guragain. “Zomato Business Model: This Is How Zomato Is Making Millions ?” Brand Riddle, 22 Sept. 2019, brandriddle.com/zomato-business-model/.