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By Tanisha Lele
As investors’ roles change, it might be time for them to step up and support their failing portfolio companies.
When we come across the term ‘investor’, we immediately think of money, and naturally, given the profession itself. But when it comes to backing startups, an investor’s call of duty is not limited solely to the financing of a startup – it involves a lot more.
Increasingly, modern investors help make important decisions, bring in clients, help the startup make new and useful contacts, and most of all, always have the entrepreneur’s back. Plenty of factors can affect a given investment poorly, and where investors in the past were hands-off most of the time, there have been increasing calls for venture capitalists (VCs) to be more actively engaged with their portfolio companies.
Seamon Chan, Co-founder and Managing Partner at Palm Drive Capital, shares his experience and insights into the work an investor does on a regular basis.
Establishing an investment philosophy
Investors each have their own unique approach toward investing, and look at different metrics before finalizing which business they want to fund. For some, a company with promising technology is more appealing, while for others, a product in demand is more of a lure.
For Chan, who was born in the U.S. to Asian parents, cultural roots have played a big role in influencing his investment philosophy.
“I guess I do have an immigrant mentality, I appreciate founders who have a similar mentality or like working really hard, trying to make their lives and those of other customers better by being resourceful,” he explains.
At Palm Drive, the venture capital (VC) firm he founded in 2014 along with Co-founders Hendrick Lee and Nick Hsu, Chan says the wider investment philosophy of the firm is dedicated to betting on areas underserved by the current capital market.
“We like to help [startups] scale and grow beyond their own area. This is what we’ve been doing all along and that’s our plan forward as well,” Chan says. “We want to be able to find the best founders no matter where they are and help them, beyond all the areas we are already established in.”
When it comes to metrics, he says that their primary focus lies in unit economics – considering on a basic and fundamental level whether it’s a good business or not. Startups with demonstrated traction and enough data to support their metrics can make better cases for themselves. Their client base, and metrics like customer acquisition cost and churn rate, are very valuable details.
Aside from the value of due diligence, Chan is also quick to emphasize the importance of doing one’s own research.
“We spend a lot of time in our industries and so we’re really close to the market. That’s how we decide whether to invest in a company in the first place, because we’ve researched them enough and therefore trust them to run the business,” he adds.
But despite the well-researched investment, sometimes companies do fail. And no investment philosophy is complete without accounting for failure.
“Venture capitalists make multiple bets on numerous companies. So there’s a chance that some companies will fail and some will do better than others, or some might be really successful in some way where they can’t fail,” he says. “But most of the time, we like helping companies that are failing, because the ones that are doing well don’t need that much help.”
On a personal level, he believes failure isn’t necessarily always bad – in fact, he says experiencing failure is a good way to learn how to face adversity. The one caveat: if you’re going to fail more than once, do it in a different way each time.
“If you fail in the same way again and again, then that is not a good sign,” he says.
These philosophies aid investors in making their investment decisions. But what follows after the investment is made, is the knowledge of skills and techniques that may come in handy when helping the founders to keep the company going.
Managing a firm is often deemed to be the CEO’s job, and in most cases, entrepreneurs prefer little to no meddling from the investor’s end. They like the freedom to make decisions and take actions without being questioned. However, investors also have a responsibility to protect their investors – the Limited Partners (LPs) who funnel money into venture capital firms. Striking a balance, then, is the key.
“We like to get an update and see what the entrepreneurs do, and try not to interfere too much. But we do like to be helpful; we lend our support wherever needed,” says Chan. As an example, he says they may sometimes introduce founders to potential customers, putting the possibility of incoming revenues on the table.
In Chan’s experience, most startups need outside resources or the help of their investors to secure beneficial partnerships and opportunities.
“I think the most important or the best investors always lend a lot more support than just capital, and do a lot of advisory mentoring. As [investors] have seen a lot of pattern recognition, entrepreneurs, and companies, this provides for a lot of advice or insight or feedback,” he says.
All these efforts may increase the odds of success in a startup’s favor, but they’re not a guarantee. If a business reaches a point where it is beyond saving, an investor may have no other option but to gracefully wind down and part ways with the firm. But even while exiting, Chan says it’s important to maintain good relations and try to find an exit that works for everyone.
Cross border investment
Palm Drive’s unique approach to cross-border investing has led the company to invest in titans such as Hong Kong fintech unicorn WeLab, and San Francisco-based healthtech startup Clover Health.
As a firm with a presence across Asia and the U.S., Chan has a unique perspective around cross-border investing. Recalling an example from one of his global investments, he says that there are many large software companies coming out of the U.S. largely because people there are willing to pay more for the product, whereas in Asia, people are less willing to pay the same amount for software.
“There are more investments into ecommerce in Asia; overall it is a lot more advanced,” he adds. “There was no chance in Asia for retail chains to develop – it went straight into ecommerce, and brands were built overnight. Because of this, you saw a big push for mobile payments.”
In comparison, he says, the U.S. is the exact opposite. Consumers remain attracted to companies with brand history, and the main payment medium is the credit card. Users can still be monetized through online ads, and overall the value derived from one user is often more for a U.S.-based user than one in Asia.
Chan also likes to work with both local businesses and global ones. He believes there’s a lot to learn from both of them respectively.
“Many investment firms think they can go in and do [cross-border investment] themselves, but having that local network – particularly of LPs and angel investors – and a solid support system, is crucial,” he says. “This will make sure that you not only have the connections you need, but also that you follow the local customs and business culture.”
He warns that investors who choose to do the investment themselves may experience an unnecessary amount of trial and error, which can be avoided by finding someone trustworthy on the ground with local experience.
He also strongly believes that “capital isn’t enough to find a company.”
“You have to have an established network of both local and global connections to help somebody succeed across borders,” he adds.
Whether it’s the Managing Partners’ respective backgrounds and experience, their approach to working with and guiding founders, or something else entirely, Chan’s insights provide a window into what it takes to bet big on a promising horse – and how investors can manage their expectations and react evenly if it turns out to be the wrong one.
Top: (L-R) Seamon Chan, Nick Hsu, and Hendrick Lee, Co-founders of Palm Drive Capital. Image courtesy of Palm Drive Capital.