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Despite global fundraising activities being hit by COVID-19, APAC-focused Private Equity and Venture Capital (PEVC) funds are outperforming those in North America and Europe. APAC-focused PE funds also recorded another year of robust growth in 2019, where a lot of dry powder is piling up in private markets waiting to be invested in promising startups.
However, given the pressures of a volatile market and global economic slowdown, PE fund managers are taking an increasingly cautious approach to screening potential investments. Nonetheless, Caelus Asset Management (“Caelus”) feels optimistic towards the recovering Asian markets and has recently launched a healthcare PE fund. Carl, the founder of Caelus, will share the top 3 criteria that he looks for in a potential portfolio company for his private equity funds that span across healthcare, technology, and e-commerce industries.
1. Strong Management Team and Founder
“The pandemic will not last forever, but businesses with a nimble and creative management team do.” – Carl Chan, founder of Caelus Asset Management Limited
Especially for pre-revenue companies, personnel are crucial for a successful fundraising story. Oftentimes a founder is very closely associated with his/her brand – Facebook and Mark Zuckerberg, Apple and Steve Jobs, Alibaba and Jack Ma – so a founder must also be the face of his/her company. A founder’s character and presentability, and a cohesive management team inspire confidence in investors.
Carl’s advice to startups:
The management team and more importantly, founders must show passion and confidence towards their business models during investor meetings. The way you present your company and how you approach potential investors matters—whether through middlemen or actively participating in business pitches.
It might be a challenge for startups to do roadshows and fundraising activities internationally under COVID-19, when travel restrictions have been imposed in a number of countries. However, take this opportunity to appeal to domestic investors, and if possible, meet them in person to establish stronger relationships. Humans are social beings after all!
Due diligence is just procedures and factual findings. Building trust is the most important thing which helps with your future fundraising calls.
2. Sustainable competitive advantage
“Revolutionary innovation is valuable, but disruptive innovation is invaluable.” – Carl Chan, founder of Caelus Asset Management Limited
Incumbents, or established companies in the industry enjoy many advantages such as name recognition due to established relationships with stakeholders, while disruptors often have faster innovation capability and greater agility. From an investor’s point of view, investing in disruptors provides higher upside potential as they create new markets that have immense room for growth, while revolutionary innovations are valuable but does not affect existing markets.
However, it is not easy to become a successful disruptor that brings about paradigm shifts, but you should always look for ways to set your business apart from your competition with a unique value proposition and make sure that you are in a market segment that has growth potential.
Carl’s advice to startups:
I always first consider whether a potential portfolio company has a strong and unique technology or offerings that stand the test of time. Of course, the offerings must also keep up with competition and market trends as time goes by. It could substantially boost investors’ confidence if your offerings are already or will soon be legally protected, such as by patents, copyrights and trademarks.
Alternatively (or even better, additionally), companies with innovative business models that changes how people traditionally do things is also an attractive investment proposition. Your company does not necessarily possess a patented, breakthrough technology, but rather inspire people to change their habits and adopt your way of doing things.
3. Ambitious but feasible business plan
“Plan your work and work your plan” – Napoleon Hill, American author
Pre-revenue company valuation can be tricky hence a promising and realistic business plan is important, which gives investors some idea about a startup’s positioning and value. Not only useful for investors, a business plan also helps you articulate a strategy for commercializing your offerings, guides you through the journey and navigate new markets. Although there are considerable chances that things do not go as planned, a business plan shows how well-prepared you are to grow your business and how you would keep your promises to your investors.
Carl’s advice to startups:
Speaking from a PE investor’s point of view, a PE expects more from a startup’s business plan than a VC. Compared to a VC, a PE typically sources companies that are later in their lifecycle, which means that a PE assumes that the potential portfolio companies should have figured out to a great extent which path to take on and that they should be able to produce a concrete business plan and financial forecast with substantial evidence.
The company’s expansion and development plans should be reinforced by an extensive market research, with numbers such as the existing market size and the company’s market penetration rate in the coming 3-5 years.
More importantly, the business plan should include a detailed financial forecast that shows realistically how the company is going to generate revenue and profit, and the anticipated return on investment for the investor. After all, an investor’s ultimate goal is to profit from the increased valuation of their portfolio companies. Therefore, a clear exit strategy such as an M&A or IPO in the foreseeable future is also an essential element of the business plan for investors to prepare for a cash-out.
We also noticed that startups which successfully secure subsequent rounds in funding constantly build an online presence to keep their existing and potential investors attuned to their company news. If you do not prefer a social media presence, monthly company updates via emails help as well. You would be surprised how consistent investor relations will bring you more business opportunities in the future!
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