Ep 16: How to attract investors

[00:00:00] Allen Lau: Not all companies should be or could be venture backed. A very small percentage of the companies would belong to this category. What's the characteristics of this category? They could be very, very fast growth, for example, 50% year over year growth, or in the early, early days could be a hundred percent, 200%, or even 500% year over year growth. On the other hand for the angel backed, or even self-funded companies, they are almost like polar opposite. And I would say most companies would belong to that group. They don't need a lot of capital but many of them would need some capital to get the ball rolling.

[00:00:42] Andrea: Ok strong start to this topic that is angel investment and venture capital. I’m excited to dig a bit more into them.

[00:00:50] HOST: Hi, This is Small Business, a podcast by Amazon. I’m your host, Andrea Marquez. This is one of our TISB: Minisodes: shorter episodes for those of you who want a quicker binge. [00:01:00] These are packed with helpful information in 10-15-minutes. On this episode we continue the conversation on funding your small business and jump into angel investments and venture capital with Allen Lau, Co-founder and Venture Partner of Two Small Fish Ventures and the Co-Founder and former CEO of Wattpad and Executive Advisor to WEBTOON Wattpad.

[00:01:27] Andrea: So, if I've exhausted my bootstrapping options, which one should I chose? How do I even know when and how to choose between the two: angel investment and aiming to raise venture capital?

[00:01:40] Allen Lau: Well, you look at the type of the business, like realistically, how fast you can grow. If you exhausted the self-funding station, you know, you need some more capital to survive, then you, you have to ask yourself, okay, how much capital do I need? What is it for? And after attracting that capital, [00:02:00] can I get to profitability? If so, how quickly? These are the questions that you have to ask as yourself because, uh, if you don't ask yourself, the investors would ask you and you better be prepared to have all those answers.

Basically, any investor would wanna know; what is planned? Is it buying equipment? Is it buying the stove in the kitchen, or is it for something else? And any investor, what they are really looking for is a very simple idea: they put $1 into a box that's box owned by you. At some point, they wanted take out, say $2 or $3, get some return. So, you have to ask yourself, if an investor give you a dollar, if you use it properly, well, you must use it properly. It's not an if you must use it properly, but how? Have that answer. And by investing [00:03:00] that dollar into, say, buying, some amazing food in the kitchen, you, you can attract more patrons in to, to your restaurant then you generate more revenue. This is your expectation, how much more people you can attract, and that's how much more revenue you can attract. And then how much more profits, uh, if you haven't achieved profitability yet, when and how, and how much you project you can do.

And these are, once you have answered these questions, then it's black and white, whether this is an investible opportunity or not. And, uh, by knowing that you would know, from an investor perspective, at some point perhaps you, you share the profit back to the investor, depends on the arrangement. You share the profit back to the investor, then the investor would know, okay, I put a dollar in three years later, I probably would get back maybe 60 cents, and then another two years get back another 60 cents. [00:04:00] So, you know, they can do the math and, and make a decision.

[00:04:04] Andrea: Let's double down on that. If I decide to go the venture capital route or the angel investment route, I need to be very, very clear about what I'm gonna use this money for, what the profitability is and what my investor's going to get from it. Right?

[00:04:20] Allen Lau: Yes. I guess for venture capitalists, they might not care much about profitability early on because for venture capitalists, what they are looking for is actually the growth because the growth would drive the value of the company. They know they might need to provide more capital in a few tranches down the road. So for an early-stage company, sometimes profitability might not be the first thing that, that they ask for. They may think about this. They might consider that, but the most important thing is high growth. [00:05:00] And that's why this is, only a very, very small percentage of the companies would fall into the venture backable category because through high growth, you can increase

the value of the company pretty drastically. And that's how venture capitalists make money because eventually when they sell the shares, whether, uh, to other investors or in the public market, that's how they make money. So, profitability might not be the first number one consideration as long as they can see the trajectory to get to that point at some point in the lifetime of the company.

[00:05:38] Andrea: As a small business starting out, who has already exhausted self-funding, should I consider angel investment and venture capital?

[00:05:47] Allen Lau: I think a lot of people would consider external capital first, that's probably not the best idea because in a way you're giving a percentage of your company. [00:06:00] So let's say you raise capital, you give away half your company to raise the capital to, to drive growth or get to profitability. The math has to work for a year, right? If you are choosing between: continue to bootstrap or raising more capital. You give up half. Eventually you, you have to get it back, right? You are sharing half the profit with the new investor. For example, if you don't think the new capital would give you at least double your profit or revenue. Depends on what you wanna measure. Then, it is not a good deal for you as an owner because you give up half the company, but you perhaps, uh, will never get back half the profit ever. You might not have a choice, but that might not be the best option.

Raising capital is a very, very important decision, but raising the right type of capital, from the right profile of investor is also extremely important. [00:07:00] Imagine a venture backed investor invested in a slower growth company, the investor would not be happy, right? Uh, if an angel investor invested in the company and realizing, okay, this is a high growth company. We need to raise a hundred million more capital. It's, it's, Originally, it's not the type of company I imagine my share could be diluted, you know, uh, that person might not be happy. I thought I just put in $10,000. I can get back, you know, $20,000 in, in two years. I didn't realize it will take 10 years to build this gigantic company. I'm not in it. I don't want it. It could be like that. So that interest alignment is very, very important. So pick the right investor, choose carefully, choose intelligently. It’s like marriage, it's not writing a check, a transaction and, and see you later. You are walking along with that investor for a very, very long time and, uh, if you don't have to raise, [00:08:00] maybe you shouldn't, then you can a hundred percent control your companies on your own terms, and that's okay too. So, uh, there's no right or wrong answer, but there's a right or wrong answer for your specific company, and you just have to make the right choice.

[00:08:17] HOST: That was the Co-founder and Venture Partner of Two Small Fish Ventures, and Co-Founder and former CEO of Wattpad Allen Lau. Here are some of the key takeaways from our conversation:

• Raising external capital shouldn't be your first choice. It’s a tricky situation because you would need to be sharing part of your company with someone else, or several others. So maybe consider other options, like bootstrapping, grants, and loans as we discussed in our previous episode with Darlyng and Co, before you consider giving up some shares. But if you reach that point, it's not a bad thing, sometimes you might need to raise capital, especially when your target is fast growth.
• The most important thing for venture capital [00:09:00] is a fast-growth trajectory even before looking at profitability. You need to have a clear plan that you can show investors for how and when you think you’ll achieve major growth milestones year over year. And this also goes for angel-backed businesses, where investors might be considering other things first in an exchange for equity, but will still want to know what the plans are for year over year growth.
• Picking the right investor is super important. I love that Allen compared it to a marriage. You'll be spending a lot of time with your investor so make sure you're both a great fit for each other and aligned with the goals of the business.

That's it for episode 4 of season 2 of This is Small Business, a short and sweet episode of our This is Small Business Minisodes series, brought to you by Amazon. On the next episode, we'll be talking about setting goals for your small business and how to make sure you reach them.

Meanwhile, if you like what you heard, subscribe and tell your friends about us [00:10:00] by sending them a link to this episode. And we want to know what you think. So, leave us a review on Apple podcasts – it’s easier to do it on your phone. OR email us at thisissmallbusiness@amazon.com with your thoughts.

Until next time – This is Small Business, I'm your host Andrea Marquez -- Hasta luego -- and thanks for listening!

CREDITS: This is Small Business is brought to you by Amazon, with technical and story production by JAR Audio. [00:10:34]