For Mikaal Abdulla, founder of Hong Kong-based personal finance startup 8 Securities, raising venture capital can be “miserable,” no thanks to flaky investors who disappear after signing term sheets or indiscreet backers who share confidential data with competitors, just to name a few.
“It’s a seemingly benign characteristic that seems to run deep in so many VCs in Asia. That characteristic is a lack of empathy. Empathy deficiency is what really makes Asia’s venture capitalists special… and not in a good way,” wrote Abdulla, whose firm was acquired by US-based Social Finance (SoFi) in April 2020.
Abdulla says he has raised a total of US$70 million in the past decade and has been in “at least 150 investor meetings.”
Asia’s flourishing tech scene has drawn an influx of venture builders, accelerators, and VC firms to the region, but between the numerous accelerators that have folded and the proliferation of new ones, their success has been called into question.
Conversations with founders reveal an undertone of unhappiness about how the balance of power is often tilted in favor of investors. Many acknowledge – and even accept – that between accelerators, investors, and entrepreneurs, a misalignment of incentives is a given.
Adding to that, a lot of investor advisors are former management consultants or banking and finance professionals who haven’t established startups before. Their lack of experience has placed startups at the receiving end of unfavorable deal terms and poor advice.
To change that status quo, a trio of former founders set up Iterative, an accelerator designed to be operator-led and founder-friendly.
A pro-founder approach
Iterative is finalizing its first cohort of nine startups, says managing partner Hsu Ken Ooi, who started the company with Brian Ma and his brother Hsu Han Ooi.
The three serial entrepreneurs established machine learning company Decide, which was acquired by Ebay in 2013. Divvy Homes, a home ownership startup that Ma co-founded, recently raised US$43 million from investors including GIC, Singapore’s sovereign wealth fund.
It’s hard to empathize with the founders you’re working with if you’ve never been in their shoes.
Iterative is modeled after the principles of California-based Y Combinator (YC)’s principles – the golden standard for startup accelerators, as far as Hsu Ken is concerned.
This includes a large, active alumni network of founders helping other founders and deals structured to benefit startups as well as pro-founder policies such as an internal blacklist and a review system of past and existing investors who are screened by other YC founders.
Effectively, this precludes investors with a poor track record from working with other YC startups in future. “There are specific rules. If you have a term sheet and [the investors] don’t follow through, they get blacklisted and [can] never invest in a YC company again,” Hsu Ken says.
The relative inexperience of Southeast Asia’s accelerator operators compared to their Silicon Valley counterparts was an impetus for starting Iterative. “The majority of people that run accelerators [in the region] haven’t founded and sold their own companies,” observes Hsu Ken, who was born in Penang, Malaysia, grew up in the US, and moved to Singapore two and a half years ago.
Establishing a business means you go through the entire process of realizing an idea, finding market fit, pursuing growth, achieving monetization, and getting acquired. It’s a unique experience, and someone who’s gone through that trajectory is generally better able to empathize as well as offer more tangible advice and perspectives, he adds.
“It’s hard to empathize with the founders you’re working with if you’ve never been in their shoes. I don’t think you can understand the level of risk that they’re taking, and the level of self-doubt that they have on a daily basis,” Hsu Ken says.
A lonely road
Being a founder comes with a distinctive set of challenges, which non-founders might not be able to fully grasp. “Entrepreneurs need investors that understand that first-hand and will have their back during tough times. Waking up to find out your best engineer has resigned, your product broke overnight, and you can’t pay your rent next month is the norm,” Abdulla shares.
For many founders, the road to setting up and running a company is a lonely one, riddled with self-doubt that never really goes away. Hsu Ken noticed that many first-time founders in Southeast Asia struggle in isolation. “I felt like everybody was solving the same problems on their own,” he says.
You get the feeling [that investors believe] that startup founders should be lucky to get face time with them.
Hsu Ken, who was part of networking startup Weave – a YC company – says he owes a lot to founders who were “mentoring us when there was no reason to.” He hopes that Iterative will foster a similar sense of community through internal tools that will allow founders in the batch to book consulting time with and rate mentors or seek help from other founders.
Regular “small group meetings” among founders will also help cultivate camaraderie. It will also hold events including an alumni demo day and potentially an annual camping trip – similar to what YC does.
Then there are power imbalances – a reality in the startup scene – which founders have to grapple with. Between venture capitalists and founders, “the party writing the check has the upper hand,” Abdulla notes.
In Southeast Asia, however, the power equation is “way out of control,” says Hsu Ken, citing conversations he’s had with founders in the region. “You get the feeling [that investors believe] that startup founders should be lucky to get face time with them.”
In contrast, the power scales in Silicon Valley have gradually tilted towards startup founders. At VC firm Andressen Horowitz, partners are “fined” US$10 for every minute they’re late to a meeting with an entrepreneur – a show of respect for the founders they deal with.
Abdulla has also heard instances where VCs have taken advantage of their position of strength to request information that may be useful to another portfolio company or in making an investment decision. Some corporate accelerators have turned out to be more pro-corporate than pro-founder.
“I have seen fintech startups given the ‘opportunity’ to build a prototype for a bank, and that eats up all of their focus and independence. Of course, it can be valuable for the startup but I rarely see it materialize into anything meaningful,” he points out.
Are program fees necessary?
There’s also a debate around whether accelerators should be charging program fees.
In Singapore, Antler invests US$100,000 in exchange for 10% equity stake in a company, but it charges US$40,000 in program fees – or 40% of the investment sum – to cover the costs of running the program. Each individual also receives a monthly stipend of S$3,500 (US$2,460) for 10 weeks.
“Program fees are the standard in the industry – some people choose not to show them, but we have chosen to be fully transparent… This package is on par with peers regarding the financial structure,” says Jussi Salovaara, managing partner of Antler Singapore.
“However, we do believe we differentiate ourselves with our global platform and our dedication to support our founders through our global advisor and alumni network,” he adds.
The practice isn’t exclusive to Antler. San Francisco-based 500 Startups, for instance, charges a US$37,500 participation fee that’s deductible from its US$100,000 investment. Participants are encouraged to consider this as their tuition fee.
Other accelerators may not impose program fees, but they find other ways to bake in these costs. “Every program has a fee component in some form,” says an industry observer who spoke to Tech in Asia on the condition of anonymity. Accelerators that don’t charge outright could simply plunk down a smaller investment sum, take a larger stake, or impose higher fund management fees, the source suggests.
“A model like an accelerator, a [startup] generator or a talent investor is, in general, resource-intensive. Someone needs to pay for it – ultimately, it comes down to an arrangement between the fund investors and the people running the program,” the source adds.
Entrepreneur First (EF), which calls itself a “talent investor,” says that instead of collecting fees, the costs of running the program are “passed up” to the fund’s limited partners.
Iterative, which doesn’t charge a program fee, has raised initial funding from some investors and its founders personally bankrolled the program. Investing a full US$150,000 upfront in exchange for 15% of equity has the benefit of aligning their incentives with the startups that they back from the get-go, Hsu Ken explains.
Iterative, however, takes a bigger stake in each startup compared to other accelerators.
A good or bad deal?
The program fees might deter some founders, but others are unfazed. Mike Sayre, chief executive of robotics company Cognicept, formed his team through Antler and considers the chance to connect with a good co-founder “priceless.”
There are now roughly dozens of incubator and accelerator programs in Singapore. Many are run by corporations and public institutions such as universities, each with its own structure and goals.
It’s like choosing a university – what kind of experience do you want? Do you want a liberal arts kind of experience, or do you want to be super-focused on one MBA?
Since their motivations differ, their success is hard to gauge. Corporate-backed accelerators, for example, are often designed to infuse the main business with innovation. On the other hand, those like EF, which has incubated startups such as internet-of-things company SensorFlow, helps individuals find co-founders and ideas, with a particular focus on deep technology.
It’s tempting to judge each program – whether it’s a seed accelerator or venture builder – based on their common denominator: capital investment. “Startups have no idea how valuable this thing is going to be, so they seize on that number and obsess about [cash]. [But that’s the] least valuable thing that the startup gets,” says JFDI co-founder Hugh Mason tells Tech in Asia.
JFDI was an active startup accelerator from 2010 to 2015, investing seed money in some 70 companies such as jobs platform Glints.
But for many, the process of fast-charging a concept from zero to one, culminating in a “demo day” is in itself invaluable. Gaining the skills to run a business, getting access to an enduring network of like-minded entrepreneurs, and bridging new markets and customers are also important.
“It’s like choosing a university – what kind of experience do you want? Do you want a liberal arts kind of experience, or do you want to be super-focused on one MBA? They’re totally different experiences, one size doesn’t fit all, really,” Mason adds.
Hsu Ken and his team are chasing a lofty goal, but could signs like serial accelerator-hopping mean that existing programs are inadequate?
Only a “very, very small” number of entrepreneurs jump from one accelerator to another, says Bernadette Cho, general manager at EF Singapore. She says that some founders had completed other accelerator programs before approaching EF, and vice versa. Each program offers a different environment, and that might explain why they go around and explore, she suggests.
Enlisting in accelerator programs based abroad could also be advantageous for startup founders. They can open up new customer bases overseas by leveraging their local connections. “It can be a smart play around customer and also investor acquisition,” Cho says.
Antler alumnus and Cognicept boss Sayre, who raised a seed round through Sequoia’s Surge last October, says that selecting an investor or program boils down to finding “smart money and the right partner – somebody who can help us connect to the right customers and people.” The latter is critical since his company operates in the niche field of robotics. That’s also why Sayre says he’s open to going through another accelerator program “if the valuation is right.”
A well-trodden path
Last November, YC shut its doors in China, saying it was “not the right time to run a new, country-specific version” of the program. The move raised doubts about the viability of Silicon Valley-style accelerator models in Asia.
JFDI, the first accelerator in Southeast Asia, ended its program in 2016 because of high costs and a tight market for tech talent, but it continues to mentor its portfolio companies in its capacity as a shareholder.
Around four years later, the same structural challenges remain for accelerators in the region. Southeast Asia also lacks large groups such as Google and Facebook in the US that are constantly on the hunt for early-stage companies. Facebook’s recent purchase of Giphy is an example of this appetite for acquisition.
Without an opportunity to exit, it’s a long wait for both investors – accelerators included – and successful entrepreneurs, before they move to the other side of the table and become investors themselves.
Will Iterative find success in Southeast Asia given how others have tried and failed?
Iterative believes that a combination of factors, including high internet penetration, a fast-growing internet economy, governmental support as well as strong founders returning home, are heralding a golden age for the region.
“We strongly believe that Southeast Asia is at a tipping point where all of these things will start to turn,” Hsu Ken says.
Currency converted from SGD to USD: S$1 = US$0.71.