Category Equity Financing

10 Things you should know about the Singapore startup landscape

With Singapore Week of Innovation and TeCHnology (SWITCH) just around the corner, there is a significant interest directed at Singapore these days.

Of course, there has always been interest in Singapore’s tech and startup scene, especially when the city-state became the only Southeast Asian country to rank in Startup Genome’s Top 20 Startup Ecosystems in World report in 2015.

But if you’re only just discovering Singapore’s tech and startup scene, here’s ten things you should know about it.

1. A steadily growing entrepreneurial activity

Over the last five years, Singapore’s startup landscape has grown tremendously. According to Jonathan Lim, Director of Startup and Global Innovation Alliance of Enterprise Singapore, the number of tech startups has grown from 3,400 in 2012 to 4,000 in 2017.

While Singapore has been a significant hub for startups since the late 90’s, this 17 per cent boost in a span of five years is a significant number that can be attributed to a conducive business environment, ample government support, and a strong entrepreneurial community.

“Singapore has a very positive outlook when it comes to trying new things and finding innovative ways to solve different problems,” said Yuki Shimahara, CEO of LPixel, a startup specialising in developing AI for Life Science research.

2. Highest amount of startup funding in the region

In 2017, startup investments in Singapore reached US$7.3 billion, making up 45 per cent of all deals in the region. This is not a one-off; Singapore has been steadily growing to this number, with venture funding alone growing from US$136 million to US$1.37 billion in just a span of five years (2012 to 2017).

3. Singapore starts them young

The median age of entrepreneurs in Singapore is 28 years old – the youngest globally. By comparison, the world median is 40 years old. As an example, let’s take a look at Structo.

Structo is a startup that develops high-speed, industrial-grade additive manufacturing 3D printing systems using its proprietary Liquid Crystal Mask Stereolithography, with a niche in dental applications. It was founded in 2014 by four National University of Singapore graduates, and have managed to draw in investments about US$720 thousand investment from SEEDS Capital and Wavemaker in 2016 and an over-subscribed round of US$2.9 million investments from various investors.

Also read: National University of Singapore to spend US$18M to launch 250 deep-tech startups

4. It’s the home of unicorns

Singapore has seen the birth of five unicorns – Grab, Lazada, Razer, Sea, and Trax currently valued at a collective US$12 billion. Being headquartered in Singapore gave them access to the talent, funding, and connections that they needed as startups.

Singapore’s startup landscape has provided these companies with the support they needed to grow big – something that young companies like LPixel are banking on. “Overall, I think Singapore is an excellent place for new startups like us, to offer new values and solutions,” said Shimahara.

5. A launchpad to ASEAN

Market-wise, Singapore is small. This is not a hindrance, however, as it only pushes startups to create strong relations with neighbouring countries.

“Our aim is to develop Singapore as a reference test market for startups that want to access the region and we have made concerted efforts to strengthen our connections to those key markets like Indonesia, Malaysia and Thailand,” said Lim.

This is a claim that has a lot of history backing it; going back to the previously mentioned five unicorns, all of which operated regionally while headquartered in Singapore.

6. Tangible government support

Enterprise Singapore, part of the Singapore Government, has been actively working with different partners to develop Singapore’s startup landscape.

It works with partners such as private VCs and accelerators, Institutes of Higher Learning and public agencies to put in place a wide range of programmes that meet the needs of startups under Startup SG.

Startup SG represents the shared interests of the startup community and showcases Singapore as a leading startup hub. It is the brand for all local support initiatives and provides stakeholders with a platform to connect globally.

This support could mean mentorship, funding and investments, and incubations, which are all critical to the growth of startups.

SLINGSHOT@SWITCH powered by Startup SG, for example, was launched in 2017 to showcase the best global startups in deep tech. This year, the startup competition returns as one of the key events at SWITCH 2018.

“Winners of SLINGSHOT will have a chance to tap on Singapore’s network of startups, VCs, accelerators and corporate partners to expand not only in Singapore, but within Asia, given our strategic location in this region,” said Lim.

Also read: SWITCH has 9 partner events, here is why you should go

7. Ample opportunities for partnerships

While Singapore is geographically small, it packs a punch when it comes to conduciveness of starting a business – something that entrepreneurs all over the world are aware of. In the 2017 Startup Genome report, they estimated about 463 entrepreneurs moved into the country for the purpose of starting a business. The global average is 300.

This means more entrepreneurs, more businesses, and more opportunities for partnerships locally and internationally.

Government support also plays a significant role in these partnerships, such as with the experience of LPixel. “We got in touch with some medical institutions through the government’s network. We are actually in the middle of exploring joint research opportunities with some of them,” Shimahara said. “This process would not have gone smoothly without the support from the government.”

8. It’s a gateway to the going global

Singapore is ranked 3rd globally on the ability of startup leaders to connect and form relationships with entrepreneurs in other countries. The strong startup community in Singapore allows founders to build relationships and partnerships not only locally but also internationally.

Singapore is home to many international tech and startup conferences, after all. And while there is a strong local support for these conferences, there is also an equally strong international interest in them, resulting in potential million-dollar partnerships in the works.

“We want Singapore to be a vibrant and self-sustaining global startup hub that is deeply connected with other startup ecosystems, especially those in ASEAN,” said Lim.

9. Deep tech thrives here

There is an increasing number of deals and VC investment amounts in deep tech. As showcased in SLINGSHOT, the Singapore government focusses on attracting and building more startups in deep tech sectors like medtech, cleantech, fintech, and future mobility, among others.

These are also in line with the global trends – increased focus on Industry 4.0, increasing emphasis on healthcare due to an ageing population, as well as rapid urbanisation and digitalisation, particularly in Asia.

One such example is MiRXES, a spin off from A*STAR’s Bioprocessing Technology Institute. The startup has developed an alternative non-invasive solution to accurately diagnose cancer through blood tests, at an earlier stage and with a higher degree of accuracy. MiRXES has raised about US$2.9 million in Series A.

10. Singapore is one of the best countries for women entrepreneurs
In a study conducted by Mastercard, Singapore ranked 5th best market globally for having strong supporting conditions and opportunities for women to thrive as entrepreneurs. Women made up 27.5 per cent of total business owners in Singapore; one of the higher proportions in the total markets studied.

And while the numbers may seem paltry, the conditions on the ground are not. There is a growing, vibrant community of women entrepreneurs in Singapore that aims to inspire women to create the next big thing.

Whether you’re a homegrown Singapore local, or an international entrepreneur searching for a friendly place to plant your startup roots, Singapore is one of the best places to consider.

“Startups play a key role in contributing to Singapore’s economy, especially in creating innovative solutions to support the growth of our companies,” said Lim. “We have managed to build a vibrant startup ecosystem over the years through our good business environment, investment in R&D and strong MNC presence.”

The KPIs of Raising Capital

The best tool that we have found for managing business partners, joint ventures, and team members are Key Performance Indicators (KPIs). A KPI is a measure of an action or activity which lets you know if work is getting done, if that work is leading to results, and what the yield is on the time invested in that activity.

In capital raising, you will want to have different types of KPIs in place, with some activity-based and some results-based. These will be the leading indicators as to whether you are raising capital effectively or at least on the right track to raise capital.

Some potential capital raising KPIs could be:

  1. Write One Article Per Week
  2. Meet with 5 Investors Per Week in Person
  3. Schedule and Complete 10 Conference Calls per Week
  4. Speak at One Conference Per Month
  5. Call 20 Investors Per Day
  6. Meet with One Potential Connector or Networker Who Could Help in Raising More Capital Each Week

Each KPI must be measurable so you can say objectively if it was completed or not in the time frame expected. Even if you are just managing yourself this can be helpful, with the goal being to set up realistic but challenging KPIs that will shape activities and make it more likely that capital will be raised.

Good luck with your KPIs!

by Theodore O’Brien, Managing Director at The Miami Family Office – Investing Private Capital in Excellent Businesses

Crowdfunding, venture capital, angel investing?

Crowdfunding, venture capital, angel investing – there seem to be so many different ways to get funding for my business. Which one is best and are there any downsides to letting other people own a share of my company?

Eleanor Lawrie of This is Money replies: You could feel like a kid in a sweet shop when it comes to the different forms of investment on offer for your small business.

But while the offer of ‘free money’ may sound tempting, it’s important not to seek outside funding too quickly, get into anything you don’t understand, or give away more of your business than you want to.

Here we look at how to choose the right time to look for an external backer, the different forms funding can take – and how to successfully pitch to investors.

When is the right time to look for outside investment?

While many small businesses would like to take their time expanding, it’s important to be flexible in order to take advantage of opportunities as they arise.

Bivek Sharma, head of small business accounting at KPMG, says: ‘Slow, organic growth can be appealing, especially compared to the alternative of taking on debt or giving up equity, but competition complicates the picture.

‘If competitors secure cash injections and invest in talent, technology or materials that put them in a better position to jump on new business opportunities, they can quickly eat into the territory of the more cautious.

‘For most young businesses, the reality of growth opportunities is that they are often fast and erratic, not slow and steady. In these moments, outside investment rounds can be a great asset.’

If your business is keen to grow and is seriously considering outside investment, there are a few questions to ask first:

Why do I need outside funding?

Sharma says: ‘Being clear in your own mind about exactly why you need extra capital can give you a great steer on which funding route will best suit your business.

‘For example, a start-up may need seed funding to help establish their concept, before going for a larger round when looking to scale-up.

‘Established businesses may need investment that is focused on scaling, whether that’s for additional staff, equipment or new technology.’

How much should I ask for?

Once you know how you would put the money to work, you can start to calculate a good amount to ask for.

Sharma says: ‘Having an appropriate figure in mind is important when approaching investors. Ask for too little and you may need to generate further rounds of funding, which can damage the business’s credibility.

‘Apply for too much and you run the risk of being turned down or out-pricing potential future backers.’

Which type of funding is right for my needs?

Funding options have increased exponentially in the past few years, and it’s worth taking time to consider which route would suit your business best. These can really differ in terms of the amount on offer, the speed of the process and the strings attached.

SMEs need to consider what they are prepared to give in exchange for a cash injection, whether that’s paying interest on a loan, or giving away equity in the business.

Bivek says: ‘My advice is to ignore the hype and focus on your own needs and goals. Just because some businesses raise millions through crowdfunding doesn’t mean it’s right for everyone. Consider every option and whittle them down.’

Peer to peer lending/crowdfunding

Early stage companies may want to investigate peer-to-peer (P2P) platforms such as InvestDen and Funding Circle, which match growing companies directly with organisations and individuals who want to lend to them.

The idea is that, by cutting out the banks, individuals who lend to you get a better rate of return. At the same time, your business may be able to borrow at a cheaper rate than the banks offer – if you have a good credit score.

These loans are collated so that lenders’ money is put into a bucket of different companies or individuals put together by the platform to even out their risk profile.

The risks of this type of financing are borne mainly by the lenders as their money isn’t protected by the FSCS. However, SMEs who borrow through peer to peer lending need to treat it the same as they would a bank loan – you won’t necessarily be accepted, and if you don’t pay it back on time your credit score may be affected and you may be chased by a debt collection agency.

Meanwhile, crowdfunding lets individuals financially back your product or service. On some sites the aim of this is to help charitable or socially conscious projects get off the ground, and the backers get nothing back other than the satisfaction of seeing it come to life.

But usually, businesses offer something in return, like equity (shares) in the business, or debt (bonds or mini-bonds).

Once on the crowdfunding platform, you have a set time-frame to attract the funding you need. In most cases you will not receive any of the investment if you fall short of the target, but you are usually allowed to raise more than your target. This means it’s important not to set a target higher than you can realistically raise.

Crowdfunding can be a useful marketing exercise in itself, helping to raise the profile of your business while (hopefully) attracting your desired level of funding.

Angel Investors

Angel investors tend to be successful or affluent business people who want to financially back promising companies, usually in exchange for debt or equity. These investors will sometimes also offer guidance and support, and will often have expertise in the sector they are investing in.

Sharma says: ‘Angel investors can be a good option for the super ambitious, as they often provide a sizeable lump sum. They frequently act as business mentors too, and are happy to invest time to guide start-ups.

‘Making sure you are eligible for the Seed Enterprise Investment Scheme (SEIS) can make the investment considerably more attractive to these investors, and can mitigate the higher risk involved with large amounts of money.’

Venture Capital firms

Venture capital firms usually offer much bigger sums than angel investors – usually at least £1million – but are likely to expect a higher rate of return and/or more equity in your business.

Sharma says: ‘A more established high growth company with excellent potential, for example one with valuable intellectual property, may be well-suited to venture capital. This can work well if your aim is to increase value in a short time, for example, if you’re aiming to sell the business in three years.’

While this level of funding can have a huge impact on your business, venture capitalists can also take a long time to decide whether to invest, so this method may not be a good choice if you need funding quickly.

Businesses also have the option of selling their intellectual property – the ideas behind their product or service – often in the form of a patent or copyright that they have already secured.

Corporate investment

It may sound counter-intuitive, but small companies can sometimes attract funding from more established firms in the same industry. For example, in the 2000s, McDonald’s took a 33 per cent stake in upmarket sandwich chain Pret a Manger and Google invested $1billion in fellow search engine AOL, as part of a strategic alliance.

Sharma says says: ‘If you have a disruptive product, consider speaking with the companies you are looking to shake-up – they might be keen to buy a stake in the business as a defensive measure.

‘Just make sure a corporate investor is keen to share in your success, rather than simply neutralise the competition.’

What makes a winning pitch?

Once you’ve worked out which form of investment is right for you, the next step is to make sure you nail your funding pitch.
The best way of doing this will depend on your audience. For example, crowdfunding investors are unlikely to be experts in your field, so you need to be clear in your pitch about what your business has set out to achieve and why this represents an exciting opportunity for them.

Meanwhile, venture capitalists or angel investors are likely to ask probing questions about the inner workings of your business – so you need to be prepared for that and make sure you know all your facts and figures.

However, there are a few tips all small businesses would do well to bear in mind, regardless of who they are pitching to.

Sharma says: ‘You should be able to explain your business in one or two simple sentences. Being able to succinctly describe your product or service, and the problem it solves, is critical to securing investment.

‘For certain sectors, such as technology, it can be helpful to give a demonstration, or talk through a prototype, which will help potential funders to visualise a complex idea.’

While backers may think your idea is good, they will also want to know pretty early on what’s in it for them financially.
Sharma says: ‘One of the most important things to get across is how you plan on generating revenue. The bottom line is that backers look for a financial return, so you need to prove that your idea is a promising investment.

‘Lastly, excite investors! Enthusiasm for a venture, plus expression of your own expertise and tenacity can be a great asset.’


Why Investors Aren’t Calling You Back

Entrepreneurs are constantly befuddled by how an investor would choose one deal over another to review or invest in. The refrain pretty much looks like this:

“What?! How can that investor possibly invest in {Insert Undeserving Name} when my company is far more attractive?”

The truth is there are lots of potential reasons for these decisions, but it’s important to understand what the landscape looks like, and how your deal stacks up to others.

It’s Kind Of like a Dating Site

Imagine investors were just regular people like you on a dating site. They would sort through tons of profiles looking for a few things that are important to them. Maybe it’s the picture, maybe it’s your height, maybe it’s whether or not you like longs walks on the beach.

Are these investors going to call every single person, go on a date with them, and then figure out whether or not they should get married? No, of course not.

They are going to whip through profiles as fast as possible until they see some sort of signal that indicates they should even bother composing a message.

These signals for dating exist for investing as well. What’s more important is that you understand how you stack up against other deals.

Recognize Deals Are Competitive

A funny thing happens when you raise your hand and say you’ve got money to invest. You instantly become smarter, funnier, and far more interesting to a whole bunch of people who would love to have some of that money. (I’m kidding… sort of).

For this reason, most investors aren’t sitting around waiting for one person to show up at their door with “the best deal ever.” It’s more like a huge line of people pushing each other to get to that door.

If you can appreciate that you’re competing fiercely with lots of other deals at the same time, you’ll understand why small red flags can easily keep you from ever getting a meeting to begin with.

Small Red Flags Are a Big Problem

There’s no absolute science to how every investor thinks. Some may only invest if they have a strong personal connection to someone in the deal. Others don’t use anything but their gut instinct.

Still, there are a number of red flags that tend to steer the majority of investors toward one deal over the other.

High Valuations or Bad Terms

Deals that have an extraordinarily high valuation relative to where the investor thinks the price should be can sometimes warrant a pass. If you’ve been in business for 3 months and are looking for a $20 million valuation, that might be a problem.

Sometimes the deal type itself could be a problem. Some investors might hate convertible notes and are just going to move on to a deal with a (hopefully modestly) priced round.

No Personal Connection

When an investor writes a check, big or small, it often helps to have some personal connection to the deal. It may be that they know someone who’s worked with the founders. It may be that another investor in the deal has invested with them before.

Most VCs will tell you that theirs is a relationship business atop all else, because they are making a few very large bets, and having the relationship to source and bet on the deal is critical.

On paper your deal might be better, but the fact is the investor hasn’t worked with you before, and the person they are writing the check to has a better relationship. Never discount nepotism.

No Lead Investor

I’ve written before about the importance of having a lead investor in your deal. This helps an investor pick your deal over another because it indicates that someone else has already done some diligence, and backed that diligence with a check.

Investors have more money than time, so any indicator that they can save a little bit of time by not having to start absolutely from scratch is really helpful.

That’s Just The Beginning

These are just a few of the many signals that investors rely on when sifting through the many offers on their desk. What’s more curious to note here is that none of what I’ve described has anything to do with your actual company.

It’s not that you have a terrible company (though, maybe you do). It’s that you don’t have the proper signals that warrant investors to look at your company to begin with.

Just like dating, don’t worry about who’s not calling you — worry about turning the first dates you do get into marriages. It’s all you really have the power to do.

By Wil Schroter, Founder & CEO

Equity Financing Stages for Startups

It is rarely possible for startups to raise sufficient capital to kick-start their operations, launch products and break even. Although a ‘one-time investment’ strategy is theoretically possible, it is hard to cite examples of any successful startup that has gone this route. Moreover, most angel investors and venture capitalists prefer to fund startups in steps. This practice helps investors assess the value of the company and minimize the startup risk. Therefore, entrepreneurs should articulate their investment requirements, while keeping in mind how investors like to fund startups.

Venture capitalists and angel investors categorize startups into stages based on a number of startup parameters including who makes up the management team, the value proposition, the risk, customers’ profiles and engagement, revenue, etc. and provide equity finance accordingly. Most startups are categorized into the following stages:

Early Stage

Seed round
First round
Expansion Stage

Second round
Third round
Bridge loan
Liquidation Stage

Merger & Acquisition round
Initial Public Offering (IPO)
Leveraged buyouts

Early Stage

Early stage refers to the initial days of a startup. The company starts off with a business idea, experiments with, and articulates its economic viability. The company establishes its proof-of-concept by demonstrating the technology and getting potential customers on board. This can be done in several ways. If the business idea is product based, the company would demonstrate a prototype of the technology to real world customers and get them on board. If the business idea is web based, the company would set up a website, track the internet traffic and get user feedback. In either case, the company is testing the market and establishing the viability of the business idea

This phase is very important for a startup. It is crucial for a company to prove its concept and establish its business case. Some companies can get through this phase without the need for investment. However, other companies need investment to complete this phase. For example, an online company hardly needs an investment to prove the concept. However, a pharmaceutical company would need investment. Companies that need investment to establish their proof require seed investment or seed round investment. This round has the highest risk in terms of Return of Investment (ROI). Most investors shy away from investing in this round and would like to see the company pass this stage without the need for investment.

Once the company establishes its proof of concept, it prepares a roster of potential customers who are willing to positively talk to venture capitalists. The individual customers should be ready to say, “Hey VC, if you fund this company and help it launch a product, we will engage with the company and take the relationship to the next stage. The technology interests us because.. ” A customer reaction like this is the Holy Grail for an early stage company seeking venture capital.

Companies that have passed the proof of concept stage, have an established team and a list of potential customer references need money to start their operations and launch a product. Such companies need their first round investment. First round investments are comparatively less risky than seed round investments.
Early stage investment is the most risky stage compared to all other financing stages. The majority of startups fail in this stage. The key to surviving this stage is the ability to bootstrap the operation. (Refer to the “Go-To-Market Strategy” article on our website for some strategies.)

Expansion Stage

After the first round of investment, most companies launch their products or services and get a few paying customers. However, these companies need further investment to expand their product line, operations and marketing efforts. This phase is called the expansion stage because during this stage most companies have to expand their operations and invest in expensive marketing efforts.

Second round investment is meant for companies that have a production-quality product along with a few paying customers. However, they need more money to improve their products and attract more customers. It is very important for companies to get positive paying customer references at this stage. The customers who are using the products should be able to say, “Yes, I have been using the alpha version, but I need more features. I am more than willing to pay $x for further capabilities.” Apart from this, the company should also have more business opportunities on the horizon.

After the second round investments, companies can launch any number of expansion stage rounds. Note that the company has to dilute its equity for every expansion round. Given this situation, it is better that companies attain break-even at the earliest. The sooner companies break even, the better it is for all the investors so that they can take their money out.

At times, companies that are in their expansion stages can opt for bridge-financing instead of equity-financing. Bridge-financing refers to short-term interest only financing. Companies typically need this for restructuring boards, especially if certain early investors want to reduce or liquidate their positions, or when the former management’s stockholdings change and management is buying out former positions to relieve a potential oversupply of stock before becoming public.

Liquidation stage

Companies need money to liquidate their stock so that some investors can cash in their stocks. Companies liquidate stock either through going public, Merger & Acquisition route or through a leveraged buyout. Most of the investment money is required to engage investment bankers and other legal services for the transactions. Leveraged buyouts enable an operating management group to acquire parts of the business (which may be at any stage of development) from either a private or public company. The acquisition may be through the purchase of select assets or stock.

Most companies fail during the first funding stage. Entrepreneurs should really analyze their business case and try to minimize their risk before investors come in. As companies progress from the seed round to the expansion stage, the risk decreases and raising money becomes easier.


How Can I Get Angels To Invest In My Company?

How can I get angels to invest in my company? Angels are private investors who look for promising new companies to invest their money in. Generally they invest in businesses close to where they live and there are many local angel groups in many areas. They are investors with their own money who are looking for promising businesses to help start up for an equity in the business. They usually want to have an exit plan once the company is firmly on its feet.

Angels are generally successful entrepreneurs themselves and so have experience with starting businesses up. They have the experience to see great business ideas and sometimes offer their expertise to help with business advice. They can be the help from heaven your business needs-thus the name angels.

It is critical to get your business considered by an angel group to find a referral. Check around in your network of people for friends or others you are acquainted with that know angel investors. It is a good idea to ask your attorney or business friends who they know as it is always a foot in the door to know someone in common.

In order to get angels to invest in your company you need to do your home work on the local angel groups in your area. Find out which businesses they specialize in if any and what their normal meeting times are. Make sure you find out any procedural things such as forms they want you to fill out or questions you will need to answer to be considered. Most have websites with information for you to learn the answers to these questions.

Not all businesses are right for angel investors. There are some important questions you must ask to see if an angel investor is right for your business.

Am I willing to give up some of the ownership of my company to a partner type situation with the angel being in control to some degree as it is his money being invested?
Will my business realize a profit in 3-7 years? Most angel investors want to see their money returning in this time frame
Am I willing to take advice from investors and receive board of director’s decisions I may not agree with?
Am I willing to accept an exit plan which may include my selling the business to someone else in 3-7 years?
Angel investors look for specific things to make their decisions about which companies get their money.

Here are ten things that angel investors will be looking for:

Is your product almost near completion?
You have existing customers or customers who have said they will purchase your product
You have invested your own money and exhausted all other resources at your disposal i.e. family or friends
You can demonstrate that the business will grow rapidly and create 15-30 million in revenues in 3-7 years
You have a strong management team
You have a great business plan
You have an exit plan for the investor in less than 7 years
You have a unique product or service with a broad customer base
A clear market picture with a market penetration plan

There is a strong potential for return on the investment

10 Questions to Ask Before Accepting an Investment

When to say “no” to investors.

You may think that when someone offers you money to fund your startup, you should find a way to take their money. But even more important than landing an investment offer is knowing when to say yes to investors and when to say, “Thanks, but no thanks.”

Just because someone has money doesn’t mean they have the knowledge to help you grow your business. And that’s what I mean by “dumb money”—I’m a firm believer that anyone who invests money in your business should also bring something other than money to the table.

You should think of choosing an investor the same way you consider choosing a business partner, because after you take their money, they become a partner in your business. And if you choose a partner based on money alone, you’re going to find yourself in trouble.

(It is possible to take money from investors who choose to be “silent partners”—but you’d better have that clearly agreed upon, as well as clearly outlined and documented in your operating agreement to avoid any conflicts later on as you grow your business. It’s not the standard.)

So how do you know when money’s dumb to take?

A Ten-Point Checklist

If you can answer “yes” to any of the following questions about the person or people giving you money as an investment in your startup company, you may be taking “dumb money”:

Is this the investor’s first time investing in a startup company?
Is this the investor’s first time investing in your industry?
Is this the investor’s first time investing in a company that needs to raise multiple rounds of financing (if you are in fact doing so)?
Is your target market new to the investor?
Is the investor asking for a non-dilution clause (a stipulation that their equity shares never dilute) in your operating agreement? (No savvy investor will ever ask for this, nor will a savvy investor want to invest in your business if you have any investors who demand this clause. Every time an investment is made, everyone dilutes!)
Is the investor asking for an equity stake that does not fairly correlate with the amount of money they are giving you? (For example: You’re raising $1.5M. You haven’t launched your product yet. An investor wants to invest $100,000 in exchange for 50 percent of your company. This is most likely not a fair and equitable exchange—regardless of what you might hear and see on the TV show Shark Tank.)
Does the investor want to keep lawyers and CPAs out of the investment discussion? (Major red flag!)
Is the investor’s lawyer new to the startup investment scene?
Is the investor hesitant to share references from other companies they’ve funded, or references in general?
Is the investor pressuring you to take the money by a certain date and not transparent with you about why?

This is not an exhaustive list of questions to consider during your due diligence process with a new investor, but these are all items you should be able to confidently answer “no” to before moving forward with taking the investment.

I hate to admit it, but I’ve been on the receiving end of “dumb money” myself—in my first startup company, I took a significant amount of investment capital from an angel investor about whom I would have answered “yes” to questions 1, 2, 3, 4, 5, and 8.

Needless to say, that company failed. It didn’t fail because of that investor, but it did fail because we made a series of mistakes that, when combined, created a perfect storm.

It’s important to seek out investors who add immediate value to your company—and not just to your bank account. This helps create a healthy investment culture in your startup and sets the tone for how you’ll continue to grow the company.

How to Identify the “Smart Money”

Below are examples of what “smart money” brings to the table, and what you should seek out from potential investors:

Contacts to help you grow your business.
Specific skill-sets that are missing in your company (e.g., human resource management, computer
programming skills, operations, financial management, leadership in high-growth environments, sales, new media skills, patent filing processes, etc.).
Challenging your ideas and assumptions in a productive manner.
Mentorship and coaching when needed.
Connections to other accredited investors.
Credibility based on their background.


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