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The Startup Odds of Raising V.C. Investment

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We offer terms to 0.2% of the opportunities we see. The chances of raising VC investment are far lower than getting into that high school, top university or coveted corporate job. In fact, you have a 11.8% higher chance of getting into Harvard Business School.

While it may sound obvious, we want founders to beat those odds, but not to game them. By tracking “loss reasons”, we aim to provide insights into why we turn down opportunities and more importantly what founders can do to improve their odds of raising VC investment.

Key takeaways

  • Founders face a ‘differentiation challenge’, to set apart their company as a whole, as opposed to one or two isolated features.
  • Sizing up the addressable market determines a startup’s potential to deliver venture scale outcomes, so it’s important to do the maths.
  • Tech-push ideas are at greatest risk of not articulating a clear use case

At seed stage, the odds of a good founding team, with a fully tested product and early signs of traction would tend to be greater. At pre-seed, it’s a different ball game. For our monthly Office Hours (our main touchpoint with pre-seed founders), we receive ~150 applications per month, of which 10% get through to a 15-minute meeting and 1–2% progress. 4 out of 46 of our portfolio companies have now raised investment via Office Hours.

To help with the content we publish on The Path Forward, we track our “loss reasons” i.e. why applications don’t get through, of which the most common are outlined below:

There’s plenty of advice on The Path Forward on how to avoid these pitfalls:

Understand the “differentiation challenge”

Startups, by their very nature should offer something new and exciting. It therefore seems surprising that 32% (the highest number of opportunities) are lost because they fail to differentiate their offering versus what already exists. However, we appreciate it’s not easy to make a new product, vision or business model stand out, or indeed to build credibility in crowded markets.

Our guide to “evaluating your startup idea” provides a hands-on approach to testing whether founders have developed a differentiated product by putting it directly into the hands of customers. A particular challenge we observe from Office Hours submissions is the “feature trap”, where applicants pitch a new tool or a small tweak to existing solutions, but don’t have enough on which to build a differentiated business.

The founder’s ‘differentiation challenge’ is to set apart their company as a whole, as opposed to staking their future on one or two isolated features.

Markets that deliver “venture scale” outcomes

Many Office Hours applications pitch perfectly good businesses, which have every chance of succeeding by gaining traction in small, but limited market segments. These businesses often succeed with organic growth or raising investment from angels, whose cost of capital, (and required rate of return) is lower due to tax breaks and incentive schemes.

However, this article on the Equity Kicker explains why VCs must do the maths on the market and the potential exit outcomes when evaluating an investment. Due to VC fund economics (a subtle way of calling out the difficulty of predicting the success rate of startups), each investment we make must have the potential to return the entire fund back to our own investors (in Forward Partners’ case, that’s £60m). That means if we have a 10% stake, the exit value should be £600m or if we have a 25% stake it should be £240m.

Assuming this outcome is based on a 3–4x revenue multiple (£60-£80m revenue in the exit year), and the startup has captured 10% of a given market, the total size of the addressable market needs to be £600m+.

If founders are going after a large market (or starting with a small bridgehead before expanding into adjacent ones), it is equally important for founders to articulate the way in which their vision could deliver venture scale outcomes. This might involve setting out a clear plan on how to scale their marketing channels, or the unit economics behind achieving that kind of growth.

Fit with a VC’s investment strategy

Whether your startup is on / off strategy is a binary outcome (affecting 20% of all inbound). If a startup doesn’t fit with the fund’s focus or investment stage (9.7%), no matter how awesome it is, it’s unlikely to get a second look.

We have an article on getting to a first meeting with VCs, which explains how to target funds that are the best fit for your business. However, the best way to get a sense of a VC’s investment strategy is to look at their current portfolio or read thought pieces by their Managing Partner(s). For instance, Nic Brisbourne outlines Forward Partners’ investment strategy for Fund II here.

Similarly, it is important to pick the right VC targets. It makes no sense to send an application to a VC if you are too early (or in our case, more often too late) for their stage focus.

Articulate a crystal clear use case with proven pain points

Few applications (9.8%) are rejected on the basis of a poor use case, though this loss reason has been increasing over time. Cutting the data by “sector” or “category” suggests this correlates with our “Applied AI” investment strategy.

In areas such as artificial intelligence, there are many technologies looking for a problem to solve but it’s important to address a clear market pain point with the solution you have built. To help tech founders, we have a guide on identifying market applications for their technology, as well as more specifically for AI/machine learning startups.

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About the Author

This article was written by  of the Path Forward. The Path Forward was developed by Forward Partners, a VC platform that invests in the best ideas and brilliant people. Forward Partners devised The Path Forward to help their founders validate their ideas, build a product, achieve traction, hire a team and raise follow on funding all in the space of 12 months. The Path Forward is a fantastic startup framework for you to utilise as an early stage founder or operator. The framework clearly defines startup creation as being comprised of three steps. The first step of this framework involves understanding customer’s needs.

Callum Connects

Sun Ho, Founder of LittleLives Inc

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Sun Ho has an edtech business, LittleLives. She’s helping turn complex school operations into simple and enjoyable processes.

What’s your story?
I’m just a small town girl who won’t stop believing.
Someone recently told me that the curious little 10-year-old girl in me is still shining through with excitement for the world today. Although, now, instead of being curious about how things work, I am interested in how we can solve real world problems. Today, I get to learn and build everyday on our dream to turn complex school operations into simple and enjoyable processes.

What excites you most about your industry?
Have you been to a preschool lately? In our day-to-day, we get to hear the wonderful laughter of children. We see the innocent smiles of our little ones, who learn as they play. We meet the tirelessly loving educators, leaders and parents who give their best. These are the people we serve everyday at LittleLives. It excites us greatly to be in an industry that meaningfully impacts the future of our world. When we see a new feature we have implemented in our system helping to shave off minutes or hours of administrative work for schools (and put a smile on many faces), it is deeply satisfying.

What’s your connection to Asia?
LittleLives started in Singapore. We have since expanded to multiple cities in Malaysia, Vietnam, Cambodia and China. Everywhere we go, we gain unique insights about different cultures. One thing that remains unchanged around the world is the passion to improve education. This includes the desire to refine school processes too. I absolutely love the people I work with, in schools and in my own team overseas. They have taught me so much about their cultures and countries.

Favourite city in Asia for business and why?
It is so hard to choose one. We love Kuala Lumpur, Penang, Ho Chi Minh, Hanoi, Beijing and pretty much every city we have visited. Setting up in multiple Asian cities has really become faster and more transparent than ever before. What a time to be alive and working on a startup, and even more so for a young woman in Asia.

What’s the best piece of advice you ever received?
Be true to yourself.

As a woman and as the founder of a tech startup, I have heard the many ways in which people express their surprise that I do not fit into – for lack of a better word – the norm. I am my own mix of feminine and geeky. I have a computer science background that I am passionate about and, at the same time, I love fun aesthetics and product development. Technology is an industry in which venture capitalists traditionally favour white, male founders as the stats show a concentration of success in this small demographic. Despite this, I have found that the people around me will respect me for being me because I let my personality and passion take the stage.

Who inspires you?
Beth Fredericks, the Executive Director at Wheelock College. She is a wonderful educator, leader and orator. At 67, she is as active as any young teacher and as wise as the oldest, most experienced professor. She has inspired so many early childhood educators with her stories, her teaching and above all, her warmth and delightful personality. She has contributed so much to the early childhood field here in Asia, and all over the world, over the span of her illustrious career. Her charm and kind heart makes her one of the most sought-after collaborators in our industry today. Yet, she remains humble, approachable and personable. Her enthusiasm for education and children, coupled with her infectious humour, are what I aspire to.

What have you just learnt recently that blew you away?
What continues to blow me away every time I witness it, is incredible potential that can be unlocked when a great team comes together. When you put together bright, experienced, communicative and open-minded people in a team, miracles can happen.

Creative ideas that were recently put forth in a small ad-hoc project team are now being turned into a new product that LittleLives will soon offer. When we first began discussions, we had no idea where they would take us; the only thing we knew definitively was that we wanted to help educators gain better access to resources to help them in their everyday classroom. It all fell into place when our team started brainstorming ideas that were based on the problems we knew were present in early childhood education.

Now, we have the trial version of a new module, LittleAcademy, and I am in awe of how all of this came together. I would like to quote Margaret Mead here, “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it is the only thing that ever has.”

If you had your time again, what would you do differently?
To be honest, I would not change a thing. We made so many mistakes when we started this journey, but the lessons we learnt from our failures are what make us stronger today.

On a related note, there is this beautiful quote from Batman Begins:
Thomas Wayne asked, “Why do we fall, Bruce? So we can learn to pick ourselves up.”

How do you unwind?
It is important for us to allow our body, mind and soul to unwind and recharge. Badminton is my go-to exercise. I play twice weekly to keep fit and nimble. Recently I have picked up Yoga Nidra with an excellent instructor who has opened my eyes to all the good that meditation does for our minds.

Beyond this, I find that spending time with my loved ones, friends and teammates helps me feel grounded and loved.

Favourite Asian destination for relaxation? Why?
I travelled to China twice last year and truly fell in love with the country. It provides such a rich variety of experiences, from culture and art, to commerce and tech. I was in a constant state of amazement. It is a fast advancing nation that I really enjoy my time in, both learning and relaxing with the people I meet.

Everyone in business should read this book:
High Output Management by Andrew Grove, late CEO and Chairman of Intel. This is a book written in the 90s, but its ideas are still very much applicable to businesses today.

Andy lays out what you need to do to successfully manage your business in simple and concise terms. This does not mean that it is easy to grow as successfully as Intel did, but the book shows us that the path to greatness is apparent. What I personally love about this book is that it presents its ideas both logically and emotionally without judgement.

On the issue of an underperforming teammate, Andy offers a very simple explanation:
“When a person is not doing his job, there can only be two reasons for it. The person either can’t do it or won’t do it; he is either not capable or not motivated.”

And as a manager, all you can do is to train and motivate.

This is an excellent review of the book by Ben Horowitz of Andreessen Horowitz: https://a16z.com/2015/11/13/high-output-management/
I highly recommend this book to all entrepreneurs.

Shameless plug for your business:
LittleLives is a leading preschool edtech company with a strong presence in over 700 schools in Singapore, 20 in Vietnam, 130 in China and 100 in Malaysia. LittleLives develops and provides applications that allow preschools to record children’s administrative records digitally, from attendance-taking to portfolio management. In addition to reducing the hassle of physical filing and documentation, the LittleLives system allows parents to keep track of the progress of their children’s learning at school through LittleLives parents’ app.

As an edtech company, LittleLives does more than facilitate day-to-day school operations. In 2017, LittleLives hosted the first ever International Pre-school Conference in Kuala Lumpur, which was attended by educators representing 1200 preschools in the region. LittleLives has helped over 215,000 children, 430,000 parents and 23,000 teachers bring schools into the 21st century and we are hoping to continue empowering many more around the world.

Reach out to us if you are involved in education or entrepreneurship. We’re always happy to chat!

How can people connect with you?
Just drop me an email at [email protected].

Twitter handle?
With so much to say, 140 characters is not enough. Hence, it is best to follow us on Facebook (facebook.com/littlelivesbigdreams), Instagram (littlelives_inc), YouTube (youtube.com/user/hosunSG), and check out our LittleLives Blog (blog.littlelives.com) to get to know us better!

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started,
built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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Entrepreneurship

Women on Top in Tech – Daphne Ng, CEO of JEDTrade

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(Women on Top in Tech is a series about Women Founders, CEOs, and Leaders in technology. It aims to amplify and bring to the fore diversity in leadership in technology.)

Daphne Ng is the CEO of JEDTrade, a blockchain technology company focused on trade, supply chain, and financial inclusion projects in ASEAN. She is also the Scretary-General at ACCESS and Exco. of Singapore Fintech Association

What makes you do what you do?
I was introduced to blockchain technology in 2016 after I left my corporate banking career after 10 years. It was my mentor who first got me interested in this technology, which I then went on to delve further into, on its potential applications in the lending and trade finance space – domains where I came from.

How did you rise in the industry you are in?
Being in the space for 2 years and actively involved in the ecosystem, I was able to bring on the projects, network and a good degree of thought leadership in this vertical. Early on in the startup journey, our team faced many challenges. And to me, the key to rising above failures are two essential factors – resilience and support. While resilience is innate, I received a lot of help be it in terms of connections or advice. ‘Nobody succeeds without help’ rings very true for me.

Why did you take on this role/start this startup especially since this is perhaps a stretch or challenge for you (or viewed as one since you are not the usual leadership demographics)?
From the start, I focused on my domain expertise in trade finance and the application construct of how blockchain and DLT can be applied to these use cases. Also, my strategy from the start was to build a technology company made up of 80% tech and engineers, which is also our key competitive advantage today. At the end of the day, deliverables are about strategy and execution, which includes building and leading an ‘A’ team.

Do you have a mentor that you look up to in your industries or did you look for one or how did that work?
I have many mentors, which includes our company advisors (all of whom are well-known in this industry) and mostly informal mentors I meet via my connections, and on various occasions and circumstances. Creating opportunities also means putting myself in the right place, at the right time. And in my case, these were mostly organic and genuine friendships formed from the initial connection.

How did you make a match if you and how did you end up being mentored by him?
To me, a match in values is very important. It also takes humility to ask for help and be willing to listen to advice, which is important in order for mentorships to be successful – be it formal or informal.

Now as a leader how do you spot, develop, keep, grow and support your talent?
I love this question! I am passionate about building strong teams and helping my people grow. I abide by the 3Rs when identifying talents: resourcefulness, resilience and right values. And then I invest in the ‘potential’ and this means giving them room to lead, make decisions and take risks.

Do you consciously or unconsciously support diversity and why?
My support of diverse talents, skillsets and characters can be seen in the make-up of our core team – all helming specific roles and each bringing their own value to the table. We need the sum of all parts to build a great company.

What is your take on what it takes to be a great leader in your industry and as a general rule of thumb?
Great leaders emerge in times of failures and challenges, never abandoning the team, and always putting the team’s interests before her own. And I consciously live by these mottos every day.

Advice for others?
My advice to other entrepreneurs: be resolute and dare to be different. If you are going to follow others, then you will end up on the same path as them. No right or wrong; but I would rather chart my own path. This June, we are officially launching our blockchain project, Jupiter Chain (www.jupiterchain.tech), which have garnered much interest in the industry, even before we made it public. We believe this project is the epitome of marrying innovation with practical implementation, and we want to be the first to truly operationalize blockchain for our ecosystem projects in this region.


If you’d like to get in touch with Daphne Ng, please feel free to reach out to her on LinkedIn: https://www.linkedin.com/in/daphne-ng-%E9%BB%84%E7%91%9E%E7%8E%B2/

To learn more about JEDTrade, please click here.

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