SINGAPORE (July 30): When Anuj Jain left the corporate world to start his own company, he was unprepared for the hurdles he would encounter. Jain had set up a website to sell antique furniture and expected his years of experience successfully climbing the corporate ladder to make a difference. “You think magic will happen, but it doesn’t,” he says, recalling his experience.
Instead, Jain found himself having to navigate a fragmented and confusing start-up world. “It’s a very tough journey for a founder even after you have had a great career and accomplished a lot,” he says. To raise money, for instance, Jain spent a good nine months to a year figuring out the local start-up funding ecosystem.
“There are so many accelerators, incubators, crowd-funding platforms, venture capitalists (VCs), angel clubs, events, boot camps,” he says. “As a founder, you have to go [out there to raise money] and it depends on your physical time and reach. How much can you do while you are creating a product, developing a team and running against time in terms of your cash burn?”
Jain also had a very short window of time to impress potential investors at the pitch sessions and demo days he attended. And his potential investor pool was limited by geography: He could really access only local investors. “It’s a very opaque and subjective journey,” he says.
The experience led Jain to co-found Startup-O, a multi-purpose platform for founders and investors. For start-ups to be eligible to be enrolled onto Startup-O’s platform, they must have full-time founders and a product that is ready to be in the market. The platform then filters companies based on revenues, traction and potential in the market, combining the perspectives of a panel of experts as well as algorithms. “[Startup-O gives start-ups] a fair chance to access capital and networks, which are the two elements that are most important for a growth-stage or early-stage start-up,” says Jain.
By collating this information, Startup-O is also better placed to service potential investors. Besides information on individual start-ups, Startup-O also provides investors with portfolio monitoring features. Investors can compare one start-up with another or ask the founders questions via the platform, allowing them to make better decisions.
Jain’s co-founder Nitin Nath says Startup-O addresses many of the pains he had experienced as an investor in start-ups. A former investment banker, Nath understood the process of evaluating a start-up and assessing its potential. “But I was limited by who I knew and where I was. If you try to find companies, you literally find them in your immediate neighbourhood. And there’s no real way to cross-compare one versus another,” he says.
Nath had taken about a year and a half to identify six to eight start-ups to invest in. “I was analysing their balance sheets on the weekends, educating myself along the way,” he says. “I used to credit myself as an angel investor.” Then, he came across research that an angel investment portfolio needed 20 companies to achieve attractive returns.
According to data from the Kauffman Foundation’s Angel Investor Performance Project, portfolios with one or two investments have an 83% chance of breaking even. For a 99% chance of breaking even, and a 67% chance of more than tripling one’s money, a portfolio needed 20 investments. A portfolio of 500 start-ups is almost certain to break even, and the chance of a return of three times is 96%.
The thought of having to build a 20-company portfolio was daunting for Nath. “Chances are if you pick 20 out of the first 40 you see, you’re subjecting yourself to availability bias. But if you want to be comprehensive about it, it’ll take you so long that you’ll miss the boat,” he says. “And bear in mind, windows of opportunity [for start-ups] don’t last more than a few years.”
Nath is still invested in some start-ups, and has had positive returns. “But I think if I had to compare this to other alternative investments that were made available to me and the opportunity cost on my capital, I don’t think I have outperformed.”
Startup-O was also established with a new kind of start-up founder in mind. “The cost of launching a new business has fallen to all-time lows. Therefore, a lot of people dabbling in this are corporate dropouts, not college dropouts,” says Nath. “And if you look at the history of the ecosystem, it was initially built for college dropouts. That’s why you have incubators and accelerators and soft advisers and mentors and things like that.”
What is the main difference between a founder with a corporate background and one fresh from school? For one thing, Nath says, it is not usually necessary to help former corporate honchos with the skills of running a company: matters such as cost management, accounting, SWOT analysis, meeting regulatory requirements and creating pitch decks. “And because they have some kind of savings, quite often their initial prototyping and their initial proof of concept are something that they can either self-finance or get immediately raised from family, friends and people in their networks,” he says. Also, because their start-ups are typically built on an industry they know, their ability to get early revenues is actually quite high.
“Where they tend to struggle is after getting to a point where they show early traction, they then need $1 million to $3 million to stabilise the business. That is too big for angels and too small for the VCs,” Nath adds. This group of founders is also reluctant to cede control of their companies, which tends to be a requirement among the smaller VCs or larger family offices. “Sometimes, this control is given away to people they may not necessarily feel understand the business as well as they do — it may be a junior employee of a VC firm or it may be a scion of a business family. And they get frustrated because they left a larger organisation to be their own masters, [only to] become glorified employees again.”
So, rather than provide mentoring or advice to start-up founders, Startup-O uses data and expert knowledge to give companies a better feel for how attractive their businesses are to potential investors. Every start-up participating in the platform’s vetting process will be able to see how it measures up based on standard metrics, and those that do not make the cut will see why. All the experts on the platform also have experience building businesses or have specialised subject knowledge.
Startup-O also allows experts, investors and founders to help each other win new business or score new orders. A percentage of the profits that come through this channel is paid to Startup-O and shared with those who make the successful introductions, in what Startup-O calls “venture building”.
Since its launch in 2016, Startup-O has been funded by Nath and Jain, as well as a small friends-and-family investment round. The company is lean and Nath says cash flows are sufficient to cover costs. Besides venture building, Startup-O earns carried interest from investors who invest via its platform. It currently has one fund investing on the platform and expects to have another by year-end. The third revenue stream comes from successful start-ups on its platform that subsidise some of the operating costs, something Jain says founders are typically very happy to do.
There have been requests for Startup-O to grow more rapidly overseas. To do so, it may need to raise more money. It currently has more than 900 companies from over 40 countries on its platform, and more than 70 experts. Most of the start-ups are from Asia. But Startup-O also has partnerships with accelerators IoT Tribe in the UK and Creative Valley in France, both of which will funnel promising start-ups to the Startup-O platform. It is also in talks with an incubator in Africa.
“The problems in different ecosystems — in Africa and Europe, for instance — are the same,” says Jain. “It’s fragmented, it’s subjective, and investors as well as founders have similar problems. We are at a point in time where there is an opportunity to anchor ourselves as a global brand and facilitate even more diversified start-up founders.”