[Image by DTCP]
Silicon Valley-based venture capitalist, angel investor and startup advisor Jay Eum interacted with startups in one of Seoul VC Connect’s five Bootcamp sessions. Operated by the Seoul Metropolitan Government and G3 Partners, Seoul VC Connect supports Seoul-based startups in their international fundraising goals.
In this session, Jay shared his expert advice on international fundraising, how to prepare for it and why startup growth stages matter.
Q: When raising international funds, is there a ‘sweet spot’ in terms of the company development stage?
Jay: I think there definitely is a sweet spot. In the case of pre-revenue early-stage opportunities, it’s difficult for international startups to readily come in and bet on them. Most Silicon Valley-based VCs have evolved from having just traditional stage funds to having growth funds. These growth funds look for opportunities anywhere and everywhere irrespective of the location or sector. Sequoia Capital, for example, invested in both Coupang and Kurly in their growth stages. International investors are interested in high growth opportunity startups such as above when they are already dominating their domestic market. In other words, unless you’re a startup growing at an average US$5 million~$10 million Annual Recurring Revenue (ARR), it can be tough to convince an international investor.
Q: What metrics should startups focus on / excel in to have the highest chance of success with international investors? And do metrics from Korea count?
Jay: I’d say we can narrow down company valuation factors to two – cash engine and growth engine. So you’re looking at the company’s profitability and its growth rate. When the business is generating high cash flow with a relatively slower growth rate or vice versa, in both cases the company demonstrates a strong valuation.
Metrics in Korea matter, yes but it is difficult to say that they can guarantee you success overseas. Many of the Korean companies that have achieved major milestones, have done so domestically. It is also important to consider that when you venture into the international market, you will be facing competition from domestic competitors in that market. The Korean market on its own is a big market that has produced multiple unicorns, so as a Korean company you don’t need to demonstrate your capabilities by expanding internationally.
Q: Which two or three Korean startups have seriously impressed you with their international fundraising or partnering efforts and why did they succeed?
Jay: As I mentioned earlier, there are two paths that can successfully get international funding. Baemin fits the first, where you grow into a dominant market player in your domestic market and raise substantial capital to fund your expansion overs. Baemin did this in Vietnam and is trying to do it again in Japan. The second case is where you as an entrepreneur launch your company overseas and leverage resources from Korea for R&D, branding, marketing etc. Noom is a great example of a company that applies this strategy.
Q: Is it better to go through an international accelerator before trying to raise international funds?
Jay: Absolutely. International accelerators, particularly Y Combinator, have high standards. So any startup from such accelerated programs essentially gets a stamp of approval. They demonstrate having successfully completed relatively rigorous YC screenings and knowledge on growth hacks and the YC network. It is especially advantageous for startups fresh out of Korea because otherwise, it is difficult for international investors to be familiar with you and find you credible.
Q: Many Korean government programs aim to help early stage companies rise internationally. What are the chances of success with this type of program, and beyond actual deals, are there other benefits startups can derive from them?
Jay: Firstly, we have to acknowledge the amount of support that the Korean government provides Korean startups, including funding it pumps to the Korean startup ecosystem, is unparalleled. Earlier attempts to bring early-stage startups international funding generated perhaps a handful of success stories.
The good news is, the Korean government is now focusing on producing more unicorns to attract investments from foreign VCs. For example, the Korea Venture Investment Corp which is backed by the national government has started a K-Unicorn program where they are recruiting growth-stage startups and giving them an online platform to connect with international investors. This is efficient for investors too as they are able to view company pitches and profiles from the comfort of their homes and connect easily. Currently, at Deutsche Telekom Capital Partners we’re actually evaluating a startup we discovered through this program for our potential next investment.
Government programs like Seoul VC Connect serve as the training wheels or the basics that can support startups venturing into the startup world for the first time with no background on how everything works.
Q: How long does it typically take to raise money from an international investor, as a Korean startup? Any tips on how best to prepare for the international fundraising journey?
Jay: Regardless of how much you prepare, if you’re not a growth-stage company or are not at the US$10 million revenue runway, you’re wasting your time trying to raise funds from an international investor. Now if you reach that qualification bar, how long it takes to raise funds is honestly all relative.
The due diligence requirements international investors have is not that different from what you may find in Korea. They are looking for the same elements such as well-prepared financial reports that are historic and also provide reasonable projects on future growth.
What I’ve noticed especially with Korean startups is that they tend to project unrealistic hockey stick growth numbers in their reports. This tends to show the entrepreneur’s nativity and lack of experience. Before meeting international investors, I’d highly recommend having a team member with a background in finance. They can provide your company with necessary support when developing financing reports and help dramatically improve the efficiency of the due diligence process.
Q: What metrics do international investors consider in their fit tests for startups seeking investment?
Jay: Generally, growth investors factor in things like ARR and Revenue (Growth factors), Gross Profit Margins (Cash Generation factor) and Efficiency.
In the U.S., we also have the Rule of 40 Percent which applies to a combination of growth and net profitability. You want this number to ideally be over 40%.
Q: How has COVID-19 changed the international business process (not just fundraising)? What should startups be aware of and do better now, post-COVID?
Jay: When there’s a shock to the system, investors step back, looking inwards instead of looking outwards. They focus on their existing portfolios to see if those companies can survive the crisis and go through a triage process to determine which companies to give attention to.
This year has been the year for the Mega-Tech IPOs which gave investors unexpected liquidity and confidence to invest in new opportunities. Currently, there are plenty of fundraising events happening and many startups are getting funded even if things aren’t the same as how they were pre-COVID.
What’s changed in the US, where in-person meetings are still difficult, is that investors are typically focusing more of their efforts into companies they’ve had a relationship with already.
In the case of new opportunities, I have personally made about seven Angel investments after interacting with startups on online platforms. However, making bigger investments of Series A and over with an in-person has been difficult for most investors including myself.
Jay co-founded Translink Capital in 2007, but after leaving the company last year he is now preparing to launch a new fund and also serving as a Senior Advisor to Deutsche Telekom Capital Partners (DTCP) and as an Investment Advisor to TBT Partners. Before co-founding Translink Capital, Jay established Samsung Ventures America and led investments in a number of companies that went public (IPO) or were acquired.