EHK Chats with Fundraising Expert Padriag
Pádraig Walsh is a Partner in the Corporate group of Bird & Bird, an international law firm that focuses specifically on the technology sector. An expert in startup investment negotiations and completion, and implementing deal terms, Pádraig has represented a broad range of new generation emerging Hong Kong startups, including: okay.com, Easyship, KeptMe and ActiMirror. Pádraig is a mentor of Startup Garage and Swire’s Blueprint Accelerator.
This interview with Pádraig Walsh was conducted and condensed by EntrepreneurHK (EHK).
1. You have helped many HK startups close investment rounds. From your experience, is it difficult to raise money in this city?
I think it’s difficult for any entrepreneur raising capital in any city! Let’s refocus this on what the funding environment is like in Hong Kong for startups. There is capital in Hong Kong for Seed and pre-Series A, and then for Series B and later. The funding gap is for Series A funding. Some of our clients are raising their first round here in Hong Kong, and then going elsewhere – the Valley, Singapore, London, Israel – for Series A. The intention is to return to Hong Kong or China for Series B onwards. This intuitively makes sense when you look at the stage of development of the startup ecosystem in Hong Kong. Tech startups did not really exist here, say, five years ago. Real traction in the community began about three years ago and it’s only in the last two years that you can say the scene started to really happen. Investors don’t move as fast as entrepreneurs. Institutional investors are beginning to show some interest at an earlier stage than before, but still it is unusual to see them investing before a B round. The incumbent institutional investors need to deploy bigger amounts of capital, and are accustomed to more recognizable and measurable risks. Series A is too small and too risky for them. There is a very good network of angel investors in Hong Kong who, for the right business proposition, can fund a seed or pre-series A round. So, the funding gap is at Series A – too much for most angels; too risky for most of the institutional investors. As Hong Kong continues to develop (and some if this is happening already), you will see specialist startup funds focussing on Hong Kong and plugging that Series A gap.
2. What are the common characteristics of a successful startup?
The single most critical component is the calibre of the people. Given the choice of average tech and great people, against great tech and average people, success will always favor great people. What does that mean? Six things in my view.
Experience: A relevant business track record is vitally important. Track record with a startup that successfully exited really helps.
Expertise: The core disciplines of finance, technology, compliance, management, marketing and HR have to be checked off across the core founder / management group.
Integrity: Investors will ask around. Bad reputation sticks.
Maturity: This is not about age. This is about how serious and grown up you are in running your business.
Commitment: Is this a hobby? Or is this what you are committing your life to? All other things being equal, success is proportionate to commitment.
Dynamism: Markets move fast. Opportunities bubble up and disappear. Responding to feedback on a business concept, and revising and updating the strategy, tech and execution to match can make or break a business. Knowing if, when and how to pivot is critical.
3. What are your views on the different corporate structuring options for startups in HK at the moment?
When it comes to corporate structuring, the best advice is to keep it real at the start. There is no need to set up a complicated group structure in the early days – at least until the founders know there is real value in the business. If the operations are in Hong Kong, start with a Hong Kong incorporated private limited company. If there is real traction and growth, then the internationalization of operations, the location and vehicle preferences of investors, and tax efficiency can all feed into the optimal corporate group structure. Given the costs involved, it’s better to start simple, but keep things scalable. I see corporate restructuring mainly at the Series A stage. That’s the time when the business, or incoming capital, can sustain the cost of a more complex corporate group structure.
4. Bird & Bird has 28 offices across Europe, Middle East and APAC. What is the fundamental difference between investors in HK vs other countries?
Investors in Hong Kong do not have the same track record for startup investment as is the case in other places with longer startup history and a more mature startup ecosystem. So, in London, there are more funds that focus on startup investments. Characteristics you come across more frequently there than here are:
- Experience in valuation of startups
- Better risk assessment and management
- Better portfolio diversification and management
- More focus on mentoring and support
- Higher tolerance of loss on individual investments
If a PE or later stage investor dips its toes into startup investing, there can be a few shocks to the system. Startups are messy. Risk levels are higher. A PE fund may make, say, six investments out of a normal capital raise. The GP’s expectation – the standard to which it will be held – is that the majority of those must be a success. Startup investors know that the success rate will be more like 25% or less, and the number of investments made will be significantly more than six. The dynamics of startup investing are totally different. This isn’t quite in the DNA of Hong Kong investors yet … but it’s changing.
5. What is the most common mistake startups commit during fund raising?
Ignoring the basics. There is an energy and coolness about the startup scene. All those endorphins can make people think that the rules of business have been reinvented. They haven’t. It is still about getting money in the door and turning a profit. A great idea means nothing unless it can be monetized. Future and potential won’t pay the bills and keep the lights on. So getting lost in the dream and not getting the simple things right is the most common mistake I see.
6. What is your advice for all the startups that are raising money?
In no particular order:
- Be sure you need the money. Equity investment is expensive money. Can you get where you want to go in the time you want to arrive there, without equity investment? If so, do so.
- Do your research. Know what is market, or not market, in deal terms. Don’t ask for what is never given, and don’t concede what you don’t have to give.
- Know your investors. Investor selection is not like a swipe on Tinder. You are inviting someone to travel on a business journey that you have committed your life to. Will the investor help or hinder you on your journey?
- Respect your investors. A client of ours said that he wanted to build relationships with investors so that he knew he could reach out and receive support in times of need, as well as in times of success. That requires investor relation skills.
- Understand your investors. Investment is a dish served cold. Investors are there to deliver a return to their own stakeholders. True alignment of interests has got to acknowledge and accommodate this.
- Have your house in order. Make sure accounts, tax filings, corporate filings, and statutory records are correct and up-to-date. Make sure you have captured and perfected ownership of IP rights. This goes to maturity.
- Prepare a fully reasoned, verifiable business plan. Consider a formal valuation by a chartered valuer that knows how to value startups. Get the numbers right.
- Create some easy value propositions. For instance, if you have registrable IP – patent, trademark, (in some places) copyright – start the process of registration.