No one’s talking about venture capital anymore – that boring old-fashioned way of raising money. With ICOs a threat to venture itself, you might think that VCs are going easier on companies. Not so, from our experience. Approaching the end of 2017, we reflect on the evolving deal terms in Southeast Asia.
deals taking longer
From term sheet to closing, transactions are taking longer. VCs are no longer investing at a rapid pace and can take more time on deals. For founders, that means extra due diligence and investors less inclined to negotiate. Southeast Asia has lots of first-time funds and corporate VCs and these types of investors sometimes can be more risk adverse. Investors are also reviewing transaction documents from earlier deals as part of liquidity events or restructures. Inevitably they seek to address any weaknesses of the terms of those documents going forward. The end result can be tougher terms for founders on their new investment deals.
convergence of terms
We’re still not close to having any standardised documents in the region, but investment documents do the rounds and investors adopt terms from each other’s deals. Whilst standardisation can be good news for founders in terms of streamlining the negotiation process, it also means you’ll hear the inevitable sound of investors claiming that a position which is favourable to them is now market standard.
de-risking the deal
Specifically, with exit and redemption rights. These terms set the clock running for the company and require an exit or other buy-out of the investors after a set period of time. A couple of years ago, we only saw these occasionally. Now VCs are asking for such rights on series A or even pre-series rounds on a regular basis. We have also seen exit periods as short as 5 years (with 7 years being more standard).
We’re occasionally seeing company boards set up so that founders effectively lose their majority, even at an early stage. There may be more than one investor director appointed, or perhaps an independent director. This means, aside from the usual investor veto rights, founders are not even in control of the day-to-day running of the business at board level. Fortunately, this is a relatively rare scenario.
tips for founders
Negotiating is hard work given the imbalance between the folks with the money and those asking for it. How should founders respond to these trends? Think about the following:
- Reject the market standard argument. Most issues should be up for discussion (subject to point 2 below). The VC should have to justify their positions logically, rather than relying on a broad statement that something is apparently market standard.
- Know your investor. Do your due diligence on the investor (including asking your lawyer about them). That way you’ll know what’s coming down the track from the outset. If a particular VC requires a certain term on all of its deals, then you will need to be a pretty special prospect to negotiate it away.
- Negotiate at term sheet stage. Investors expect the final documents to align with the provisions of the signed term sheet. Avoid presenting a signed term sheet to your lawyer and asking him or her to get you the best outcome on the deal. They’ll do their best, but the horse has already bolted by that point unfortunately.
- Take governance seriously. When you raise multiple rounds, control of the company can quickly be lost with investors at each funding stage looking for a seat at the board table. Focus on retaining key decision-making power for the founders at board level, even if investor directors can participate in discussions. This should of course align with the best interests of your investors.
by lee bagshaw, 7 December 2017