vol.4 Points of startup investment practice②
０）Table of contents
・The first Insights from my experience with VC, startups, entrepreneurship and CVC
・The second Why are major business companies investing in startups these days?
・The third Points of startup investment practice①（last time）
・The fourth Points of startup investment practice②
・The fifth (Planned) Co-creation between major business companies and startups
Continuing from the previous issue, in this issue we will write about what and how to do “investment practices” when a major business company invests in a startup, including points and advice.
１）Shareholder report meeting
After making an investment, we attend a shareholder reporting meeting (sometimes a board of directors meeting, but also under various names) as part of management monitoring.There are some startups (SU) that do not hold debriefing sessions, so we would like to take advantage of this financing to propose holding debriefing sessions, for example once a month. I think the frequency of holding meetings should be determined, such as once every month, every other month, or once every three months, depending on the stage of the SU and taking into account the wishes of other shareholders.There are stages at SU where you want to focus on increasing sales and recruiting, rather than spending a huge amount of time creating materials for debriefing sessions.
A shareholder report meeting is usually attended by one person in charge of unitholders, but if that is not possible, another member of the company should attend, and it is best to avoid having no one attend as much as possible. The main purpose is to get a sense of temperature and texture in a meeting (mostly online these days, but still), which you can’t get through emails or documents. There was a lack of awareness of the dangerous situation, there was tension among SU directors, the one-man nature of the SU president became clear, and reliable auditors and outside directors were found, etc.
Having regular opportunities to communicate with shareholders allows them to better understand the SUs they invest in, and generally improves relationships. In addition, you can quickly consider additional investment in the next investment round, and you can introduce companies that match SU’s needs (e.g. potential customers, potential investors). There are great benefits for both SU and shareholders.
Another benefit of having regular report meetings is that the SU management team is “always aware of numbers.” For example, if last month’s sales results were only 30% of the plan, management would look at the gap between the plan and actual results and think about how to catch up in the remaining period, and whether something (personnel or methods) needs to be changed. This is an opportunity to speed up the PDCA cycle. Surprisingly, some SUs do not conduct such reviews. When shareholders (VCs) request regular reporting meetings, I sometimes find it troublesome, scary, and even unpleasant, but I think it’s important to make them understand that there are benefits to SUs.
Our recommended shareholder report meeting agenda (draft) is as follows.
- Review of last time (progress of previous task)
- Performance trends (single month and cumulative total for the current fiscal year, discrepancy between plans and actual results)
- Cash status (cash and deposits, burn rate and runway, funding progress)
- Human resources plan (open positions and compensation, recruitment progress, retirement status)
- Requests to shareholders (investor introductions, sales support, etc.)
In addition to the shareholder report meeting, another benefit is that it allows for horizontal connections between shareholders. These days, it is often held online, but it is a good idea to have it face-to-face offline at least once a year. When shareholders meet and talk in real life, even if there is a conflict of opinion in subsequent negotiations regarding stock price or rights and obligations, it is easier to respect each other’s opinions and reach a soft landing (also good for SU).
It also creates a sense of camaraderie as shareholders who support the same SU (riding the same boat), which leads to mutual introduction of other projects. This is not limited to investment projects, but also includes consultations related to our main business and co-creation projects. In many large companies, information exchange with non-affiliated companies is still limited, so I think this is a great opportunity. I think it will go smoothly if you ask them, “What kind of companies and areas does your company invest in? Would you like to have a conversation about your thoughts and stance on investment and co-creation?” and request an interview after meeting with them at the shareholder report meeting.
２）1on1 meeting
Basically, we hold one-on-one MTG meetings every month between SU management and unitholder representatives (usually online, but occasionally face-to-face offline). In my case, I give direct feedback on what I notice and share my own experiences.It is easier for people to accept experiences of failure than experiences of success.Rather than ending up with, ”I never had such success before,” or ”Wow, that’s amazing,” they say,” I failed and withdrew from something like this, but if things continue like this, your company may also end up withdrawing, so if these signs appear, maybe it’s better to do something like this, or maybe it’s better not to do this.”I can’t tell you the correct answer, but I think I can tell you some theories that can lead to failure. The basic format of the meeting is one-on-one with the investee SU management. The reason for this is that there are times when I have to say things that I would not want to talk about in front of other investors or other executives.
This “1on1 meeting” is different from a shareholder report meeting, so I don’t think it’s necessary to talk about the results of the previous month’s monthly trial balance or how to fill in the differences.Rather, I think of it as a time to find out what the business owner is struggling with or worrying about, have a discussion about it, and worry about it together.They say things like, “I understand, this is a difficult problem. Maybe this is what I would do, but what do you think?”In the end, managers have to judge and make decisions all by themselves, and it’s a very lonely role, so I can’t say that this is the correct answer, but I think it can be helpful just to stand by someone and listen.
In our case, we purposely name our 1on1 meetings “ZATSUDAN MTG” so that the other party does not get defensive. When I suggested that we have monthly one-on-one meetings with VC investment managers, the SU managers were reluctant at first, thinking,Won’t this just create more opportunities for us to get squeezed in again?” (lol) Therefore, I tell them that there is no need to prepare anything in advance, and there is no need to decide on a topic to talk about; just say whatever you want to talk about at that time.So what do you think about shareholders saying things like, I'm working too much and things aren't going well with my family," andNo. 2 (director) is about to quit.” What do you think? There are so many different stories coming out. Once you get used to it, there are some reliable business owners who prepare a sales list for MTG and say, “Please introduce all of them” (lol).
The good thing about this 1on1 is that it not only leads to the growth of SU managers but also the capitalists themselves. From a management perspective, SU managers may be better at many situations than capitalists. I think this is a good system that allows capitalists to grow together with their investees by learning from their managers.However, managers of growing companies are busy, so it is difficult to continue working without the experience, knowledge, information, and personal charm (and sometimes communication compatibility) of a capitalist.For inexperienced capitalists and CVC personnel, it is a good idea to compensate for their lack of knowledge with their information-gathering skills and stories of past experiences.
３）Funding support
Funding support for investee SUs is one of the strengths of venture capital (hereinafter referred to as VC) Since we have extensive networks with other VCs, CVCs of operating companies, financial institutions, etc., we are able to introduce investors and provide advice regarding any type of capital policy (finance design).
It is very important to decide what type of capital policy (finance design) to use, in other words, which stock type (common stock, preferred stock, J-KISS, etc.)“,at what timing”, from whom (VC, CVC, overseas investors, etc.)",how much total amount” will be raised, and “what will be the shareholding ratio (largest shareholder, management team, total within the company)”, etc. I believe that capital policy is an “art,” and although it is rare for things to go 100% as planned, I strongly hope that capital policy will be implemented in a clean manner.
As for specific advice, we will discuss what kind of company is best suited for shareholders depending on SU’s business field and stage, and we will look at the investor list and select investors that we think we can introduce. Naturally, the SU side may ask you to connect with this investor because they want to approach you for financing.
By the way, what are the points we focus on when considering additional investment in SUs? We make an initial decision on the entrance based on the following three factors.
①Forecast of performance
②Fair value
③Communication and contribution
① is the most important. What is the current performance (performance) compared to the performance plan at the time of the previous investment? For example, it would be great if the achievement rate was about 80% of the plan, but it is clear that it is quite difficult to achieve a 10% achievement rate.Some SUs create business plans optimistically (quite bullishly), but while they may be able to raise funds at the desired (higher) valuation at the time of financing, they will be forced to struggle when it comes to additional financing, so I strongly oppose it.
Regarding ②, I think it’s good for existing shareholders that the stock price of additional financing is high because the value of their equity will increase and there will be a theoretical “unrealized gain,” but from a medium-term perspective, it will have a negative impact on future financing and IPOs, so I do not support it.In rare cases, you may receive more funds than expected even though you think it is considerably more expensive than fair value. In that case, existing shareholders such as VCs may even consider transferring their equity.On the other hand, I do not agree with a valuation that is too low.
At first glance, this seems good from the perspective of investors acquiring new shares, but for managers, is it the most important thing after life? I believe that most managers who sell their company’s stock at a low price are not good at business (weak at negotiations) and are often unable to achieve their business plans.
Regarding ③, through communication after making the first investment, what is the compatibility between the investee SU and our company? Let me reconfirm this point.Things like whether the dialogue is going well and whether our company is helping them grow.In addition, whether the investee SU management team is able to listen to shareholder proposals, consider them, and decide whether to implement them or not, in other words, whether they are “coachable” or not.
We conduct a primary consideration (DD) by comprehensively considering ① to ③, so it does not mean that we will automatically forego additional investment just because one of ① to ③ does not meet the criteria.
4）Business partnership support
When SU is in the seed and early stages, shareholder support focuses on advice for entrepreneurs and financing (investment), but in the middle and later stages, one of the most important themes is how to partner with major operating companies (collaboration and business alliances). As a shareholder, it’s time to show off your skills!
When SUs go to major business companies to propose collaborations, we do not recommend that they always use the same proposal form to introduce their services and technologies. Rather than counting numbers, we recommend thoroughly researching the other party and making proposals at the optimal timing (improving quality).After reading the mid-term business plan of the company you are interviewing with, you can increase your accuracy by preparing three collaboration proposals that fit your company’s plan and proposing them to the appropriate partner, that is, the company’s collaboration department.The departments involved in considering collaboration are the CVC department, investment department, new business development department, and corporate planning department.
Each other’s status (situation) and timing are also very important. There are times when major business companies want to actively start new businesses and invest in startups, and there are times when they are frozen (passive). On the SU side, it is necessary to take actions according to the company’s situation, such as whether the product or service is already available or under development, whether the product or service is to be used on a trial basis or whether it is entering the sales expansion phase, and whether the organization has secured sales and business development personnel, or whether it is only engineers.Taking into account the circumstances and timing of both the major operating company and the SU, we propose timing for collaborative MTG and set up interviews, and may even attend the first MTG if necessary.
Our company specializes in food tech, so we have experience, knowledge, and human networks in this field. These are connected to providing value in 1on1 meetings (entrepreneur mentoring) and business alliance (collaboration) support. In order to acquire (stand out) our strengths, we are specializing in the food sector (local warfare).
5）Team building support
How to carry out team building (team composition) is an important point in the growth of SU. Depending on the stage of the investee SU, there may be departments that are not yet established, so we will discuss with the investee SU’s management team what positions to strengthen (for example, CFO or CMO), the timing of assigning and hiring people to those positions, and the benefits. In addition, we provide advice regarding the granting of stock options (mainly rule design) and dialogue with management regarding employees who are likely to leave the company.
These are ultimately decisions that are made by the management, but in many cases inexperienced managers tend to focus on the target’s previous company name and skills, so we believe that one of the functions and roles of VCs, etc., which has seen many cases, is to bring in diverse perspectives, such as getting the target person to notice whether their personality and values match (or are close to) the company’s. When it comes to CFO and CMO candidates, I often advise that it is better not to make them directors at the same time as hiring them, but to judge them based on their work performance and compatibility with the company for a certain period of time after joining the company.
Continued in next issue (final episode)
