Contributing writer Lisa-Ann Lee talks to entrepreneur-turned-angel investor Leslie Loh of Extream Ventures about how he started as an entrepreneur and gets some tips about approaching an angel investor.
In 1983, Leslie Loh started software company System Access Limited with RM5,000 borrowed from his grandmother. Over the years, it grew from a one-man operation to a public listed global banking software solutions company with offices in Europe, the Middle East and Asia. In 2006, it was acquired by US software giant SunGard for $120.2 million. Today, Loh is a partner with early stage venture fund Extream Ventures and an angel investor, a profession which he describes as “entrepreneurship without the anxiety.” He talks to us about how he got started as an entrepreneur and what he looks for in a start-up.
Tell us how you got started as an entrepreneur.
I was very young and had just finished university. I had a job for a very short period of time and fortunately or unfortunately, the company went bankrupt. I was a Malaysian then and I wanted to stay in Singapore. However, I was worried that if I changed my job too many times, I wouldn’t be able to renew my employment pass so I thought one of the ways to stay employed was to start my own business.
But having said that, I also thought it was a good opportunity to learn. If you start your own business, you can decide what you like to do and it can also give you a potentially strong foundation for the future be it as an entrepreneur or an employee.
What did your company do?
I started out developing software for companies. I didn’t spend too much time thinking if what I had was a great idea or if there was a market I wanted to address. It was 1983 and for the first time, small companies could turn to computers to automate their work. So we looked at what they needed and developed turnkey software to address their needs.
There weren’t many software development companies at that time so I thought if nothing else, I’d be able to learn how to write software for a commercial market with my company. I learned to write software in school but it wasn’t comprehensive enough to realistically support a business.
What did you learn working as an entrepreneur?
During the early years of starting the business, I went beyond just being a software person because as an entrepreneur, you do everything. When I think back, one of the greatest benefits of starting a business at such a young age was being exposed to different things — looking at a business from a financial perspective, being exposed to sales, business development, public speaking and so on.
How did you get funding for your business?
Back in the early eighties, there wasn’t any government funding available and you never thought about funding during the early stage of your business anyway. My angel investors were my grandmother and my landlord, who was also my accountant. I couldn’t afford rent so I offered him shares in my company instead.
It wasn’t until 1993, which was almost 10 years after I got started, that I got my first VC into the business. At that time, we were already profitable, so we were funding for growth.
Why did you become an angel investor?
I’ve built my business, got it listed and sold it. I think being an angel investor is a good way for me to put my experience and network to good use.
I see angel investing as entrepreneurship without the anxiety. You get to enjoy the excitement of building a business without the associated stress and anxiety. You’re a coach who gets close enough to the action without the strain that players face on the ground. You get more return compared to putting your money in a bank, which is really boring. As an entrepreneur, you feel good doing things that others could not. As an angel Investor, you feel good seeing things that others could not.
What do entrepreneurs often misunderstand when they approach angel investors?
Often, they’re so passionate about their product and idea that they forget that what the investor is ultimately looking for is a scalable and profitable business.
Although they may have an innovative product, the one thing that most companies frequently fall short of is a target market that is profitable and scalable enough. It is important to note that investors will not be able to secure their expected return unless the business achieves a certain level of growth and scale.
One of the sectors that Extream Ventures focuses on is Information and Communications Technology (ICT). How would you evaluate the start-up potential in this sector?
This sector can be further divided into three categories: 1) software business, 2) interactive digital media (IDM) business and 3) disruptive technology such as biotech and clean technology.
There are different risk levels and returns for each. However, I must say that though it’s easy to start with the IDM side in Singapore, it isn’t easy to get into a sufficient scale because the digital media business is all about consumers. The US, India and China all have large consumer markets so a digital media business in those countries could be very big business. You could never have a Google in Singapore because there’s no domestic market. There are opportunities, but we have not seen many successful digital media players here. On the software side, there’s the potential to target the corporate sector and you can sell your product to the region.
As for the third category, we look for breakthrough technology that is so disruptive that there will be a ready market once it is proven that it works. There’s good potential here given the investment the government has made in research and innovation.
What do investors look for in a start-up?
There are basically four key criteria:
1. Is your product or idea innovative enough?
If you’re doing something that is as good as what the market leader is doing, you’ve lost. Why should I go to someone who’s unproven? Therefore, you need to have an idea that is significantly different and better.
2. Is the market you’re addressing a profitable one?
It is important that the target market is large and profitable enough. Start-ups tend to target a niche market where they have a differentiation. But the downside is that the market may be too small or not profitable enough to scale the business.
My experience is that it’s actually not that difficult to develop a differentiated product but generally it’s very difficult to correspondingly have a market that is large or profitable enough.
3. Is your management committed and passionate?
By talking to them, an investor must be able to feel that they understand the business and that they are passionate about and committed to the cause.
4. What does your company’s financial performance look like?
I’m going to look at the business plan that can deliver a financial plan that will enable me to exit on my investment with the expected return. Let’s say I’m looking at 5x return for this company; if it’s valued at $10 million, it has to be a $50 million business in 5-6 years.
What’s the most difficult aspect of being an angel investor?
Saying ‘no’ constantly, especially to young entrepreneurs who are passionate about their product. I try to share my perspective and give them advice as much as possible. Hopefully, they’ll be able to take something away from it. Maybe they’ll change their approach or they’ll realize they need to look for another investor who thinks differently.
How often do I say ‘yes’? Maybe one out of 30 or 40 times.
3 key questions every entrepreneur should ask when they meet a potential investor.
1. Does your business fit in with the investor’s investment target?
Generally, an angel investor has his/her own preference regarding the type and development stage of the businesses that they are comfortable with.
2. What is the investor’s perspective of your business?
It is always a learning opportunity when you meet a potential investor. You should keep an open mind so you can learn from the engagement even if they have a different perspective of your business.
3. How can the angel investor help you?
Given that you are probably new to the game, you would want an investor that can play coach so he/she can guide you. It is therefore important that your investor understands your business and has the relevant experience and network on which you can leverage.