By Soichi Tajima - Founder & General Partner of Genesia Ventures, a Venture Capital firm focused on seed and pre-series A stage internet and mobile technology startups.
Since Genesia Ventures was founded in August 2016, we have invested in about 80 seed-stage startups in Japan and Southeast Asia. Today, most of these companies are past the seed stage and are steadily moving forward toward series A and beyond.
In Japan, these include HRBrain, Sukedachi, BizteX, Baseconnect and Timee, to name a few. In Southeast Asia – Docquity, Luxstay, Qoala, Bobobox and Manabie. As we look at the growth of these companies, we can identify some common and reproducible factors that helped them progress.
At Genesia Ventures, we are continuously improving our knowledge of these factors in order to help portfolio companies. Observations pertaining to these factors, shared in this article, will be especially relevant to founders who are running companies in the seed-stage and planning to raise their Series A rounds.
Choosing a promising business domain
A "promising business domain" might sound ambiguous to some. So what does it really mean, from an investor's perspective?
Market size is often considered as one of the measures to judge whether a business is promising; in actuality, the approach is more multifaceted. While the points investors lookout for will differ depending on the business domain and stage, the factors are taken into consideration (apart from market size) include the following:
- whether the business is in line with major trends in the global market;
- the intensity of competition (including replacement competitors) in the business domain; and
- the extent of the demand for that service or product in the global market.
In short, investors evaluate the viability of companies by looking at the market size; direction of business trends; market concentration, and competition that could affect the road to achieving the companies' objectives; and demand size.
When a company is operating in an industry (from the investor's perspective) that is not in line with the global trends, is rife with competition and substitutes, or has low global demand, the business will not look promising even if the market size is huge. On the other hand, even if the company is operating in a relatively small market, but is in line with the trends, has few competitors and substitutes, and demand in the global market is high, investors will see the company in a positive light and as a viable investment.
At Genesia Ventures, we focus on investing in the DX (Digital Transformation) of traditional industries, and the OMO (Online-Merge-Offline) model ( in the concept of DX in the B2C segment), in both Japan and Southeast Asia, because
- there is a large market size;
- it is in line with the global trends in terms of the strong need for DX;
- and although alternative players exist, there are relatively few strong competitors.
Many of our portfolios are operating in business domains that have the above-mentioned factors in common, in addition to having strong management teams. This makes them very likely to become successful and move toward the Series A stage and beyond.
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Strong management team
Founders often have specific hypotheses they believe in when starting businesses, such as:
- There are big problems to be solved in the XX industry.
- This industry will evolve into XX in the future.
I find keeping the following formula in mind to be useful:
F(x): Business hypothesis ⇒ Y: Reality (actual business status)
On the left is the management team’s vision for the business. As the business grows and moves through the stages, the left and the right should gradually become more closely aligned, indicating the actual status of the business.
The figure below shows that at the seed stage, corporate value consists mostly of the business hypothesis, and as the company approaches the later stages, the weight of the business hypothesis gradually decreases while the weight of the company's actual business status increases.
What I mean by a strong management team, in this case, is the team's ability to transform the business to facilitate the shift from the left (hypothesis) toward the right (actual business status), and that depends on two main factors:
- the level of detail (resolution) of the hypothesis on business strategy; and
- a comprehensive execution ability.
In short, the business depends completely on the competence of the management team.
If investors believe that a team has a strong ability to transform their business and move from a business based on hypothesis toward turning that hypothesis into reality, then even with just the hypothesis and little traction to show, the company will be able to raise funding relatively smoothly. On the other hand, if (from the investors' perspective) the team does not display that strong ability, then even with great traction, investors tend to spend more time looking into the details and negotiating the valuation.
How investors identify the ability to come up with a detailed (high resolution) hypothesis and to execute it is usually based on the management team's professional background and track record, and the personality traits of the individuals in the team. Other important factors include:
- The structure of the pitch deck, the story, and mid-to long-term strategy;
- Level of detail of the business plan;
- The quality and speed of the discussion and exchanges with potential investors;
- Effective backcasting based on the fundraising deadline.
Ability to demonstrate multi-layered assets
The last topic I would like to cover is the value of startups (valuation). At Genesia Ventures, the components of the valuation are roughly broken down as follows:
Generally speaking, when it comes to the startup value (valuation), the points in (i) are the main discussion topics. For example, in the case of SaaS businesses, the valuation is often calculated using the formula of 5 to 10 times the company's ARR (Annual Recurring Revenue). However, in reality, there are often cases where the valuation exceeds 10 times the ARR, and investors take into account (ii) the value beyond the BS / PL, and (iii) qualitative value.
As for (ii), investors can often gather information from the pitch deck and from discussions with the management team during meetings, on topics that include mid- to long-term strategy of the company, the ability to build a sustainable competitive edge (the so-called MOAT), and the level of detail of the plan (again, high resolution). For points mentioned in (iii), besides looking at the management team's professional background, track record, and Founders-Market Fit, other important factors to consider are the team's ability to communicate, influence, and share information with others in their surrounding, the ability to build a strong team, and the ability to build a strong organizational culture.
I strongly recommend that founders make themselves familiar with the above-mentioned points, and, as much as possible, showcase each of the "multi-layered assets" of the company to potential investors.
While in this article I've broken down the Series A fundraising mechanism for seed startups into three components (business domain, management team, startup value), it is important to keep in mind that each component should not be considered separately, and that VCs make their decisions based on all factors as a whole.
If you are aware of and pay attention to all the points mentioned above, it is highly likely that the fundraising process will be relatively smooth. For founders who are considering starting a business and raising seed funding, I strongly recommend that you consult reliable investors who can provide advice and guidance.
I hope this helps to fill in the information gap between entrepreneurs and investors, even if by a little, thus giving birth to more startups that strive to change the world, one baby step at a time.