CASH ON DELIVERY
With prices for technology stocks in retreat, how does a young company get funding?
By Steven Crane

Singapore-based e-commerce portal asiaship.com is running out of cash. In an effort to stay afloat, it reportedly laid off four part-time staff in October, while its senior vice-president of finance, Michael Woo, and co-founder Captain SC Chak abandoned ship of their own accord. Although one of the company's backers, Singapore/Hong Kong-based AsiaCommerce, had pledged funding totalling S$8.5 million (US$4.86 million) earlier this year, to be awarded in stages as the company met its business targets, it has reportedly refused to consider further funding for the shipping portal.

The storm blew up quickly. Only last January, CEO and co-founder Eric Lui was boasting that asiaship would become the Yahoo.com of shipping, providing business-to-business (B2B) connections for Asian shipping companies in such areas as freight services, ship repair and bunkering. Today, the portal has scaled back its expansion plans and has publicly pointed the finger at AsiaCommerce for slowing down its funding. Paul Spooner, AsiaCommerce's vice-president of corporate finance, declined to comment on asiaship's financing, but insists his company is only a small shareholder.

Maybe so. The fact is, though, that while private equity is still plentiful in Asia, it's hard for CFOs to get their hands on it. Business sense, a scarce commodity in the high-tech sector a scant six months ago, is making a comeback. It's back to the fundamentals, says Singapore-based Dane Anderson, research analyst at International Data Corporation (IDC). "What investors are seeking now," he says, "is a clear path to profitability. If you can benchmark your company against its competitors, demonstrate differentiation and your value proposition, then you'll get the money."

Former junk bond trader, economist and investment banker Joe Cunningham thinks he can match those requirements. As CFO at Singapore-based start-up Healthcare Management Asia (HMA), his first task, after finding seed capital from friends and family members, was to raise the company's first round of funding. HMA needed investors up-front because HMA depends on expensive IT systems to run its on-line business, which provides information and data management, as well as logistics and supply chain management for the health care industry. "Planning and executing our IT needs," says Cunningham, "was more complicated and time-consuming than expected." It also didn't help that his chief technology officer was lifted by a dotcom in the US. On the other hand, he found that potential investors were reasonable, understanding the risks of the business in terms of keeping talented staff.

Show Me the Money

To find his investors, Cunningham first invested his own time into drawing up a wide range of business plans. He ended up with three versions, one running just several pages, another stretching to 150. He pitched his plans to his personal database of 2,240 sources for funding, 363 of which specialize in health care. He used the shotgun approach to pitch the company, sending out a broadcast fax to as many potential investors as possible. The strategy worked - HMA completed its first round of funding from private investors earlier this year, and in October secured its second round of funding from a European-based venture capital fund. Cunningham, however, won't reveal how much money the company has raised to date other than to say: "It's substantial."

Substantial or not, Cunningham was lucky to get anything at all. "The environment for raising capital for unlisted companies," says Rajeev Gupta, Hong Kong-based research analyst at investment bank Goldman Sachs, "is difficult [if not dead] and hence those [companies] with cash are in the driver's seat. As long as they are reasonably conservative in their cash burn (their rate of cash expenditure), can execute their business plan, and accelerate their profits, they'll be rewarding investments." But investing in start-ups, he adds, especially dotcoms, has never been for the faint-hearted.

In other words, investors' appetite for risk is currently small. Most investors, including wealthy individuals, venture capital funds and institutional backers are sitting on loads of money. They also see loads of business plans that aren't worth the paper they're written on. Their typical strategy, says Cunningham, is to convince CFOs that they have a number of better projects all with higher returns than yours. "Quite simply," he says, "[Their] dirty secret is that they've got too much money and too few good projects."

Nikunj Jinsi agrees. "There's a lot of private equity out there," says Singapore-based Jinsi, managing director at Hong Kong venture capital firm AsiaTech Ventures, "but companies have to do some tailoring to attract it, for example, adopting a hybrid business model combining on-line and off-line businesses. It's no longer cool to be perceived simply as a dotcom." Indeed, AsiaTech has been doing some tailoring of its own as one of its investee companies has come apart at the seams. Two-year-old Hong Kong-based ActionAce.com, one of Asia's first on-line retailers, ceased its operations in July and is currently seeking bids for its e-commerce assets. AsiaTech, after investing S$4 million (US$2.3 million), is trying to find new funding and salvage what it can. "For companies that are faltering," says Jinsi, "you have to examine potential exits - if the burn rate is too high and market confidence is lacking, and no more funding is available, then you have to decide when not to throw good money after bad. In a downside scenario," he says, "a fire sale strategy is better than nothing."

While the dead body count will inevitably rise as unsound business plans collapse, CFOs with solid value propositions are confident they can still tap into funding. Indeed, for Bob Lim, getting cash is apparently the easy part. In November, he secured US$6 million in funding from Walden International, a group of international venture capital funds in the US and Asia Pacific regions, and US-based e-business solutions provider Broadvision. Lim joined Malaysia-based e-consulting company Cybertouch as CFO in August last year specifically to raise funding for the company's ambitious regional expansion plans. "Finding a partner with the right contacts to help with recruitment, business connections and office locations in various Asian markets is as important, if not more so, than the money itself," he says.

Comfort Equals Trust

Cybertouch lost about US$500,000 on turnover of US$4.6 million in the last year, mainly due to its expansion into Taipei, Hong Kong and Singapore. Lim forecasts revenue of US$10 million for 2001 with a further loss of US$1 million. Early investors, he says, have provided paid-up equity to date of S$1.1 million (US$627,000), about 50 percent of which came from local angels and the rest from the founders. "They're in for the long term," he says. "We provide monthly financial reports but they're totally hands off." The US investors, he claims, aren't much different. "We've offered them a board seat (non-executive) and monthly finance and management reports, but they haven't applied pressure for earlier profitability or expressed concerns about our business risks or execution."

The key, then, to investor relations, is reaching a comfort level. Early fund raising rounds are often seen as adversarial: the owner wants to protect the company from investors with the right valuation without diluting his interest. There are a lot of ways to calculate valuation, of course, most commonly using discounted cashflows as a starting point. While it's tempting to get caught up on valuations, says Singapore-based Roger Wolf, what's more important is to get the business running. "For that to happen," he says, "you need trust."

To date, Wolf, vice-president of finance at artificial intelligence (AI) and speech developer Mindmaker, has been trusted with US$32 million over five rounds of funding. In the last round alone, completed October 10, the company raised US$17 million.

Up until Wolf joined the company in November 1999, almost 100 percent of the money raised since the first round in 1996 was invested in research and development, with expenditure on other items such as administration kept to a minimum. "The strategy was not to rush products to market," he says, "until they were commercially viable." Since then, new funding has been used to build a marketing team and spin off those products ready for market to produce revenue streams.

In other words, Mindmaker operates its core business in R&D and has a lucrative sideline as an incubator for its own products. Having a strong geographical spread has helped. The company has its corporate headquarters in Silicon Valley and five subsidiaries: two in Hungary, two in Singapore and one in the UK. One company, Singapore-based data-mining provider, Cygron was spun off in April, with US$2.2 million in separate funding. Two more spin-offs are in the pipeline, each to receive independent funding ranging from US$2 to 4 million. Mindmaker retains majority control in the spin-offs and investors receive a proportionate interest. Mindmaker forecasts positive cashflow by mid-2001.

The key to finding good investors, says Wolf, is communication. On average, he says, Mindmaker holds (mostly informal) monthly meetings to share information. "You have to take great pains to do quality business planning and risk scenarios and be transparent with it," he says. "There's nothing wrong with investors pestering you for information. It's good news in that it means they care. After all, if someone keeps coming at me for information, I'll share it and get their ideas in return. Currently," Wolf says, "out of a total of seven board members, five are investors."

That representation, of course, provides investors with the transparency they need to calculate on-going business risk and the merits of continued investment. Without that kind of transparency, further funding will remain elusive.

Steven Crane is executive editor of CFO Asia