Since Rocket Internet (or maybe even before), many in Southeast Asia tried to replicate, or refine, the model of venture building.
Since Rocket Internet (or maybe even before), many in Southeast Asia tried to replicate, or refine, the model of venture building.
A significant part of Momentum Works’s business is in venture building as well.
Why do people do that? Well, reasons vary for different players, but generally in two categories: 1) seeing multiple opportunities and would like to grasp them all; and 2) wanting to build an enhanced accelerator/incubator with more operational control.
Corporates are joining the fray as well – telcos, banks and manufacturing companies have all built their internal builders, attracting external talent to solve their problems while building businesses around those solutions.
Not rosy at all
Nonetheless, most venture builders fail…to build any ventures that last. We have seen a lot of these – to avoid making anyone upset we will not name here.
One only need to look at the startups that receive series C funding or have been acquired to realise that almost none are coming out of venture builders.
Many venture builders launch with much fanfare – sure US$100m fund to back it, sure best advisors in the universe – and still turn into oblivion within a year. So does their initial portfolio of promising startups.
Why?
We conclude that two reasons are at play:
1- Project/venture selection
Quite often, we look at the portfolio of a particular venture builder, and start wondering: these businesses are neither scalable nor exit-able, why would anyone other building them?
Good projects are not necessarily guaranteed to succeed. Among a number of factors, timing and execution are two of the most important. If you do it too early, when the infrastructure is not ready, you educate the market and later competitors will easily over take you; if you do it too late, well, it would be hard to convince any investor you can effectively catch up, unless you have a stellar team; the importance of execution doesn’t need to be repeated;
2 – People and their incentives
Building successful venture is no easy task, as described above. Execution largely depends on the quality, flexibility and resilience of the team.
The particularly tricky part for venture builder is – what is the role of the team, and what incentives/motivates them? Rocket does a poor job retaining good talent because even the best founders would only get a small percentage equity option. The good thing is that the venture builder retains absolute control, facing unproven founders; the flip side obviously is during challenging times founders have no incentive to not abandon ship.
We’ve seen many venture builders taking a similar approach to rocket, giving a small equity – the difference is the salary the founders receive is smaller than that of Rocket. Hardly see why good founders will accept this model instead of building their own ventures.
The right incentives
Of course, they are a few ways to solve this problem.
One way is equity incentives: a successful venture builder in China (they built about 20 ventures so far, with one reaching US$2 billion valuation) gives founders a decent salary (so that they do not worry about livelihood), and 30% equity upon a milestone (usually significant series A funding).
The incentives are better coupled with what we call “skin in the game”, getting founders to purchase the initial equity (say 10%) while incentivising them for upsides. I have seen two models and they seem to work: one is to convert their market salary into equity (i.e. cash-wise they get paid much less) at a discount; another is to dilute the venture builder but not the founder during the first two or three rounds of external funding.
With everything said, there might not be a fixed formula for different ventures – perhaps each and every case is negotiated. What is important here is picking the right people with the right motivation, and understanding deeply what they can contribute to the business in addition to running it – that would determine how much percentage share the venture builder can legitimately claim by supplementing resources and capabilities.
Focus on success rather than diversification
Rocket did not start as Rocket – it started building upon the success of Alando and City Deal. Having success cases always makes it easier to attract funding as well as talent.
We believe the same would apply to other venture builders – you do not need 20 ventures during your first year of operations.
Having 5 with 2 of them raising series A funding would probably be a strong enough endorsement.
