Startups asking for venture capital money should spend more time demonstrating how investors can be de-risked, says Weichang (Grant) Ge, senior investment analyst at HAX, the venture capital-based program of SOSV.
According to Weichang, most startups, when facing venture investors, often present their grand vision of what they are going to achieve with the VC money.
He said VCs are racking their brains trying to de-risk themselves, thus a startup that can spend more time demonstrating how investors can be de-risked will be very attractive.
“This can be that you are cleared for FDA, landing a contract from a big-name customer, hitting a milestone in R&D, or receiving a commitment from another prominent fund. These are signs VCs are hunting for,” Weichang said.
HAX is a part of SOSV, a global venture capital firm providing multi-stage investment to support founders’ big ideas. HAX helps founders tap into the world’s premier ecosystems for real-world product development, manufacturing, and fundraising, combined with over $25 million in investment per year via SOSV.
Prior to HAX, Weichang worked as an intern in various venture capital firms including Qiming Venture Partners in China and VU Venture Partners as well as CRCM Ventures in the U.S.
He graduated from the University of California, San Diego with a Bachelor of Science degree in NanoEngineering and Columbia University with a Master of Science degree in Materials Science and Engineering.
Weichang talks about the investment thesis of HAX, funding advice to startups, and a lot more in an interview with AsiaTechDaily.com. Edited excerpts below:
What background and domain expertise do you have?
I was trained to be an engineer throughout my academic career. I studied materials science for six years until I realized my true passion extends beyond a specialized subject. That was when I decided to dabble into ventures.
I’ve always been fascinated by various innovations arising every day from every corner of the world that have the potential to challenge the status quo. Where else better to be than ventures if I am into the cutting-edge technologies shaping our future world?
What types of companies/sectors do you look to invest in? and What’s your mental model for investing?
At HAX, we are laser-focused on deep tech enabled by hardware. We fund companies at their earliest stages, pre-seed, and seed mostly. With our in-house engineering expertise, we are very hands-on with companies to support them from prototyping to scaling. Our past investments span robotics to climate tech, IoT to medical devices, and energy storage to digital health. As a matter of fact, HAX is the largest hardware investor globally in terms of the deal count.
As for the mental model for investing, I want to quote something I just read from the book “The Power Law.” In the chapter where it talks about the early days of Sequoia and Kleiner Perkins, Perkins’s Law is mentioned; it states, “market risk is inversely proportional to technical risk”.
That’s why at HAX we are comfortable with the technical risks associated with the truly innovative deep-tech solutions that tackle the most challenging problems in the world, whether it be a complex robotic system that boosts productivity, or a medical device that empowers doctors to make better decisions, or a novel climate technology that reverses our carbon footprint. From my standpoint, the market risk is less of a concern when addressing a burning problem at the correct time with unparalleled technology.
What is your typical investment range and how many startups do you invest in per year in general? Additionally, can overseas-headquartered startups get funding from you?
Our first cheque is typically a few hundred thousand USD, but we do follow-ons in later rounds after the first investment. The ticket size for the follow-on rounds varies. In general, since we are a pre-seed/seed fund, our max ticket won’t be larger than $2 million.
We make about 30 new pre-seed investments per year through our program, and we are geographically agnostic. Hence, with a diverse portfolio, we open our arms to startups from any corner of the world.
What would be the KPI that you usually check about the startups’ growth? It may be diverse in each industry like LTV, CAC, MoM, etc. but it will be helpful to understand more about your additional investment factors.
There is no universal KPI, but since we work with hard-tech companies, we look for metrics like the number of deployments, unit economics, gross margins, etc. For any health tech that requires regulatory approval, FDA/CE timeline is also extremely crucial.
What mistakes do you see founders make when raising money?
Even though venture capital is inherently the riskiest asset class, it doesn’t signify that VCs have the appetite to swallow any risks. As a matter of fact, VCs are racking their brains, trying to de-risk themselves. Therefore, when you, as a founder, are asking for VC money, don’t just show them your grand vision of what you are about to achieve with their money but spend more time demonstrating how they can be de-risked. This can be that you are cleared for FDA, landing a contract from a big-name customer, hitting a milestone in R&D, or receiving a commitment from another prominent fund. These are signs VCs are hunting for.
What’s your advice to entrepreneurs who have a chance to meet investors like you? What are the top 3 questions that you always ask the founders?
Building a startup is a long journey, and most likely, it’s a bumpy one. The final product in customers’ hands might be drastically different than you initially envisioned, so be prepared to pivot and constantly iterate. Most importantly, building something that creates value for your customers is above everything else.
Why hasn’t this problem been properly addressed before?
How are your solution superior than the existing one?
What’s your customer persona?
What’s your general thought about the term “Global” and What are the important factors (criteria) for local startups to consider for international expansion?
If you are not in one of the few markets, namely the US, China, and EU, that can single-handedly sustain an abundance of multi-billion-dollar businesses, then going global is crucial. The cake in your home country simply is not large enough. With that being said, you don’t need to build a “global corporation” from the get-go.
The imperative at the beginning should be focusing on doing one thing right and attaining the Product-market fit on your home turf. Once you are at PMF, it’s your game to lose. The international expansion comes after PMF. The playbook for scaling globally is not unique, and you can find many success stories to learn from.
What kind of startup or tech industry will impact the world in the future like 2-3 years in your view? (or what tiny/nonexistent markets today will be trillion dollar markets in 10-20 years?)
I am very bullish on two themes – automation and climate tech.
Automation – The labor crunch alone would justify the investment in automation technologies. With more and more people dropping out of the labor force, the labor shortage isn’t getting any better. Moreover, the drastic decline in the birth rate in many OECD countries poses a severe threat in the coming decades.
We see countries like Japan and South Korea, which have lost the demographic dividend leading the way in robot deployments because automation empowers them to lift societal productivity to accommodate the rising living standards of their citizens, even with the declining populations. I am sure in the coming decades, robots or automation technologies, in general, will be increasingly prevalent in various aspects of our lives.
Climate – Climate tech is an obvious one as climate change has become an existential threat to humanity. There are a number of growth drivers behind the climate tech boom. First, the general awareness of the urgency has compelled immediate actions from countries, organizations, and individuals. In addition, the advancements in deep tech unlocked substantial technological breakthroughs in the field.
Lastly, capital allocators are pouring money into the sector with increasing appetite, hoping to capture the next Tesla. Even with the market downturn we are experiencing now, we don’t see much reduction in early-stage climate tech investing activities. All factors considered, the enthusiasm for climate tech is very likely here to stay in the coming years and even decades.
What are the top-three books, movies (TV series) or podcast episodes that changed your life and why?
Book – The power law: Ventrue Capital and the Making of the New Future
I just finished it. For founders and want-to-be investors, I highly recommend it. It covered the history of venture capital and the less-known behind-the-scenes stories of the remarkable companies you see today.
Movie – Interstellar
A masterpiece by Christopher Nolan. Definitely a movie worth watching over and over again.
Podcast – All-in
The four besties are funny, and their hot takes on trending issues are not to be found anywhere else.