Fund Focus: Cocoon Capital abandons traditional VC approach as it targets B2B startups

Subscribe to our newsletter

From the left: Monthida McCoole (Investment Partner), Michael Blakey (Managing Partner) & Will Klippgen (Managing Partner)

Angel investors – William Klippgen and Michael Blakey – who recently launched Cocoon Capital, a US$7 million venture fund in Singapore, believe they are uniquely positioned to fund early stage B2B companies in the region.

For starters, the Cocoon founders Klippgen and Blakey say that with over 30 years of early-stage investing experience with multiple successful exits, they bring far more experience than many of the other VCs in the region.

“Will and I’ve had a great deal of success over the years as angel investors, so we’ve tried to take the best practices that we’ve used as angels and combine them with strengths that having a fund brings,” Michael Blakey said.

“One of the main reasons that Michael and I decided to set up Cocoon Capital, is that we found that we were spending a great deal of our time reacting to problems that our portfolio companies were having rather than proactively helping them avoid them in the first place. This is because we were spending a lot of out time supporting companies raise the seed rounds that we were investing in. By being able to now not have to fundraise for the companies, we can spend more time supporting the entrepreneurs,” added William Klippgen.

Cocoon’s model involves working closely with few founding teams annually, to ensure these companies get the maximum amount of traction to make the next funding round much easier, the duo told this portal in an interview.

Against the traditional and conservative approach in this region, where often multiple VCs come together, even for early stage rounds, Klippgen and Blakey said Cocoon preferred to take the full round. As a VC, it takes no management fees, and caps the number of deals it undertakes annually to five, adding that it was the only fund in this region to follow this approach.

Cocoon’s cheque size, which ranges from US$250,000 to US$700,000 in Southeast Asia, is not a handicap, due to multiple factors they argue. Rather, they point out that in the first place, startups in the SaaS (software as a service) space don’t have many VCs interested in the segment to even reach out to, which gives them an edge in addressing the requirements of such firms.

Edited Excerpts.

You plan to back software-as-a-service, ecommerce, and fintech startups – but you give cheques ranging from US$250,000 to US$700,000 even at seed/pre-Series A and Series A levels, most startups in this sector require a lot more capital. How do you address this issue? 

MB: When we invest in an early-stage company, we ensure that they’re raising enough funds to last them for 18 months. For companies in SE Asia they shouldn’t require more than USD700k to achieve this. Also, with the structure that we’ve used for Cocoon Capital and the investors that have backed us, we’ve got the ability to continue investing to Series A and beyond if we so desire. Also, as we’re focusing on B2B companies, they normally don’t require as much funding to achieve profitability as their margins are much better than those of B2C companies.

WK: Early-stage companies can do with less funding, if the funding is spent wisely. Our model is to work closely with the few founding teams we support each year to ensure that they get the maximum amount of traction to make the next funding round much easier.

For a start-up, why should they consider Cocoon Capital, against a slew of VCs and other options that are now available in the region? 

MB: I would argue that there isn’t a huge amount of funding options available for early-stage and/or pre-revenue companies, especially outside of Singapore. Also, many of the funds that are in this space are only looking to invest a part of the round (up till $200k), whilst we prefer to take the full round. Also, between Will and I, we’ve got over 30 years of early-stage investing experience with multiple successful exits, which is a lot more experience than many of the other Venture Capitalists in SE Asia.

WK: Also, much of the funding that is available, is still looking more at B2C opportunities, while our focus is on B2B. In regards to other sources of funding like government grants and crowdfunding, I believe that they have a place in the eco system, but don’t see them as competing for the same deals that we’re looking at. One reason is that grants and crowdfunding financing rarely come with any founder support post investment.

In terms of sectors like Software-as-a-Service, how do you see this region shaping up? What are the trends that you are seeing here?

MB: Over the last 12 months, I’m beginning to see some very good SaaS companies being built in the region. Companies like PlusMargin and Nugit are building technology that is more for the global audience than just local or regional. We’re still quite early in the developments of SaaS businesses in Southeast Asia, but I believe that over the coming years the region is going to build some global companies in this space.

WK: We see that most SMEs in the region have an enormous potential to drive more efficiency by adopting SaaS business software. As salary levels increase, this potential will be more apparent, and the big question is now how local SaaS providers will stack up against the global ones.

Overall, how are deal flows in this region looking like? A common complaint that most VCs say is that while the dry powder is available, but the region is not producing requisite deal flows for deployment – do you agree?

MB: I think that for early-stage companies, there is a growing number of good deals, but your catchment area must cover the whole region rather than just one country. At Cocoon Capital, we’re receiving many applications for funding every day, and we’re coming across many good deals this way. I believe there is a lot more money available than good deals at the pre-Series A stage, as companies are really struggling to progress from Seed to Series A.

You have said that you won’t take the traditional VC approach? What exactly does that mean?  In the startup world, there is a lot of scepticism when it comes to VCs stating stuff like ‘intensive business support and mentorship’ – it is often viewed as a tactic that VCs use when the ticket sizes they want to commit are much smaller – how do you fight this perception? In terms of business support and mentorship, what is that you bring to the table?

MB: We’ve structured Cocoon Capital very differently from a traditional VC to overcome some of the potential conflicts we perceive between start-ups and VCs. Will and I’ve had a great deal of success over the years as angel investors, so we’ve tried to take the best practices that we’ve used as angels and combine them with strengths that having a fund brings.

As early-stage VCs tend to be small, the management fees aren’t large either. This tends to lead the VC to invest funds as quickly as possible, to enable raising the next, normally larger fund.

Also, they keep themselves as lean as possible to keep costs down, which means that they focus more on making investments than supporting portfolio companies. To avoid this, we don’t take any management fee and also we cap the number of deals that we can do each year to only 5. As far as I know, we are the only one doing this in Southeast Asia.

As angel investors, Will and I’ve averaged two new deals each year. Part of the reason for this is that we like to actively support the companies that we invest in and to don’t feel that we can support/ mentor more than 3-4 companies at any one time.

WK: One of the main reasons that Michael and I decided to set up Cocoon Capital, is that we found that we were spending a great deal of our time reacting to problems that our portfolio companies were having rather than proactively helping them avoid them in the first place. This is because we were spending a lot of out time supporting companies raise the seed rounds that we were investing in. By being able to now not have to fundraise for the companies, we can spend more time supporting the entrepreneurs.

For each company that we invest in, the support that they require is different. A few of the most common areas of support, though, are around personal development of the founders (how to be CEO’s, leadership etc), forecasting/ fundraising, product – market fit, efficient marketing, brand development and corporate governance.

Also, to align ourselves with our investors and entrepreneurs, we can only personally invest through the fund (it’s through this investment that we’ll make our money) and we also won’t charge any fees / or in-kind benefits to portfolio companies. As you can see, we care a whole lot about not creating any conflict of interest between startups and us as investors, and I think this builds the foundation from which we start growing the next success stories in close companionship with the founding teams.

We see a lot of incubators/accelerators coming up with demo days – but, do demo days actually accomplish the purpose, which is helping entrepreneurs raise money and meet investors. Most startups in Singapore that have raised funding, rarely have they met their investors on demo days or pitch days. Also, the format privileges the ones who pitch well, rather than the ones who have the highest potential. Therefore has this concept gone stale? 

MB: I think that you’ve got to take a couple of different perspectives to be able to answer this question. The accelerators want to have the demo day for 3 reasons:

The first and most important reason is that it “forces” the teams to get prepared with their pitch and documentation. The second is that they want to showcase their companies to investors, especially the passive accelerators that aren’t so involved in the eco-system. The third is that it helps the accelerator get much-needed PR to raise awareness within the entrepreneurial ecosystem to attract companies to their next cohort.

On the investor side, you’ve got to break it down between 2 types of investors. The first is passive investors for whom I believe that demo days are very useful, as they can just turn up and hear a number of companies pitch and hopefully hear one that is of interest to them. This means that often, they’ll end up focusing on the better pitches rather than the best companies.

For active investors (and in particular, lead investors) they would hopefully have spent a great deal of time talking to the companies before demo day and quite often would have picked the ones that they like long before the day itself.

The reason that, even if you fall into this camp, it’s still worth going to demo days, is that it’s a great place to meet other investors and also quite often you get to hear some very good questions asked to the companies that you might not have thought about yourself.

There is a Series A slowdown across the region – how does that impact VCs in the seed stage? How can you help your portfolio companies get funding at the next level? 

MB: I personally haven’t seen a slowdown of Series A investments in good companies. What I’ve seen is that investors in later rounds have become more experienced and thus are being more selective in their investments. When I look at making an investment at the seed stage, I talk to a number of later stage investors to understand what the metrics are that the company would need to hit to get them sufficiently excited to invest in a later round.

This also helps me identifying VCs that would be interested in later rounds and I can help start building a relationship between the VC and entrepreneur early on. At Cocoon Capital, many of our backers are looking to invest in the later rounds which is very reassuring to our entrepreneurs.

You have a global network of investors, including 28 family offices and active angel investors Magnus Grimeland, co-founder of Zalora; Karan Thakral, chairman of the Singapore Angel Network; and Salman Niaz, portfolio manager at Goldman Sachs Asset Management. How can you leverage them?

WK: There are a number of ways that we’re looking to leverage our network of investors. As they are based around the world, they can give us a more global view of what’s happening in different markets and help us identify trends and competitors that we might not be aware of in Southeast Asia.

Also, their diverse backgrounds across multiple markets and sectors are very helpful when conducting due-diligence. Also, as mentioned previously, many of our investors are looking to invest past the seed round and this again will help the companies expand much quicker than if they had to continue to raise external funding.

We use very efficient SaaS tools to enable instant communication across our investor base, which drives transparency and also engagement.

Why has South-East Asia not seen a strong angel investment community, and how has that impacted the startup ecosystem?

WK: The investment style of investing in companies that will take considerably time to start generating a cashflow was not common in Southeast Asia prior to the online revolution. Unlike Silicon Valley, there are still very few investors who made their money from building technology companies, and thus, few potential angels with the required inspiration and knowledge to be good business angels.

A second reason is that the culture of working through angel networks is only starting to develop. Networks aren’t just about building connections between investors, but also a good way of sharing learnings and deal flow. Not having these networks means that many angel investors are repeating earlier mistakes, which makes them less successful and leads to many stopping investing. I don’t believe that there is any successful early-stage eco-system anywhere in the world that was built without networks with a strong focus on sharing experience and knowledge.

How do you see the startup ecosystem in SE Asia? Singapore had a huge lead over all other countries, but has it been able to build on it? 

MB: I believe that the ecosystem in Southeast Asia is still at a very early stage of development. There are massive growth opportunities for companies in the region, but it’ll take time to pursue them fully. I see that Singapore has placed itself at the epicentre of the ecosystem due to its strong legal infrastructure and access to funding, both on a local and global level.

Going forward, I see Singapore focusing more on finch, logistics and deep tech verticals and that other countries will take a lead in other sectors. For companies starting outside Singapore, many of them will still have operations and connections with Singapore.

Also, the fact that global tech companies like Facebook, AWS and Google out their headquarters in Singapore will keep attracting talent that will quite often leave after learning the ropes to set up new companies. This is what happens all the time in Silicon Valley, New York and London. Also, the global tech companies are the ones with a strong acquisition appetite that will support the future exits in the region.

Be it India or South-East Asia, has the time finally come when we will see a lot more product companies get funded out of these two geographies? 

MB: I hope so and that’s why I’m such a big supporter of programs like Entrepreneur First. EF taps into the talent pool that we’ve got in the region and helps give them structure and support to build product companies.

This can’t be left to just EF, but I believe that higher education institutions need to offer more support in terms of their curriculum. Across the globe, e.g. at MIT or Imperial College, this has been shown to work. When investors start seeing these type of businesses being successfully formed, then the investments will follow.

Also Read: 

We want to be go-to partner for top global startups: George Ugras, IBM Ventures

VCs bullish on SEA’s ecosystem, say best is yet to come for region’s startups

Startup innovation on a positive growth track in Singapore: IBM Connect panel

Startup Digest: Cocoon Capital launches $7m fund; Paktor picks stake in 17 Media

There needs to be more investor interest in B2B plays: Paul Tenney, Ematic