A newly formed group of local investors is looking to fund Cambodia’s emerging startup scene and join a growing number of angel backers helping finance projects in the early stages of development.
The 10-member group has yet to decide on a name and still needs to define membership requirements, but Sokny Sao, one of the founding members of the group, said he hopes to move forward with formalising the project soon.
“We are still developing guidelines to determine the required investment amounts and participation rate, but we think right now it will be at around $10,000 per member per year,” he said.
“The initiative is very new, but we are putting our money together so we have a pool of funds to allocate to startups, which allows us to share the risks, because investing in startups is very risky.”
Sokny explained the group will focus on equity investments, adding that this allows for startups to access funding when they would otherwise be unable to receive it through more established channels.
The group recently made its first investment in BookMeBus, a Cambodian online platform for bus ticket purchases. Sokny, a lead investor in the project, explained that the investment was undertaken through a convertible note loan, which is a debt financing mechanism with an agreement to turn the investment into equity after a later round of financing.
Rithy Thul, a member of the local angel group, said the first step of the project was to engage Cambodian startups to get a better sense of their needs, which he explained would then translate into more concrete and possibly larger individual investment commitments.
“We will not be able to spend all of our money in the first year because we will need to find the startups first and see how much money they will need,” said Thul, who is also the co-founder of SmallWorld, a co-working space in Phnom Penh that has served many local startups.
“We are looking to work with three to five startups per year, with an expected investment of $20,000 per startup on average,” he said.
Funding, especially for startups in the early stages of their development, is very hard to come by, Thul said, noting that the group aims to fill that gap and help entrepreneurs gain initial momentum.
“There are not enough quality startups in Cambodia to receive large amounts of funding like you would receive from larger institutions,” he said.
“That is why angels are very important to help them get off the ground.”
Restrictions for entrepreneurs seeking financing make angel led initiatives very important, according to David Totten, director of Emerging Markets Consulting, because banks are unlikely to extend sufficient credit to startups during the risky early stages of development.
“Startups are rarely immediately profitable and even if they are, they will not be able to borrow enough to support rapid growth,” he said.
“You will need to double, triple, quadruple or more your staff, move to an office, furnish it, invest in IT, hire an accountant, do some marketing to reach the larger market and it is very unlikely that you can obtain a bank loan to support that growth trajectory.”
Totten said the pool of entrepreneurs who can pull together $10,000 to $20,000 from their own resources was small. At the same time, it was very costly for established investors to take part in the process of identifying, developing and funding project, which forces them to focus on larger investment opportunities.
He said a local angel investor group focused on smaller Cambodian projects would help bridge this gap.
Jesse Orndorff, innovation program manager at the USAID-funded technology support project Development Innovations (DI), emphasised this point further, noting that most of Cambodia’s startups have not reached the size that would interest investors.
“There is a big gap between that family-and-friends round of funding where you get enough cash to [operate] for three to six months and that time period where you can actually prove the concept and then get real venture capitalist investment funding,” he said.
“There are venture capitalists here that I talked to who want to fund projects, but they are all looking at an investment range greater than $150,000,” he said.
“But if you are doing an investment of that size, you are talking about a million-dollar valuation, and there are very few, if any, startups [in Cambodia] that have reached that level yet.”