Done deal? Startups learn a hard lesson after 500 Startups withdraws interest

Investments in startups in the region are heating up, and we’ve seen VCs pour money into a variety of companies at different stages. Naturally, we’ve also seen some deals hit a snag.

Tech in Asia has learned from reliable sources that recently, 500 Startups didn’t push through with the signing of term sheets with three startups – one based in Singapore, the two others in Malaysia and the Philippines. For two of the companies, 500 Startups cited conflict of interest as reason since the fund had competitors in its portfolio.

We’ve reached out to the startups. While all were disappointed with the decision, one said there was no harm done since it was talking to a few other investors at the time. This wasn’t the case for the other one, however. Based on the startup’s account, two other investors wanted to join 500 Startups in the round, but couldn’t keep up with the pace of negotiations. So the investors decided to drop out, while the startup told them it’d be going with 500 Startups.

The startup further told us they thought it was a done deal, judging by how talks with 500 Startups managing partner Khailee Ng went. But the VC called the whole thing off later on, saying there was some overlap with another startup in its portfolio.

It was like a rug had been pulled out from under the startup’s feet. The founder told Tech in Asia it caused some delay in their plans and forced them to continue bootstrapping. The third startup didn’t want to comment.

We reached out to Ng for his side of the story. He stressed that there was never a solid commitment to invest, only verbal expression of interest. “There’s a big difference between interest in participating in a round versus actually participating in a round (signing on documents). I’ve never backed out of anything that I’ve signed. However, after giving verbal interest, a variety of things can cause things not to translate into a signed commitment.”

Competing investments are a valid reason to withdraw interest. There’s also no legal issue here because a term sheet isn’t legally binding. Even the startups know this.

But wouldn’t it have been better had 500 Startups known from the start, even before the terms sheets were prepared, that there was a conflict?

Ng said: “We tend to know ahead of time. [But] we invest in seed stage where companies do pivot, and in many cases overlap is not direct. Hence, sometimes it becomes only clearer later on.”

We reached out to other VCs for their insights on the matter and we got mixed opinions.

Dmitry Levit, general partner at Digital Media Partners, told us: “We prefer to offer a term sheet only after having gone through extensive preliminary discussions with the company, and the negotiations leading up to a signed term sheet may take months given that we like to be as specific as possible in the term sheet for the sake of clarity. Therefore, for us, matters such as potential conflicts of interest should have been resolved before the drafting of the term sheet.”

However, Levit acknowledged that every VC’s process is different. There’s no universal standard as to when a term sheet is supposed to be offered.

Jenny Lee, managing partner at GGV Capital, explained that investors not pushing through with the signing of term sheets is common. There are even times that a pullout happens after a term sheet has been signed. “A term sheet is not a legally binding document but an expression of interest and terms are subject to due diligence.”