I invest in cross-border companies that operate between the United States and Asia. Often enough the company is incorporated in Asia rather than in the U.S., and so I run into variations of the highly contagious Ebola virus, sorry, convertible note in many countries -- the U.S., of course, but also in India, Singapore and the Philippines.
But there is one place the convert absolutely shines, and that is speed. For both the entrepreneur and the investor, mostly because the valuation can has been kicked down the road. This is why the convertible note has been a fantastic catalyst for the startup financing explosion in the U.S. (and specifically in Silicon Valley). And in this respect Asian policy makers, who are constantly looking for ways to catalyze a startup ecosystem, could take a page from the U.S. book.
This critical issue of trying to get entrepreneurs the fuel (i.e. cash) to get going can get lost in a thicket of weird Catch-22 type rules. This is such an easy fix -- but exactly the kind of small-but-vital thing that gets overlooked.
In India, for example, doing a convertible note takes brain surgery, especially for non-Indian investors. This makes equity investments the only realistic option, and so the vital advantages of speed and simplicity are lost. Global VCs are forced to use traditional convertible preferred equity, which involves months of diligence and negotiation even for tiny investments in tiny companies. Two passionate founders and an idea don't merit six months of diligence, 200 pages of legal documentation, and multiple government forms in triplicate.
India is an extreme case; it's better elsewhere in Asia, but still nowhere near as easy as it should be. What may seem like relatively minor frictional barriers end up hurting startups and the ecosystem.
In a future blog post I will lay out a practitioner's view of five easy regulatory fixes that can help juice a startup ecosystem.