Investing in Venture Capital and Why Angels Should Consider?

Are you interested in investing in venture capital, but not sure where to start? Well, you’re in luck because VC investing is all the rage right now in Southeast Asia, and Malaysia is no exception! With a growing startup ecosystem and record levels of investment pouring in, it’s an exciting time to consider investing in VC.

But, before you jump in headfirst, it’s important to understand what venture capital is and how it works. Essentially, venture capital is a type of private equity investment made in early-stage companies with high growth potential. By investing in these companies, investors can potentially earn significant returns if the company succeeds.

Venture capital (VC) has consistently been one of the top performing asset classes in Malaysia, Southeast Asia (SEA), and the world. Let’s take a look at some case studies, examples, and statistics to demonstrate this:

1. Malaysia: In Malaysia, VC has also emerged as a top-performing asset class in recent years. According to the Securities Commission Malaysia, the country’s VC industry saw a compound annual growth rate of 16% from 2016 to 2020, with a total investment value of RM8.7 billion ($2.1 billion) over the same period. One notable example of a successful Malaysian startup that has attracted significant VC investment is fintech company Soft Space, which raised $5 million in a Series A round led by Japanese VC firm Global Brain in 2020.
2. SEA: According to a report by Bain & Company, VC in SEA delivered an average gross return of 13.6% per year from 2015 to 2019, outperforming both public equities and private equity funds. This strong performance can be attributed to the growing startup ecosystem in the region, which has seen a surge in investment activity in recent years. For example, Indonesian ride-hailing giant Gojek raised over $3 billion in funding in 2019, while Singaporean super-app Grab raised $4.8 billion in 2020, making it the largest fundraising round in Southeast Asia to date.
3. Global: On a global scale, VC has consistently delivered strong returns compared to other asset classes. According to data from Cambridge Associates, VC funds in the US returned an average of 20.4% net of fees from 2000 to 2020, compared to 6.5% for the S&P 500 over the same period. This outperformance is due to the potential for high-growth startups to generate significant returns for investors, as well as the ability for VCs to invest in a diversified portfolio of companies with high growth potential.

This table compares the average annual gross returns for venture capital, public equities, and private equity in Southeast Asia from 2015 to 2019. Data is sourced from a report by Bain & Company.

Overall, these examples and statistics demonstrate the potential for VC to be a highly profitable asset class for investors in Malaysia, Southeast Asia, and beyond. However, it’s important to note that VC is also a high-risk asset class, and investors should carefully evaluate investment opportunities and conduct thorough due diligence before making any investment decisions.

And here is a table showing the growth of Malaysia’s VC industry from 2016 to 2020:

Now, let’s get down to business. Here are a few steps to consider when investing in VC in Malaysia and Southeast Asia:

1. Do your research: Before investing in anything, it’s crucial to do your homework. Look for reputable venture capital firms with a track record of success and a diverse portfolio of investments. In Southeast Asia, there are several well-established VC firms, such as Golden Gate Ventures and Monk’s Hill Ventures, that are worth considering.
2. Consider your risk tolerance: VC investing can be risky, so it’s important to understand your risk tolerance before making any investments. It’s important to note that not every investment will be a home run, and you need to be prepared for the possibility of losing money.
3. Start small: If you’re new to VC investing, it’s a good idea to start small and invest in a few funds or companies before committing to larger investments. This will help you get a feel for the market and reduce your overall risk. In Malaysia, there are several funds that focus on early-stage investments, such as Cradle Fund and 1337 Ventures, that could be a good place to start.
4. Network and connect: Finally, it’s important to network and connect with other investors and professionals in the industry. Attend events and conferences, join online communities, and seek out mentorship opportunities to learn from others who have experience in VC investing. In Southeast Asia, there are several industry events, such as Tech in Asia and Echelon Asia, that bring together investors and entrepreneurs from across the region.

Why Angels Should Consider Venture Capital:

While angel investment can be a great way to support early-stage startups and potentially earn a return on your investment, there are several reasons why angels should also consider venture capital:

1. Diversification: Investing in VC allows angels to diversify their portfolio beyond just individual companies. By investing in a VC fund, angels gain exposure to a broader range of startups and can spread their risk across multiple investments.
2. Professional Management: VC firms have professional investment managers who are experts at evaluating early-stage companies and identifying high-potential startups. This can be particularly beneficial for angels who may not have the time or expertise to conduct in-depth due diligence on individual companies.
3. Access to Deals: VC firms have a wide network of contacts in the startup ecosystem, which can give angels access to deals that they may not have found on their own. This can be especially valuable in Southeast Asia, where the startup scene is rapidly evolving and deals can be difficult to come by.
4. Access to Expertise: VC firms often have deep industry knowledge and connections, which can be leveraged to help startups grow and succeed. As a VC investor, you may have access to this expertise and be able to provide value beyond just funding.
5. Liquidity: Investing in VC provides the potential for liquidity through exit events such as IPOs or acquisitions. Angel investments, on the other hand, are typically illiquid and can tie up capital for long periods of time.

Differences Between Angel Investment and Venture Capital:

While both angel investment and venture capital involve investing in early-stage companies, there are some key differences between the two:

1. Size of Investment: Angel investors typically make smaller investments in individual companies, while VC firms make larger investments in multiple companies.
2. Risk: Angel investment is generally considered riskier than VC investment, as angels are often investing in unproven startups with little to no track record. VC firms, on the other hand, typically invest in startups that have already shown some traction and have a higher likelihood of success.
3. Expertise: Angel investors may bring industry expertise or connections to the table, but they generally don’t have the same level of expertise as a VC firm with a team of professional investment managers.
4. Exit Strategy: Angels may be investing for the long-term, while VC firms are often looking for exit opportunities within a few years. This can impact the investment strategy and timeline for both types of investors.

Investing in VC can be a rewarding experience, but it’s important to approach it with caution and a willingness to learn. By doing your research, understanding your risk tolerance, starting small, and networking with others in the industry, you can increase your chances of success and potentially earn significant returns on your investments. So, what are you waiting for? It’s time to start investing in the future of Southeast Asia!