The One Thing I Had Totally Wrong About VC

Over the weekend, I took a flight down south to Singapore from Kuala Lumpur for a day trip to attend the Venture Capital Accelerated course offered by Quest Ventures. The impromptu trip was rather fun, visiting the Jewel again, had a bowl of good Ramen, by the waterfall, except for the waiting time to board the plane.

So what are the lessons I have learned that day?

Question #1: After Covid-19, is it the right time to raise funds for startups?

In general, VCs raise funds from institutional investors like university endowments, foundations, pension funds, insurance companies, family offices, sovereign wealth funds, etc.— they’re commonly called the Limited Partners (LPs). All VC funds that are raised from LPs commonly have a lifespan of 10–12 years.

It’s a fact that trillion of dollars floating around printed by the US during COVID-19. New initiative and incentives by the Japanese Government encourages their MNC to invest into startups outside of Japan. China — US tension has forced Renminbi to re-route their investment strategy back to the Asia (mainly SouthEast Asia). The fall of Hong Kong as a stable financial hub and transportation hub has forced the outflow of money elsewhere undisclosed and quietly. All the above have briefly indicated and pointed toward the Singapore as the next beneficiary for inflow of fundings.

Besides above, university endowments commonly will allocate ~ 10% — 20% to PE & VC, and approximately half of that is allotted to Venture Capital investments.

The truth is there is a good surge of funds in the market and some has gone into the VCs’ hands to be distributed. It’s believe the above factors has given confidence and supplies for the fund raising activities.

The largest endowment fund in the SouthEast Asia is the National University of Singapore (NUS) and Singapore Management University (SMU). In term of world ranking, USA still hold the champion of the largest endowment funds overall consist of the Stanford University, Yales University and MIT. The Harvard University endowment is the largest academic endowment fund in the world, with a $40.9 billion asset under management as of 2019.

In 2021 alone, Singapore have attracted ~300 family offices to setup in Singapore, and another ~200 in 2022 registered as investor entity to invest as a LP, which has spurred the growth and interest of the VC scene in Singapore. Through the introduction of?venture capital fund manager (VCFM) regime?— a new government regulations that encourages and resulted approximately ~80 VC firms had been setup in the past 5 years.

With the influx of new VCs that came into the scene,?there are more money supplies than quality startups to be invested to begin with,?hence, turning the table favouring startups looking to raise fund.?The ripple effect will then spread across SouthEast Asia benefiting countries like Malaysia, Indonesia, Vietnam and etc, who are active in their startup ecosystems and known to churn out good quality startups.

The VCFM regulations implemented by the Singapore government will be a good referencing model for other countries to attract and drive VCs’ community and interest.

Question #2: How much return can VCs generate and how did they do it? — The Power Law

Power Law simply putting it .. it’s a powerful law! (.)

Let’s assume we have a VC fund of $100 million, the minimum return for a VC fund is expected to be 3x, and a respectable minimum should be at 6x.

The truth is VC will invest into companies, for the sake of easy calculation, assuming into 10 companies and they simply expect 1 or 2 out of 10 will get 50x return. (realistic is 1 out of 10) to be on the top left in the graph, giving a return of 140x — 1000x. That one company is a bet to save their axx and bring back all the returns.

Realistically, they’re expecting 5 will be losers, 3 small wins, 1 medium win, 1 large win, which averages to 3x returns (hopefully at a minimum). The above equation have yet to include the 2% management fee charged to the fund that they raised and managed. Fund managers charge (industrial term 2+20) 2% management annually to the fund.

50% return less than 1x (losing money), 35% return 1–2%, 10% return 2–3x, 5% return more than 5x from another perspective.

In the VC world, there is also a term called “spray and prayer”, in which the VC would invest large enough numbers of startups in hope that one turns out to be the unicorn and give back all the returns, just like how Sequoia invested in Apple during the early days.?The world largest spray and prayer is Sequoia, and followed by 500 startups.

Didi’s angel investor who invested in their early stage has gotten a return of 8000x. Whereby their seed investors get 1000x returns.

Question #3:?What are the career options of a Venture Capitalist (VC)?

Generally you will start your VC career as a junior Analyst → Associate → Principle then ultimately, to General Partner (GP) to qualify as a “true” VC who will then entitled for the 20% carried interest (aka carry). It’s also common that the GP will have to put 2% into the fund as skin in the game.

The one lesson and thing I totally wrong about VC is that …?stop seeking to be a VC as a job, there is simply no career option into the VC if you cannot convince yourself to be entrepreneur, putting your money into the basket and take?big enough risks getting ready to loss everything?as a General Partner, because you only get one chance to continue your VC reputation and career, you can’t afford to fail, in another word, you have to be constantly winning.

In the case where if you’re wrong at your ability to manage the fund to get the expected or promised minimum 3x or respectable minimum 6x return after 10 years, where LPs entrusted their money to you and you didn’t keep up to your promise for their ROI. No one else would entrust their funds to you anymore. no one gets many 10 years to loss. do they??

So, now, question to yourself, are you up for the ultimate challenge, turning odds of losing into guarantees of winning?

Thank you James for the realistic insights and everything you did paying forward, I totally appreciate your selfless sharing.