Understanding the Venture Asset Class (My Journey)

From working with startups on their marketing needs, investing personally to spending the last half a year with Decacorn Capital, I've compiled some of my key learnings and takeaways on the elusive venture asset class. For clarity, I'll be referring to VC(venture capital) funds, direct startup investments and syndicate/SPV(special purpose vehicle) investments as part of the venture asset class. Many people have asked me questions surrounding these topics in various ways and I hope that this can add some value through the sharing of my journey to better understand and participate in this asset class:

1. Risks and (il)liquidity

Startups are risky and even scale ups can face challenges leading to down-rounds (follow on investments are later stages at lower valuations) or bankruptcy. If you need to see the money back in your bank in any time frame shorter than 8-10 years, I would hold off any investment in this space. Private companies are not as stringently regulated compared to listed companies and are typically only available to accredited investors who basically tell the regulator that they are aware of these risks and capable of doing their own due diligence. On balance, a higher risk profile also comes with a higher potential upside, as startups often disrupt traditional industries and have innovative technology and/or business models that can translate to a nice financial return. The world of startup investing is all about delayed gratification- holding off today's pleasure for future gain.

"Don't put all your eggs into one basket"

Within the startup world, no one has a crystal ball, the commonly quoted statistic is that 9 in 10 startups fail- that's a scary statistic for sure but definitely one to take into account when deciding where/what to invest in. Aside from the risks that individual company investments carry with them, larger geography or sector-specific risks should be taken into account. Before investing in startups, I had spent the majority of my time and resources on running my own companies, with some participation in public equities and alternative investments. Having been a proponent of financial literacy since my teens, I took my own advice and reviewed my personal risk appetite and portfolio allocation to reflect my objectives of living a simple lifestyle and making money work for me over a long time horizon. Amidst the sea of red and huge risks, I came to the conclusion that this was something I could stomach and at most, an expensive lesson I was willing to pay for.

2. Picking winners

It will still be sometime before I'll know if the investments I've made will succeed, and like every investor I hope they do. Some people come up with checklists and rubrics to score investment opportunities while others rely on gut feel to make their picks. I'm a proponent of a holistic evaluation approach, looking at the team, product and market just like how an artist, artwork and audience is used to evaluate art, taking into account the first point on risks and diversification. Some investors would prefer to invest in only things that they understand, whereas I believe that learning is a continuous process and experience/education can actually inhibit our ability to imagine certain possibilities in some situations.

I started my journey by investing into Accelerating Asia's first fund, targeting pre-series A companies from around Asia and coupling the investment with a 100 day accelerator programme. There was no track record from a previous fund to reference, but 2 cohorts of startups had already gone through the accelerator programme. I had heard very positive candid reviews from one such company, and having had the opportunity of working with numerous accelerators through Startupmedia before that, I knew what founders would say about these accelerators in front of and behind the camera- the latter often wasn't very positive. I saw the fund as a great entry point given the broad sector-agnostic approach and stringent selection criteria, with countries across within the region I was familiar with.

3. Deal Flow

Whether it be access to fund investment opportunities, syndicate/SPV offerings or individual startup investment rounds, the venture asset class is extremely opaque. There have been platforms such as Wefunder, Angelist, Republic or Our Crowd that accredited even non-accredited investors can jump on to and see deals. Some have argued that these platforms are incentivised to maximise transaction volume rather than prioritise quality deal flow, though it will be some time before one finds really 'hot' investment opportunities on these relatively more open platforms. The best founders want to curate who sits on their cap table instead of simply taking anyone's money, especially in the current climate where liquidity is floating around and almost freely available.

I did my first couple of co-investments into the Accelerating Asia portfolio startups, taking advantage of their due diligence and following their terms given that I wasn't writing extremely large cheques. I also looked to expand my network of founders locally and regionally as I travelled across the world, and did not count out the above-mentioned platforms and participating in syndicates/SPV's, again mostly for learning value. Once one starts writing cheques, word usually gets out and more opportunities will come knocking on the door- it is then important to flip the stones as quickly as possible while continuing to hunt for great opportunities. I continue to do this stone flipping activity in my current role as its important to balance the hunting and hunter conversations to curate a good portfolio.

4. Valuations

How does one value a startup, especially a loss making or even pre-revenue company? Traditional financial models, concepts like DCF (discounted cash flow), revenue multiples or even benchmarking similar companies have to be thrown out of the window especially when looking at the most innovative and differentiated plays. Startup valuations at the end of the day are a function of the amount needed to get the company to the next round and how much the founder(s) want to dilute. That being said, the definition of a startup is different depending on who you ask, and valuations are also conditional upon having investors who believe in the vision and formidability of the startup and team.

Discoverable valuations through instruments such as a convertible note/SAFE agreements (simple agreement for future equity) have become more popular for early stage investments or quick bridge financing rounds. Investors would typically agree to a discount on shares issued in the follow on financing round, an interest and/or a valuation cap (maximum valuation at which their invested capital gets converted into shares). This simplifies the process when looking at earlier stage companies who might have little to no traction, though still caries the risk that the company may not deliver on their goals and fail to raise follow on funding- an investor would also still need to agree to the key terms mentioned above too (valuation cap, discount, interest, whichever is being offered as part of the deal).

5. Venture Capital Funds

Softbank's vision fund has made a name for itself through bold multi-billion dollar bets on everything from hotels (OYO), co-working spaces (WeWork), fintech and the list goes on- though I wouldn't really consider them a VC fund. Many funds today are deploying capital at record speeds, with the likes of Tiger Global recently raising 8.8B for their latest PIP15 fund and fundraising cycles being compressed as the world is flushed with liquidity from stimulus measures. The case for participating in funds, despite adding a 'middle man' who charges management fees and carry, would be to diversify and spread risks, gain an understanding of the landscape and a play in companies that might otherwise be unavailable to individuals (finding companies to invest in is one part of the equation but convincing founders to take your money is equally important).

In my opinion, small to medium sized funds can select the highest conviction deals rather than being pressured to deploy capital instead of sitting on cash, avoiding the spray and pray approach that hopes for a few breakout successes while writing off many companies. I joined Decacorn as I believe in the vision that the world is our oyster and that as a VC fund playing in the disruptive innovation space, it is important to be disruptive ourselves. We're unconstrainted and evergreen- much like Sequoia's new structure, without the traditional stage, sector or geography mandates. Investors have more visibility on a live portfolio, the fund doesn't need to exit positions immediately upon a liquidity event and can also be opportunistic to enter companies that we believe are at an inflection point and whose technologies create for them a huge moat.

While VC funds are still illiquid, and carry risk, they are an excellent starting point for folks looking to start allocating toward this asset class. It's how I started but it definitely is not the only way to do so. Curation is critical, whether one decides to do it yourself or leave it in the hands of professionals, sometimes it is also a function of the amount of time and capital one has to put to work. My day to day work now revolves around deal sourcing, fundraising and growing the online footprint for the fund, but if I could sum it up- it's all about seeking out fellow tribesmen who can walk along the narrow and winding path together. Whether it be founders or investors, the world of startups/disruptive innovation is not commonly understood until it happens and its important to have the right people along for this exciting journey.

Conclusion

What is most important at the end of the day is to answer the question: 'What is one's vision of the future?' Whether one is a believer in the metaverse, crypto currencies, flying cars or going to Mars, we can all agree that change is constant and the world we live in today might be difficult to recognize just a few decades later. We might sound like lunatics, be mistaken for fools in the early days or even be flat out wrong about certain things, but the potential for a better tomorrow keeps me in the game. My personal mission is to do something useful and not just solve first world problems in first world places and I believe that this can only be done through the marriage and deployment of people and resources.

Returns will always be central to any investment strategy, but I believe that there is also immense learning value in understanding the world of startup investing/VC and how to efficiently allocate capital to create value and solve real problems. Feel free to reach out if you have any further questions or clarifications on the topic.

The above does not constitute investment advice nor any invitation to subscribe to financial products/securities and is representative of my personal views alone.