5 Things to Know about VC, After 5 Years Spent in Indonesia’s Venture Capital
Since I joined MDI Ventures in mid-2015, I have not properly sat back and taken a moment to reflect. While it serves as a self reminder, I think fellow venture capitalists, founders, or anyone trying to break into VC could also learn from my learnings (especially the latter, as I’m getting more inbound messages from that group).
In the process, I’m lucky enough to be involved in deals (and missed some) from various categories that span from Enterprise, Consumer, Fintech, Cybersecurity, to frontier categories such as Space and Biotech. Here goes some things that I’d like to reflect on.
In Funds, returns and thesis matter, but luck makes things happen
It was only after I entered the industry that I grasped how VC actually works. In one analogy from Nicko Widjaja, now the CEO of BRI Ventures, a VC to startup relationship is comparable to the relationship between a music label and its rockstar line-up. The other analogy is like an experienced casino player that has mastered gambling with OPM (Other People’s Money).
When it comes to these funds, a VC tends to follow the Power Law, or to oversimplify by Pareto, 20% of the investment portfolio would end up as fund returner which carries 80% of fund performance. Some companies, such as emerging Unicorns, would deliver the home-run. A lot of these are theories I would read on the Internet or in books (well, primarily Scott Kupor’s Secrets of Sand Hill Road), but it was only after some lucky exits and unicorn events that I understood how the Power Law truly works.
For industry standards, people care more about the fund’s IRR, some others care more about cash on cash returns. Main difference is IRR perspective prefer faster exit by nature as it goes lower by dragging holding period longer, while cash on cash perspective can afford to wait until moment really hits, there are companies where value creation accelerates only once its public and takes gradual rise, as such the private investor (VCs) might shoot themselves in foot for liquidating too fast, for example Xero and Sea Group. Either way, it boils down to the LP preference. LP also likes things that VC inclined to like, something scalable, repeatable and profitable.
Bottom-line here, each fund is formed with a specific thesis in mind by the LP-GP and VC job is to source and pitch investment deals that fits those funds. While there’s many attempts to de-risk high returns, I admit luck and uncertainty still determines end results. Then again, I also believe in what Scott Galloway said in his blog writing :
However, consistency to test the winning formula is important to prove continuity of funds. Luck also favors those who consistently strive for those serendipitous moments : right guy, right place, right time, which feeling resonates during investment decision making.
On Investment Decision, game of validation, conviction and asymmetric information
Good chunk of VC portfolios are referred to by other investors, for a simple reason, this is a game of validation. Exchanging deal notes frequently done between VCs. Due diligence standards vary across VCs, but some VCs can trust the others enough to waiver some parts of due diligence for faster deployment. Remember earlier when I talked about IRR, the speed of capital deployment as VC matters a lot to the IRR movement. This is especially true to heavy hitter funds such as Softbank and Tiger Global that executes large ticket-size at mind-blowing speed.
Now, due diligence could take weeks getting back and forth depending how late the investment stage is, but what I’m looking for each time, is answers to quite the same questions:
1. Why do people care? (about the product / solutions / business model)
2. Why this team? (some kind of unfair advantage that only the specific team has)
3. Why now? (tailwind effect and momentum evaluation alone makes a deal worth revisiting even within 1–2 quarters away post-rejection)
4. What’s the likely exit scenario? (time horizon, probabilities and how it matches to fund IRR target)
To borrow a very good tweet that aged quite well from Founders Fund’ Keith Rabois :
Which also means a typically difficult problem to solve, but extremely rewarding in value when it can be done, a large addressable market with multiple margin expansion possibilities = High Growth + High Margin = Aggressive Value. Of course not every company can pull this off, but when I see the probability, it brings excitement.
Today, those possibilities can be seen in many sectors in the SEA region and Indonesia, Agriculture, Healthcare, Insurance, and many more categories where you usually hear society complain publicly on news or social media, that’s the sign.
Given that I’m comfortable with ticks on those boxes, what comes next is a question for me and the rest of the Investment team.
How can we be a value-added investor to them?
This remains a work-in-progress area for me, but I’ll try to expand on this on the following point about Value Creation.
Now, if narrative along those lines are exciting enough, the numbers would support it. Be it Growth, Margin, Retention, or specific ratios that proves a company is already a cut above the competition.
Decisions may play out wrong, or come as brilliant, but the more important thing is to always reference check (remember the game of validation), focus on what needle can be moved (not external factors), and continuous learning by reflection (like this article that I’m writing).
On Value Creation and Synergy, platform and ecosystem can be a flywheel
After hard work of deal sourcing and due diligence to execute an investment deal, the activities of post-investment are no easier, if not actually harder. In an ideal world, a portfolio can perform on par or exceed expectations of its projection. In reality, many could struggle up to the point of falling behind a target or survive with a long sideways growth (what is usually dubbed as Zombie or Cockroach mode).
The idea of VC platform is to support and navigate those hardships. So what’s a VC platform? The diagram below from Lerer Hippeau tries to simplify the understanding.
Besides that support, being a good board is equally important to assist a founder. According to Ben Horowitz, there are wartime and peacetime CEOs. Covid-19 year brought many CEOs tested on their wartime skill.
Not many succeeds and it is actually fine, different founders have different skill sets and it is actually remarkable to see a founder, who’s actually young, able to wear multiple hats, be the face of the company, continue to develop product and navigate firefighting, all in one body (ie. Mark Zuckerberg). The point is, investors and Management should collaborate in harmony to create value and cover weaknesses in each other (Zuck also has weaknesses).
So, how hands on a VC could be with a portfolio? Quick signal is to see the ratio of relevant team members against the number of investment portfolios. Multiple VCs can co-exist within one cap table, but who will the founder call when wartime comes? That will be the most value-added VC that they have as an investor.
The last one is something I quite uniquely learn in greater depth as Corporate VC, delivering synergy. Co-written in MDI’s Bits x Brick.
In shorter version of the framework above,
- Formulate
- Set dialogue -> dedicate task force
- Roll the ball
- Measures, Evaluate, and Iterate
Not surprisingly, it is applicable not only in Corporate-Startup settings, but also in Startup-Startup settings, except in the latter case, time spent could be much less.
Next one is evaluating the engagement level of business relationship, also with the original excerpt from Bits x Brick in 2017 below.
My learning process also slightly changes perspective on this evaluation, as the adjustment would be as follow:
For corporations, at the lowest level, an investment portfolio would bring value as a vendor, typically a cost-saving proposition. Next level is to engage in a more mutual benefit relationship that I’d call venturing, meaning revenue-generating propositional through strategic partnership. At the highest level, a portfolio could deliver value as an ecosystem, meaning they empower each other resulting in better product, growth, profitability.
My ongoing conclusion, a multi-stage venture firm is more than capable to connect dots and shape up value creation as an ecosystem in long-term holding period, where synergy is not just a buzzword but a real action to increase portfolio values, something more akin to a Private Equity definition rather than Venture Capital.
To simplify synergy into value creation, 1+1 should be able to become 3 or even 5.
On Dealmaking, the importance of sales pitch, social capital and closing
For better or worse, warm intros influences likelihood of a deal, which is naturally human but also a slow trigger to unconscious investing bias. Although it’s not always the case that a good portfolio refers to another potential investment, which will be equally good or even better.
Now, similar to founders, VCs also have their sales pitch rehearsed probably hundreds times a year. Statistically those are the annual number of pitch decks that a VC would receive, and conversion to execution tends to be fairly small.
Here, I feel the speed of conviction is key to winning deals and also the cause of losing a deal. The rest is to gauge other investor interest to the extent of how a deal can be dictated. Given conviction is already there, it’s important to ensure the founder side is still comfortable to have a VC on their cap table / board rather than killing a deal with deal-breaker clauses. It’s best to continue the sales pitch in the negotiation process.
On the founder side, ultimately they seek CAN : Cash (on founder-friendly terms as much as possible), Advice (best board that their cap table could afford), Network (clients, investors, partners, talents, brand signals). The last part is trickiest to fulfill, VC can only accumulate that by experience and hone it by managing warm connections. In this sense, VCs are super connectors that help founders to open many doors and accelerate things to reach the founder’s vision / end game.
Finally on losing a deal, especially a Unicorn candidate, when conviction is there, it’s best to pay a premium and ride the rocket ship. Staying longer in the game, I experienced both FOMO (Fear of Missing Out) and JOMO (Joy of Missing Out). Both are good feelings to have, but when conviction waivers, consider weighting regrets of investing vs. regrets of not investing. The latter tends to hit back harder.
On Areas of Improvement, ESG and the risky bets
I also learned some areas that the VC industry is lacking. ESG and Frontier bets (higher risks) are few that I spend more attention to, lately.
I think more VCs could and should gradually adopt ESG framework to evaluate impact of its investment portfolio. It might still feel nascent to see VCs with ESG, but in SEA, tech companies’ scale is way different from a decade ago.
Now there’s new regional leading companies such as Sea Group, GoTo and Grab with several Unicorns that follow behind them. Frankly speaking, the first three are capable and managed to surpass Telkom Indonesia, parent company of MDI Ventures, in market cap. This is not counting yet the extent those three companies have made on countries GDP, household income, etc.
This moment feels similar to FAMGA (Facebook, Apple, Microsoft, Google, Amazon) in the US, BAT (Baidu, Alibaba, Tencent) in China or even Atlassian in Australia, when public market would flip to tech companies from other industries, especially as retail investors financial literacy are getting better (especially in SEA region). Eventually ESG responsibilities will catch up to these new market leaders from the tech sector, thus a push from the investor side (which includes VCs) would accelerate adoption.
Last but not least is expecting to see more bets in frontier categories that typically would take 5–10 years to break out, or rather quite unproven business and product. Once again, I’m lucky enough with MDI Ventures to participate and witness companies such as Loft Orbital, a space tech category that specializes in payload-as-a-service, finally launched two missions in 2021, after only about 4 years of investment. Following that, they also secured six upcoming missions and multi-million dollar contracts in revenue.
I feel that many technologies are currently being developed at accelerating speed, similar to how Moore’s Law sounds. Space tech, Biotech, Fintech, Crypto, Metaverse space are a select few that I believe will continue to undergo massive innovation in the coming decades and I admire VCs with courage to take those bets. Here’s hoping that I’ll be able to engage more intensely in those categories, and more companies of those types emerge from the SEA region.
