I've spent the past year building iSeed SEA, a seed fund partnering with ambitious founders across Southeast Asia at the earliest possible stages. I wanted to share a few of my observations and beliefs from launching and scaling the fund in the past year.
The greatest upside is investing at the seed stage.
The caveat is that it is the riskiest stage and you can't deploy a lot of capital at the seed stage. If we look at previous seed funds, the majority of their returns come from the first check and not from the follow-on checks. The default position of seed funds is to reserve capital to follow on and double down on winners. However, this limits your pool as the best Series A funds look at every company and know what a great Series A deal looks like better than the seed fund managers. As a seed fund, if you're following on into a company, it has to compete with every other potential investment you have. My belief is that price is bid up faster than risk decreases so most seed funds are better off increasing ownership and only investing at the seed stage.
Ride the macro wave.
When looking at the outcomes of an event there is a lot of risk and luck involved. To minimize the role of external influences, it helps to understand macro trends. It would have been hard for an investor to lose money investing in tech in the US in the early 2010s. Lots of factors came together to accelerate the growth of that ecosystem and I believe we are at a similar time in Southeast Asia. If we're able to bet on the right founders building in a large category it will yield strong financial returns.
Diversification vs concentration.
Having a diversified portfolio decreases the standard deviation of the fund outcome. Returns follow a power-law distribution, so the probability of hitting a winner increases as you make more investments. This is important for emerging managers as by diversifying, you increase the chance of hitting a winner and can build your brand. However, with a larger portfolio even when you hit winners, you own less of them. If you make fewer bets and hit a winner, you own more upfront and through the pro-rata rights. Owning more but fewer is how you capture the upside if you have reasonably good picking skills. So for experienced investors, they should play for the upside. A concentrated portfolio means more exposure and higher possible returns. Over time, the way to generate returns is via concentration, by having conviction, and by taking on more portfolio risk.
There are so many unknown unknowns and uncertainty and we can't know the winners beforehand. So following the Kelly criteria, we should keep our bet size constant, and given the outcomes are so extreme we need to maximize ownership early on.
Your fund size is your strategy.
Managing a $10M vehicle is very different from managing a $100M or a $250M vehicle. The incentive of a fund manager is to scale their fund but as you scale the zero-sum game changes. At the end of the day, your fund size dictates your strategy. However big your fund is, what you are promising your LPs is that will be the magnitude of your biggest exit if you execute your strategy. This business is about making investments that will return more than the entire fund by themselves if they work. You need to have a strategy that is coherent with your fund size and this game changes at every scale.
You are either investing before or after PMF.
In the Southeast Asia ecosystem, there is a lack of true seed funds. We typically see a founder raise a small ($500k to $1M) seed round to get to PMF, the product may show some early traction but not clear PMF, and then the founder is unable to raise to get to PMF. This is because the hardest part to invest is when a lot is built but there isn't PMF yet. The risk curve implies you're just about to get the product-market fit, so I should pay just a little bit less than the product-market fit price. But I believe that you're either at PMF or you're not. So investing when the product is built pre-PMF has comparably the same risk as investing pre-product, pre-PMF. For a founder, this means if possible, within their first round of financing they should raise as much as they need to get to PMF with a small buffer.
An abundance of capital in the ecosystem.
This is especially true in the US and increasingly true in Southeast Asia. Public investors are moving upstream to invest in growth-stage deals. Growth stage PE funds are investing in Series A deals. Series A funds are investing in seed deals. Everyone is moving upstream to invest earlier. This is because deals are getting more competitive so firms want to build relationships with their founders at the earliest stages to be able to secure an allocation. Furthermore, the magnitude of outcomes in technology is also much larger than what most investors had underwritten. We are seeing $100bn+ IPOs where most of the value is captured in private markets, so public investors are bringing their knowledge of public market analysis to invest earlier in private markets (Tiger Global model).
Invest in people.
It is common wisdom that founders are important when investing but I still think the importance of this is underestimated. Founders are the key drivers that impact the outcome, and this will always be underrated. The best teams will find large markets and also grow them.
Best founders don't need your help.
Following up on the last point, the truth is that the best founders often don't need your help and as an investor, most of the time, you have minimal impact on the trajectory of the company. This doesn't mean you can't help, but odds are they would have figured it out without you anyway. But this is the only asset where the asset chooses the manager, so developing a brand and marketing yourself as a vital part of a founder's journey is critical to winning deals.
This takes a long time.
This is a long-term game. For most people, VC isn't a great path to building wealth. The secret of VC is that there aren't that many great companies out there and most funds don't return any capital (95% of returns in VC are generated by the top 2% of funds). It also takes a very long time to develop investing taste. Knowing what you don't like is just as important as knowing what you do like and it requires a lot of discernment and repetition.
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