VC Model
- The VC model is extremely challenging. The business model itself - relying on LP investment capital to help manage risk into investment in early-stage companies to cover for OPEX, will be under pressure as more LPs will question the need to do so. Within the current ambit of making financial sector less opaque and costs are fully paid for, the need for VCs to return money and perform the challenge of returning VC stage returns to LPs will be overwhelming. This may still be a slow burn development given that this model is only now seeing replication throughout the world after over 40 years of iteration in Silicon Valley, but I do think the model itself is under threat.
- Performing VC type returns is hard. It is so because the reliance on private valuation means that if you are not part of the club at the onset, you are the laggards who will enter the fray at subsequent financing rounds where the pricing is higher, albeit with lessened risk. Entering the club is not impossible, but VCs intending to do so will need to display the requisite amount of chutzpah to do so, and to be fully backed when the bet fails. At that point, it is a bet to get to the higher returns by investing in earlier stage companies.
- The other alternative is to enter into a derisked form of investment, later stage, lower valuation, derisked pathway to commercialisation and a potential liquidity event. This entails mainly under-the-radar type opportunities, typically again shown by longstanding partners, perhaps European or China, outside of the US.
- The need to have long-standing, good, well-connected, trustworthy and excellent partners is essential.
- Withoiut that chutzpah, teh VC may be a boring place to be in.
- To fund early-stage opportunities requires a different skillset.
- It's not trying to understand a new tech, or a tech platform, and how it can be better than the existing standard of care or gold sfandard. When looking at a specific drug functionality, it could be easier as it has a single hurdle at the consumer/commercialisation end to overcome. Not to say the journey there is easy as regulatory, technology and product development barriers are substantial. But as comparison, the evaluation for an early-stage opportunity is goign to be excruciatingly difficult and is more prognosticating on tech use and predicting how the world will unfold in the intervening horizon.
- What is easier to manage would be a shorter horizon investment. But for early-stage investments characteristics of small investment amount may be foregone. So, the ideal early-stage investment is one with short horizon and small amount ie pre-commercialisation at most, and small investment for marketing/commercialisation or the ability to compress timeline to a liquidity event by having a regulatory mark.
- In a Malaysian/regional/emerging market context, a licensing type opportunity startup that has the ability to get into distribution phase for the regional market is ideal. In shirt, it's a business building incubator. The networks are different and it's more of supply-chain disruption or enabling procurement of innovative products on QC/TQM principles.
- Building for growth is also another viable outcome. Scaling up markets.
- Identifying segments of interest is key - small scall investments into platform tech is essential - AI/ML applications is one such application.
A few updates to these thoughts from 3 years ago.
ReplyDeleteThe other approach is to actually be really good at identifying early-stage opportunities where entry point is low. This means embracing the multitude of risks prevalent for investments at that class.
This is where the detection, pipeline development, pattern recognition has to be highly developed to understand and fully assess the opportunities. Not all novel ideas are going to make it, and execution is not simple to make out.
Sometimes, a flurry of activities is not a substitute for effectiveness, as markets too tend to be fluid and potential acquirers or follow-on investors will have their appetites shaped by events with recent flavours. There are too many variables to account for, and to just attribute the success of early-stage investing purely to individual skill is disingenuous.
The skills involved are typically that of scale. Throw enough money around and some will stick. That level of money also gets the funders the scale of opportunities with a certain level of founders and the ability to select from a premium buffet menu.
GPs without scale tend to be left out.