Over the past five years global investment in Venture Capital (VC”) has risen by over 350%! Growing numbers of individuals, family offices and institutions are adding venture to their overall asset allocation models. I come across many people who are looking at investing in startups, but absent existing deep knowledge and networks it’s often better to begin by becoming a limited partner in a VC. This means that you invest your money in the VC fund and they manage that into startup investments on your behalf.
There are a number of advantages to investing as a limited partner in a VC that can help you build your own startup portfolio:
VCs are like a mutual fund or ETF but instead of publicly traded equities they invest in startups. This means you have similar advantages like diversification. In fact, according to “Institutional Investor”, the more startups in your portfolio the higher the average performance and the lower variance in performance. By investing in a VC you gain access to diversity that it’s very difficult to get on your own.
VCs are specialists in identifying the best founders and companies. They know what red flags to look for, they have legal resources to ensure that the documents are set up properly and enforced in later rounds as terms change and new investors enter the scene. They will usually track metrics of their portfolio companies on a regular basis and can spot issues ahead of time. All of this de-risks the investments and increases the chances for success.
A large part of successful startup investing is picking the rights startups. Step one of this is getting access to a high quality and high volume “top of funnel” deal flow. VCs often interact with thousands of startups per year, filtering that down to a much smaller subset of companies that they actually invest in. At Accelerating Asia, we invest in less than 1.5% of the companies that apply to our program, and that doesn’t include the many others that we interact with through other means. By investing in a VC you get to take advantage of this filter which is extremely difficult to build out yourself. You can then often put more of your own money into select startups alongside the VC. This is what many of the limited partners at Accelerating Asia do.
By investing with a VC you can learn how much of the previous topics work, you can start building your own portfolio through co-investments and you can figure out what profile of founders and companies you resonate with. Many of the limited partners at Accelerating Asia Ventures use us to scale up their own knowledge base and build out their own startup portfolios alongside their investment(s) in our fund(s).
Besides all of the above, and a chance at a good return on investment, being a limited partner of a VC fund plugs you into their community, where you’ll engage with startup founders, other investors, ecosystem partners like the big tech companies and other really smart and interesting people. Great friendships are formed and wonderful experiences are had through this community.
Accelerating Asia invests in startups with scalable technology solutions and revenue generating business models that combine purpose with profit.
In making an investment decision, investors must rely on their own examination of startups and the terms of the investment including the merits and risks involved. Prospective investors should not construe this content as legal, tax, investment, financial or accounting advice.