"I always tell people, emerging VCs are like founders—they build a company from scratch. When building a first fund, you plan to design your thesis: do I make 20 investments or 40? Do I invest in a certain geography? Do I invest in America? Do I invest in Hong Kong startups? There’s a bunch of thesis work. Then you do fundraising, pitch people to put money in the fund, close the fund, get everybody to wire the money, and manage your relations with the LP over time. Now they understand the whole unicorn structure of it. The LPs provide about $99 million, and the GPs provide about $1 million. The VC will earn about 2% of this million for 10 years." - Jeremy Au, Host of BRAVE Southeast Asia Tech Podcast

Jeremy Au breaks down the hidden math behind venture capital: why only a few startups matter, how VCs double down or walk away, and what real exits look like. Using the case of Instacart and Southeast Asia IPOs like SEA, Grab, and GoTo, he explains what separates paper value from cash returns, and why timing is everything.

01:07 VC Fund Economics and Decision Making: Covers how venture capitalists allocate time and support across their portfolio. Highlights the paradox where top performers need little help, while struggling startups consume the most resources.

04:04 Instacart IPO Case Study: Breaks down how early and late investors in Instacart performed. Shows how investment timing, conviction, and follow-on decisions shape actual returns.

08:34 Instagram vs. Snapchat: Acquisition Decisions: Compares two founders who faced billion-dollar buyout offers. One sold early and built long-term value inside a larger company. The other kept control but faced a bumpier ride.

11:20 VC Fund Performance and Metrics: Explains how to interpret MOIC and DPI. Focuses on the gap in Southeast Asia where paper returns look strong but real liquidity is still limited.

(01:07) The economics of what VC funds are doing. when VCs have sourced and selected the companies they want to do, then they have to make a decision about whether they want to add value or manage a portfolio.

(01:18) adding value, is the sexy part, board work. strategy, compliance, hiring, do connections. So somebody was asking earlier about how do you differentiate as a VC fund so you add value.

(01:28) say you should pick me because I'm a VC fund that adds a lot of value. a lot of VC funds, make 20 investments and say, we thought all of them were gonna be home runs.

(01:36) But after one year, half of them, I don't wanna spend time with anymore. 'cause I wanna prioritize my time on the remaining 50% I wanna reevaluate those on track versus off track versus home runs I have a limited amount of time, resources, and

(01:48) So it's not one or the other, but a mixture of both, for example, if you go to a VC fund, I know of this startup, they're not doing well, and the VC fund is supposed to be on the board, So they have a quarterly board meeting, (02:00) but the VC's never there, the VC no longer cares about a company because the VC doesn't think the company's doing well.

(02:05) But of course there are famous stories where suddenly this company's not doing well for one year. Then suddenly the founders figures it out. Then suddenly the VC pops back up and says, okay, you are back on track. Now I'm gonna pay more attention So there's a yin and yang where you're adding value, but also judging and pruning your portfolio.

(02:20) VCs are thinking should I prioritize home runs? Should I support them? Should I dedicate the support work to somebody else, or should I just ghost and, not do any more work with that time? For example, one way that they could potentially score a portfolio, out of a hundred companies, let's say across three funds, right? Let's make it simplify that. So let's say you are VC fund and you have five VC funds, each of them as 20 companies each. So you've invested in a hundred companies let's categorize them to expectations After a while you're like, 50% is. Loss goes to zero, 25% I'll get $1 for every dollar put in. small win I'll get 10%. Large win is maybe I get 100% return and the (03:00) unicorn is, I get, ten to a hundred x reward profile, right? So obviously definitions can be loose as well.

(03:05) Deferring funds differ. Definitions of what, but people always think which one should I do? look at the outcomes if 2% of your company is unicorns, the return profile is 2.42 for every dollar you put in.

(03:15) So you get 240% after this time period. normally you're supposed to get one unicorn out of every 20 startups. the key thing here is the paradox from the VC perspective, your best winners, your unicorns are growing quickly.

(03:28) They don't need much of your help because within one year, the two years they raise money from a larger fund, they get more help. Everybody likes a winner, or the best employees wanna join. A company that's doing well, right? So your best winners tend to require not much help. the people who are struggling the most, doing very badly, need the most help.

(03:43) there's actually a bit of a contradiction that is there. VCs have to make that judgment call about which startups they actually can make a difference in. at every round when the next investment round comes in, the VC can make a decision about whether the double down and put more money into the company.

(03:56) they make double the investment. double down, they can, prorata means I can (04:00) maintain the ownership stick that I roughly have. Or skip, which is, I don't want to invest in it. this chart shows the Instacart IPO, Instacart came out on the public markets a few years ago, and this chart shows all of the funding rounds they achieve.

(04:12) So we talked about previously, right? C series A, B, C, D, E, F-G-H-I-I-P-O. this shows the year 2012 to 2021 plus. Equity pricing shows roughly, what is the value of the stock they had. one stock was worth $35 back in 2012. when they IPO'd the price per stock was $9,300.

(04:33) this shows the investors from YC to Fidelity and Series I the round right before. this green shows the return profile. So this shows how much return would they have made from a compounded basis. Green is good rate is not so good.

(04:46) Okay. But what the second chart here is this shows the s and p performance, the index of what it would've been done if you put it on public equities. in 2012 you put a dollar in, you have gotten 30% return compounded (05:00) from 2012, right? And then obviously this gray column shows the percentage difference how much outperformance versus the stock market.

(05:08) Okay? So basically what it means that from Instacart's IPO wins 2012 when they came up with this crazy idea, which was let's have somebody pick up your shopping for you from the supermarket and bring it to your house. So that means you put a dollar in the next year is a dollar 55. Then the next year is a dollar 55 times 155%, after that first round, they were like, no. One year down the road, they did a series A at the same price.

(05:32) it was a flat round. Sequoia came in and so they made 61, 62% because the time this is between 2013 to 21 is shorter Anderson Horowitz came in for 29% in 2014 for Series B, Kleiner Perkins did series C at $4,000, then Sequoia came back at $6,000. In 2012, y Combinator, you put money in an you CA company. One year down the road, they raise money at the same valuation.

(05:59) none of them (06:00) did. Cosla, Kanan and YC all said, we're not gonna put a second check in. we don't believe in you. To that extent, to put another check in. This shows the lead investor. Obviously they could maintain the pro ratta, so maybe they could put a small check in, but they didn't put a large check in.

(06:12) But what i's suggesting you see here is that a Y Combinator from the first check in 2012 came back in Series D in 2017. Sequoia also came back from 2013.

(06:21) They didn't lead the next round, but decided to lead. The series D. Sequoia is acting like a multi-stage investor, They invested in the series A, which was barely Series A is, it is effectively a seat round pricing, but then it came back for the Series D for the late stage.

(06:35) So they are a multi-stage investor, if you look at, series F and a tender offer, DUI doubled down Then for Series H, they came in again, In 2020, the check for series H, it was the minus 21%. And then series I here, for this group of people, they lost about 51% of the value The stock price was effectively 39,000. Already bought in, but eventually iPod for $9,300. So basically (07:00) if you are a vc and you join Instacart, let's just say a series seed round, you could have been like, you know what?

(07:06) I think this company's amazing. I'm gonna double down. I'm gonna lead the next round. You could put a ton more money in and make money. some VC investors put in more money. And didn't do well Sequoia, came in and did okay.

(07:16) this series I Check was Bad Lost Money, right? they came in into Series D. They still make some money, right? it's an interesting perspective. for example I'm part of a VC fund, and then basically we are looking at portfolio and then the initial investments that we had, they're presenting to us.

(07:30) When we make a decision, do we want to reinvest in them again for the next round?

(07:34) what do we do with companies that are not doing well? they can wind down, hire or cash out. wind down is quite straightforward. The whole company sells off the assets. They pay back any debts and return any remaining capital to shareholders.

(07:45) Echo hire is the company buys over the team 'cause they want to get the talent in a team. So they're not really buying the company for the company's products, they're just buying the company for the talent in the team. And so we see that a lot in many different AI (08:00) companies. Now, a lot of them are being Echo hired because, Microsoft are desperate for AI talent and AI startups not doing well. They want to buy them back and give them a small outcome. And obviously there's cash out. So maybe the founders have basically somebody mentioned earlier, like what happens if the startup gets a certain point, but never go for IPO make consistent profit every year for the next 10, 20 years.

(08:20) Then you can cash out, you can sell your stick back to the founders and say, okay, you go and continue running the business for a while. Acquisition and merger is a common exit path you sell the entire company for cash because they wanna buy over and keep running a product.

(08:32) I wanna show you two different stories. One story is about Instagram. The other one stories about Snapchat. So both these companies were offered the opportunity to be acquired by Facebook.

(08:42) Instagram was founded in 2010. After two years of work, they were given a $1 billion Facebook acquisition offer. they only had 13 employees. at that point in time, everybody got very rich from this acquisition He stayed there 2018.

(08:57) And in 2023 Instagram was (09:00) making $20 billion of no revenue. Kevin left in 2018 and then he recently launched a app in 2023, and then he closed it down this year as well. But Instagram is a guy who said yes. Snapchat was founded one year after Instagram in 20,011.

(09:14) He was also offered after two years an offer, and he was offered $3 billion. He said no. At that time he had 20 employees. now the company's worth about $16 billion. You're like was it right or wrong?

(09:24) Instagram, you sold it for a billion dollars straight away, you get money. Then you work, you get paid very well, you grew much bigger. Snapchat is not that big, but you have control. whether you'd hype a founder who would've taken the offer, yes or no, and whether the board wants to sell yes or no.

(09:38) companies can choose to go public. That would be the true home runs or unicorns. And so this roughly is around two to $3 billion threshold. So in the US they'll pay attention to you if you're about two to $3 billion valuation. So you had to be ready to be compliant.

(09:50) You need to choose the right market. I gonna list on the US stock exchange, I gonna list on the Indonesia stock exchange. Are I going to list on the Singapore Stock Exchange? The New York Stock Exchange started first, (10:00) IPOed in 2017 for $4 billion.

(10:04) And today they're now worth $26 billion. the classic IPO went on New York Stock Exchange. this is Forest Lee. He's a Stanford, NBA. There's Dick Nash is now the founder for Asia Partners and his team ringing the bell. Then the second company is go to. So GoTo did traditional IPO on the Indonesia stock exchange not the US one. And listed directly. they listed for $28 billion and dropped to $6 billion last year. this year, 2024, they're worth about $3 billion.

(10:36) Slide, but they went public on Indonesia stock for grab they went public on a special purpose acquisition company. the difference is I'm a private company and IPO I auction shares to enter public market to get money. A special purpose acquisition corporation is basically saying, I raise money from the public market to acquire a private company to bring onto stock exchange.

(10:58) when I do an (11:00) IPO, I'm auctioning my equity and highest bidder gets my price. And then I go public. A special purpose raises money to acquire a private company to make it go public. The other one is. A special purpose vehicle buying a company. But anyway, all you need to know is that these are three different Southeast Asia unicorns and they all went public in three unique, ways.

(11:20) what you need to realize about VCs is that, most VC investments don't work. this is an example from 2004 to 2013. 65% of companies, Generate less than one X, 25% generate one to five x. But only 4% generate 10 to a hundred x.

(11:35) Yeah, which is what you need for a unicorn exit.

(11:38) analysis, by Heroic showed that if you look at VC power law 6% in terms of quantity, generate 60% of all VC returns in the industry half of this, 50 plus percent also lose money.

(11:48) So those are two different graphs. We have two different methodologies, but shows the same analysis, which is a very small number of companies. make a large amount of money. you'll see Some very established with young (12:00) VCs.

(12:00) Fund one is raised on relationships and thesis. Fund two is based on momentum. numbers starting to look good, But there's not much data.

(12:08) by fund three there's a lot of data from the previous fund performance LPs are able to say okay, the reason why I'm investing in fund three is because you did well in the previous one and two funds. VC fund managers, so I always tell people emerging VCs are like founders.

(12:22) They build a company from scratch, which is a vc. when building a first fund, you plan design your thesis. Do I make, 20 investments or 40 Do I invest in a certain geography?

(12:31) Do I invest in America? Do I invest in Hong Kong startups? There's a bunch of thesis you have here. Then you do fundraising, pitch people to put money in fund you close the fund, get everybody to wire the money manage your relations with the lp over time,

(12:44) Now that understand the whole unicorn structure of it, the LPs provide about $99 million and the GPS provide about $1 million. Which comes out to about a million total VC fund. The VC will earn about 2% of this million so about $2 million for 10 years.

(12:58) for 10 years, they'll collect a $2 million (13:00) check to run the VC fund. The VC will invest $5 million in about 20 startups, and one of these startups will generate a billion dollar exit, which creates a 200 x return. 19. Other startups are effectively rounded off to zero upon exit. As a result of that $1 billion exit from the million deployed, the LP gets $99 million back.

(13:17) The initial quantum, they get 80% of the upside, and so they receive $820 million of returns and then the VC gets their initial $1 million back Then they get 20% and then they get $118 billion bonus at it. So this is the best case scenario of everything I described for you of great VC fund that's able to source great companies have right judgments, support them, and exit them at the right time.

(13:41) On the IPO, this is what the best case scenario looks like, which is why a lot of VCs look like superheroes. what's important to know is there are several terms used. there's committed capital or like what's the size of the VC fund, a hundred million dollars, et cetera. Then there's a bunch of definitional terms, right? Paid in capital, cumulative distributions, rest the dual value.

(13:59) Which (14:00) shows the formula. But the most important thing for you to know is that in general there are two definitions that people will hear about VC funds. they'll say, what is your multiple on investor capital and DPI, distributions paid capital? I would explain it simply.

(14:13) if we as LPs put a hundred million dollars into the VC fund, and this VC fund now has a billion dollars of paper valuation, but nobody has exited yet. There is no liquidity event. The companies have not gone and iPod yet, so the paper value of all that stock is a billion dollars.

(14:30) Then the multiple on investment is 10 x. Does it make sense the return is 10 x. The distributions, the paid capital requires a liquidity event to unlock it from paper to actual cash to flow back to me, how much did I actually receive back?

(14:45) So this is one of the big issues that Southeast Asia. Asia is that with a lot of VC funds that have high multiple investor capital of paper returns, but nobody knows if they're able to actually IPO and exit that capital and create a cash payout that flows (15:00) from the startup. IPO to the general partner and back to the lp.

(15:04) So again, this is for you to learn what you don't know, and for you to do research more on. what's really important for you to understand is that the time value of money is really important. If you make money over a long period of time, that's good, but you make a lot of money over a short period of time, that's even better.

(15:20) on this y axis is the multiple on invested capital. if I put a hundred million dollars and I get paper return off 10 x. So the paper valuation is $1 billion it takes me 10 years to achieve this.

(15:35) Then the net return is 26%. this is the benchmark, top quarter VC funds that are mostly aiming for this kind of outcome. A 10 x return in 10 years, that's your 25, 6% outcome. Okay? Then obviously if you can get a 10 x outcome, but you do that in five years, then your net return is 58%.

(15:55) just something for you to be aware of.