Which VC funds should you (not) raise from?

by | Nov 2023 | Early-Stage Capital

For founders raising money, here’s how a little research can save you a huge amount of wasted effort.

I spoke with one of Asia’s largest early-stage VC funds earlier this month. They have really simple criteria for what deals they find interesting.

For them, it’s all about distributions.

I’ll explain.

Some investors focus on “multiple” (this is how I think as an angel investor).

If you can make a 5-10x multiple on most of the deals you do, even if you lose some companies along the way (almost inevitable), you’ll be in a good place.

If you’re lucky, one of your companies will deliver an outsized return (“the power law”). In that case your returns could be much higher.

This doesn’t apply to the fund I spoke to this morning.

These guys have $500m to deploy.

In case you’re wondering, that’s a lot.

(For those that don’t know Southeast Asia, it’s not uncommon for funds to range between $10m and $25m. $100m is considered large. $500m is a whopper.)

The managers of this $500m fund don’t think in terms of multiples. They care about distributions (i.e. how much cash will each deal return to the fund if the investment is successful?).

Here’s why they think this way (don’t forget, they’re early-stage):

Imagine they invest $1m into a startup at a $10m valuation.

The startup grows to a $150m valuation and sells. Pretty good, right?

No, not for these guys.

That deal would return <$15m to the fund. Does $15m move the needle on a $500m fund?

That’s right – it’s barely noticeable.

Of course it’s not a disaster, but this is not the type of deal they’re looking for. They wouldn’t spend time on it.

So what IS a good deal, in the eyes of a $500m fund like this?

These guys will only look at startups with the potential to return 20% of the fund (i.e. a $100m distribution).

If they own 10-20% of the company, which is common, that means the company would need to sell/IPO at a valuation of $500m-$1bn.

If your company doesn’t have the potential to scale to that size, save the effort. Don’t even bother writing to them.

Who does this rule out?

If your business doesn’t have global ambitions, you can probably forget it. They won’t entertain anything with a local focus (with the possible exception of certain consumer plays).

So you probably shouldn’t apply to a $500m fund unless you’re building…

  • Globally-relevant software
  • Globally-focused fintech
  • A winner-take-all consumer platform

If that’s not you, focus on smaller funds (or angels/syndicates/alternative sources of funding). They’re more likely to entertain sub-$500m ambitions.

Good luck!

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– Midjourney

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