How good are venture funds as an investment tool?
Does investing in startups appeal to you? Innosight’s Scott Anthony shares 4 things you should know before taking the plungeBy Terence Ng 13 Mar, 2014
Ever since organised financial activities sprung up in the 1500s to enable enterprises to pool risks and reap returns, investors have been chasing after more and more ways to park their money in the search for greater yields. This is all the more true after the 2008 recession, wherein investors have begun diversifying their holdings away from traditional bonds and stocks.
One investment vehicle that investors have been looking at is venture funds. Buoyed by the recent successes of Facebook and Twitter, which achieved multi-billion-dollar IPOs, as well as the billion-dollar buyouts of smaller companies like WhatsApp, seed and venture investing in tech startups certainly start to look all the more attractive despite the fact that most startups fail; a single success could conceivably cover the losses of hundreds of failures.
Here, e27 brings you an exclusive interview with Scott Anthony, Managing Partner of Innosight, an innovation consulting firm and leads Innosight Ventures, its venture capital arm. Since 2010, Anthony has been with Innosight Singapore, overseeing its venture arm and leading Innosight’s expansion into the Asia-Pacific region. Below are Anthony’s four points to be kept in mind when investing in venture funds.
It’s getting easier to invest in venture funds and new startups
According to Anthony, in the past, only institutional investors with deep pockets could afford to invest in new companies due to the risks involved. Anthony’s experience in the US was such that people who wanted to become venture capitalists and angel investors needed to undergo strict background checks, and have a minimum value of assets.
Now, with the introduction of the JOBS (Jumpstart Our Business Startups) Act, Americans have been able to invest in startups, free from investment regulations that apply to larger companies. While it remains to be seen if other countries, particularly in Asia, will follow in America’s footsteps, it is a sure sign that seed and venture investment in startups have started to become more mainstream.
Asia is the place to be for venture investing
Anthony believes that innovation knows no boundaries, particularly in today’s technologically connected, globalised world. While Silicon Valley remains the world’s current startup capital, startups abound all around the world, solving problems both, global and local in scope. In fact, Anthony believes that Asia and other areas with less well-developed startup ecosystems are more conducive to invest in, having a relatively flat playing field compared to that in the West, which is generally dominated by a few big players.
Also, Anthony singles out the Philippines, Thailand, and Indonesia as having particularly vibrant startups scenes in Asia, with entrepreneurs busy using tech to solve problems from disaster management to social networking. He notes that it is not inconceivable that in the future, American startups will flock to Asia to raise funds and validate their ideas, as compared to the opposite which is happening today.
Innovation is key
How do you look for startups to invest in? Naturally, coming from an innovation consultancy, Anthony takes innovation to be one of the most important factors in deciding if a startup is investable. From experience, he notes that though there are no guarantees of better results in the innovation process, the success rate of innovations can be increased by following a structured process. It’s possible to, for instance, take the best academic research and apply it to real-world problems, see what works and what doesn’t, deduce the factors behind it, and repeat.
Right now, Anthony is seeing more and more startups following this process, no doubt inspired by the Lean Startup model. According to him, the results are apparent. Where once, back in 2010, the business plans he looked at consisted of mainly rehashed ideas from the West applied to an Asian market, now startup ideas are getting much more creative, solving unique problems with the application of technology.
Venture investment is not for the faint of heart
After all that’s said and done, venture investing, like all investments, carry a certain amount of risk. Anthony cautions that while venture investing can sometimes produce phenomenal performers like the aforesaid Facebook, the great majority of startups ultimately fail or otherwise stop growing, causing the investor to lose part or all of the investment.
According to Anthony, nearly 75 per cent of all venture-backed startups return no money whatsoever to investors. He also shares that out of the 30,000 software companies started in the decade between 2003 and 2013, only 40 gained valuations in excess of US$1 billion, the much-vaunted “unicorns” of the startup world.
In conclusion, while venture funding startups may provide the returns an investor so desperately seeks, due diligence is critical. Putting money blindly into startups hoping for them to scale and grow is no different from throwing coins randomly into the sea hoping to hit a well-buried treasure chest.