Musings From The VCs

"Insights, Reflections, and Lessons from the Frontlines, Intermediates and Beginners in the Venture Capital World."

Category: Uncategorized

  • The Three Big Questions That Define Every Investment Fund

    Hey guys, it’s me, the new guy again. Here’s my thought process as of late: Next time if I have a sizeable amount of money, the best way to grow that money is to pay someone to grow it for me (i.e family office funds, private bankers etc.) The 1-2% management fees on top of the slight margin they take on profits is honestly not that bad, considering how much of your time it frees up. But in order to be that rich guy or family, I’m interested in first working for them, being their private banker, being that fund manager, being the one the fund manager turns to for investment decisions or outlooks, you get the gist.

    And so I was researching into funds, its components, various themes, how they perform over time. And that’s where I stumbled across this fascinating discovery: Funds can have values too. And one would think that there are endless possibilities to the types of funds and financial products you can invest in, but I’ve managed to understand how they can be broken down into 3 broad categories, with all funds having 1 trait in each.

    Let’s dive straight into it, before I provide some real-world examples:

    1. Fundamental vs Statistical

    Fundamental funds would involve investing based on one’s understanding of the cause-and-effect linkages that makes up the markets and economics machine, such as looking for undervalued equities, or bonds in regions that are likely to perform well due to its economic performance. On the other hand, statistical funds would mean investing based on statistical relationships that can change rapidly, looking for the best combination of various asset classes to generate the best risk-to-return ratio (Sharpe ratio).

    2. Systematic vs Discretionary

    Systematic investing involves, as its name suggests, a system, with explicit rules defined for investment decisions that can be debated and stress-tested across time, countries and environments, such as using machine learning to analyse historical trends etc.. Discretionary would be investing without explicit criteria that the above has, but it could be something like riding the Gen AI wave, or crypto boom as of recent months. It values recent performances and trends a lot more than historic performances.

    3. Diversified vs Concentrated

    This last category is fairly straightforward, where diversified means your risk is balanced across good, various unrelated return streams to minimize dependency on any given source, such as investing across major markets and asset classes, while concentration would be something like putting all your eggs in one basket – you can either hit the jackpot, or get knocked out of the game if you are wrong.

    Confusing? Here’s some real life portfolio/fund examples that all seem pretty legit, but are made up of different values.

    Example 1: A more classic, textbook fund, where machine learning is used (systematic)to generate trading strategies across 100 different markets (diversified), building a portfolio from these strategies based on the relative weight of each strategy from its historical performance in the last 40 years(statistical). This probably involves a bit of quantitative trading to generate those alphas… an area of potential research.

    Example 2: Holding a portfolio of exclusively US equities and bonds (concentrated). You can determine and change the shares allocated to equities and bonds as well as whether you want to de-risk and change it to cash (discretionary), with these decisions being made based on how well you think the economy will perform (fundamental). If one day the US market crashes because of something Trump announces or war breaking out, this portfolio will just go crashing out… good luck with that. But if not, the last 6months or so have been looking great for the US market, so whoever owns this is probably doing great!

    Example 3: A team of top macro investors identifying their top 10 investments in a given year (discretionary) to build a diversified portfolio of 20-40 positions across various markets (diversified) based on those recommendations. This is likely a fundamental approach to investing in its fund, with no statistical correlations involved at all in the way the fund is structured.

    Learning points and takeaways!

    As you can see all these fund structures out there are all either fundamental/statistical, systematic/discretionary and diversified/concentrated, even though they’re all different but very legit ways of investing in their own right. Not saying there’s a right or wrong though, some funds take on higher risks and in return give higher returns if they “guess” right, while others may be more stable but give you lower returns in a sense. While constructing these portfolios/funds, it is critical to know the investors’ risk appetite and risk preferences, before deciding how to approach the structuring of such funds, to create synergy between the funds and investors’ similar values. As for me, I’ll stick to the GenAI boom for a little while longer. Happy investing everybody! Hope this was as eye-opening for you as it was for me 🙂

    Until next time,

    J

  • Crowdfunding for Budding Entrepreneurs

    Musings of an Intern

    21/02/25

    Two diff types of approaches A. product crowdfunding B. equity crowdfunding.

    Product crowdfunding generally refers to money used for physical products. The funding is nondilutive because there is no equity involved and instead they are often preselling a product or collecting cash upfront. The campaign could either blast off and be successful, be unable to finish building the product so they raise more capital to complete the product or never ship/ partially fulfil the campaign.

    Equity crowdfunding is when an investor gives money via an online funding platform in exchange for securities such as debt or equity -> gives you an ownership interest be it common or preferred stock, or convertible debt. While these might require an SEC registration there are ways to work around it. Lets say you want anybody to invest then they are limited to $1 million over 12 months and non accredited investors can only invest based on their net worth. (starts from as low as 2k$) However, if they only crowdfund from accredited investors (high net worth, vcs, etc) then they are legally bound by a number. Often however when money is raised through such crowdfunding approaches, common stock with little legal oversight powers are issued

    Since in crowdfunding no one is obliged nor do they “care” too much about the company, if the company fails and requires new funding they may be left stranded unlike in a small investor pool where they will be backed by the angels/vcs. Or you can also find karens who care too much and will go out of the way to demand things from you.

  • Offshore Funds: A Beginner’s Guide

    Musings of an intern

    20/2/25

    Today, the other intern is taking over with a quick dive into offshore funds—what they are, why they exist, and how they work. I’ve always heard about them in documentaries or movies, you know, those “paper companies in the Cayman Islands” that seem super shady. But after spending some time researching them, I can confidently say they’re way more interesting (and less scary) than they sound.

    Why Do Offshore Funds Exist?

    Let’s start with the basics. Offshore funds are essentially investment funds set up in countries outside of where the investors are based. Think Singapore, Dubai, Jersey (the island, not the sweater), or the Cayman Islands. These places are known for their tax-friendly policies, which is the main reason people set up funds there.

    For context, we’re based in Singapore, where the corporate tax rate is a flat 17%. Imagine if your company earns 10 million revenue net of expenses. That’s 1.7 million of your profits going right to taxes! Ouch. But here’s the thing: Singapore doesn’t tax capital gains (profits from selling investments) or impose withholding taxes on dividends paid to foreign investors.

    This means that if investors were to invest 1 million into a fund based in Singapore, and their 1 million grows to 11 million, they don’t pay tax on the extra $10 million when they cash out. Remember, tax is only for profits not capital gains! And if the fund distributes dividends to foreign investors, those aren’t taxed as well. Sounds pretty good, right?

    The Allure of Tax-friendly Jurisdictions

    In fact, many other jurisdictions have low or zero taxes on capital gains, dividends and interest. I was reading about Dubai, with a 0% corporate tax rate in free zones, and Jersey (the country not the sweater), where there is no corporate tax for most businesses, and no withholding tax on dividends as well. As for the Cayman Islands, well they basically have 0 tax at all.

    Layers to Offshore Funds

    Here’s where it gets interesting. Offshore funds often involve layers of companies-yes, companies that own other companies that own other companies. And no, it’s not just for fun. There’s a method to the madness.

    Let’s break it down with an example:

    Main Company: This is the entity that earns income (in whatever form). You set this up in a place with 0% corporate tax, like Dubai.

    Feeder Fund: This is the entity that collects money from investors. You set this up in a place with no capital gains tax, like Singapore.

    Structure: The feeder fund invests in the main company, which earns income (tax-free) and sends profits back to the feeder fund as dividends (also tax-free).

    In this setup, the main company’s income isn’t taxed, and the returns investors get, whether dividends or capital gains, aren’t taxed either. It’s a win-win for everyone involved.

    Why Isn’t This Talked About More?

    Honestly, I have no idea. I used to think that these offshore funds and paper companies were set up for criminal purposes. I was wrong. Offshore funds are a legit way to structure investments, yet they’re often misunderstood or portrayed as shady. The reality is, they’re just a smart way to minimize taxes and maximize returns for investors.

    What I’ve Learned

    The world of offshore funds is vast, and the possibilities for structuring them are endless. From tax optimization to asset protection, there’s a lot to consider. If I ever get bold (or rich) enough to set up a company or fund one day, I’ll definitely think twice about where and how to structure it.

    That’s it for today’s musing! This is my first time writing a blog post ever, but I hope you enjoyed the read!

    Until next time,

    J

    P.S: If you’re a budding entrepreneur or investor, don’t sleep on offshore funds. They might just be the key to unlocking your next big opportunity.

  • Venture Capital Funds – How Do They work?

    Musings of an Intern

    19/02/2025

    So actually in a Venture Capital Firm you will find that there are many names and companies associated with it. This is because they are split, the management company is the ‘franchise’ employing everyone and paying for every expense. Then there are the Limited Partnership (LP) vehicles that actually contain the investors and the money raised by these Limited Partners (LPs). Then there is also the General Partnership (GP) entities which are the legal entities serving the GPs where often the managing director plays this role.

    VCs get money from various places like govt funds, banks, MNCs, rich people, charities and they are subject to a Limited Partnership Agreement (LPA). In this way VCs have a new boss, these LPs. Although lets say they raise 10$ mil, the money is actually with the LPs and they have to do a capital call to get this money to invest from the LPs, if the LPs dont want to provide money, other parties can buy off these LPs and make the contribution. Capital calls do cost money and affect admin fees so sometimes especially with smaller sums and individuals, the money is given directly after a deal sign off.

    So VCs make money from management fees of these funds, often between 1.50-2.5% per annum and finance the operation. There is also something called carried interest or carry which is the profit sharing after returning the principal investment to the LPs, often carry can range from 10-30%. There is also a hurdle rate and some LPs will request for up to a 20% hurdle rate which essentially means that the investment will have to give a return of 20% per annum otherwise the GP will not receive any carry. It might look easy but given a 5 year investment fund, the investment will have to reach a 150% profit otherwise hurdle rate will be not hit since the IRR is compounded. Another issue is that since management fee is taken from the principle amount, if the company does not recycle their fees back into the investment sum, then they will have to make the amount based on that. That is where it gets tricky as lets say the management fee accumulates to 10% the company will have to get 200% profits instead due to the smaller pool invested.

    There are additional commitments that the GP has to show like co-investing 1% of the fund size alongside the LP, similar to a broker-leverage situation. Cashflow is also very important as they often would prefer to recycle their commitment in order to get back as much returns as possible so they have to be careful otherwise they will be crunched and unable to recycle for investments and pay employees and they will receive less profits and the cycle repeats.

  • Discounted Cash Flows

    Musings of a VC Intern

    18/02/2025

    DCFs, NPV, LBO, EBITDA and so many more finance terms are thrown around daily here and there.

    Today let’s delve into DCFs first. Discounted Cash Flow is a financial model that helps evaluate how much a company will be worth in the future or its NPV by analyzing financial statements. There are often key assumptions in place such as growth potentials and expenses. A financial model is never accurate but they are there as a metric to roughly gauge how much our company can be worth in the future. Often this is done by analyzing at least the past three years and estimating growth rates. By determining this values we can arrive at a terminal value. This terminal value is the price which the company will be worth in the future by x number of years. Depending on the value of this terminal value people will evaluate whether it is a worthwhile investment.

    We then talk about WACC, weighted average cost of capital. This is the weighting of future costs and benefits to reflect the time value of money. This is because money decreases in value due to inflation, we also have to consider interest rates if we borrowed said money to invest in the company and grow it. Assuming an interest rate of 4% and an inflation rate of 3%, our WACC is 7.12% per year. Lets say this spans a 5 year period, our net present value based on the DCF would have to be a minimum of 41.04% larger than the initial capital before we can consider the investment even profitable.

    Furthermore private equity investors would look for higher returns. Assuming we negate the interest rates because these people invested money in us so we dont technically owe them, and also the inflation rate is not accounted for as they will be wanting to see value of the investment against other companies or for example SnP500. So lets say a return of at least 15% per annum. Thus, we would have to return 101.2% larger than the initial investment for them to consider an investment.

    There are also dividends we can consider into play. Assuming we give out 1% as dividends per annum and they want a 10% return rate. Now you try and do the math this time.

    So every year the discount factor will change because it is further from your present and the value of that money will drop in a discounting manner. By estimating these cashflows using the potential discount rate, we can derive how much capital we can gain each year from the investments in net present value terms.

    But wait if the company has a steady income and growth potential can’t you sell it off for more money? Exactly, that is where terminal value comes into play. There will be a sensitive factor known as your growth rate in growing perpetuity. You can take a rate of let’s say 5% a year. Or you can evaluate it using Enterprise Value (EV) multiples, which essentially shows you how much other companies similar to your own is worth. Often times this is very industry centric and will sway largely accordingly. With that, now we can value our company accordingly.

  • Learning From Losses and Gains

    Musings of a VC Founder

    17/12/24

    Dear Diary,

    We often hear investors share stories on how they learnt more from their losses than gains.

    When faced with losses, especially those that were not due to impulse or misinformation, morale of the investor would be absolutely crushed. That is not to say such losses are unavoidable, there must be gaps in the investor’s judgment and cognitive sphere that ultimately led to the misjudgements.  

    Experiencing losses force an investor to rethink and reconstruct his entire cognitive sphere to one that hopefully would prove to be more robust and ultimately more accurate when judging investments.

    The most difficult lesson is perhaps how he would in the face of mounting losses, regain his sense of worth and confidence. Often crushing defeats can annihilate the will to fight on. How do we defend against that and regain our sense of the world?

    Now, lessons are also taken from gains. Such lessons tend to be about confirmation of what works and what doesn’t. These are dangerous lessons; they may lead to confirmation bias getting sunk deep into one’s cognitive sphere and often our most unexpected losses would come from such.

    How do we then meaningfully learn from our Gains? Some would say, deconstruct the entire decision-making processes and look at the variables that led to the outcome. If there are more uncontrollable variables that turned out to be positive which are not backed up by one’s cognitive sphere, perhaps the element of luck from such Gains are significant and perhaps the right lesson would be to learn how better to analyse such uncontrollable variables and risk mitigate against them turning on you.

    To end this reflection I thought it is timely to reflect on two examples of men who learnt from their losses.

    Paul Tudor Jones lost 70% of the monies he managed early on in his career. Such losses would have ended many investment careers.

    Ray Dalio made a wrong market prediction in 1982 leading to him almost going bankrupt and losing the confidence of his investors.

    Both men bounced back and as they say, the rest is history..

  • When I Grow up, I Wanna Be Like Him.. (In Memory Of David Bonderman)

    Musings of a VC Founder

    16/12/2024

    Dear Diary,

    Growing up, I read in awe, the exciting cut-throat and immensely stressful work done by the pioneers of private equity. Among the titans of PE, one name stood out – David Bonderman. David Bonderman was seen by many as a “Polymath”, transiting effortlessly between legal practice and private equity and conservation works of historical monuments.

    Perhaps deep in me, there is a voice shouting out loud “I Wanna Grow Up and Be Like Him!”.

    This was a man who so called stumbled into investment when approached by a Texan billionaire to help run his family office. And this was a man who had this great co-founding partner, Jim Coulter who complemented him so well I just feel not everyone is born the same (when it comes to luck in securing partners!). Now this was also the man who enjoyed problem solving drawing from a toolbox of skill sets acquired across different fields and domains.

    This man could look at the same deal everyone saw and passed, we would do it and create a miracle out of the impossible – Remember how Continental went from most hated to the best in 7 years? Remember how TPG brought bank rescue frameworks to East Asia and helped clean banking messes in the East Asian economies in the late 1990s having done so with the Savings & Loans crisis in USA (and developed TPG’s unique financial institution restructuring and rescue frameworks).

    I thought, I seriously thought, if I work hard and be a little someone, perhaps I could have a chance to be his friend – anecdotal examples of how he mingles and mix well with people from all walks of life and had this never-dying curiosity in people and their welfare. Now with his passing, I just collected another dream that would never come true. 

    Now, how do you, in PE, not wanna grow up and be like him?

  • The Origin

    Musings of a VC founder

    28/11/2024

    Dear Diary,

    It is one of those countless sleepless night I am having since the founding of our firm. While we are never in better shape than now, I still feel the “slaps on my face” when we get rejections from co-investment schemes (to be fair, we do not have a lot of dry powder at the moment), getting snide remarks as an “investment club” that is not serious and doing things for fun (what?!) and ultimately paled in comparison to our monied peers who caught the rising wave of the industry earlier and had their representative investment successes through the rise of regional unicorns.

    We entered into the fifth year since the founding of our firm. While we projected this year to be the year where our fund management firm’s revenue (not inclusive of carry) would finally match our expenses, we still missed our target, albeit, we remain healthily cash flow positive.

    The founding team came from the same department in the same organisation within the leading IHL in Singapore. We are very different individuals. “One” is a veteran in the scene, with more than 19 years of experience under his belt (now 24 years), seen the nascent growth of a fledgling VC industry took shape and was instrumental in mentoring some of the household names among startups in Singapore and the region. “Two” came with corporate restructuring (as a lawyer and while working in a listco), general corporate management (at a listco), corporate finance (in private equity), fund management (private equity) and lawyering background who had at one point provided legal services to 30-40% of the VC fund management firms in the region. “Three” came equipped with engineering optimisation background, armed with a systematic approach to dissecting various aspects of businesses to optimise for results. “Four” came with a reputation of being everybody’s friend, likeable and agreeable in every way and had some years of VC fund investing and startup mentoring exposure through shadowing his father’s work as a LP in a famed VC Fund of Funds.

    As active participants in the startup scene, our team has witnessed improbable startup miracles and have seen our fair share of startups with great promises crumbled. We thought we know something about picking the right horses, perhaps we really do, since our team’s track record prior to founding our own firm stands at 50% success rate for seed stage startups and more than 75% success rate for startups raising Series A and above. Our secret sauces: (1) “It takes a village to raise a child approach” where we find many industry friends and supporters to provide market access, first contracts and sometimes even key hires to the startups; and (2) building trust and rapport with founders so that we could make critical intervention when required through the help of our industry network. 

    We started our VC firm thinking we could translate the goodwill and relationships we had cultivated with investors and various institutions from our respective work stints at an IHL in Singapore focusing on nurturing and investing in startups. We couldn’t be more wrong.

    Weeks before COVID-19 took the world by storm, we resigned from the comforts of our beloved workplace where many memories were forged, where we soldiered on, fighting the good fight among many student entrepreneurs. In a little badly lit dingy little office room we set up base at (Midview City), we received news on all US$15M pre-commitment pulled out from the fund just before we entered into lockdown in Singapore. To be fair, such commitments were secured too quickly (a little too fast to be true?), i.e. through 2 trips made by “Two” to link up with his monied friends from China and Hong Kong with term sheets signed. Worst, our landlord sold his office unit and we had 1 week to vacate the room.

    Most among us were ready to throw in the towel and call it a day. “Two’s” career has been riddled with obstacles and near impossible challenges throughout and thought such setbacks are only normal and more will come. He encouraged and probably some would say, coaxed everyone to forge on. (to be continued…)