Accelerating Asia's unique approach to Seed investing
According to Cambridge Associates, 74% of historical returns from startup investing comes from the first institutional cheque, typically called the “Seed” stage investment. Investing at this stage is riskier as it often comes before real product-market fit has been established, but once that has happened, valuations tend to rise quickly and then the chances for a large multiple become much more challenging for follow-on investors.
At Accelerating Asia, we invest at the Seed stage but also put our invested startups through our award-winning startup accelerator program to enhance their chances of success and lower their risk. Our journey is just beginning and early data is encouraging. Some of our best investments to date have received 300-400% increases in valuations in one year of less - an early sign of high returns! And that is just the delta between when we invest and the next round of investment. On average our portfolio of 36 startups increase their revenue by 5X within 12 months of completing our accelerator program while the best performing teams (that we typically invest more capital into) on average increase their monthly revenue by 2,500%!
Revenue growth of top performers from Fund I Portfolio
While it’s great to say you invest in Seed stage companies because the returns are higher, how can you find the best ones? Picking winners is difficult; Venture Capital returns are dominated by a power law where around 6% of deals create 60% of the returns. As an example, when Kleiner Perkins Caufield & Byers in 1999 invested $12.5 million in Google for a 10% stake, its hugely profitable fund would have been underwhelming without that outlier investment.
To pick winners, it’s important to have dealflow. We receive over 1000 startup applications per year from over 30 countries and select around 20 startups per year for investment, a strict filter resulting in an acceptance rate below 2% and similar to Ycombinator’s rumoured rate of ~1.5%. The best startups in our program, which we invest additional capital in, represent ~20% of those teams, moving the filter to 0.4%. For comparison, Harvard University accepts 5.2% of applicants.
So the winning combination is investing in high quality Seed stage companies at sufficient scale to create the highest chance for hitting “home runs” that drag the rest of your portfolio to outperformance. At Accelerating Asia, we do this, but we also have a few other unique levers we pull to tip the scales in out favour:
Our Management fee is set at 1%, far below the industry standard of 2%. This means that more capital will be deployed into startup investments rather than used for other expenditures. Obviously this should increase the returns of the fund.
We also have a tiered carry structure. Carry is the term given to the fee that the General Partners earn for managing a venture capital fund. At Accelerating Asia our carry starts at 10%, far below the industry standard of 20%, but rises with performance. This means our General Partners are aligned with our Limited Partners to generate outperformance, unlike most funds.
Our Accelerator program charges an equity program fee to startups for participation, with a portion of this equity program fee going to our venture fund. The fund gets this equity without further capital outlay when we make our first investment in the startup. So we raise our equity stake in each startup with no additional capital outlay thus providing (only upside) leverage to future returns on investments.
Accelerating Asia = Seed Investment + Accelerator + Efficient Fund Unit Economics
We believe this structure gives our fund and our portfolio companies the best opportunity to outperform in a region that is growing faster than any other in the world.
To learn more about Accelerating Asia and startup investing in South and Southeast Asia and beyond, check us out here.
Accelerating Asia’s early stage VC fund invests in pre-Series A startups across Southeast and South Asia. If you’re interested in connecting, investing alongside us, meeting our portfolio companies, or just generally interested in talking to us about startup investing, please reach out and tell us a little bit about yourself.
Disclaimer
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.