Course → Unit 8: Alternative Investments → Lesson 8.1

Venture Capital

Every unicorn startup you've heard of — Grab, Sea Limited, Airbnb — was, at some point, a handful of founders with no profit and a pitch deck, and the money that got them from that point to a public company came from a specific, unusual corner of investing called venture capital.

What VC is: funding startups before they're profitable

Venture capital (VC) is money invested into young, private companies (startups) that typically have little or no revenue and no profit yet, in exchange for an ownership stake, on the bet that some of them will grow enormously. This is fundamentally different from buying shares of an established company like DBS or Apple on a stock exchange: there's no track record of profits to analyze, no long history of financial statements (the subject of Unit 6), and often not even a finished product yet. A VC isn't valuing cash flows the business is generating today — it's valuing a story about what the business could become, backed by evidence like the founding team's quality, the size of the market opportunity, and early signs of customer traction.

Because startups fail far more often than established companies (most startups fail entirely, and even among those that survive, most never become huge successes), VC is one of the highest-risk, highest-potential-return categories of investing that exists.

The VC fund model: raising capital, deploying it, returning it

VC firms don't usually invest their own partners' money alone — they raise a fund from large investors (pension funds, university endowments, wealthy individuals, sovereign wealth funds) who commit capital for roughly 10 years. The fund then goes through three phases:

• Raising — the VC firm convinces institutional investors to commit money to a fund, often $100M to over $1B in size, based on the firm's track record and strategy.
• Deploying — over the first 3-5 years, the fund invests that capital into a portfolio of startups (often 20-40 companies), taking minority ownership stakes in exchange for cash the startups use to grow.
• Returning — over the following years, as startups are acquired, go public (IPO), or in rarer cases pay dividends, the fund converts its ownership stakes back into cash and distributes the proceeds back to the original investors, typically by year 10, though funds are often extended a few years if needed.

VC firms earn money through a fee structure broadly similar to the "2-and-20" model you'll see again in Lesson 8.3 on hedge funds: an annual management fee (often around 2% of committed capital) to cover operating costs, plus a share of the profits (often around 20%, called "carried interest") once the fund returns money to its investors above a set threshold.

Power law returns: why one investment needs to return the whole fund

VC returns follow what's called a power law distribution — a small number of investments generate the overwhelming majority of a fund's total profit, while most investments return little or nothing. It's common for a VC fund to see roughly a third of its investments fail completely (total loss), another third return modestly (breaking even or a small gain), and just one or two investments out of thirty deliver a return so large it accounts for most or all of the fund's overall profit.

This is why top VCs explicitly aim for companies with the potential to become huge — a startup that might return 2x isn't worth the risk of investing in, because the fund needs its rare winners to be enormous enough to cover all the losers and still deliver a strong overall return. This explains why VCs push founders to "think big" and pursue large addressable markets rather than modest, safe businesses — a modest, safe outcome doesn't actually help the fund's overall math.

Term sheets, valuations, cap tables — basic concepts

A few terms you'll encounter constantly in VC:

• Term sheet — a short document outlining the proposed terms of an investment (how much money, at what valuation, what rights the investor gets) before the full legal contracts are drafted. It's essentially a "deal in principle."
• Valuation — what the startup is deemed to be worth. "Pre-money valuation" is the company's value before new investment is added; "post-money valuation" is pre-money plus the new cash raised. If a startup is valued at $9M pre-money and raises $1M, its post-money valuation is $10M, and the new investor owns 10% ($1M ÷ $10M).
• Cap table (capitalization table) — a record of who owns what percentage of the company: founders, employees (via stock options), and each investor from each funding round. Every new funding round typically adds new investors and dilutes (reduces) everyone else's percentage ownership, even though the dollar value of their stake may still rise if the company's total valuation grows enough to offset the dilution.

The SE Asia VC landscape

Singapore has become a major regional VC hub. Two well-known names worth recognizing: Peak XV Partners (formerly Sequoia Capital India & Southeast Asia, which rebranded as an independent firm in 2023) is one of the region's largest and most established venture firms, having backed companies across India and Southeast Asia at various stages. Monk's Hill Ventures is a Singapore-headquartered VC firm focused specifically on early-stage Southeast Asian technology startups. Both illustrate how Singapore functions as a regional base for VC firms investing across a fast-growing, populous region, even though the underlying startups are often headquartered in Indonesia, Vietnam, or elsewhere in the region.