This is the reality of investing in startups.

VC has a sexy reputation, but how does it really work as an asset class?

Let’s find out from Hsu Ken Ooi, Co-Founder and Managing Partner of Iterative, an early-stage accelerator exclusively for Southeast Asia.

Today in 10 minutes or less, you’ll learn:

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Hsu Ken Ooi is the Co-Founder and Managing Partner of Iterative. Iterative is an early stage accelerator program similar to YC but exclusively for Southeast Asia. In the 3 years since they started the fund, they’ve raised $65M+ over 2 funds, invested in 120+ companies who are now collectively worth over $1B.

Prior to Iterative, he started 2 companies in the US, Decide.com (acquired by eBay) and Weave (YC S14). He’s originally from Penang, Malaysia.

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I’ve had the same co-founder (Brian Ma) for all of the companies I’ve started and we started the first when I was 23 so it’s really all I know. We started our first company when I was 23 and I’m 40 now so building stuff is the only thing I’m familiar with professionally.

People often ask if this (starting companies then becoming an investor) was the plan all along and my response is always “What plan?” Despite being very structured in decision making at our companies, I can’t say that I’ve ever been that structured about decision making with my career. Whenever there was a career decision to make, I only really paid attention to 2 things, what will (1) teach me the most and (2) sounds the most interesting.

I never had the intention of being an investor. In fact, I actively disliked (and still dislike) the idea of being an investor. Unfortunately, being an investor seemed like the best way to make entrepreneurship more accessible in Southeast Asia which seemed like it would teach me a lot and I was deeply interested in.

I’m not saying this is the best way to make career decisions. It’s just the way that made sense to me and it’s seemed to have worked out okay.

Let’s say you start a lemonade stand on the side of the street. I think your lemonade is great. You want to sell more lemonade but you need more $ to buy more lemons. I give you $ to buy more lemons and in return, you make me a small owner in your lemonade stand. You still make the lemonade, decide what types of lemonade to make, etc. but if you ever sell your lemonade stand to someone else, you need to give me some of the $.

Large VC funds (say US $500M+ AUM) still predominantly raise $ from pension funds, endowments and large family offices. Simply put, they’re the only group of people that can invest $100M+ at a time. That hasn’t changed.

What has changed is the explosion in small (less than US $50M) and micro (less than US $10M) funds for 2 reasons. First, it’s become easier to run a fund (AngelList, etc.). Second, there’s more people who have made $ from tech, are now familiar with venture capital and would like to participate.

VC as an asset class to me is very strange and relative to other asset classes sounds like a horrible investment. Imagine telling a prospective investor they should invest millions of dollars in a fund where 97% of the investments will go to 0, there’s no liquidity and they won’t see a return for 7 years. Who would invest in that? And yet, here I am and gainfully employed.

The entire asset class is built on the promise of those 3% of companies that don’t go to 0 and even more so on the 1% that become the next Google. Investing in a company like Google, before they were Google, is so lucrative it makes up for all the other investments that went to 0 and so much more.

I'm actually not sure what the common myths are but here's a quick list of the realities if you're investing as an angel investor.

You Will Lose $ – Most startups fail and if you're someone who invests in them, you will lose $. In fact, because companies that fail do so faster than those that succeed, you will lose $ much faster than you make $. You should know that going in. It's a long game and what matters in the end is you make more $ than you lost.

Long Feedback Loops – You won't know if you're good at investing in startups for 3 to 5 years. You'll know if you're bad at it within the first 3 years if all of the startups die but those that survive, you won't know how successful they'll be.

My advice to people who are interested in the asset class is to pick an amount you're comfortable losing and investing in as many companies as you can by investing as little as you can in each company. Typically that's $5K to $10K for very early stage companies.

You can think about it as getting the most experience with the least amount of $ necessary. Once you get more comfortable, you can invest more.

There's a lot but here’s a quick shortlist in no particular order.

Smaller Market Size – In the US, the only real concern is do people want what the company is building? In Southeast Asia, it's do people want what the company is building, is there enough of those people in that country, will other people in other countries want it and are there competitors in those places already doing it? It's more complicated.

Lower Valuations – As a byproduct of smaller market size, less frequent liquidity events (acquisitions, IPOs, etc.) and less $ needed to run companies, valuations in Southeast Asia are significantly lower than in the US.

Aversion to Global Competition – Investors in Southeast Asia tend to stay away from companies who need to compete globally. Instead favoring companies focused on Southeast Asian markets and in industries where being based in Southeast Asia is an advantage. It's still hard for investors to think the Sales CRM in the world will be based in Southeast Asia.

This might make it seem like Southeast Asia is a bad place to invest but I believe these things will change and if you wait until you do, you'll be too late.

Although I did a number of angel investments prior to starting Iterative, being a professional investor and investing other people’s $ is a very different endeavor. It’s only been 3 years but here are some of our learnings.

Future Growth > Current Traction – I wrote a post about this (The Importance of Slope) but when we started, we mistook current traction for future growth. Turns out, you’re better off investing in something that’s small and growing fast than big and growing slowly.

Projecting – This might be unique to Brian and I since we were founders but when interviewing founders, we found ourselves seeing the opportunity more clearly than the founders. To the point where we started pitching the companies back to the founders who would obviously agree because they wanted us to invest but didn’t think of their companies that way.

This is more of a contrarian opinion but founders are NOT the most important thing when evaluating a company. There's a minimum bar but once someone is above that bar, it's important but not the most important thing. And this is coming from someone who has been a founder and became an investor primarily to help founders.

At Iterative, we believe all startups exist to solve a problem and that problem is the defining characteristic about a startup. It dictates the market size, the type of founder that will be successful, how the product should work, etc.

You should follow me on Linkedin or subscribe to my blog where I write about starting and investing in startups. If you have questions, you can also leave me a message.

Last week, I shared my money rules and asked for yours. Here’s a few of my favorite money rules from readers:

Jazel:

Viktor:

Lily:

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