Power Law, Unicorn Hunting & Jungle to Highway: How VCs Bet on Southeast Asia’s Future - E575

"If you look at the news that came out, Sonos released a new soundbar that uses a new technology, right, called the Arc Ultra. So they promised this groundbreaking technology. But what had happened was that about 3 years ago, they had acquired a startup. This startup was a Danish startup that had created a new technology approach to make the sound device much more efficient and much smaller. In other words, instead of having a sound system with 2 speakers, a subwoofer, you can combine all of that into a much smaller device and have the same level of sound quality. It's like a 10X smaller form factor for the same sound quality, which is an interesting pitch they have made." - Jeremy Au, Host of BRAVE Southeast Asia Tech Podcast

"This company called M-A-Y-H-T, they basically raised $10 million of funding. They were very hot in Tech Crunch, and then one year later they were acquired by Sonos for $100 million. So a 10X return in one year as a founder. So they invented technology, raised the money, they acquire it for a 10X return, and then 2 years down the road, their product is now available in the Sonos Arc Ultra. But these are the kind of returns that would be good, because if you're a VC, you invested $10 million today—next thing, you get $100 million, a 10X return, right." - Jeremy Au, Host of BRAVE Southeast Asia Tech Podcast

"For example, we see that Y Combinator invests in 632 companies, and about 1% of them are unicorns. So it's—versus you look at the other side, which is Union Square Ventures, which most of you have not heard of because they're very focused on their geography, which is New York and America. For them, they only invested in 62 startups, but 8% of the companies are unicorns, right? So that's about one in 12. That means every portfolio of 20 investments, they have about 2 unicorns in that portfolio. These are very different strategies. Some of them are snipers at the top—high pick rate, selection rate, good judgment, small number, snipe it, get it done. Whereas YC, that you think is very selective, is actually more like a shotgun—but a very prestigious shotgun approach—where they have that. And then there are other companies in between that have differing versions of that strategy. As a result, we were able to map out how these VC investments are power law." - Jeremy Au, Host of BRAVE Southeast Asia Tech Podcast

Jeremy Au pulls back the curtain on Southeast Asia’s high-stakes venture capital world where 5,000 startups fight through the jungle, but only 10 reach the expressway. It’s a ruthless game of asymmetric bets, power-law outcomes, and make-or-break timing. He reveals what really happens inside VC firms: how general partners juggle investor pressure with founder bets, why a single breakout startup matters more than dozens of average ones, and how the best founders move faster than anyone expects. You’ll hear about billion-dollar exits, internal prioritization dynamics, and why follow-on capital is often more political than rational.

01:11 GPs Must Master Dual Survival Skills: Jeremy explains that general partners in VC funds must do two high-cost, high-stakes things: invest in the right startups, and raise capital from limited partners like sovereign funds and endowments each with different return horizons and motivations.

03:57 Real Case Studies: 50x in 3 Years, 10x in 1: He shares two explosive examples: Sequoia’s $60M investment in WhatsApp returned $3B (a 50x return in 3 years), and a Danish startup acquired by Sonos returned 10x in one year without ever launching a product.

07:00 VC Funnel: Brutal Qualification from 5,000 to 10: A sample Southeast Asia VC sees ~5,000 startups a year. 3,500–4,000 are immediately disqualified. 300 are prioritized. 100 get diligence. 10 get funded. Most never get a meeting, let alone a check.

10:32 Exit Scenarios: Billion-Dollar Choices & Regret: Jeremy breaks down how VCs navigate exits via shutdowns, talent acquisitions, or full IPOs. He contrasts Instagram (sold early to Facebook) vs. Snapchat (held out), and shows how Sea Group, Goto, and Grab all exited differently.

(00:50) VC is part of the value chain. A lot of you wanna be bankers and a lot of you will be doing a lot of lending.

(00:55) For example this last week they announced venture debt fund. (01:00) LPs and banks and Korean banks are investing in debt vehicles to startups. So there's all kinds of vehicles out there. The crux of it is that every VC fund has three tiers. The first tier, is your limited partners. These are the people who are putting money into the fund, but they don't have any legal liability. The second, is the general partners. these are people who receive the committed capital, and they're responsible for deploying the capital.

(01:23) And they have unlimited legal liability. They may. Often be serving on the boards and have a fiduciary duty to the shareholders of the startups that they invest in. And lastly, all their capital flows to the startups at the bottom of their pyramid. So that's how the flow of money goes through. And so general partners in a VC fund often doing two things.

(01:43) I was just talking to somebody this morning. He is a senior in the uc, Berkeley. He reached out to me because, we were affiliated through our social impact consulting days. But the key thing he was asking me about was. Should I join VC in my junior years and so forth. And I said, Hey, when you are a general (02:00) partner, the two skills that you need to have is so costly.

(02:02) One is you need to invest in great startups. You need to be able to fundraise money from limited partners. those are two very distinct skill sets limited partners are different types of capital out there. sovereign wealth funds.

(02:12) University endowments, corporations, family offices, fund funds, and high net of individuals, and all of them have deferring time horizons, different reasons for why they wanna invest. And capital can flow from any of these sources. And the return on investment is key.

(02:27) Most of these investors are sophisticated investors, so there's a general belief that VC as part of a portfolio will beat public market returns by about 5% over a 20 year period. So that's the belief whether it's true or not for the next 20 years, we don't know. Which geographies we also don't know.

(02:42) But of course there are other reasons that can be there. So obviously ROI is important. Diversifying into a high risk, high reward asset class is important. Getting insights to a geography and focus is important. It can be a sensor network for sourcing. for example, a large wealth fund may do late stage investments, but you don't have (03:00) enough time and attention to early stage investments.

(03:02) So you. Delegate your capital to these VCs to do the early stage capital. some VCs also take that time to learn from them about how to get better as building your own VC fund in the future. we talked about how there's a big difference between private equity and venture capital.

(03:17) some of you may be seeing this distinction for the first time, a lot of people, you open up the headlines. Private equity is bad. Private equity kills jobs whilst Private equity is an asset class that buys from their perspective underperforming, stable companies that can be run better.

(03:31) Management takes over control of the management. Does. The hard moves or the debt moves or whatever the moves are to extract value rate, more value and they target about 15% rate of return every year. Whereas venture capital instead of, will invest in about 20 portfolio companies, but only one to two of these companies will be highly successful with 20 to 100 x returns and this small number of home runs will generate out the entire portfolio, about (04:00) 25%.

(04:01) Return. So again, a big distinction is that private equity, you make a few investments concentrated. You're spending a lot of time working with them versus venture capital, which is you're making minority investments. You don't wanna let the founder run with it and hunting for home runs 

(04:14) The two lever that they have is, of course, first of all, they're looking for companies that are high growth rates that have the potential return, 10 to 200 x. But of course, what they're trying to do as well is they're going to try to come in cheap in the sense that, and that's tricky part of it, right?

(04:27) It's you know what is cheap, right? If you think that company's going be a billion dollars, maybe paying a hundred million dollars is fine, right? We gave an example recently that Sequoia invested. $60 million in WhatsApp. And then Sego eventually earned $3 billion from that $60 million investment, which was a very handsome return which was effectively 50 x returns in three years.

(04:47) So tremendous outcome. If you look at the news that came out today, Sonos released a new soundbar that uses a new technology, right? Called the ARC Ultra. So they promised this (05:00) groundbreaking technology, but what had happened was that about three years ago, they had acquired a startup. This startup was a Danish startup that had created a new technology approach to make the sound device much more efficient and much smaller. In other words instead of having a sound system with, two speakers, a subwoofer, you can combine all of that into a much smaller device and have the same level of sound quality.

(05:22) It's like a 10 x smaller form factor for the same sound quality, which is an interesting pitch they have made. this company called

(05:32) M-A-Y-H-G they basically raised $10 million of funding. They were very hot in Tech Crunch, and then one year later they were acquired by Sonos for $100 million, so a 10 x return in one year. As a founder. So they invented technology, they raised the money they acquired for 10 x return and then two years down the road.

(05:50) That product is now available in the Sonos Arc Ultra. But this the kind of returns that will be good because if you're a vc, you invested, $10 million a day, next you got a hundred million dollars, a 10 x (06:00) return, right? VCs are obviously thinking about how they are both competitive and collaborative.

(06:05) What this chart again reminds you of. Is that startups go through a value of death. So for example, the company that I just mentioned to you about, they had engineered this new type of speaker and it had never existed before and they never sold a single speaker. All the speakers that made was all in r and d prototypes and they were being demonstrated and got very popular 

(06:26) But before they even gone onto the market, they were already acquired by Sonos, So for them, they had a big value of death. Some VCs funded them, and angels invested in them. And of course, you can see here the acquisition. This happened pretty early, But for other startups, they see there'll be stages where they'll receive your seat round.

(06:44) Oh, sorry. See your seat. Your series A, series B, series C. And go over there. And VCs tend to collaborate across this timeframe, but tend to compete with each other within that same round. And so we use it in a context of Southeast Asia. We give some benchmarks. A prese route is about (07:00) 0.1 hundred, 0.1 to one mil.

(07:02) A seed is about one three mil. Series A is about five mil. Series B is about 10 mil, 50 mil. Series C is 20 mil plus, and go on. And of course, as your company goes more mature as your company goes from what I previously described the jungle phase where you don't know what you're building. To the dirt road phase where you know what you're building, but you're still scaling it out to Series C around that is you should be more like a highway where everything is running like clockwork and you're just aggressively expanding.

(07:29) And so every great VC has a source, select support these companies and then eventually exit. A VC cannot make an investment in a company.

(07:37) They never got a C. And so as a result, we talked very quickly about how this is a sample VC in Southeast Asia. They will see about 5,000 startups. They would disqualify about three to 4,000 of them very quickly because they are like pretty bad or shorty not viable. Then outta 1,500, they'll prioritize about 300 startups that they think has a shot.

(07:58) And then they may (08:00) have full conversations and look into the data about a hundred startups. they will do a deep dive write a deal memo and invite the founder to do a formal pitch. For 50 of them. eventually the VC fund would make investments in about 10 of them in one year.

(08:15) So this is why VC funds always are happy to hire VC associates because all of the qualification stage and the early deprioritization like the Tier C, tier B startups would be farmed up to you whilst the Tier A startups will be farmed or nurtured by principals or senior investors. So we talk about how view sourcing is difficult because thousand startups are launch every year with no public data.

(08:38) If, for example Zenia decided to build a company today, I would've no idea. It wouldn't be in LinkedIn, it wouldn't be anywhere. It would just keep growing and then she could be very successful. If you're a strong founder, you can accelerate very quickly because the best founders can attract capital very quickly, attract teammates and then the group can break out. we saw that example with Evan Hang and Zen of (09:00) Education. He was a freshman and sophomore when he started the business.

(09:03) Nobody knew what his business came about. By the time he hit junior and senior year, he was already making millions of dollars. And then, those who were able to invest in him early, they saw that they invested in him. And now that he's full-time, the company has continued growing since then, right?

(09:16) So they tend to grow much faster than you expect them to so you don't have time to wait for them. And so we talk about how it's not just me, every other VC is working hard to look for these people, these diamonds in the rough. 

(09:27) So they have a podcast the All In podcast, YC has videos. They have a brand, they have outbound. If you write that your LinkedIn, you write, I'm a founder. Within one day you will get a bot emailing you, asking what your startup is building.

(09:41) There'll also be public information available. you are sourcing public information for your founders. And then obviously there's private information they may get from other people. And we talk about how founders and VCs can refer deals to one another. 

(09:53) I just followed it in. So they have an opportunity for a late stage investment in Epic games, right? some of you may (10:00) know that as Fortnite, right? For Epic Games. So there's opportunity invest there and he's. It's not competitive for him, it's opportunity. So he's sharing a deal with me because he's friendly, So I'm looking at it and I'm like, that's probably not a good fit for me. But I'm happy to forward that to some of my network who might be interested in this thesis. we talk about how companies have been thinking about adding value in terms of, portfolio success.

(10:24) We also talk about how VCs have always had to be judging and making, prioritizing their time between high priority companies versus low priority. Because they have limited time and attention. And one of the ways that they can tru time and attention is not their support, but also thinking through about how, whether they allocate additional capital to the company.

(10:44) So we gave a very in-depth and tar conversation about Instacart IPO that happened about. One to two years ago, some VCs were able to double down very early and make money. And some VCs did not have an opportunity to double down or did double down too late. (11:00) And so they lost money as a result.

(11:01) some people should never have gotten in because they lost money overall for their VC investment. So I thought that was a fascinating conversation that we had then. And so we talked about how for low priority companies that three options we can either close the company, wind them down to is we can hire them and convert their talent but not the product.

(11:19) And lastly, we can sell the VC stick back to the founders to let them run it as a lifestyle business. we gave the example of the acquisition as an exit path and we went thoroughly with examples. One of Instagram and one of Snapchat. Both of them receive billion dollar offers by Facebook. One said yes, one said no.

(11:38) one has done really well. But you could argue that he left money on the table and should have gone. That continue kept going independently and our company kept going independently by argue that he should have sold to. Facebook meta, so it's hard to tell. obviously acquisitions are very important for big tech companies to work with small companies. We also talked and (12:00) gave example of how companies can go public. So we give three examples. One was a C group which went with the new exchange. IPO we talk about go-to which rented an IPO on the Indonesia stock exchange.

(12:13) And then we also talked about grab that went public through a special purpose acquisition corporation through the n so yeah. So these are all the various opportunities that were there. three Southeast Asian unicorns with three dramatically different exit opportunities. we talked about how VCs as a result, are investing based on a power law basis, rather a normal distribution.

(12:33) They're looking for guys and girls that can really create outsized returns, and we talk about how most returns are generated by a few people. some VC funds are structurally better at picking good companies. For example, we see that Y Combin invest in 632 companies, and about 1% of them are unicorns.

(12:52) So it's. Versus you look at other side, which is Union Square Ventures, which most of you have not heard of because they're very focused on their geography, which is New (13:00) York and America. for them, they only invest in 62 startups. But 8% of the company are unicorns, right? So that's about one in 12.

(13:07) it means every portfolio, 20 investments, they have about two clients in that portfolio. these are very different strategies. some of them are snipers at the top. High pick rate, selection rate, good judgment small number, snipe it, get it done. Whereas YC, that you think is very selective, actually more like a shotgun but a very prestigious shotgun approach.

(13:29) Where they have that. And then there are other companies in between that have differ versions of that strategy. as a result, we are able to map out. how these VC investments are power law, we talked about how the VCs can be differentiated into four major categories.