This essay was taken from interviews with Putra Muskita from TechinAsia for their visual stories: “The hidden alliances between Southeast Asia’s VCs, uncovered” and “Should VCs have many friends or a few buddies?”

When it comes to co-investments, one can think of the story of the blind men and the elephant, where the sum of the blind men’s perspectives is greater and more accurate than any individual observation. Co-investments are a way for investors to accumulate value, information, and insight while sharing the risk with others also putting their skin in the game. It’s also a way to build brand and reputation within the ecosystem, and potentially help gain the confidence of LPs in future fundraises. 

Looking at the bigger picture, more co-investments point to a maturing ecosystem where firms are more secure in their positions and have a better understanding of the market and each other.

We share our thoughts on what co-investments mean to Southeast Asia’s startup ecosystem, the factors that go into co-investing, and the impact of these co-investments for founders. 

Key Takeaways

(1) The maturity (early) and density (low) of Southeast Asia’s VC market is at a point where strategic investor relationships and co-investments are critical to getting a foot in the door in a specific market or vertical or positioning portfolio companies to be the proof-of-concept the region needs in terms of exits.

(2) A golden rule in investing is to diversify, and as the jungle sees more players mark their territory, it’s in the interest of firms to stay well-connected and well-positioned in the ecosystem.

(3) Finding the best deals and the right relationships go hand-in-hand for a venture capitalist’s success.

(4) Even though Southeast Asia’s VC market is still early, many VC partners and professionals in the region either come from more mature markets or mature outfits. The relationships built over these careers can have an influence on the co-investors VCs reach out to in a firm.

(5) At the end of the day investors will want to do what they perceive to be the most valuable or needle-moving investors for their companies, be it in terms of value for money, a valuable board member, or deeper industry expertise.

Co-investments in Southeast Asia

The maturity (early) and density (low) of Southeast Asia’s VC market is at a point where strategic investor relationships and co-investments are critical to getting a foot in the door in a specific market or vertical or positioning portfolio companies to be the proof-of-concept the region needs in terms of exits.

The ecosystem still has a lot to prove in terms of what local unicorns can achieve and the overall returns on exits in the region, so VC firms are incentivized to support each other in supporting performing companies, especially during this period. It is also likely that given the population of VC-backable startups in the region vis-a-vis VC firms there may be more circumstantial co-investments than there are strategic relationships at play.

While an Oxford Said Business School study on 50 US VC firms from 1985 to 2012, “Getting Tired of your Friends: The Dynamics of Venture Capital Relationships” found that having deeper relationships with co-investors leads to fewer co-investments and lower exit performance, Southeast Asia is not yet at that point where VC firms are getting “tired” of their friends.

But as the ecosystem matures and populates with new firms and more startups, the cumulative benefits of co-investment with any single firm may not be as strong as the study suggests. A golden rule in investing is to diversify, and as the jungle sees more players mark their territory, it’s in the interest of firms to stay well-connected and well-positioned in the ecosystem. That means keeping their doors open for new relationships or actively seeking to create new ones.

Finding co-investors

There are many factors that go into a decision whether to co-invest or not with a firm on a deal. One can look at it from two perspectives — as the firm introducing the deal or a firm discovering (or being introduced to) the deal. For the former, the primary factor is the value a potential co-investor can bring to the company. For the latter, it’s the deal itself (eg. are there competitors in the portfolio, the terms of the investor, etc.) and the track record of the co-investor making the introduction.

Timing is also important here. Often early-stage VCs will want the first check in or the biggest early check in, so first-time co-investments with other VCs are less likely to happen in seed and pre-seed rounds.

It’s because of these factors that VC firms co-invest more with firms they have worked with before. Once investors make it through the first date, the next few dates are easier to come by. It’s less about avoiding firms and more about finding fellow investors who are aligned with the firm’s big picture for the region.

Choosing between deal quality and relationships is a false dichotomy. At the end of the day, the VC business model is built on multiplying dollars invested into dollars distributed back to investors. At the same time, VC reputation and success are also built on trust and relationships. Finding the best deals and the right relationships go hand-in-hand for a venture capitalist’s success. 

There’s also something to be said for the influence of individual partners on how these co-investment relationships are formed between firms and the kind of impact they have on exit performance. Even though Southeast Asia’s VC market is still early, many VC partners and professionals in the region either come from more mature markets or mature outfits. The relationships built over these careers can have an influence on the co-investors VCs reach out to in a firm.

The founder perspective

It is important for startup founders to do due diligence on investors, and that includes the networks of these investors. In raising a new round, aside from the startup’s own outreach existing investors on the startup’s cap table will also want to introduce investors.

That said, investors will rely on their immediate network first, and hence the tendency for “friends” to join in, especially if the quality of their network matches the needs of the company. It is also possible that the startup has a certain investor in mind, and it so happens that investor is connected to their current investor and so it would appear that “friends” co-invested.

Even then, great investors do the work to exhaust possibilities, even beyond their immediate network, in order to find the right co-investors for their companies. Regardless, at the end of the day investors will want to do what they perceive to be the most valuable or needle-moving investors for their companies, be it in terms of value for money, a valuable board member, or deeper industry expertise. That is the priority.