Adapting VC to emerging markets

Tailoring a venture capital fund to the market's statistical realities.

The Realistic Optimist is a B2B paid publication covering the globalized startup scene.

It publishes in-depth, written interviews with founders/investors around the world.

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Biography

Archie Cochrane is co-founder and general partner at Nascent, a top decile LATAM pre-seed fund. 

Prior to Nascent, Archie worked for global fintech PayU (acquired by Naspers) and was an investment principal at Anthemis Group.

In your articles, you speak about the importance of tailoring a venture fund’s strategy to its specific context. What does that imply?

It comes down to what product you are offering your customers. In my case, my two customers are the LPs that bought my fund product and the founders I support.

Venture capital used to be an artisanal, cottage industry. Particularly in the last decade, the asset class has grown and the average VC fund size has expanded with it. The spectrum of ‘fund products’ now goes from industrial-sized funds (ex: Softbank’s Vision Fund) to boutique funds like ours. We are all called venture capitalists but the products we offer vary enormously. Therefore, the customers that buy our product also vary enormously. Similar to a startup, building a venture fund entails building a product your customers want.

My first customer persona are LPs, the people whose money we are investing. The type of LP you target influences the returns you promise and subsequently, your investment strategy. Smaller funds tend to promise larger returns than larger VCs, since it's mathematically easier to return a smaller fund. Larger institutional LPs are happy with 10+ year holding periods whilst family offices and individuals typically prefer shorter liquidity timeframes. 

My second customer persona are the founders we support. The choice of which founder to back depends on your investor-market-fit. What specific skills/network do you have as a GP, and what type of founder can those best assist?

You set up your fund with those two customers in mind.

For example, Nascent’s partners are ex-operators. We add the most value during the company’s initial years, on topics such as go-to-market, hiring, fundraising, storytelling… Our value proposition as investors diminishes as the company scales, so we’re often happy to sell our stakes to later-stage investors once we feel that the company has outgrown what we can offer.  

That’s helpful regarding the fund construction. How do you further tailor a fund for emerging markets (EMs)?

The general parameters are the same globally: venture capital is a high-risk, high-return business. Many of your shots on goal will fail, but you aim for the few successful shots to make up for the rest. The added EM complexity is that startups there typically enjoy smaller and rarer liquidity events. 

If you’re running a $100M seed fund in San Francisco (SF), you can invest in 40 startups with less than 5% in each at exit. You aim for one or two of those companies to IPO or be acquired at an outlier (multi billion dollar) price, returning your fund even with your stake in the company heavily diluted over time. 

Expecting those mega exits makes less sense in EMs. It’s safe to assume that the median exit size of a venture-backed startup here is lower than in the US. The probability of later-stage exits, such as IPOs, is still small. Those IPO chances are further reduced by the fact that tech companies are staying private longer, even in developed markets. 

Sturgeon Capital’s analysis of some frontier market exit sizes

How does this inform Nascent’s fund construction then?