The secret sauce to de-risking early-stage venture capital

One of the biggest challenges in raising capital for an early-stage venture capital fund, no matter the theme, is thinking that venture capital is a big throw of the dice.

Synonymous with a spray-and-pray strategy, some horrifying historical records like “Nine out of 10 startups fail” and “The average return on every $1 invested in venture capital worldwide is 90 cents” — the appetites and the allocations suppressed.

Of course, there are risks associated with the traditional venture capital model, but to be successful as a VC fund manager, it is crucial that risk mitigation remains at the heart of investment decisions.

So how did we, as venture capital fund managers, disrupt historical strategies and create a lower-risk investment opportunity for our Limited Partners (LPs)?

Build a focused portfolio

At Mandalay, we focus on deploying capital in three to four investments per year. Over our five year capital deployment time horizon, this may equate to 15-20 portfolio companies, which is very compact overall.

Also read: Why venture capital is making it big in cloud mining

Focusing on quality over quantity and never accepting failure as a by-product of venture capital are two extremely important mindsets. I’m often asked how many of my portfolio companies are likely to fail, and my answer is quite simply…zero.

Buy well

I love this strategy my friend Ainsley Lee, Head of Investments at NRMA and LP in Mandalay, used to build a hugely successful career. Venture capital investing requires rigor and discipline, avoids investing in companies with overly aggressive multiples (particularly in revenue), and doesn’t get caught up in hype or emotion as they tend towards cloud judgments. And of course, there is never any hype and emotion in early-stage startups.

My points regarding building a focused portfolio and buying well may seem relatively obvious or generic, but I assure you, in the world of VC funds, they are not. That being said, the next two strategies are largely Mandalay’s “sizzle” in the market, and so we found ourselves managing money on behalf of some world-class names.

Founded by founders for founders

I believe that business and finance savvy founders and entrepreneurs make excellent early stage VC portfolios and fund managers.

They have had a personal founding and startup journey that gives them a unique insight into what it takes to succeed. They can pick up on qualitative characteristics that other investors miss. In addition, they speak the same language and relate on a personal level with the founding team, building relationship and mutual respect.

Mandalay was the brainchild of its four founding partners: Mark Gustowski, Philippe Ceulen, Timothy Hui and myself, Al Fullerton. With diverse educational and career backgrounds, we all bring specific skills and expertise when it comes to business growth and ensure that all aspects of the business are strategically managed by the partners.

As Managing Director, Gustowski can look back on many years of experience in the C-suite management level. Over the last 20 years he has been a partner and has advised many fast growing companies. He also brings technical expertise, having previously worked with the Australian Government to develop regional innovation programs in support of agricultural technology.

Ceulen is Head of Strategy and leads our innovation platform, which includes programming, venture building and community engagement globally, all within Mandalay’s portfolio and across the entrepreneurial ecosystem. He also brings a wealth of experience building communities and ecosystems.

Hui is Head of Operations and focuses on growing startups as well as leading fund operations and governance and managing all areas of financial and regulatory compliance.

And then I’m finally here. As a managing partner, I have extensive experience in agrifood technologies, renewable energy and sustainable venture capital. I lead investor relations, global technology scouting and portfolio allocation.

Also Read: The Correct Interpretation of the Corporate Venture Capital Road

Mandalay was founded by founders for founders, and our founder DNA is the ultimate in our risk mitigation and alpha generation tool we call Sleeves-up Capital.

sleeves up capital

Rolling up sleeves means rolling up your sleeves and helping drive the growth of your portfolio companies by providing so much more than just capital.

At Mandalay, we know what it takes to truly build a business from the ground up, having walked this journey as founders personally. What we can do now is share our knowledge and insights, not in the form of a quarterly macro whiteboard, but by really jumping in the ditch with the founders and helping to accelerate the company’s growth profile and this non-linear ramp-up curve .

And through good buys and a focused portfolio, the scalability of this model across the portfolio and the ability to create real value for each individual investee company is really given.

Venture capital plays a crucial role in the startup ecosystem. Without VC, the companies you and I take for granted every day — innovations that save lives or technologies that feed the masses — quite simply wouldn’t exist.

At Mandalay, we enhance returns on capital through our sleeve-up approach to capital, generating alpha while mitigating early-stage risk for our investors. And we do this while helping to unburden and smooth the day-to-day challenges for venture capital companies and their founders.

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