Contrary to popular belief in some parts of the market in Southeast Asia, I believe it’s healthy for founders to start taking some chips off the table around Series B. There’s a widely established belief that founders shouldn’t sell any secondary shares when they are raising capital in Southeast Asia. This is a result of a fatal error in not determining the difference between System 1 and System 2 thinking. More investors should be open to founders selling some of their shares in a secondary offering, if not actively encouraging it.

System 1 vs System 2 Thinking

System 1 and System 2 thinking, as conceptualized by Daniel Kahneman and Amos Tversky, represent two distinct modes of cognitive processing:

• System 1 Thinking: This is fast, automatic, and often subconscious. It relies on heuristics and intuitive judgments, enabling quick decision-making in familiar or routine situations. While efficient and energy-saving, it’s prone to biases and errors.

• System 2 Thinking: This is slow, deliberate, and conscious. It involves analytical and logical reasoning, requiring more cognitive effort and time. It’s crucial for complex problem-solving and decision-making tasks that demand careful consideration and evidence evaluation.

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Level 1 vs Level 2 Thinking Applied

In Southeast Asia, investors often apply System 1 Thinking to founders selling shares, assuming it represents a lack of faith in the business or an opportunity to grab cash. There are concerns that founders may no longer have sufficient interest in the business and could walk away at the first sign of trouble.

However, once a business has a repeatable sales process and the founder’s equity stake holds significant value (in the millions or tens of millions), it’s time for investors to switch to System 2 Thinking. The relative percentage of equity held by founders becomes less important, and what matters more is ensuring that founders are taking the right risks to scale the business.

If founders are constantly under financial pressure, they may accept the first acquisition offer that comes along, which is unlikely to optimize long-term value. Ensuring that founders are financially stable allows them to focus entirely on growing the business, rather than their personal financial concerns.

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Conclusion

The attitude towards founders not selling into secondary offerings is rooted in heuristic thinking and a misunderstanding of what’s important at each stage of growth. Allowing founders to take a small amount of secondaries in late Series A or Series B rounds can provide them with financial freedom while keeping them motivated to push for long-term success.

It’s about creating a balance that benefits both founders and investors without prematurely enriching the founders. The key is to ensure that founders are financially stable but not financially complacent, optimizing for long-term success.