How Venture Capitalists Pick Startups | Rajeev Mantri, Navam Capital

Transcript

Speaker: Rajeev Mantri has spent years backing more than startups and now runs a fund at Capital.

Speaker: For him, startup investing is a lot like poker. You make a bet before you know how the hand will play out. Sometimes that means backing something early like Agnikul and its rockets. On this episode of Founder Thesis, Rajiv tells Akshay Dharth how he decides which bets are ah worth taking.

Speaker: We received messages on LinkedIn or email and so on from companies looking to raise money. We have invested in companies like that too. You are the first VC who has told me that you have invested in response to cold outreach.

Speaker: Welcome to Farmer Thesis Podcast, Rajiv. You're the founder and GP at Navam Capital. ah You know, I always find it interesting to ask a VC to pitch. So I want you to give me an elevator pitch on why I should care about what you have to say about VC. In the next two odd hours, we're going to talk about VC and the world of VC and you teach a course on it also. But Before that, what's claim to fame? What are your credentials?

Speaker: Hi Akshay, great to be with you today on the founder thesis. So I started my career in venture capital about 19 years ago now and have basically never left the field.

Speaker: I trained as a materials engineer, material science and engineering at Northwestern University in the US and stumed inulan stumbled into ah VC investing right after college and essentially have ah ah been in the same domain now for that period of time.

Speaker: So you you were first doing in the US? that' That's right. I was working at an American deep tech fund called Lux Capital. So I started my career at Lux and ah then moved to India and been working in India. When did you move to India?

Speaker: About 17, 18 years ago now. Okay. But Navam Capital is a new fund, right? relatively new fund. Yeah. So we have raised our first third-party capital alternative investment fund, EIF, ah recently.

Speaker: So prior to that, we were investing own capital essentially. And ah ah this is the first fund structure we have set up. The fund held its final closing at about 315 crores in February of this year.

Speaker: Own capital as in it is like family wealth. Which you were investing But I actually love our own company, yes. Okay. What company is that? That's what we call North Capitol. And what does it do? Like, what's the source of the wealth? Like, what business is it in?

Speaker: So our family started in the the tea garden business about seven decades ago. ah So in the family, we had tea gardens in Assam. Then my father went into equity trading, equity broking business in the 1980s, 1990s.

Speaker: So family business essentially has been in financial services and stock broking for better part of 25-30 years. And ah when I returned from the US, we essentially set up like a division to invest in unlisted companies.

Speaker: So about 16-17 years ago when I started doing this, it was quite unusual. and And now of course, a lot of ah family offices and even um mainline stock market investment companies and so on, everyone is looking at unlisted very seriously.

Speaker: But when when we had started doing it, it was quite uncommon. I think at that time, there would have hardly been any deals also. well like what What would you have invested in? like you Like legacy businesses which were not listed yet, something like that.

Speaker: Actually, there were all kinds of startups coming up in India, but most of them, I would say, were essentially emulating, ah copying, imitating ah Western business models.

Speaker: So if something started working in the US, there would be a clone of that company in India. ah So, ah you know, if you if you dig back long enough, you would read the history of that period. So you would find a a clone of Google in India, a clone of Expedia in India, a clone of digital a advertising networks.

Speaker: Flipkart was essentially like clone of Amazon. And yes, Flipkart of course was emulating Amazon. So many of those companies have a kind of shut shop, but some of them have really aired out of the park. Flipkart, of course, being one of them.

Speaker: ah And there are a few others as well from that generation. MakeMyTrip was another successful company, which is still around. ah so So that was the era in which I think India and Indian entrepreneurs were primarily looking at like a copy-paste for lack of a better framing.

Speaker: ah And the that was the world you were living in. i mean, this was still... ah For the most part, a country which was living on dial-up internet, um but of kind of relatively slow speeds with broadbra broadband internet or non-availability of broadband in most parts of the country.

Speaker: Even in metro cities, the broadband was not really reliable. And the often like ah you know foreign attorneys like myself would get frustrated with the quality of internet in the country.

Speaker: But of course, the generation of entrepreneurs who build companies in those types of non-supportive environments really hats off to them. Of course, digital payments is another area which is a recent phenomenon.

Speaker: Prior to digital payments, and today we all take UPI for granted almost, ah but it was a very, very difficult task to get paid online. Yeah, i mean, Flipkart had to start that whole cash-on-delivery process.

Speaker: Cash on delivery, that's right. i right so So credit card penetration was very low, continues to be quite low. ah It was extremely low and now it is ah somewhat better, one can say.

Speaker: And that's why companies like Shepcart started accepting cash on delivery. And that was a different era actually. And yes, like you mentioned, there were only kind of ah ah those types of business models and ah startups to choose from when one was evaluating companies.

Speaker: But we've always kept a very consistent focus on finding and investing in IP driven and engineering driven startups. ah and And we invested in a handful of such companies in the 2010 to 2020 era, I would say.

Speaker: and And this was a period in which there were not too much activity in the deep tech domain. Because most startups were in the digital ah category or or software and online marketplaces.

Speaker: To some extent, SaaS type of businesses were there. ah But yes, today, of course, it's a different landscape altogether. I think last four to six years, I've seen a shift which few people would have imagined.

Speaker: how is So you've seen both yeah your family businesses in public market investing. You have been in venture investing or private market investing. ah How is it different? Who, like VC as an asset class is for what kind of investor?

Speaker: So some of the distinguishing nature or distinctive nature of unlisted ah private markets is that there's ah no there's ah obviously illiquidity attached to it.

Speaker: and And of course, the other distinction between public and private markets is that in public markets, there is a certain regulatory oversight on the company itself. The company is required to do certain standard of reporting, corporate governance and so on.

Speaker: But in private markets, it is more of a buyer beware market. So private limited companies are obviously run very differently compared to how listed companies are run. But ah who is like who who's that asset class for venture investing? Who should think of putting money into private market investing either as an angel investor or as an LP? An LP is basically the person who gives money to VC funds. So you have raised in 15 crores from LPs. so who

Speaker: like Who should think of becoming an LP of a fund or becoming an angel investor? So anyone who has substantive surplus liquidity or investments along with ability to not ah require access to that invested capital for a prolonged duration of time ah should look at this asset class.

Speaker: So for those who are seeking liquidity, those who are seeking safety and high security of capital, ah this may or may not be the best asset class because one has to choose carefully in VC.

Speaker: Compared to ITs or ah mid-cap and large-cap companies. i mean, those are relatively, i would say, more secure in in the assets that they are.

Speaker: but But why invest in a VC category at all? It's not liquid. It is high risk. ah Does the return profile, has has India shown that VC written return profile is better than just putting your money in an index fund?

Speaker: So, you know, index fund would give you 14, 15%. Does VC give that kind of return to LPs? So the other side of the coin is when we look at illiquid markets, those markets can also be inefficient.

Speaker: right So so where where there's liquidity where there's high liquidity, there's also better price discovery, better eff efficiency in that market and hence the returns are also commensurately harder to achieve.

Speaker: Second part of it, which you mentioned, ah which is the risk factor. ah So in the Chinese language, I think, in Mandarin, risk and reward are kind of expressed in the same way.

Speaker: And I would say, okay there's there's one word for both. Okay. Kind of, ah it is expressed in the same symbolic way. So there's risk that also is small. but But the caveat I would always add is that venture capital is a very high dispersion asset class.

Speaker: So, for example, what that what I mean by that is that if you if you were to invest in, let's say, the top 10 banks in India ah ah or the Nifty Bank Index, for example, ah chances are you would get a predictable return within a certain bounded kind of range.

Speaker: Like on the lower side, ah you know maybe maybe it'll go to an FD return, but probably can't go much lower than that. And on the upper side, maybe it'll 15 to 17%, but much can't go much higher than that. In venture capital, what happens is, and the reason the asset class is both sort of appreciated by investors who have selected funds well and also not appreciated by people who have burned their hands,

Speaker: is that there is no so there is ah very few things, there are very few investments that are worse than a poorly run venture fund, if I can put it that way. okay So ah venture capital funds are… You will not even get your capital back.

Speaker: They did ah poorly run funds do end up eroding and destroying capital. ah They would often be expensive in the fees that they charge to investors. And they would also ah maybe not me that meet that high performance benchmark, which one expects to achieve given all the risks and illiquidity factors that are attached to it.

Speaker: so so Which is why it is it is a specialist asset class. It is not meant for everybody. Probably most people should not be investing in venture funds. and And hence, obviously, there are regulatory kind of ah safeguards as well to ensure that.

Speaker: I think the the point that you're trying to make is that because of the illiquidity, it can be extremely bad, but also it can be much better than what you've done.

Speaker: It does bring its pricing in the market. um There's a counterpoint to it, right? Yes, of course, the stock, even the the the instrument of the security could be illiquid because there's no market for it.

Speaker: But then because there's no market for it, it also tends to get mispriced. Because as's for any kind of asset at the early stage, there only so many bidders in a given ecosystem. And and ah hence hence the assets tend to be mispriced.

Speaker: At least ah that is what the a logical conclusion of this would be. That where there illiquidity, there is a mispricing. And of course, one has to apply one's own knowledge, or filters, understanding to select the assets carefully.

Speaker: That is where the skill of a fundraiser comes into play. Okay. So a good, well-run VC fund can significantly beat index fund or market returns.

Speaker: ah That is the idea. so So, India, of course, is still a very nascent market for venture capital funds. So, formally, ah ah the alternative investment fund regulations were notified only about, I think, about 14 years ago.

Speaker: And the first few rupee capital ah venture funds, by rupee capital venture funds, I mean those venture funds which are raising money in India, not the dollar denominated funds which are sponsored by foreign investors and so on. Those have been around for longer.

Speaker: But the rupee capital funds in India have been around for less than 15 years. so So one can um ah see that there the first vintage of funds is just about finishing their investment cycle now.

Speaker: ah so So we have some very early results from that period of the venture capital fund. And what what do those results show? So again, it's a high dispersion asset class, right? And by high dispersion, you mean there'll be very, very bad performers?

Speaker: and And the poor ones are really poor. And hence, this is a difficult industry. um There's high mortality. ah not Not many funds get to fund number 2, 3, 4 and so on.

Speaker: ah Because obviously to keep getting capital from one's contributors and investors, one has to deliver returns. And when fund managers like us are raising capital in the market, these are the questions that constantly get asked to us regarding performance, regarding a risk reward, reason to invest in this asset class because obviously there is and number of other alternatives for those who have capital.

Speaker: ah They can put their capital into listed equities, they can put their capital into REITs nowadays, which give a pretty good the a fixed income type of ra return. REITs give 10-12% or better?

Speaker: In some cases, they've also ah managed to give capital appreciation along with the dividends. so So it's proved to be a pretty effective mechanism, ah pretty effective structure to park some share of savings.

Speaker: But ah like I said, from an India perspective, we are still early in the cycle of having ah venture capital industry grow here and having a domestic VC industry kind of come up in India.

Speaker: ah Whom did you raise ah this 315 crore fund one? Whom did you raise it from? So, um our fund has been backed by some prominent tech founders, large family offices, ultra high net worth individuals, corporate treasuries and so on.

Speaker: So we have raised almost entirely actually rupee capital which is something I'm quite proud of. So, you know, when you said this is a high dispersion market, so um the the challenge for someone who's building a VC fund is to convince the the people with capital that I will be on the higher side of that high dispersion, not on the lower side.

Speaker: ah How does one do that? ah So um the track record gives some evidence. ah ah So your ah family office, ah the the personal wealth that you were investing, that you were able to show that as the track record.

Speaker: That was part of our track record, yes. ah Another thing is, of course, ah every every prospective fund investor evaluates the management ah management team, the fund management team of the fund to see why are they uniquely positioned to execute on this particular strategy?

Speaker: ah ah What is their unique edge in the marketplace? What the relationships? What is the network, etc., etc.? And ah ah we've been around doing this for some time in India. So ah we built good relationships. We have a certain position in the marketplace.

Speaker: We are known for doing deep tech. So I think all those factors helped us. So relationships matter from a deal sourcing perspective or even from fundraising?

Speaker: up So I would put it differently. i think I think when you're thinking of building a venture capital fund, you have to first build your own team well. so So the fund management team, the investment team has to be of a certain caliber.

Speaker: So if your investment team is good, you are then able to attract good quality founders because founders value investors who understand their business, who understand their product and tech and who understand, you know, ah who who can distinguish between one type of an investor versus another type of investor.

Speaker: So if you if you first build your own team well and frankly, what kind of a ah on a venture fund founder are you if you can't even build your own team properly, right? So I would say first you have to build your team properly.

Speaker: Second, if you have done that well, ah you would be able to attract good quality people who want your money. Because in many cases, it's a competitive world. ah Good founders have lots of options and often they will choose their investors.

Speaker: So you want to be the partner of choice to the founders who have choices. And if if you can do those two things well, the third thing follows, which is what gets around the market and people say this is the right fund to invest in because of these ah initial two factors.

Speaker: It's a chicken and egg story though. You're saying build a good team so that you attract great founders. But how do you do that without first raising money? so So it is a classic cold start problem, right? Every business, you know, faces a cold start problem.

Speaker: The venture business is no different. So that's where, I mean, spending time, like building credibility, we have we've fortunately been able to do that. And that we've got we managed to get together a nucleus of supporters, a nucleus of believers.

Speaker: and And that has grown into a fund now, which we are very grateful and but happy about. How much of venture investing is a science and how much is luck?

Speaker: Or is there a third factor also besides science and luck? In the investment world, if you talk to people who are you know serious private equity, bulge bracket private equity type of investors or public market investors, they always... Who would be bulge bracket? Like you're saying KKR Apollo?

Speaker: Yes. or who like Likes of Chris Capital, Warburg Pinkers, ah you know those types of large ah investors who are investing for multi-billion dollar funds, looking at like ah businesses where they are certain degree of maturity and so on.

Speaker: So those types of investors, even like listed market, public market, stock market investors, if you talk to them, many of them will actually scoff at venture capital for good reasons. ah Because from the outwardly, ah you know, this perception is always that, ah you know, these fellows are just speculators.

Speaker: They put money into 50 companies and two of them work out and then you go to town type of kind of bragging about. Yeah, power law. Yeah. Yeah. making those like LinkedIn thing posts about you are successful at it and so on and so forth.

Speaker: So there's a certain degree of like in the within the bigger kind of asset management industry and investment world, there's a certain degree of sneering which goes on that these VC fellows, what do they do? They're just like talking.

Speaker: but but But there is a genuine, I think, a method to the madness. I mean, if we if we study the venture managers who have done well over time, who have consistently delivered good returns, there is a certain method to the madness. There is a certain process.

Speaker: can you Can you name two, three venture managers that you really admire who have done well over time? so So, there are two funds, one of whom I've had the privilege of working with, working at Lux Capital.

Speaker: So, when I was there, it was a 100 million fund. Today, they're managing an AUM north of $7 billion. So, they've owned 70 times in the last 20 odd years. And ah i know that And I have seen how they work on the inside. I mean, ah they are very much coming from the same level of discipline, same level of capital ah allocation um ah mindset, which ah good quality investors do in whichever asset class they are.

Speaker: So Lux Capital would definitely be on high on my list like that. And another fund I really admire lot is another American fund called Union Square Ventures. So UnivSquare Ventures really stands out because they have delivered north of IRRs decade after decade.

Speaker: decade after decade So they are really good at what they do. ah They have remained kind of like focused on venture capital. Unlike many other funds which have gotten bigger in size, they have kind of increased their AUM to absurd degrees if you ask me, like multi tens of billions of dollars.

Speaker: They are practically not really doing venture anymore. They are doing all kinds of multi asset class investing. So um very, very large asset management companies at this point, frankly.

Speaker: ah but But USV I really admire because they are stuck to the craft of venture and they really practice that craft very well. So, so um and and and I think if you do that well in an ecosystem like the US, like I mentioned, they were north of 50-60% IRRs, which is simply phenomenal.

Speaker: In India, the government's data, unfortunately, is less visible. So I can't think of too many Indian firms. And frankly, like I said, the Indian industry is also very, very at a nascent stage even now.

Speaker: Like just the first few early funds are reaching a point where they are delivering full returns after 10-12 year cycle. So we'll have to wait a bit more to see how things have played out. So the reason why a venture fund is able to deliver 50-60% IRR is because it is playing in an illiquid market. Therefore, assets are mistriced. Therefore, it can find ah great value buys. Like, you know, it can come into deals which are mistriced.

Speaker: So that is correct. But i would say that's like a a very financial perspective I gave you. Let me give a different perspective, which is... ah which is that venture capital is a core engine for funding and supporting innovation in an economy.

Speaker: We've seen this over and over again in the US context, ah ah stretching over four five decades, that entirely new industries have been seeded and funded by venture capital investment.

Speaker: So ah whether it was the computer hardware industry, then software, ah then internet, then the whole Web 2.0 wave, then of course clean technology, a biotech as a category was created by venture capital actually.

Speaker: There is nowadays also of course lot of interest in semiconductors. Semiconductors too were ah backed by the early venture funds in California and and that's where they got off the ground.

Speaker: ah so So the entire kind of technological world that we live in has been funded by VC money. Now that's not to say that every VC fund is going to be successful.

Speaker: Like we discussed, a high-dispersion asset class. But at the end of the day, I think a VC ecosystem is crucial for any economy, for any country to build its own capacity in technology, to build its own autonomy in technology.

Speaker: but Yeah, I mean, yeah, of course, but, you know, I am a capitalist at heart. So the they're doing good part of it is like, you know, yeah, I mean, yeah, I agree with you, but that's not why you would start a VC fund, right? the the the the the I mean, every fund manager is looking at being on the upper side of that dispersion. Yeah.

Speaker: Okay, ah so now you talked of the craft of VC and USV as a company that you admire for how well they practice the craft of venture investing.

Speaker: And you yourself teach a course on the craft of VC or the craft of venture. What exactly is the craft of venture? like How would you break it down? like These are the elements, for example, like an investment thesis or a portfolio strategy. or like like you know What all comes into that, ah the craft of VC?

Speaker: um so the course i teach One of the core ideas of that course, which I teach at ISB at Indian School of Business, ah is that ah ah value investing the principles of value investing apply just as much to venture capital as they do to other asset classes.

Speaker: So in other asset classes, obviously there are well-worn ah processes and principles which are frequently implemented by asset managers, but that is less well understood in a VC context.

Speaker: So first, ah ah tell my audience what is value investing? So it's a very simple idea. You buy something for less than what it is worth. That's all. Yeah. Okay, right. Mispriced assets where where you're buying on the lower side, not on the upper side. Exactly. So you're just you're just seeking and sourcing assets which are somewhere mispriced.

Speaker: And ah one of the reasons, like we discussed, the reason an asset can be mispriced is that the market is illiquid. So that's one of the drivers of mispricing. The other major driver, of course, or the principal driver, in fact, I could argue, is that these are ah technologies and products which are poorly understood.

Speaker: And that is arguably the biggest contributor of mispricing. So, um if if a cutting-edge technology is ready for commercialization, then there are only a handful of people who can actually understand the value and import of that for a prospect prospective customer, buyer, etc.

Speaker: ah For most people, ah they may not have the technical depth, they may not have the kind of knowledge or understanding to truly and to truly appreciate and underwrite as to why this is worth something to someone.

Speaker: Yeah, I mean, for example... the OpenAI, like Vinod Khosla invested some fairly large amount of money into what at that point was, there was no indication that it would become as big as it had. You know, it was just a bunch of researchers who were fooling around and nobody knew it would blow up the way it did.

Speaker: Or even Microsoft came in. But so what you're saying is their edge was that they could understand the technology and they could see the that this is a mispriced asset. Yeah. there is There is an element of um investing before the flop.

Speaker: Before the flop. Okay. What does that mean? so there's a flop, the return is a river, right? No, I don't know these terms. You'll have to explain them. Let's not go into that whole new tangent. No, no, no. Tell me. that I'm curious. I mean, I've played poker, but I've played poker in parties. I'm not a regular poker player, but I've played a little bit.

Speaker: And this is one analogy which one can use. So essentially, one has to bet on the fundamentals of what something could be worth. well before that is blatant or obvious to others. So in poker, in your hand, you have three cards and then... cards.

Speaker: Two cards. Okay, you have two cards in your hand and three cards you pick from the the common pool. Three and then one and The first three cards of the flop, then there's a turn that's the river. Okay. So betting before the flop.

Speaker: We're only based on the potential of those two cards. Yeah, so if you have a good hand... you cannot bet before the flop. You raise the stakes before the flop. Which, in a poker context, other people may not bet before the flop if they are playing the hand they have.

Speaker: And ah ah they're not feeling so confident about the hand they have. So, this is fundamentally what an early-stage investor does, right? Betting before the flop. a crude analogy It's a crude analogy, but one has to sort of have a certain variant perception, a different view of what something can become. Now why Vinod Khosla invested at that stage in OpenAI?

Speaker: Or why um you know Axel invested in Flipkart? Or why Sachin and Binny Mansal invested in Ather Energy? um you know What did they see in this company?

Speaker: which is today an electric vehicle pioneer pioneer in India. Like they invested this company 12-13 years ago when it was just basically, you know, two guys who are from IIT Madras and were trying to create something.

Speaker: So what did they see in that team? What did they see in that industry, in that technology? They definitely saw something. And ah ah at that stage, you could say it is absurd to give a valuation of X crore rupees to this. There's nothing here.

Speaker: Right. But but if you're taking a slightly longer view, which like which most funds are, which most investors are, you're underwriting the optionality embedded in that a group of people in that early stage company, which obviously we call a startup. Right.

Speaker: I love that, of underwriting the optionality. So ah by underwriting the optionality, you mean to say that you're putting money so that you have the option to put more money in back a successful startup. Does that does that what it mean or what is it? So at the very early stage, if if let's say a venture capital investor says this startup is worth 50 crore rupees.

Speaker: So a conventional, let's say a stock market investor or somebody else could say, here's nothing. People are sitting in a room, why is this worth 50 crore rupees?

Speaker: Yeah, yeah, yeah. But then there are certain inherent talents and capabilities which those people have. There's a certain commitment and fire and passion which those people have to do something to hit of the park.

Speaker: and And when those people stay on that track, when they execute on the um ah vision which they have set for themselves, which they have committed to their investors and so on,

Speaker: Magical things happen. We've seen this happen repeatedly now ah in in different markets, in different countries, in different industries. like Like I was mentioning, entirely new sectors which we live in today, which are part of what we call the modern world, exist only because of this format of entrepreneurship, this style of entrepreneurship.

Speaker: ah If this didn't exist, not none of this would exist. would put it that way. Okay, phenomenal. So, like, an early stage investor essentially needs to think like a poker player and, you know, needs to say that these are only two. don't want to post that analogy. Got I don't want to post that analogy. in a sense, I mean, if one is trying to get across, right, because how do you make judgments?

Speaker: It is always about, like I said, first principle is you have to find something or invest in something for less than what it it is worth or it could be worth. ah The second principle is a circle of competence in value investing. Circle of competence means we invest in what we know, what we understand.

Speaker: We don't invest in what we don't know and what we understand. And there is a limited universe of things which each of us know and understand, right? Like if tomorrow someone were to ask me about the, I don't know, coal mining business, I have no idea how coal mines run.

Speaker: ah um But I know a few things about some other industries. So there is that inherent ah value to specialization. That's what value investing teaches us. That's staying your lane.

Speaker: Don't get out of a lane. You know, stick to your knitting and get better. Yeah, like the the the guru of value investing Warren Buffett did not invest in any tech stocks till I think maybe five years back or so.

Speaker: Yeah, and and you know, Berkshay Hathaway has still done spectacularly well. ah Like a 60-year track record record of over 20% year returns. Nobody has. Right? Inside of them, we're saying all the tech companies.

Speaker: i For Ali Munger and Warren Buffett, their specialty really, if you look at the source of their returns, has been in consumer brands, retail, insurance, ah banking, ah and and and probably you can argue railroads to some extent.

Speaker: So of late, they've made big investments in all those categories. And some of these investments, ah which have done very well for them, they've held for decades. yeah well So um i think I think there is a lot of value to specialization, which is why we are a specialist venture fund. We don't invest in everything under the sun.

Speaker: ah Deep tech ah competence comes from both your education and the Lux Capital experience where you are again doing deep tech investing. Yes, so my training as an engineer definitely helped me a lot. I think it continues to help me. It was very difficult for me to get to that program. It very hard program, by the way.

Speaker: At least I found it very hard. Most of my classmates ah went into academia or corporate R&D and so on. ah ah it was ah It was a very competitive university as well.

Speaker: so So it was quite a challenging thing for me to sort of complete that program ah and graduate from Northwestern, if I may say so. ah ah Then, of course, ah as valuable to me in my early phase of my career ah as the ah training at Northwestern, the Lux Capital Sting was probably as valuable to me.

Speaker: Because um I really got to learn from there how to source, filter, think about investments. I had some terrific people that I got to work with and learn from directly. So it was it was really transformation transformational for me.

Speaker: And Lux was also deep tech focused or you were deep tech focused at Lux? It was and continues to be a deep tech focused one. Okay, got it. Okay, so second principle, circle of competence. What else?

Speaker: ah So um third one kind of ties into the first one that one should never overpay. if you overpay for an asset that investment is DOA basically dead on arrival you can never kind of claw back or make it good again so if you misunderstand something if you overpay for it things don't work out very well so so I would say these 2-3 ideas are the key ideas ah and and kind of one doesn't need to be a genius or excellent at everything.

Speaker: One needs to stay focused on a few things, do them well, specialize in them. And I would say in comparison to public markets, one more distinguishing feature of venture capital is that it is what I would like to call an activist asset class in some ways. So activist in the sense that one doesn't write a check and tata bye bye, it doesn't end there.

Speaker: Because founders themselves don't... Unless you're a tiger global. so So, yes, but that is a different type of approach altogether where they've invested in lots of companies.

Speaker: ah Often over I've heard over emails, they could do they make and they trust transfer the money just like that. but that's a different approach. I mean, some people have done it ah successfully. Not too many people, i would argue.

Speaker: but But one has to be able to bring something of value to helping grow a business because that's what founders also seek from venture funds. Like they want early stage investors who can get them customer connects, help them out with different types of issues.

Speaker: I know it is often derided and mocked at that I'm the VC who's here to help. But then that's what good VCs do. I mean, they they know when to step in. They are sometimes asked to step in by founders and experienced VCs, good VCs do have that value ah to bring to the table, especially in an enterprise or B2B and B2G kind of context, the way deep tech operates.

Speaker: So most of deep tech companies will either sell into enterprises or will sell into government. And it helps to have ah funds who understand those markets. So, you know, ah one of the things I was going through your course outline where you were talking of finding investable spaces. What is the approach to find investable spaces?

Speaker: ah So we look for two drivers. In a nutshell, the first driver is policy change. So often policy changes throw up entirely new industries, which were heretofore closed for private parse participation or not available or illegal.

Speaker: right so So if we go back ah five, six years, the drone sector became legalized in India and that has led to a certain boom in drone industry. ah if we look again like around around four years ago during the COVID period the space sector was opened up to private participation So before the government formally opened space sector to private parts participation, the only space entity in the country, the entity authorized to do space business was Israel.

Speaker: Everyone else was basically disqualified from participating. But the government opened up the sector and commensurately there's been a major shift with all kinds of of activity ah bubbling up there.

Speaker: ah More recently, we've seen the opening up of nuclear industry. So, nuclear sector in India, nuclear power generation and nuclear medicine, all of those categories are now open for private parts participation.

Speaker: Earlier, it was the exclusive preserve of, again, government participation only. So policy is a major driver of you know where these new spaces open up.

Speaker: And the second driver of opportunities like that is technology. So technological change, which itself derives from fundamental advances in science.

Speaker: So so if you if you study what the research labs, what the cutting edge institutions today are working on, chances are at some stage, you know, 8, 12, 15 years down the road, that could turn into an investable technology.

Speaker: which will hopefully someone would translate into a product, which obviously becomes a business. So so those two would be the fundamental drivers of, I think, all opportunities.

Speaker: So policy change, technological change. How do you ah keep, see policy change? Yeah. I mean, just it's publicly available information, but technology change, how do you keep track of that?

Speaker: um know There are many ways to do it. I mean, one can one can look at ah different types of scientific journals, ah magazines, which cover what's going on where.

Speaker: And in today's day and age, you know, these are easily accessible. You can be sitting anywhere in India or anywhere in the world and you can read if you if you so desire, if you have the time and effort and interest. You can read American magazines, American or German journals, Japanese literature, whatever you like.

Speaker: It's all a click away. Okay. the The researchers will typically want to publish. Yeah, every researcher wants to be published. So that that drive to get published is... Yeah. and of literature Those types of articles, even in popular science magazines, there's a fair degree of good quality output like that in popular science magazines as well.

Speaker: and ah And one has to be interested. I think that's all it takes, frankly. Right, right, right. So that gives you some indication of what's happening where. And ah then, of course, one can even travel to some of these places, right? so So if you if you are in the business, if you are if you're immersed in this world, you can travel to the top institutes, whether it's in India or abroad.

Speaker: You can talk directly to the stakeholders, to the scientists and technologists themselves and know from them, you know, where is the frontier, where is the kind of action at.

Speaker: Does this help define your investing thesis? Like my understanding of a VC fund is that one of the core things for a fund is to have a thesis, ah you know. So is this what leads to a thesis or like how is the thesis formed?

Speaker: No, certainly, I mean, one can get a a foggy idea, of how is how put it, of how things are playing out in different new domains. ah But the good thing about even having a foggy idea is because it's a new thing, no one has any idea.

Speaker: so if you have foggy idea, you are probably a little bit better off than the others. Yeah, true, true, true. So so that's the that's the ah fun part of this. that If you think you have no clue, well, guess what? No one else does either.

Speaker: This is not like a banking industry where ah you know there is an expert out there who knows it to the T. ah So in new categories, there are no experts. That's the beauty of That's the challenge of it.

Speaker: I'm curious that, ah you know, when I was doing my MBA 22 years, 24 years back, ah they would tell us about ah mission and vision of a company as one of the core things that you had to understand and whatever, which ah over the last 24 years, I've seen that, I mean, I haven't seen that being manifested in any way about the importance of mission and vision of companies. But every presentation which you had a case study, you would start with vision and vision of the company during my MBA days. Is the thesis also like that? No, I would say one of the one of the other things that I cover in my class as well and and I've written about this, that as an organization gets bigger and bigger, a certain degree of bureaucratization which happens, right? Like there's there are departments, there are hierarchies, there's corporate politics.

Speaker: So once all of that kicks in, Somewhere the germ and the kind of fizz which was there in a startup at the early stage, which is what made the company of a certain size after that success, that goes away after a point of time.

Speaker: And it's very hard to retain that kind of um agility as you scale up. and And what you're mentioning about, you know, those things become mere slogans. Like, you know, it's it's sitting there somewhere as a, ah maybe the company makes an annual calendar and there's a slogan somewhere on the calendar.

Speaker: But in practice, you look around and you wonder that is this really happening here? But that's just a function of size in some ways, I would argue. So size and human nature together kind of bring that ah ah state.

Speaker: and And one has to fight against it actively. it's like you have to, if you're not pushing back against it, it consumes you. So which is why there's a certain premium always placed on founder-led organizations.

Speaker: So founders, owners have certain agency over the organization. They can kind of do things which a pure professional person who's there purely in a managerial capacity or whatever, may not be able to take those type of the decisions.

Speaker: Okay, got it. So once you've identified, the like say, drone ah as an investable space, then what is the next step?

Speaker: I would argue it works backwards. I would say it works backwards when I start with the end need. So there are certain fixed or new and evolving needs too. There are in some cases fixed needs and in other cases it could be new new and unmet me needs which are there.

Speaker: And then you have to work backwards as to how can this new technology fulfill that requirement. Instead of trying to make the technology fit the world, you have to find a problem somewhere which will get addressed addressed with drone use for example.

Speaker: so So that's how I think founders think like that. And I think high quality entrepreneurs go ah are are led by the problem set. They are led by the problem and they use the technology as a solution to an existing problem.

Speaker: Because it can be quite challenging to actually take a technology and then you know look for a problem which can fit into that solution. Like that's that's I would argue so like inverting the whole process.

Speaker: ah Which is why a very early stage, when let's say a company is getting incubated or just incepted, a founder has to really carefully think of who is this for? Who I making this work? Like if you develop something in isolation, you might find that no one wants this.

Speaker: And that's the worst possible thing that can happen probably. So what you want do is you want to spend time with the prospect, learn listen to them, hear from them, what their issues are, how this new technology or new product that you're proposing to develop, how that can solve that issue.

Speaker: And when that matching happens is when the magic happens. But, ah you know, typically investors have their own ah identified the spaces where they actively seek companies. So,

Speaker: um No, we have we have a kind of certain categories where we are more interested, less interested, but we frankly don't have any fixed ideas. i mean, ah sometimes like people do ask that, what is your view on this?

Speaker: and And frankly, we are there getting educated by operators, founders. I mean, we are not making it up, right? Like, a at naum neither am I nor my colleagues. We are not ah working in the field. So frankly, we...

Speaker: have an even worse idea than ah ah those who are actually doing it. So we constantly get educated by our own experiences, interactions with founders. I mean, ah we we obviously have certain views on why something can be better than another thing or why a particular industry is more attractive or less attractive.

Speaker: ah but But there are no, I would say, no hard set or specific ah ideas like that. Okay, this is the thing we want to do with drones. this is the thing you want to do Because frankly, if you're not doing it yourself, you probably can't fully understand, appreciate ah you know what the customer really wants.

Speaker: Having said that, we do hear from industry, for example. In our LP base as well, we have some of the largest businesses India, some of the largest business owners, promoters who are LPs with us.

Speaker: So we hear from them and they too are operators. We hear from them what the challenges are for a particular thing in their domain. And and and that gives you some idea that, okay, this is a recurrent problem in this industry.

Speaker: So maybe someone addresses it. It could be something breakthrough and valuable. You have this concept of the value chain mapping, which ah which is supposed to help decide where to place your bet ah within a space. so So help me understand what is that?

Speaker: So every every sector, every category has some value chain, right? So um it's it's just about figuring out where in the value chain the maximum value could accrete into.

Speaker: Give me an example. Like say Space Tech, within Space Tech, what would be the... So as of now, it's the launch service providers. If you look at the state of play right now, it's basically launch service providers and even within the launch service providers is one company actually.

Speaker: Which one? That's SpaceX. SpaceX, by far the most dominant launch service provider. So you're saying in the space industry, the launch service provider is where all the value is currently being generated?

Speaker: As of now, that is true, yes. But but is there a science on ah this or like how did you arrive to this? Or it's just that you're basing it based on actual revenue, like SpaceX is getting all the money. Yeah.

Speaker: is your actual actual What has happened in the marketplace last 10-15 years? but but But when you're early in the market, when you don't have the revenue data, in that case, how do you decide where the value will accrue?

Speaker: So it is it is somewhere commonsensical, right? So to do anything in space, first you have to get there. So how will you get there? Well, it has to be a launchers product. If there's no way to get to space, then there's nothing else you can do.

Speaker: Right? so Let me ask you, in the ah model, in the AI space, you have the chips, like say NVIDIA, AMD, then you have the model builders, you have the data centers after chips, I guess, next in the value chain would be the data centers, companies, then would be the anthropics. And then the software and application layer and so on, yeah.

Speaker: Yeah, yeah. Then there's tooling and then there is like, yeah, applications. So in this value chain, where does the value lie? so So see, it's also highly cyclical, right? ah So right now, it's the inf infrastructure layer. I would call it the infrastructure layer.

Speaker: Like launch services is infrastructure layer. In some ways, you're building data centers, you need compute. That's the fundamental unit without which there can be nothing else. Like you can't have AI if you don't have chips. You can't have a space economy you don't have launch.

Speaker: It's as simple as that. So what will happen after that? We'll know... over time. But for the moment, that's been the case. I mean, there are some people who argue that the value will shift away from compute providers like NVIDIA into the application layer.

Speaker: Now, whether that happens in three years or 10 years, that's the kind of big question. Similarly, once you are able to kind of have rapid, reliable launch on demand, let's say we try to imagine a world where anyone can go to space anytime, then what happens next with that capacity?

Speaker: ah What kind of satellites would be launched? What kind of services would be available? and so on and so forth Could there be manufacturing in space? What is worth manufacturing in space and not worth manufacturing in space?

Speaker: do All those questions come to the fore. There is a fair bit of ah cyclicality also inherent in this where one has to gauge carefully how early are we or where are we in that ah developmental phase.

Speaker: I mean, if you had to place a 10-year bet within the AI value chain, where would you place it today? um So what we have been evaluating is companies which are going very specific and vertical into using artificial intelligence for particular problems. That's where I think ah even for a fund like ours, I think we can play in that category.

Speaker: ah Of course, like it some of this is highly driven by the size of your own fund, your own priorities and so on. ah So so we are we are also investing in semiconductors ah which build into AI infrastructure.

Speaker: ah We are investing in applications and software which are using some of the models for very very specific use cases and ah there's already a good degree of customer traction around those use cases.

Speaker: A measurable revenue of course. ah We can talk to the customers, they see the difference ah with the AI solution without the AI solution. so So, there are many ways to slice it. I would say one has to constantly seek feedback, talk to the right stakeholders, you know, kind of get information.

Speaker: I mean, in a way, as a venture capital investor, you're getting you you are getting paid to supply information to the market, if I can put it that way. Compared to ah public market investing where insider trading is kind of illegal, ah i I remember reading somewhere where you said that insider trading is like a feature of venture investing or insider knowledge.

Speaker: trading but that's why right look like so in the unlisted space one has to have one has to have that ah quote unquote inside knowledge like you need to know where the puck is going to whereas if you know that in public markets it it is a regulatory violation ah and and it's a complete inversion of that in private markets where you are supposed to know that if you don't know that you shouldn't they have no business investing here actually yeah okay I also remember reading about the the adverse selection problem in VC that the the deals which come to you are the worst deals like like just help me understand that like how does deal sourcing happen in a VC fund

Speaker: yeah well So one has to always be very right. ah So there is this ah ah very of famous like theorem, I think.

Speaker: It was called A Random Walk Down Wall Street or something. and That was a paper or book. Yeah, it was a book. It was American book. It said you find a $100 bill lying on the street, you wonder is it lying there? it was an american books so it said if you find a hundred dollar bill rang on the street you' wonder why is it lying there How come it is lying there?

Speaker: And why are you the special person who's seen it and others have not seen it? Why has not been picked up as yet? So in a way, it's talking about the efficient market hypothesis that deals which are too good to be true are probably you know not real.

Speaker: There's some cash, there's some you know hidden cost attached to it. and And that's why, I mean, when one meets companies, ah one always asks that, you know, why am I the preferred partner of this company?

Speaker: And, you know, what makes us so special? Or what makes us so unique that we have found us? And is this too good to be true? Like, one has to always have that level of skepticism about any company.

Speaker: And I mean, of course, if you've been around in the field, you can sort of ah have a certain reputation, have a certain access, which a novel person or a random person may not have.

Speaker: and And that is what we call edge in this business. ah What really works when it comes to deal sourcing? I think word of mouth is the most ah underrated and most powerful multiplier.

Speaker: ah So this is a very gossipy industry for better or for worse. So founders will always obviously, as they should, do their due diligence on whoever VC they're talking to, whichever VC they're talking to, they always want to know you what has this investor invested in previously, what are they like to deal with you know are they good people are do they do they do what they say do they say what they do basic stuff like that I mean it's basic but not ah you know not everyone practices that unfortunately so so people do talk ah and word of mouth I think really matters reputation really matters

Speaker: And ah ah I think i think ah ah founder referrals and ah kind of people telling other people that, you know, we liked the way Navam has handled this or some other firm has handled it and the way they've invested in this company, supported this company in different ways.

Speaker: It has been great and that's why it's worked out. That is the most powerful, I think, endorsement one can have. yeah In a way, you're saying the referrals or warm introductions is the best way or the best deals come through.

Speaker: Yes. So um um that is one source, I would say. of For us, we have ah cumulatively over 20 companies now in our portfolios. That's like over 35, 40 founders.

Speaker: So of those 40 founders, they're all working in the frontiers of the knowledge industries we're interested in. And they will refer us to other founders who are working in similar areas Or those founders will reach out to ah portfolio companies of ours and ask those who are working with us that, you know, how have how has Navam been with to collaborate?

Speaker: And should we talk to them? And then things go on from there. So that's one. So second source is, of course, people also do a cold outreach to us. Like we we receive messages on LinkedIn or email and so on from companies looking to raise money.

Speaker: ah We have invested in companies like that too. you You are the first ah VC who has told me that you have invested in response to cold outreach. Most VCs whom I interview tell me that... can't run actually in this one. Okay. I mean, most VCs say that referrals and introductions is where the best deals are. and they yeah at to I mean, or the highest signal one.

Speaker: It is the highest signal source, I would say. But we've done one company which was literally a cold inbound on LinkedIn. ah it It converted into an investment for us.

Speaker: yeah Okay, okay, okay. Interesting. That's the second one. Third one is, of course, we stay close to the incubators, the institutions where many of our deep tech startups, ah our prospective investments in deep tech are kind of um ah ah being born and being nurtured.

Speaker: So we stay close to those institutions and entities and we maintain close links with them. That's the third one. Fourth one is also, again, we hear about companies from people we know in the industry. industry So often, let's say, if if a particular company is working with someone we know and see the oil and gas industry, so they'll tell us that you all are investing in deep tech.

Speaker: This is a particular company, which is, let's say, bringing some degree of, let's say, industrial automation in oil and gas or robotics in oil and gas, you should talk to them. and And that also tends to be a very good validation because this is a prospect prospective user, a buyer of the product who's telling us that the good company.

Speaker: so So that's i would say the fourth channel.

Speaker: and and and And then we've also collaborated frequently with funds we know well. We've invested with other funds in different rounds, in pre-CZ rounds, CDZ rounds, and so on.

Speaker: Is it important for VC funds to seek a strong public profile, you know, to be well known, to come on podcasts, to write a lot of stuff on LinkedIn and, you know, things like that?

Speaker: No, it is it is somewhat of an occupational hazard in some ways. ah But see, there are people who have done it without doing any of this, frankly. I mean, some of the best investors do nothing of this type and they are still, you know, ah done quite well for themselves over a long period of time.

Speaker: So there's it's not to say that this is required, but ah ah i think I think especially if you are, i mean, it depends ah which fund you're working at. It depends, you know, what you've done previously in your life and career and so on.

Speaker: I mean, if you're working at a very well-known brand name firm, then, you know, someone else has done that work for you, right? And today you are sitting that firm and business just comes in through the door. ah But if you are, a let's say, of a new venture fund, well, then you have to build that. You have to build that market presence.

Speaker: And what have you found as the best way to build market presence? um i think I think one should hone one's own kind of of understanding, knowledge, know-how and just in a candid and frank manner, say what do you think. I mean, ah like I'm not very active on LinkedIn, but I've been on X, previously known as Twitter for a long time. and i just like say what I think actually.

Speaker: i don't really curate or manage my social media presence. I mean, a lot of people tell me, how are you talking like this? Like, you know, what will people say? I'm like, yeah, it's like this. So we try to be kind of honest. And I think somewhere people may like you for that. Some people may also dislike you for that.

Speaker: But it's a natural selection, which over time will work to your benefit. If you stick to who you are. And frankly, it's also comfortable. I mean, you know, I'm not the type of person, at least, who can, you know, ah put out like inauthentic type of posts and say things which I don't really believe in. i mean, I pretty bluntly say what I think.

Speaker: so So it works well with some founders. It may not work with some founders. I obviously hear from the ones with whom it's working well. I don't hear from those who think think otherwise of it, but just as well.

Speaker: We're not here to please everyone. How do you ah balance the two different pressures? You know, one pressure is that ah you don't, I mean, you will say more no's than yes's and you know, you will have to be very, very skeptical. But at the same time, the other pressure is that ah the best deals are ah being chased by many other funds and, you know, the best the best founders are spoiled for choice and you have to, ah like like you have to kind of ah win that deal through speed, through agility, whatever. so So, you know, how do you balance these two pressures?

Speaker: No, I mean, see, we are we are very old school in our approach, I would say. We we do our diligence carefully. We take our time. ah We also stick to our commitments. We also expect founders to stick to their commitments.

Speaker: um And I mean, as long as we are doing what we say and saying what we do and another person is also doing the same, I think it makes for a great relationship.

Speaker: and ah ah and And being competitive in the marketplace, it comes back to basically bringing something else to the table as well. and And that comes through to a founder, to a sophisticated founder at every step of the interaction.

Speaker: So if you walk into a meeting, if you if you know something about the industry, if you are well-read in that domain, if you have done your homework, and if you are just generally curious, ah these things come naturally to you.

Speaker: ah So, so ah like, then then founders want to work with you. and And that is the only defense, frankly. Like a founder has to choose you in a competitive situation because they are also optimizing, especially at the early stage, when I do believe deals are less transactional.

Speaker: ah If you're raising growth capital, then somewhere, you know, it it kind of converges with a private equity style, more transactional approach, like who's giving better terms, who's giving better valuation and so on.

Speaker: But in some cases, i do think founders will take money from an investor whom they like even at a slightly lower valuation if that investor has you know got a certain reputation has convinced them or impressed them in some way and it's not easy right like imagine you are saying as a VC you are able to create an impression on a founder who is spending his whole life building in that domain How can that happen? I mean, it it sounds absurd, but good VCs do that repeatedly. And there are plenty of examples of such VCs.

Speaker: You know, there is a a portfolio construction strategy also, which is important for a VC fund. Help me understand ah the nuances of that. So, so um when when one is constructing a fund portfolio, ah there has to be, I believe, some concentration. because if you're not having Fundamentally, what is portfolio construction first? Like, very basically, you have to invest, you know, in in what is the a size of investment you're making?

Speaker: the allocation to each company what is the sector strategy like are you over indexing on a particular industry because that brings its own kind of risks of course that if there's too much capital let's say riding on ah semiconductor sector and something goes south in that industry then it can affect the fund's performance So there is certain like sector focus, stage focus, bed sizing, like investment sizing one has to do to make sure that for a given fund, there is at least a few companies in there which can return the entire fund. every Or rather every company should fit that description that this company could potentially re return the entire fund for us.

Speaker: at the stage at which we entering and the size at which we are entering. So, so ah that really matters. I mean, ownership matters. Maintaining ownership matters over up our subsequent financings and multiple funding rounds. So, portfolio management is a bit different, I would say, again, from a public market context because in public markets,

Speaker: One has always got the comfort of exiting tomorrow morning. At least in mid-caps and large-caps, more or less that comfort is there that if things really do not work out for some reason, then one can sell the shares and you know get your money back.

Speaker: But you don't have that luxury in unlisted space, of course. so So one has to be appropriately careful. ah But how do you decide then that what will be my investment per company?

Speaker: How many companies will I invest in this fund? Like, just take me through for Navam, how did you decide that? How many companies will you invest in? Tech sizes? shows Sure, sure. Different funds will do it in different ways. There will be funds who say if we have 100 rupees, we are making 200 investments.

Speaker: ah Or 100 investments. you know like They'll put 1 rupee into every company. And have a very, very diversified ah like almost like trying to index a particular category. like All the consumer tech companies which are founded You know, most of them we want in our portfolio or maybe not all of them, but a good percentage of them, which the manager thinks are ah quality enough, they all get like a small check.

Speaker: And you you're kind of basically saying that ah even if half of them don't work out, a small fraction of them will hit it off the park and become like flip card or whatever.

Speaker: of that era. So that's one way of doing it. Like you do a, I mean, it is a, in a derisive way, it is called spray and pray. ah But it has worked for many funds and nothing wrong with that. I mean, ah but, but I do feel that it is better to take a more selection based approach.

Speaker: where you have some filters, you're looking for certain things, certain attributes in the product technology, founding team, target industry. And we particularly feel comfortable where ah there is a clear opportunity for us to sort of bring something to the table.

Speaker: ah So we actively cultivate certain types of sectors and we are seeking companies in those sectors where we can bring some plus-plus in support of the business.

Speaker: ah so So for sure, I think it makes sense to select companies and select one. It goes back to the idea of circle of competence. So if we are if if we are good in certain areas, we want to invest more in those areas.

Speaker: So the the selective portfolio strategy would mean instead of one rupee per company, you do 10 rupees into 10 companies. Yeah, yeah. Like 5 or 10 rupees and 15, 20 companies. Let's put it that way. I think there is also a demerit to being over-concentrated. Like for, let's say, if you have only 5 companies, I think that too is a certain risky approach, which at least we are not practicing.

Speaker: ah but But I do think that there is a merit in having, let's say, a 5 to 7% allocation per company over a period of time and sticking to that.

Speaker: And how do you, ah what about the strategy in terms of how much will you invest in your first check and then will you also participate in the subsequent funding rounds? ah When will you look for an exit? Will you so hold all the way till IPO?

Speaker: Tell me about those decisions. so So that tends to be get driven by the fund life. ah So every fund has a finite life. So it's driven very much by the life of the fund, how many years are left.

Speaker: ah Our fund typically invests a certain amount and reserves almost equal amount of capital for follow-on rounds. So 50 rupees into the first check and then another 50 rupees to back the winners.

Speaker: Yes. So, so so ah ah like I said, part of portfolio construction is having capacity to do follow-ons. ah And in some cases, ah even ah sort of ah on an average, maybe some companies will be less than the average investment per company and some will be slightly higher.

Speaker: So that's also fine. ah But I think having some reserves is ah always a good thing in this business because especially as a lead investor, you want to be able to invest and reinvest in a company over multiple rounds.

Speaker: And this 50% for backing the winners or for follow-on, is there a like a logic behind it? Or it like, is it typical that most funds would do 50-50 or like, how is that?

Speaker: Some funds do little bit lower, some do a little bit higher. It depends again on the um ah own strategy of the fund. I mean, some funds are heavily investing in the commitment period and they may or may not invest in follow-ons, which they make clear to a company which is raising from them.

Speaker: That they only invest, let's say, a certain chunk in the first 3-4 years and then they don't invest anymore. ah so So, I think ah it really depends on the unique approach which every fund takes.

Speaker: But as a general rule, I think it's fair to say that above a certain size, every fund will reserve at least 30-40% of capital for follow-ons. Okay. And why is it important to reserve money for follow-ons versus putting it all into first hits?

Speaker: Okay. So one of the things is if you are coming in early into a company, chances are the pre-Series A company will raise a Series A or a Series B at some stage. And, you know, the Series A, B, C rounds, multiple numbers of the funding will happen.

Speaker: Especially if the company continuously growing, it will receive that growth capital. And one wants to retain ownership. As the company grows, as the business scales up. The second part is obviously there's a certain certain signaling risk. So if a major investor in a company is not investing in the follow-on financing realm, it does send you as to why is this investor not investing.

Speaker: So um I would say it is almost like a ah ah kind of negative signal if a major investor is choosing not to invest.

Speaker: but Why is maintaining ownership percentage important? Because I mean, the way I look at it, you bought an asset ah which was mispriced ideally, and ah you bought it at 100 rupees. Today it's worth 1000 rupees. So you've made a 10x. Why does it matter that how much ownership percentage it denotes of the company?

Speaker: no So, um having sufficient ownership i mean to drive overall returns for the fund. I mean, the presumption here is one goes in with a conservative, this thing, that not everything will work.

Speaker: Or not everything will work spectacularly well. So, when something is working, then you want to have sufficient skin in the game. You want to double down. Okay. Holding in that type of business.

Speaker: Because the production here is conservatively, maybe everything will not work. We have to go with that. I mean, we are obviously making an effort to do as much as we can to do well with every company. But over a three to five year period, i mean, there are all kinds of things that can happen.

Speaker: So, which is where we come to that term of underwriting options, and the underwriting optionality. Absolutely. so So, basically, you are buying options too. please come I mean, even things like founders can split up. There could be acrimonious founder breakups, which have also, you know, well-known things have happened like that.

Speaker: so So, I mean, all these are risks for a ah a company, right? Like, if a promoter group splits up or a founder group splits up, well... When you went into the company, or a certain understanding that okay this person has this, the other person has a different role and so on.

Speaker: ah But over a period of time, i mean relationships relationships can change. i mean This is a very people-centric business too. So we've talked a lot about ah the market, the the space and opportunities within spaces. ah Now, if you zoom in ah to the people who are pitching to you,

Speaker: How do you evaluate them? How do you evaluate a founder or a founding team which is pitching to you?

Speaker: um we We try to see if there is a good kind of matching between ah the product technology a sector in which the founder is trying to work and why they uniquely qualified to do well in that area.

Speaker: so So like a founder technology fit. Yeah. So it could be that they have certain academic training or certain industry experience or certain special knowledge from some source. ah which comes across in interactions where you can say, okay, this person really knows what they're doing in this domain.

Speaker: And hence, they are kind of worth partnering up with and supporting. Okay. So essentially, founder market fit is the basic. Yeah, that's what it's called. the I would say that's like very crucial at the early stage.

Speaker: And then, of course, general characteristics of the industry. I mean, there are some industries which are bad industries. ah so So, you know, there's a whole there's ah there's a famous ah ah Warren Buffett quip that ah he said, if you have a good manager, a good executive, run a business which is in a bad industry, it is the industry which retains its reputation.

Speaker: yeah That's a nice one. Okay. So again, this is another idea which ties in from value investing in public markets to value investing in private markets and startups.

Speaker: ah People who want to work in VC funds, what's your advice to them? What kind of skill sets would you like them to cultivate? you know When you are hiring someone to join your team, what are you looking for?

Speaker: So there are many different functions actually which are there ah in the operations and the management of a a venture fund ah asset management company.

Speaker: I would think of it as there are essentially three things. right So think of it like three legs of a stool. The first is fundraising, where every fund has to raise money, right? Otherwise, what else do what do you invest in?

Speaker: So, we also are going to the market, we are talking to um um ah prospect prospect prospective fund investors, we are making up it as to why we are the fund which they should be investing in among um among a litany of funds out there. There are so many funds which are all saying that, you know, we are the right entity for our strategy, right? So,

Speaker: We are going in front of fund contributors. We are making our case. So fund raising is a big part of running a venture business. The second part is, of course, the lesser known underrated part, which is the entire fund operations.

Speaker: So fund operations, finance, accounting, administration is a major piece because a fund is a regulated entity. So as a licensed regulated entity, ah there's a certain degree of reporting, compliances, accounting standard, which have to be continuously met.

Speaker: And that's a whole job by itself. So there is a team which is required to sort of execute on that in a regular fashion. And third piece is, of course, which is most visible and most known to the outside world, which is the actual job of selecting startups, ah building a portfolio.

Speaker: The analyst role. basically all the fun stuff at least I would say fun stuff is the thing which we want to do when we get into the venture business but then with that we have to do these two other things which are also very important so I would say the easiest part to break in into venture capital industry is in the operations and finance part Because there's always like things to do.

Speaker: ah There are certain skills which are very, very crucial to have. And capacities one has to build inside a firm to do that part of operations, finance, accounting, reporting, investor relations, do it well.

Speaker: ah and And the other two parts of are slightly more challenging. So fund raising, of course, you have to know people to raise money. But then how do you know people who' not been in the industry?

Speaker: And similarly, ah getting access to deal flow, getting to know what is happening where there too, it's a cold start problem, classical cold start problem. But if you've not been inside the industry and spent sufficient time here, people don't know you you don't have you, you don't know anybody. And hence, it's hard to break in.

Speaker: So it's it's a classical, i would say, apprenticeship type of business where you have to spend time in it to get a ah grip on all of these other pieces. ah So in a sense, ah to start a venture fund or to be in a decision-making investing role in a venture fund, one has one has to either raise money or find avenues to deploy that money. There are really only two roles in that category.

Speaker: Yeah, yeah, yeah. If you can raise money, if you can deploy it well into... But raise money is not an entry-level role, right? I feel like that would be what is the GPs... Like you said, you have to know people to... Why should people give you money, right? Why should someone invest their capital with you?

Speaker: ah They have to have a good reason to do that. So again, it goes back to a certain chicken and egg problem ah that if people know you well over a period of time, if they've seen what you've done, then maybe they'll trust you with their hard-earned money to invest into other What kind of salaries do analysts get? Like an analyst would essentially be more on the deployment side. ah Yeah, so so typically an analyst would be supporting the investment team.

Speaker: So analysts would be working with partners in a fund, helping them intelligence, helping them with certain research, certain type of ideation, certain type of ah information, intelligence collection, and so on.

Speaker: And it really varies, frankly. I mean, it can be... Depends on the size of the fund. Yeah, yeah. Big funds pay like, you know, the analysts in large funds are better paid than the partners in a small fund. yeah Okay. Okay. Interesting. ah How do partners make money?

Speaker: ah so So, typically partners receive a share of the profit of the fund above a certain rate of return, which is called the hurdle rate. So, if the fund delivers a certain rate of return, then the partners get a share in the carry, what is called the carry.

Speaker: So, that is what actually fund partners are hoping for and playing for. Carry is the total return or is the return minus hurdle? Okay. ah So one has to meet the hurdle to get a share of the carry.

Speaker: Like to and to get carry, it has to meet a hurdle rate of return. okay Okay. So for example, like if you've taken 100 rupees and you are returning back 110 rupees, you will not get anything because probably 10 rupees would be the hurdle.

Speaker: But if you're returning 140... And there would be no carry. Yes. Okay. So if it's a 10-year fund, a 10-year fund has to at least ah ah triple its money, I would say. Double or triple its money for there to be, not even double actually, at least 3x the money for there to be any meaningful carry.

Speaker: And is this the only way in which, or what about a salary and stuff like that? How does a VC fund pay salaries? So there's a ah management fee income that fund managers receive. So that management fee income can be anything from, let's say, nowadays, I mean, 2 in 20 is what used to be the norm back in the day, but I think it's more like 1.5% on average.

Speaker: And that will cause there are other costs. although ah you know It's not that the whole 1.5% is available. So so ah I think it it it is not a business where if you want to kind of quote unquote get it get rich quick, it is not the industry to be doing that. It's a 10-year horizon at least before you... It's a long ah burn. It's a difficult business, competitive business.

Speaker: I think most people who are doing it actually do it for non-financial reasons as well. I'm just curious. like like So you essentially would be getting a management fees of crores from Navam Fund 1.

Speaker: What is the split of that? Where does it get spent? like What are the major... Every fund has some operating costs. I mean, obviously, have to maintain staff, you have to maintain, you know, your team, you have to pay other types of costs. So, one would be payroll. or Payroll is how much typically?

Speaker: ah See, it depends from fund to fund.

Speaker: Like I said, the ah I mean, ah we are also in the marketplace for talent, right? So, as a fund, you also have to get the type of people who founders will be excited, happy, interested in to speak to.

Speaker: right So you have to ah recruit that caliber of people. They have to bring something which is special to the table. And it's not an easy business. I mean, you know Tuesday you could be meeting a semiconductor startup.

Speaker: Friday it could be a climate tech company. It can be a lot to keep processing and understanding. And it's not for everyone is how put it. ah it can be It can be very quickly overwhelming if you're not interested in the domains that you're investing in.

Speaker: i think you have to be quite curious, quite ah naturally kind of, you know, a person who absorbs information, who's interested in reading, those types of things.

Speaker: Otherwise, how do you stay on top of all this? I mean, there's no way that a person would stick around. I think i think it is an industry designed for a certain type of weirdness. um I mean, one can do it, but it won't be effective is what trying to say. I mean, like I said, to be competitive and effective, you have to have that the connect with founders.

Speaker: And you can't have that if you're just passively there just doing something random. This was a wonderful chat, Rajiv. Thank you so much for your time. Thank you, Akshay. Great to talk to you.