Want Money Got Money with Sam Kamani

4: What is a VC's mandate? With guest Venture Capitalist - Hattaf Ansari, Part 1

July 28, 2020 Hattaf Ansari
Want Money Got Money with Sam Kamani
4: What is a VC's mandate? With guest Venture Capitalist - Hattaf Ansari, Part 1
Chapters
Want Money Got Money with Sam Kamani
4: What is a VC's mandate? With guest Venture Capitalist - Hattaf Ansari, Part 1
Jul 28, 2020
Hattaf Ansari

In this episode I interview πŸ₯ New Zealand based ex-VC, ex-Private equity investor -> Hattaf Ansari ex - New Zealand Venture Investment Fund.

This is the part 1 of a 2 part episode.Β 

He sheds light on following topics.

  • What is a VC mandate πŸ¦„
  • How did his Venture Capital firm select who to invest in
  • Difference between early and late stage investors
  • Working for a VC firm backed by government public money
  • Evaluating risk 😨

If you are a founder that is interested in raising money then this is a must listen episode for you.

In the next episode Hattaf will share what happens when things go wrong and general advice for founders. Part 2 will be live within a week.

Subscribe so you don't miss the next episode.

You can connect with him here:- https://www.linkedin.com/in/hattaf-ansari-14ba0b56/

Show Notes Transcript

In this episode I interview πŸ₯ New Zealand based ex-VC, ex-Private equity investor -> Hattaf Ansari ex - New Zealand Venture Investment Fund.

This is the part 1 of a 2 part episode.Β 

He sheds light on following topics.

  • What is a VC mandate πŸ¦„
  • How did his Venture Capital firm select who to invest in
  • Difference between early and late stage investors
  • Working for a VC firm backed by government public money
  • Evaluating risk 😨

If you are a founder that is interested in raising money then this is a must listen episode for you.

In the next episode Hattaf will share what happens when things go wrong and general advice for founders. Part 2 will be live within a week.

Subscribe so you don't miss the next episode.

You can connect with him here:- https://www.linkedin.com/in/hattaf-ansari-14ba0b56/

Want Money Got Money ep - 4 Hattaf Ansari - Part1

Sam Kamani: [00:00:00] Hello and welcome everyone to another episode of Want money got money. with Sam Kamani. 

[00:00:09] In this episode, I have done something different. 

[00:00:12]I have divided this episode into two different parts in first part Hattaf is going to share all about a mandate, a mandate of a venture investment fund on how they choose their investments on how they choose a founder on what makes them choose a certain startup over another. And in part two, he shares with us what happens. 

[00:00:38] When startup founders promise a result and they cannot deliver results.

[00:00:44] So without any further ado let's get into it

[00:00:49] welcome to the show. 

[00:00:50]Hattaf: [00:00:50] thank you very much for having me, Sam. 

[00:00:52] Sam Kamani: [00:00:52] this podcast is called one money, got money. This is the podcast for. Founders and entrepreneurs and investors. This is where we find out from founders, you know, what works, what doesn't work, and also from investors. we try and find out.

[00:01:10] What makes them choose one founder over the other, or one idea or the other, and just get some insights. So for those who don't know, I know from when he used to vote for , which is that New Zealand venture investor fund, and yes, at that, why don't you tell us a bit about like, What you do and how you got started, but also all VC industry and stuff.

[00:01:35] Hattaf: [00:01:35] You always want it to be in venture capital when I was younger. So I was involved in family businesses at a young age. So yeah. Was loosely understood. How has entrepreneurship worked and, got really lucky and got into private equity at a very young age at 23. So first job after university. And I got to understand how investments work, but on the more mature side of the things, you know, so investing in say, oil rigs, investing in say, you know, real estate.

[00:02:06] So really mature assets, but not really early States of back then, I was really, really excited.  The fact that I used to think about venture capital and it would really excite me because to me, venture capitalists are the rock stars of the finance world, because you've got investment bankers. You've got your people working at EYP UWC and venture capitalists are the ones that are actually taking the most amount of risk.

[00:02:26] And that's just something very enticing. And I don't think everybody is every, not everybody can be a good VC in my opinion.  And the other opinion I have is you don't need to be. Good at finance to be a good VC.  So some of the best VCs in the world, if you look at what Sequoia does, and if you look at, you know, how people got into VC, everybody's going into VC using their own.

[00:02:48] Like everybody's had a very interesting journey into venture capital. So some people go into venture capital by being a founder, a successful founder. And I think those are the best VCs because they've been through the journey. They've built the networks, they know the ups and the downs they've had to make payroll.

[00:03:03] So these are the best VCs because they can empathize. The felony, there are certain VCs there. They get in via MBAs, they do their MBA and they maybe have a background in investment banking when you haven't background in investment banking or private equity, basically really useful to a startup company.

[00:03:20] But when the startup company wants to exit in an M and a somewhere, so you're pretty useful there, but you're pretty useless in the early stage. Like literally you can't offer much value. . So, or you have, yeah. So there are three, three bats either you've gone in through the investment banking, private equity field, either you've gone in as a founder, or you were really lucky to get a job as an analyst when you were really young, straight out of university university.

[00:03:46]So that's the rarest. so my path. Was was a little bit convoluted.  The sense that I did have some PE background back in Dubai, and then I moved to New Zealand. I did my masters in investments from a messy.  And I did the research, which was, you know, very well recognized. I got pushing the journal of applied finance and I managed to get an interview.

[00:04:08] The CEO of . Yeah. Back then. And I was just in the right place at the right time. So I managed to luck my way in as an analyst. That was my.  that was my in. But if you look at say some people like Sequoia. 

[00:04:22] Sam Kamani: [00:04:22] Yes. 

[00:04:23] Hattaf: [00:04:23] So, cause this is something that I have all to do a known. Given a lot of thought to what, what is a good VC?

[00:04:28]so if you look at what Sequoia does, which in my opinion is the best VC on earth right now.  Some of their partners have had really interesting backgrounds. So for example, I'll give you two really interesting outliers and you can use used as this as a basis off. What a good VC is like, because you cannot pinpoint what a good VC is like.

[00:04:46] So one of the partners at Sequoia was an actuary. And he has a really good track record. And when people ask him, how is an actuary making such good investment decisions?  He basically said that's because as an actuary, you're trained to think 30 years into the future. That's why I'm a really good idea for VC.

[00:05:04]Right. And that's why I have an excellent track record. There's another partner at Sequoia who used to be a reporter business. Very good receipt partner. People ask her how, what do you think? Why are you such a good VC compared to everybody else? She's just because as a reporter, I'm trained to ask the right questions and to get down to the right, you know, basically the meat of it all.

[00:05:26] So I think in summary, I don't know what it could be. She is. but you know, it's just, in my opinion,   if you're a founder and you want to basically raise money from a VC and you don't know if the VCs go to bed, there is a couple of ways to figure it out. Really easy ways to do it. Firstly, you ask who's actually back to you as a VC, you actually have to.

[00:05:46] Someone has to back you because you're managing 

[00:05:47] Sam Kamani: [00:05:47] other people's money. 

[00:05:49] Hattaf: [00:05:49] Yes. So if you have, you know, a sovereign fund backing you, or if you have some really credible founders backing, you exited founders backing you, then you can basically say that these, you know, think to yourself, you know, someone's done their due to their diligence.

[00:06:01] These guys have done their diligence and they are comfortable with your networks. They're comfortable with your commercial acumen.  And you know, that's how this is. This is one way of figuring out second is talking to other founders.  because every VC will need to go out and they need to talk to lots of founders.

[00:06:19]And there's a famous quote. I read somewhere. It says a VC is reputation is not based on who you fund it.  It's big. It's who you've rejected. What did they say about you?  Right. When you've, if, if you go to a VC and the VC Dick, because if you go and you as a VC, if I back someone, obviously they're going to praise me.

[00:06:38] I'll just do, they're going to say, yeah, he's good. He's this? He's this he's this. But just as important, you have to go to the people who didn't vacuum and see what their feedback is, you know, did they give you a fair hearing or were they really like, did they have really good reasons? Like for it, VC might say we're passing on this investment because of these challenges.

[00:06:57]No, as a founder, do you think this was valid over this was not valid? So, yeah. Yeah. So again, I've said a ton of things because it's a very interesting topic. What is a good VC? How do you get into VC? This is a, this is not an easy, easy answer, but 

[00:07:12]Sam Kamani: [00:07:12] and everyone will have their own journey. I'm sure.

[00:07:14] Just like you. 

[00:07:16] Hattaf: [00:07:16] Yeah. It's just, yeah. So I think, I think you're right there. It's just, 

[00:07:20] Sam Kamani: [00:07:20] when you were with  for when you were in the private. Sort of, equity and all that. what would make you choose one founder over there or, you know, one investment over another,  what's your yardstick words?

[00:07:34] Hattaf: [00:07:34] So I, I, so there is like two, two ways to do it. So every fund  hesitant strategy. Absolutely. So, first I'm going to start there, so you need to figure out what the fund strategy is. For example, if you have a fund, which is say a hundred million dollar fund. Yep. Right. And that's it. They're two partners.

[00:07:53] And let's say that the company is a very hands on investor. The want to be engaged with you. They want to handhold you. They want to join your board. They want to add value. Right. Then automatically one in one partner cannot take more than five board roles. Okay, right. Physically. It's not possible.

[00:08:14] So if that's the case, then if you have two partners to get maximum, do 10 investments, every fund has a five year cycle. So in five years they can make 10 investments, max.  And all funds. The way you make money on a fund is you never put all your money. I mean, depends on how much money you are deploying.

[00:08:31] Some early stage funds do go all in, but most funds, the way they operate is on a risk adjusted basis. They put, give you some money up front and as the risk diminishes, they follow on in the ones that are really good. So for those funds, right. And then certain funds have a specific sector focus. I'm just from say, I just do biotech.

[00:08:49] I have. So what we would look for when those funds. It's totally dependent on what the strategy is. If I'm a hands off fund and I don't take board roles, I can actually invest in 50 founders, a hundred founders. If I'm investing in a hundred founders, let's just loosely say 1 million or each on a hundred founders.

[00:09:05]So I'm not talking about the following on if I ignore the follow on it. If hypothetically I have to back a hundred founders, if that's my, so I'm going to focus on founder and his personality and I'm going to go early.  And I'm going to take lots of bets in the hopes that some of them work out.

[00:09:21]If I am a more of a, active investor, which is more useful, I'm more of an active investor, then I'll automatically only invest in 10 companies. And what I look for would be very different. So, again, if you want, I can, so this is. The background here. So then I can, what I can do is I can run you through what we used to look at when we were at the private equity level, which is late stage compared to what we used to look at or what we were told to look at while we were at ended with.

[00:09:46] So I can walk you through in really precise detail as to precisely what 

[00:09:50] Sam Kamani: [00:09:50] our, that be super useful. 

[00:09:52]Hattaf: [00:09:52] It's exactly what people look for. So, From a private equity perspective.  This is what we used to do. So our sector focus was real estate and you know, things which are capital intensive. We used to put a ton of money in, and I think what prepay you guys are doing or what lists these guys are doing is that by that time, the business model is kind of set.

[00:10:12]You're not investing into a company to change the business model. . You're not investing into a company to basically inform them, Hey, this is, this is this. This is how you get to product market fit or, Hey, this is how you build a brand. When you investigate stage from a value add perspective and late stage, what you're purely doing is you're adding your M and expertise.

[00:10:33]You're basically saying here, if I give you say $20 million now  will that allow you to say, use that as collateral and get $50 million loans from the bank, for example. Right. So that's capital structure. Can I come in and can I, so this is leverage, right? Can I basically come in and using my networks?

[00:10:54] I can validate you. I said, Hey, I'm backing you. So there might be a CEO of a really big shock CEO. Who's unwilling to associate his name with your company, but if I'm there and I'm backing you. Can I entice a really big shot CEO to come in and run it for you? as a PE guy, the other things you're looking for are, if I come in, can I find an image, any opportunity for you accompany that you can buy and acquire.

[00:11:16] And overnight doubled your revenue or improve your revenue. So that's the value I'm bringing. right. So a lot of people say they do this a lot of times. Unfortunately, people are just coming with a check, not adding value, whereas a PE guy, that's the stuff I'm looking for. So I'm not really looking for, is the founder good as yet?

[00:11:35]It says, this is, this is a bond 

[00:11:38] Sam Kamani: [00:11:38] at a later stage. 

[00:11:39] Hattaf: [00:11:39] You look purely at the business model and you look at. What's the key riskier. Do they have say 90% of the revenue coming from one customer that's a risk? do they have too many debts? do they have enough protections? Yeah. if I come in, you know, if I make some big capital expenditure, am I going to grow this business?

[00:11:56] So that's, that's a little bit as to what I'm looking for, which is exciting. You seem really different from VC.  So VC is also very different. CVSA. Onwards is very different from early stage VC. So now if I bring back to what we were looking at, it ends up. So, you know, having worked at with was extremely beneficial for my career because.

[00:12:19] Those guys had backed the historically they were doing it passively. When I got hired, they were doing it actively. They had backed, you know, they had a company of, they had a portfolio of two 80 companies across the country. 

[00:12:29] Sam Kamani: [00:12:29] 200 and 8,000 is a massive 

[00:12:32] Hattaf: [00:12:32] portfolio native companies across, across, late stage VC and early stage.

[00:12:36] So we could, we would invest across the spectrum.  we were, we had to do follow on investments into the companies that we already had. we were looking at new companies every year and we were just a very small, so the learning opportunities were immense while we were there. And plus a lot of the companies, you know, as, as a VC works portfolio works is most of your companies are not going to come through.

[00:12:59]So we had the post-mortem of all the, as to what went wrong in all these companies. So it was just an immense, immense really, really valuable learning experience. And yeah. Again, we had this and then you obviously get to meet with all the smart people, Zealand and international people coming through.

[00:13:16]So I can tell you precisely the, what we looked at as an early stage VC compared village stage VC.  I guess as a rule of thumb, again, it depends on the industry.

[00:13:25] It depends on the situation. It depends on, for example, what our strategy is. It depends on how much money we have in the bank at the moment. It depends on, you know, are they really good deals we're looking at because there was no rule of thumb. Cause we as government, we were supposed to spend $8 million per year.

[00:13:42]Right. So we had to spend that money government mandated us to do it, to help. So our philosophy had with back then was, let's give this money to the companies that had the greatest chance of success. 

[00:13:52] So our CEO had told us, you know, we need to back the companies with the highest odds of success rather than helping everybody.

[00:13:59] So, that was our mandate and every fund has its own mandate.  But if you're a VC, then your mandate is to make money because your investors are not going to back you if you lose money. Absolutely. so as I said, everybody has their own philosophy area, their own mandate, but I can give you some general rule of thumb as to what investors typically look for.

[00:14:16]Or what we used to say, how we were told to look at stuff from a VC perspective. And, again, early stage and late stage is we look at stuff differently. So we look at the same things early stage and series a and later stage VC, but it's just the focus shifts across the stages. So you're looking at the same things, the same handful of things, but the focus actually shifts.

[00:14:41] What's more important across the stages. It's different. Yeah. and again, I can give you a personal opinion of mine. So there is a, so this is regarding early stage investment, especially angel investment. this is my first opinion. there is a big difference between like imagine super early stage stuff between friends and family.

[00:14:59] This is something founders might find really useful. This is, but this is how I think of this. having been there, done that,  When you super early stage and you don't have as much validation, traction, et cetera, from an investor side. Okay. What were they, what were you employed to do? Especially when we're managing other people's money?

[00:15:17] Is that we make investment decisions?  Okay. And investment decision has four, three, four core things. You need to have an investment thesis. Why am I investing? How long am I investing? What are the key risks here and what needs to happen for this to work out?  If you don't have these four things yeah.

[00:15:37] Then you're taking a bet. You're not making it and investment. So if I go to the, if I basically go to the casino on the roulette and there is, you know, black and red and I put all on black, there's a 50% chance. I'll double my money.  But what's my investment thesis. I don't have these four things ironed out.

[00:15:53] So if I say this is an investment decision, because I'm betting on black. And if I just like a VC, I bet on black 10 times something will, will pay me back. Eventually a lot of angels are they say, I'm making an investment in that back the founder. But what they're typically doing is they're doing that.

[00:16:10]as a VC with someone, especially with someone who has not built a company before. If a new founder came to me and said, trust me, this is my experience in my mind, this is my personal opinion. This might be controversial, but I used to think, look, I don't have enough evidence here. Will you work out with you and I'll work out?

[00:16:29] So there are key things. Investors look at, especially sophisticated investors, especially when I say sophisticated, I mean investors with a method. So some investors are investing with a specific methodology and some investors are angels. Yes. And they are taking bets on founders really early on. It could be because of relationship could be because of the recognized patterns in this founder that they themselves saw in them when they were going through this, or yeah.

[00:16:55] It's because they have a, you know, an affinity to the industry that you're in to kind of get it.  Or they may have special networks, especially relationships with like, you know, if I back this guy, like, let's say someone like Jeff Bezos. Really strong e-commerce networks in the States. You go to Jeff Bezos tomorrow, you don't need validation.

[00:17:12] You need nothing. You give him your idea. And if it's e-commerce related, he can tell you based on his gut feel instantly. I can back you. I won't back you.  Right. But if you go to a VC with no connection to econ.  For me, it's a bet for this guy because he has more information than me. For him, it's an investment.

[00:17:30] early stage is very fuzzy. That's what I want to do, basically.  So that's the rule of thumb. That's my opinion on how I see it. But there's a difference between investments in beds difference between taking lots of bets. That's actually some people's investments, strategy, take lots of bets and, that now I'll quickly walk you through what I think typical VCs look at when you go to them.

[00:17:54] They locally, typically look at seven, eight things. Firstly, they look at the team, especially when you go early stage, you look at the team and what they're looking for is has this guy done it before?  Has, is this guy, is this hard in the right place? Because building a company from scratch because when a VC is investing money in you in the first round, He's like, okay, this is a 10 year journey because no one is investing for double or triple my money.

[00:18:18] Everyone wants a thousand percent return everybody, because if you're taking this massive amount of risk backing in an unproven business, you want massive return. Because yeah, because otherwise I put my money in the bank. I'd put my money on real estate, on private equity, even in private equity. So private equity in New Zealand does really well.

[00:18:36]If I can triple my money in private equity, why would I give you money in super early stage? Triple my money when I can do that in private equity. So as an asset class, if VCs want to be relevant, they have to go for these big wins, huge wins. so firstly, I look at the team and I'd be like, okay, if this is a 10 year journey.

[00:18:53] So you have occasions where, you know, like, WhatsApp and there are certain companies that got sold for huge amounts early on.  But typically. You know, if you're doing VC, it's a really long game. So the first thing that you look at as a team is this guy is as hard in the right base. Is he, if he's, if he's there for, for the money, if it is just a doll for him, then when, you know, if he gets another job somewhere else, he's going to leave.

[00:19:19] It's just hard in the right place. Why is he doing this? Can he navigate the ups and the downs that will eventually come.  Because no matter what, if you're trying to disrupt something, you will have lots of struggles. Is this guy going to be able to navigate to the ups and the downs who has backed him?

[00:19:33] That's what we used to look at with, because we were industry agnostic. We didn't have any specialty who has backed him. You know, if are there other people within affinity in this space, are they backing him? who is he connected to? What's his network? Is he, you know, We would diligence the founder. So the founder is very, very important, especially the earlier you go.

[00:19:52] 

[00:19:52]Sam Kamani: [00:19:52] Thank you so much for listening to another episode of one money, got money with Sam Kamani. Thank you for your time. Let's pick up this conversation again in the part two of this episode. In part two Staff is going to share what are the tough things or the hardest thing about being a VC and what happens. 

[00:20:16] When things go wrong and they often knew what happens when founders don't produce the result that they promised. So do you undone and please subscribe so you don't miss any of this in the next episode i highly recommend if you are a founder and if you are interested in raising money from a vc or an angel you need to listen to the part two of this episode