Transcript: Sajid Rahman - Angel Investor Secrets - Lessons from 1000+ Startup Investments

Host: Hey Sajid, welcome to the show.

Guest: Hi, Hi, how are you?

Host: Doing good.

Host: How are you doing?

Guest: I'm good.

Host: Yeah, so we talked you know, we had you on the podcast a couple of years back.

Host: Uh we talked about Angel investing.

Host: Um and I think it's been a while and the markets have changed.

Host: You know, investing landscape has changed a lot in the last couple of years.

Host: And I thought it would be fun um you know, to have you on the podcast and because you're you do so many investments as far as I know you're probably in the top five Angel investors out there in terms of at least volume that I can see.

Host: Um so I thought it would be interesting to, you know, have you on the podcast talk about how things have changed.

Host: Um so I guess to start the conversation um how do you see the landscape changed from let's say you know, 202021 or 2020 uh to what we are seeing right now?

Guest: So it has uh changed quite a bit.

Guest: Uh you know, it used to be at the when we talked last time we were sort of at the cuff of uh sort of a bull run and we saw uh lot of companies uh raising at um unjustified valuations.

Guest: So that has come down significantly.

Guest: Uh I think once the money is out of the system uh because of interest rate rise uh you know, the global challenges uh etcetera.

Guest: The when the money is out of the system uh we are seeing a lot of companies uh going through significant down rounds to the extent that one company which has gone on from zero to almost eight or nine billion valuation in a span of a year or two has been bankrupt, right?

Guest: They went for liquidation in past year or so.

Guest: So we are saying we are seeing those are extreme examples but in general we have seen a lot of companies doing down round or struggling to raise.

Guest: Uh the other thing that I have seen uh significant shift is uh you know, what happens is when a market goes down uh some of the very strong companies also suffer.

Guest: Uh and we have seen uh companies with very strong fundamentals uh could not keep the valuations they raised before.

Guest: So they also did some down round and there is a very good opportunity in that space and we are seeing investors jumping in that opportunity and going into late stage deals which are happening at a discount.

Guest: So there were two trends.

Guest: One on the early stage or in a few late stage companies we are seeing down round.

Guest: While in some of the late stage companies we are seeing people going big time into secondaries uh deals.

Host: Yeah, so you're basically saying the secondary deals that happened in 2021 are basically toast most of them.

Guest: Yeah.

Host: Right?

Host: Um because I remember when Robint was going IPO and I think the valuations were around 6080 billion in private, right?

Guest: Mhm.

Host: Which is which I think we haven't seen yet to for Robinet to touch that valuation in public markets, right?

Host: And we'll probably not see for a while.

Host: Um how but I think it's bit of um you know, change in interest rates, we still see very high valuations, right?

Host: One I can think of is you know, Twitter, perhaps SpaceX, perhaps I keep seeing secondaries.

Host: How how do you put SpaceX in this in this lot?

Guest: So so going back to your first point on Robin here.

Guest: So you know, similar thing happened in strike.

Host: Yeah.

Guest: So I I recall it went up to 95 then they do a secondaries like 50.

Guest: Now you know, so in fact myself and a lot of people went into this 50 billion and now it is creeping up to 65, 70 billion.

Guest: So I think we don't know whether it will reach 95 but so, you know, it may it's again going in the right direction.

Host: Yeah.

Guest: Uh regarding your second point.

Guest: So Elon Musk is sort of uh you know, out of this whole narrative.

Guest: So, uh you know, his uh SpaceX of course, you know, keep on, you know, raising.

Guest: I think last was at uh so we did SpaceX three times so far and the last one if I recall was around 145 billion valuations or stuff.

Guest: And the hypothesis there was uh the Starlink, which is there were some discussions going on that Starlink would be taken out of SpaceX and would be floated as a because you know, SpaceX is one of these companies which remain private for a long time and we don't know when it will go public.

Guest: But the the thinking is that Starlink would be taken out and Starlink would be ones to one, you know, split.

Guest: So and the thinking is that Starlink would be listed around 100 billion plus valuations.

Guest: So even if you're sorry, go ahead.

Guest: Yeah, so even if you're investing in SpaceX, you well you may not well you don't know when you'll get liquidity, but Starlink may, you know, come up with a significant liquidity.

Guest: And of course, you know, the uh I don't know whether you have seen uh uh he's raising a new another company called X..ai, which is a generative AI.

Guest: And that is already in discussions of raising at uh I understand at 15 billion and that's the sort of preed stage valuation.

Guest: And then of course the other AIs like open AI and anthropi those are going through the roof.

Guest: So the initial thinking I was saying generative AI is probably the space where you know, it doesn't apply.

Host: Yeah.

Host: I mean I remember I think a year back or you know, when the first interest rate sort of you know hike hit in the US, there was this talk of you know, a lot of dry powder.

Host: Like that this was the key term that was being thrown around.

Host: Like there was a lot of dry powder.

Host: Um and just for the audience sake, I think dry powder at that point referred to the uninvested capital that was already committed to venture capital funds of all different types and stages.

Host: Um it seemed like I've recently seen another article or post where they're still talking about this dry powder at it being at its peak.

Host: How do you see this whole dry powder phenomena?

Host: Is it coming back?

Host: Like um or is it's never going to come back in a way that you know, we were investing in 202021.

Host: how do you see the whole dry uh dry powder uh argument or like phenomenon?

Guest: I think there is a some misunderstanding about this whole dry powder, you know, uh thesis or how it's it's used.

Guest: So first for example and you know, besides doing the Angel investment, I now have a fund.

Guest: I have actually have three funds and I'm deploying from there.

Guest: So I have a broad idea on how this whole dry powder thing works.

Guest: So first of all, uh you know, the moment you call a capital your clock starts ticking, right?

Guest: So the fund performance starts.

Guest: So if you if as a general partner, you're not very sure how to deploy the fund, you don't want to call the capital.

Guest: So that's one, right?

Guest: So just because there is a LP commitment doesn't mean it would be drought down.

Guest: So that's one.

Guest: Second is uh you know, there are especially in case institutional LPs, uh where you know, they have been participating in your funds over, you know, let's say first fund, second fund, third fund, you also don't want to you know, put that relationship at a strain.

Guest: So as a general partner, you are very careful and in some cases those institutional LPs uh usually have an option to pull back from the commitment.

Guest: And it depends on how the total portfolio of that particular LP is working because you know that LP might have commitment in public market which is which didn't do well and everything stuff.

Guest: And so you know, the LP might say, okay, look, I committed 50 million or 100 million to your fund, but I'm now going to cut it down to 30 million.

Guest: So, you know, so when a fund is announced, let's say some X raised a billion dollar, doesn't mean that you know, that billion dollars is going to be deployed uh you know, depending on the situation.

Guest: So so this dry powder would broadly depend on these individual fund scenarios.

Guest: And of course, you know, how the whole thing plays out in the market.

Guest: So that's one.

Guest: In terms of whether it will come back to the previous stage uh so so this has been said many times when the..com bubble happened and another happened and every people keep saying, oh, it's not going to happen again, but you know, the human psyche is that that it keeps happening throughout the cycle.

Guest: So it will completely depend on how the global situation is, how the total market is.

Guest: So if hypothetically there is a big problem and you know, uh US starts printing money uh you know, and what the one thing that we have said is every time the money gets printed, it breaks the previous records, right?

Guest: So you know, when this financial crisis happened uh there was bailout of you know, 50100 billion dollar and people said wow.

Guest: And then this time there were trillion of dollars getting printed.

Guest: So we don't know what the next quantum would be, but um yeah, usually if it gets printed, it gets in a very large amount.

Guest: So I will not be surprised that we see another cycle like 2021 happening in future.

Host: Um but is the dry powder coming back or uh how how do you see just whether it is coming back to the market or is it waiting to still be deployed?

Guest: Uh it is slowly coming back.

Guest: So what we are seeing is uh you know, the valuation is sticking up.

Guest: Uh I'm saying the funds are raising uh late stage valuation is going up.

Guest: So yeah, especially in a couple of segments like AI and to some extent crypto nowadays, you know, the the valuations are gripping up.

Guest: Yes.

Guest: It is not at the same quantum like 2021 before, but my guess is uh if the market starts, you know, looking up lot of these uh dry powders will start getting deployed.

Guest: So people are just sitting on the sideline and watching.

Host: You you bought up crypto and you know, I think you are one of the people who've been consistently I think investing in crypto um like during the boom and bear during the bull and bear cycle.

Host: I would say uh what do you see is happening now in crypto because I am not a big investor into crypto.

Host: Um and I don't follow the space much.

Host: Um but I'd love to know what what your thoughts are and what's happening in the crypto space.

Guest: So two things uh you know, I now have a fund which specifically focus on web three infrastructure.

Guest: So we don't do crypto as such like tokens and et cetera but more on the web three infrastructure companies that are building large blockchain, you know, companies.

Guest: So that's one.

Guest: Uh so first of all about this whole web three space uh there is a lot of scam.

Guest: Uh lot of misuse, lot of you know, misapproriation, breaking the rules, et cetera et cetera.

Guest: So there's a lot of noise out there and it's very important for investors to take those out of the process go through the proper due diligence before investing.

Guest: Uh what changed the narrative significantly is when Blackrock and uh you know, the large funds started launching ETF on Bitcoin.

Host: Yeah.

Guest: So that clearly changes the narrative that okay, if if if trillion of dollars of funds are coming into the space then clearly there is a big potential there.

Guest: So that's one.

Guest: The second thing uh that the three narratives now driving this web tree space.

Guest: One is artificial intelligence.

Guest: So uh you know, while we know artificial intelligence is big on uh you know, let's say web two companies in case of web three companies, the question remains is the data, the large language models that artificial intelligence use, will it be centralized or decentralized?

Guest: So if it is centralized, the power of AI still remains on, you know, in a few hands.

Guest: But if it's a decentralized through blockchain and web 3 then you know, then the power of AI gets more distributed.

Guest: So one big narrative is the is the intersection of AI and blockchain or decentralization.

Guest: So that's one.

Guest: Second big narrative is what we called RWA, real world assets.

Guest: So the question is uh you know, the large uh mortgages uh housings uh large scale, you know, uh other assets can those be converted into blockchain and distributed.

Guest: So real world assets is a big narrative that's coming in.

Guest: And the third one is what called Depin, which is essentially more on decentralized infrastructure IE storage et cetera can those be decentralized.

Guest: So these are the three big narratives currently driving web three, you know, web three boom.

Guest: Uh and we'll see how that is, but again, like previous Webstream boom, there is a lot of scams out there.

Guest: So everyone should be very careful.

Host: I mean one one of the things my experience with the tree is as you rightly pointed out, you know, everything sounds like a scam in the first place and everything is ridiculously high priced.

Host: And the structure itself is weird to invest.

Host: I think investing structures have been innovated a lot on web three when it's, you know, during the peak of 2021, which was probably the worst part of it because you didn't know like how to deal with it.

Host: Uh for regular investments you don't you know how to deal with it but there's new there's this new uncertainty of how to deal with this investment in general.

Host: Like has that part changed a bit and people sort of established what is the right way to invest?

Guest: So there are two things happening, you know like uh one thing the one you pointed out so the big challenge is uh you know, companies were raising rounds through token issuance et cetera where you know, you don't even know who the founders are.

Host: Yeah.

Guest: You you don't you know, so you don't even know who these people are but you know, people are throwing money millions of dollar, right?

Guest: So so and there are still people doing it because of the hype, because of FOMO, et cetera et cetera.

Guest: But interestingly, what I'm seeing companies building you know, for example, let's say Coinbase launch this whole uh layer uh you know, second layer as you know called base.

Guest: Uh base is based on optimism and base is you know, so there's no token, right?

Guest: So we are seeing companies which are building large blockchain infrastructure in a pure equity model.

Guest: So there there are no tokens issued and et cetera.

Guest: So yeah, so there are companies which are very careful and they know that if they issue token they may get into a you know, difficult spot in the US and other places given the restrictions.

Guest: So they are raising a pure equity uh like the web two companies.

Guest: So those are happening also.

Guest: and in fact in quite a few companies people keep wondering when they're going to issue tokens and they're saying they're not because they don't want to get into this legal troubles uh with tokens et cetera.

Host: Yeah, that's good to know because I think tokens were also misincentivizing the public, right?

Host: Because an investor might get early tokens which are liquid pretty early and they could sell and you will not know, right?

Guest: Yeah.

Host: Um which is opposite, you know, in regular structures.

Host: Um I know you are pretty active Angel investor.

Host: Um I know that you have a web three fund, but you hinted at to other funds.

Host: So how many investments tips and how many investments are you doing taking a step back?

Guest: So uh you know, compared to the last time when we discussed, I was mostly doing Angelist uh you know, or other syndicates and et cetera, which is essentially SPV structure.

Guest: Uh now and you know, the total number of investments, you know, through the I mean total has obviously thousand plus.

Guest: I don't probably 12, 1300, 1500 uh I don't count anymore.

Host: How many guys people do you have?

Guest: Yeah, so everything you know automated et cetera.

Guest: But but in terms of the uh so the way the the structures that I'm using is the structure is still continuing and I have partners running it.

Guest: So I I do it but mostly the other people are doing it because it has created quite a bit of scale.

Guest: Uh then there are funds uh which are essentially one is obviously the web stream fund that I mentioned.

Guest: The other is a YC fund because there's a lot of companies coming into YC.

Guest: So I have a fund which dedicated to YC focus fund and that's uh that we do.

Guest: And the third one is a general purpose fund and so which is essentially companies early stage companies where we invest.

Guest: Now, what I'm working on now is artificial intelligence, generative AI focus fund because uh you know, we are seeing not only late stage deals, but quite a few early stage deals that are coming up on AI space.

Guest: And some of those are very interesting companies.

Guest: So we are, you know, we are now working on AI focus fund which will probably launch soon.

Guest: So then this would be the four funds uh.

Host: So when you think of raising a new fund, are you thinking because you're based in uh Jakarta, Bangladesh, but you know, your investments are all all over the world.

Host: When you are conceptualizing a new fund, who are the LPs that you generally think of?

Guest: Mostly US based LPs.

Guest: Um so what we have in the funds are because you know a lot of our companies uh while I'm based in Jakarta, a lot of the companies are essentially US companies.

Guest: So I would say uh 80% plus maybe 90% companies are US and the LPs are primarily from US.

Guest: There are a few from Asia, Europe, uh you know, uh Latin other places, but yeah, almost 70% plus almost 80% would be US based LPs. Uh and these are yeah, sorry.

Host: Sorry, go ahead.

Guest: And these are essentially people from family offices.

Guest: So people running family offices, investing or few uh you know, high net worth individuals.

Guest: And there are a few cases, there are institutions uh uh you know, our companies which have set aside some fund to invest in other funds.

Host: Regarding the YC fund, uh there are you know, at least couple of YC funds I've seen, you know, Brian who was on my last episode has a YC fund, I think Angelist themselves run a YC fund.

Host: There are some YC funds run by you know, uh YC alumni.

Host: Um how do you sort of differentiate when you have you know, so many YC funds and you're pitching a new YC fund or when you pitch now that it's established.

Host: Like how did you approach that?

Guest: So you know, there are two things I've seeing happening in the YC space.

Guest: One is um people are investing cohort basis.

Guest: So all the names you mentioned uh they will say, okay, we are going to we are raising a fund or we have this fund which will invest in YC winter 24 or YC summer 24 or 23, right?

Guest: So cohort base.

Guest: Uh I used to do that before.

Guest: So I had one fund YC fund before which was a cohort based.

Guest: I think two funds.

Guest: The current one that I'm doing is a bit of a perpetual fund.

Guest: So we are investing over four five cohorts and the LPs are getting the you know, benefit of investing through cohorts rather than a one particular cohort and then you know, so there is a possibility.

Guest: It's a bit of indexing on YC companies over a longer period of time, but at the same time, you know, they they are getting exposed to three four cohorts or five cohorts et cetera.

Guest: So that's one differentiation I started compared to other YC funds.

Guest: The second thing which is quite important in case of YC is that because many funds are pitching to the same company is mostly on the founder who decides which company to go with or which fund to go with because you know, they also have you know, they also don't want to raise you know, indefinite amount.

Guest: In these cases the founders will usually reach out and ask specific questions, okay, how can you add value?

Guest: et cetera.

Guest: and that's where I think this whole Asia connection helps because uh first of all, YC has has an internal system where the founders rate the funds.

Guest: Uh the previous founders.

Guest: So, you know, so the YC founders can check what is the, you know, review of this particular fund from the previous alumni et cetera et cetera.

Guest: So that helps them to go out and specifically reach.

Guest: So and I see a lot of inbound reach from YC companies.

Guest: Uh second, of course is the values that the fund bring in.

Guest: So I'm probably one of the few funds which has this whole Asia you know, uh lands et cetera.

Guest: and many of the YC companies want to you know, enter this market.

Guest: And of course YC also has few companies from Asia which goes into the YC batch and they also like to raise funds from us.

Guest: So I think that sort of uniquely positions us compared to other funds.

Host: What else?

Host: I mean because you you sort of have this vantage point of investing across the world.

Host: What other ecosystems have like slowed down or uh you know, sort of things changed outside the US?

Guest: In general, I I would say I'll say across the world.

Guest: So even in Asia I have seen you know, funds slowed down, in India, in you know, markets in Asia, you know, I see the races slowed down a bit.

Guest: and you see a lot of the news coming out of India for late stage companies.

Guest: So you know, so there is a bit of uh again a readjustment on the valuations et cetera.

Guest: Uh same with Africa, same with Latin.

Guest: You know, what I've seen is across these markets uh uh the valuations have gone down, founders struggling to raise.

Guest: So so it's nothing new.

Guest: The reason probably being that for funds based out of Asia or you know, Africa, Latin, most of the LPs are US based.

Guest: I'm sure there is a good portion of LPs locally, but also a significant money used to come in and once that slows down, the rest of the world, you know, especially on the startup space slows down.

Guest: Um so yeah, so that were that was happening across the world.

Host: So I I'm a little curious how you actually operate like when you're running four funds, I think you were you know, being a CEO last time we talked.

Host: I don't know if you're still uh you know, a CEO of a company.

Host: I I'm curious like what does your day look like when you have four funds and I know like now I think you're a little bit slow down on Angelic syndicates, but you know, you are very aggressive in terms of deals, I think you're probably the highest you know, deal maker on Angeles.

Host: I don't know the stats but qualitatively I feel like you have to be, you know, top three.

Host: How does your operation system look like?

Host: Like and you also have when I talk to you, you have a certain level of calmness to how you talk also.

Host: Like I don't understand how you operate.

Guest: So so the the good news is or the bad news?

Guest: I'm not the CEO of that company anymore.

Guest: So that opened up some space because you know, it was getting too too many things.

Guest: But what has so but I joined couple of boards and one of the board is a company called Ican, which is Internet Corporation for names and numbers, which is sort of a regulatory body uh you know, controlling the whole internet governance regulations policies.

Host: operation that issues domain names, right?

Guest: Yeah, yeah, yeah.

Guest: So they are globally and you know, because they should domain names, all the register registries, they have a contractual obligations to Ican and then I can get involved into the contractual obligations, the regulations, the the privacy of individual, you know, registries, et cetera et cetera.

Guest: So there's a lot of interaction between regulators and Icon and that takes quite a bit of my time because I run their audit committee and then you know, also you know, a couple of other things.

Guest: So uh so while I'm not a full-time CEO anymore, but couple this board and few other boards are taking some of my time.

Guest: Uh the way I have structured most of these is I have now brought in partners.

Guest: So you know, when we talked last time I was mostly doing it solo, but now the funds have own partners, the syndicate, most of the deals are through the partners and et cetera and I I do come in once in a while, but uh so because I have distributed my work uh because on my own it was getting difficult to manage.

Guest: Uh so that's one.

Guest: Uh so my everyday is you know, starts very early in the morning because a lot of calls are on the US side and then it ends very late in the evening.

Guest: Uh but yeah, but it it it it flows through.

Guest: Different things come up with different funds and the other thing that is outside the fund I've now getting quite involved into a couple of businesses.

Guest: So I don't know whether did I mention it to you.

Guest: So I I was building one of the large wind power project in Bangladesh.

Guest: So so yeah, so the I built the first uh 60 megawatt wind project in Bangladesh uh you know, so that has gone operation.

Guest: So it was $110 million project.

Guest: Now we are adding another, you know, roughly 200 megawatt in different wind projects, or renewable projects.

Guest: Uh that's one.

Guest: So we are working on a EV conversion for two wheelers and three wheelers.

Guest: So we are working with a Korean Samsung and other companies to create a you know, converting existing two wheelers to three wheelers into electric vehicles and a battery assembly plant, et cetera.

Guest: So I got involved in a couple of other businesses, which is also taking some time.

Host: Again, I don't understand how you operate.

Guest: These are all there a lot like a lot of partners, you know?

Guest: So so, you know like um uh yeah, I mean you know, so people uh because if you have very strong partners working on different projects, uh that helps a lot.

Host: I mean what do you think about your own career?

Host: Like uh are you always a person who has done more than one thing at any given point of time because usually most people do one full-time job and then don't do anything else.

Host: Like uh if I look at on my you know, my colleagues or my peer group around, most of the people do this one thing.

Host: Like even me doing a podcast or investing outside my full-time job is an exception in my peer group.

Host: Like why do you think you do all these, you know, different things in different directions?

Guest: A good portion of my professional career I was only doing one thing.

Guest: So I was in a bank and you know, so that took me all over the world and I was essentially working bank most of the time.

Guest: But once I left the bank, uh the whole plan was to do two three things because you know, I was finding getting stuck with one working to to be boring.

Guest: So at that point I started this whole investment thing, this whole building this health company where I was the CEO and then building this renewable project, you know, which were all quite innovative at that point and then and then of course one led to another I got exposed to too many other options and everything.

Guest: And I find it interesting two ways.

Guest: First of all personally it's a good learning experience, uh you know, professionally as well as so the things that I learn on building a infrastructure project like a power plants, uh that some of this a few of these learnings can be transferred to uh you know, investment in a startup which is very honest.

Guest: It's very different type of businesses, right?

Guest: Or uh you know, doing this board roles which is so which is a very different like a regulatory role where you know, discussion happens more like you'd see a discussion in a government level, you know, very each word is in a memo, each word is you know, questioned and whether that should be there or not compared to a startup where you you where the whole hypothesis to move fast and you know, build things and think about the impact later et cetera et cetera, right?

Guest: So very different hats for different job.

Guest: So that helps.

Guest: On a purely professional level or the other side of it is, you know, in a way it's hedged against one another.

Guest: So you know, so even when my startup was not doing well because of this whole funding you know, the infrastructure project was doing very well because all the energy sector, government projects, large scale 18 years contract and et cetera or the the you know, the Ican which is very much a regulatory, you know, where you sort of like uh don't worry have the cash flow sort of speak and et cetera, right?

Guest: So so in a way you're one if one goes down in productivity the other keeps going up.

Guest: So so you know, so it is in a way it is hedged against each other because these are very different types of organizations.

Host: You you're sort of removing single point of failure for your own career, I guess.

Guest: Yeah.

Host: That can happen.

Host: Which which you might you know know in Ican.

Guest: That that's what it's all about that none of the DNS servers have to go down.

Host: Um but uh in in your personal portfolio, how do you hedge startups versus because startups are you know, we know that you can lose to zero and I'm sure you've experienced zeros quite often, right?

Host: How do you divide personally like what percentage of your investments personal investments before starting the fund like went to startups?

Guest: Oh, it's it's very high.

Guest: In my case uh my personal net what is is I would say 70% would be tied to startups.

Host: Mhm.

Guest: Uh so yeah, so most of I mean I hardly do public market uh you know.

Guest: So my investments would essentially be these projects like large scale infrastructure projects now which is slowly creeping up as you know, as they're coming into you know, uh start generating.

Guest: Uh but uh startup is mostly there.

Guest: But of course startups will again go up depending on you know how the market performs.

Guest: And the other ones is like you know, typical real estate and income from board rolls et cetera et cetera.

Guest: So those are be small amount.

Guest: Uh but yeah, but it's uh you know, 70% startups, maybe 80%.

Host: And so you said you mentioned I think now you're up to what 1300, 1400 deals.

Host: I'm sure I think last time we talked you're up to like 40 unicorns or so.

Guest: Um what were some of the big exits um that you got?

Guest: purely in terms of multiple, there are few which got you know, 30X, 40X et cetera.

Guest: So you know, it's not like I'm I got those proverbial thousand X nothing yet that's that's but there are few which are theoretically are trading at 250, 300, 350X.

Guest: But those are all on paper so we we haven't yet to see an exit on there.

Guest: But in an average so in terms of the total portfolio itself, which is my personal excluding the funds, those are now trading at on a on paper if the last time I checked around 8X. Uh so the total portfolio level, 8X uh so you know, the IR is very high, et cetera.

Guest: