Farooq Abbasi of Preface Ventures joins Nick to discuss Funding the Misunderstood Technical Founder, Self Evaluation as a Solo Capitalist, and Capital to Underwrite R&D risk vs. S&M risk. In this episode, we cover:
- Walk us through your background and path to VC
- Why did you launch Preface?
- What’s the thesis at Preface?
- How do you define enterprise/infrastructure frontier enterprise?
- What’s most different about your approach?
- Are the businesses you fund created and ideated by the founders or is it a collaboration between you and the founders or do you take concepts and bring them to future founders?
- What’s your approach to sourcing?
- Because your model is different and the founder profile is a bit different than most… in what unique ways do you provide value post-investment?
- You’re a solo-capitalist… How do you evaluate yourself and keep some checks/balances on your decisions?
- Did you put together an LPAC — if so how big is the group, how often do you meet and when/where do they help?
- Are you actively investing in open-source startups?
- What are your thoughts on the Bifurcation in the VC industry… capital underwriting of R&D risk vs. S&M risk?
- What are your thoughts on biases in founder selection, data-driven predictors of founder success?
- What’s been the greatest challenge in your VC career and how have you overcome it?
- You’re passionate about Diversity, having founded Diversity.vc in 2016. How are you practicing a more inclusive style of venture capital?
- Three data points… hypothetical investment scenario
- Farooq Abbasi, a son of an Indian immigrant family, planned to become a physician like his 45 doctor cousins. However, at 19 years old he was introduced to VC by Mood Rowghani and that changed his journey.
- At some point, Farooq realized how much he enjoyed being an individual decision-maker and launching Preface Ventures was the right opportunity for him.
- Preface Ventures exists for the founders that are “unloved” in Silicon Valley and it is focused on enterprise infrastructure.
- The founders that Farooq funds oftentimes just have an idea on a whiteboard or napkin but they have a defined point of view of a technical problem they solved.
- Farooq uses a proprietary algorithm to find founders for potential investment opportunities. He starts to build relationships with founders early often even before the founder starts a venture.
- Farooq’s post-investment added value: “For the first hundred days, I’m always there, I’m always accessible, I want to earn the right to be the first call, not just in times of goodness, but also in times of challenge… like I care about these people because they’re human beings.”
- Farooq is a solo capitalist and GP, and he has established relationships with partners that provide instrumental feedback for investments.
- One of Farooq’s hot takes is on open source startups. He is actively investing but with an incredibly high bar. Farooq explains there’s data to show that open source startups have a proven distribution model, but not so much a proven revenue model. Farooq thinks the better risk-reward for investing in an open-source tends to be post-revenue. And that’s usually around sort of Series B and plus.
- “Biases come out in human decision making when you have imperfect information, and my god venture is imperfect information.”
- Three questions: What technical or product opinion is contentious in your industry? Why now and why the customer believes? What would make you stop working on this?
Transcribed with AI
Welcome to the podcast about venture capital, where investors and founders alike can learn how VCs make decisions and reach conviction. Your host is Nick Moran. And this is the full ratchet.
Nick Moran 0:18
Farooq Abbasi joins us today from New York Farooq is founder and GP at preface ventures preface ventures invest 250 to 750k at Day Zero in teams that build the frontier enterprise to improve work. He is also co founder of diversity VC, a nonprofit group that seeks to increase diversity of thought in the venture industry. Prior to preface Farooq has been a career VC, most recently with mosaic ventures and co cinoa Ventures. Frank, welcome to the show.
Farooq Abbasi 0:45
Nick, thanks so much for for having me. I’ve been a fan of the show for a while. And I’m excited.
Nick Moran 0:51
Awesome, man. Appreciate that. Yeah. Can you talk us through your background in path to Vc? Yeah,
Farooq Abbasi 0:56
happily. So I’ve been venture capital investing as an institutional VC for the last 12 years. And over the last four years as a solo practitioner, pretty much have always been a seed investor. So I can’t can’t can’t get rid of it. By 50 million across 45 companies have sort of always always been here. It’s the only job I’ve ever had. I grew up in Chicago, youngest of four Indian immigrant family. Definitely not Ivy League educated, definitely not like upper class that, you know, it wasn’t an accident that I got into venture. It was through a lot of hard work, and a lot of repetition and learning from people and a lot of my mentors and former bosses who gave me a shot, which is, which is fantastic. And what I invest in is enterprise infrastructure and cybersecurity and the frontier enterprise, which we can define later. But I want to back the non obvious founders that, that don’t always look the part, but have the capability to build something quite quite meaningful. Yeah, and, you know, look how I truly first first got started, you know, what, just want to say thank you to mood Rigoni. I met him when I was 19 years old, I’m pretty sure I had a faux hawk, I had emo clothing. I, I just I was I was coming from an Indian immigrant family. I mean, the plan I 45 first cousins were doctors, the plan was to become a physician as well. But that was averted. Happened to intern at General catalyst when I was 19 years old. And ever since I just knew that I wanted to do this. And that, you know, it combines it combined some of the best parts of around continuous learning, using non often nonprofit capital to to fund entrepreneurship, that which creates jobs. And that’s a super fulfilling, and so I’m, I’m going to do this for another 30 years.
Nick Moran 2:51
So was the thought always to, you know, launch your own firm and be entrepreneurial? Or did that, you know, did that? Did you have, you know, a transition at some point in time working for these other venture firms where you said, you know, I need to go off on my own. So
Farooq Abbasi 3:07
I’m a big family, person and family matters a lot to me. My older sister asked me to move to London, to help her raise her kids. And so I actually worked at a venture capital firm in London called Mosaic ventures. And while I was there, I wind up investing personally in a small sized vehicle and some angel investments with sort of friends and family. And I just loved and enjoyed that the most. And being truly authentic with founders, they knew they know who I am, they know how to get in touch with me. There’s no bureaucracy, and it just felt the most authentic. And so I learned, right, and I think this is a craft of apprenticeship, for starters. And so I learned from really good people, and investing in good credit companies like auto one and remitly, which hopefully should go public pretty soon. But at some point, I just I realized how much I enjoyed just being being an individual decision maker. And, you know, and I’d love to sort of get into that a bit later about, you know, the funds structure. And it’s not just me, it’s other people. It’s a it’s a network. But I kind of stopped fighting, I stopped fighting the urge. And so to, you know, launching preface and being a sole sole GP and starting my own firm, it’s a function of a couple of different things. I mean, for sure that probably the biggest thing is the strategy that I wanted to execute on. And what I think founders truly need an enterprise infrastructure, it’s just hard to find another way to sort of be my full self and support founders and they early kind of day zero journey as to do it. Kind of lean in me. Good, good. So, you
Nick Moran 4:41
know, we covered this in the intro you cut 250k to 750k checks at Day Zero. Tell us more about the thesis preface.
Farooq Abbasi 4:51
Yeah, so what I do if I had to quickly summarize it, I basically find product engineering leaders who have self selected in Building proprietary tooling inside their organization. So say they work at Oracle or Netflix or IBM, they solve a problem in cybersecurity, or software development, automation or revenue analytics. And they do it. They they basically get a directive from their executive and says, Hey, solve this problem, the engineer frantically looks around he or she and says, Alright, I’ll look into this. These types of folks look into open source solutions, existing vendors, and at some point, they’re just like, You know what, I can do this myself. And these types of people are my people. They corral the resources, the integrations, they own the p&l, they became individual contributors that became managers. And, and I can give you kind of a best example of that story with with red lock, which we can get to. But these types of founders in these types of teams, they are so unloved in the Silicon Valley. I mean, you didn’t know how many times I’ve heard of the story, mostly from founders where you have like a technically creative person who build something internally. Right. So maybe that’s Eric, one zoom, or Olivia data dog or, you know, Jyoti Bansal now from Abdi and now what unusual adventures are all these people slack, right? I mean, all these all these sort of projects are built internally. And they go, and they try to pitch and get funding, and they’re perceived as too technical. They’re often immigrants, and they don’t have access to the same sort of funding that works. But they’re so critical to their companies. And if they weren’t at their companies, they would like the light switch shut off. It’s for these people that I exist. And what’s wonderful about these types of teams, is they have a competitive advantage. I mean, they’ll hire their old engineers, they’ll have kind of customer connectivity. And what I do is as kind of founding investors, I’m, you know, as they’re spinning out, or as they have spun out, and kind of like the first or the second round, but usually the first round round, I support them in the way that they need to be supported. And, yeah, that’s so enterprise infrastructure is is the focus, and for a lot of reasons, it aligns with me and kind of my own personal background and biases. But uh, it’s the stuff that everyone needs, and everyone will need. Everyone will need the identity management stuff that Oracle has built, everyone will need the software development, developer productivity tooling that Netflix has built internally. And then eventually that becomes classified API ified. And I want to I want to help kind of make that process more frictionless. Very good.
Nick Moran 7:18
Very good. You’ve talked about these terms, Frontier enterprise, and enterprise infrastructure, you know, how do you define that?
Farooq Abbasi 7:26
Yeah. So if you’re, if you’re a large enterprise, today, or if you ever, if you’re a startup, you purchase a ton of software, you purchase software as a service, software payroll, but there’s stuff below the stack, so to speak. So if you had a set of slides, enterprise infrastructure, I’d say there’s a good data compute layer, there’s a storage layer, and there’s a network and security security layer. This stuff as it touches sort of cloud spend. Today, looking at p&l, your if you’re purchasing software typically lives in op X. But AWS, for example, in hosting lives in cost of cost of goods sold, like frontier enterprise is the stuff that literally was so critical that they had to corral and siphon off engineers to build the thing in order for them to functionally operate. That is that that is the stuff that I tend to invest in. So what are some examples? Multi like identity management? Right? Are you using Okta, or using, you know, LDAP? Or odacc? Or jumpcloud? Or how do you access a hybrid application or a on premise application or a cloud application, all of these companies have VPs of identity. But then again, what happens every single time is that someone emerges as like the leader, and it becomes API ified. And so that’s just one one quick example. But, you know, being being kind of situated in the right networks, I can and interviewing engineering leaders, I haven’t, I have an interview with an engineering leader, like once a week, just to learn from them. And it’s great for my own intellectual diversity. But every once in a while you learn about a theme or you find someone that you just have to partner with. And that’s, that’s what I do.
Nick Moran 9:04
Or the businesses that you fund, are they created and ideated by the founders, or is it a collaboration between you and the founders? Or do you even take, you know, concepts and bring them to potential founders that are these, you know, product builders and engineering folks within organizations? Yep.
Farooq Abbasi 9:22
That’s a great question. Oftentimes, these type of teams, they’re still they’re spinning out of their organization, they know who they’re going to work with. They definitely don’t have a deck. And what they do have is a defined point of view of a technical problem, because they solved that before internally. And there isn’t a deck and when we when we meet for the first time, it’s often like a whiteboarding or a napkin experience where network napkin writing experience where they kind of share what they’re about to do and not having a duck. It’s, I actually think in some ways, it’s sort of a good thing. And what were my input tends to come in is around product Marketing, right? So if they have a new technical solution to solve a, you know, continuous deployment software solution or problem, how does that solution fit in with legacy infrastructure or new competitors? How can how can like we stack the deck in the, in the favor of the founders to make sure they have a capital efficient outcome, and they don’t need to raise too much money for sort of, you know, goals of success. That’s, that’s typically how the situation happens. I mean, often, you know, I think 70% of the time, I’ve been the first check in these businesses. To answer your question. There are times though, where I have, there’s a talented founder who’s like looking for something. And they have the customer empathy, and the domain expertise and operational expertise and vision. But I all sometimes kind of, you know, Inception them, or, or, or maybe, you know, we’ll we’ll just talk about and we’ll have a lively conversation, or I’ll introduce them to people that I think are working on an interesting set of problems that are that are tangential. So, you know, for example, like putting it out there to the world, I would love to find a company that does like an integration platform, like a mule soft or trade IO for cybersecurity data and data products like that should exist, or are a way to sort of infer third party cyber risk, without like a survey. Like these things are important and critical. And you just you give someone an idea, and they might take it in a totally different direction, and let them write their story, right. I mean, like literally, preface, I say that we’re the capital before your story. They, they built they build, and I just share a bit listen more, and hopefully something good happens. Yeah,
Nick Moran 11:40
talk to us about sourcing, right? Are you finding these individuals and kind of watching them and connecting with them? You know, in some cases, years before they actually are ready? Or, you know, how are they finding you, you know, how do you get together with these folks? And, you know, find new potential investments?
Farooq Abbasi 12:03
Yeah, good question. So, I’ve, I look for sourcing, I leverage 100% distributed model. So it’s funny, you use the term watch them. I have, I’ve built an algorithm that finds potential founders sort of, for me, but not necessarily, like, I’m going to invest in them. Because the algorithm says, this is an interesting person, it’s just a highly qualified conversation from like a VP of engineering or a VP of product. And so once a week or twice a week, I’ll reach out to an engineering leader, I’ll understand like, what they built at their, at their, you know, formal organizations, and we just sort of talk talk and have a conversation. Oftentimes, I have gotten to know them for for many months or years. You know, it’s kind of like love, right, you have to, like meet someone at the at the right time. But sometimes you kind of get to know, the girl or the guy, for for a while, right before it before someone makes the move or relationship happens. As a fungicide, you know, First Round Capital will have a lot of respect for they, they, you know, there’s a couple of really good predictors and data driven predictors to their venture capital successes, I think this is public. It’s the out there’s repeat founders have had shown better success, which is true. But a really good predictor of their VC investment outcomes has been the number of days they got to know a founder. Right. So like, they knew Travis Kalanick, for years, and his company. And so I like to invest in the line and not the dots. And using these types of folks. Yeah, then them getting interested in startup companies that they send them and helping them and then helping with diligence, and I help them with whatever they they want to they want to do. I mean, the good thing about the Silicon Valley culture is, don’t come in with a hard expectation. Try to be helpful, try to be helpful and just see see where it can go.
Nick Moran 13:57
So you know, you run this algorithm, you’ve identified all these potential candidates for businesses, or are you then reaching out like at anytime? And in building those relationships? Are you waiting to see some sort of trigger or some moment?
Farooq Abbasi 14:12
Yeah, I would say, honestly, like, like, oftentimes, I just, I am not like waiting for a trigger or a moment to have a conversation, right? Like, in fact, to some degree, and we talked about sort of diversity and diversity, VC. I want to actually have I care about having an outbound sourcing model, because there are people that I don’t often know and I want to build connectivity to people that I don’t know. And so I’ll have a conversation with someone and I’ll kind of in my own heads for think, okay, like, that person is very happy with their organization. Maybe they’re having kids soon. Maybe they’re about to get promoted, whatever, like, let me just, you know, keep in touch and just be be accessible to that person. He or she whenever they’re ready. But uh, you know, there are there are interestingly some Some data driven signals for when people are about to start companies, like if they start blogging on medium.com, about racial inequality, or climate change, or the future of identity management, that’s a signal, they start angel investing if maybe their company was acquired, and they’ve been, you know, cooking at the business for two years or three years, and so they went through their earnout. Time doesn’t matter. But my hope is to get to know people early, and not to be so directive about the relationship.
Nick Moran 15:28
You know, because your, your model is different in the founder profile is a bit different than most, in what ways? What unique ways you know, are you providing value post investment, and you had mentioned this kind of at the top that you kind of help fill some of those gaps? You know, in many cases, these are highly technical founders, maybe they don’t have the same sales skills. You know, how are you contributing? And how are you helping amplify that portfolio?
Farooq Abbasi 15:57
Sure. So for the first 100 days, I’m very, I’m always there, I’m always accessible, I want to earn the right to be the first call, not just in times of goodness, but also in times of challenge, you know, if the kids are sick, if someone’s getting a divorce, like I really care about these people, because they’re human beings. So like a personal like being at being a first investor kind of gives you the right for that, for that sort of close, intimate relationship. And that’s what I really enjoy about it. With these types of teams, right, when they, when they leave their organizations, and they have the competitive advantage, and like in hiring and customer connectivity, there are there are some things that are, I wouldn’t say Are, are by necessity, like trends, but insular thinking, for example, so say, say, Nick, you were an engineer at Google. You could say, hey, we do stuff the Google way, we can’t do it this way. So the first 12 months of of investing in the company, I promise for qualified customer introductions. That’s, that’s key. Second piece is on recruiting. Usually, when I find a team, you know, maybe they need like a developer evangelist, or maybe they need, you know, as a product marketing manager, or product manager, I’ll often introduce the founder to at least two people who have done it before have had success and luck, maybe they join, maybe they join as advisors, but I want to sort of facilitate and accelerate the learnings of my founder to be capital efficient, and hopefully create those connections through osmosis. Definitely getting the companies funded like that. That’s key. Because younger in my career, I used to think, man, like, like, you know, getting cat like, who cares about fundraising like, you know, it’s all about the it’s all about the goods. It’s all about, like, can you deliver, having a founder operate in this in a safe space and have like capital to sort of do experiments intelligently, and make sure that they can raise more capital to continue their experimentation and find product market fit is critical. And so I’ll introduce my founders and follow on financings and in current financings to the floor for at least four of the best leads that I can kind of put together and backchannel to make sure that happens and happens well, and so I’m pretty explicit about this. And in fact, on my website, I have a section called the code. There’s so much left, there’s such a lack of transparency. And there’s even humor about this, like there’s these remember those Twitter profiles, like let me know how it can be helpful. Right, like, like, it’s actually it’s pretty, it’s, it’s, it’s kind of strikes me that it’s that it’s humorous. And so, you know, I would just sort of say, Yeah, I just gave you a bunch of examples. But in short, actually saying in advance of what you’re going to do and executing on it is going above the bar, right?
Nick Moran 18:47
You’re you know, you’re working with these companies, and it sounds like you’re working with them in a significant way. Right, the first 100 days. That sounds very hands on, you know, how do you make sure that you have enough, enough time allocation to the other responsibilities of running a fund, you know, including sourcing, new deals, and IR and everything else? Yeah.
Farooq Abbasi 19:09
I like I like time management is the secret, I think of successful venture capitalist thing. Yeah, saying no to things. What I have done, which I think suits me, and I’m trying not to be, you know, proselytizing here. But having a deployment pace of three years, and then also only doing four to six investments a year enables me to have time enables me to have time to sort of work hard for those first 100 days. There is no like small check for preface. There’s no optionality check. And I think of it as a as an investment as an investment of my own time and making sure that I am accessible to the founder in the first 100 days, helping them create the board deck. That’s important. It’s like a high high leverage machine in that in this case, kind of a low time asked, but we’re, you know, helping helping the founding team focus on fewer things and knocking it out. Park and measuring the right stuff. And look at some point. Founders won’t need that kind of high intensity of, of, of interaction. And I would say, in general, and when I think about my life, and when I think about when people have had the most biggest impact on me, it’s not necessarily like Did someone spend hours and hours and hours with me giving advice, it was at like, 30 minute conversation that totally changed my life. I tried to have an impact like that, every every time I can.
Nick Moran 20:31
That’s great. That’s great. You know, you’re, you’re a solo capitalist, much like myself. And a challenge that that I’ve had, that I’ve thought a lot about is, you know, how do you audit your own decisions? How do you? How do you keep score? How do you have some checks and balances? You know, how does one evaluate themselves and, and make sure that you’re making sound decisions? And kind of looking back at the track record? You know, how do you think about that? And how do you sort of evaluate yourself? Yeah,
Farooq Abbasi 21:04
that’s a great question. So the one wonderful thing about the long term is it’s dpi, right? So like performance, performance over enough time, like, you’ll tend to see that people trend towards a certain set of outcomes. And so that’s ever though, right? It does, it does take forever, I think enterprise infrastructure to happens sooner than other segments. But no, it’s a really good question. So for sure, I’m an I’m an individual decision maker, but it takes a village. You know, I like I don’t want to speak for you. But I don’t think we mean you we have a monopoly on wisdom. But the right answer often lives outside of the partnership. And so there are people that you cultivate good relationships with that you can kind of bring in. And so what I have is part of my as part of my fun, as I have a group of kind of active LPs, and we do quarterly calls together, and they’re very talented investors and operators, and they give me feedback on on, you know, they give me you know, sourcing is very useful, but also like diligence help. So if it’s a, if it’s a company, like a bottoms up SAS business, I’ll call the investor who’s the early check in Slack and UiPath. Or if it’s FinTech infrastructure, I’ll call the early check in Robin Hood, who is, you know, has an engineering background and supported that company early on. I think writing writing helps a lot. So writing a memo, I always do a memo, customer introductions during diligence is important. But if I’m looking a little bit more long term, I found this useful. And if it’s useful for anyone listening, I would suggest the same. Once a year, I write down every investment I’ve ever done. And I have like, it’s a sort of a secret Google Drive spreadsheet that I have. And I right, where I knew I could be right where I knew it could be wrong, where I didn’t know is going to be right where I didn’t know I was going to be wrong. And I really focused on the last two sections, and like, what were the sort of the unknown things or things that could have uncovered more and more, and that helps a ton. So I’m just I’m grateful, though, that there’s, yes, I’m a sole solo capitalist, and sole GP, but there’s a there’s a structural kind of aspects of my fund with my partners who are just wonderful. And I’m so grateful and appreciative for their for their support. But like creating the sort of systems and structures to reflect periodically, is super useful. And I think the ELPAC also also is useful too. Yeah,
Nick Moran 23:26
speaking of the ELPAC sounds like you put one together limited partner Advisory Committee, do they help with decision making? Or, you know, what, what? In what capacity? Do they assist you? You know, in leading this fund?
Farooq Abbasi 23:41
Yeah, sure. So it’s in process. It’ll be three folks. One who’s actually backing me for the for the third time and the first time as a sole practitioner. We meet, but we meet annually, and I would say that, yeah, for sure. Strategic topics around reserve management, deployment pace, and kind of checks. Yeah, it’s a good healthy sort of set of checks and balances around the big strategic questions. Yeah, certainly, certainly useful. And then the next one’s in November.
Nick Moran 24:12
Good, good. Fruit. Are you actively investing in open source startups?
Farooq Abbasi 24:20
So one of my hot takes, is so I’d say actively, yes. Both with an incredibly high bar. So there’s so well, so there’s a ton of excitement around open source and for good reason. It lowers the friction to adopt technology, which I’m supportive of. And it really is a core choice for a lot of database infrastructure. But as a startup investor at seed, there’s data to show that open source is a proven distribution model, but not so much to show that’s a proven revenue model. When you think about like volume of exits, when you think about capital efficiency, it actually takes 220 million bucks to create 100 million to dollars in open source revenue. And these companies are taking are staying private longer and said developer trends. What’s interesting is everyone was everyone thinks, you know, Docker is amazing. And everyone thinks, you know, X company is amazing, or this project or that project, really like, what do you think about it, it’s not just downloads, it’s not just forks. And like these sort of metrics at the early stage, like you’re still you’re still underwriting, monetization risk as an investor, and usage and budget, and there’s so many missing pieces to it. And so look like around database infrastructure, MongoDB, elastic data, bricks, confluent. Like, these are all excellent companies. But I think the better risk reward for investing in an open source tends to be post revenue. And that’s usually around sort of Series B, and plus, and I think Mike Volpe at index has done a really good job. And same with Matt Miller at Sequoia and others. But then the question I would ask every founder who isn’t who has open source software, and I’m an investor in armory.io, which is doing doing fantastic. And that’s a commercialized Spinnaker open source project. What I would ask all these founders is like, Why does being open source help you? And if they if they just say, oh, some loose answers are on community and this sort of like, religious philosophical approach, it’s kind of it’s kind of an insufficient answer for me. Like, try to, like, your startup is like your home, or like, try to try to make your home and design it in a way that is like useful for you and then useful for your customers. And so, yeah, I’m, I, I’m open, I’m certainly open to it. But I tend to have a bias towards proprietary software. And in fact, you know, when when these founders leave, or future founders, I should say, leave their their mothership, like they have assessed open source, and they realize that a proprietary solution is the right way.
Nick Moran 26:51
I like it. It’s certainly a hot take I, when we have a Soliel dish bond on the program, I’ll I’ll definitely ask for his take on that. Because I know he’s got an active approach to investing in open source. Yeah. And
Farooq Abbasi 27:02
him and I are co investors in armory. Oh, yeah. So like, I’m, yeah, for sure. open to it. And it’s a it’s a very, it’s a it’s a great company.
Nick Moran 27:11
Fruit, what about, you know, what are your thoughts on sort of bifurcation in the VC industry with, you know, capital underwriting, underwriting r&d risk versus sales and marketing risk?
Farooq Abbasi 27:24
Yeah, so, the, like, there’s, there’s all this nomenclature now around like seed, post seed, Mango seed, I don’t know that maybe there’ll be another maybe there’ll be avocado seed one day. Like, that sounds like California, and I could probably do it at some point. I just like when I think about like, venture capital and like your, your your funding innovation, like what risk? Are you underwriting? Are you underwriting r&d risk? Are you underwriting sales and marketing risk? We’ve seen a lot of the larger like, kind of, and I think it was Nikhil, who who articulated this as like aggregator funds, or is that is that right? aggregator versus specialists that I’m forgetting agglomerate or agglomerate? Or excuse me? Yeah, so these big mega firms who manage multi billion dollars, and the ones that actually on their website, say like, you know, we back founders at the early stages, that’s a, that’s a generalism, what a lot of these firms are looking for some evidence of sales and marketing risk, and they’re benefiting from the fact that an enterprise software and infrastructure, everyone’s a customer, and these markets are really, really large for underwriting r&d risk. And this is what I see like, and I have deep empathy for these types of founders when they leave, you know, like Oracle or Cisco, and they come to you and they have kind of like a loose idea. Maybe they even have it’s a formed idea and they have some pilot revenue and it looks at slumpy those those those voices, it’s like a no story is it falls on deaf ears. And so like my the gap that I’m that preface is filling in the market, and like what I want to be there for as for these the, you know, 40 to 45 year old immigrant engineers who lead these organizations and they are there, they’re creating something and I am underwriting the r&d risk of it, and at seed and where valuations are, but also just what I enjoy and being part of like, the founding story of these of these companies, is just where I like to, it’s where I personally like to be so. Yeah, I look, I look forward to partnering with the sales and marketing risk underwriters at sort of Series B, C, and D. And I love them all. Because they they’re there, it’s fuel on the fire, but you got to build the engine first. Yeah, it’s
Nick Moran 29:34
a good partnership. I mean, I would have to imagine that if you’re selecting the right talent, you know, and partnering with the right folks and the, the r&d risk is a great place for you to sit and kind of help with from a capital standpoint. Yep. Absolutely free. What are your thoughts on biases and founder selection in you know, data driven predictors of founder success?
Farooq Abbasi 29:59
Yeah, I’m so if, if you think about if you just do an analysis, I take away all the passion take away like the crazy crazy our outlier successes like Zuckerberg and Bezos, more often than not successful entrepreneurs, particularly enterprise 43 years old. 43 is not a Stanford dropout who has flip flops or whatever. They’ve typically worked at like a tier one tech company like an oracle or IBM, or a Cisco, maybe a Yahoo, they’re immigrants, they got a chip on their shoulder. And again, like they’ve they’ve been a part of a founding story of a startup and they want to be CEO this time. And if that kind of if that founding story last time was like a 50 million to 150 million, and they made a little bit of money, and they’re inventing, they’re actually self funding and they’re putting more skin in the game. They’re actually two times more likely to have a billion dollar outcome next time. If they’re angel investing, that their angel investing, it’s actually there’s there’s there’s been data to show that there’s a higher correlation with venture capital successes. And if you think about, like, the intuitive reasons why it’s because they’ve won the investor hat, and they get to learn, you know, other you know, how other founders communicate, ask questions to investors. And so, I think about these inputs and how I’ve actually codified them and my algorithm called Klarman as an ode to sort of the Seth Klarman, the the famed value investor. It’s it’s self selecting, like a pre qualified group of really impressive people who often are just unloved.
Nick Moran 31:33
That’s great, that’s great. Farouk, you’ve been passionate about diversity, you co founded diversity, VC, I believe, check Warner and, you know, I’d be curious to see or to hear more about how you’re practicing, you know, a more inclusive style of venture capital.
Farooq Abbasi 31:52
Yeah, that’s, it’s a really good question. And it’s often not asked asked about. Yeah, look, like, I’m, I think I mentioned earlier, like, I’m not one of these people, like I didn’t, you know, venture venture capitalists, the ones that are kind of, you know, tier one, Silicon Valley funds that are kind of all the same, and that some of them are even related to one another. And it’s, it’s a, it’s, it’s kind of a kind of a small world. And that’s a reflection of the founders that, you know, they all back. And I almost have some empathy towards it. Because, you know, biases come out in human decisioning when you have imperfect information, and my god venture is imperfect information. It says, like, like, like, we’re, we’re, we’re, like, you know, do we back to the people because they remind us of a childhood friend, or do they look like me, or they remind me of someone or whatever. So I’m actively trying to remove bias from my own decisioning. So for one, like with, with the algorithmic sourcing tool called Klarman, which I talked about earlier, it’s totally gender neutral, and it’s education neutral, it’s more merit focused. And so it doesn’t matter if you went to, you know, you know, San Jose State or Harvard or whatever, you if you, you know, had a good title and you were promoted. Like, that’s, that’s good, and it’s pre qualified for me. Second piece, I mean, like, when you think about stakeholders, right, so founders matter, but also LPS matter. So 50%, of my LPs are female Endor people of color, which is good, and then I’m trying to make more of an effort to be inclusive, because even that community, which is actually better and more gender diverse, at least, than than the venture capital GP community, you know, like, venture is a really wonderful asset class, and you’ve done, you’ve done wonderful work with your founders, and I’ll hopefully continue to do wonderful work with my founders to that, that alpha and that, like, economic empowerment should be, should be pervasive to other groups, and not just Caucasian males. When I think about the founders that I invest in, so when I create the board docs with them, I actually ask them in the org chart to show gender and ethnic split by by function, which is important as well as turnover for when people leave, which is key and I know what you what you measure, something that you can change, I illuminate these topics a little bit earlier for these types of founders. And then I aggregate that and actually share that with my with my LPs. And so I mean, there’s there’s so much more to do. There’s there’s 1000 more things to do, but that’s what I’m doing on a day to day basis and for sure, I keep my you know, inbox and calendar sometimes open as much as I can, you know, when when someone of you know, someone wants to get into this industry and they email me for a 15 minute chat. I usually take it I usually I usually I usually take the call I’m like alright, like call me in five minutes or whatever and I give them my phone number. And just to see because someone Someone saw that in me and if if more people of different backgrounds get into this industry, socio economic McLean’s gender experiential, diverse people, they’re more likely to fund the fun soaks that are reflective of like the overall universe. Because an opportunity is unfortunately in the financing world, it’s it’s not meritocratic. It’s a lot about who, you know, I hate warm, warm introductions is funny concept to me. Yeah. All right.
Nick Moran 35:21
I’m gonna give you a hypothetical, hypothetical investment situation. All right. All right, you can only ask me three questions for three specific data points in order to make your decision. So so let’s say you’re approached to invest in a frontier enterprise startup, the founder is credible with great domain expertise in the space prototype has been built that demonstrates the value, but maybe it’s not commercial ready to breadboard. And let’s say the market seems large and interesting as a space that will experience strong growth. Here again, the catch is that you can only ask three questions for three specific data points. What three questions do you ask?
Farooq Abbasi 36:00
One? Could I have more time? Sorry, it’s good. Yeah, no, it’s a super good question. I would say, first one would be what? What technical or product opinion? That Do you have? That’s contentious in your industry? Like what? Like, what do you and I asked this question, because I want to understand, you know, if that’s the foundation of someone starting a company, but like, why did they disagree? Like, what does conflict look like for them? So that’s the first question. Second question would be, you know, which person or which customer outside of your own company believes you believes in you the most? And why is it now for them? And it’s useful, it’s useful, it’s interesting to kind of triangulate, you know, for a customer diligence, but like, why, why now? And why do they believe another person’s word? And then the third thing, third question would be, what would make you stop working on this? And the reason I asked that question is I want to better assess grit. And most people don’t expect that question. And they get a little uncomfortable when they ask it, and I kind of read their little body signals, body signals and facial signals. And yeah, and but basically, like, like, like, getting behind someone’s motivations for why they’re sort of starting a company is good. Like, why are you starting this call? I saw this massive opportunity. And you know, what will make you stop doing it? Like, you know, will they will they mentioned an answer about family? Will the maintenance enter about health? Well, they mentioned mentioned an economic opportunity. Like, it’s, it’s interesting, just, there’s no real right answer, but it gives me a better insight into who they are. And so, really, like at seed stage, I mean, founder market fit is what we’re what we’re sort of optimizing for. And once we have that we can put some gas in the tank and, and get some future capital efficiency, because hopefully, this frontier enterprise hundreds on it before and, and
Nick Moran 37:56
have, you had a situation with like an early startup that, let’s say, had some traction and had some customer momentum, but optically, it looked great. But you know, those, those optics ended up in red herring, you know, like, the company wasn’t able to kind of get to product market fit or hit escape velocity are, you know, really ramped venture even beyond that, that first initial year or so of success? Has that ever been an experience you’ve been in? Yeah, and
Farooq Abbasi 38:29
I wouldn’t name a name, but I’ll tell you kind of like a situation that I’ve seen play out. Where, say it’s a frontier enterprise founder, and like, they’re kind of famous in their community, and they have a bunch of VPS that they’re friendly with it either there will almost be like a like a false signal. Because they like this VP of product at bio box, or whatever, will actually like will just champion it and own a little bit of budget and be like, hey, like, I got a license from box or and then I got I got a license customer from Salesforce idolized the customer from snap, or whoever it is, that that happens. And so there is a way to solve for that. And the way to solve for that is introducing these types of founders to people that don’t know them. And like throw like throw like a healthcare technology, a healthcare company, or a hospital awesome throw, like a real estate company or financial services firm. And these fortune 500 execs like they don’t have time for anyone. And they’ll give you the painful truth that you need early on as a founder. And so hopefully, hopefully, introductions to that, to these types of teams early on, will help them actually find product market fit because it’s easy to get in this like Valley bubble. Like I’ve just okay, like I sell to startups and have high growth startups and these are all my customers. But you know, where whereas whereas a lot of GDP, a lot of GDP is outside of technology explicitly and it will become technology at some point that you got to you got to start that early. So, yeah, it’s a little bit of the insular thinking thing we were talking about earlier. And, and also just the false signal and getting your buddies to give you budget. That’s bad.
Nick Moran 40:12
It’s great, great observations.
Farooq Abbasi 40:13
Nick Moran 40:14
Baruch. What do you know, you need to get better at
Farooq Abbasi 40:16
raising capital, actually, I think is a real skill. And it isn’t always meritocratic. And what I what I will say is, it’s sometimes hard to communicate to to LPS who are important, important actors in the ecosystem, right? They a Armis, with a capital to take on risk. You know, why enterprise infrastructure is sexy. It’s a little hard sometimes to people to to articulate it. But, you know, I hope in the long term, I get better at it. But what’s what’s nice and sort of the great the great equilibrium, yes, DPI, it takes a long time, but um, being positive dpi, helps. So I’m, I’m, I’ll hopefully get better and better with results. Two. Very
Nick Moran 41:04
good. And what’s the best way for listeners to connect with you and follow along with preface?
Farooq Abbasi 41:09
Yeah, so, man, I wish I was more of a Twitter person. I am not. But I do, we do have Twitter accounts. So at profit ventures net Farouk underscore bossy, but honestly, please just email me Farukh F AR o Q at preface. ventures.com very happy to have a conversation and to help folks. Any way I can. Awesome. Well, this
Nick Moran 41:34
is a lot of fun for Ruka. You know, I appreciate you making the time and talking through like a really compelling model. I mean, this is not one that we hear of often or in this form on this show. And it’s it’s one I mean, you highlighted some great entrepreneurs, you know, zoom, and many others that that struggled to raise but certainly had the right mindset and the right product. So excited to watch you know, how things evolve with preface and see how how big that DPI can get.
Farooq Abbasi 42:04
Thanks, that’s a that’s a good send off.
Nick Moran 42:10
That we’ll wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest competently. Thanks for joining us