How venture capital works with Tushar Roy, Partner at Square Peg Capital

Episode summary

Tushar Roy and Philipp dive into what venture capital is and what VCs look for in potential investments.


Episode transcript

Philipp: Welcome to another episode of In Your Best Interest, your personal finance podcast. I’m your host, Philipp Muedder, and today we will be chatting about all things venture capital. It's a topic that we've been asked to cover for a considerable amount of time from listeners, especially with the recent rise in tech company growth throughout the COVID pandemic as well as high profile startup failures that have been hammering the news like WeWork and Softbank.

So people are getting more interested in how we see firms operate, how they pick deals, and how one can be part of it. So in order to learn more about the topic and see if that is something for us to consider in our pursuit to becoming better investors, it is my pleasure to have Tushar Roy from Square Peg on the show today.

Tushar joined Square Peg in January 2015. From inception in 2012, Square Peg today is a venture capital fund that invests in Australia, Israel, and Southeast Asia with a focus on Series A and Series B investments. Tushar has more than ten years advisory experience in various industries, including tech, media, telco, financial services, and travel.

He has advised on all facets of business, including domestic and international growth strategies, M&A, go-to-market, leadership development, organisational design, and process improvement. Tushar was a principal at Boston Consulting Group, specialising in growth and TMT.

Prior to that, [02:00] Tushar spent five years in the legal practice at Baker & McKenzie. Tushar also holds an MBA degree from INSEAD. Thank you so much for taking the time to share and joining us on the podcast today.

Tushar: Pleasure to be here.

Philipp: Yes, we really appreciate having you here. I think it's a very exciting topic as I mentioned before for a lot of our listeners, personally for me as well, working in a startup, right? I would like to learn a little bit more about what it's like on the other side, on the venture capital side as well.

But before we dive right into the topic, we usually ask some personal questions to our listeners because it's getting to know the interview guests. So what we usually start with is getting to know a little bit more about Tushar before all these accomplishments that I just listed out. What was it like for you growing up?

Tushar: Look, hey, I had an atypical childhood to most people. In that, I’ve lived and grown up across several different continents. So I was born in New Delhi, India, I spent the first nine years of my life in India, so primary schooling was in India. Then my family migrated to the UK, and we spent the next seven years living in different parts of England, basically no longer than two years in any one place.

So as a child, particularly during my early teen years, I moved around a lot, changed schools every couple of years, had to make new friends, and never could lay down roots. After seven years of moving around like that, my family decided enough is enough. We wanted to stay in one place for some time, so we all migrated together to Sydney, Australia.

And that's where I completed my secondary schooling and did most of my tertiary education. After which I went on to work at Baker & McKenzie as a lawyer, then went to do an MBA at INSEAD, which took me out of Australia again to France and then to Singapore. But then I came back to Australia to work in BCG for a while before joining Square Peg.

So I think what's really shaped me as a person is that early experience [04:00] of moving around, having to adapt to different cultures. It’s partly what attracted me to INSEAD as well because it's a very international environment. But also, it just helped me build skills that, for me, were necessary to actually survive, which were to land in any new place, learn it quickly, adapt, build relationships quickly. And it's something that, if I reflect on what's most useful for me today as a VC, it's not the legal part, it's not the consulting part, it's actually those relationship-building skills that I learned from moving around as a kid.

Philipp: Yes. No, lots of moving around. So it's a great experience always; I think a lot of our guests so far have lived in a lot of different places around the world and that really shaped them, right? Same for myself. I lived in lots of different places, moved around quite a bit. But making new friends is always great, right?

That gives you a nice life skill of networking also and learning a lot more about this. So, how then if I go back, you mentioned you studied law and became a lawyer at Baker & McKenzie. Why did you study law? Was there a particular reason for it?

Tushar: So I studied computer science and law together. And in Australia, it's very common to do a dual degree with law; you can't really study law by itself as an undergrad. Why did I study computer science and law? Well, the computer science part's easier to explain: it's because I’ve always loved technology.

Ever since I was a kid, when I was living in England and we were moving around a lot, and I didn't have friends that much. My parents bought me a computer, one of the first sort of home computers, and I used to play with it, learn to program on it, and tinker around on it, so I’ve always had this affinity for technology. The reason for law is quite boring: I didn't get into medicine, which is what my parents wanted me to do, and the next best thing was being a lawyer.

I think as a migrant family, you always want your kids to have jobs that have a certain amount of status in a community. So you often find migrant families want their kids to be doctors or lawyers [06:00] or hold positions like that. I was attracted to the intellectual aspect of law, so I did enjoy doing the degree. But that's why I went into it. There was no other grand plan behind it.

Philipp: Yes, that's good. And I think for listeners, I always like to ask these questions about how you grew up and how you figured out which degree to get to, or how did you get to your job, right? And there are so many different avenues, right?

And it's never a straight line when it comes to where you end up yes with your job, and you can tell for yourself. You can have that affinity to tech, you did law; both of these are very important when you do deals or when you create investing companies, right? Because you have a legal side of it, but you also have to have the affinity or interest in actually the topic that you're investing in, right?

Tushar: Absolutely.

Philipp: So with that being said, first job Baker & McKenzie you get to work the first day and after 30 days you get your first paycheck; what did Tushar buy with that first paycheck?

Tushar: So my first paycheck was not Baker & McKenzie actually; I don't know how far back you want to go. But my first paycheck was I used to walk around my neighbourhood in England washing cars, so I had like my own little business, if you would, when I say business, sort of being very kind to what I was doing.

I literally had a bucket and a sponge and some soap, and I used to walk around and ask people if they wanted their car washed. And then they would give me £1if I washed it. And that was really the first time that I earned money for myself. Didn't spend it on anything particularly exciting. I think it was fish and chips, and some lollies.

So graduated from that to the paycheck you're talking about at Baker & McKenzie, which was far more substantial. And after paying a ridiculous amount of tax, I decided to spend it on what any sort of young professional in a seemingly sexy profession does: I bought a brand new suit and a bunch of ties, which then I think, I still have them but I haven't worn them in over ten years, yes.

Philipp: Oh, that's interesting. So you've been hustling [08:00] since a very long time, washing cars. With that being said, how did that affect you growing up with money, right? So obviously your parents have instilled somehow into you also already I can tell that you have to earn your money, right? It's not all given to you from family, and you said your immigrant family, you're moving around a lot as well, right?

So how did you develop your sense of personal finances when it comes to personal finances? Did you get a stipend from your parents as well? Was it all what you earned? How did you go about that? And how did it develop over time now?

Tushar: I’d say my thinking around money is far more sophisticated now than it was growing up. I think the thing with money is there comes a time in any person's life when they start to realise the value of money. And then, depending on where you're coming from, you have different importance placed on money.

So growing up as a kid, money was never taught to me as the most important thing; it was other things. But I realised early on that you need money to access things, to access opportunities. So I’m not sure if I’m answering the question when I probably answered it again from the beginning.

But to save money, you need to earn enough to sustain yourself first. So I think the first part of my life was around as a family unit, making sure we had enough to survive and have a comfortable life. And then we started to think as our situations improved, okay now we have excess capital like what are we actually going to do with this?

And as me and my brother finished education and got better and better jobs, the aspiration for what we could do on the financial side grew more from sustaining ourselves and providing for our families, to okay, how do we start to create wealth. [10:00] And that was a bit of a journey, and it's through that I started to learn around.

Studying computer science and law, the thing that I didn't study was business, so I didn't know anything about the stock market or even basic finance, which is partly why I went to INSEAD. I’m not sure I’m answering the question anymore.

Philipp: No, I think you're spot on, right? And what I was getting to is then how do you look at your investments now, when you look at your portfolio? Are you more comfortable with certain investments? Do you look more into real estate? Is it something that you're interested in? Maybe it's as part of the VC world.

Maybe you invest also privately in companies that you as a company invest in. But maybe it's the stock market or ETFs, right? Whatever it may be. How do you structure like your personal finances in that way?

Tushar: Yes. I learned how to structure my personal finances from INSEAD. So I learned from the teachers there the value of diversification, how you think about different asset classes. And so from quite early on, I’ve had, without deliberately thinking about it and being very deliberate about it, I’ve always had a fairly diversified savings plan.

Now it just so happens that you live in Australia, you want to own a home, as soon as you do that you are way over-indexed on real estate, because that is like by far your biggest asset, and it's super expensive. But whatever is left, I did try and put that into places that were quite different to real estate.

So I’ve never been a very active stock trader; I do believe in efficient capital market theory, so I’ve never felt like I had any unique insight into a company that would let me buy a particular stock and hold it. I felt like it was punting. And so I’ve always gravitated towards low-cost, diversified exposure to public markets, even before we [12:00] invested in StashAway; I mean, for the longest time, I’ve been an investor in Vanguard's funds in Australia, which basically are index funds.

Philipp: That’s how a lot of people start, right?

Tushar: Yes. And I’m a big believer in buying and holding the market, rather than necessarily buying and holding a particular stock.

Philipp: Yes, especially if you have a long-term time horizon, right? My question I always ask friends, especially because friends always say, oh, what do you think you invest in, right? Especially with StashAway. Yes, we like StashAway, but we also want to do something else. I said, well, that's great, but then is that investment, do you think that company is worth more in 10 years than it's now?

That's one of the big questions, even for public companies like an Apple or an Amazon, right? That always asks, hey, is it worth more in 10 years or not? Then okay, then invest in it, right? But I still think go with the diversified approach; why do you have to take this risk when you can just own the whole market?

Tushar: Well, I think there are no rules to this stuff. People often think about investing as an extremely economic and rational activity, but it's not; it's an emotional activity. People like to buy stocks because it's engaging and exciting, and you're taking a bet on something. It's like that in venture capital as well.

I think if people were purely rational and completely educated, then the world would look very different and possibly quite boring. But I find in everybody I meet, we meet a lot of investors, both sophisticated and unsophisticated, for all of them, there's a heavy, healthy dose of emotion in what goes into their investing strategies.

Philipp: Yes, that's very hard to put aside, very hard to put aside. With that being said, last personal question before we get into venture capital, because I do want to, we have lots of questions there, I really want to get deep on that. What's the best investment that Tushar has ever done in his life? It doesn't have to be financial either; it's whatever you want it to be.

Tushar: I read this question yesterday, and I thought I’ll think about the answer later on. I actually don't have an answer to it. There's so much luck that goes into investing. People ask me like [14:00], “What's the best investment you've done at Square Peg?” and there's many that are working out really well for us.

One of the best investments that I’ve personally made is one where a good colleague of mine at BCG was going to invest in a startup and said, hey, I’m about to do this, do you want to put in some money with me? And I asked him four or five questions, and met the founder for 10 minutes and thought sure; I’ll put in a few bucks. And that's still one of the best investments I’ve made.

And so counter-intuitively, you do a lot of diligence on opportunities, you think deeply about a market in some cases, and it either works out, or it doesn't. In other cases, luck just plays such a big part; you don't do any diligence, you put in a bit of money, and it turns out to be an amazing outcome. So that's one of my best investments.

Philipp: That’s good to know. And I want to get into this; this is more on the angel investing side probably. But I have some stories to tell and then ask you some questions about this going forward. But now, thank you for sharing, first of all, all these personal details, it's very interesting, and I think it's a lot of great insights for our listeners. How would you then explain to someone what venture capital actually stands for?

What is venture capital, right? It's this big word. As I said in the introduction, it's been thrown up, thrown around quite a bit, right? Because ever since Facebook's IPO, it's becoming more mainstream. Also the last 10 years since the financial crisis, it's all about tech, right? It's all about growth, it's all about startups.

We have seen huge raises and valuations, and WeWork, as I mentioned, is one of the big examples that just money is thrown at, and they can spend it as they like. So people in the news see the falls, the rises, and everything in between, but it's polarising. So how would you say venture capital, what does it stand for, and what is it actually for in the layman's terms?

Tushar: So, as a concept, venture capital has existed for the longest time, pre-dating public markets, right? Like when royalty finance [16:00] ships to sail from Europe to Asia, that was financing a venture, that was capital provided to finance a venture of sailing and trying to discover new lands. So as a concept, it's existed for a long time. The modern understanding of that is applied to a more confined set of types of businesses.

Essentially it's private capital, so it's money that is invested into ventures, and they use the word ‘ventures’ because they're typically very early stage in their formation. These are private businesses, not public businesses. So not everyone can access them and invest in them. And it's providing capital to those businesses at the early stage to help them to get through those early stages of growth of building a team, building a product, building a service, launching it into market, and hopefully trying to make it successful over the long term.

And these days, when people say ‘venture capital’ or ‘VC’, mostly they mean that it's investing in companies that have a technology angle to them. Now that doesn't have to be that way, but that's just the way the market understands the term now, which is why when you look at what venture capitalists are investing in, it's predominantly technology companies.

Philipp: Yes, technology-enabled companies. You're right, and I think that's interesting for people to understand. Especially on the private market side, because people always think it's a stock market that drives all the economies. But it's, actually I think it's more than 95% it's actually still private markets, it's venture capitalist, private equity.

And with that being said, there are differences in how to access these private markets or how to invest in them. One you just mentioned is venture capital; there's also private equity, and there are also angel investments, right? Which predates, even like the VC coming into the companies. What would you say are the differences between the three of them?

Tushar: There are several differences. So let's take angel and VC; I think angel funding is individuals that are investing their own money into ventures that are [18:00] interesting to them, or which they feel some affinity. So it's me finding an entrepreneur and liking what they're doing and giving them some capital, or getting some of my friends together and doing that.

Then you have venture capital, which is typically organised as a fund. You have a venture capital fund whose job it is with a team to invest in multiple different entrepreneurs to drive a return. And the core thesis when you're investing at that early stage into venture capital or angel investing is you're investing in the team; you're investing in the person to build something and scale something.

And that's the biggest bet you're making. Then when you think about private equity, private equity is later stage investing still in private companies. Check sizes tend to be larger; deal structures tend to be different. And also, the mindset with which you invest also evolves. So venture, as I mentioned in angel investing, you're betting on the team to make it work, and it either will work or it won't.

In private equity, you typically take larger stakes in a company, and you have more ownership and more control of the outcome. So you are more operationally involved in the business, trying to drive it to the outcome that you want. So those are the high-level differences.

Philipp: Yes. And I think you mentioned the involvement, right? In a private equity firm, probably more. Because people put in substantial amounts of money, there's also the way that the deals are structured is different, sometimes with a lot of debt as well, and then they turn around the company.

Tushar: But also like a private equity firm, a fund in private equity might have maybe 5 to 10 investments in a fund; 10 would be quite a lot. In a venture fund, it's very common to find 15 to 25 or 30. So you fire fewer bullets, bigger bullets, and then you take more control.

Philipp: Yes. And you mentioned that in VCs, it's mostly 15 to 20, or it could be substantially more. Is that because it's a higher risk? You believe it's a higher risk?

Tushar: It is high-risk, absolutely. [20:00] It's a very high-risk investment class. I certainly wouldn't suggest to any listeners that they over-index their capital into venture capital or private equity. But as part of a diversified portfolio to generate real alpha or differentiated returns, because the returns are completely uncorrelated to public market returns, for example, then it can make some sense. But absolutely, it's high risk.

If you look at the best-performing venture funds in the world, a large proportion of their investments in e-commerce fail. They don't return capital, or they don't return much capital. So venture investing is power-law investing. You want to have a diverse diversified set of assets in your fund, and your hope and expectation is that a handful of them will go on to return all of the capital of that fund and generate all the profits on that fund.

Philipp: So it's a numbers game?

Tushar: Yes.

Philipp: Very big. So let's assume our listeners are interested in investing into venture capital, and they too would like to add some part of that to their portfolio or to generate that alpha that you just mentioned. We can talk about ways to get into it in a little bit, but maybe you can explain a little bit more of how the VC fund works.

Maybe like where does money come from to actually start a VC fund, or what's the life cycle of a fund and things like that. We can slowly go through a couple of the items I wanted to touch. But starting with where it actually comes from, right? So how do listeners actually get access to it, which is how the VC funds work in that way.

Tushar: So VC funds are typically started by a group of partners that invest their own capital into the business. These are called general partners. They then seek out capital from others to invest in their funds, and the general partners will control the investment process end to end. The people that invest into the fund are called limited partners. [22:00]

These can range from individuals, high net worth, family offices all the way up to large institutions, endowment funds, sovereign wealth funds, and the like. So if you look at the investors behind some of the largest funds in the world, you'll find a cross-section of all these types of people that I’ve just mentioned. Typically, venture capital firms operate as funds, so every few years, they will raise a fund. And then spend the next few years deploying capital from that fund into different companies.

Philipp: So even VCs have to go fundraising, just like the founders do?

Tushar: VC's continuously fundraise, continuously fundraise depending on the VC that process can be super simple and be done in a week. Or be extremely painful, and even in success, take 6 to 12 months.

So it's an extremely involved process. What I tell people and entrepreneurs is that actually, there are more similarities and differences between what they have to do and what VCs have to do. VCs have to raise capital, manage stakeholders, and manage where they put that capital, which is what the entrepreneurs have to do as well.

Philipp: Yes, absolutely. So then you told me that's where the money comes from, is there a way actually for non-accredited investors to get any kind of exposure to venture capital? Or is it really reserved for, like you said, big government pension funds, institutional money, family offices?

Tushar: There are now more options for people to invest in early-stage ventures than they've ever been, and technology has facilitated that. One example of that is crowdfunding platforms; if you look at Kickstarter, that is one example of allowing access to anybody to invest in a super early-stage venture. But if you want to invest in a venture capital fund, you need to usually have a certain amount of capital to invest. And you need to have access to venture capital funds.

And the key thing is, I mentioned to you the power-law dynamic [24:00] in venture capital funds, where a few investments return the bulk of the profits, that actually also applies to venture capital firms themselves. Where certain firms have a great track record and consistently generate great returns. Many don't have that track record and lose capital. So you have to be quite careful as an investor if you want to access this investment class, as to which firm you're accessing, what their track record is, what's the management team likes, what their strategy is before putting money down.

So on paper, it looks like it's more possible now than ever to invest in a VC; I’d say that for a large majority of retail investors, it's still quite hard to get access to the type of venture firm that I think you should be investing with.

Philipp: No, and it's tough; it's the same with private equity, right? When people ask always ‘hey, how do we get access to private equity,’ it's kind of the same thing, right? You need to know some people, then also the research you have to do on the manager, it's a whole nother story. So it is still a little bit elusive in that sense. So the angel investing you can do on your side because you do it personally.

Hey, maybe you put in 25k or 50k into the startup that your friend is starting, or from your friends about oh, this guy is good, right? And you invest in the founder, as you said. But getting into it, it's still quite elusive, so to speak for the everyday investor, right? So you mentioned where the money comes from.

Now the fund gets deployed, what timelines are you looking at in terms of let's say I did get access to you to Square Peg one of the funds, I put some money in. What can I expect over the next, do I get my money can I get my money back every month? Can I get my money in 10 years? What's kind of the timeline you're looking at?

Tushar: So usually, venture is an extremely long-term and long-ranged investment class. So typically, any venture fund has a life of 7 to 10 years with the right to extend that even further in some cases. And that makes sense [26:00] when you think about what they're investing in; they're investing in really early-stage technology businesses that need time to get to material scale and deliver a return.

So you need to sort of partner with people over a really long term. What that means for investors is that they need to be comfortable that there will be illiquidity in whatever they invest, which is the other reason I say you shouldn't over-index your investments into venture capital.

Philipp: Know that it's locked up for a while, and be comfortable with it that you don't need that money, right?

Tushar: Yes, that's right. That's the advice that we usually give people, is you need to be comfortable that you will possibly not see the full return on this capital for 10 years’ time. And the counterbalance of that is that we think if we can do our job right, the returns you do see will be fantastic. And far greater and uncorrelated to the returns you might see from other asset classes that are public or liquid-like real estate or the stock market.

Philipp: Yes. So a longer time frame, know that it might be liquid, you can't access it. You said in the beginning, or I actually said at the beginning, but Square Peg where you work, where your partner at, is mostly or predominantly looking at Series A and Series B investments. For people who have no idea what that means. Can you maybe explain a little bit like the different stages of a startup, and then why you invest actually only, try to invest mostly A to B stage?

Tushar: Look, the letters can be a bit confusing, and in the end, I don't think they mean that much. I think a simple way to think about it is what stage of company are you most comfortable investing in as a fund, and what's the check size that you can invest given how big your fund is. So what people call seed stages, companies that are very early in their journey, they may not even have a product.

They barely have a team, they have a vision for what they want to do, but there's not much else other than maybe a couple of founders. So typically seed stage [28:00] is investing at that stage. What we call Series A is a stage that comes next, when you've got a bit of a product, you've got some initial traction in the market, you've proven out some things, and you're looking for more capital.

Then comes Series B, which is, ‘okay, we've proven product-market fit, we've proven that the business fundamentally works, and now we're looking for more capital to scale the whole thing.’ And then you have Series C and Series D and E, and you go through all the letters of the alphabet until one day there's a public market listing or some other exit for everybody. When we say Series A and Series B, we really think of it as what's the stage of business at which we feel most comfortable investing, and also what's the typical check size that we can write from a fund that is our size.

And that means for us, and each of these letters corresponds loosely to a range, a numerical range of what check you might write. So Series A investors will typically write 2 to 7 million (US Dollars) check sizes, Series B might write 7 to 15 (million US Dollars). So for us, that's really why we say Series A and B because we feel comfortable. And as a general rule, we write checks that are anything from 3 to 12 (million US Dollars)

Philipp: 3 to 12 US million, okay. So thank you for the explanation, very helpful, I think. Then my next question was actually going to be, how does a VC make money? How do they profit? But then also, depending on the stages, right?

The earlier you go, the more return you probably expect as well, right? The multiple of what you put in. What do you guys aim for, usually on a particular company? When you invest, do you think about hey? This needs to be make 10x of what I put in? And that is a 20x, 30x, 5x. What is success then for you?

Tushar: VCs, different VCs have different guide rails around how they do this set, yes. At Square Peg, we try to not think about it based on specific thresholds [30:00] because we think that it's very hard to tell when you're investing in a business at an early stage what it will become in the next five to ten years. It's a long time, right? And so what we try and think about is what's the problem that's being solved, how big is this problem?

Is the problem going to get easier or remain a difficult problem in years to come? And if this group of people can solve this problem, how big an impact can they have, and the impact firstly in a market sense or a customer sense, like what impact can you create with people in the markets in which you're operating, and then what could that translate to as a financial outcome for the business.

And what we want to see is that if you can thread that needle and become really successful, in success, that business can be big enough, that our shareholding in that business could return the capital of our fund, does that make sense?

Philipp: Yes, absolutely, absolutely makes sense. And then before we go into finding companies to invest in, I did say I would ask you these questions. So how is a VC fund structured to make money? What's the fee structure of a VC fund like?

Tushar: So, VC funds typically have two types of fees that they charge. One is a management fee, and one's a performance fee. The management fee is a percentage of the capital that you invest, and that fee is used to essentially run the business day to day, and to help pay for the team and help us try and find the best investments.

And then the next part, which is the more lucrative part in success, is the performance fee, which is called ‘carry’. And that only applies if the venture firm can deliver an outsized return on the capital. And it's typically a percentage of the profits that go to the manager. [32:00]

Philipp: So that's where you also have the skin in the game, so hey, say this is where our performance fee for the performance we can deliver over and above, right?

Tushar: That's right.

Philipp: Yes, that makes perfect sense. So it's a little bit like a hedge fund, not quite, but close enough.

Tushar: Yes.

Philipp: Great. So we all know now where the money comes from, what kind of timeline we are looking at if we ever want to invest in, and what we need to be aware of. We know how much profit can be made hopefully, and next step is you set all this up, right?

You set up the VC fund; now you need to go out and actually find companies. And I assume the fundraising is hard, but finding the right investment is also very difficult. I don't know how many pitch decks you get every day or every month; it's probably quite a bit.

Tushar: Quite a few.

Philipp: Exactly. So how do you guys go about it? Is it usually mostly that you get pitch decks? Is it something you do research on, are you looking by yourself, do you go to conferences? What's usually the process for you at Square Peg, and how you do that?

Tushar: Yes, there is some science to this, but there's also a lot of art. And the thing with funds and firms like this is that they are very driven by the personalities in them. They're never large teams, so each person in the firm has a different way that they go about trying to find investments.

What you want to build as a collective is a selection of people that, when they do what they do together, you try and cover off all the different ways of trying to find the best opportunities. So, for example, I have a bias towards trying to be more outbound when I try and find opportunities. Which means that I like to sit alone in a room by myself and think about what the world would look like in 10 years’ time, and what type of things, a region for example, like Southeast Asia, will need.

And then, I try and work out what's happening in the market and see if there are any opportunities that align [34:00] with my high-level thinking. There are others in the team that have some of the most amazing networks around, and they get access through those networks to really exciting entrepreneurs that are about to start their journey. And we get to meet those entrepreneurs first, so that's more inbound through network.

And then there is a collection of activity, which is around trying to be in the right place at the right time, where great founders are going to congregate. And that could be like you're saying like conferences, there is an element of networking with other people in the ecosystem to try and learn what they're seeing, and share knowledge back with them, and through that try and find the best opportunity.

So there are lots of different paths through this; it's driven largely by the individuals. But as a collective, most firms do a mix of dealing with inbound, and the bigger your brand, the more inbound you have. But also carving out time to have a perspective on where the world is heading and try and go outbound, and try and proactively find great opportunities.

Philipp: So that all makes sense, and I think one follow-up from this is you've done quite a lot of deals already, right? There's usually also other maybe other venture capital firms in those deals as well, right?

Is there also an exchange between different VCs on new deals, or you liked we partnered on one and, you sit on the same board, so you get to meet people, right? Or is it very contentious like oh no, we don't want to tell you anything about it, because we want to be first? What's it like for you guys?

Tushar: I think there is a healthy dose of collaboration and competition, and those two tensions exist in the market. And at some point, one is more pronounced than the other. But generally, I think because you're in an industry which is so driven by investing in a few outliers, the few companies that are going to deliver most of the profits, everyone is incentivised to network and play nice with that network.

And then, of course, if you find [36:00] something that's interesting, and six other people think it's interesting, it becomes a bit competitive. But generally, I think everyone's pretty collaborative in the ecosystem.

Philipp: That's good to hear, good for founders to hear as well. But you sat in your room, you've done your research, you know where Southeast Asia is going to be in 10 years. What's the next step? Kind of like you reach out to the different teams, right? But what's the due diligence process that you do? Or what do you look for before making that investment?

Tushar: Because we invest quite early in the life cycle of a business, the majority of our diligence is actually about people. It's about understanding who is building this business, who they have around them, what are the fundamental motivators, how passionate are they about solving this problem.

Building a company, as you guys will know more better than anyone, it's difficult. You turn up to work; there's a lot of risks. There's a lot of personal risks that you're all taking, working even in a company that's established as StashAway. It takes a lot of emotional fortitude, intellectual rigour to be in these companies at this stage. And what we're trying to assess is, ‘Do these people have what it takes to stick with this over the long term, just from a resilience perspective?’

But also, ‘Do they have the intelligence, the wherewithal, the ability to learn, to adapt with the ebbs and flows of a market over a five or ten year time period to build a great team that actually builds something enduring?’ And that's why I think a lot of the focus is on asking people questions about their personal motivators, asking people trying to get to the heart of who someone is, and why they're doing something. But then also there are other aspects, the more mature business is, the more you can spend time looking at what they've achieved to date.

So that involves perhaps what your listeners [38:00] might think of as more classical types of due diligence, which are looking at fundamental metrics balance sheets, P&L's, all that good stuff. Looking at growth plans and evaluating those, where you plan to spend your capital, we do all of that as well. But I’d say that the number one factor for us when we invest, and the most time you spend, is with the team.

Philipp: Yes. Do you think you're different in that way to other VCs? Or is this very in the early stages, that that's still the most important usually. Like maybe it's 80% founders, 20% business and fundamentals and stuff like this.

Tushar: I think most VCs would say that they are extremely team-focused; they have to be. I think if you ask founders, they would say that some are more team-focused than others. And I think VCs are people, firms have some personalities, and they can feel different in the interaction.

And I think depending on where the individual VCs come from, it can be hard to, you can intellectualise it's about the team, but people have different preferences; some people gravitate to numbers if you've had a particular background in private equity or consulting, then you gravitate to the market size. So I think people do their best, and most VCs would say that team is the number one thing. But it can feel different in how they go about doing that exercise.

Philipp: Yes. And I think with that being said, for you guys, right? There's probably also a team looking at every one of those investments; it's not just one person. So perhaps you guys also have people that are more numbers-driven; they look more into this part.

But then in order to not just be jaded by numbers, you have to also have people with a bigger picture, looking at the founders. Do you have different people that look at these deals and then stitch it all together?

Tushar: Yes. Normally, there are one or two people that lead an investment and spend most time on it, but our decisions are made collectively. And that's when we [40:00] get the benefit of having people in the team that have these different preferences or areas of specialisation. So, for example, I tend to get over-excited about people in the team, and I can sometimes think, dream what I think a market's going to become, and that dream looks nothing like what it is today.

And perhaps look too much into those things, and some people in my team can help pull me back and focus me more on the fundamentals of how big a market is currently and how it's growing. And help control some of those biases. I think that's the trick to building a successful investment team in VCs, having people that have different strengths working together in an aligned way to make really good investment decisions.

The outcomes that we drive from our venture fund are going to be driven by finding the best people and making the right investment decision. And what I mean by that is, “Should we invest in this, or should we not invest in this?”.

And then if we invest, they're going to be driven by just working really hard for the companies. Which hopefully will mean that one day when you're all successful, and someone asks you who they should partner with, you will say, ‘Go talk to Square Peg.’

Philipp: Yes, absolutely. It's about these networks and partnerships again, right? So let's flip it around a little bit because maybe there's a lot of listeners, maybe they can't invest into venture capital funds, but maybe they have great ideas. You come across so many founders, so many ideas, right?

What are some tips that you could give to startup founders when they look at venture capital to raise some funds? Are there any particular tips you have for them or mistakes to avoid when talking to venture capital funds?

Tushar: Again, I think it depends on the firm. For us, we don't react well when people tell us that they're going to build a billion-dollar business. [42:00] For us, it's less about the value of the business, more about what's the problem you're trying to solve, and what's the impact you want to have on the world.

I’d say a general tip would be if you can try and find a warm introduction to a VC because VC firms and people that work in VC firms are inundated with people trying to get time with them. And so it can be hard to stand out. But if you somehow find your way into a direct connection with someone, it can help your chances of even getting an audience, that's one. I’d say for people that want to approach me; a tip is I’m really interested in why, why you're doing what you're doing.

I want to know what you're doing, but I’m really interested in why you're doing it. So the more in your initial outreach, you can tell me about who you are as a person and why you're doing something, and why a problem is important to you. The more chance there is that I will want to learn more about it. If all I can see from the initial approach is that you've seen something somewhere else and you're copying it, I’m not going to be that interested.

Philipp: Yes, they can go to other companies then.

Tushar: Yes.

Philipp: But yes, they're good tips for our listeners. So if you try to reach out to Tushar on LinkedIn or something, you have an idea now then. Please be careful; you got the tips here on how to do it in the best possible way. But one thing before we wrap up that I do would like to get your view on.

So we're now in the fall of 2020; it's been quite a year already, right? We had everything from wildfires in Australia, to COVID-19, to wildfires in the US to protest, to the election coming up in a few weeks’ time. I wanted to see, you said, you sit in your room, you think about the markets that you invest in, in 10 years’ time or what does the world look like, right? Where is Southeast Asia in 10 years in your view? What's interesting to you, right? Like what's exciting you in 10 years’ time in Southeast Asia? [44:00]

Tushar: Wow. So many things, I’m trying to work out where to start. If you look at Southeast Asia, if you were just like in a spaceship looking down, and you knew sort of where the countries were, you'd see that the region is positioned in between so many amazing economies. So you have India, you have China, Korea, Japan, Australia; it's such a strategically-positioned region. Then you zoom in a bit more, and you look at the size of the market, and by size, I mean just a sheer number of people.

I mean, it's home to so many people. And when you look at who those people are, it's some of the youngest demographics globally. These are young people. Now you overlay what's happening to these economies, you see that they're some of the fastest-growing economies in the world. People are just entering middle class, but they already have two mobile phones each, right? Everything is happening online and usually on mobile.

And when you look at the potential of all of that for how it can impact, how these people consume any service. How they consume education, how they access finance, anything really, how they shop, I think the potential is absolutely immense. So for me, that's what really excites me about this region.

Is that you are just now at the precipice of seeing one of the biggest middle classes in the world emerge in this region? It's the youngest middle class; it's the hyper-connected middle class. And they are going to use technology like no one else in the world use technology, and for me as an investor, that is super exciting. I think what we'll see in this region is how people access credit, how people generate wealth, how people educate their children is going to look different to how they do it in India, and in China, it's going to be unique to Southeast Asia. [46:00]

I’m not saying it's a region without problems or challenges to scaling; Malaysia is very different to Singapore, as you know. And Jakarta is very different to the rest of Indonesia, but as a collective, it's such an exciting region to invest in as someone, as a tech investor.

Philipp: Yes. Absolutely, I think you mentioned a good point; when you zoom out, it looks like one place, right? But it's actually not; every country is very different. Regulations are different, especially when we talk about StashAway. Every country is literally a new challenge because you have a new regulator; you have to do new things.

It's very different, too, if you're in the European Union or in the US when we're investing there. It's very easy, we have 380 million people, and there we can just go in any state, we don't need all this regulation. But yes, it's a good point that people underestimate sometimes about Southeast Asia as well, that there are challenges when it comes to different languages when you're having your product that you want to scale up.

Tushar: I think people underestimate that about the US and India as well, for example. If you think India is one market, then boy, are you mistaken. If you think the US is one market, that's also not often the case. For businesses like yours, the regulation from one state to another can often vary.

So you really have to modulate what you're doing in your product, and you go to market. So I think there are scaling challenges everywhere, but I think when you look at the overall macro picture of how fast these economies are growing and how excited the people are in these economies about the future. I think that's what really gets me excited.

Philipp: I think that's the nail on the head because that's why I came here. Because I think living in the US for 12 years in wealth management and stuff, and just Europe as well, right? My family is from Germany. But it's very always, almost depressing nowadays. They don't look like, oh, this is so exciting in the future, like oh like this is going to be great.

It's very stressful almost, whereas when I came here, it's all of a sudden like no idea is big enough. Everyone is excited about what's ahead; [48:00] no one looks into the future and says, oh, it's going to be a very, like not in a demotivating way, they're very motivated of what's ahead, right? I think that's a huge difference right now geographical wise what's going on.

Tushar: I want to share an anecdote with you; it may be completely irrelevant, so please feel free to cut it. I feel like technology, and the whole startup economy is so much more embedded into the mainstream here than it is in other parts of the world. So I got into a Grab last week, and the driver said, “Hey, what do you do?”. And I usually say I work in finance. And he's like okay, what type of finance?

I said I invest in technology companies; he said, oh, venture capital, I’m like yes. And then he started, we had this conversation for like 20 minutes where he asked me what companies I found interesting, we started talking about Grab, he shared his views on Grab, and they were really insightful. Like he was talking about the unit economics of the business, path to scale, capital requirements, and I’m like, what are you doing driving a Grab?

And he said no, I’m a Grab driver, but I’ve got my own investment portfolio, and I do some angel investing. I’m like wow like it is so much a part of the fabric of these communities to know about these amazing tech companies. It's so much more mainstream here, and people have a view on it, and they're excited. I think that makes me excited.

Philipp: Yes. I know absolutely; I think that is exactly right, it's so exciting. Exciting trends, you mentioned why you're excited for Southeast Asia and this region in 10 years’ time; what have you done at Square Peg or with Square Peg to take advantage of that? Any particular investments that you might mention that take advantage of these views that you have that you would like to share with us?

Tushar: Well, I’d like to think  they all do in some way, and we can talk about StashAway if you want. Maybe one example I’ll use is FinAccell, which is a company that we invested in a couple of years back. And there are many different ways to characterise what FinAccel [50:00] is doing; you can call it a digital credit card or a buy now, pay later offering in Indonesia. But what fundamentally that company is doing it's bringing credit to a market that didn't have access to credit.

And when you think about what helps drive economies through different stages of growth, at some point in an economy, people need credit to be able to continue to grow. People want aspirational purchases, you want to buy a bit more, and that's the way the economy grows. And in some of these markets, it's very hard for people that are good credit to actually get credit.

And there are many reasons for that. The infrastructure doesn't exist; in the US, if you want to get a credit card, someone pings and gets your FICO score in a few seconds, and then you're either they'd give you money or not. That infrastructure doesn't exist in most parts of this world. And what this company is doing is using data to help credit score individuals and use that as a basis to offer them credit.

Which I think is such a great example of what technology can do in these markets. It can bring structure to the unstructured; it can bring capabilities where they didn't exist before. So that's an example of a business where I think they are solving such a big problem for a region and an economy. You doing it using technology in a way that just wasn't possible even five or ten years ago.

So that's an example of a business that I’m really excited about. I’m also very excited about StashAway; I mentioned that before that, this region is on the rise economically. And I also mentioned that in the past, we never really thought about savings as a family because we were trying to sustain ourselves. Then, there came a point when we actually had excess capital; we're like okay, what do we do with this?

That's happening now in this region. 10 years ago, people here didn't have savings to invest. Now they do. Most of them have literally stashed them away as cash under their mattress. And I think the responsibility, and the great problem that you guys are solving, is helping them to generate a long-term [52:00] return and outcome on that, and generate real wealth using your product. Again, I don't think you could have done this ten years ago, but you can do it now, and you are doing it, so I’m really excited about that as well.

Philipp: We are excited about that as well, exactly. Thank you so much, Tushar, for your time today; we really appreciate it. I know you're very busy.

Tushar: No, thank you.

Philipp: Thank you for being here, and we'll probably speak again at some point in the future.

Tushar: Sure.

Philipp: Still lots of things we can go down different rabbit holes, but again thank you so much for this overview. I think the listeners will really appreciate this.

Tushar: Okay.

Philipp: Thank you.

Tushar: You're welcome. Thank you for having me. Thank you.

Episode notes

In this episode, Philipp and Tushar Roy discuss how a venture capital firm operates, funding amounts, and what draws them when making a funding decision. Tushar also shares what excites him about Southeast Asia.

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Episode contributors

  • Philipp Muedder (Head of Financial Planning at StashAway)
  • Tushar Roy (Partner at Square Peg Capital)