How I Invest with David Weisburd - E3: Ramzi Samara of MASIC | The Rise of Saudi Arabia and the MENA Region in Venture Capital

Episode Date: August 1, 2023

David Weisburd sits down with Ramzi Samara, Co-Head of Private Funds (VC) at MASIC, one of the few family owned investment firms in Saudi Arabia that has a dedicated venture capital program. Ramzi is also an active angel investor in early-stage startups in the US and MENA. In this conversation they discuss the vibrant dynamics of the region, Ramzi’s investing thesis and multi-year power-law driven strategy, and looking at passive vs active early-stage fund managers. If you’re ready to level-up your startup or fund with AngelList, visit www.angellist.com/tlp to get started.

The team is really at the heart of it. Does the team have the right hunger? Do they have the right connections, the right sourcing strategies in place to find the winners? As you know, venture capital, it really falls down to power law dynamics. So we try to get a grasp if this is a team that can pick out the winners.

Do they have that gut feeling to find out who are the next unicorns out there, who are going to be the top market leaders, and can they return the fund over? Welcome to Limited Partner Podcast, where we talk about venture capital through the lens of limited partners. I'm your host, David Weisberg, co-founder and head of venture capital at 10X Capital, one of the most active venture capital firms in the world. The world of LPs is notoriously secretive and private, but on this show, influential limited partners and investors speak candidly about the venture capital ecosystem in 2023 and how they go about investing and navigating the space. This week's episode will be a must-listen for anyone who is interested in fundraising from the Middle East,

the MENA region, the number one new net geographical area for venture capital investment in 2023. This week, we have Ramzi Samara, the co-head of private funds at MESIC, a single-family office based in Riyadh, Saudi Arabia. In today's episode, we'll discuss the number one mistake U.S. managers make when coming to the Middle East, whether the region is in early stages or whether LPs have cast their bets on U.S. venture, and what timelines U.S. managers should expect when raising in the MENA region. Without further ado, here's Ramsey. Well, Ramsey, welcome to the podcast. It's great to have you in. Thanks for having me, David.

It's my pleasure. So let's get started. So we see a lot of venture capitalists going to the region and specifically Saudi as well. We saw Mark Andreessen and Ben Horowitz recently there with Adam Neumann. So tell me a little bit about market sentiment and how do you find the market in Saudi, specifically as it relates to U.S. venture capitalists? It's a very interesting question. We've been seeing an overwhelming number of US fund managers and global fund managers coming through Saudi. But specifically to US fund managers, I think it's a very positive sentiment. The first is when you look at the ecosystem, it's always a validation when a US venture capitalist invests in your startup.

They're also looking at ways where their portfolio companies can benefit from a different market. So it could help to path to profitability or ways they can partner up with local companies in different regions. And lastly, when you look at the Saudi ecosystem, I think there's a lot of collaboration between sharing deals and know-how. So overall, it's been a very positive sentiment towards US VCs coming towards the region and also accepting LP investments. You mentioned collaboration with a local startup and local ecosystem. What have been some examples that you could point to that you could say this is something that has worked out pretty well? There are some, for example, fintech companies here that have received funding from some

US venture firms. And I believe that really brings in some know-how on how other fintech companies in the US have grown. So there's a lot of lessons learned that can be shared. I think that's one learned that can be shared. I think that's one example that comes to mind. I'm sure there's others, but it's still not as prevalent as we want it to be. I think the Saudi ecosystem, at least around startups, is still in the nascent stages. There's a lot of strong startups. There's a lot of positivity. There's a lot of funding that's a lot of you know funding that's coming

in from government as well as the private sector but it just hasn't reached the levels where you're seeing all the vc firms flying in and investing in multiple companies it's still in the early days however i do feel that in in due time especially with all the exits happening in the secondary market in the stock exchange, with some of the acquisitions happening here over the past years. If you look at Careem, which was acquired by Uber, if you look at Suwok.com, which was acquired by Amazon, it's really setting the tone for future entrepreneurs, as well as sending positive signals to some of the global VC firms that, look, there is a attractive market here for you to start looking at potential investments. Regarding VCs, a lot of them come to the region and expect to come back with a bag full of money.

Obviously, that's not how it works. Tell me about some of the best practices and what have you seen some successful case studies for U.S. venture capital firms going to the region? So I think the first point you touched on is I think one of the mistakes many, many fund managers do, whether they're U.S. or, you know, from neighboring countries or from Asia, many of them think that it's easy to fundraise from LPs in the region, that it's easy money, but I think that's far from the truth because we have a lot of sophisticated investors, whether it's from family offices or institutions or even sovereign wealth funds. Relationship building is at the heart of this all.

And I think many managers come here thinking it's easy money, come in, come out. As you mentioned, the bag filled with cash, that just doesn't happen. It really takes time to build relationships. It's really core to the culture here in Saudi Arabia. We've seen some mistakes from fund managers passing by who don't really want to listen. They just want to try and sell. And usually that doesn't sit too well. Managers need to understand that different institutions, different individuals have various mandates. And listening first and then trying to find the potential way to collaborate is key in such an environment. You talk about a relationship building, and that's somewhat of a vague term everybody throws around in every geography.

What does that look like in the Middle East? What are some non-financial relationship building that goes on in the area and how could US venture funds be of greater value to the region? It's taking the time to really get to know the potential LP, trying to understand what their mandate is, trying to understand what the history of the firm is, trying to understand what their long-term goals are. These are really key components that fund managers, and some have been doing this very well,

need to come to terms with. Secondly is also knowing the individuals. I think it goes a long way with being familiar with the individual or your counterpart. Today, it's easier than ever to do business, whether you're on Zoom or Microsoft Teams, with the individual or your counterpart. Today, it's easier than ever to do business, whether you're on Zoom or Microsoft Teams, similar to what the conversation we're having now,

it's very easy to fundraise and meet fund managers online, but it takes the relationship to a whole new level when you meet face-to-face, when you're able to have a cup of coffee and just discuss things outside of business, which is still important in the culture today. The whole come in quickly, fundraising is going to close in a few weeks.

We need, you know, we're looking for LPs. Just doesn't work here. In Saudi versus the other areas, how does Saudi compare to other areas? Obviously UAE, but also Bahrain, Qatar seems to have some activity. Are they more alike than different? And how would you differentiate for VCs navigating the region?

Well, if you look at the UAE and Qatar and Kuwait, they have been in the VC game a little longer than Saudi Arabia. Many of the larger institutions out there like Mubadala, Adia, ADIC, QIA, KIA, and a few others, they've been investing venture capital for longer than Saudi has in general. It might be easier to raise from those regions, given that there's more understanding of the asset class. And some of those investments have gone through market cycles. Saudi Arabia is a bit newer. You know, when you look at the local VC ecosystem, you're looking at maybe 2014, 2015, when the first VCs started to be formed. Although entrepreneurship dates back since the founding of the country.

But when you're looking at venture capital as an asset class, it's very nascent. And then when you add that level of international venture capital, it's only in the past four or five years where larger institutions like Sanabil, which is part of the sovereign wealth fund, a few other sophisticated family offices have been getting into venture. There have been some families who've been investing in venture capital for more than 10 years, but they're very few.

When we're looking at the larger landscape, venture capital is still a new asset class. With US fund managers in specific coming to the region, Saudi has been added to the itinerary, I think because of all the activities around venture capital and startups. So I wouldn't necessarily say that it's easier to raise from UAE or Qatar than it is from Saudi, but investors are getting more sophisticated. And I think it just needs some time for different family offices and institutions to get comfortable with venture capital. But there's already some strong players in the market who have been allocating to venture capital for some time now. Quickly growing enterprise in Saudi.

In terms of Masek, so tell me about your fund and tell me a little bit about your thesis. Yeah, definitely. So Masek is a family-owned investment company that was established in 2009. And we recently went through a strategy refresh last year. And part of our diversification, because we're over allocated towards a few other asset classes like real estate, public equities, private equity on the direct side, our board approved adding venture capital as an asset class for several reasons. First, it's more of a international mandate.

So we are looking to commit to global venture capital, specifically in the US at this moment in time. Secondly, and I think, you know, Mark Andreessen has, everyone quotes him, but software is eating the world. Software touches on all types of businesses. And we want that type of exposure, especially when we're looking to obtain outsized returns

for our portfolio. Masik is known for emerging managers. Tell me about how you went about that thesis and what constitutes that thesis. So definitely, you know, emerging managers are key to the ecosystem. We have looked and have committed to more established and more mature fund managers. And I think looking at emerging managers, we took a page out of the VC playbook. We're committing smaller ticket sizes to more emerging managers, because when you look at all the statistics out there, if you look at Cambridge Associates, for example, first time fund and second-time fund managers outperformed the more established fund managers over a 10-year cycle. But that said, it's also very risky investing in an emerging fund manager just given that you don't know if they're going to be able to succeed or able to continue fundraising reaching those outperformance returns. So the way we're looking at it is committing to a larger number of emerging managers

on an annual basis with smaller ticket sizes, and then really tracking and benchmarking how these emerging managers perform against their peers. Because we also want to be part of the next wave of emerging managers that become the next benchmarks or union square ventures. We're very bullish on emerging managers and have been looking at several this year. Even though the environment, the fundraising environments are very vastly different than last year, we're seeing more and more emerging fund managers, whether they're previous operators or founders of startups, as well as spin-outs from other firms raising a smaller fund this year. Yeah. You have a couple of different definitions of emerging managers.

What is an emerging manager in your book? So in our book, an emerging manager is a fund manager that either has a fund one up to fund three, around 150 million or less in their fund size. And it's new to them. Now, we've gotten some pushback from first-time fund managers who have a track record saying, look, we're not emerging. We have a strong track record. But as a brand, they are emerging.

They might have a new team, a new strategy, a new thesis, focus. So for us, we look at the fund size. We look at the team, their backgrounds, and definitely the brand. In terms of your diversified portfolio, you must get a lot of co-invest opportunities and follow-ons. How do you guys process co-invest opportunities? To be honest, it's not part of our mandate for the time being, given that venture capital is a new asset class to our shareholders and at Masic. For now, we're not looking at co-investments. We're really patient and long term investors and fund managers.

We see that across, especially on the institutional side, that tends to be the last program that they do in an asset class. In terms of diversification geographically, stage-wise, how do you look at that? And what rules do you follow for diversification on your LP portfolio? So from a venture capital fund perspective, at this moment in time, we're looking at the U.S. and we're opportunistic in Europe. Our current exposure as Masic throughout all our other asset classes we're looking at the US and we're opportunistic in Europe. Our current exposure as Masic throughout all our other asset classes, it's more locally driven.

So getting more exposure to more mature markets like the US and Europe gives us that diversification from a strategic asset allocation point of view. And then from a sector focus, we tend to like more generalist firms, but we're also open to more sector-focused fund managers. That's interesting. That's a bit contrarian,

especially with the emerging manager thesis. Typically, people like to have their, you know, 20 to $150 million specific bets. What makes you have a bias towards generalist firms? The risk with more sector-focused firms is really getting a grasp of sector itself. Starting off our portfolio, in terms of portfolio construction, because we're in the early days, we always feel it's a better diversified approach to go for a generalist manager that looks at several types of sectors. But as we build out the portfolio in the next few years, we would be looking at more focused

funds that look at whether it's healthcare or potentially fintech. We think those would be good diversifiers to the overall portfolio. But in general, the generalist approach is what we're most comfortable with at this time. And once we start digging deeper into the different sectors, we'd get a better grasp of what additions we want to add to the fund. So if you take AI, for example, over the last two months, we've been seeing several AI funds, AI focused funds really popping up, but it's very difficult to assess because AI is a vast space. You have different layers from the application layer all the way to the LLMs.

We're shying away from some of these funds, but still educating ourselves more about sector-focused fund managers. Yeah, that's the trade-off. You see some of the best vintages in industries are before they're even named. At least AI has a name before you had uh uber and airbnb which later became the sharing space it wasn't really an institutional sector so i think that that's a bit of the trade-off hey we'll continue our interview in a moment after a word from our sponsors the limited partner podcast is proudly sponsored by angelist if you If you're a founder or investor, you'll know AngelList builds software that powers the startup economy.

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As you grow your portfolio, think of Macek in five years. Do you plan to put more lead behind fewer arrows, the famous Google strategy in terms of re-upping in the top managers? Do you plan to re-up in all the managers and right size later on? How do you look at that? How do you look at your portfolio strategy? When looking at the asset class, we want to be long-term patient investors. So we're going to be looking at re-upping in the majority of our fund managers. At times, different fund managers go through generational changes. They go through different market cycles that might impact their strategy. So we'll be keeping a close eye to that at every new fundraise. We'll be really assessing the strategy consistency, the fund size, and does that make sense in line with the market, looking at the team, the turnover, and really getting a feel that do we still have conviction?

In general, we'll be re-upping most of the time because we do believe in developing those relationships long term. You mentioned the term strategy consistency, and I was speaking to a couple of fellow GPs and we were talking about the fact that startups are allowed to pivot, but venture capital firms are not even allowed to move by 5%. What's your view on that? And is there room for strategy creep from fund to fund, especially on the emerging space?

You have to assess the fund managers on their strengths. If a fund manager has been investing in SaaS for the majority of their career and they take a hard spin into consumer, that might be a yellow flag. It's not necessarily a red flag, it's just a yellow flag. We need to just dig deeper to say, okay, do we want a consumer-focused fund?

Because initially we committed to a SaaS-focused fund. So for full construction, full fit is very important to us. And that's why strategy consistency is one of the elements we look at. Fund managers can pivot, but we just need to assess them using that new pivot to understand can the team really deliver in that new focus. An analogy that I've heard is if Michael Jordan comes back to play baseball, you pass, but if he comes back on basketball, you make an outsized bet. In terms of venture capital and how you look at emerging managers, specifically before you have data, what are some leading indicators that you look for

and what you believe will be the next generation of top venture capital managers? That's another internal debate. And I believe we're getting smarter by the day. We don't really have a set criteria. But some of the areas we look at, it's definitely lighter due diligence than some of the more established and mature managers, but the team is really at the heart of it. Does the team have the right hunger? Do they have the right connections, the right sourcing strategies in place to find the winners? As you know, venture capital, it really falls down to power law dynamics. So we try to get a grasp if this is a team that can pick out the winners.

Do they have that gut feeling to find out, you know, who are the next unicorns out there? Who are going to be the top market leaders? And can they return the fund over? It's more qualitative than quantitative. Emerging managers might not have the track record that you see with other fund managers, but it's an area we do assess, you know, especially through reference checks, speaking with the team multiple times, really trying to get a grasp of

how they're thinking and looking at the world and what their strategy is. Strategy is also important to a certain extent, especially, you know, looking at different sectors that they're focusing in on. Is it sectors that we like? Could be sectors that, you know, we have restrictions on. For example, being in Saudi Arabia, we have certain restrictions. We don't invest in, you know, adult entertainment or any wine or gambling type companies. So we have some restrictions on the type of funds that we invest in. So strategy is important to see,

are they playing in a crowded space? Can they win deals or are they gonna be second to the table? And is that gonna matter? Because some emerging managers have a highly concentrated portfolio. Others have a larger portfolio. So it's really looking at some of those details to see

do their justification and thought process make sense? Do we have enough conviction that we believe this fund manager might be the next top performing fund in the future? You mentioned fund managers' ability to pick winners. Are the best venture capitalists picking winners or are they getting winners to pick them? Is it a game of securing allocation or is it a game of being the smartest person in the room? That's a good question. It's a bit of both, but it really depends on what stage you're playing. When you tend to look at some of the early stage managers, some are hands-on, some are hands-off.

So the ones that are maybe more passive, it's about picking winners. The ones that are more active, it's about what value can they bring to the startup and their portfolio companies to get them to the next level. So that's also an area we do look at is that value they bring.

And across the board, some firms help with recruiting, you know, the first few critical hires, others look at, you know, how can they help these portfolio companies secure the next funding raise? So there's different facets, and I think it's not a one or a zero, it's not black or white.

I think you really need to look at the details and build up that conviction as you go along through your diligence process. You mentioned passive versus active. It seems like the lead investors are getting bigger and bigger from an AUM standpoint. Does that concern you or is the TAM really growing that much? We have a diversified portfolio and that's what we're building towards. So at times it makes sense to commit to some of these larger managers. Is the TAM increasing or not?

I think that's a separate discussion that, you know, we could really dive deep into it. But you just really need to assess the firm. Are they AUM gatherers or are they looking for returns? At the end of the day, you know, our objective is to, to maximize return. So when we, when we look at some of these fund managers, they've been increasing 50% year on year or 100% every time they're fundraising. It really comes down to how is the market operating?

And we believe there's a correlation between fund size and return. So it really depends on where do they fit in our portfolio construction. That would get us closer to that conviction. If they're a larger fund, maybe more late stage, you know, raising, you know, nine figures, it's different than how we look at an emerging manager

who is a $10 million fund that are looking at the early stages. So I think it's just different dynamics, but it goes back, I think, to any LP. What is their objectives in their portfolio construction? And how does each new fund manager that they commit to play in the overall outcome of their portfolio? You mentioned AUM gatherers, which I like that term. I think I'm going to use it.

You mentioned 200% year-over-year growth as a sign that somebody might be an AUM gatherer. What are some other leading indicators that LP should look out for for somebody that is in the business more to collect management fees than to collect carry? Again, it's all black and white. I think you need to really understand the objectives of the firm. You know, we've been exposed to some fund managers where they have high management fees, the fund size is extremely large, and there's been this jump between fund sizes between their previous fund and the current fund. And then when you look at the market and you say, well, there's dislocation in the market, it just does not make sense for that growth in your fund size. Your team's still the same size.

What are you looking for? You know, how are you going to deploy? You know, the past few years, we've seen a lot of managers really deploying at a faster pace, just given the market dynamics. But when the market has slowed down and you're, you know, increasing fund size significantly, it's usually a yellow flag, it's just something for us to dive deeper into, to understand what's usually a yellow flag. It's just something for us to dive deeper into to understand what's the justification behind that. But when I met AUM gatherers,

it's just sometimes fund managers get way too large rightfully or wrongfully. There's no right or wrong in this space. It's just what you're comfortable with. We just, at the end of the day, look at, you know, is that the right type of fund manager for our portfolio mix? And can we keep up with the fund size? Because again, when you look at re-upping and you have conviction in the fund manager, you know, you hopefully want to go in pro rata. But when a fund is increasing 100% or 200% or 300%, especially in the late stages, proves to be difficult from a pacing point of view. I agree with you. The AUM growth is a pretty strong signal. What would be the counter

argument to me? What would be a good reason why a fund manager is growing quickly in your experience? Some of the reasons we've heard, and some are convincing, is you really need to understand the opportunity at hand. So, you know, we've seen some early stage managers who have a core fund and an opportunities fund. Those tend to increase their core fund significantly with the justification of, you know, reducing the SPVs or the co-invest because now they have enough capital for follow-on

or those who are looking to increase ownership and lead deals. you know, reducing the SPVs or the co-invest because now they have enough capital for follow-on or those who are looking to increase ownership and lead deals. Really the devil's in the details. You mentioned opportunities funds and they have a mixed reputation in the industry. Some people love them, some people hate them. Where do you land there and why? We've heard both sides of this table. Some LPs we've spoken to love opportunity funds. They believe it's a way to double down on the winners, especially if the strategy is to follow on from the core fund. And others just don't like it at all

because they feel they're put in a corner that they're forced into some of those opportunities. For some fund managers, it does make sense, especially if they have a smaller core fund and they want that easier method for LPs to get into some of the follow-ups rather than doing SPVs. SPVs are very difficult, they take time. You know, at the end of the day,

what you wanna do is make sure your fund manager is focused on investing. You mentioned something a couple of questions ago on a $10 million emerging manager. Have you ever gone that small? And what was that experience? And tell me a little bit about the risks, the downsides of investing in a micro VC.

So at this point in time, we haven't gone in that small, even though we're currently looking at a few of those fund managers who are at 10 million and 20 million. The risks, I think, are similar to some of the other managers with a larger size. It comes down to the strategy and the experience of that GP, if they're able to find the right deals and win them, or at least be able to get some of that ownership in these top future top performing companies.

What we tend to look at at times is if we're taking a core position in some of those smaller funds, our concentration in that fund will be much larger. So for example, if we invest 5 million in a $10 million fund, you know, we're anchoring the whole fund. And for us, it just, you know, from a risk return perspective, it just doesn't make sense because, you know, there might be one other or two, three, four other LPs. So we definitely look at those fund managers and try to understand, does it make sense for us to get into a smaller fund manager or not? And that's why we recently approved a emerging manager bucket, which allows us to go in with a smaller ticket sizes so that we could alleviate some of that concentration risk. I think a lot of GPs are confused on the concentration risk. From a

diligence standpoint, you don't want to be the only one in a fund, usually not a good sign. But what are those concentration risks? If you could double click a little bit on that. It's about diversification. I'll go back to the example I used about $5 million and $10 million fund. If we took that 5 million and put 1 million in five different fund managers, and if they're emerging,

two might make it out of the woods, three might fail. We're able to diversify our risks there. But if we're putting 5 million in a 10 million fund size, they're not a top performer. That money could have been used elsewhere in a more efficient manner. So really, it comes down to how can we diversify our portfolio and make sure that we're assessing our risk-adjusted returns from a concentration point of view. Part of what we're doing with this podcast is trying to demystify the space and humanize LPs. LPs are not spreadsheets sitting behind a computer.

What would you want people to know about Macek? And outside of investing into the very top funds, how could VCs and general partners be of help to your organization? We're one of the few family-owned investment firms in Saudi Arabia that has a dedicated country capital program. So we're just interested to really meet and speak to different fund managers. Although we have a very strong, healthy pipeline, it's always good to get a sense of the different strategies out there and to learn from the fund managers of what they're seeing. Sometimes being in Saudi Arabia, a bit far removed from different ecosystems we're investing in, it's always helpful to kind of get those market insights from fund managers.

But that said, we do our best to travel to the US, whether it's New York or the West Coast, a few times a year to really spend some quality time with some of our existing portfolio fund managers, as well as some of the new ones that we're meeting. Given that you are one of the most sophisticated and early adopters of the venture capital asset system in Saudi, and given that you've been bullish on Saudi and you've voted with your feet, what would you like a US venture capitalist to know about Saudi specifically and about the region? Saudi is really going through a transformative period, especially with the Vision 2030. And I think it's very prevalent with all the announcements you're hearing and all execution on the ground.

It has a very vibrant startup ecosystem, which is in its early stages, but it's really growing rapidly. In the past two years, we've had a few IPOs from some of the startups here in the region. I think there's a lot of talent when you look at the population, we have 70% of the population

is younger than the ages of 35. So you have a lot of hungry youth looking to disrupt different industries, looking to bring technology to really create an easier experience for either consumers or businesses. What's interesting is during COVID, it really excelled the rate of adoption from a digital standpoint in all industries. From government, e-government is very strong here in Saudi Arabia. You could do almost everything on your app when you're dealing with the government.

And from a service standpoint, whether you're looking with the government. And from a service standpoint, whether you're looking at ride hailing or food delivery. But I think we're in the early stages. There's still yet a lot of destruction to happen. Even when you look at AIs, there's a lot of Saudi companies really tackling AI, large language models around the Arabic language and how you could start to interact with, you know, vast amounts of Arabic documents to find answers, whether it's from a consumer standpoint or from a business standpoint.

So, you know, it's a very promising environment. And I think Saudi Arabia is open for business. And, you know, we're looking to collaborate with others. We're looking for potential partnerships. For those who might be a bit skeptical about Saudi Arabia, all I could say is, you should come visit it, meet the people and see all the changes really happening on the ground.

Yeah, somebody who's been to the region three times over the last 18 months, I was just shocked by the future thinking and the time scale of where policy is done decades and decades and decades ahead of time. It goes without a mistake that I was introduced to you by several people and recommended to talk to you. This has been an absolute pleasure.

Thank you for expanding on Saudi and on Masek and your strategy. And I look forward to building the relationship with you as well. Definitely. Thank you, David and Eric and the team. It's been a pleasure.