We Study Billionaires - The Investor’s Podcast Network - TIP469: Would Warren Buffett invest in venture capital? W/ Kiyan Zandiyeh

Starting point is 00:00:00 You're listening to TIP. In today's episode, I invited back Kean San Diego. Kea and I have always wanted to apply the teachings of Warren Buffett and child amonger in both investing and life. In this episode, you'll hear the fascinating story of how a hardcore value investor found his niche in venture capital and frontier markets and how you can profit from it too. This is not your classical value investing story of how to grow your wealth through investing

Starting point is 00:00:25 in companies such as American Express and Coca-Cola, but how you can apply the same principles to invest where the hurt does not. This is definitely a conversation you don't want to miss out on. So without further ado, let's hop to it. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast. I'm your host, Dick Broderson, and I'm here with repeat guest, Kian San Diego. Kian, Welcome back on the show. It's a pleasure to be of you against Dick. Thank you.

Starting point is 00:01:14 So, Kian, our podcast has been founded on the teachings of Warren Buffett and Charlie Munger, and I know that they have had a profound impact on you as well. It might seem surprising, given the topic we're going to talk about here today, but I would argue that it should not. As value investors, we should be ready to take on a contrarian you on investing. And again, not so much for the sake of being a contrarian. But we should not be afraid to take another standpoint than the herd whenever we found value and our analysis is correct.

Starting point is 00:01:46 So, giving that, how does the teaching of Buffett and Munger apply to your venture capital fund? I think this question could be the topic of a podcast in itself, but I'll try and kind of break down my evolution for that. How kind of Buffett and Munger really impacted me, how it led me to do what I'm doing now, and then try to kind of cover the principles, I guess, which are. which I've learned that I think are relevant to the way we do our business. And so effectively, I was a 13, 14 year old kid that kind of randomly fell into investing.

Starting point is 00:02:18 And so kind of to study the area properly, I simply, I was around 15. I remember I did a Google search to kind of who were the best investors of all time. And clearly you have Warren Buffett's name. So I then went to know a book, which at the time was the Lowenstein book on kind of the making of a capitalist and kind of devoured that. And again, if I'm to be completely truthful, I probably would profess to really understanding about 50%. But what I did understand off the back of that book was really, in Buffett and Munger, you have truly unique characters. And that really, I think the success that they've had, let's say, from a business perspective and an individual perspective, is really a function of the

Starting point is 00:02:55 quality of their character. That is, being pragmatic, being rational, being decent, having high integrity, working hard, keeping a head down, being hump. These character traits were just broadly good character traits to try and adopt. And then from there, literally, read every single piece that I could find on these guys from Buffett's early partnership letters to all the shareholder letters, interviews and all of these things. And the other thing that you come away with is that they were really kind of young, hungry guys that just got going. And I thought that the best way to kind of really study something is to by doing something. So in very kind of uningenuous fashion, I really copied Buffett's early partnership when I was in my late teens in the sense that I felt

Starting point is 00:03:34 I had more ideas than money when I want to put whatever knowledge I had to work. And so raised raised kind of pretty good amount of money at the time from investors, copied Buffett's fee structure as well, which was 0% management fees and 25% performance fee above six, and went about my work. And the fund did quite well, but I was unique in the sense that I really had no constraints. I could invest and do invest in any manner I want anywhere in the world, and I could be very concentrated. So I did kind of your merger arbitrage, your kind of spinoffs. At some point, I had 70% of the fund in one position. And the fund kind of probably did well.

Starting point is 00:04:06 It kind of compounded nearly around 32%. percent for five years. So it kind of cemented the idea that what I really wanted to do was investing. I truly enjoyed it. But being kind of rational and trying to be honest with myself, I understood that I couldn't scale that investing business because no investor would allow me to invest with such concentration and kind of such a broad mandate. And it just so happened that the most successful investment I had was a company in an emerging market in Egypt. And conceptually, I found out quite interesting, originally an Iranian born in the UK. And when I would travel to the country a lot, you would objectively see that there's just a hell of a lot of opportunity.

Starting point is 00:04:38 but then if you kind of transposed the track record of investment firms focus on emerging markets, they weren't, you don't really find someone that had a really great long-term track record. So in traditional private equity as well, in intrinsically your revenues are intertwined with kind of GDP and currency, which are inherently volatile. And if you looked at investors that kind of really were doing private equity meaningfully, again, they really weren't posting returns in line with kind of the perception of risk. What did happen, though, was that you really had a technology infrastructure shift in these country. So many of these countries went from 20, 30 percent smart phone penetration to 70, 80 percent.

Starting point is 00:05:13 All of a sudden, the country had access to internet, and everyone is very young. You have 67 percent of the population under the age of 30. And you'd seen digitalization play out in a handful of other countries. So from China to Latam to Southeast Asia to India, meaningful technology companies are built. So the thesis form is, okay, there are a handful of countries that are large countries. Why not test building technology companies? And I'll get to how the principles of Buffet apply and see how it goes. So basically raised a bit of money and was the founding investor and kind of very active investor and free companies. And then basically over a six, seven year period, two of those companies now collectively do more than 50 million in revenue operating from 30%

Starting point is 00:05:53 operating margins, 80% operating margins. And the third business today is a $200 million revenue. The point being that they came across extremely talented operators tackling business large opportunities in the developing world. And I saw why and for what reasons, they were successful and can get onto those reasons later. And then really built the idea of Sturgeon is to kind of build that out into doing more transactions and being more involved in company building in Emerging Mark. Now, coming back to the principles of Buffett and Munger and why it applies, I think, to this line of work is kind of the universal principles that you can get from them are quite a lot

Starting point is 00:06:28 because what you quickly come to the conclusion is that you cannot replicate one-for-one what Buffett has done with Berkshire. Why? Because they uniquely were operating in a period of time that was the longest bull market in the boom of capitalism in the country that was the center of capitalism. And they were managing capital was being managed by two uniquely gifted individuals. So to think that that could be replicated is probably invalid. But the principles could be applied and broadly whatever it is that they're doing. So the concept of compounding, the concept of compounding and knowledge, that is to constantly be in the pursuit of studying to understand your

Starting point is 00:07:03 weak spots to be improving, to be constantly gaining perspective and trying to understand truth for what it is on a large scale. And that that is a precursor to be able to compound money. But compounding money is very important concept. And if I was to try and quantify what it is that we do in the venture business numerically for kind of very simple calculations, what we care about then is that the normalized operating margins of that business range between 35 and 80%. That with that compounding revenue at some point in time, they will become very profitable

Starting point is 00:07:33 engines. And that if you play that out, so a company doing $1 million, compounding the company a month, after 10 years, you get to about a 90 million revenue business. Let's say you're doing 50% operating margins. That's a 45 million operating margin business. And if it has a runway of growth ahead of it, you could value that company between half a billion to a billion. And if we start off owning 10% and let's get diluted by 5%, what basically means that we will really do 25x or 50x capital. That's the best case. Obviously, you have differing outcome. So the concept of compounding is very important. The concept of system building is also very important. So if you look at Berkshire, I think it's a good way to think about it is that it's the most elegant business system designed

Starting point is 00:08:11 in the history of capitalism. Why? You have basically the insurance business that is a form of kind of very, very cheap leverage or float, that you have the unique ability of Buffett and Munger to recycle that ever-growing floats in things that have a higher return on capital, both in private assets and public assets. In private assets, they have a system of implicit trust with their operators. Why? Because they operate in a decentralized way, and there is an implicit trust in how Buffett allows them to operate. So you put the totality of the system together, and to add that very rational people sat at the top,

Starting point is 00:08:47 the concept of systems is very important. As we build our firm and as we invest in companies, kind of understanding the true essence of the system of those businesses. The other one is to be involved in something that truly is a long-term secular trend. So if you look at again, where Bucket started, I think he always recognized that the U.S. was a long-term secular trend. He understood the essence of why capitalism in a large economy played out over a long period of time leads to good outcomes. So we ourselves have to be involved in the kind of long-term secular trends as well. We believe digitalization in developing world is a 2030-year trend, meaning you will have interim volatility, but if we're right, we're right big, played out over a long time.

Starting point is 00:09:25 then on a more micro level, the concept of why a business can return a high amount of capital over a long period of time. So the concept of moats, the concept of industries, some of them being providing products and services, they're very valuable to the end consumer, but for whatever reason, they don't capture those economics, e.g. the airline industry. Why is it that a business like Coca-Cola has sustained higher returns in capital over a long period of time? Because it had a distribution advantage. So the concept of when we investors, what are the businesses that are building modes and that constantly can recycle capital the high rates of them? So those concepts are also very similar. And then finally, it's just understanding the character of the operators. So if you look at a guy like Buffett, I think both he

Starting point is 00:10:10 himself is a tremendous character, but the people he invests with are tremendous character as well, the operators that are running the underlying businesses. The stewards that he's built with kind of Todd and Ted Westler, they will be their unique characters that will steward that company going forward. So as we hire individuals to our company and as we invest in individuals, we are kind of constantly looking for those unique characters and how we think about being able to work with such characters. So to cut a long story short, we're doing something very different, but a lot of the principles I feel that at least I learned or came away with by constantly studying Buffett and Munga, we're trying to apply on a day-to-day basis. And the final small point I will add is that

Starting point is 00:10:48 at Sturgeon required reading is a manga's lecture on worldly wisdom as a relates to investment management of a business, which is basically the best 10, 12 documents, page document, anyone in this business should be reading. Kian, our audience, they're not too familiar with venture capital. We have talked about it a bit here on the show, but most think traditional value investing. And they do think about that in the sense that Buffett talks about, you know, predicting cash flows. And it's easier to predict cash flows of the coacolus of the world than perhaps some of the

Starting point is 00:11:17 venture capital back companies. But the principle still remains. It's all about finding value. It's about getting more money back than what you invest in. But roping myself back in talking about our audience not being too familiar with into capital. They're still very smart people. And they have heard that founders talk about not attracting the highest amount of capital, but the right capital to their team.

Starting point is 00:11:42 What type of value at does a good investor such as sharing capital bring to the table? It's actually a really interesting question because when you really think about it, at some point in time, you come to the realization that ultimately capital is really a commodity for a great firm, for a great company that needs investors, capital is a commodity. So implicit in investors is the concept of, I would call it the brand of capital. And if you want to, let's say, apply that to Buffett to kind of link to the last question, what is Buffett's today's myth capital? It is long-term patient, high trust capital. and that if they can partner with individuals and companies that can work with that, great outcomes are provided. The second brand of capital that Buffett has is that can be a fast deployer of significant amounts of capital very quickly in distress situations.

Starting point is 00:12:30 So you can be very specific about what its brand of capital is. Then we can link it to the venture business. And probably it's important to give some context maybe to the listeners of how broadly to think about venture and the different stages and why it is the way it is. The concept of venture is basically taking a very early stage company that in theory has the ability to be a very significant company. And assuming that company, for example, could be a billion dollar revenue business in 10, 15 years. And that company over that intervening period would need 100 to 150 million in capital to get there. The point is that you cannot provide that capital all up front for a wide variety of reasons. And so it's provided in various stages.

Starting point is 00:13:11 and it's probably important to define what those stages imply about where a company is and then going back to a question of what value added an investor should bring. So you have basically pre-C2-C, which is a very early stage of a company. And what a company is really doing there is basically finding traction in some form or manner that validates the concept of that being a demand for their product or service. The type of investor you want at that stage is someone that can accelerate your traction, reduce barriers and that trusts you with an amount of capital on probably a high variance outcome. Then you get to what's called Series A, which is a stage above.

Starting point is 00:13:48 Where is a company typically a Series A? A company in Series A really discovered their demand care. They really understand what it looks like, what it would imply about trying to move up the demand care, how much they can price their product at, how much it would cost them to acquire more customers, what does the nature of the OPEX of the business have to look like as it scales up? and you have much more data points, but there are typically companies around $1 million to $2 million in revenue. That's really where we get involved. From that stage, following out, kind of going forward from that stage, it's really about company building and institution building to service

Starting point is 00:14:22 the market you have ahead of you efficiently in a profitable manner. So the point is that at each stage you need a different skill set from an investor. In the later stages, let's say you're a company that's already doing $200 million in revenue, you really need the individuals that understand what that means to operate the plus thousand person company, prepare a company for what it would mean to be in the public market, for example. Those are a very different skill sets that are needed a different stage. And that's why you broadly have actually venture firms structured in a manner that they focus on specific state. So benchmark, for example, there's very early stage.

Starting point is 00:14:55 You have firms like Cho Chu that do very late stage. You have the unique firm like Sequoia that does all stages and they do a tremendous job. Now, where we play is really at that Series A stage. So the companies found their traction, they founded demand curve. And it's really about scaling the organization. And what is it that we really try to do that? It's to say, it's probably a good analogy is kind of bopslating. Before they go down a race, they sit there and they visualize what they have to do ahead of them.

Starting point is 00:15:20 So what do we do? You want to sit there and try to objectively visualize what this company could look like in its best form. What would it take to get there? What are all the different steps that they have to get right? From there, then, it's to basically identify what are the biggest stumbling blocks, hurdles, bottlenecks that they will likely face in that journey. Is it that they will have to raise a significant amount of capital over the next five years? Is it that they have to get regulatory approvals?

Starting point is 00:15:46 Do they have to hire a very good suite to senior? All these different things. And then our job as investors to try and focus laser sharply on de-risking all those those big, big, hairy risks. Why? Because if you do a good job with that, you leave a better canvas for the operator to really just grow organically and do a great job. So that's kind of the downside, let's say, value.

Starting point is 00:16:07 about the upside is basically we have the privilege relative to an individual company of interacting with a wider range of the ecosystem. So in the countries that we operate in, we speak to large corporates, we speak to kind of late stage investors, we speak to the government, the regulated. So, and you have an embedded network that in theory could speed up acceleration for companies. So if a company does ever need to get regulatory permissions, okay, we have already have a relationship with that and we can accelerate that happening and reduce the friction of that happening. Today, we invest in nearly seven different countries. So if a company we see is operating well in one country and we see the same opportunity in another,

Starting point is 00:16:44 again, using that embedded network, we can accelerate their market entry. We recently did that with a company called Zootpe, they're dominant in five countries. We saw that in Pakistan they can implement the opportunity to themselves. We put a two-week kind of intense roadshow where they met every relevant firm in the ecosystem that they would need to be able. And then shortly after that they started their operations. You want to be the guy that whenever that someone, calls you from the company, the founder calls you, anyone from the team, you can be the objective source of reason and ration, that you can be pragmatic, that you will be an honest voice,

Starting point is 00:17:16 that they can trust in, and know that you will stand on the front line with them as they're building their business. That is a very, very powerful thing, especially for early stage high growth companies, which are very difficult. It's a very difficult task. So you need that source of depth of kind of trust and pragmatism. Your company are investing in frontier markets, How is that similar and different to the traditional venture capital scene that we know from Europe and the US? I think probably you can start with what is the same. So our job in essence is the same. That is to provide capital and hopefully assist in the kind of arts and science of company building

Starting point is 00:17:55 to hopefully create meaningful businesses and generate as financial return and hopefully in doing so generates some form of impact as well. The difference really comes in in the landscape that we're investing in. And it's really a function of the development of where these countries are, who the lens of private sector formation and capitalism. Again, if you think about the US and broadly developed Europe, it's basically had much more iterations and a longer period of time of capitalism being implemented,

Starting point is 00:18:25 meaning that the sophistication and the types of businesses that have been created are relatively high, and they've just had a longer runway to be able to build these sort of businesses. The difference in our markets is that it's only in the past five years or so where from a technology perspective, things have become equalized and equalized from a technology infrastructure perspective, meaning the majority of the population today has smartphone penetrations, whereas three, four years ago, they didn't. The majority of the population today has accessed it free G, 4G, Internet, whereas five years ago they didn't. And because you now have the concept of cloud computing, all of these things, you can actually build businesses. technology business models that we've been accustomed to in the more developed world there for the first time. Now, why is that dynamic interesting? Because the countries that we look at, for example, let's say the countries that are our main focus at the moment, take Pakistan, Bangladesh,

Starting point is 00:19:18 Egypt, that's half a billion people combined and nearly 600 billion in GDP, where you have sub 1% e-commerce, you have 40, 50% of the population that don't have bank accounts. B2B software doesn't exist in the whole country. And so there's just a wall of an opportunity ahead. for all these things to be built. And then the question is, well, will they be built? And there's enough precedent now in the world, as I mentioned, for countries like China, through India, for Latin America, for Southeast Asia, where meaningful technology companies have built off size.

Starting point is 00:19:48 There's an inevitability for that kind of dynamic taking place. So what is different is that you're investing in a landscape and nothing has been built. And so the question of what business models work and how they have to work in those countries relative to, let's say, in the U.S. is very different. but it's all in my mind also an advantage. You've had the kind of surgence of neobanks in many of the developed countries. And frankly, they've had a very difficult time into building meaningful business. They don't have a great service, but they have a good enough service that is very difficult

Starting point is 00:20:17 to take them away. In the countries that we're looking at, the majority of the, well, not a large part of the population have not been banked. They've never had a financial service, meaning if we build a business that really truly from the get-go caters to them and provides a service that is great, we are leapfrogging what has happened in the development in terms of business model formation. Take a company like Wechats and Tencent. There's no model that is analogous in the West to do that.

Starting point is 00:20:43 There's no business that has the depth of the consumer that they have in the West. So really it's a function of the landscape that we're investing in. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible. food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd,

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Starting point is 00:24:50 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. You and Sturgeon Capital work with some of the leading Western VC companies. To a lot of companies, that's sort of like the Holy Grail. That's where you can get the capsule. You might also be able to get some know-how.

Starting point is 00:25:14 But let me actually roll myself back in and start with the very first thing. How did it happen that you got to? to work with some of these companies. And how does this relationship work together? They are global investors. So you just had Sequoia last week that raised a $9 billion fund in China. They have a dedicated office in India. So I think it's safe to say that truly venture capital has been globalized and why has been globalized? Because of the dynamic I just mentioned that all of a sudden globally you have this well-distributed technology infrastructure, which meant that large populations and large parts of the global GDP that hadn't yet been

Starting point is 00:25:50 digitalized, could be digitalized. Not in a sophisticated deep tech manner, but basically in the coordination and the organization of these economies that could be made much more efficient on scale through technology. And obviously, there have been many success stories in that globalization technology. I mean, they're very well documented. Then you say, okay, well, if a lot of the world is being digitalized, what are the last areas that are haven't, or what are the last large countries that yet haven't. And really, I think those are the countries that are our focus. So if I individually go through them, Pakistan, 220 million people, Bangladesh is 170 million people, Egypt, 130 million people. And each of these countries have a region surrounding them

Starting point is 00:26:35 that they can also operate in. Combined, that presents a very large total adjustable market, if you want to kind of use VC linger. And so then the question is, at what stage do these global venture investors get involved in these markets. And my read is really a function of liquidity. If you take a country like Pakistan, prior to 2021, on average for the three years, prior to the country raised about 10 to 30 million a year in venture capital. Certain legislation was changed and certain kind of technology infrastructure became embedded such that there was an unlock in 2021, you had $350 million of venture capital. So far this year, you already have more than that and we're kind of halfway through the year. That's a reflection.

Starting point is 00:27:17 basically of a few things happening. Some companies becoming a success story, creating a cycle such that the successful people around the world come back to the country, seeing that the opportunity exists and continuing to build, that then creates a local VC ecosystem that is funding those companies that continues their growth. And at some point in time,

Starting point is 00:27:38 the quality of those businesses, if they've earned the rights for it, will attract the attention of global venture investors. So then coming back to a question of where we sit in all of that. If you overlay all of this with a stock of capital that's available to these countries, as I mentioned, you have the local VCs, which do a fantastic job in building the ecosystem and being champions of venture and technology in those countries. And they didn't push the companies and they're always there.

Starting point is 00:28:04 Where we play is we focus systematically on these types of countries. So countries of nascent venture ecosystems and understanding what sort of businesses are successful in these ecosystems and systematically investing in them across. The benefit that we have is that we both have local teams in the country, but we're London-based. So we are in a position to be able to integrate and have conversations and interact with the global investor community, where where we act is effectively the underwriter of early stage risk and the presenter of opportunity to these investors where we understand what is the sort of opportunities that they want to look at. And it's a marriage of convenience and compliment. So why is it convenient? because at some point in time,

Starting point is 00:28:45 if a company is approaching series C and above, they will need probably around $40 to $50 million in capital, sometimes more. We ourselves obviously cannot provide that today. Hopefully there will be a time we can. So it's important that we secure downstream funding by having relationships of co-investors that can provide it so that our companies have the cycle of funding

Starting point is 00:29:04 that they require to get to the size that they need. At the same time, the experience of obviously these investors working with them is tremendously valuable. And that because it's not zero, are some, you work in a very collaborative manner for the collective best outcome. And all our incentives are aligned. So hopefully that explains kind of the nature of the interaction, why we interact and why we like to think it's a win-win.

Starting point is 00:29:27 Yeah. So in this situation, you would be picking, say, you mentioned should pay before, but it could be any other of your portfolio companies. That is entirely on you. Or is there any kind of where they would bring you different deals and then you would have to sign off on that? Where is their value at aside from capital? There's a natural dynamic where if you've had many repetitions in something,

Starting point is 00:29:51 your knowledge and understanding of that thing is very high. So if you were a firm that over a 10-20-year period has invested in hundreds of companies, your collective wisdom and understanding is very high. And that kind of collective wisdom adds a tremendous amount of value to company building, the company-building process. it also provides a more honest sounding board to the company. So if you typically think of an early stage company in any point in time really having a handful of investors,

Starting point is 00:30:20 ideally you want to curate that investor group to be the best sounding board possible for you. We almost have to work with companies to curate that sounding board. We really want the greatest minds working with the greatest operators to build the greatest businesses in these countries. And so it's to think that it can be done all by itself is probably so hardy. The last time you were on our podcast, that was on episode 306, and your business

Starting point is 00:30:48 have grown a lot since then. We were talking back July 2020, and you had $25 million asset on the management or AOM as it's often known. Now you have 300 million. And I wanted to explore a bit more about how to attract capital. I sort of like to continue the discussion we had before about how you're working with the leading VC company. in the West. One is perhaps the most obvious one, if you create great results for your investors.

Starting point is 00:31:17 And based on your latest valuations, you've made 73.4% internal rate of return on Sturgeon opportunities funds. Which deals have been the main driver of the returns and how far away are you from the exit of the investments that you made? So implicit in kind of building an investment firm is that effectively to think of your funds as products and understand why a certain investor base would want to have a demand for that product. And so if you want to crudely think about it is you have to be able to generate a rate of return that is attractive enough commensurate with the perception of risk or the reality of risk that is attracted enough for a certain investor base.

Starting point is 00:31:58 Over time should be, ideally if we want to build that investment firm, should be broader and broader applicable, but be very specific about it. So what do we say? We say we do funds for now that we're underwriting the ability to be able to journey is 40% IRA, meaning if you're doing a crude financial model on your investments, your discount rate is 40%. We then basically extrapolate that to look at the markets that we're investing and ask ourselves statistically, what will we have to do to be able to get there, how much do we have to allocate, and what sort of situations do we have to allocate and what is the market debt for us to allocate and to be able to kind of with a level of confidence generate that rate of return. And so we don't do three, 400, 500 million

Starting point is 00:32:40 funds. We do very specific fund. You can be very specific to also investors about what it is that you are and how you do it. And I think that's scalable because then once you do it, hopefully you kind of under promise and over deliver, you build trust and you build credibility that can be kind of leveraged in many different ways as you build that you are. And so that's really the gist of it. Now, The last investment on paper, if you want to call it on paper, is up really 4X. Now, maybe if I speak specifically about the evolution of business since we last spoke to kind of get the context. The general principle of the business was that there are a handful of countries that neither e-commerce exists, neither consumer lending exists, and neither SME lending exists. And that really, if you want to solve for it, it's a data and distribution problem.

Starting point is 00:33:22 And so, okay, the easiest way to build data and distribution is first doing e-commerce. So let's build the infrastructure to enable e-commerce. And then basically, in a few years, they became the most download of shopping app in all the countries that they operate in. 10 million downloads, 2 million monthly active users and 50,000 merchants selling on the platform. That links back to the distribution point in the sense that in many countries, you now are the significant owner of distribution, and a lot of value is always in distribution. And you have transaction data. So, okay, then you want to start lending. On the consumer side, for the first time, you provide installment options for individuals,

Starting point is 00:33:59 if they want to buy, for example, a product that they would need on a day-to-day basis. And that increased average order values from $40 to $140, which are very interesting. And a lot of data was picked up on that because in most of these countries, there's no credit bureau. The other side of the equation are small to mid-sized businesses. So the 50,000 merchants that are selling on the platform. And what the company did then was effectively acquire fulfillment centers. and sold all those merchants, bring your products into our fulfillment centers. We have visibility on we see the product.

Starting point is 00:34:30 We see who you're selling it to. And we can finance all of that working capital. And e-commerce, consumer lending, SME lending are the largest markets in these countries. So it really evolved from e-commerce when we last spoke to becoming a platform for lending and probably many other services that it can add. At the moment, it's kind of just past 130 million in annualized revenue. and we see it that has a tremendous long runway ahead of it to keep going. Another business maybe to kind of give some more context.

Starting point is 00:34:57 We really like the B2B software space. Why? Because if you look at the business landscape across all of these countries, many back-end processes of companies are still done either with paper or Excel. So you've seen what solutions broadly work, and they're not innovative, they're not kind of very innovative solutions. They're HR software, their inventory management software, they're capital management software. And we invested in what we believe to be the leading head phone management software at the time of the Eastern Europe and Central Asia.

Starting point is 00:35:28 And what the business is tremendously shown is that it's basically a 90% operating margin business. Every new customer that it sells to 98% of the need keep, so they have less than 2% share. So you have very high levels of recurring revenue. And that basically you have a very good understanding of how much you need to spend to acquire a customer. and that from a revenue basis, the ratio between the two is actually very large. And because you're a high-margin business, you'll be a very profitable business. And that really what you have to build is the system of distribution for approaching different customers on scale to show them the efficiency gains and the benefits of your product.

Starting point is 00:36:03 So it is likely that it can become the dominant HR software company in this broader region that we're talking about. Again, a company that went on to have a funding round led by another investor at a higher valuation of this to what we initially invested. So if you allow me to play devil's advocate, and I can't help myself because whenever I see returns like 73.4%, I'm thinking, well, first of all, there's this giving FOMO that I guess all the investors know like, wow, that's a lot. And the second order of thinking is also that I know you're leading many of the Series A rounds. What does mean to be leading? You talked a bit

Starting point is 00:36:40 about before in the interview what is a Series A round the first place. But whenever you're leading around, you also have a say in what's the valuation of the company, which again, spills back over to what are your returns? And so, could you please talk a bit about that? I guess probably to first define the concept of leading around. So I got a broke down earlier on the concept of seed, series based dncy. And maybe a different lens to see that concept of different stages. It's both a risk management kind of tool in the sense that you can deploy capital over a period of time as opposed to all up front. At each stage, your company learns more and more. And so the confidence level with which you can determine the outcome increases as time goes on,

Starting point is 00:37:22 in theory. The concept of leading rounds really comes in that whenever a company is raising capital, let's say, for example, it wants to do a $10 million round. And let's say on average you have three to four investors that are participating in that round. There has to be one investor that is basically the largest investor in that round. And by virtue of being the largest investor, But really, the crux of it is valuation and governs. Now, the point which I think you're saying is that to what extent if you, for example, invest in the seed round and you're leading the Series A round, are you kind of increasing your pay-to-performance yourself? Yes.

Starting point is 00:37:59 So take a step back. I mean, the reality of all of this is we could show 73% IRA, we could show 30% IRA, which is 5% IRA. In reality, that IRA doesn't substantially mean anything beyond being an interim system. signal as to how things are going. At the end of the day, really, your performance is a function of the amount of money you return back to investors and what multiple is that relative to the capital they put in. That really at the end of the day is what matters. But obviously, during a 10-year period, investors want to see kind of signals how things are going.

Starting point is 00:38:30 So there's no ideological reason why we wouldn't want to lead a seed round, lead series A round, in some cases maybe lead series B round. Why? Because if we have conviction and confidence in a company, we would want to deploy larger amounts of capital in it. Now, implicitly, there is a dynamic where we don't want to be signaling prices to give a false signal to investors. So what we typically do is we lead C, we lead series A, and then we don't really lead from series B onwards. So any that we have on our portfolio that implies a certain IRA, they are always from funding rounds that have been led by an external investor. So we say there is external validation and proof of what the valuation of the company is, and we're simply following that. Interesting. And with the interest rate rising, which is just on everyone's mind right now,

Starting point is 00:39:19 you know, due to the inflation pressures we're seeing, it seems like a lot of money has been pulled out from the venture capital scene. You have what they call tourists in the valley leaving the scene. And so whenever you talk about tourists, and now I'm more talking about the valley, I know you're in a different spot. So I'll go into that later. But, you know, So you had these venture arms of large companies such as like Salesforce, X-Mobile, then you had many New York heads funds, Wall Street, buyout companies. Some of those have been pulling out as the interest rate has going up, and they're going way from what you would public called risk-on assets, which a lot of venture capital companies

Starting point is 00:39:59 are seen such as. I'd be interesting to hear more about you. I know you are partially being funded by some of the Western VC companies, but you also raise caps in many other places. So I guess my question goes more into how have you felt the impact on interest rates and how, I guess, as in connection to that, how uncorrelated is these frontier markets due to the rise interest rate that you see across the world? If you kind of try to very simply and crudely define the past 15 years, because you've had

Starting point is 00:40:32 low interest rates, in effect, the confidence level behind assumptions needed for investing has been, let's say, the lowest of all time. Meaning the burden of proof was kind of cyclically very low. So if a company, for example, showed very high growth rates, but didn't really have a clear path to profitability, as long as that growth rate was very high, it was likely that generally would be funded. What changes really is liquidity, as you kind of rarely said.

Starting point is 00:41:00 The concept of inflation in these markets isn't too relevant because they are typically high inflation countries. They live through it, so it's kind of something that they're redacted. adapted to and they function within it. But really it's liquidity. Why? Because as a company is growing, especially in the early stages, clearly it's not profitable. So it needs liquidity. It needs kind of effectively oxygen to be able to keep growing and to capture the opportunity at hand. And so the message effectively was that survival is a precondition for growth, that great companies are built through cycles. The very nature of cycles is implicit to company building. That is

Starting point is 00:41:37 to kind of always be expecting of it, but that great companies are built through, great value is created through enduring fruity cycles. And then really ultimately, it's a function of calibration. And calibration is easier in markets, kind of going back to my previous point, when competition is less intense.

Starting point is 00:41:57 So, for example, if you are in the US, in a very competitive industry, where everyone has historically raised a lot of capital, I mean, you put kind of fast delivery grocery apps in this, in this bucket, you are now in a very, very difficult situation. But if you were a business that previously was growing, let's say, 3x, and you had line of sight as the profitability in two years, the calibration is, okay, maybe I should not grow

Starting point is 00:42:23 a 3x, I should grow 1x or 2x, but bring that line of sight to profitability to the next six months. It's a function of the runway of capital that you have ahead of you. So if you're a company that has two years of cash ahead of you relative to your plans, you have to calibrate accordingly. If you have one year, you have to calibrate accordingly and probably raise a bit more capital now to give you the extended runway and slack. That's really what's happening. Now, between ourselves and the stack of capital that's available in the kind of local markets and the regional markets, looking at where there's enough capital to provide companies

Starting point is 00:42:55 between three to five years of the runway. So it's really a question of what can be done in those three to five years and to what extent they could build quality business, but ideally profitable businesses by that point of time. So they're self-sustaining. They don't need to kind of raise capital. They're in a position of strength. And the final point, which is a positive in my mind, is that the current situation has brought a lot of discipline back into how things are done. So from a capital allocated perspective, if your confidence level was 20% on a certain assumption, today it has to be 90%. That passes on to companies itself. They have to then increase the confidence level behind their own assumptions and how they're operating. And so the whole

Starting point is 00:43:33 process becomes much more discipline because the bar raises. The bar raises whilst actually valuations come down. So in theory, all else being equal, you have an increase in quality while prices come down. And in my mind, that's a very attractive kind of dynamic to be investing in. You have all these studies that look at how well companies performed. They were founded in boom times and in bus times. And no surprise, the companies who are founded whenever things weren't going too well, They're the strongest companies.

Starting point is 00:44:04 They will prevail. And they have a very different financial discipline because they had to. You know, it was just a prerequisite right out of the gate. So it's embedded in their DNA. Whenever I think about Sturgeon Capital, one of the concepts that comes back again and again is that about impact investing. And that's also one of the reasons why you work so well with the local authorities in the frontier markets you invest in. It's a win-win because you provide employment opportunities for highly

Starting point is 00:44:37 educated locals. You improve the country's digital infrastructure. It also provides a layer of protection for your investors because as opposed to running a, say, a gold mine that is operational, very simple. The government cannot take over the companies you invest in as they're just too difficult to run. How do you work with local governments? A precursor to this is that if you really look at the majority of these countries, why is it that broadly they have lower GDP capita than, let's say, the develop world? I say this without any kind of ounce of judgment. It's really because that capitalism, for many different reasons, wasn't truly formed.

Starting point is 00:45:16 And if you believe that kind of an unlocking ideas and unlock in wealth and kind of improvement and kind of general living standards has come a lot of it through capitalism, what we are in essence doing through the way we invest in these countries is kind of. bring the full force of capitalism, competition, entrepreneurialism to these countries. And it's done successfully, implicitly, it does a lot of benefits. It creates a lot of jobs. It brings a lot of efficiency gains for a broad range of people.

Starting point is 00:45:43 And we like to think kind of sets a very good operating culture for how business could be done. The point is it's kind of all good and well, me telling you this verbally, but how do you kind of quantitatively prove them? So what we've done for the past two years is actually publish an annual impact report. What we tend to look at are what are the kind of critical issues in the countries that we're investing in. What are the implicit things that we're doing that are creating an impact?

Starting point is 00:46:08 And how do we focus and systematically do it? So I could tell you on a quarterly basis how many jobs our companies have created. How many jobs have been under the age of 35? How many female jobs we've had? How much money is spent on R&D? All of these kind of statistics. And then we went a step further. We kind of believe in this concept of a quality of opportunity.

Starting point is 00:46:27 And then we said, okay, objectively. these countries you have very smart individuals that for no reason of their own don't have the platform to be able to present themselves to the world. And so let's go to the universities, the leading universities in these countries and then tell them which are the smartest students that you have that for whatever reason can't fund their education. We commit a part of our management fees funding those students. We then during their studies give them internships in our portfolio companies and when they finish their studies, if they so wish and if they're able, they can get full-time jobs as well.

Starting point is 00:46:59 So you're creating the full funnel of talent spotting, both in companies, but both in individuals in these countries. And we then set that up in a kind of formal foundation where we commit amounts of our revenues to it every year to hopefully do kind of nearly 50 to 100 scholarships a year in these countries. The broad point is kind of, I think it's all good and well to have a system that makes money,

Starting point is 00:47:20 but probably when you're old and you look back, if you could build a system that collectively made money, but substantially also had an impact that you could measure, it was measurable, would be kind of a really great thing to do. And that if we could build a value chain for our business, that we are taking on capital from investors we either admire or organizations that do great things, that we invest in a manner in countries

Starting point is 00:47:45 that severely need kind of efficient solutions on scale, having impact in those countries, in doing so make money that benefits our investors and they hopefully can spend it in productive means, that we ourselves as employees of the company can independently become wealthy and hopefully be characters where we reallocate it back in society and productive way, that that is a very positive sum value chain. It's not saying that it's easy to implement, but it would be a great thing to try and accomplish.

Starting point is 00:48:10 So in what ways can we interact to maybe help set legislation, to create certain incentives so that we can build an ecosystem around ourselves? We don't want to be the lone player. We want everyone to be there at an investor. It adds to the quality of the ecosystem. So it ranges from being advisors to certain elements of the government that can really help shape that ecosystem. And in some instances, we actually manage money for certain elements of the government to really practically invest alongside ourselves in building that ecosystem.

Starting point is 00:48:39 So hopefully that answers the question. It certainly does. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up. And customers now expect proof of security. just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're

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Starting point is 00:52:11 that you can find frontier markets. One of them that you mentioned that would be e-commerce. And one of the things I heard to say is that the advantage do you have is that you've seen what works in developed countries, something like Amazon, you know, might come to mind. One of the key tasks for you is to find the right team in those frontier markets to execute on those ideas. What are you looking for? I guess there's always a debate on kind of what is the main thing that as a venture investor

Starting point is 00:52:40 you're really looking for that kind of time is a success. and I kind of think of it through a filter-based approach. The first filter is, in the best case, is this business a one that has a defensible high returns on capital and a relatively high margin business? And really understanding why those conditions would exist that would enable for that to happen. Once you pass that hurdle, really the magnitude of your success is a function of the quality of the team that is executing that business plan over an extended period of time. To have a framework of really understanding who are those great teams or individuals that

Starting point is 00:53:11 of doing that is actually really, really important. In the best case, you would have an entrepreneur that has done it a number of times before. And so there's precedent of how they built previous businesses, why they were successful, and why they specifically kind of contributed to that success. So in the case of Zutpe, the founder in his 20s built and sold a hundred million dollar business, then built a company, sold it for $800 million. And this is a third company. So you know it's someone that really has kind of been through what it means to be,

Starting point is 00:53:41 in the bowels of a building a business and to come out the other side successfully. The more tricky one comes when you're dealing with first-time founder. So a first-time founder is someone that previously either has worked in a range of companies, but it's really the first time that their entrepreneurial endeavor to start a business. And what you're really looking for there is deep domain expertise combined with the concept of founder business fit.

Starting point is 00:54:07 So deep domain expertise is basically someone that for a particular reason really understands the truth and the nuances of the particular industry that they're looking to tackle in. It may be because they've worked in it for five, ten years. It may be for a handful of reasons. But that is very important to kind of just get right. The concept of founder of business fit is that if you think about it, you need a certain character or profile of founder relative to the type of business that you're in.

Starting point is 00:54:33 So if I basically give two extremes, if you were running a luxury consultancy service, the profile of the person running that is very different to someone. as running a logistics hall at business. The nature of the ecosystem you're interacting with different. The types of things that the systems that you're building internally is different. Gronly, that profile a person has to match the industry, the type of industry they're operating. Then it's kind of a question of a lot of character trait. So what you want is someone that is intellectually honest.

Starting point is 00:54:59 It's very important that they're intellectually honest. That is, they know what they know, they know, they know what they don't know, they don't know, but they kind of systematically are trying to study and build kind of feedback loops to improve their full processes in individuals. and collectively the system within the company. It's important that they're intellectually rigorous, that broadly the conclusions that they come to, the things that they try to explain are logically developed. There aren't too many gaps in how they've come up with the method of what they're doing. It has to be someone that is very personal. They have to be, if you think about it, you're starting

Starting point is 00:55:31 from, let's say, 20, 30 people in a company and you could potentially have 5, 600 people in the company. So does that person understand what sort of systems to be built, to be able to scale an organization then they basically have to be ruthlessly, ruthless executions. They have to have a deep bias for action because it's all good and well being methodical, having great thoughts, but if they're not implementing it kind of on the front line on a day-to-day basis, then you don't learn as fast and you don't test boundaries and you don't understand boundary constraints. It's very important that someone is dead driven and pushing. And then basically our job is to study the teams that come our way that we can speak to,

Starting point is 00:56:08 to come to a conclusion who really has the combination of all those factors and is tackling a business where we believe they have a unique edge in building it. And we know that that business in its end state will be a very profitable business. So it's the kind of combination of the two. So whenever you're leaving around, very often you would get a board seat. So how does that work? Is that one of someone who are working with Sturgeon specifically that you would appoint? Would it be someone external?

Starting point is 00:56:37 How do you find the right expertise to help that company? Maybe it's a way to explain how we're set up. So the way we set up is that we have a London-based team that typically travels quite a lot. And the London-based team is split up by business verticals. So the three main verticals that we invest in our B2B software, marketplace businesses and FinTech, so financial services. And we want basically on a partner level someone to be a deep expert in each business. each of those business models that is applicable across the countries that we invest.

Starting point is 00:57:12 Then we have a layer of individuals on the ground in the country that are also very kind of either have been ex-operators in that country, that is they've founded or maybe sold or built technology companies or they have venture investing experience in that country. What they really bring to the table is a true understanding of what is going on on the ground, what it means to kind of bottom up build a business in that country. and combined with that kind of sector or segment expertise, it's quite a powerful combination.

Starting point is 00:57:43 Then we add a layer on top of that in what we call a suite of venture partners. Venture partners are who. They're very well-experienced individuals that have built and successfully, let's say in some cases sold, very large businesses in that particular verdict. So in FinTech, for example,

Starting point is 00:58:01 we have a gentleman that basically built a bank from a $30 million dollar bank to a plus billion dollar IPO and went on to build two or three other banks in many different emerging markets. What does that do for us? When we're looking at investments, pre-investment, that collective kind of system reduces hopefully our error rate so that we're right on our assumptions. And that post-investment, when the majority of the work goes in, we have the ability to truly

Starting point is 00:58:27 add value in how that company is being built. And that's the manner of which we interact and kind of try to allocate capital and invest in it through that system that we described. The other thing that we do is because typically we're one of the largest investors in these markets, our portfolio companies are very complementary to each other. So, for example, if ZootPay obviously operates within the logistics ecosystem. So we potentially have a software company that works in the logistics space and it's very easy to put the two together. they have efficiency gains from kind of working together, but they also kind of help each other generate revenue. Because you need infrastructure layers to enable the front-head layer, and we invest both in the infrastructure layer and the front-end layer.

Starting point is 00:59:11 And all of that stack is complementary. So then we work quite hard to building the ecosystem together, so that all these companies supporting each other in the pursuit of what they individually are trying to achieve. Let's continue on some of those thoughts. Warren Buffett, someone who mentioned quite a few times here throughout the interview. He's known for his bet on the airline industry in 2016. And it also has to do with all the money that he's managing. But instead of picking the winners, he bet on the four major airlines,

Starting point is 00:59:40 so Delta, America, and Southwest and United. So let's say that you found that e-commerce in Pakistan, you know, that's your bold thesis. And you found one great company you feel they could pull this off, but you don't know if they're well. do you then go in and invest in the five best teams, eight best teams, or do you just pick one? And what are your thought process about that? This actually links back to that concept of moat and competitive edge. And it's actually quite interesting to then overlay that with kind of venture investing.

Starting point is 01:00:15 So my belief is if an industry has a large range of competitors from the get-go, that basically probably will be an industry where the end-state economics. are not that attractive. Doesn't mean that a valuable business won't be built, but as an investor, it's a very high risk proposition, in my view. And I'll give kind of maybe a practical example of a company for your listeners. So if you think about Uber as a business, clearly it's a success story in the sense that it's a kind of a decade now.

Starting point is 01:00:44 It's kind of worth tens of billions. But if you kind of take a step back at probably the beginning of the journey and think about why it's a difficult industry to invest in, is that the, you know, the, initial barriers to entry to get a business like that started are actually quite low. And you don't particularly have driver loyalty. The drivers will go to wherever they get paid the highest commission and the passengers will go over to where prices are lower. So you don't have pricing power in a traditional sense.

Starting point is 01:01:10 The network effect that you build up in one city or the monopoly you build up in one city doesn't necessarily apply to another city. You basically have to go and build the monopoly yourself. Now, so all of that dynamic put together, I mean, it's a very, very difficult business. and combining the fact that it's low barrier to entry means that basically the game that you're playing is a game of execution and capital raising. So the company that will win is the company that has the ability to raise more capital from investors and can execute faster. You could fall off at any government than time. Now obviously statistically you have success story and in this case it's Uber

Starting point is 01:01:44 in the West. But the point going back to your question is that if indeed we're looking at an industry where there are a handful of players and they're all of good quality and you played it out, played over five, 10 years, which is typically the investment horizon we're investing in. It's very likely that that will be such a competitive industry that is very difficult in a normalized state to create abnormal kind of returns or very high margin business. So we really focus on thinking through what are the industries where actually truly are developing a moat. And if you think about a moat, it's not a static concept. You are either developing one or your kind of your moat is being attacked. So we want to see businesses that

Starting point is 01:02:21 are gradually, systematically, methodically building a moat. And that because of that mode, they will generate a kind of high return on capital. That applies in software. Why? Because once you're ingrained in the workflow of a lot of companies, the substitution costs are very high. Typically, it means you have high levels of recurring revenue. The product you've built is built on initial CAPEX to build software, which can be scaled

Starting point is 01:02:44 without kind of significant marginal costs. And so you have a high recurring revenue business, high margin that basically what you to get right is distribution. And typically when we invest, we invest in the category leader in that particular software. Same in marketplaces. Marketplaces are network-based businesses. So if you have a particular edge in forming a network and over a distribution channel, typically that's a very, very strong moat.

Starting point is 01:03:07 And if that network or distribution channel happens to be larger by far than anyone else, it means you can overlay more and more services at basically zero marginal cost that continues to add to your moat. Same in kind of fintech. You either have a balance sheet advantage or a distribution advantage, but all of these free business models are business models where a moat can be built and as such kind of highly, kind of consistently high return on capital business can be developed. So to answer your question, we basically, in history, have never invested in multiple companies

Starting point is 01:03:38 in the same industry. In the public markets, you can do it because you aren't liquidity tied, you can sell out at any point in time, probably from a risk perspective is a safest bet to make. But we're making 10-year capital commitments. And so it's very important for us to have visibility that ultimately that industry does have a motor and it's high return on capital basically outcome. You know, you have very few founders that can excel in all stages of company growth, from founding to the IPO and continued growth.

Starting point is 01:04:05 We talked about this before, you know, the skill set you would need whenever you were just signing out and the skill set you need to run a thousand people company. This is just very, very different. And of course, you can come up with some people, someone like Max Zuckerberg, he might come to mind. And not long ago, you could also include Jeff Bezos. He's no longer CEO, but now he's the executive chairman of Amazon. But they're more the exceptions to the rules more than anything else. How do you, as an investor, ensure that you have the right people in the right seats as the company grows and matures? I think if you kind of maybe define the perfect individual first or the

Starting point is 01:04:44 perfect mindset to kind of understand probably what it takes to be that character. So to be the Mon Zuckerberg and be the basis of this world. I think the first point to recognize is that if you look at both of them, at least when Bezos was kind of day-to-day running Amazon, they had a very deep bench of quality management. And then if you then kind of transpose it back to when they first started their business, what you really wanted an individual is a person that going back to the concept of Buffett is a compounder of knowledge. is because they are on the front line on a day-to-day basis, because they are pushing on a

Starting point is 01:05:16 day-to-day basis, it implicitly means that they have a very steep curve in terms of learning trajectory, but that at least in some formal manner they have as a system that they can continuously take those learnings and re-underwrite all their assumptions and all their knowledge basis and all everything that they do. And then they execute on that re-underwriting of assumptions in a more optimal manner. And that they do that as a continuous process day in, day out, So if you think of a guy like Zuckerberg or Beda, and you think about it for the following lens, they are inherently very capable people.

Starting point is 01:05:52 They're inherently constantly learning more. And the volume and the nature of the interactions that they have are on such a high level. The types of people that they're interacting with on a day-to-day basis type of problems that they have to deal with on a day-to-day basis are very difficult things. And because they're doing it consistently, their kind of subsequent ability to do more

Starting point is 01:06:11 just constantly increases, you really want those kind of types of characters, ideally. What you also need in those people is to really recognize in an honest and pure manner what their weak spots are and what they will likely be as the company grows and then hire for it. So to have a true depth of management and team that can support them holistically in a comprehensive manner as the company grows. And then finally, is a person that really thinks through systems. If you look at any great business, it's really you can untrue. packet by looking at the system that's governing how that company operates. We talked a bit about how Berkshire system works. Every great company is kind of a system and people operating

Starting point is 01:06:51 within that system. So those individuals, you want to be system builders as well, and ultimately system calibrated. Because a company isn't built by the individual. It's built by basically a system of individuals operating within that system and constantly tweaking that system. We both are running, growing companies, and you're sort of like you have to reinvent yourself all the time? Like, what kind of skill set do we need now in this, in this states of the company? But speaking of which, you're now opening your second early state VC fund called Sturgeon Opportunities 2, and you're raising $50 million. And you're focusing on Bangladesh, Pakistan, Egypt, Central Asia and the Congress of countries. So, Armenia, Azerbaijan, Georgia, Kazakhstan, you know,

Starting point is 01:07:34 and this goes on. What is the, what is the bold thesis behind your new fund? Probably, to be fair, I'll cover the bull feces and maybe what the bear feces as well. So the bull feces is kind of, let's say, accumulation of kind of what I've been talking about so far in the sense that what are we doing? We're really looking at the last really large countries in the world that have nascent venture ecosystems. They happen to have now the technology infrastructure such that technology, meaningful technology companies can be built. They have relatively low levels of VC capital funding, but that is increasing every year. And that we're very, we're quite early in the inevitability of investing in meaningful technology companies to be built.

Starting point is 01:08:18 And if you want a concept of validation of that high level thesis, it's, you have enough precedent in nearly two dozen countries where once a country has reached a level of technology infrastructure, digitalization meaningfully accelerates. And as a result, capital formation around technology companies accelerates. and as a result, you have kind of significant businesses created. So if you believe that there's an inevitability that meaningful companies can be built, it's really then a bet on our ability to execute within that. That is, to have the ability to make sure that we have access to the greatest opportunities,

Starting point is 01:08:55 the greatest companies and the greatest founders operating in these markets, that we have a good engine to understand what are the business models and people we should and should not be investing with. And that once we're invested, we have a meaningful ability to, increase the probability of success and decrease the rate of probability of failure. And that collectively put together, it will lead to good outcomes. And in each of these countries, you also had the precedence of success stories. So from Kazakhstan, you have a company called Kaspi.

Starting point is 01:09:22 Today is a $12 billion listed business in London. It's a $12 billion business in a population of $18 million. In Bangladesh, you have a company called B-cash, which you have the likes of Alibaba and SoftBank that invested in. In Pakistan, you had Dera, which was acquired by. Alibaba, in Egypt, you have Fowary, which is a listed $2 billion payments company. The point is that there is also precedent and truthcases for meaningful business to be built, but also egged in our countries.

Starting point is 01:09:50 Now, it just so happens that there is still a huge amount of things that have not been built. So I mentioned e-commerce 1% penetration. Consumer lending doesn't exist. A lot of the population don't have bank accounts. B2B software doesn't exist. Important infrastructure layer that relates to payments, logistics, is not built. They're large enough combined when you're looking at a population of half a billion and you're looking at GDP above half a trillion, that meaningful companies will be built,

Starting point is 01:10:17 and I believe humbly that we have a system that we know how to go and do it. And hopefully in the last fund, we've kind of proven that also we have the ability to execute and also generate high rates of return. The bear case is basically, if you want to think about it on a high level, is that for whatever reason, the concept of digitalization stalls, there is truly a death of liquidity, meaning that companies don't have the oxygen to be able to build. And on a micro level is that we make mistakes in backing the wrong founders and backing the wrong business models. If you kind of really want to substantiate the risk is really, really those are the risk.

Starting point is 01:10:53 So some we can mitigate. And on a high level, we try to mitigate by basically ensuring that for all of our portfolio companies, and we run a relatively concentrated portfolio, we always have enough funding for them to be able to execute on what they're doing. And then relative to the reality of that funding available, they are calibrating their plans accordingly so that they're not running head fits into a wall, that everything is kind of planned properly and that we're kind of tried to operate rationally in a pragmatic manner, kind of if you want to kind of be cheesy to kind of wrap up to be kind of emulating

Starting point is 01:11:26 buffer and manga in their mindsets and how they approach things, but doing what we do. You know, Kian, this has been, it's been fantastic speaking with you. And before I wanted to give you opportunity to talk more about where the audience can learn more about you and sturgeon capital. I know we covered a lot of ground already, but is there anything that you think that we haven't had a chance to talk about that you wanted to mention to audience? If you look at the kind of value investing community, sometimes it's, you can make the criticism that it's kind of set in its ways. That it truly doesn't understand, for example, why Buffett is successful the way he is. the fact that when he was running his partnership actually was not long-term buy and hold.

Starting point is 01:12:06 He was doing everything. He was doing, I think there was a paper at some point where if you took out merger arbitrage, if you took out spin-offs, control situations, that during the partnership years when he kind of compounded a 35%, you took all of them out, it would have been 18%.

Starting point is 01:12:18 You have to kind of truly understand the reality of what is going on to then see what principles are kind of applicable. The reality of Berkshire, it is, as I said, the most elegant, beautifully crafted system of operation of building a defensible tank that gets larger and larger over time, and that could last forever. So it's very interesting than to understand system building, not probably stock picking per se, because stock picking is an output of everything else.

Starting point is 01:12:44 So it's kind of what are the true inputs, what are they applicable in other areas? And the final point on kind of the circle of competence, but it always says it's important that you have your circle of competence and that if you look across the different investment areas, there are a handful of firms that over a 20, 30 years, sometimes longer period have consistently made money but doing completely different strategies. So, you have Renaissance technologies that does purely quantitative and have been amazing at it. You have Sequoia Capital that has purely done VC for 30, 40 years, they've been amazing at it. You're Stan Druckenmiller that does kind of macro and less than everything that has done a tremendous job at it.

Starting point is 01:13:21 You have BALPOS that does distressed assets on top of traditional value, but there is not one kind of silver bullet as to what is the right sense. It's what is the area that you believe you have an edge up that you can execute him consistently to generate outsize returns. And I think the kind of principles and Buffett and Munger are applicable, regardless of the type of investing that you do and where you invest. And probably that's the kind of as a kind of a true admirer of Buffett and Munger is kind of what I would say, my humble opinion. What a great note to end the interview on.

Starting point is 01:13:55 Kian, before we let you go, welcome the audience more about you. Steering Capital and also a new fund. So the easiest way to go is on our website, we try to actually regularly put up four pieces or kind of things that we're thinking about and you can obviously subscribe and anyone can listen to it. You can reach out to me directly. I mean, my email's KZ at sturgeoncapto.com.

Starting point is 01:14:16 Always happy to kind of speak with individuals that kind of share common interests. And yeah, just reach out. We're quite easy to find online and yeah, always more than happy to speak. I can speak all day about these things. So if anyone wants to learn more, This is they call or email me.

Starting point is 01:14:31 I hope our audience will take you all about it. Kian, thank you so much for making time for The Investors Podcast. It has been very interesting to learn about venture capital, the Buffet and Munga Way. And I hope we can invite you back on the show again soon. Thank you very much, too. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence.

Starting point is 01:14:56 To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP469: Would Warren Buffett invest in venture capital? W/ Kiyan Zandiyeh

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