06: Finding Alpha in Texas - Rajiv Bala, Clutch VC

06: Rajiv Bala - Clutch VC (Final edit)


Introduction to First Funders

Aamir Virani: Hi, welcome to First Funders. This is Aamir Virani. Our interview today is with Rajiv Bala, general partner at Clutch VC, a pre-seed and seed stage fund based in Austin focused on Texas B2B software companies. We wanted to have Rajiv on because we've gotten listener requests to hear more from folks outside the Silicon Valley ecosystem.

Many angels and GPs ask us whether it's even feasible to get in the startup investing game. If you're not connected to the San Francisco Bay area and the venture capital firms here. Meanwhile, Shaherose and I are both big believers in the power of entrepreneurship and company building anywhere in the world.

And I'm from Texas, so I think it's the best. I know many smart people there, but I also think there's a distinct founder go for broke mindset you only see here in California and haven't really figured out whether that means you should try to build a company elsewhere. With Rajiv, I think you're going to hear more about this difference as well as how he thinks about outcomes and founders.

When you have a little bit more time with folks before making an investing decision. Here's our interview with Rajiv Bala of Clutch VC.

Meet Rajiv Bala: GP, Clutch VC

Aamir Virani: Welcome to First Funders. Our [00:01:00] guest today is Rajiv Bala at Clutch VC, which is based in Texas. I'll mention real quickly how I know Rajiv. He was one of my students when I was a TA senior year at Rice University in ELEC 241, which is the Intro to Electrical Engineering, and so we got to know each other there, and then we both went off and I would keep hearing about him as a person who was a couple years behind me, and then we reconnected whenever he ended up being in venture capital while I was a partner at Felices ventures.

And we've stayed in touch since then. And I've heard lots of exciting things about what he's been working on. He's now working on his own firm and we're happy to have him here today.

Rajiv Bala: Thanks for having me.

Aamir Virani: So we.

Rajiv's Journey into Venture Capital

Aamir Virani: Rajiv, we'd love to hear about your journey into investing, right? People usually do something before they go into venture capital.

And so we'd love to hear where you started and how you ended up deciding that this was the place for you.

Rajiv Bala: Yeah. We were both at Rice University together sitting electoral engineering. And after I graduated, I went to be a applications engineer at Texas Instruments. They have a group where you, they, it's an incubator group where they throw a few [00:02:00] engineers and a business person at a problem and try to go build a business around that.

So that was the group that I ended up in, in digital radio. So we built a business out of that. And then I moved over to the product and marketing side where I was a product manager, marketing manager focused on automotive infotainment. So we had a chip set and some software that we were selling into tier two automotive manufacturers.

We, uh, built that into quite a business there. And then all of my customers went bankrupt. So Visteon, Delphi, all of the American automotive manufacturers in 2006, 2007. So I decided that was a good time to go back to business school and decided to go to the university of Texas one, because I knew I wanted to stay in Texas longterm.

And two, they have a program where you can intern at venture funds. And I was thinking I'll go. Get some exposure to that and then go be a product, a person at startups, but ended up through that program, interning, and then ultimately joining a firm called S3 Ventures. In [00:03:00] 2008, and I ended up spending a decade there learning the venture business and growing quite a bit.

When I first started, we had a 20 million fund and there were two of us in a venture partner. And by the time I left, we had raised half a billion across six funds. We had gone from a 20 million fund to a 200 million fund. I think we had eight investment professionals grew up quite a bit during that process.

That's where I learned the venture business.

The Texas Startup Ecosystem

Aamir Virani: I'll ask the question that my wife often asked me, why the loyalty to Texas?

Rajiv Bala: One, I believe that there's just tremendous opportunity here. It's 10 percent of the US population, 10 percent of GDP. There's still only about 4 percent of venture capitalists deployed here.

And there's a, a massive opportunity, but honestly, it was one of these things where I fell into it at first. It could have very easily, I could have very easily moved to the Bay area, but year after year, Texas just keeps getting [00:04:00] better and better to invest in and post pandemic it's we've hit this step function that makes it a really special place.

I'm sure you guys know someone who's moved to Austin pretty much anyone I talked to know someone who's moved to Austin, which is not the case 10 years ago when we were investing here. I would call someone in California and they'd say Texas and I get hung up on. So now it's, it's a lot more, people are a lot more interested in it.

I'll put it that way.

Shaherose Charania: Wow. I'd love to jump in and hear a little bit more about the evolution of the ecosystem there. For me, even around the 2006 timeframe, probably closer to 2008, I started visiting other ecosystems all over the US. So there was Austin, Chicago, Boston, and then Toronto at the time there in London and followed those ecosystems for the following 10 years myself through the work that I was doing at the time with Women 2. 0.

I was only driving by and getting to know the local VCs and the founders. And didn't necessarily plant my roots. I [00:05:00] remained in the base. I'm super curious for someone who stayed in one place for that period of time. Like what is different now? What has shifted? What are you seeing? And what keeps you bullish?

Rajiv Bala: Yeah. As you guys know, the venture arcs are very long. And so if you go back to before the dot com crash, even into the seventies and eighties, there's just a lot of activity in telecom and semiconductor. When venture capital as an asset class became a thing and we did pretty well. There's a lot of great semiconductor companies that came out of Texas, a lot of great, uh, telecom companies, and then

after the dot com crash, telecom semiconductor never recovered. And we had a lost decade where there was one firm that dominated called Austin Ventures, and they had a tremendous amount of success. They ended up raising some pretty large funds in the early two thousands. And that's when a lot of the current dominant funds started between 2005 and 2010, [00:06:00] we all started with small funds.

We all had a lot of success and have raised bigger and bigger funds. And so what I'm seeing is the cycle start again where we're, there's, I see a tremendous opportunity in pre-seed and seed, which is why that's where I'm focusing now.

Shaherose Charania: Yeah. Yeah. And I was going to say, can you comment a bit about the shift in the rest of the ecosystem on the founder side or a little bit more about what kinds of companies are coming out now given post like semiconductor crash?

Like, what can Texas be, or what is Texas becoming known for from a venture side?

Rajiv Bala: Yeah, it's interesting. Over the past, let's say 20 years, we've, our legacy has been infrastructure, software, developer tools, cybersecurity, some of that, some of those verticals. But over the past few years, there's also been quite a bit of activity in marketplaces, vertical SaaS, even some consumer.

And so when I'm fundraising from LPs, if I get exposure to [00:07:00] Texas, what is it that I'm, what are the underlying sectors that I'm actually getting exposure to? And there's not a great answer because, you know, we have a legacy of some of these, uh, sectors, but with the amount of people that have moved here in the past

decade. There's one point where Austin was one of the largest cities for cybersecurity talent without any of those cybersecurity, any of those people working for Austin based companies. And so you're starting to see some of that talent develop and companies form and it's in a broad variety of sectors.

But I don't know that we're like, if you're investing in New York, you get great FinTech exposure. We just don't have a great story around that yet.

Texas-style company building: work-life balance and outcomes

Aamir Virani: So I lived in Austin after leaving Rice for a couple of years, and they were trying to brand themselves as Silicon Hills back then. It's like the early 2000s.

And then I moved out here to Silicon Valley and realized no, not even close. It's just a mindset that is very different. The [00:08:00] people here are leaving and breathing startups, and they think that is the thing to do. So one question I have for you Rajiv is like, what do you think is the mindset down there?

Not just in Austin, but in all of Texas. Can you share how not just investors think about the startup ecosystem as well as how the founders are operating? Like here it's live or die, right? I'm working on this 80 hours a week, blah, blah, blah, blah, blah. Do you think that's different down there? What do you see?

Rajiv Bala: I do think it's different. It is that when I go out to Silicon Valley, it is everything revolves around startups and building companies and. even if you go to the restaurant, like the next 10 tables are talking about the same thing in Austin and especially in Houston, Dallas, San Antonio, El Paso, any, anywhere else that you go in Texas, it is not like that.

The reason that people move here is because it's a great place to live. It's a great place to raise a family, no taxes, and you can have a great life without having to [00:09:00] spend a couple million dollars on a house. And so people come here because it's a great outdoor city. It's a lot of culture, great live music.

It's a fun place to live, but at the expense of you don't get people living and breathing startups 24/7 in the same density that you do in Silicon Valley.

Aamir Virani: Do you consider that a con or do you think that's just different?

Rajiv Bala: I think any geography that wants to be the next Silicon Valley is going to fail.

And so we want to be the first Texas. We want to be the first Austin. And I think that we, we attract the type of talent that is looking for a great work life balance while also driving and creating some amazing companies and going to a cocktail party and not having to talk about your startup 24/7..

Shaherose Charania: Do what do the LPs expect then? Cause we have a standard operating playbook for startups with the Silicon Valley mindset, which is. Raising a certain amount of cash based on your industry [00:10:00] and getting to, uh, an interest, uh, an outcome within a certain amount of time. Is that playbook a little different and our LPs, do they just acknowledge that there's a new playbook being written particularly for this region?

Rajiv Bala: Yes, I do think it's a different playbook. I think. Uh, the playbook is actually, if you go back to Silicon Valley 20 years ago, it's the playbook that we use here and really in any geography outside of Silicon Valley, I think over the past 10, 15 years, there's become this, this mentality of you've got to be in unicorns.

You've got to be in. Only 10 billion companies. And that's the only way to 5x a fund. There's plenty of funds in geographies outside of Silicon Valley that have five to 10x on purely sub 500 million exits, right? It is certainly a different way of investing than only trying to find the unicorns, right?

It means that entry point matters. It means that your portfolio construction has to align with that. Your fund size has to align with that, [00:11:00] but it is a certain, it's certainly a different mindset running a geographically focused strategy.

Shaherose Charania: That is great. Thank you.

Rajiv's lessons on portfolio construction: diversification and fund size as key levers

Aamir Virani: Can you share a little bit about how you're constructing your portfolio

then? When we look back at some of the other guests who have been on, there's been a whole discussion of, I have a lot of money and so I deploy more in order to maintain ownership and there's other folks who say I write smaller checks. So I have to diversify and spread it out a little bit more while still taking into account future pro-rata considerations.

What are you thinking about whenever you're developing the, the portfolio of when you're constructing the portfolio for Clutch.

Rajiv Bala: I'm coming to the conclusion that you make your money on portfolio construction and everything else that you do, trying to set up your companies up for success, helping them along the way, helping them connect to other investors, helping them raise fall on capital, getting the right person into the right spot at the right time, all of that

is driving to help them hopefully catch luck at some point, but if you drive a broad enough portfolio, say, super disciplined [00:12:00] about initial checks, follow on checks, I think that's how I've come to approach this early stage investing.

Aamir Virani: So can you share some specifics on that? What does that mean for your check sizes, the valuations you're dealing with and like the stage of company?

And maybe this is also a good place to just tell us about Clutch specifically, since we didn't talk about it in the intro.

Rajiv Bala: Yeah, so there have been a handful of times in my venture investing career where I thought I had a sure thing. There's no way this company can lose. And if you think you have a sure thing, you should plow as much money into it as you can.

And specifically, uh, there's probably a decade ago, I had an opportunity to put some personal capital into a portfolio company that I thought was no chance it would fail. I didn't do it at the time, but ultimately what ended up happening to that company is it ran into some macro tailwinds and ultimately couldn't recover.

And the company [00:13:00] that was doing 20 plus million in revenue dropped down to sub two of revenue. And that was a huge lesson for me in that even if you believe that it could be a sure thing and you want to double down on your winners and you want to throw more capital into companies that you think are going to work, you still have to get back into that mindset of does this align with my portfolio construction because you can get overexposed to a company that ultimately all of these things are still startups and they can all fail at any time that Makes sense.

Does that answer the question?

Shaherose Charania: Yeah, absolutely. Diversification is a strategy for a good reason. It works, right? I think you're very right about that. I think it's easy to believe and know in that or feel a belief in that moment. But we all don't know what the future holds as investors and we all are always humbled.

Rajiv Bala: Yes.

Shaherose Charania: When things evolve.

Rajiv Bala: You want to believe, right? Like you've been working with these people for years and years and you've seen them in like the depths of despair at [00:14:00] the, in the highest highs and you're like, all right, they finally got it. We're finally going to make a ton of money together, but that may not be the case.

Shaherose Charania: Yeah, absolutely.

Where and how Rajiv sources deals in Texas

Aamir Virani: As part of, we're talking about this as part of your location as well, right? You keep referencing Austin, but there are other cities in Texas as well. It sounds like your, one of your theses is just to focus on Texas investing. Could you share like how you're thinking about just the geography itself?

Do you worry about Houston and Dallas and San Antonio and El Paso? Or is it more Austin 90 percent of the time? And if someone else emails you great.

Rajiv Bala: No, it's, we're certainly spending a lot of time in Houston, Dallas and San Antonio as well. El Paso a little bit less, although we've looked at a handful of deals out of El Paso, Midland.

There's opportunity all over the state, but because we're primarily investing in software, a lot of that activity happens in Austin. The way that we think about talent and great ideas are coming from all these cities, but you, if you're going to scale a really big company [00:15:00] in even Houston or Dallas, where there's tons more people, almost 10 X more people than there are in central Texas, you still have to find the talent that values private company stock.

And that's willing to get out of there. Great oil and gas job to take a risk on what could be ultimately a failure. And so culturally it's a lot easier in Austin to really scale a business, although that's changing quite a bit in Houston, Dallas, and I think there's going to be lots of opportunity in both of those cities as well as San Antonio, El Paso, Midland, you name it.

Aamir Virani: So this leads to a question that we got from a lot of listeners before you came on. You are not in Silicon Valley. You're in Texas, which is still a hotbed, but it's definitely lower tier than Silicon Valley or New York. How are you finding companies? How are you finding people to pump money and like teams to put money into?

This is like in Silicon Valley, you can go to a coffee shop and you'll hear people. Talking about their startup while drinking a cup of coffee. And meanwhile, you're talking [00:16:00] about cities that are literally hundreds of miles apart and trying to find all the deal flow you can there. So how are you doing it?

How are you reaching out to folks? How are you finding companies that might be interesting when they're that early stage, they may not even have a website or revenue.

Rajiv Bala: I've been doing this now in Austin for about 16 years, my partner for 30. So most of the venture backed companies over the past 20 years have touched one of us that are coming out of Texas.

And the first thing you do if you are a early stage company, if you're a first time founder and you want to go raise venture capital, oftentimes you go find someone who has been in a venture backed company before. And most of those people who have been around Texas for a while know who we are. And so almost all of our deal flow is network or other investors.

We also have. I think it's later later stage investors that are investors in our fund. So we get a significant amount of deal flow from those funds. That's like, ah, it's just a [00:17:00] little bit too early for us. Why don't you go talk to the guys at Clutch? So we try to set it's we're not doing a lot of. Inbound in region stuff yet, although that we would like to, it's primarily setting up the pieces and the deal flow comes to us in that way.

Rajiv's "why" for investing: led to his hands-on investing approach

Shaherose Charania: Okay. Let's talk a little bit about why. So here you are running this fund. You took the leap on your own, which is not an easy task. What is your why for investing? What is your purpose in all of this?

Rajiv Bala: I love working with founders. That is really what it comes down to is there's this point after Companies have started, they're maybe getting their first customer, their first couple of customers and they have to figure out how do I turn this into a business?

How do I get the right help to alongside me to really scale this into something big? And that point is what I love working with founders. It's super messy. A lot of times there's [00:18:00] product iteration, which I love as a product guy. There's go to market iteration. And no, no one figures it out the right way.

Out of the gate. And so that's the stage that I just really love working with. And so ultimately, like, I am successful at that part of the start of stage. We'll create these rebel effects that have impact on people on the economy, you name it. But really, ultimately for me, it's about helping founders get through that stage.

Aamir Virani: So does that mean that you like to get on the board of companies at that super early stage? And then you roll off as they solve all the problems that you find interesting?

Rajiv Bala: Yeah, we, we will often get on the board. We don't have to, I, I view board seats as ultimately Being able to implement negative control, like block something or do that.

What I care about is positive control. I care about influence. I want the founders to listen to us. We have a certain point of view on how to build companies [00:19:00] and we want them to trust us to give them good advice on that. They have to, they can listen to it. They don't have to, but. We want them to listen to it.

They don't have to do what we say, but we would like them to hear what we have to say. And in those early stages, ultimately, if you do your job as an investor, in my opinion, as the company progresses. Whether or not you maintain that board seat or stay on the board or roll off, if you're still the go to that they call when they have an issue, then you still have that positive influence over the course of the life of the company.

Aamir Virani: As you suggest that there's a, it sounds like there's a Clutch playbook that you would like to follow. That you like to expose your founders to, could you share a little bit about that with us? Because you're saying that there's a thing we like to see once you're working with someone. So what is that?

Rajiv Bala: Yeah, ultimately what I think our job is and seed investors is, uh, and really series a investors and that it, it changes as you get to the series B, series C and beyond. But it's really all about how do I get a [00:20:00] predictable business that can scale with capital? And if you get to that point by the time you're at the series B, then it's all about just dumping capital onto it to help it really expand.

So if the ultimate goal is predictability, it can take a number of paths to get there. It could be, we need to really work on the go to market model and get a super experienced enterprise salesperson in there. It could be, we need to iterate on landing pages and figure out what the right messaging is. It could be that, Hey, we don't even have the right product.

We need to make sure that what we have is what people want to buy. And so I wouldn't say there's a standard playbook. For that period, get a company operating in a predictable manner. You do have to have a certain element of the, can you rinse and repeat? And that's where we try to get companies over the course of the first year or two of investment.

Shaherose Charania: Yeah. Sounds a lot of the process of getting to product market fit.

Rajiv Bala: Yeah, exactly. [00:21:00]

Shaherose Charania: I love that.

Lessons from Early Investment Furnace Software: an early DevOps leader bought by BMC

Shaherose Charania: So let's now talk about a time way back when, so you came out of business school and joined a venture fund. Would love to hear, and maybe that wasn't the first time, but what was the first investment you did? And what did you learn from that experience?

Rajiv Bala: Yeah. The first investment that we made when I was at my old firm, it was in a company called Furnace Software. We, it was, it's in the, it was in the DevOps space. We invested when it was very early, where you would now call a precede company at the time it was called series. We just started to work. We sold it 18 months later to BMC for great outcome, almost fully returned our fund, a massive success.

And I was like, man, this venture thing is easy. Little did I know everything after that was really hard, but it was super interesting because seeing that type of quick success early. What kind of showed me what was [00:22:00] possible in this business and they had a amazing team who we've gone on to invest in various iterations of those teams

multiple times. The CEO of that company is now coaching one of my portfolio company CEOs. Right now. And so it's, it was just a really fun experience to see from cradle to grave in 18 months when I first started in the venture business.

Shaherose Charania: And when you reflect on that journey at that moment, when you decided to put that investment, what did you see that said to you, it's time to put a check in?

And could you see, could you foreshadow the outcome that did happen?

Rajiv Bala: Absolutely not. It, there, there takes a little bit of luck in this business. And I think that one, we just happened to catch it at the right time. It was a time where I was very early in my venture career. So I hadn't really developed the pattern of recognition or any of that stuff yet.

But it was a product that people [00:23:00] clearly needed. It was a new market. There's development and it, and there's this broken handoff that was happening in between. And it was a, a part of the market that we felt like there really needed to be a solution. And, and luckily other people agreed over time and needed to buy the business.

Timing was interesting too, right? This is 2008, 2009. The world was falling apart. There were buyers. For the product, we had no idea if there would be buyers for the business in any timely manner, but it ended up being right place, right time.

Aamir Virani: Can you give us the super short elevator pitch for what Furnace does or did?

Rajiv Bala: You're taking me back, but it was basically for Java app deployment automation. When you were deploying a Java app to a Java app engine, there, there's a bunch of configuration that you have to do is all done manually. And if you made a mistake, there's no way to roll it back. And that's [00:24:00] what this product did

is it manage the configurations for job app engines and allowed you to basically manage those in a operational manner.

Aamir Virani: Given the background you describe, and maybe if some of your teammates that sounds pretty technical. How did you as an early stage venture investor? That's something that sounds that technical like that.

I think a lot of the listeners out there are saying like, I'm not technical. I just have money I want to deploy or I'm a founder, but I'm not in a technical space. What was the process that led you to say, okay, this is worth making writing a check for. This is worth actually investing in.

Rajiv Bala: Yeah, this is a thing that I still both lean on and struggle with today.

Being engineers early in our careers, learning how to build product. I learned how to build good product. I also learned how to build bad product, but at the end of the day, I am not really great at evaluating technology. And there's plenty of people that I know that are way better than that. Even in the early stage investments that [00:25:00] we make now, we often won't take technology risks.

So we want to see it in someone's hand working now that doesn't have to be paid. It doesn't have to be the final product, but We want to know that there's something sellable there before we invest. So we let the customers tell us really.

Aamir Virani: Every venture capital firm. I've talked to has some sort of deal memo they like to write, and there's a section that's usually about risks.

So it sounds like one of the, one of these sections in risk for you is technology. Can you share with us what other types of risk you actively think about?

Rajiv Bala: Absolutely. Team risk. We will never take, we want to believe in the team, the stage that we're investing. If we believe that. They're not the right team to go execute.

If they are maybe the great team to go execute, but they're not going to listen to us. We often won't do that deal. Market risk is one that when I was a series B investor, I was not willing to take at the pre-seed and seed stage. That almost is one of the best risks that you can [00:26:00] take. And that's not to say that, that if the, if the market will always win, I think there is a Kleiner or Perkins or somebody said an A team against a B market.

Well, the market will always win, but as a pre-seed C stage investor, if you want to bet on the fact that a market will appear and will be massive, that's where I think you can drive some outsized returns. And that's some of the best wins that we've had is betting on markets that don't exist yet, but. That we believe have a really good chance of showing up in the short term.

Aamir Virani: So to summarize the risks that you have top of mind are technology risks, team risks, and market risks.

Rajiv Bala: And then deal or economic risk. That's another one where we often, we are looking for enough ownership to where it can move the needle on a decent outcome. It can move the needle on the fund and the fund returns.

On a decent outcome, those, that rule is one that we are willing to break when the [00:27:00] right opportunity comes along. But but it is one that we take into account.

Shaherose Charania: Given your fund size. What is your target ownership?

Rajiv Bala: We want to be at least at about 5 percent ownership. Our typical check is a 500K check. So we can go up from that if there are certain dynamics, if it's a little bit of a later stage company, or if there's a.

A higher price that we're just joining a syndicate, but we, we certainly want to at least own that 5 percent if we can get up to 10%. Great. That has to be a, oftentimes a lot earlier stage company, but that's where we want to be.

Shaherose Charania: That makes me want to ask the question for the companies that you look at, what is the band that you're seeing in terms of valuation right now?

Rajiv Bala: It's all over the map. But the, in general, I would say that valuations tend to be 30 to 40 percent lower in the non Silicon Valley markets than they are in Silicon Valley. And we are usually looking at companies in the 10 [00:28:00] or sub 10 range. We've done a few up to 15, but if it starts to get into the twenties, then usually get the way from us.

Aamir Virani: We've offline spoken about the difference in traction. For early stages, well, though, right? This is not true, but a lot of people think that the typical Silicon Valley raise it pre-seed is, oh, I had a slide deck. I didn't even have a product at all. Right? That's not true. People think that's true, but it's not true.

Rajiv Bala: Right.

Aamir Virani: It's true once in a while, but not often. But I think comparing it to what you say you've experienced, it would be helpful for the audience to know what does a pre-seed company look like when they're coming to you and saying, Hey, I'm looking for my first, my first true funder, right? Not just friends and family, but beyond that, what are they coming to you with?

Rajiv Bala: Usually it's product built, something that's sellable. It's usually in the hands of customers paid or unpaid. And that's where we will really engage half million dollar check into a million to 2 million round. That's really our sweet spot. Post [00:29:00] product pre revenue, early revenue. With teams that we backed in the past or other folks that we know, we will invest on a slide deck.

That's typically a smaller check for us, 250K. But for us, that's a, a bet on, on the team. And then usually if it's getting to half a million plus of ARR and they're raising a true seed round, three to 5 million, we're focusing earlier stage in that.

Aamir Virani: So you've definitely got a delineation in your head for a difference between pre seed and seed compared to some of the other investors.

It sounds like there's both something around. The team and product what's been accomplished there. And then also the amount raised and asked for and the valuation asked for.

Rajiv Bala: Yeah, usually it's, I would say the difference for us between pre-seed and seed is pre-seed a million to 2 million around early revenue, free revenue, but close to commercialization seed tends to be into commercialization, maybe not figured out the repeatable sales process yet, but[00:30:00]

enough traction where they can go raise a three to 5 million round.

Rajiv's lessons from his worst investment came with an opportunity to build founder empathy on how hard the journey is

Aamir Virani: Thanks for sharing the information about Furnace and your first investment with us. So why don't we move on to the next question we'd like to ask, right? Which is about your worst investment. Or like a standout challenging moment that brought you important lessons.

So this is probably going to be further in your career, but we, what's something that sticks out to you as your worst lesson or investment?

Rajiv Bala: Yeah. Anytime someone asks me this question, it's the same one. It has been for a long time because it happened almost immediately on the heels of our great success.

It was a company that we invested in late 2009, early 2010. They had pulled some assets out of a defunct company, right? So this is maybe an interesting time to talk about that because we're starting to see some of those type of deals come back. Hey, this company didn't work, but there's great technology in it.

We think that we can respin it and start a new thing and turn it into something. So it was, it [00:31:00] was pulling those assets out and create a new company around it. It was in the internet telephony space. And we love the idea. We thought that there was a really big headstart that they were going to get from these assets.

But ultimately, very quickly, actually, it became clear that we were not going to get product out the way that we thought we were going to get it out. And we had to restructure the company and I ended up running it for a while, which if, if when the VCs have to step in and run it, shit has gone south. But it, for me, it's just incredibly impactful because it was early in my venture career.

I had to step in and I had to lay off half the team on day one. And it's going through that and having to look people in the eye when you tell them you don't have a job anymore is a incredibly formative experience. And I'm glad that I was able to have that early in my venture career. I do see every once in a while, young venture capitalists saying, you just cut a bunch of heads.

And [00:32:00] that disconnect between taking costs out of the business and Firing people or laying them off and reducing earn by cutting their salary. Disconnected from the, like viewing those people is an easy thing to do. Especially early in your venture career, having those things put together very solidly in my mind, I think creates a lot of empathy and what we do today.

Shaherose Charania: Yeah, I can relate to that story. Wow. You're taking me back. I, I think I forgotten about it, but I too had to go through this where we incubated an idea inside of Nike. With a real founder and real employees, and we had real customers and it, it clearly wasn't working and it was time to shut it down. And I had to come in and do exactly what you did on day one, which was to lay off almost the entire team, including the co founders.

And so layer after layer, it's a hard, it's a really hard task, whether it's your company or not. To handle humans who've chosen to believe in something [00:33:00] and expect some livelihood from it. So I can feel some empathy for you. And I think I've ignited some PTSD as well.

Rajiv Bala: Yeah.

Shaherose Charania: So thank you. Thank you for that.

Rajiv Bala: Is I don't know that we're really going to take a look at companies that are pulling assets out of distress to restart companies, because. What you think might be a technology at risk might actually just be an albatross.

Shaherose Charania: Absolutely. You just never know what you're pulling off the shelf. I totally agree.

Aamir Virani: So you're going the direction I was going. I'd love to hear you reassess this then using your frame. So let's go through the list. Right? So. It seems like something was off with the technology risk. Can you share a little bit more about like the learning there or what you, what was off, what was your misassessment?

Rajiv Bala: This was during the period where a lot of internet telephony was transitioning from large CapEx into. The software layer, and we miscalculated what that, because we got actual things, boxes, internet telephony, [00:34:00] boxes out of this bankruptcy. And it turns out that was the wrong path forward.

Aamir Virani: Yeah. This is definitely reminding me of another friend's company at that time as well.

They put bet on hardware when the bet was actually supposed to be on software.

Rajiv Bala: And exactly.

Aamir Virani: We're using, we all use zoom today. And that was the thing that won compared to the friend's company. How about the market risk IP telephony? Everyone uses IP telephony. So what was wrong? Was there anything wrong there?

Do you feel like, no, that was great.

Rajiv Bala: We were so right on the market. So right. This was, it was almost a combination between Twilio and GroupMe, both of which went on to be massive successes, but we were, we just didn't have the right tech.

Aamir Virani: And, and then how about the deal ownership? Did this sink the fund, what happened there?

Or was this just the proper allocation and you would all, it was gonna go to zero and it's fine. Everything else worked out?

Rajiv Bala: Yeah, this was probably my first early lesson on portfolio management. We just, we didn't have a ton of money in it. And so it, it was [00:35:00] painful and it was a great lesson early in my career, but it was a loss that we could stand at the fund.

Shaherose Charania: All right. That's such a great story. And I, again, somehow you reignited some old memories cause I was in the internet telephony space. I could never say that word when I was in it. 2000. Oh my gosh. What year was it? Yeah. Same timeframe. 2000. Actually 2006 through 2009. Something like that. I worked at two, two venture backed companies in the space and it was such the iPhone was coming out.

I just remember all of that. It was such a big shift in the industry. Thanks again for the story.

Rajiv's best investment: he Converse AI journey

Shaherose Charania: So. Let's talk a little bit about something that's a little more positive. Let's shift our energy into so far. Is there an investment that you are incredibly proud of and where hopefully you've realized and you've realized some sort of outcome.

We'd love to hear about what that was. Again, what lessons you had from making that investment? How long [00:36:00] did it take? The full story would be great.

Rajiv Bala: Okay. For a couple of years, I was doing deal by deal investing. We were putting the other SPVs. And primarily leading rounds. And one of those deals was a company called Converse.

Now they are a voice AI for food ordering company. We, I originally met them in 2019 Q1, I believe, because in 2014 I had looked at a company. That was in the robotic space ultimately wasn't a fit for us and we passed on it, but I guess those founders had a good experience with me. And so they referred this company over to me.

And so originally they had a voice platform that was going after a different market. And I was like, I really like these founders. I really like the technology. I just don't like that in market. So we spent almost a year together over the course of which they ended up finding this market around food ordering.

And to your point [00:37:00] earlier about technology risk, I was like, man, I think this is really cool, but there's no way I'm going to be able to tell if this is good tech or not. And so basically I told them they had one unpaid pizza location and I said, if the owner, the franchise owner is willing to roll it out to the second store and pay for it. Then I believe that the tech works well enough that we'll invest. That's what they did. And it, it started to work. We had our capital lined up in February of 2020, and then the world fell apart in March. And the same time my daughter was born February 20th. And so we were sitting here in April, not really sure if.

This thing was going to go, but we ended up cobbling together the syndicate and investing it. And it's probably going to be the best investment of my career. We, since then craft ventures came in and did the a enlightened hospitality investments, which is Danny Meyer from Shake Shack's investment arm did the, did around [00:38:00] after that.

And we're clearly the leaders in the space, thousands of locations with brands. And in the NLP space, there's not a ton of real world applications. Food ordering is one that works and is, has real commercial traction. So that company is doing really well and we're super excited about it.

Aamir Virani: Can you share some of the brands they work with? Do I use Converse now at, you know, my favorite place to go eat?

Rajiv Bala: Yes. You've any Domino's location that has automated food ordering, Wingstop, a number of smaller brands that they work with that we're live with. I think it's. several thousand locations of things in burgers, wings, pizza, uh, sandwiches, Chinese food, you, you name it, they're all over the place.

Shaherose Charania: I am so hungry now. So something you said really stuck with me and I'm super curious. Craft ventures led the [00:39:00] next round, a San Francisco-based venture firm. Tell us more, is it common that your breakouts end up in being invested in liaisons by, by San Francisco-based true funds, by Bay Area based venture fund based venture funds?

Like, is there a trend across the portfolio that certain companies will continue to raise from the local geography and some will break out to other locations?

Rajiv Bala: Yeah, I don't know that there's really a rhyme or reason to which ones go to the local firms, which ones go to the coastal firms, but especially over the past five years.

The coastal firms are waking up to the opportunity in Austin. You look at a firm like Craft, they've done a handful of deals here, Andreessen, Sequoia, battery, you name it. We've had coastal investors coming here in the past. A lot of it's been from the East coast though. And so. I think West coast investors are starting to look at other geos and in particular, Texas.

Shaherose Charania: Yeah. Um, do they mostly come during South by Southwest?

Rajiv Bala: There are a lot that come during South by [00:40:00] we, it was just last week. It was nuts. We ended up having an event here with a hundred vCs that were in town.

Shaherose Charania: Yeah. Which, yeah, we hosted, we hosted a brunch as well, and we saw everybody who we normally run into in the street

I know. In Austin.

Rajiv Bala: Yeah. Yeah, exactly. It's, it's one of these things where the rest of the country comes and sits on Austin for a couple of days, which is a really good thing. I like it.

A higher valuation isn't the end game, pick your investors for a long game

Aamir Virani: So I have a question for you about incentives, right? I could imagine that for you and the founders getting a Silicon Valley or a New York firm involved might mean that the evaluation is higher than if they had stuck around and just went with someone in Texas.

So do you feel like that game is being played that you're hoping to be a pipeline to the more valuation insensitive big firms on the coasts so that you can bump up your paper returns and hopefully your ultimate financial returns on exit.

Rajiv Bala: Think that coastal firms coming in is a great validation point.

The valuations do tend to be higher, but my experience, these intermediate [00:41:00] valuations at the series a series B, whatever it's, it's fine. It's a good. Leading indicator, but we are definitely trying to optimize for value out investors that can help us get to the next stage. And that's what I always tell my founders is don't optimize for valuation, optimize for the best partners because an extra 10, 20 million bucks of valuation.

It's a great ego metric, but it's not necessarily going to help you get to the end goal, which is money in your pocket. And, uh, it takes so long in this business to get to a real outcome. And some of these, um, uh, indicators are directionally valuable, but they're not the end all be all. And so if you really optimize for long term creating long term value.

Then that's where I think you can really win.

Shaherose Charania: Yeah. That's a great point that has come across in other episodes too, that it's really [00:42:00] about choosing a partner that's going to be there for the longterm as well. And not just for this funding round and to your point, the highest investment doesn't always win over time.

Selective incubation: Rajiv builds relationships with Founders before the check and wants to see the product reach initial traction

Aamir Virani: Why were you willing to stick with the founders for so long at the beginning before making an investment? It sounds like you didn't just say, Oh, I met with them once, maybe twice. And then moved on. You kept up the relationship. What made you do that? That's I think that's a question that a lot of founders have.

And even angel investors are wondering if I don't make a decision in one hour, should I keep talking to these folks? So what made you keep talking to these founders here for Converse AI?

Rajiv Bala: It's an interesting question because I don't do that with every meeting that I take. There are some meetings where you're just like, Oh man, I.

These this team is onto something. I really like them. And and ultimately, if you can be helpful and you can work together, you can see them operate over time [00:43:00] and ultimately build conviction on what they're doing. They're the other question to ask is how many of these teams do you do that with that never end up in an investment?

And I think that it's probably one out of every 10 that we follow for that type of process ends up in a in an investment. Sometimes we're wrong and the company goes really far and that is too far along for us to make an investment. Sometimes they never end up getting to the right end market or something like that.

But our average time from first meeting to investments is around six months. The longest I've tracked someone in my career before investing is four years. The shortest is probably like a month and a half. I've never been one to jump at a first meeting. Write a check. I think there are plenty of people who do that.

I'm not one of them. And I like to get to know people because ultimately at this stage, I'm investing in people.

Shaherose Charania: [00:44:00] That's really helpful to, for you to paint the picture of the timeline. What's happening across that time when you have first met a team. There's some interest and you're getting to know them.

Is there consistent meetings? Like just paint a picture for what it would look like if someone pitched you over that six month period.

Rajiv Bala: Yeah. Oftentimes if we think that there's something interesting there, we will try to put them in front of a bunch of customers and really figure out. Is there something here that people are willing to open up their wallet for and the sometimes it's, Oh yeah, I would love to do that.

But we need these X features. And then the founders go back and build a little bit on on that vector. Or sometimes it's. We really like you, but we think you need a really strong technical co founder and we'll help you go recruit that. And so we'll introduce them to a handful of technical co founders.

It's everything under the sun. Sometimes it's just, Hey, let's meet up every couple of times. And we, we [00:45:00] never say you have a good business. We often say, here are the points of risk that we see, and if you solve that point of risk, which maybe I've never seen a company solve that point of risk in 15 years, but there can always be a first time for it.

So we never try to say we know exactly what's going to happen here. But we say this is the point of risk that I would want to de risk in order to, uh, to move further on an investment.

Aamir Virani: I have a question for Shaherose here. When I was investing, I feel like I was trying to be that type of investor where even if I was not actively investing in you, I wanted you to reach out to me if I could be helpful.

And just because I like being around founders and startup ideas and seeing companies kick off and no one ever took me up on it, especially when I was like formally at a firm. So Shai Rose, did the same thing happen to you? And is there anyone else who says this and actually lives it? Because like Rajiv, I can think of one or two other people in the valley that maybe are that way, but

I don't know. Maybe I'm just really out of it.

Shaherose Charania: Yeah. I do offer that for a team that I feel like [00:46:00] I can add unique value to, and there's actually two or three in the last, in the last like year where I've done that. So it's not every team just like Rajiv and two of them have come back looking for perspective, advice, intros.

And I absolutely supported and helped them. We did, by the way, specifically say, no, we're not investing, but the follow up was we're not investing. And I really believe in what you're doing. It's just not a right fit for us. Feel free to get in touch. And yeah, to my surprise, two out of three have come back.

It makes sense to me that sometimes they wouldn't, it could be a little bit of a psychological block for them to come show up as opposed to, I don't actually think you're valuable. Yeah. I wouldn't. Aamir, tell me more about your experience.

Aamir Virani: Well, I, there's two sides to it, right? I know, having lived the founder life, that you'd sometimes feel ashamed, but more like, fuck you too.

I don't need to spend time with you, you already said no. And so, I'm going to go spend time with the people who said yes, or the people I need to cultivate into a yes. So that's [00:47:00] one side of it. I think the other part is just, like, all of our times are valuable. And how do you allocate time to maintaining this relationship with someone that isn't necessarily going to have a return while being genuine?

And I feel like I would genuinely say to some teams, no, really, I like what you're doing. Please keep me up to date. Let me know what's going on. And like the best result I would get is I'd be put on their mailing list for like potential investors. But no one ever said, sure. I like the way you think we had a really good conversation.

I'll just keep coming to you once in a while. And maybe that will lead to an investment down the road. So I feel like Rajiv, you figured something out there. If it's actually working for you in Austin.

Rajiv Bala: I think there's a couple of things that kind of work in our favor. One, it is a small market and in Silicon Valley.

Okay. You could probably just stumble onto the next investor and, and create maybe a, a relationship that's closer to a transaction. But the other thing that, that I will say is that the way that we view it is it may not result in a, [00:48:00] a transaction for that company or that opportunity or whatever, because we've been doing this across a couple of decades in Texas.

I used to tell all the junior people at my old firm that came in, even if the company is not anything that we'd ever invest in, if it doesn't look like it's ever going to go anywhere, just leave people with one helpful thing, whether that's an article that they can go read or an intro that that you can make or whatever it is, if you do that consistently over a long period of time, you will end up, in my opinion, with a good, uh, good reputation.

And a decent reputation in small geography, I think, is ultimately what we're trying to build.

Shaherose Charania: Like that. Something for me to think about considering. That's great. Thank you. Let's move on to the last question. Aamir, do you want to tee it up?

Clutch's Investment Strategy and Market Focus

Aamir Virani: So, again, you've been referencing Clutch a lot. Why don't we end with what you're excited about today?

What are you working on? Can you give us more details about your investing strategy and the firm you've built and our [00:49:00] building? We'd love to hear just the brass tacks of what's going on now.

Rajiv Bala: Yeah. The amount of people that have moved to Austin, the amount of incredible companies that we're seeing right now at pre seed especially is just incredible.

So we are buried in super high quality companies right now that we are. Uh, potentially looking at one of the other things that I'm super excited about right now is a program that we're working on for company building. So we are working with a handful of teams, some that we backed before, some that we've known for a long time on basically diligence, the ideas with them.

And if it works, we'll write the first check pre. Basically on that slide deck, I'm spending a decent amount of time doing that in addition to our typical precede investing. But we, we just wrapped up fundraising in Q4. We are, uh, incredibly excited about the opportunity. We have tons of capital to go deploy.

And I think this is going to [00:50:00] be the best fund in my career. And I think this year is going to be the year of the best opportunity in my career. So I'm just super excited about what's ahead of us.

Shaherose Charania: You referenced earlier that you like to take market risk. So as you think about what you're excited about today, What are some of the markets and opportunities, white spaces that you are actively looking to invest in right now?

Rajiv Bala: So we're spending a good amount of time in FinTech with basically the amount of fraud that's going to be enabled by AI, generative AI. We are pretty excited about some opportunities in that space. We are looking at a, a handful of things in GovTech, Austin. That's one of the sectors that we're pretty good at.

Not something that I've done a ton in, but there's a couple that look really interesting marketplaces. There's some really interesting marketplaces that are getting kicked off right now in, in Texas, especially with some stuff that [00:51:00] in the areas that we're really good at, like oil and gas, that. We're pretty excited about, and there's just a lot in a lot of different areas that gets us excited, but for the most part, it's, I'm just really excited about the available talent right now because it's like nothing I've seen before.

Aamir Virani: So go ahead and tell us more of the specifics about Clutch and the sizes of checks that you write.

Rajiv Bala: Yeah. So Clutch is a pre-seed stage fund focused on Texas B2B software companies. We write a typical check of a half million into a million to 2 million pre seed round. We get very hands on with our portfolio companies and really help drive them to the point where they're ready for following our investment.

Our smallest check that we'll write is, uh, 250K into a basically a slide deck. Our largest check that we'll write is a million into a three to 5 million seed round where we believe that we can have the most impact and where we're seeing a ton of opportunity and where not a lot of people are operating [00:52:00] is really in this pre seed million dollar or 2 million round size where we can, we feel like we can really punch above our weight.

We have a handful of venture partners and a bunch of advisors that we bring to the table and really help our portfolio companies. Operationally, and we have a number of later stage funds that are investors in our fund, as well as deep ties to funds on the coast, where we can really, if companies start to work, we can help guide them to the next round financing.

So what we ultimately want to do. Is we want to be the firm that is the go to for entrepreneurs looking for pre-seed capital in Texas.

Aamir Virani: Do you think that exists today in Texas? If I'm in Houston and I come up with an idea, is there someplace that's, is there a default? I feel like when I was in Austin, it was still, Oh, I should go talk to Sequoia and Kleiner Perkins at the time.

Like that the big name for the firms that I knew about were the ones out there. Out here in like maybe Austin ventures once in [00:53:00] a while. Is there a place to go if you're a funder, if, sorry, if you are a founder right now in Texas?

Rajiv Bala: Uh, for that initial check, the first capital in, it's pretty hard, the, once you want to get that three to 5 million seed round, there's lots of capital here, and then as you get into growth rounds, tons of capital.

We have a handful of firms that have been really filling that gap over the past few years with bigger fund sizes starting to drift later stage. And so that's really why we started is to address that opportunity.

Aamir Virani: So it sounds the goal for you is to be like, if I'm a founder in Texas, I come to Clutch first and then go out from there to the other main firms that are in Texas

to go on and do like my seed round and my a round, but you want to be the first stop for any founder who's listening right now.

Rajiv Bala: Absolutely. And if you go to one of those later stage firms, we think that you'll likely get redirected to us as well.

Shaherose Charania: So besides more reps, how do you get better at investing?

Rajiv Bala: [00:54:00] That's a good question. I don't think there's anything that's special about, about my skill set or any particular investor, at least with this strategy. It's, I think the reason that we're pretty good at what we do is. You've just been doing it for a really long time and I've been seeing a ton of companies over the past couple of decades and we can use that pattern recognition to hopefully help founders avoid some of the traps that we've seen in in previous companies previous years.

Shaherose Charania: In 10 years,

you're on the Midas list. What got you there?

Rajiv Bala: I think that means that the, there started to be some amazing companies, some multi billion, a hundred billion dollar companies coming out of Texas. We want to be in the best deals in Texas and. If we do our job over the next 10 years and we happen to catch one that gets to a hundred billion, that's probably what's going to get us there.

Aamir Virani: Okay. So this is related to something you were talking about earlier. Do you think that the LPs out there who invest in [00:55:00] venture capital, private equity would see you as a hedge? Against the coastal firms then that if they have a VC firm in the portfolio, that they should consider you as in case the big outcomes start happening in Texas, that they should be putting money into you.

This is not financial investment advice. We're just talking about this to shoot the ball.

Rajiv Bala: I think that if I do my job, I give LPs exposure to the earliest stages in Texas. And if they believe that there is a, an opportunity to create outsized returns in Texas, then I think we're the team to do it with. I think that there's plenty of people in Chicago or Seattle or Miami that could make the same argument.

I happen to believe in Texas, but so yes, I think they could view us as a hedge. But you probably want if you're going to run that strategy, you probably also want to do some of these other GS.

Shaherose Charania: Okay, speed round questions. You can keep it to one word. You can. Go on further. If you want, who is another first funder you [00:56:00] admire?

Rajiv Bala: I feel like a little bit of a cop out is my partner has been doing this for 30 plus years and he knows everything about ventures. So I learned from him every day, but I'm going to say, and then the other great one is John Doerr and some of the other. Amazing folks that have come out of our alma mater. Uh, but I'm going to say Mike Maples.

I think he pioneered this style of seed investing. He's an Austin guy. We were on a board together. I learned a ton from him then.

Shaherose Charania: Okay. What is a book or a piece of media that has had a major impact impact on how you invest?

Rajiv Bala: I don't know if it's a major impact on how I've invested, but I really loved this book and I'll tell you why it's called empires of light and it's about the ACDC wars in whatever that was.

And the thing that really struck me when I read that book, one, as an intellectual engineer, I loved geeking out on the science, but two, they were entrepreneurs just like the software entrepreneurs of today. They were thinking through all of these problems about adoption. They were thinking through like the merits of [00:57:00] AC versus DC and there, you know, they, uh, DC was actually the incumbent and AC ultimately won.

Anyway, it's a fascinating story and I think it's very instructive. It's the same lessons over and over again. It's really good business lessons.

Shaherose Charania: I am an audiophile. So when you first said that, I thought you were talking about the band.

Rajiv Bala: I also, yeah, I also love listening to ACDC.

Shaherose Charania: I was like an epic story about the band.

Aamir Virani: What do you expect from a Seed Rich guy?

Rajiv Bala: Yeah, exactly. Ah, Will Rice. Is that right?

Aamir Virani: I was Will Rice. Yeah.

Rajiv Bala: Okay. All right. Next week. Okay. Hold on. I do want to tell one story. I was thinking about saying this for the first investment that I wish I had made. Was in 20 or 2000, I was, what, maybe it's a sophomore or junior.

And there was this, and I was doing like signal processing stuff, like just a bunch of math. And then there was this [00:58:00] guy who was like, would be cool to make as an MP3 alarm clock. And it was the first thing that to me was like, Oh man, you can actually use this stuff that we're learning to build cool shit.

Yeah. And I don't know if you can guess who that guy is. Aamir?

Aamir Virani: Yeah. That was one of my senior projects.

Rajiv Bala: It was incredible.

Aamir Virani: I 2000, 2001.

Rajiv Bala: Yeah. Like who thought of that and who built that back in 2000, 2001?

Aamir Virani: It didn't work very well. The speed feed round question is Zoom, phone, or in person meetings?

Rajiv Bala: In person all the way.

I try to get in person as quick as possible, even on first meetings.

Shaherose Charania: Wow. That's awesome. Social media platform of choice.

Rajiv Bala: LinkedIn for useful stuff. Instagram for lurking.

Shaherose Charania: Wait, what are you lurking?

Rajiv Bala: I'm just catching up on what friends are doing for time waster. That's what I do. Scroll through Instagram.

Shaherose Charania: It's okay. Okay. I thought there was a different strategy. I didn't know about. Okay. Thank you. Rajiv Bala. Where can people find you?[00:59:00]

Rajiv Bala: Our website, clutch. vc, LinkedIn. Feel free to message me. I'm usually pretty responsive there, but those are the best ways.

Shaherose Charania: Thank you so much.

Aamir Virani: All right.

Key Takeaways and Final Thoughts

Aamir Virani: Thanks to Rajiv for that episode.

So Shaherose and I are going to go over some of the key takeaways that we had after talking to Rajiv, I think for me, the first big thing was that there's clearly a Texas mindset and a work life balance set of options that are different from what we see here in Silicon Valley. I'm not really sure if. If you can even like transplant that information and bring Silicon Valley to Texas or Texas to Silicon Valley.

Um, I don't, I don't know if it would do anything. I, and I don't know if that should affect how you think about outcomes in general.

Shaherose Charania: I agree. It really shouldn't affect how you. As an investor or an LP, think about outcomes. And I agree, it's clear. There is a Texas mindset that is different from the Silicon Valley mindset, and I think that's true of other tech hubs like New York or Seattle [01:00:00] or London or Toronto.

Each region has its own unique set of inputs, culture, and mindset that helped to create the technology. An ecosystem for innovation to start and thrive. And what's unique about Silicon Valley, it's obvious. It's very dense here, dense with all the right inputs, talent, investors, mindset, culture. And that creates a network of people that are all in 24/7 into this idea of building big companies

There's obviously advantages and disadvantages to Silicon Valley. And we're often told that we're in a bubble and we are, that's what it creates.

Having said that we all know that plenty of companies have successfully started and reached unicorn status outside of Silicon valley. but what I think is important. For that to be possible is the village is the ecosystem, right?

[01:01:00] Companies need more than just themselves to succeed.

Talent needs to collide with the founders. The founders need to collide with the investors and everyone coming together with a culture that embraces risk and ideation and creativity. All of the pieces of what makes a great ecosystem. help with the journey of reaching out-sized outcomes in a process that is inherently highly risky. And so I'm excited for Rajiv to play a role in continuing to foster an ecosystem in Texas, because we all need more companies to be started

And that should not be limited to Silicon valley. That should happen. Anywhere and everywhere where. The people are committed. To creating that culture, that mindset.

Aamir Virani: My second big takeaway is that you do make your money on portfolio construction. We've heard this multiple times and Rajiv brought it up. He's had [01:02:00] experience with, helping to see a venture capital firm go from, uh, you know, tons of millions under management to over half a billion dollars.

And then he's also doing it from scratch right now with Clutch. And it seems like there's a financial calculation here that I don't really understand. And it would be good to dig into that more Shaherose. Have you seen anything around this? Like how to think about portfolio construction?

Shaherose Charania: Look, I'm still learning to, I believe the first question is, what is your fund size? it's easier to return a small fund than it is to return a large fund.

It just means that the outcomes from any singular company needs to be some multiple that's larger than the total size of your fund. So for example, your fund is a 20 million fund. And when you have a company have an early exit, in any price range of 50 million to 500 million, that really works well in your favor.[01:03:00]

But if you have a 2 billion fund. You can see how the fund size really dictates what kind of outcomes you're looking for. But irrespective of fund size, there's still some baseline diversification.

The fund size gives you some clarity on how to then take decisions on how many bets, what are your check sizes? How much do you reserve for follow on? That's portfolio construction. What I'm learning is that you try to have at least 20 to 30 shots on net, 20 to 30 initial investments.

over the course of one to three years of investing so that you have the chance at having a few outcomes in that five to seven to 10 year time frame.

And then there's a delicate balance because sure, the more investments you make, the higher chances you have of hitting some outsized outcomes, but then you're limited [01:04:00] by your fund size. So the amount of ownership you have isn't as big. And so it's like a delicate balance and dance.

It's obviously different for every firm, every fund, but there are tried and true methods. So you're ultimately trying to have. a diversified portfolio so that at least one to three of them lead to outsized outcomes.

Aamir Virani: my third big takeaway is one that we've heard before too, but Rajiv really brought it home and that's, there's no such thing as a sure thing. I think any investor who's had some experience. Going, you know, at least five years is going to have encountered a company that they thought was the thing they told you that was going to work out.

It was easy money and it didn't work out. I think Rajiv's story about his worst experience hammers this home. And I think it shows that, you know, in the end, no matter what you are placing a bet, sometimes the bets are a little bit better, but your expected value on these should be zero.

Shaherose Charania: Yes. I think as an angel investor, you might want to keep your mindset that these [01:05:00] will most likely go to zero.

I would say though, it is better thinking about your entire portfolio as an angel. If you're able to make 20 to 30 bets in some, say two to three to five year timeframe and expect some returns in that sort of five to seven to 10 year timeframe, but if you're one bet here or three bets there, uh, Yeah, I would say statistically speaking, the chances of those coming to fruition, especially at the early stage are low.

I think the mindset is different for an angel. However, as a, as a VC, we are constantly monitoring our portfolio and trying to be realistic about the underlying value of the company in the portfolio at any point in time. Um, sometimes we'll proactively mark things down to zero and often we keep deals at their last valuation [01:06:00] until there is a reason to mark up or mark down the VC mindset is certainly looking at the entire portfolio versus singular bets.

Aamir Virani: My last big takeaway is one that I still just don't know how to do and that's that nurturing relationships is key. I, I honestly don't know what that means. I think, you know, I have a hard time keeping up with friends and family. I don't know how you do that with founders in a business setting, uh, besides setting up calendar entries.

And even that feels impersonal in the end. I know I've interacted with venture capitalists and investors when I've been on the founder side of the table where I feel like they are doing a great job of being warm, friendly, uh, you know, keep keeping me in mind as they do their thing. Yeah. But I don't know how they do it.

I really don't. I do. They just have an incredible CRM system. Do they have an assistant that is magical? I don't know. I, if I could figure this out for myself, I think I'd be much more successful as an angel investor. How about you, Shaherose? Have you, did you get any key tactical takeaways on this point?

Shaherose Charania: That is funny. [01:07:00] Yeah. I think this part is natural for me. Um, yeah. Well, I would say it's part natural and I do have a light system around this. the natural side of me is that yes, often in the course of my week or my month or my day, I make it a point to be in touch with friends, founders, or other investors.

yeah, calendar entries are effective. Actually sometimes I do have to schedule even a casual hello to someone. It's not always. Reaching out because I need something or they need something for me. Sometimes it is literally. Just checking in on how you're doing and I find text message and voice messages to be really effective tool for this.

But in terms of you know, am I keeping on top of people through some sort of tool? I think I could do a better job at it. But what I do have is this Excel list of people I email Like to work [01:08:00] with and people I'd like to work with and they just sort of scan it I would say I don't know maybe every two months or every quarter Just to check in you know, have I been in touch with this person but overall it is sort of natural to me and Often part of the job, right?

You're thinking about problems that founders have and thinking of people you might know that might be able to solve those problems or the founder's fundraising and you have a reason to reach out to your investor friends. And so, I, I find that the problem solving opportunities lead to a reason to reach out to someone, but I, I do it naturally and just wonder how people are doing.

So look, I think for you, something to think about is if this isn't natural to you, I think you could set up a CRM like affinity could be a really great way to let you know when you haven't been in touch with someone who is important to you. and. [01:09:00] I feel like that's something that you could really just be okay with outsourcing to the machines, and have them do the hard work of telling you who to connect with and when.

So that's my tactical takeaway for you that you might want to try out. I'll just add two final takeaways. our conversation about selective incubation that Rajiv does, where he works with a team for six months to a year before writing a check. I really, Love that. And I wish we could always do that.

But again, time is limited. And so I wanted to share how I do it. I, I, I noticed it's probably been one to maybe three teams maximum in a year where I stay in touch with the team at a really early stage until they're ready for their pre seed or seed. And what I [01:10:00] noticed is it tends to work well with either a founder I already know

for some amount of years. And so we have a natural reason to be in touch. We're kind of friends. or it's a new founder to me in a space that I know well. So they have a reason to reach out to me. I can give them, perspective on the space or I know people in the space. And so I do think that, there's so much value in getting to know someone over a period of time as an investor, it gives you some asymmetrical information before you make that investment.

So, yeah, I think it's a wonderful way to de risk investments. if you do it selectively, it can work within the busy schedules we all have. The last takeaway I'll share is just the very touching one that Rajiv shared in the beginning, how, how early in his career he had to step into one of his portfolio companies and manage the shutdown and how [01:11:00] humbling the That experience was and how that experience of operating through real world experiences created empathy for the journey.

And I think, Investors do benefit from these experiences, whether they are stepping into a portfolio company, or they are a former, operator or founder. there is nothing like understanding the human side of building a business, even if we are building technology. Uh, in the end, humans are coming together, they're believing in something, and they're, taking risks together in, in a way that, That doesn't happen in, in a, in a corporate setting.

and so I think there's a huge advantage when investors can speak to that experience and have empathy, and then be helpful in some of those challenging moments. That's all for my side.

Aamir Virani: All right. That's what we've got for this week. I will talk to you soon. Bye Shaherose.

Shaherose Charania: Thanks for listening. We'd love your feedback and suggestions on topics and guests.

You can find us on Twitter X [01:12:00] @Shaherose and @avirani.

Aamir Virani: Subscribe to our newsletter to get behind the scenes access, learn more about the guests and receive the key takeaways from each episode. You can find it at firstfunderspod. com/newsletter.

Shaherose Charania: And don't forget to subscribe and share with your friends at firstfunderspod.com/subscribe..

Creators and Guests

Aamir Virani
Aamir Virani
Helped 50+ orgs grow product and scale teams.Software Engineer โžก๏ธ Product Manager โžก๏ธ Founder (Nest Cam fka Dropcam) ๐Ÿ”€ Investor, CRE, Founder@pifgov 2021
Shaherose Charania
Shaherose Charania
Venture Investing at @CakeVentures and @joindvc | Always helping founders | Raised on Atari, MS-DOS, Bollywood & Hip Hop. ๐Ÿ‡จ๐Ÿ‡ฆin ๐Ÿ‡บ๐Ÿ‡ธ
Rajiv Bala
Rajiv Bala
GP @clutchvc, Austinite, Rice Owl, and Houston sports fan
06: Finding Alpha in Texas - Rajiv Bala, Clutch VC
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