Zain Jaffer, Partner at Blue Field Capital, shares his journey through entrepreneurship and how he switched to investments. Zain talks about how being a former founder helps him to support the founders he backs as they scale their companies. He also highlights the need for founders and investors to focus beyond first-world problems and solve for real impact.
Zain Jaffer, Partner at Blue Field Capital, shares his journey through entrepreneurship and how he switched to investments. Zain talks about how being a former founder helps him to support the founders he backs as they scale their companies. He also highlights the need for founders and investors to focus beyond first-world problems and solve for real impact.
In this episode, you’ll learn:
[4:24] Distinct advantages and challenges of working with investors who were once founders
[11:14] Long-term returns are more attractive to VCs; so chase your ambition.
[15:29] What’s the relationship between your existence and the company’s mission?
[23:12] How can venture capital have more meaningful impact on people's lives outside Silicon Valley?
Non-profit organization that Zain is passionate about: The Zain Jaffer Foundation
Zain Jaffer is a Partner at Blue Field Capital. Zain is an accomplished investor and entrepreneur. He previously founded Vungle, led the company to become the fastest growing company in the advertising industry, and sold it to Blackstone for $780M. Zain invests in PropTech startups that have a promising long-term substantial upside.
Fun Fact: Zain is a recipient of prestigious awards such as “Forbes 30 Under 30”, “Inc. Magazine’s 35 Under 35” and the “SF Business Times Tech & Innovation Award”.
Blue Field Capital is a Utah-based investment firm that focuses on real estate and PropTech startups. Blue Field Capital partners with founders at the Seed and Pre-Series A stages when there is a clear product-market fit. Its portfolio companies include AuditMate, DigiBuild, Roost, Canopy, Insidemaps, Dreamspace, BASKING, stake, stayflexi, and Poplar.
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Zain Jaffer: Venture is the only asset class where you have a shot at 100X returns and generational wealth, whether as an investor or as a founder.
Gopi Rangan: You are listening to The Sure Shot Entrepreneur, a podcast for founders with ambitious ideas. Venture capital investors and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision.
Welcome to The Sure Shot Entrepreneur. Today's guest is Zain Jaffer. He's a partner at Blue Field Capital. Blue Field Capital has a billion-dollar real estate portfolio and investments in land, apartments, warehouses, hotels, offices, and senior care facilities. But interestingly, Zain also invests in startups. Prior to starting Bluefield capital. He was a successful serial entrepreneur. He was the founder of Vungle and he was also the CEO of Mediaroots. We'll talk a lot about his journey through entrepreneurship, how he switched to investments. And what does he look for in founders now?
Zain, welcome to The Sure Shot Entrepreneur.
Zain Jaffer: Thank you so much for having me.
Gopi Rangan: Tell us about yourself starting with where you grew up. You grew up outside London.
Zain Jaffer: Yeah. I grew up near the airport and it's funny because my parents were refugees. They fled east Africa to come to the UK with no money. And so I grew up in Hays, which is very close to Heathrow.
Gopi Rangan: How did your early childhood in the UK and leading up to Kings College in London shape your thinking and outlook?
Zain Jaffer: My 23andme test basically says I'm a hundred percent Indian. And so my parents are Indian and they put a lot of pressure on me to study and go to university. I didn't want to do that. Actually, I was addicted to computers and because I grew up in a rough neighborhood, I managed to stay out of trouble by learning how to code building websites. And so that was my life really. A lot of the people I grew up with, unfortunately, didn't do very well for themselves. For me, I thought I wanted to be an entrepreneur. I was actually running a startup. I didn't want to go to university, but my parents pushed me very hard and I made a deal with my parents. I said to my mom, " Indians and hygiene is very important for us. And I really don't want to be in a dorm room type of environment." And I also said, "if I get into a top university, then I'll go."
So my mom agreed to that. I got into Kings College London. There was like a one in eight chance I would get into the only accommodation where you have your own suite toilet. Unfortunately, I got into that, so I had nothing to say to my parents. I went to university and even when I was there, I couldn't help, but be quite entrepreneurial. And I did numerous projects; always had that itch.
Gopi Rangan: After a successful journey through a few startups, including Vungle, you switch to the investing side and you chose PropTech. What's exciting about PropTech?
Zain Jaffer: Prop tech basically is property technologies and it's about helping real estate be more efficient. Being a startup founder, it was terrifying that in my time that was concentrated with one illiquid stock. One day you think you're going to take over the world, the next day you realize you might go bankrupt and have nothing. I always saw other people in real estate making a lot of money, especially with leveraging their money, taking advantage of tax-efficient vehicles. I'm getting cash flow from real estate. And there I was as a fan and not taking any salary for many years. So I thought to myself, real estate is meaningful to people's portfolios and I want to actively manage my own real estate. I want to understand how real estate works. As I started to buy real estate and I even joined a private equity fund where I could scale up buying real estate, that's when I realized, wow, the scale of problems that technology can solve is unlimited. A good way for me to cure the itch is to shift from being an operator to more of a capital allocator, being a venture capitalist, and also real estate.
Gopi Rangan: Yeah. I remember looking at Open Doors S-1 filings and they shared that the real estate industry is going through digital transformation and like 0.5% of the industry has technology applications. There's a long way to go for the real estate industry to adopt technology. We're starting at the very early stages.
I'm really curious, how did you change your perspectives on startups? As a founder, you were in the middle of the arena, you were the striker. You had the ball. But now as an investor, you're not. How does staying in the shoes of a founder, running a company help you now as an investor?
Zain Jaffer: It's been a very difficult transition. When I first started investing, I was still optimistic because as a founder, especially when you've had a lot of success, we started Vungle and in our first year we did $850,000 revenue next year, $15 million the year off with $56 million. And it just kept growing. So when you're talking to a big market, everything works and you're optimistic.
I was very optimistic when I first started investing in founders and startups, and it was very easy for them to get to a quick yes. And I didn't really do much due diligence and because it wasn't a lot of money, I didn't really care. I just looked at it as a portfolio. I want to help founders. I was very naive in that it's quite tough to pick winners. And after a while, you need to be a lot more cynical. You need to be saying no a lot more than you say yes. And I think today I become one of these cynical venture capitalists that are constantly saying no. When I first started investing, everything was like, oh, this is great. I love the founders, energy and passion. You invest in them. And then, my first maybe five investments moved down to zero. Whereas I look at my last five, 10, they are doing really well. can appreciate now how there's some baggage you bring with you if you are a founder that's being successful. You automatically think everyone else is going to be successful. It's going to be easy. That's not the reality.
Gopi Rangan: Yeah. There's this tinge of optimism because you know that things can work and it's just around the corner and if they get a drive, it will be huge. You've seen that happen in your own life and you have that hope for every startup, but that doesn't turn out to be the case with every investment. It's sometimes sad to see founders struggle. How do you hold back when you know that, "I know exactly what I need to do with this company if I was the CEO..." How do you hold back and say, "well, you know, it's not my company, I'm here to support."
Zain Jaffer: It's still very hard because sometimes you're like, I could do this myself. You just need to do X, Y, and Z, and you'll be fine.
You don't want to be a meddling investor. I had a few of those and it made my life hell. The thing is with investors who don't have operational experience, you do start to discount the advice they give you. I feel like the entrepreneurs making a mistake here, and I felt like it shouldn't be this difficult or this needs to change. That needs to change. And it was also tough. I think also some founders need to learn to work with their investors and leverage their investors well. If I invest in you, I love to help when it comes to scaling your company and giving you advice on things a normal VC might struggle with.
On the other hand, I get a lot of founders asking me questions about, you know, oh, I've got this legal term sheet. Can you help me understand this? It's like, that's kind of boring for me. I'm still the founder at heart, you know, I'll bring my partner. One of my partners at the fund he's a former attorney. So that's when I loop him in. do love working with founders and helping them. It is tough though, holding back when you're like, oh, you know, I could do this myself. But it's also this, when you're a founder and you grow your teams and you bring on an executive team, you have to stop micromanaging. Learn to let your executive team make their own mistakes. And you have to empower them and you have to have them learn failure as well.
And so it's the same with founders, even though you have a strong opinion that the way the founder is attacking the problem isn't the right way to do it, you have to remember when you're an investor, you also need to empower your founders and let them figure it out themselves and guide them rather than micromanage and make their life miserable.
Gopi Rangan: That is true. It's two different worlds as a founder and as an investor. The mindset, the outlook, the decision-making process, the analysis, everything's kind of different as a founder compared to how you do all of those things as an investor. Tell me if you agree with me, this might be a controversial point of view.
I feel that founders who turn into investors on one side have a significant advantage because they've been in the shoes of the founder. They understand what it means to run a business and they probably faced many of those problems firsthand themselves. So, they can impart that knowledge. "Don't make the mistake I made, or here's how I solve the problem and it worked for me." Those kinds of practical examples from real-life experiences are very valuable. But on the other hand, it's one point of data in the life of one founder at one point in time in the past. A professional investor usually has multiple points of data and has a way to think about all of that, synthesize it and support the startup.
I often struggle with that because I do want to respect entrepreneurs who switched to the investment side, but I feel like they're too narrow-minded because it worked for them in that situation. It may not work in this new situation. And that is a really difficult transition for many entrepreneurs who decide to become investors.
Zain Jaffer: I agree with you here. I made this mistake myself. I was on the board of a startup and I kept relating what the founder was doing and the way he was running this company to the way I was doing it as a board member. Your experience experiences, one experience we're in a different industry, we don't have the same dynamic.
I was so grateful for that founder for telling me that. And since then, across multiple companies, I hold back a lot more from sharing what worked for me as a founder in my industry if it isn't relevant. I came from the marketing technology industry and I'm playing in PropTech. I see many similarities, but there are lots of things that are wildly different. As I've made more and more investments, I'm now able to join a richer variety of data points, more company boards, and I see more failures than successes. I can pass on much more. And the more I realize that my one experience a little bit was like a diamond amongst the other gems around here, it's not the right tool to use sometimes as a hammer, sometimes like a knife, sometimes as a screwdriver. My experience is only one of many tools and I think I've got a richer perspective now.
You know what I've learned is so hard as well. I was very, very lucky and I hated it when people said, oh, you know, you're lucky when you're a founder and you work 24/ 7 and really hard, you hate people saying that you're lucky.
You want credit for the hard work you and your team do. I generated 200X returns on my investments. I would love to have that kind of exit. You're not going to get that with a handful of companies. You need to have a much larger portfolio. And I realize very few companies can generate the sort of exit that I was able to generate for investors. And so that's an extremely isolated example. You actually learn more from failures than your successes and that also holds true as an investor.
Gopi Rangan: It's incredibly insightful. You're sharing your personal journey here. Now that you're an investor and you've invested in 30 plus companies, what do you look for in founders? What kind of founders inspire you?
Zain Jaffer: Everyone can answer that question generically. I'll give you more of a stronger opinion. I don't like founders who are already planning for an exit and I tend to hear this a lot from founders in countries where there isn't a good VC ecosystem.
I like founders that want to swing for the fences. I want to take a company public. I want to just dominate. So to me that that's a key criteria. There's a lot of deals I haven't done that would have been a good 3X, 5X, just because the founder or the board were too focused on an exit.
And I experienced that too. Had I not sold my company, it would have been far larger. So much returns are to be had at the late stage. It's like every year you hold on, you double or triple your previous year's risk combined returns. So I look for founders who aren't going to want to sell too early.
Gopi Rangan: I get that if an entrepreneur tells you that, "I'm planning to build this business. There's a 90% chance. Now you'll get a two X on your investment and we'll sell in the next two years." That's not very exciting for you.
Zain Jaffer: No I wouldn't do it. I mean, there are so many other asset classes where you can generate not easily, but there's a shot at generating a 2X.
If you're deploying money in venture, not only is it a higher IRR that you want to generate for your LPs, you're putting money here because you want that shot at 100X. You don't want a bunch of 2Xs and 3Xs. And that was hard for me to learn. I'll give you a quick anecdote. Okay.
I was thinking of selling some secondary stuff once. I never sold any secondary. I cashed out everything at the exit, [...] when I was a founder of Vungle and I had enough for a what would have been $250 to $300 million secondary, right, in terms of the valuation.
Maybe a year later, the business sells for $70 or $80 million and the secondary would have been, you know, $250 or $300 million. I got back in touch with that investor because he felt the price was too high back then. I was like, "you missed out, you made a mistake." And he goes, "dude, if I would have invested in the secondary and all I got was a 2X or 3X, I wouldn't have had any pat to my back. When I'm investing in the secondary as an asset class, I want to get a 10X. Oh, wow. I thought you would have been really upset you missed out. And of course, everyone wants an easy 2X or 3X. But, when you look at an investment, you really need to think about 10X, 100X returns.
So I'm giving that analogy because that was late stage, but also it was a very well-respected investor who obviously didn't buy the stock because he thought it was expensive, but he's still stuck by his rationale. And I'm here today and I've missed out on 2, 3, 4, 5Xs. I don't care. I want the 10X, 100X.
Gopi Rangan: Okay. I'm with you that long-term substantial upside is what a good VC looks for. And that's what you look for as well. How do you assess that in the first one or two meetings? What questions do you ask them? If you ask a founder, "Hey, do you want to do an IPO or do you want to sell in two years?"... he would tell you, I want to go all the way and do an IPO. And especially if they've listened to this podcast, they are going to tell you, yeah, I want to do an IPO, but how do you really assess that? What is the real ambition? How far do you think they would really go?
Zain Jaffer: I don't think you can get the answer by asking directly, and you only ask directly when you don't get the other signals.
You can tell with the language, the passion, the excitement that the founder has, how they quantify the market size. Eventually, they speak your language, it clicks, you know, there were some pitches I see where it's like, wow, they've really laid out the market size clearly, pointed out to other companies and comparables and valuations, and then the revenue milestones are quite aggressive, and there've got the traction to support it. And the founder is very ambitious. I see this a lot with technical founders. Technical founders want to build everything. They want to build an ecosystem. And the risk-reward ratio does favor a lot of technical founders at the early stage because they can build the product correctly.
So I think it's not a question I ask directly, it's a feeling I get. But of course, if someone volunteers, "I really think we could sell the business for 2X, 3X in a few years"... that's a red flag for me. If they outright say that. And a founder needs to be honest. You don't want investors that aren't aligned with you. Once I back a founder, I'll do everything to support them. But I've got the opportunity to say no before I invest. Once I've invested, I give full support in every way I can, but I don't want to invest in startups just for 2 or 3X returns. My public market stock portfolio has got a bunch of 2Xs and 3Xs. I mean, there are so many asset classes where you can do 2 or 3X.
Venture is the only asset class where you have a shot at 100X returns and generational wealth, as an investor or as a founder.
Gopi Rangan: What happens in that first meeting? What do you ask them? What do you want to observe?
Zain Jaffer: I want a conversation and I want to understand why they exist. Why do you exist, and is there a relation between your existence to the company mission? I find that some founders were just born to do this company. And when you see those founders, that's when it really gets exciting. One founder behind DigiBuild is building blockchain for the construction technology industry. Construction is full of fraud. People don't trust each other. One of the founders, she's a strong female founder. She volunteered that her dad committed suicide because of all the stress and lots and lots of people in the industry do commit suicide. It has the highest rate of suicide. She wants to solve this. She wants to make construction more transparent and blockchain is a great way to do that.
Look, I've got questions about blockchain. I don't know if it's going to succeed or not, but I cannot afford to miss out on this round. She's so passionate. And Rob, the CEO is also from the construction industry. Working with his dad. It's like, "wow! These people were born to build this company."
Another founder, her name is Ashleigh. She runs a company called AuditMate and she and her family come from the elevator industry. The elevator industry is run by large family companies that are worth tens of billions of dollars. They make 50% of their revenues from selling maintenance contracts. There is a big opportunity to improve that maintenance and allow companies to get better deals. Ashleigh came from that industry. She literally cried in a meeting because she was so upset with how there was so little transparency in the elevator industry and how clients were getting ripped off.
And so she decided, "you know what, I'm going to go head to head against the very industry I came from. I want to bring transparency." When you hear founding stories like that, where it feels like their life purpose is this that's very exciting to back, versus, "I went to Harvard Business School, I did a market analysis, I saw that this is a hot industry and so I pivoted a few times, and this seems to be the company I want to build." The founding story is what I really want to get in that first meeting. And then everything else follows after that.
Gopi Rangan: Yeah, these MBA types that use Gardner's quadrants to show where the market size is that's not as exciting. Why do you exist? And that seems to come through in the examples that you shared. There's a visceral reaction, there's a personal connection to why they're doing what they're doing. And that's very exciting to hear.
Zain Jaffer: I agree. Yes.
Gopi Rangan: How long does it take for you to make a decision whether to invest or not after a few meetings?
Zain Jaffer: I'm the type of guy that when a salesperson calls me and they've got charisma, I really appreciate what they've gone through it to get a meeting with me, you know, and I want to buy that product just to support them. So I have to be very careful. I force myself to sleep on the decision. I follow a very deliberate due diligence process. The process varies cause I wear two hats. On one hand, I'm a former entrepreneur and I run a family office. On the other hand, I've also got LPs and it's not just my money. Most of the time now I wear my venture capital hat and I'm much more focused on those. And those are larger checks too. In that situation, it takes a while to get to a yes. I look to get to a no much faster than a yes because I don't want to waste someone's time.
So assuming the first meeting goes well, then I will discuss it with my investment committee or my partners. We'll review the deck, discuss what their reaction is. Then we'll try to identify, if this is a PropTech startup, we know a lot of people in PropTech because we are real estate owners. Why don't we call it our own portfolio? We own buildings throughout the US, hotels, family apartments. Let's call some of these apartments and hotels, industrial warehouses, and see what they think. Can they be a potential customer? So we do a lot of due diligence. We also have a lot of limited partners that come from the real estate industry. We'll also see if that's something that they're willing to engage with. That way, when we invest in the founder, we've de-risked the investment because we know the industry, we don't have to just sort of go with their references. We can do our own research and we can potentially come with some customers so that when we invest, we can create tracks for the company. That process has happened as quickly as two weeks, but I prefer it to go to relationship, and then sometimes it can take a month or two. So we on the venture side are a lot slower than I am on the angel investor side.
Gopi Rangan: You start with the question of why, and then during the due diligence process, you already begin to think about how you can support the company with the introductions that you can make with your own portfolio of investments in real estate. And you get deeper into the business,.
Zain Jaffer: Correct? Yes.
Gopi Rangan: Very few investments go all the way through where you say yes, I want to invest and you close the transaction. Most of them don't. What's the most common reason for you to say no, besides the first question, are you building a long-term business that will fit with the venture business model? Let's say we pass that question. What other reasons come up often when you say no?
Zain Jaffer: I usually won't take the meeting until I can see a deck, unless, the circumstances where there isn't. And that way I can try to see if this is a competitive conflict or not. I don't want any potential conflicts and I might not take a meeting if I perceive conflict. If it's a gray area, I will usually ask the founder who is pitching me if they're comfortable. I will let them know what my portfolio looks like. They can easily find that out. Before they even get a meeting with me they get an automated email with my portfolio. One of the things highlighted there is please check that there's no conflict... Because I don't want to be in that situation. I treat confidentiality very, very seriously. As long as there's no conflict, then I'll take part of the meetings. Sometimes the founder might think there's no conflict. But one of my portfolio companies might think there is a conflict. I have to navigate that too, which is tough.
Assuming that works out, another reason I say no is the market size just simply not big enough. I want to see a market size that can support a 100X outcome. If you assume your average valuation is $7 to $10 million at this stage, then you need a billion-dollar exit to achieve that. If I can't work backward and see how that can be, I'm less likely to do it. I'm really looking for a 100X because I find once a company can get 10X, a couple of years later you can fetch 20X, 50X, 100X. You just never know, right? It's just hard to get off the ground until you're in the 10X plus category. If 10X is a stretch, I'm not going to do it. But if a 100X is foreseeable, they might land anywhere, like they say, shoot for the stars and you might at least end up in the moon.
Gopi Rangan: That's right. If you shoot for the stars you end up on the moon. If you aim for the moon, you may end up on the roof. If you aim for the roof, you barely jump off the ground.
It's important to aim high. It's difficult to say no. And that's unfortunately the more frequent answer from a venture capital investor. Glad to see that you have a methodical process on how you approach this.
Zain Jaffer: And it kills me by the way. And many times, founders have turned my no into a maybe, into a yes. I'm in a situation right now where I've got more deals than I can handle. I can't kill these deals. I'm trying to find a way to say no, but every time I bring concerns with the founder, they addressed that concern so well, I'm like, okay. Wow. Okay. So I explained my concerns to the founder. They addressed it. I thought I was out, but I didn't understand it and now I do. This just ticks all my boxes.
You want to find a way to say yes. But when you have 10 deals to look at, you have to choose between a good company and a great company. And so you sometimes as a VC, have to just, unfortunately, pit them against each other. Here are the pros and cons. This one has more cons. I'm going to have to unfortunately say goodbye to this good opportunity.
Gopi Rangan: Yeah. We have a limited number of opportunities to invest. We can't invest in every good company we see. So we have to be very selective. At the time at the early stages, they all look good, but you got to pick one that you want to follow through. Sometimes you have to say no even to some good startups. That often breaks my heart.
This, is really good, Zain. You're giving me a lot of really fun stories. So you've been a founder you've been an investor, actively investing in 30-plus companies. And you have a methodical process. You have a way of connecting with the founders, even finding ways to help them. What's your view on Silicon Valley in general, how people show up... where do you think we are? Are we in a hype cycle at the peak, our investors behaving in the right way to support entrepreneurs? What's your view?
Zain Jaffer: Oh, that's a great question. I'm going to attack it in a different way because Silicon Valley isn't just Silicon Valley. Now it's New York, Austin, Miami it's everywhere. Look, venture is getting very heated. More and more money is flowing to late stage. And it isn't necessarily trickling down to seed and Series-A and pre-seed stages. However, when it comes to me as an investor, I'm wary of Silicon Valley types. I was a Silicon Valley-type myself. Although I came from a poor family, I got spoiled here in Silicon Valley after I made a lot of money. Right? And you live in this ecosystem, this chamber where you don't get a realistic view of how the world looks outside. And again, I'm using Silicon Valley as a metaphor for all these tech hubs.
Founders who come from these types of places, technical founders, especially, sometimes build technology for themselves. You get this knowledge of Silicon Valley building technology for Silicon Valley. This is very common in PropTech. I see a lot of founders building great technologies for people that are wealthy, who live in class A, luxury, high rise buildings. I don't necessarily get excited by that. I get excited by technology that's going to impact the everyday person, the average renter, who has a net worth of $6,800. America's working class and people that live below the poverty line. They're the ones who need the proper technology. They're not the ones who are interested in these luxury amenities. They're the ones who struggle to pay their rent on time that need some FinTech solutions or decent solutions to help them.
I look for that and I'm starting to invest in companies real focused on affordable housing, workforce housing, making a societal impact whilst making money at the same time.
Gopi Rangan: Yeah. Sometimes Silicon Valley startups have this approach for solving first-world problems and, you know, it's a lot more exciting to build a business that touches people's lives in a meaningful way. Also, that's an underserved market. Not a lot of entrepreneurs look at those markets. It's a very fulfilling endeavor to go out and build a business that way instead of targeting some very niche high-class problem that exists in bubbles like Silicon Valley. I'm glad that you highlighted that part of your mission with your investments.
Now that you've been on this journey as an entrepreneur and as an investor, you've seen the venture world. If there was one thing you would change about venture capital, what would you change?
Zain Jaffer: Oh! That's an amazing question.
I think information transparency is very important. It's crazy that you're asking me how fast do I get to a yes, isn't this crazy that I need to get to a yes very quickly. Suddenly, if I say yes to a founder, I'm tied to the hip to that founder, especially if I join the board, and it could be a 10-year relationship. There's so much you have to learn in such a short amount of time. I just wish there was more information transparency. I wish investors were more honest. I wish founders were more honest. I just wish there was more information to make the decision, more time to spend and know a founder and ensure a mutual fit. Some people aren't going to be as confrontational upfront.
And unfortunately, if they're not upfront with the founders they back... I've experienced this too, by the way. I'm speaking as a founder. I've had investors who were not necessarily upfront about their motivations or their return criteria. I had investors that were banging on the door for a quick exit, for example. I didn't want a quick exit. I wanted to take my company to the stars. Yeah. We landed on the moon. It's great. I think it's important you get the right fit between the founder and the investor. I don't know how you solve that.
Gopi Rangan: Yeah. That's a tricky question and the incentives are not always perfectly aligned. You'll find yourself at odds whereas a founder, an investor pushes you to make certain decisions that may not be aligned with where you want to go.
Zain Jaffer: I think if I can dive into that, right. I always heard about this concept: "As a founder, you don't care about LPs, man. I just want a VC who believes in me and my mission." You know what you have got to appreciate what it's like for the VC who has LPs. You talk to LPs and they ask, what's your track record? What markets have you had in your phone? How can you make sure you can exit companies when they don't look like they're succeeding? These are the questions that LPs will ask you. And if you're starting out and you're managing a $3 million, $10 million, $20 million fund, you're not going to make much money no matter how successful the first fund is.
Instead, you need to go raise more money for your next fund. And that's where the challenge lies. You see when a VC is trying to raise the next fund, and they've got portfolio companies that could return the fund, they want to quickly exit those so they can get a track record and raise a new fund. Think about the economics. Managing a $10 million fund versus a $100 million dollars. A $100 million fund at a 2% management fee is 2 million bucks /year. The carry, if you turn a hundred million into 300 mills, you've got 200 million, those are profits, that's $40 million of GP carry. It doesn't happen the same way. So you've got to appreciate as a founder, that there are these conflicts of interests that do exist apparently because of how venture capital is structured.
Gopi Rangan: When founders have that empathy for their VCs and understand the VC's motivations, it becomes easier for them to align with the right kind of VC. There's this classic example of Apple investment by Sequoia, they invested $150,000 at 6 million valuation, but Sequoia's sold just before the IPO, the LPs one had to optimize for taxes and they sold for what could have been a hundred times more in the future if Sequoia had held on. I think these kinds of experiences are what push Sequoia to consider this evergreen fund, where they don't have to worry about exits and they can go for the long term and still support the founders in whatever form they want to keep the company.
There are a lot of things to change in venture capital, and this is certainly one important piece.
So, we're coming to the end of our conversation. I want to ask you about your community involvement. Is there a non-profit organization you are passionate about? Which one?
Zain Jaffer: Oh, yeah, so many. I've got my own foundation, but climate change is something I care a lot about. And we are executive producers and we're also sponsoring a range of climate change documentaries. A lot of these documentaries focus on the working class person, especially in Asia and India specifically. So we're going around to villages in India and we're talking to the fishermen, we're talking to the mom and papa, village people, and asking them how their life is impacted by the impacts of climate change. I feel like raising awareness for this is important.
Gopi Rangan: Thank you very much for spending time with me, sharing insightful stories about how you feel about founders and as a founder, how you felt about the investors that you dealt with, what we can change about the industry, and also specifically talking about what you look for when you make investments. Thanks a lot for sharing your nuggets of wisdom. I look forward to sharing your nuggets with the world.
Zain Jaffer: Thank you for providing such a great club.
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