The VC Playbook: De-Risking Deals and Finding the Right Founders with Ryaan Sharif

[00:00:00] Hi Ryaan. thank you for taking the time to join us today and for being, with us here.

[00:00:08] before we start, I would love if you can give us an introduction about yourself.

[00:00:13] Yeah.

[00:00:13] What you're doing, what got you into the startup world?

[00:00:16] What.

[00:00:19] Yeah, so my name is Ryaan Sharif. I actually come from a corporate background, uh, corporate finance background. So, historically I worked for, Ernst and Young. in, the early days I worked in transaction advisory, which got me very curious about, investing. So we did a number of.

[00:00:36] Valuations due diligences business plans, working with much larger, more mature companies or even, that point in time there were a lot of sort of bahrainian entrepreneurs looking at opening up new businesses. that kind of really gave me the fundamental understanding of, you know, what does it take to open a business?

[00:00:56] What are the elements? What is the financial planning that is required in order to scale? some of these businesses, I think with a lot of these businessmen, they were already extremely successful on, well capitalized. so it was kind of looking at it from a kind of different perspective because they were very knowledgeable already on the subject and they kind of knew how to build, profitable businesses.

[00:01:17] We were only advising them on whether, you know, the business made sense or not for the particular market. After that, I kind of transitioned into a role which was working with yourself as well, Adel, which was at the Economic Development Board of Bahrain. And, I was working in manufacturing and logistics and attracting, some very top tier multinationals to come and set up in Bahrain I think what that gave me strong understanding was. It kind of really threw you in the deep end, right? 'cause you'd have to go in and talk to very high senior level, people in different countries usually, C-suite. And, essentially you were pitching, right? So you were pitching the country. And you were doing a sales function in terms of trying to convince 'em to move to Bahrain, versus other competing countries like Dubai, Saudi, and Oman. and I think that's kind of where the entrepreneurial side came in because As you do in any startup, you need to have a deck. You need to go around to investors, and you need to pitch it and be convincing and compelling in your arguments to why they should choose you over others. So again, I think that helped a lot in terms of building out the fundamentals of kind of that entrepreneurial experience.

[00:02:35] And then eventually I got attracted to Flat6Labs. I ran a $10 million. Fund out of Bahrain investing in early stage ventures. did that for two and a half years until the funds were depleted. And then moved to A CVC, which was, now run by a company called Beyond. when I joined, it was called Patelco, but now they have a holding company called Beyond, which was a much later stage, VCR. it was $500 million allocation to later stage ventures. but then I really missed working with earlier stage companies and decided to move back to Flat6Labs. So over the last four and a half years, I've been the general manager of. Uh, Flat6Labs, UAE. we've invested now in 54 startups over a four year period. now we're currently running, a divestment period where we're looking to make exits from the investments that we've made.

[00:03:35] Excellent. Thank you. Thank you, Ryaan. And, when you started with, with Flat six Labs, what was your initial observation on the ecosystem here?

[00:03:46] that's a good question. I think, look, when I joined, I didn't really know that much about the ecosystem. And actually a lot of the knowledge transfer that I had was from yourself, from learning about, you know, it like to build up a native, ecosystem and. I think with Bahrain particularly, we're really at the early stages, play to the country.

[00:04:07] I think that they were kind of very. Pioneering, let's say for the region in terms of, attracting top accelerators to come and set up in the country. think the talent, I think a lot of people, young people had a lot of good ideas, but there was just really limited access to, I think two things. One is knowledge, so there wasn't many learning platforms that they could actually engage with in order to learn how to build. a bankable tech company. And then I think the second element that was very nascent in terms of. being able to attract funding. So there was very limited amounts of angels. the angels that were in the region were sharks. I would say. They were very used to large percentages of the business and they didn't really understand venture capital and how harmful that can actually be.

[00:05:01] Right? So you had somebody to say look, I'm willing to give you a hundred thousand dollars, but I wanna take 40% of the business. And then. Automatically that becomes not a venture play anymore. and a lot of VCs wouldn't be attracted to those type of deals. So I think there was a lot of hard work done, in the early days to try and educate some of these angels at an individual level, but also Angel networks to actually understand that, look, it's okay for you to put a hundred K in and only take 10% of the business. because at the end of the day, you must have much bigger aspirations for this company to go and become a hundred million dollars business.

[00:05:42] And your exit multiple will be very healthy. You don't need to be obsessed with. Owning large amounts of the business. I think Bahrain was interesting in the sense that there was a really good talent pool there. So had highly ambitious, very well educated, Bahrain tech founders that some of them were even self-taught.

[00:06:06] I would actually say the majority of them were self-taught. I think the one thing that we found. When we were operating in Bahrain was that some of them were not as aspirational as we wanted them to be. Bahrain is extremely small market. and once you've kind of conquered Bahrain in terms of scaling the product, That we needed to see a little bit more ambition in terms of moving into adjacent markets like Saudi Arabia. And I think some of the top companies that have gone on to do extremely well, like out of Bahrain for example, are the likes of which was a company that we invested in. I. Out of Flat6Labs, Bahrain.

[00:06:43] Again, the idea was just kind of back of a napkin type of idea when they first came to us. and today they've raised, you know, millions of dollars. They've scaled aggressively into Saudi. they sort of take about 95%. Of, the customer base in Bahrain and now they're kind of eating into the Saudi market as well in terms of, getting very good traction there. then you have the likes of, for example, Kalo, have now gone on to build this multi-billion dollar company, based out of the UAE, Bahrain. And now I've actually a company in. the UK as well. so you can really see that even him, when he started the business, it was, something which was totally different, in terms of the first business that he ran, but he transitioned into the next business from all the learnings from, the last business and then as is able to basically scale the company into a highly successful company. yeah, that was kind of my observations. When I was in Bahrain and we were running the VC out of Bahrain.

[00:07:47] Yeah. Yeah. If we're looking at beyond Bahrain, because now. I mean, the audience we have, they're focused on emerging and developing,

[00:07:56] yeah,

[00:07:57] regions. the challenges we face in emerging and developing regions are totally different than the challenges startups face, Silicon Valley or London or Xen. those guys, they have the critical mass of investment of,

[00:08:14] Of, access to talent from IT schools and stuff and these kind of factors. so when we're assessing a startup before joining, I'm also looking at myself as a startup leader. I'm investing my future.

[00:08:28] Yeah.

[00:08:29] I might be taking a pay cut, against the promise of getting shares that will grow in value.

[00:08:36] So this brings other questions, I'll need to start thinking also like an investor doing a bit of a due, due diligence, these, startups. So one of that, will be is can I work with the founders? What's the persona

[00:08:51] Yeah.

[00:08:51] that is the right persona to create a unicorn or to make this company grow and make it worth me taking the risk, leaving my corporate job to join the startup?

[00:09:02] Yeah. Look, I think that's one of the top things that we analyze, right as a VC is, founder knowledge, founder acumen, the ability to. Listen in terms of actively listening and taking our feedback on board. and I would say whenever we do our analysis, I would say nearly 80% is related to, the founder and the founding team.

[00:09:28] Right. one of the things that we run is a psychometric testing, which is run by a company called Meta, which is. Not, Facebook meta, but, it's basically three or four, scientists based out of the UK have created this personality and persona testing to actually, I. Go deep on whether they are good candidates to be tech founders and where they're particularly good and where they're deficient.

[00:09:58] Right? And when we run these psychometric tests, it can tell you a number of things. It can tell you first of all. Are they cut in order to do what they're doing in terms of running a tech business? But it also gives us really good insights into founder dynamic, right? have these two founders come together and they're coming together with exactly the same skill sets?

[00:10:22] And if that's the case, that is also a red flag, right? You want to be able to have teams which actually compliment each other rather than being exactly the same person. I would say anything related to the founder comes extremely high on our list on a criteria for investment. and I think any founder that is looking to build a startup, especially when they're picking a co-founder, is actually to try and find somebody that's not like them. and that actually has a very different skillset in terms of. Um, you know, you might be the tech guy who's good at coding in a bedroom and is great at building product. Maybe your co-founder should be extremely extroverted, should be really good at B2B sales, and is happy to go to market and be out of the office every day, selling the product. So just trying to balance that mix and making sure that you have the right mix, I think is extremely important from a. Natural employee point of view. So I'm working in a very steady job. I am able to, you know, get a increment every year. I'm able to get my, bonus every year, you know, what are the fundamentals of. Making that choice of moving away from corporate culture and moving into becoming, a tech founder and trying it alone. I think a lot of it is one financial stability. I think we find that a lot of people that are not married and don't have kids and other commitments. I think it's easier for them to take the plunge in terms of becoming entrepreneurs and founders, and they usually have built up a little bit of wealth in order to know that, look, I'm gonna try this out for a year.

[00:12:09] I. I'm gonna try and fundraise for a year and if it doesn't work out, it doesn't work out and I've burnt into my savings. and I think that's one of the key things that you need to assess. I mean, we've got great examples of people that have left highly successful jobs, right? I. some of these people have been partners at, you know, Booz and Allen, or McKinsey's, and then have decided to take the plunge and it again, I can see the pain that they go through because they were making, you know, 60, 70,000 Dirhams, monthly salaries, even upwards. And now they're going to a point where they're making a fraction of that. But what they are viewing as, opportunity gain. Is essentially the equity that they own in the company, which they could exit at a much, much higher multiple than what they would be making over a 5, 10, 15 year period with, the consultancies that they're working for. again, I think it's, you know, one of those things that you have to assess internally. One of those things that you should always discuss as well, if you have family. and then, you know, take it from there in terms of whether you should try this out and maybe giving timeline to how long you should try it out for.

[00:13:20] Excellent. Thank you for the clarification. And this also brings another question. Now again, we're looking at the success factors of these startups, and you guys have been doing a great job and you know, de-risking many of these startups. This is why even investors, they prefer to invest in companies that you have invested in your basically,

[00:13:41] What are the support? What other things do you provide that actually de-risk these projects, these startups?

[00:13:47] Yeah, that's a really good question. I think look, for all for us, we have to go through a due diligence process, right? So we usually have a thousand applicants and we have to only invest in 10 companies. So it goes through rigorous stages. So you have the thousand applicants. A lot of the applicants will submit ideas which either are not hitting. A, a proper pain point, two aren't really quite investible from a tech perspective. They're not scalable. they won't be able to go, beyond a certain point and not give the returns that we need to give to our lp. So we kind of write them off. and I think the third element is that it's not a company that the next stage of investor is looking to invest in. And I think that's a really important thing to note, right? So you might. Find a problem and it's a problem and it becomes a personal problem, so it's a problem to you. assumed that everybody else has the same type of problem. And you haven't validated this, you haven't gone to market to, you know, do any research, on this. and again, it just becomes a company which is not very investible. So we go from the thousands, we take it down to almost a hundred startups. We go through a due diligence questionnaire, essentially, which we've basically formed. Again, it's weighted in some ways.

[00:15:07] So we take into account, what are the founders? are they able to be receptive to change? Are they able to pivot? what kind of experience do they have? So a lot of the founders that we invest in, for example, if it was a health tech company, do they come from health tech background? have they been doing it from, you know, five to 10 years? So they really understand the industry inside out. do they have. The business acumen, do they have the contacts within the industry in order to scale the business? So that's on the founder side. we look a little bit more deeper into the market.

[00:15:40] Is there a sizable market in the region for this, product to scale? we look at adjacent markets as well. Do they have the ability to cross borders with, you know, limited red tape? and you know, from a FinTech perspective, as you understand from all the different jobs that you've worked in within the FinTech space, that this can be an issue moving from, example, the UAE to Saudi Arabia.

[00:16:02] It's a very different, framework, right? so we take all of this and then we get from the a hundred down to the 20. Which from a Flat6Labs perspective I think is very interesting is the 20 get flown into the UAE and we actually spend a week with them. And I think that's when you really get to know somebody, right?

[00:16:20] And we treat it as if it's our own money coming out of our own pockets and we kind of assess. And during the bootcamp, to be honest, a lot of it is done. We just observe a lot and we ask a lot of questions and we kind of see the founders interact with the other founders. and then we get a very clear idea of whether do we trust this guy to take our money, invest it properly, and to grow the business out?

[00:16:47] Or are these a founder that is very good at talking, extremely good at pitching, but perhaps not very good in terms of execution? And I think you can get a very good barometer of that when you spend a week with somebody. After that week, we take the 20 down to the 10, and then those are the 10 companies that we back. And then after we back them, I think from a Flat6Labs perspective, what is very important for us to do is kind of do a needs assessment, right? go very deep into the company and kind of understand. You know where they're potentially gonna do well and where they're potentially gonna fall over and try and address the areas where they're gonna fall over and try and remedy that. And how do we remedy that? We surround them by experts, whether that be coaching, mentoring, and training. Try and immerse them within the subjects and try and upskill them the end of the program. we work very closely with the founders in terms of building. bankable data rooms and making sure that they don't burn any bridges, because at the end of the day, if we're gonna do an introduction to an investor, we better be sure that. is at the right state and quality for us to do that introduction because, VCs can become pretty quickly impatient and, and say why are you feeding us companies that have, a terribly organized data room, you know, not very good at talking, on a 30 minute, meeting and not, I'd be able to even articulate properly what their product is. So. I think towards the end we very understanding of, you know, obviously the company wants to raise money, but we just need to make sure that they're prepared mentally in order to go and fundraise that money. And then also from a business performance perspective, are they at the right stage to raise that money and, , are they at the right stage to raise that money at the prescribed valuation that they're looking for?

[00:18:48] Excellent. this is really helpful. So you are addressing, you addressed my next question, which is, If you've got most of these founders there, they've never done fundraising before. So you will coach them, handhold them, and then connect them with the VCs. And then the VCs, they look at you as, if we do it through, flat six labs, that means these are vetted.

[00:19:09] They're,

[00:19:09] Yeah.

[00:19:10] we're not wasting our times by, considering these startups.

[00:19:14] look, I think VCs get applications from multiple sources just as, as we do as well, right? So you have the organic ones, the people that go online have done their research, reach out, are raising a sort of. Valuation that they want to raise up. The others are based on other VC recommendations, so they're actually fed by the other VC community and saying look, we're gonna put in, a hundred K, 200 k.

[00:19:39] Are you willing to co-invest and come in with us with this particular founder? Let me do the introduction. and then I think the third, which is kind of the one that we found has a high success rate, is successful founders. You usually refer other founders that are on route to being successful as well. So I think those are the kind of the three main avenues of where you can get a lot of your pipeline in terms of, finding, investible companies. with the VC community, in the UAE, I think we've got rapport with them in terms of us understanding what their needs are, for example, what of investments they're investing at, what industries that they're interested in investing in, what other investments that they've already made, which they inhibits them to make. Again. so for example, if you have one, which is like a PropTech company, that serves a certain part of PropTech, sometimes we wouldn't go back to that VC because we already know they have a competing company that they're invested in. Uh, and these are all the different dynamics that you need to understand.

[00:20:49] even as a founder. a lot of founders get frustrated, oh, this VC didn't give me face and didn't really go deep. But there's a rationale behind it, right? If they're investing in a competing product, it's very difficult for them to, invest in your company as well. yeah, I think there's a lot of trust. between the VC community, in the UAE I think we're a small community and we're not large enough to be competing with one another. It's more trying to create an ecosystem which is helpful, and supportive to one another. So we try and feed sort of the best startups that we have. To these VCs, post our investment and sometimes even, pre our investment. So you might get a VC which turns around and says, we're looking to put X ticket into this company. Can you look at them and take them through a program? Because that we know that the educational. Tools that they will get with you will help upskill 'em. And then at the same time, do you mind putting in a ticket of 150 K, 200 k also to support on the round. so yeah, these are the different things that we do in terms of working with, VC community.

[00:22:00] Excellent. Excellent. so going back now to the corporate experts coming in. If I want to join, ideally, right now, from my understanding, from what you explained, if I want to join a startup, I'd rather go and join startups that you have vetted because most likely these are the right startups, to join.

[00:22:22] what's the best way to reach these CEOs? And especially at the startup phase, it's probably too early. They can't afford me as a corporate leader.

[00:22:30] Yeah, look, I think I. Usually doing it on quite a casual basis is pretty easy. So I think one, if you're looking to become somebody that wants to work for a startup, but maybe work in a startup which is slightly more established and de-risked. Is to attend their events. You know, a lot of these people run their own events.

[00:22:52] Go to startup mixers, try to understand which business line actually suits your skillset best. go to demo days. attend the demo days. Introduce yourself. I think actually you need to like, think a little bit on. How do you sell yourself to this startup? Right? So is that in terms of your skillset, in terms of, what you're able to bring in terms of business development? actually pipelining that out a little bit and almost pitching to the startup of why they should hire you, I think is something which founders or, you know, aspiring founders should look at doing. again, going back to. Understanding that you're probably gonna get a salary, which is below expectations, because these are don't have the cash at the moment, is something that you should consider. but also think about in terms of esop. is there any ways that they can financially incentivize you, in order to get some equity in the company?

[00:23:58] Yeah, so. if I'm joining, and I like the idea of having shares within a startup becauseI don't want to start my own company. I don't want that risk. And at the same time, I probably have 20 years of experience. I come from, let's say EY, like New York case, or one of these, big consulting firms.

[00:24:18] What's the growth stage that will be ideal for me to join and am I now where many companies talk about joining scale ups? I've done that myself as well. I've tried the startup route and the scale up route. The scale up there are in a scale up phase, there are many expectations from me as a leader who joins.

[00:24:40] I'm there to set up. The blueprint, A scalable blue blueprint, a scalable operation. So from your experience working with these startups, how do you break them down? How do you, because also you're helping these founders find the right talent, right, as well.

[00:24:57] Yeah. So look, I think, in the early stages a lot of the founders seem to find their own talent, right? and I think. the earlier stages, it's much harder to convince somebody to join a company that can go bankrupt in four to six months, right? In terms of their, the fundraising and the reality of it. So I think a lot of the time on the earlier stages, I think the founders have already found other co-founders and have found other employees that are willing to work. In a much more risky environment. I think once you get to a scale up level, think some of the better VCs that are out there are the ones that actually offer HR support and are able to plug in key people, and functions into the scale ups.

[00:25:46] Right. And where do they find the talent? I think a lot of them find the talent from. One investing in a lot of companies that have either gone bankrupt, but they still obtained a lot of talent within that company and say to them, right, didn't work out for you with this particular company. But now we have another portfolio company that is performing very well. They need somebody to run their sales function we think that you'd be a great candidate for you to cross border into that. So I think that's another thing when you are a startup is your initial early on investors, you really need to think about what is the value that they're gonna add to you.

[00:26:25] as a startup, even later on in life. Right? think we even find that today with some of the startups that we have, right? They might've not obtained the value in the early days because maybe they were a little bit more advanced and they didn't need the, mentoring and coaching that we were providing. But later on, in terms of accessing the Saudi market, some of the B2B contacts that we have there, some of the investor network that we have in Saudi, they leverage that from us at a later stage. So I think you just need to have. A very holistic view of each of the investors that are coming into the cap table. Understand that they might not add value today, and it might just be in the form of monetary value, later on there might be certain things that you can leverage out of them in order for them to actually help grow your business with you.

[00:27:15] how do the founders assess the quality of the new recruits, the leaders that they're bringing on board?

[00:27:22] Yeah, I think, look, it's a lot of, it's trial and error unfortunately.

[00:27:26] a lot of the time, you need to. Give people maybe softer contracts or make them, orientated around sales. For example, if you're working with a sales function, you have to put quite strict targets on the sales person. Maybe they make a lot of their salary through commission rather than. a sustained salary, throughout. So there are lots of different mechanisms that you can use in order to ascertain whether somebody is adding enough return on investment, as a person working in the company. But, again, I don't think there's any formulaic way to.

[00:28:01] Assess whether this person's gonna work. A lot of the time, you need to create structures on the employment journey for you from taking candidates all the way to hiring and having filters in the in-between order for you to assess that person. But again, without having that person work with you for a period of time, you can't really assess that.

[00:28:22] Okay, thank you. I don't expect you to have a clear answer, but Yeah. this question is a bit tricky Usually, and as the startup grows,

[00:28:33] Hmm.

[00:28:34] founders are encouraged to fire the wrong people very quickly and keep the right ones or retain the right ones.

[00:28:42] Yeah.

[00:28:44] What's your observation?

[00:28:46] I think, from our perspective, I don't think we've had too many cases of that. I think, quite a lot of our founders have fired the right ones. have they fired them quickly enough? Probably not. you can have certain people that are maybe a bit too rash, right? And they don't give the candidate enough chance and time. But that's again, a consequence of the business that you're operating, right? You are on a limited, runway. and you need to ensure that whoever you're hiring is providing the company with the needs that it needs in order to become a scalable business. and you're always gonna have that dichotomy of, I keep this guy on for a little bit longer?

[00:29:27] and see if he can perform. Or do we need to cut ties now because we really won't have the money and we think that the next two months he's not gonna add, any more value. these are the things that need to be assessed.

[00:29:43] What about now getting into the legal side of things. Many of these startups, especially the ones that don't go through accelerator programs, they end up making expensive legal mistakes, not reviewing the contracts thoroughly,

[00:29:59] Hmm.

[00:30:00] And and even when it comes to taking investor money, signing contracts that are not, standard contracts, like the safe contracts like there is Clara, I think that is for standard, agreements, stuff like that.

[00:30:15] Now, when they come through flat six labs, things are a bit more standardized, right? Are there any mistakes or any pitfalls that they still go through after they graduate from you guys? And what are these?

[00:30:27] Yeah, on the legal side of things, I think sometimes the mistakes are already made before they join. So I think a lot of the startups that we look at investing in have perhaps signed, you know, safe agreements with crazy caps, valuation caps already on. And they're basically companies that we can't invest in because they've already made those mistakes.

[00:30:49] And it's, you know, very hard for us to justify to come in on a similar cap. So there could be, if we wanna try and salvage the deal, there could be things like going back to. investors that they've already signed with, try to renegotiate, bring down the caps, make sure they're on the same caps as us, and try and remedy those mistakes.

[00:31:10] but I think when they're with us for the three and a half months, we do spend a lot of time. We actually usually have like a full-time legal counsel hire. That sit with them and kind of explain all of the red flags that they need to look at when they're signing legal contracts, both from a corporate B2B perspective, but also in terms of fundraising perspective. You know, what does this legal language mean? if you sign this, what's that gonna mean to you in the future? How will this turn off other investors if you sign this particular financial agreement? They need to have a really deep understanding of that. Otherwise, later on, they're gonna find it extremely difficult, to fundraise without that knowledge. again, I would say I think maybe we've been fortunate that. I think we've made sure that we've invested in ones that haven't made the mistakes already. have been one or two exceptions to that, but we've managed to that by going back to the previous investors and having those tough conversations. the ones that basically are better educated during the program generally try not to make those mistakes going forward.

[00:32:20] And for someone who made that mistake, or even before they start. Where, what do you advise them? Where can they learn more? How can they avoid these mistakes before they come to you?

[00:32:29] I think, There's a lot of online content. to be honest, I think, one of the most important things is to try and absorb as much online content as possible. a lot of Y Combinator videos online as well, which kind of give you quick snapshots of what to look out for, so it's not too much for you as extracurricular activity for you to learn more about it. and. I think maybe the third aspect, again, is just being more social, right? Going out, to different conferences, and trying to pick up this knowledge from people that attend the conferences and public speaking, and just actively asking questions, right? I think no if you really don't know the answer to it, it's always good to, to try and ask certain experts. I think from a legal perspective as well, we found that a lot of legal counsel, particularly today, are quite understanding that legal services are quite expensive. working with earlier stage startups, a lot of them are quite happy to give bono hours in terms of helping upskill some of these startups. and again, why do they do that? I think it's based on the premise that maybe if this startup later on in life, you know, has a large company that ends up scaling to become a, a big thing, they could eventually acquire the services at, you know, a very reasonable price as well.

[00:33:50] Excellent.