Kamal Hassan on the The Orbit Shift Podcast

S02E14

Kamal Hassan, Founder of Loyal VC on finding success through diverse portfolios

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Kamal Hassan, Founder of Loyal VC, talks about how his firm addresses the gender gap in the startup ecosystem and how they find success by investing in a diverse and inclusive portfolio.

Kamal Hassan is the founding partner at Loyal VC. Kamal started his career as an engineer with IMAX before becoming a management consultant with Bain & Company post his MBA at INSEAD. 

At Loyal VC, Kamal operates a global startup index fund with over 130 investments across more than 30 countries. Its diverse portfolio of founders, of whom currently over 30% are women CEOs and almost 30% are from emerging markets, includes 80% social impact entrepreneurs who leverage technology to address one or more of the United Nations sustainable development goals. Loyal VC is designed to unlock greater returns for investors by minimising systemic biases in the investment process.

Edited Excerpts

Q. How big is your fund?  

Kamal: We have 162 startups that we’ve invested in around the world. We have an unusual structure to the fund, which makes the size question hard to answer. The way we work is we allow investors to trade in and out every quarter. 

When an investor invests in a venture fund, they leave their money there for ten years. An important thing for entrepreneurs to know is that when you’re taking money from a venture capitalist, you should always ask when they set up the fund, and when the deadline is that they have to give the money back to the investors because that deadline is going to be pushed down from the venture capital fund on to you. I’ve lived through that as an entrepreneur. And I’ve realised it’s not a good thing for either the venture capital company or the entrepreneur to have the entrepreneur be forced to sell their company at a time, which may not be right or the venture capitalists being forced to sell off the holdings in the secondary market at a big discount. 

One of the things we changed when we set up our fund is that we set up an evergreen fund, where investors can leave their money in 10 years if they want, and it cashes out as usual after ten years. But we also give them the chance to either leave it in forever and just get dividends or trade out early if the investor wants to do something else with the money. 

Q. What else influences your investment thesis and your philosophy on what companies you pick?

Kamal:  We don’t believe in our ability to predict the future. We don’t think we have a crystal ball that can say which companies will win and which companies will fail. We start by building a diversified portfolio across countries, sectors, just about anything you want to name. 

I’ll give you an example. In November of 2019, this entrepreneur walked in through our door, and he said that the medical establishment does not know how to treat viral diseases, and it’s not the virus that kills you. It’s how your immune system reacts, and he was talking about these things called cytokine storms etc. We have over 400 advisors around the world, and one of them is a top doctor. We got him to do the due diligence, and he said that this medical entrepreneur’s theories on viruses are not accepted, but he can’t prove him wrong. His explanation could be correct. It just didn’t match any of our experience, so we invested in the company. 

Fast forward to March of 2020, and the front page news in the Wall Street Journal talks about a viral disease that we know very well, and the cytokine storms it causes and how it’s not the virus that is damaging. It’s how your immune system reacts. 

In June 2019, that was not a hot company. It was not a desirable area. But you need to be open and diversified because you never know which way the world will go.

Q. Over 30% of your CEOs are women, and that’s ten times the industry average. Why do you think it’s important for a fund to be diverse? 

Kamal: Funds need to find the best-returning investments. We’ve had excellent returns, and we believe that diversity is one of those reasons why. 

Look at the fact that 3% of venture capital dollars go to companies led by women. Is it really that 97% of entrepreneurial talent is in men and only 3% in women? Or is there something structurally wrong in the market? 

One of the things we’ve noticed, and we did some studies on this. If you look up research in the area, you find very few differences between men and women. But one significant difference is that men are very likely to irrationally believe in their skills and capabilities, even when they have no facts to back that up. In comparison, women tend to be much more realistic in their self-assessments. 

If you look at the process of pitching for venture capital, it’s a process where people stand up in a room and make big promises. And the people who make the biggest promises tend to be the ones funded. Typically you’ll see that men are making the biggest promises. 

We want to invest differently, where you’re not trying to guess what the future is. What we do is make small pilot investments in a very diverse group of entrepreneurs. And we wait and see who succeeds. We make our money by giving more and more money to the companies that succeed. 

We have about 30% women in our pilot investments, and women have been getting follow on investment at the same rate in our portfolio as the men are. Generally, the industry is missing many promising entrepreneurs because we use pitching, and pitching is about who makes the biggest promises. It’s not about who’s going to build the best business. If 97% of your investments have a male CEO, you’re not investing in the best possible companies, you’re only investing in the best possible men, and we want the best possible people.

Q. If I’m a woman founder, how do I go about raising funds? What’s the right approach for me?

Kamal Hassan:  First of all, several funds are explicitly trying to target women entrepreneurs. Go after those funds, which explicitly say that they’re open to investing in women. Beyond The Billion is one of the organisations I know who look at this.

The second thing you can do is if you are going to stand up to pitch your company, really focus on things that you’ve done well, and be happy to stand up and talk about the facts, talk about the results, try to pull the investor’s mind to focus on the things where you do perform, which is what you’ve accomplished. And the third suggestion is if you will be talking about the future, and sometimes that’s important, just remember that the men who are in the room you are pitching against are taking the most positive possible outcome. Just remember, when you’re making statements about the future, assume every sentence you make starts with the hidden words, “if everything goes right then”, and make your statement because that’s how the game is played as people are always putting a spin on things.

Q. When you do follow-on rounds, what do you look for in the company and the entrepreneur?

Kamal: When we make our follow-on investments, we do it through a ranked process, where we rank all of the companies in our portfolio. We rank all of the pilot stage companies against each other. And every month, we invest in the top two pilot stages that have outperformed their peers, typically in sales results. 

Sometimes we go for companies that have got something technical, which is astounding. I mentioned the medical company earlier. They’ve had some fantastic technical results. Some things they’ve discovered are probably patentable and a whole new way of thinking of disease. 

Q. How do companies get into your pilot program?

Kamal: We have two partner groups we work with for our pilot. One is Founder Institute, an accelerator program that is an open-access program that is open to people around the world. We use Founder Institute as a pre-screening for us. The local directors there become our intelligence. They watch the progress of the companies for three and a half months. And we effectively have three and a half months of weekly diligence on the companies we invest in when we make that investment. A little over half of our portfolio come from here. 

Most of the balance of the portfolio are alumni of INSEAD. It’s a network that we are very connected to. The advantage of investing in a network plus an investor is that companies are less likely to cheat you because you share the same network, and they don’t want to hurt their reputation in the network, which reduces the amount of diligence we need to do. My partner Michael and I have both spent decades supporting INSEAD. It’s a school we studied at. We volunteer at the Alumni Association. And the result is there are now a lot of people who support us and support our fund. 

We’ve also structured our fund in a way where we share things. We take 20% of our carry, and we share it with our 400 advisors from around the world. That’s not something venture capitalists usually do. But when you share and build this network around you, that network becomes very powerful and being generous allows the support to be around you. 

Q: What’s an ideal time for companies to start reaching out to VCs?

Kamal: Traditionally, venture capitalists will only fund successful companies. You have to prove success and traction first, and then they’ll fund you. 

Now people stick up their hand and say, what about so and so who raised $10 million in Silicon Valley, based on a business plan and nothing else? 

When you drill down, you usually find out that those entrepreneurs were already successful. I know someone here in Canada who raised 4 million on just an idea to launch his business. But he did that because he sold his last company for 150 million. 

Venture capitalists are only to help proven companies scale. Before you’re a proven company, you will need to get your money from individual investors, call them high net worth investors or angel investors. 

Q. What excites you about the future? What are some of the prominent trends that you’re seeing?

Kamal: I’m not good at predicting the future. However, I am good at seeing what’s going on in the present because that drives our investing. 

COVID has accelerated several markets by around five years or so. For instance, we have a company that does software for restaurants where you can walk into the restaurant, pull your mobile phone up, scan the code on the tabletop, see the menu, order, and pay right from your mobile phone. This is wonderful for restaurants because then the only thing the staff needs to do is answer questions or bring the food to the table. 

Before COVID, many restaurants didn’t want to adopt this. They had restaurants that tried to adapt it, where the waiters went on strike. During and after COVID, the fact that you have less interaction is an advantage, and we’ve seen it there, in e-commerce, and a whole bunch of different places.

Q. What’s your number one advice to entrepreneurs?

Kamal: My number one advice is to start a business only if you’re doing something you love. You will, on average, make more money by staying in a good, well-paying job. Working for a scale-up or a big company is where you get financial freedom. 

If you’re going to make less money in a startup, make sure what’s motivating you to do that startup is something so important to you that you can’t sit back, and you have to get out there and do that.

Q. If our listeners want to reach out to you, what’s the best way to do that?

Kamal: They’re welcome to reach out directly on our website. A note for the entrepreneurs out there, though; unfortunately, we only fund companies who’ve graduated from Founder Institute or who are alumni of INSEAD. If you would like to be considered by us, do check out the Founder Institute program.

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