In this month of Stories of an Investor, we caught up with Syed Ali Abbas, Chief Strategy Officer of Epitome and Angel Investor. Abbas candidly shared with us his view on concentration risk in his own personal portfolio, and whether startups should be solving a niche problem or a broader problem in view of having leverage over the competition as well as traits that founders should possess.
Hi Abbas, thanks for joining us! Let’s start with a little bit about yourself. How and why did you get into early-stage investing?
Abbas: The “why” is very simple. Early-stage investing is a great way to get involved in something you’re passionate about. In my case that was the HRTech space where I felt there was a great opportunity for me to share my expertise with early-stage companies as a way of giving back and at the same time stay in touch with the latest developments in the space. The financial rewards are of course a consideration, but take a long time to materialize and are unpredictable, so they are not the primary driver for me.
The “how” was really more a series of small steps for me since I’m not a professional investor or founder. In early 2016, while I was taking a few months off for the birth of my son, I used some of my free time to network with and advise a few HRTech ventures. It very quickly became clear to me that early-stage HRTech companies in Singapore at the time didn’t have access to advisors with sophisticated domain expertise because the entire field was relatively undeveloped in Singapore at the time. Since I had some of these skills, I started to mentor a few early-stage ventures in Singapore and Malaysia, which led to invitations to judge at HRtech pitchfests in Asia and beyond, which in turn led to more mentoring opportunities, and so on.
The specific tipping point for me into investment was when I was attending a pitchfest in Singapore a few years ago. About 10 startups pitched and at the end of the day, each member of the panel I was on had to pick 1 startup which we would invest in if we could. My answer was immediate because there was one particular startup that day which stood head and shoulders above the rest for me. That was a lightbulb moment for me in terms of realizing I could get involved further with these ventures as an investor. After the session, I reached out to one of the co-founders of that startup and started tracking them with a view to potentially investing in the future.
Of course, I realized that I was an amateur in this space so needed to learn from professionals and more experienced angels before putting my money to work as an angel. So I took 2 steps to prepare. The first was a financial investment by joining The HR Fund, India’s first HRtech fund, as a Limited Partner so I could dive deeper into the early-stage HRTech ecosystem. And the second was the educational investment of joining the AngelCentral community to learn from experienced angels and also see deal flow from other industries to broaden my horizons.
Fast-forward a few years, I can honestly say the decision to get into early-stage investing has been great for me. I’ve now developed a small portfolio of my own as an early-stage investor. My current role is with Epitome, one of the first startups I advised in 2016. I’m continuing to learn and invest with AngelCentral while also currently doing a 3-month stint as an Investor-in-Residence with the Insignia Ventures Academy to learn about the next stage of venture investing and actively source deals in the EdTech sector. Also, yes, in case you are curious, I did ultimately invest in that first startup that got me interested in early-stage investing… and they are doing very well!
Given your very extensive experience in HR and as an investor, what do you think is the most important trait a founder must have to build a successful business?
Abbas: Resilience. I know this is not a very original thought but there is a reason why most investors and entrepreneurs will tell you this is the #1 quality founders must-have. The journey of a founder is very unique and is not for the faint-hearted. There are a lot of highs, a lot of lows, and a lot of extremely stressful situations in between. Staying the course despite all these inevitable challenges requires a tremendous amount of grit, determination, thick skin, courage, and drive. Bundle all these similar qualities into one word and that word is resilience. If you don’t have it, don’t be a founder.
In today’s start-up environment, do you think early-stage start-ups can still be narrow-focused on solving a small problem with big market size or should start-ups be solving a broader business problem to have leverage over the competition?
Abbas: Difficult question because the answer depends heavily on the context. If you’re doing a venture in the pharmaceutical or biotech business, you need to laser focus on a specific problem that can have a huge market impact. But if you’re in the property business, you may want to do a venture that is more of a broad platform delivering value to the entire ecosystem of buyers/renters, agents, real estate developers, and financiers.
I can give a more definitive answer in the context of the B2B enterprise tech space which is my comfort zone. The market is increasingly moving away from the current trend where customers generally installed either:
(a) an old-school monolithic (and expensive) ERP system or,
(b) had a base system of record supplemented by a number of integrated “best of breed” niche products.
Neither of these approaches ever really worked well – I speak from personal experience! – but at the same time, it’s been really difficult to improve this space without a viable third option. That third option has now emerged with “experience as a product”, companies that basically take this entire messy B2B software space and organize it with a front-end that delivers a more consistent and high-quality user experience without having to expensively uninstall/reinstall a lot of things. That’s why ServiceNow ($NOW) has a market cap of US$105b with only US$4.5b of 2020 revenue (23x multiple) while SAP ($SAP) has a market cap of only US$169b despite US$31b of 2020 revenue (5.5x multiple). And that is also why ServiceNow was able to convince Bill McDermott to leave the SAP CEO role and become their CEO!
So the current trend is very clear in this sector in my opinion – focus on integrating pieces of enterprise tech into a better user experience/user journeys and you will have a customer and investor tailwind for the next few years – and that comes from solving a big, broad problem.
“There are a lot of highs, a lot of lows, and a lot of extremely stressful situations in between. Staying the course despite all these inevitable challenges requires a tremendous amount of grit, determination, thick skin, courage, and drive. Bundle all these similar qualities into one word and that word is resilience. If you don’t have it, don’t be a founder.” – Syed Ali Abbas, Chief Strategy Officer, Epitome and Angel Investor
You have spent a large portion of your professional career in HR. When it comes to angel investing, do you focus on mainly HR-related start-ups? (If so, do you worry about concentration risk?)
Abbas: Great question. I started with a focus on HRTech and yes that is a big part of my portfolio. That being said, I’m not so worried about sectoral concentration risk for a couple of reasons.
Firstly, HRTech seems like a small segment in this part of the world but it is actually one of the hottest verticals in the venture space globally. Just in Q1 2021, there was US$2.7b invested globally in HRTech deals and 7 new unicorns were created! So I’m quite comfortable being heavy in HRTech.
Secondly, the individual HRTech ventures I’m invested in are quite heavily diversified in terms of sub-sectors and geographies. And finally, thanks to forums like AngelCentral and my personal career journey, I’ve also diversified my portfolio into other sectors like E-commerce and Insurtech.
So the biggest concentration risk I have is not that HRTech is a big part of my portfolio, but that most of my portfolio is headquartered in ASEAN or India. That is not ideal because HRTech in particular has a lot more traction right now in the US, Europe, China, Japan, and Australia… pretty much anywhere except here! So I’m actively sourcing opportunities in such markets now until ASEAN and India catch up.
You were on the advisory board of Epitome – a Singapore startup in the talent technology space. What made you jump over to the other side of the table and join the management as Chief Strategy Officer?
Abbas: One of the co-founders of Epitome invited me in to look at their first product before the company was even founded. It was a good exercise and I got along very well with the founding team, but at the time I was in the process of taking on my next corporate HR leader role and didn’t even think of joining Epitome. Hence, I joined the advisory board instead so I could informally give advice and stay in touch. This seemed like a really good arrangement for all parties.
Over the next couple of years, the Epitome team always seemed to spring a surprise on me every 6 months with major steps forward like landmark customer wins or new product launches, and these updates were always followed by them asking “so when are you going to join us?”. When I was moving on from GFG, this became a serious option for me because I was comfortable with the Epitome team already, and moving there would give me the chance to fulfill 3 items that were high on my career to-do list:
1) work in a startup,
2) work in an HRTech company,
3) work in a non-HR business leader role.
So I took the plunge and it’s been an amazing 2 years since then. The co-founder who originally introduced me to Epitome had a hilarious take on it… according to him, there was a longer courtship period trying to hire me for Epitome than wooing his now-wife!
What are your thoughts on founders having the “I know it all” mindset about their space, do you think this shows conviction or should founders have an open mind?
Abbas: That mindset is generally an immediate deal-breaker for me. I could give you the usual cliché of how nobody knows it all and the smartest people are the first to admit they need to learn from others etc. But in early-stage ventures, there are very practical implications of this.
A lot of the cutting-edge knowledge in today’s world becomes mainstream within a couple of years and outdated a few years after that. Given the length of time it takes for early-stage ventures to reach their full potential, there is every chance that there will be a very different set of skills and capabilities required for the venture and its leadership team to succeed later on.
If the founder is not humble enough to understand that they will need to be agile and learn new things, and also bring in other people to help who may have different or newer perspectives; there is a huge risk of founder conflict and/or failure in future.
In your angel investing experience, what was one of the greater mistakes that you made?
Abbas: Easy. Not investing in amazing startups and founding teams because I thought the initial valuation was a little bit too expensive.
For example, I was approached by a US-based Y Combinator venture which has an amazingly innovative product. Their Co-founder and CEO reached out to me personally with an invitation to join their first funding round because the team wanted me to help them to go global in the future. The problem was that their starting valuation was already super high with minimal revenue and less than a year of operation, while in Singapore we are mentally conditioned to think of such companies getting a much more conservative valuation.
So I passed, and the company is absolutely flying now as expected. Ouch! The lesson I learned from such situations is that if you have a high level of confidence that a venture and its founding team are of very high quality, it’s worth taking a risk at the early stage. That way you can enjoy the journey with them and hopefully, the higher quality of the team and venture will anyway be reflected in higher future valuations.
To end the session, what advice would you give for new angel investors?
- Invest in what you understand – if you don’t understand it, what is already a very risky form of investing becomes even riskier.
- Have a clear view of your budget, thesis, ticket sizes, diversification, etc – so you are disciplined, and only make exceptions for exceptional cases.
- Start with smaller bite sizes – it helps build a broader portfolio over time and leaves you with cash in hand to follow on your best investments.
- Actively support your investee companies and the ecosystem in general – reputation and goodwill are essential in the long run for early-stage investors.