Welcome back to Inside the Mind of an NYC VC, a new series at AlleyWatch in which we speak with New York City-based Venture Capitalists. In the hot seat this time is Fady Yacoub, Cofounder and Managing Partner at HOF Capital, a global venture firm with offices in New York, London, and Cairo that is focused on transformative technologies with the potential to scale globally. Fady was kind enough to spend some time with us and chat about the origins of HOF, its LP structure, what it looks for in founders, investment themes, approach to deal flow, and much more.
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Fady Yacoub, HOF Capital
Bart Clareman, AlleyWatch: Tell us about your journey into the venture business and how you came to cofound HOF Capital?
Fady Yacoub, HOF Capital: My two partners, Onsi Sawiris, Hisham El Haddad and I each moved here from Egypt to attend American universities. We are all the only sons of active business-oriented families, so we’ve spent a lot of time working with companies in emerging markets and have touched upon different verticals within our family businesses, which are predominantly infrastructure-type businesses, real estate, energy provisions – things like that. We’ve seen different angles of how business is done in these markets.
Coming to college here, our initial goal was to gain experience and then take our family businesses to a more international playing field. The way things developed was that by year three of college I was introduced to Paul Bricault at Greycroft Partners, who had started an incubator called Amplify in Los Angeles.
Paul told me the story of what they were building, and I just loved it. This was the first time that I got in-depth with an incubator. After a few conversations I decided to invest. As part of that I also said I wanted to be able to come in often, spend time with the partners, and have my own learning experience that way.
I did that for a year. It helped me build out my network in Los Angeles, which is an ecosystem I love. Getting involved from that time until now has allowed me to have a network that’s allowed me to have relationships with many prominent founders.
What got us started on this fund is that, between that Amplify investment and the genesis of this fund, I made a few angel investments while visiting close friends at Stanford, who introduced me to companies they were working on. One notable founder was the founder of Yup. I was lucky enough to be there from since before he started that company to post the pivot, and his successful growth after that.
Being there along for that story gave me direct insights, and I got introduced to his circle in Silicon Valley as well. As I’m sure you know, these communities are very tight-knit, and having personal, relatable introductions are just as important as having investment dollars.
As for HOF, the genesis was my two close friends and I invested in a value- added telecom services company. They reached out to us 3-4 months after that investment to ask for introductions to major telco providers in Latin America. We leveraged my partner’s family conglomerate and international business, called Orascom, which has businesses in real estate, mining, telecom, retail. By leveraging the relationships he had in the telecom space, we were able to introduce this company to a ton of large telco operators in Latin America, unlocking huge revenue potential and millions of potential users.
That experience is viewed internally as an early validator of the HOF model, is that right?
Exactly, yes. Seeing the value we were able to bring to the table, that was when you could say we found product-market fit. We found that our unfair advantage was in our unusual network, primarily stemming from our family offices and their international reach.
Beyond that, we’re one of the first generations to go through our entire college careers with full-on social networking. Most of the international students with family offices or family conglomerates from around the world come to the US to be groomed to be the next generation of leadership for those businesses.
A lot of those people have come into our network organically, and beyond assembling a great group of friends to travel the world with, we’ve created a database of people who are the gatekeepers to some of the largest emerging hubs around the world. We get to leverage these people, who are technology-native and understand the problems and solutions we have today, and at the same time want to bring value back to their family businesses with a passion.
We give them the tools to do that. Those tools are investments in the first place. Based on that, our core value-add is helping companies deploy into new markets they previously didn’t have access to through large multinationals – these family offices around the world – that look to us to solve their corporate pain points. You can think of us as their outsourced R&D arm.
In this role as outsourced R&D arm, is there a specific investment thesis or are there guideposts governing what you will and won’t invest in?
We only invest in companies that are direct B2B or perhaps B2B2C, which could leverage these enterprises to grow their revenue streams.
We invest primarily in US companies (as well as in Canada, Western Europe, and Israel), which understand that to deploy into these foreign markets they need local, on-the-ground partnerships to help with getting over regulatory hurdles, with hiring, with cultural retrofitting, etc. Even your largest, tier 1 VCs do not have the local on-the-ground representation that we do.
Now, I am not saying that we’ve built infrastructure all over the world with just our first fund – by no stretch of the imagination. But what we have done is we are very, very staunchly integrated with our core LPs, who are multibillion dollar family offices, and we are able to leverage these conglomerates on a very deep level.
Let’s start with Orascom. My partner Onsi is directly from the [Orascom] family office. He sits on at least six different boards on their behalf, and is able to bring companies directly to our table. As anchor investors in our fund, they’re very keen on HOF developing into more of a technology platform for helping this tech transfer between the innovative ecosystem in the US and these huge businesses around the world that have huge customer profiles and act as gatekeepers but simply don’t have an in-house hub of innovation.
Are there specific verticals that are interesting for HOF or specific problems you aim to address?
Definitely. As with any VC we are opportunistic and constantly adapting, some of the themes we’re seeing today are as follows.
One is the internet of money. I know it’s a hot term; what I mean by internet of money is, the complete overhaul of financial infrastructure in developed and emerging hubs. Companies like Stripe don’t even exist in Africa, so one of our most recent investments is a company called Flutterwave, which is building exactly that.
Flutterwave is the Stripe of Africa. In the last nine months they’ve processed over $300M. They are going to be the backend for the Starbucks’ and Ubers and the whole on-demand economy, which is still yet to grow. The company has a ton of room to grow. One of the founders is a founder of Andela, which was backed by Mark Zuckerberg, and he’s also on the President of Nigeria’s Special Advisory Group. Infrastructure 2.0 is definitely a space we’re interested in.
When I spoke about internet money, that’s clearly interconnected with blockchain. We’ve seen blockchain grow massively specifically in emerging markets because it’s creating the fintech infrastructure that wasn’t consistent before.
Some of these Infrastructure 2.0 companies, which are applicable to developed markets like the US, are now, almost at the same time, applicable to emerging hubs. That’s not how it used to be. We looked at credit cards and debit cards and things like that, and we saw that in the past it took emerging markets decades to catch up to developed markets – and in some cases haven’t caught up even to this day.
But with the internet and smartphones and what I’m talking about right now with fintech, all of this is happening at a much faster pace. Companies are either able to go international or tech is able to go global much quicker. We see the infrastructure of the online world still being built up all around the world, and in the US as well, and we’re very much bullish on that space. We feel the enterprise partners we have can help catalyze that at a higher speed.
Another space we’re very interested in is the open sourcing of everything. I think this speaks to your work at Indiegogo to an extent, however it’s not only about crowdsourcing funds, but also crowdsourcing talent and leveraging the crowd to build things. It’s about leveraging this unprecedented amount of connectivity we have today and this army of smartphone users that is expanding at exponential rates around the world.
That in itself represents this huge international market that previously didn’t exist – even if the people were there they simply weren’t online, so it wasn’t a market you could reach. Now there’s a ton of people for whom, if you can get to the right gatekeepers and telco’s and these types of people who invest in our fund, you can reach those people.
Then of course, even though emerging markets have a long way to catch up on this, life sciences are very interesting to us. We know that while emerging markets are very far behind they do have some of the largest problems in the world today; things like Malaria. Combatting these issues might also result in a bigger advancement in the space, because you have less regulation in emerging markets. It’s not to say, “we can go and use Africa as a testing ground,” but there are problems that are big enough that potential solutions can be deployed faster.
We recently added our fourth Managing Partner, David Teten, who was formerly a Partner with ff Venture Capital for six years. His background is as a serial fintech entrepreneur. I anticipate David will do more work with companies in this domain, particularly technology for investors (“wealth tech” or “asset management tech”).
Finally, we’re extremely interested in energy. That’s one of the key frontiers. My partner Hisham worked on a renewable energy company in Egypt to provide electricity to rural villages in sustainable ways, measuring energy outputs and use on aP2P basis. Developing alternative energy generating technologies, that, could truly enable developing nations to participate in our brave new crowd-sourced, P2P serviced world.
So we touch on a lot of different things. Our only constraint is we like to get involved with companies with which we can give value beyond the capital. Because of our wealth of enterprise partners we’re able to do this across the board.
Once you see alignment at the thesis level, what do you need to see in a founding team or otherwise within the company in order to invest?
As you know, when you make early stage investments like we do, the team is the most important aspect of what you’re investing in. We invest in people more than we invest in products.
As far as who those people are, of course we like seeing seasoned founders who have built and sold companies before. At the same time, we’re definitely open to first-time, early stage, young founders – we ourselves are young founders and we definitely can relate to these guys.
We like to see strong momentum building towards a big vision. We don’t typically invest in pre-product, pre-revenue companies, but it could be a company that’s pre-revenue and has a ton of users, for example. As long as we can see traction on the company’s main KPI, we don’t need to see that a company has already hit a million dollars in revenue. We totally get that a team’s product could completely change, but seeing them execute and iterate, wargaming with them on potential scenarios and what-ifs that sort of thing gets us much more comfortable with a team’s potential future performance.
We back founders who have an itching to win, and the building blocks to have a short at making it happen. A investor colleague of mine, Anthony Pompliano, Partner at Full Tilt Capital, calls them “gamers”- these are people who want the ball, and will do whatever it takes to get it. These are some of the traits needed to take an idea and turn it into a billion dollar company or a $10B company – they see the potential to scale it huge and are willing to take that risk.
It’s also extremely important to us that there are interesting and relevant corporate parties involved; that’s something we look at very closely.
What sorts of corporate parties do you want to see involved with a company?
We want to see what other enterprises a company has lined up if it’s a B2B or B2B2C company. We want to know the companies in your pipeline that are interested in your solution, whether you’ve spoken to potential users of your SaaS platform, things like that.
As part of our due diligence, we will show the solution and talk about the opportunity with potential enterprise partners in our network. Seeing if there’s a fit is a huge pointer towards us making an investment, because it clarifies that this is a product that’s being accepted by the market, or not.
We also love, for example, when an enterprise is invested in a company as well. That gives us a major sense of security and it’s a huge vote of confidence in the company. An example of that is Starship, an on-the-go drone delivery company, which has Daimler as an investor. Starship is a robotics company, it’s a far future technology – they do last mile delivery completely autonomously – so they change the market completely. However, without the partnership of a company like Daimler, we don’t think the path is as attainable.
That’s interesting. Some early-stage investors get skittish when they see a strategic on the cap table early on – they worry it will limit the universe of potential acquirers. You’re saying that for HOF, that’s an important piece of validation – is that right?
That’s right, it’s definitely an important piece of validation. Now, I see the concern you’re raising, and that’s a concern we have with the corporate VCs, say, where their investment thesis is all about how a given opportunity can make the main corporate – Verizon or whoever it might be – more competitive. We’re at that intersection where we have the corporate relationships to help our companies scale, but at the same time have the independence where we’re not married to any one of those corporations and their specific needs. We of course will diligence that the strategic investor has market-standard terms in their investment which do not unduly limit the company’s optionality.
If Daimler’s involved in a company like Starship, when we do our analysis of the opportunity, we don’t necessarily think Daimler will fully acquire the company in the next two years – though if that did happen that would still be good for investors so we wouldn’t mind that outcome either. For us, we think enterprise partnerships and strategic investments are a signal that a company’s doing great.
Another example is Social Native, which got a round led by Softbank. We came in earlier in the Seed round; they already had pilots with Mazda, Polaroid, and Coca-Cola before we even came in. Yes, these pilots were much smaller at the time and are now much larger, but seeing these big companies involved we knew that, with this founder, if he could just prove his product, he already had his customers ready – so it really came down to whether he could execute.
Let’s go back to your investment in Amplify LA. What drove that investment and how do you assess the maturity of the ecosystem in LA?
The Amplify investment came up because I was speaking with professors and economists as much as possible. I wanted to learn as much as possible about the startup ecosystem. Before coming to the US I was under the assumption I would get much more into private equity – that’s what we do in Egypt. I figured LBOs, real estate development and distressed assets … stuff like that would be my future.
So I really had a lot to learn about the ecosystem here, and Amplify provided a pathway to not only learn, but also invest and make a return and take a risk, which is something I felt strongly about. And at the same time, it opened up my network in LA, especially the fact that I got involved in 2012-2013, when the tech ecosystem hadn’t exploded to the degree it has today.
As far as the ecosystem in LA, my experience with Amplify really proved to me that once you can get introduced to the right people and add value and then, in turn, make introductions for them to the right people, this world is really a “you get what you give” type market. I almost always will help someone if I can, investing capital or not. That sort of mentality is a critical pillar of the venture community. I feel it is quite pronounced in the now exploding LA tech ecosystem.
One thing that’s a bit unusual for a Seed or Series A-stage firm is that you have a global footprint with offices in NYC, London, and Cairo. What challenges does that pose for HOF and what opportunities does it unlock?
We have four core LPs at the moment – all of them are international conglomerates. As that number of LPs increases, our independence increases and our value-add increase, because, when we invest in a robotics company, say, we can take them in an agtech route, an oil-tech route, a real estate surveillance-type route, etc. As we invest in companies we can take it in a number of routes, so the more we expand this LP base the more value we can bring to companies we invest in. So we view being global as an opportunity and as a way for us to deliver value to our portfolio companies.
More long term, the more presence we have around the world, wherever the great ideas come out of, we’ll be there. Right now, the human capital is heavily skewed towards the US – that’s why we started off here in New York, because we think of it as a steppingstone to the rest of world. But when great ideas come out of whichever market it might be around the globe, we want to be there.
One of your partners at HOF, David Teten, wrote on his blog that you could “think of HOF as similar to a typical Series A level company in its corporate lifecycle.” If you agree that’s fair to say, what were the greatest learnings for HOF at its “Seed stage”?
One of the core areas we’ve developed is our deal flow and how we look at that deal flow. At the very beginning, a TechCrunch article and a star studded cap table might have gotten me excited about a company. Right now, just because of the sheer amount of companies we’ve seen – we’ve seen over 3000 companies in two years – your sensor gets much more refined and it takes a lot more to get you excited.
Another thing we’ve relearned is the deep and material nuances associated with an enterprise sales development cycle. Even if you have literal direct ownership of the entities and board seats, you need to show them quickly and easily why a given solution is going to save them money, period, and then they’ll start integrating you.
The corporates don’t want to see the whole big change-the-world vision, they want to see, “what are you going to do for me today? And then let’s see about that future part later on.” We’ve gotten much better at presenting the problems these startups can solve for with these large corporates, and we’re getting to know these large corporates much better.
Initially we didn’t know what problems these corporations were facing internally, and now we have quarterly calls with different leaders within these businesses, the different verticals and subsidiaries. They talk to us regularly about what they need to do their business better and what problems they’re facing. This constant dialogue with CTOs, and technical managers better informs our investment decisions as we look for innovative tech solutions for problems we know exist — and for which we know enterprises are willing to pay big sums for.
We’ve come a long way, but there’s still plenty to go (that is what excites me). What really shows that is the case studies we have. To date, we’ve helped half of our portfolio expand into new markets. 5 of our 13 portfolio companies have or will shortly raise tier 1 financing at more attractive terms than their prior investment.
Among global investors, has the appetite for accessing the US innovation economy changed at all due to the political situation here?
Funnily enough there hasn’t been the extreme backlash you would expect. If anything, what Middle Eastern investors are seeing in the public markets in the US has gotten them more excited. This of course is a different story in Europe.
Generally speaking though, the biggest problem for governments throughout the Middle East center on oil, and water needs, not [Donald] Trump. So far.
What do you imagine the founders of your portfolio companies would say about HOF as an investor?
It’s a couple of things. Firstly, that we’re humble guys, and no one would ever think of us as, “these guys act like our boss.” We’re more like shepherds leading these companies through the chaos of startup life.
I’d love for them to say – and this I know has happened before – “these HOF guys really are hands on. They’ll roll up their sleeves and help us deploy into new markets, and we really feel they’re a part of their team.” It’s like we’re their free outsourced consultants.
Favorite book and why?
Snowcrash by Neal Stephenson. It really primed my thinking and excitement about AR/VR and intra-human connectivity a la Neuralink.
Most underhyped part of the tech ecosystem?
I feel as though there’s not as much excitement about alternative energy generating technologies (beyond traditional solar and wind) as there should be. There definitely are huge energy funds and renewable energy hedge funds and things like that, but there’s not close to the amount of press or coverage or heat that IoT, Drones and consumer facing internet companies get — and they are focused on long-established alternative technologies (wind, solar) which are inherently limited because of their physical locations. There should be more investment geared towards creating entirely new forms of energy generation. Inventing an alternative to the alternative.
The foundation to a real societal leap is solving the energy problem, a growing world of greater comfort is going to be one that uses much more energy.
How will the world be different in 10-20 years?
We will be tapping into global human capital at much higher rates. This trend is already evident in cross-border teams, niche outsourcing services, and the burgeoning sub contractor market. I believe in the next 10-20 years the crowdsourcing of everything from capital, to ideation and R&D will be the norm for high performance companies. This is much more prevalent across the more developed world, with companies like Hyperloop Transportation Technologies, or Indiegogo. Physical location (national and beyond) will not be a decision variable comparable in weight to the skill and relevance of the people one is trying to work with. If the best engineer for a job is based in New Zealand, the designer in Egypt and the experiential retail storefront in New York.