Q&A with Ali Hamed
Co-Founder of CoVenture
Family Office Insights sits down with Ali Hamed, Co-Founder of CoVenture, to discuss how technology is not a prerequisite to startup success, and how investing in early-stage startups through cash and software/technical team development in exchange for equity is a sustainable competitive advantage with better deal flows.
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Tell us about your background and your company, CoVenture.
As a freshman at Cornell, I co-founded a maker space called The PopShop, a co-working space for creatives and business-minded students to come together to collaborate and foster their entrepreneurial ideas. As a young serial entrepreneur, I knew I wanted to eventually get into consulting and angel investing, but when I approached startups to invest in, they would instead ask me to code their apps in exchange for stock. I was able to invest in startups that others couldn’t because of my technical background. While most VCs screen for technical skills, I believe that VCs actually should be looking to invest in companies founded by domain experts regardless of their technical skills. A company solving a problem in financial services with technology needs a founding team familiar with the industry and the problem, but may not need a top-tier senior engineer right away. Most of the time, as a founder creates a new product, she just needs a software developer to help code that first piece of software, not a salaried Chief Technology Officer on day one. We think that’s a bad way to build a business, so that’s why Jamil Goheer (General Partner), Michael Beller (General Partner), Thatcher Bell (Managing Partner) and I founded CoVenture in 2011.
CoVenture is a venture capital firm that provides its portfolio companies with software development in addition to capital. We invest in early-stage technology-enabled startups through software development and cash investments in exchange for equity. We invest in companies founded by domain experts—entrepreneurs with expertise relevant to the markets in which they are launching, and provide guidance to help validate product-market fit. We then help our companies raise follow-on capital and bring their tech teams in-house. Often, while a company works with us, we pair the founders with senior engineers in our network to act as their advisors along the way. Our in-house software and product team consists of more than 40 engineers with full stack web, mobile, and UI/UX capabilities.
Who is your target audience? What do you like to invest in?
We invest in founders who hold deep domain expertise (we look for founder-market fit) and seek companies that have strong revenue models (we don’t invest in ad-supported businesses). We don’t invest in C2C (consumer to consumer) businesses like social media and messaging applications because for those businesses, the core competency is simply the user experience, and we aren’t in the business of building the core competency of a company. We look for the domain experts that have a secret to shine a light on.
We receive tons of deals from friends and family in the community, other VCs and Angels, Entrepreneurs, CoVenture LPs, and Universities. Our team is built to work with 3-10 companies at a given time. We are in a good place in our business in that we turn away nearly 100 opportunities for each one we select. Our headquarters is in New York, but we also have full-time engineers in Pakistan and Canada. We are not scarce on resources, but our variable resources allow us to scale up or down at any time. Our fixed costs are always at 100% capacity, so I can’t foresee a situation where we wouldn’t be working on 3 companies at a time.
What are some of the challenges you face in this market?
When evaluating a company to invest in, it’s always a challenge to assess how good a founder is. We look to work with entrepreneurs who have domain expertise, experience, and relationships in the markets they are attempting to serve. It’s crucial that we get to know the founder, the team, and the business model. Even though we go off of the same information other VCs have, we have a perspective that others don’t. We have the advantage of knowing the founders on a deeper level by bringing together their ideal technology team while understanding the nuts-and-bolts of their business. The other challenge we come across is making sure that the companies we work with hire the in-house technology team they need to pickup where our team leaves off. We are meant to be a temporary solution as we interview qualified technicians and engineers in our network, giving the founder patience and peace of mind as we do a smooth transition to a sustainable in-house team.
Who are your key competitors and how are you different?
Our hands-on software development capability is unique among other venture capital firms, accelerators, and studios that invest in early-stage startups. This allows us to attract and exploit differentiated investment opportunities, earn equity at a lower cost basis while adding more value to its portfolio companies. We also acquire pro-rata rights in all our investments so we have the right to invest according to our ownership percentage in future financings for our portfolio companies.
Other top VCs also have great networks and strong track records, but our technical team is a significant competitive advantage. We invest earlier than most VCs, when valuations are lower, and since technology talent is scarcer than capital, the value of the equity we earn is greater than the cost of service. As a B2B company, we approach other seed stage and pre-product startups, which help us get better deal flow. We work with founders to mitigate execution risk by getting a product in market and then helping to select the permanent technology team. We mitigate market risk by backing domain experts and technical risk by helping with product development. This approach allows us to invest earlier without incurring more risk.
Traditional venture capital firms provide capital for founders to pay developers, but rarely invest before the first product is live. To our knowledge, no firm provides software development services with product development expertise. Accelerators like Y-Combinator and Techstars provide access to mentors and potential investors, but the economics of these programs are not great for founders since most offer $25K in cash for approximately 6% of the company. Studios like Betaworks and Thirty Labs are organizations made up of developers and designers who build new products to form the basis of new companies. Most of these companies start with an idea and then build the product and team around that, rather than around a founding team, yet expect to retain a majority ownership of it.
How are you changing the landscape of your industry?
New technology is not a prerequisite to startup success. Most VCs are not technology-companies; they are simply just technology-enabled. Most unicorns launched without investing in truly novel technology. New companies struggle with the options available for building their first product: build the software themselves losing focus building the business; hire a costly outsourcer not committed to the same long term goal as an in-house team; or give up lots of equity to the first available developer. CoVenture provides a better option to develop software for our portfolio companies by investing cash to help build the first product while it attracts its first customers, establishing product-market fit.
In the landscape of entrepreneurs with predictable backgrounds, experience, and goals, CoVenture backs different types of founders. We don’t believe that the world should be built by a homogenous group of people. I don’t want to only back people who look like me, act like me, or think like me. There’s this air from some start-ups that they’re smarter and more able than non-startup founders, so they build apps that attempt to solve the world’s problems. We look for companies that are built on empathy at the core with a focus on the user and her problems rather than a focus on technology or growth for its own sake.
Who is your ideal investor? How much capital are you looking to raise?
We have made 28 investments in roughly 3 years; our Fund II, which is now three years old, is valued at 5.6x TVPI. To date, we have raised $35 million across several funds. Our investors are high-net-worth individuals and family offices that have invested as little as $250-500K, as a way to get initial exposure, to several million dollars. We are looking to build long-term relationships with investors who are interested in growing with us as we scale our distinct approach to early-stage venture capital.
What’s your mission?
If you’re building a product that’s not good for the world, then it’s not sustainable. We invest in good products we believe in, and want to back companies that we feel proud of. We are investing in companies led by founders who are solving important problems that they know through direct experience. Silicon Valley does not represent most of the world. 2.5% of the population is software engineers, and 90% of VCs target them, while the other 97.5% of people who are not engineers, we want to invest in them.
What’s next for you?
We are going to invest in companies about which we have strong conviction. The amount of deals we see a month is almost triple from when we first started, but we have tried to maintain a consistent, high standard in investment selection. We are disciplined in choosing the right companies, so that we don’t have to make investments that we didn’t want to make. We raised equity capital in a holding company so we can be patient as we grow; we want to be thoughtful as we scale this new approach to venture capital.
Ali Hamed is a Co-Founder at CoVenture where he co-leads the firm’s Venture Capital Fund, and Direct Lending Fund. At Coventure Ali has helped deployed $40M across both venture and debt investments and has helped the firm raise over $90M of committed capital. He co-leads the firm’s management team, and is also a venture partner at Compound Ventures (formerly known as Metamorphic Ventures) where he leads investments into seed stage startups. Before CoVenture, Ali founded a technology startup and served as an independent consultant to a government, a bank, two private equity firms and number technology startups. Ali attended Cornell University where he co-founded a maker space called the POPSHOP, played on the varsity baseball team and was a part of Sphinx Head.
For more information, please reach out to Ali at email@example.com.