Meet a venture capitalist who dropped out of the Masters program at Stanford to start up a company with his professor. He is also the man who traveled to Pakistan for one day to give a lecture series to 700 students across three universities and met with some ‘hot’ entrepreneurs on his way to the airport. That’s how committed Faysal Sohail is. It’s either that or maybe he’s just crazy passionate about funding ideas with potential, helping companies realize their dreams before he runs off to find that next big thing.
The first company Faysal was part of was Actel Corporation. It was amongst the first to get into the Programmable Chip Design space and go public with a market cap of several hundred million dollars. It was this company that allowed chips to be designed faster for a fraction of the cost, becoming a platform for innovation. His second company, Silicon Architects, pioneered the Structured ASIC (Application-Specific Integrated Circuits) methodology. It is also the company accredited with developing complex ASICs for cutting edge applications that helped drive development in the multimedia, graphics and telecommunications spaces. Silicon Architect merged early on with Synopsys, which became the global industry leader in chip design and currently valued at more than $5billion.
These were all companies that were changing the way chip design was being done. Faysal’s unique ability to understand the engineering and the business aspects helped keep each companies’ offerings ahead of the market, allowing them to grow quickly and efficiently. In fact, Faysal left Actel once it was doing well because he already knew it would head towards an IPO. “My job there was done and it was time to go and do the next big thing.”
Fast forward to 1999, and Faysal became CEO of his third startup, Cadabara Design Automation and oversaw the acquisition by Numerical Technologies for more than a hundred million. He eventually joined CMEA Capital as General Partner and not only does he invest in companies in the US, his investments span across the Middle East and Pakistan.
Insanity is defined as ‘repeating the same thing over and over again and expecting different results’. When Faysal is part of the equation, you can ‘expect’ the results to be pretty mind-blowing.
Faysal grew up in the Middle East and moved to Virginia to attend boarding school at the age of 15. The fact that he was the only non-white kid amidst the population should have been a sign that he would always stand out in a crowd, but he just describes the boarding school experience as, “it was fun but harsh and I learned how to survive very quickly.” He convinced his father to let him move to Champaign-Urbana to study Computer and Electrical Engineering and join his brother Sajid, who was starting up at the University of Illinois Champaign-Urbana.
When the opportunity came, he joined his professor and 5 other people to jump into his first startup. “It was the right time to set something up and we developed one of the first programmable chip company. We did really well and took it public.”
Faysal’s objective has always been to be part of technology and teams that truly change the way people do things and make them much better.“Actel was all about providing a better chip design experience. It used to take weeks,if not months to design a chip. Fabricating it used to cost millions of dollars and our challenge was to figure out how this could be done in an effective, inexpensive and quick manner.” To simplify, Actel was making it possible to design a chip at your desk and programming it with your laptop so you no longer had to wait 6 months and spend millions of dollars. “You could do it for under hundred dollars.” Actel helped change the chip design industry.
The second company, Silicon Architects, was in the same realm. It was about designing denser, more powerful and effective chips which required rethinking the architecture. “Again, the driving force was how things could be done better.”
The Other Side of the Table
There is a huge difference between the two sides of the table: the entrepreneur and the venture capitalist. When you are the entrepreneur, you roll up the sleeves and control everything. “As a venture capitalist,” explains Faysal,“you don’t control anything. You can provide advice, experience, connections and wisdom. But it’s really up to the entrepreneur to accept or act upon it. That’s the biggest change you go through. You realize you no longer have direct control over things and can only influence the outcome to some degree.”
Faysal’s area of expertise and interest is Deep Science, Technology and Clean Tech. “There are a few things I look for in a company: Is it disruptive? Can it grow? Can it cater to the underserved markets? Next, if the business is incremental, is it large and growing or is it stagnant and small?” Once it passes the answers to these questions, then Faysal focuses on the entrepreneur. “For me, that is probably the biggest decision. Is this a person who can really go and build something, or is the entrepreneur going to fail in the first round. The entrepreneur is often the difference between success and failure.”
And while there isn’t any exact science to this selection process, decisions have a lot to do with gut feeling. “And after doing this on both sides for 30 years, you develop a pretty strong sense of who to bet on. You still end up being wrong a lot of the time, but you develop a good feel for pattern matching as to what a great entrepreneur looks like.”
The key ingredient in an entrepreneur,explains Faysal, is passion. “The passion behind your idea, your reason for doing it and how you articulate both those things to the investor.” According to Faysal, you can have someone walk in with 50 slides full of data, and you might have people who share a wonderful story, and you might choose the latter. “I’m more for people with passion and those who can tell a wonderful story about it. Of course they need to have the data to back it up.”
And that’s probably why it’s so important for entrepreneurs to have more skills in addition to the analytical and technical capabilities. “Most entrepreneurs lack the skills to articulate their ideas and often fail to convince a VC why they are worth investing in. As a Venture Capitalist, I have to know a few basic things: why they are doing it, how they are going to do it, and if they fail, how they are going to get back up.“
Todays’ world allows unprecedented access to people regardless of where they live. With the professional and social online networks, every organization is accessible. “VCs get thousands of requests from entrepreneurs for meetings and I rely on my network to recommend who I should meet with. OPEN, or the Organization of Pakistani Entrepreneurs, makes for a great network. It’s amazing how many people don’t make use of these networks.”
In addition to funding first-time entrepreneurs, Faysal has had some great experiences with repeat entrepreneurs. “In some of these cases, we’re investing in, what we refer to as their ‘grandchildren’. An excellent example is when we funded Michael Marks for his medical device company, he took it public and we had great success. He came back with an idea of a manufacturing company called Flextronics,which has revenue of more than $30 billion. We seed-funded Flextronics.” And then one of Michael’s vice presidents pitched an idea of Supply Logistics company, which ended up having a multi billion dollar outcome. “At times, we keep funding the successful entrepreneurs and their next generations. We’ve had great success with people like Pete Schultz who headed up Novartis Institute and have done several successful IPO’s with him. He is one of the top scientists in the area of Life Sciences and Materials.”
Technology, primarily the Web, has leveled the playing field and reduced the barriers to entry to a great extent. Thirty years ago, companies needed millions of dollars in capital infusion. Today, they need less than a million. What changed?“The fundamental infrastructure has changed,” explains Faysal.“Regardless of your idea, domain, size or location, you have access to the world’s best software and hardware. These building blocks are considerably more affordable than before.” Couple this access and affordability with the Cloud, and startups have considerably reduced operational costs and increased accessibility for an entire range of services. “The Web has made access to channels, customers, information and data quicker. Trends and customer behavior that used to take years to acquire can today be done through web tools and apps. So the amount of investment needed for startups is significantly smaller.”
There are apps and web-based tools to conduct surveys, manage your legal needs, find freelance work and more.
“The problem I find is that most entrepreneurs don’t know exactly what they need. Is it market research? Legal advice? Identify the right need and there is something or someone out there who can assist you. That exposure and education is required for the startup because there is an incredibly powerful network that is everyone can access.”
So every aspect of starting up a company, from channel development to earning customers has all become exponentially less expensive.It’s the scaling up that will start costing the big bucks. “But with these tools, you can at least assess whether or not your idea has potential. While you still have to put in a lot of capital when you want to go to market, you won’t be putting the big capital ahead of knowing whether you have something or not. This way, the capital at risk is considerably safer.”
According to Faysal, the smartest entrepreneurs figure out how to get the most out of the least amount of capital. That way, they can raise the capital to give them a higher probability of success. “Remember, if there is less dilution, VCs will make more money and entrepreneurs will keep more of their company. It works out really well for everyone.”
Okay, so education and exposure for the startup. What else do most first-timers do wrong? “Not investing time and money on building the right team. Always identifying the most inexperienced people to do shabby work without giving any ownership or credit, is the worst thing an entrepreneur can do.” Time and again you’ll read about how important teams are for the success of a business, and Faysal is no exception. “The team is the most important part of the business. We don’t invest in technology; we invest in the people. So not focusing on building a world-class team around you, is the biggest mistake and entrepreneur can make.”
And then that second biggest mistake of not listening to the customer or the market and building what interests you. “There are very few Steve Jobs that can truly say they know what the market wants before they demand it. If you’re not listening to the customer, how will you generate revenue?” But don’t the best ideas come out if the entrepreneur has lived through the problem? “Well true,” rebuts Faysal “after all, we do want to invest in people who have a strong views and opinions otherwise you probably are a good entrepreneur to begin with. But coming up with something that is so ahead of its time, leaves a lot of room to fail. Sometimes the belief system hinders your ability to see what the customer really wants.”
These ‘instincts’ are developed with the benefit of time and exposure – exposure to multiple disciplines and experiences. Faysal’s entrepreneurial and investment successes could be attributed to the fact that he had a strong background in both. His analytical sense helped not only in the venture space, but also earned him the Silicon Valley Education Foundation’s 2011 Pioneer Business Leader Award. When he was the Chairman of the Education Foundation of Silicon Valley, his team found a strong correlation of high school dropouts with the success they had in seventh grade math. “We developed an entire program to solve that specific issue. If we have more kids finishing high school and entering college, it’s a win-win for everyone.”
If someone with Faysal’s profile is able to hear the noise that startups in Pakistan, that’s definitely a good thing. “I read about Groopic on a piece CNN did and was very impressed. I hear a lot of interesting noise from Pakistan and Pakistani entrepreneurs but the problem remains that they are not going to get funded by Silicon Valley.”
Faysal has been looking at the Middle East and Pakistan to serve his own passion of growing entrepreneurship in the region and started seed-funding companies. Faysal has been investing in the Middle East and Pakistan recently saying, “this is something that has to be done in order for entrepreneurs to have a chance to realize their dreams and do great things.”
Faysal came across Fakhar Khalifa, who was working on an interesting idea in the Clean Tech space and visited Silicon Valley to look for funding. “About two years ago I made a personal investment in Fakhar to help bring his idea of Solar Magic Box to life. The idea was to bring power to everyone who was off the grid. A solar-powered system that would run LED lights, fans and more.”
Faysal was ready to fund him but needed him to redesign parts of the technology prior to doing so. “I wanted the design to be more modular. There were 3 dimensions of his product: the solar panels, battery storage and appliances. I felt if he could make a totally scalable three dimensional system, we could keep banking batteries together to add more appliances and turn it into a much more effective solution.”
He worked with Fakhar for about a year to get all the pieces worked out, but the value of the product became so strong, Faysal was also able to attract the support of microfinance banks and the likes of Acumen Fund to finance this. Faysal reiterates that none of the funds from Silicon Valley are going to fund ideas like these. “We’re trying to identify and locate local resources to grow it.” In fact, the road map for Solar Magic Box is to grow into an independent company and then ultimately try and take it public in one of the Asian markets or go through an M&A exercise.
As far as Pakistan is concerned, Faysal isn’t in it for the money. “This is something that is desperately needed. If we can fuel this kind of innovation, it will help to breakthrough the markets to serve unmet needs.”
Why Venture Capital Doesn’t Work Outside the Valley
Pakistan isn’t actually the ‘only’ place it doesn’t work – it doesn’t work this well anywhere outside the Silicon Valley area. And there are several reasons for that. According to Faysal, you need at least three things to make the VC model to work: a clear exit, professional management and a risk culture.
You need an exit to return the capital to the investors and make money. “From that perspective alone,” explains Faysal, “the culture doesn’t work in Pakistan. There are no capital markets to raise capital quickly, which makes the exit strategy unclear. You have to understand that the VC does not operate a company as a cash flow entity. We sell the entire enterprise or at least our equity in order to recover investments.”
It’s the entrepreneurs who have the ideas, but a complete professional management is needed around them in order build enterprises. “I think Pakistan lacks that type of talent set. There are more family-owned businesses which don’t allow this professional culture to grow. VCs invest in professionals and people to build enterprises and exit.”
The Risk Culture
“It simply doesn’t exist in Pakistan.”While there is plenty of capital to be invested, very little of that capital is what we call ‘risk capital’. “The reason venture capital works in Silicon Valley is this: when I conduct a deal, I am absolutely aware that I could lose 100% of it and I am absolutely fine with that. As long as the team did everything right and worked honestly. This thinking is very unique to this area and the culture here. If it fails, so be it.”
When Faysal talks to investors from the Middle East and Pakistan, the concept of losing all the investment and being okay with it, sounds insane to most people. “Investors want guarantee of percentage returns and that is not possible,” explains Faysal.“That’s why investors would rather invest in a building, rent it out, make a 10% return. The fact that they would invest in an idea as intangible as a startup company and it would have a 50% chance of success or failure just doesn’t compute for them.”
So what does Faysal, who is part of a Venture Capital company that manages funds with a combined value of $1 billion, think innovation is in today’s age? “The world is changing dramatically. There was a time when hardware was king, and then software replaced it. Right now, we’re in a place where devices are very interesting. Wearable device are one of the biggest categories and I think the evolution into consumer wearable and health is going to be a very interesting area.”
Monetization is what everyone is focusing on, whether its hardware, software or apps. “How to monetize everything in the Cloud is a space many startups are working in. After all, everyone builds a startup to serve the market and build companies that are sustainable.”
“The concept of everything in the Cloud and everything as a service and nobody wanting to own or manage the hardware or software, is a big space. Robotics is going to be a critical space when catering to the aging population in the developed markets like Northern Europe, Japan or even the US. Whether its robots that will appeal to the consumer space or the health field, Robotics is something to look out for.”
On the energy side, Faysal feels the biggest area of innovation needs to be batteries and storage of all kind. “Whether it’s for electric vehicles or powering wearable tech, batteries will help determine a lot of innovation.So things like Deep Science and new types of fundamental chemistry will help shape the future. And of course, there is the area of Information Security and its relationship with other sectors. That’s a big space.”
People like Faysal quite literally fuel ideas. They make it possible for entrepreneurs to do their magic. They provide guidance through their experience and expertise and nudge dreams into practical realities. VCs are more than just people who throw money at problems; rather, they help create solutions. Venture Capitalists have a critical role in shaping the high-tech driven world that we live in today and Faysal certainly plays his part well.